Access to affordable, reliable, and clean energy is critical for economic and social development. Most governments—including Indonesia’s—therefore provide financial support and incentives for energy production and consumption. Careful scrutiny of these policies is necessary to determine whether they are helping or hindering the government’s objectives to expand energy access, improve energy security, and promote the transition to clean energy.

The Government of Indonesia provides a range of energy support measures, incentives, and interventions that stimulate energy production and consumption, some of which are directed to support and protect the vulnerable segments of the population (e.g., poor households and small businesses). The COVID-19 National Economic Recovery Program is one such support measure that, like many others provided to the energy sector, disproportionately benefited the fossil fuels sector. There are also other measures aiming to promote a transition toward clean and renewable energy, although today, government support is still predominantly addressed to the fossil fuel sector.

International Institute of Sustainable Development (IISD) has published a report titled “Indonesia’s Energy Support Measures: An inventory of incentives impacting the energy transition” to identify all the support measures and incentives that are available and have been given to the energy sector by the Government of Indonesia.

Excerpts…

The Energy Landscape in Indonesia

Indonesia is a vast archipelago with over 17,000 islands (Badan Perencanaan Pembangunan Nasional – BAPPENAS, 2022; Ministry of Trade, n.d.) and more than 270 million people . It is the largest member of the Association of Southeast Asian Nations and accounts for 40% of energy consumption in the region. Energy demand in Indonesia is predicted to increase by 80%, while electricity demand is anticipated to triple by 2030. The Indonesian economy is based on agriculture and crude oil production, and the energy sector is the second highest contributor of greenhouse gas emissions after agriculture (BKPM, 2021).

According to a recent energy sector assessment by the Asian Development Bank (2020), energy production in 2019 was based mostly on fossil fuels, comprising 616 million metric tons of coal, 2.8 million standard cubic feet of natural gas, and 272 million barrels of oil. Fossil fuels also remain the main source of energy, with coal, gas, and oil accounting for the largest share of primary energy supply by source —approximately 84% for 2021.

The GoI has recognized the need to move toward clean, sustainable energy, and to that effect it has committed to achieve 23% of renewable energy mix by 2025 and net-zero by 2060. In 2020, total electricity consumption was about 265 TWh, down from 271 TWh in 2019 (International Energy Agency, 2020), but the electricity mix in Indonesia remains dominated by oil and coal. With Indonesia holding the G20 Presidency in 2022, this is a momentous opportunity for the government to show that Indonesia has an important role to play in ensuring that public money is being used appropriately and effectively to achieve a sustainable recovery and clean energy transition, which are the priority issues for the Indonesia G20 Presidency (G20 Indonesia 2022, n.d.).

Oil and Gas 

Crude oil production in Indonesia has been declining since 2009. The production decline is mainly caused by mature oil wells, while the growth of new wells is relatively limited. Since then, Indonesia has mainly been relying on crude oil imports to meet domestic demand (Dewan Energi Nasional, 2019). As a consequence, the GoI has provided various incentives and support measures to promote investment in the oil and gas upstream sector through tax deductions in the exploration and exploitation phases, as well as new schemes for upstream oil and gas contracts. Most of the support measures are in the form of government revenue foregone and aim to encourage exploration activities, therefore mainly benefiting the producers.

A total of 23 support measures for the oil and gas sector from FY 2016 through FY 2020 have been identified. Of these, four are for the benefit of the consumers and the rest are for the benefit of the producers. These measures can be classified as follows:

  1. 19 measures represent government revenue foregone (tax exemptions and reductions).
  2. Two are in the form of income or price support.
  3. One is in the form of direct and indirect transfer of funds. 
  4. One is in the form of the provision of goods or services below market value.

The total quantified support measures for oil and gas in FY 2020 reached IDR 73.5 trillion (USD 5 billion). The overall amount of support provided has been fluctuating, with an upward trend between FY 2016 and FY 2018, from IDR 73 trillion (USD 5.4 billion) in FY 2016 to IDR 126 trillion (USD 8.7 billion) in FY 2018, and then a downward trend from FY 2019. The lower amount of support provided in FY 2020 was caused by lower oil prices and also lower demand due to the COVID-19 pandemic. Only 30% (seven out of 23) of the subsidies could be quantified due to the lack of necessary data.

Table 1 summarises the total estimates between FY 2016 and FY 2020.

Measures Quantified

Out of the 23 oil and gas support measures that were identified, only seven were quantified. The top two quantified measures in order of magnitude are:

  • Total Reimbursement for PT Pertamina (both already paid and still due6). The number throughout FY 2016–FY 2020 reached IDR 432 trillion (USD 30.8 billion).
  • Value-added tax (VAT) exemption for crude oil and natural gas sales, totalling IDR 27 trillion (USD 1.94 billion) throughout FY 2016–FY 2020, with the largest amount distributed in 2017.

The reimbursement for PT Pertamina is for below-market pricing of certain fuels for consumers. The GoI has set retail prices for certain types of gasoline, diesel fuel (“Solar”), and kerosene below market since 1967. Three-kg liquefied petroleum gas (LPG) canisters are also subsidized. In 2015, following a decline in oil prices, the subsidies for gasoline (Premium) were entirely removed, and diesel was set at IDR 1,000/litre. Given the unfavourable market conditions at the time, this temporary removal saved the GoI around IDR 211 trillion. The compensation from the GoI for Pertamina’s losses as the result of the lower selling price is recorded as a support measure for fuel, with the 3-kg LPG canister as the highest item subsidized. The amount recorded for the item “VAT exemption for crude oil, coal and natural gas” was estimated based on the foregone revenue (10% VAT) from the annual sales value for the commodities.

Measures not Quantified

Due to the lack of available data, 16 of the identified support measures were not quantified: they were in the form of government revenue foregone, where no official government data were available to facilitate quantification. These incentives were given to the oil and gas sector in the form of tax deductions or relaxations, such as import duty exemptions and income tax Article 22 exemptions, where these items are not recorded in the state budget, nor is there any requirement for the beneficiaries to declare them. Information on the effective tax rate or the extent to which the tax deduction was utilized by the oil and gas companies was also not available. Unlike quantified tax subsidies, such as the VAT exemption, it was also not possible to identify an appropriate benchmark to use as a reference to estimate the tax exemptions.

Future Trends

The total reimbursement for PT Pertamina for under-pricing the retail price of fuel has been the largest form of support for all the years observed and remains so to date (see Appendix 2. A: Oil and Gas Support Measures). There have been several plans to reform the support provided for retail fuel, including the request from PT Pertamina to eliminate Premium RON 88 (Asmarini, 2021), a subsidized fuel. In addition to eliminating Premium, PT Pertamina has also suggested the reformation of the distribution method, from reimbursing Pertamina to giving out targeted support measures directly to eligible individuals, according to the Integrated Social Welfare Database (Data Terpadu Kesejahteraan Sosial/DTKS).

This targeting method would be in line with the incentive reform for 3-kg LPG canisters already approved by the Parliament (Putri, 2021), in which the support measures have already been distributed directly to the targeted individuals. This move is expected to reduce the amount of government support for oil and gas. However, with Indonesia being a net oil importer, the risk of increasingly high oil prices would eventually impact the retail prices in Indonesia. This could, in turn, translate into the government increasing the amount of support measures to protect purchasing power and control inflation.

The entire report can be accessed here.