As debate over rising fuel prices rages across Indonesia, its newly installed government will have to start work immediately on a much more critical issue for long-term economic health - securing its future energy supply.
President Joko Widodo raised fuel prices by 33 per cent last month, carrying out his election promise to do so. The country spent US$59 billion (S$77 billion) over the past five years on fuel subsidies, much higher than spending on health care (US$16 billion) and infrastructure (US$48 billion). While subsidised fuel helps to keep electricity prices low for businesses and industry, as well as for motorists and households, the drain on the national budget is tremendous.
Economists and policymakers have long argued that subsidised fuel benefits the middle- and high-income classes more than the lower-income groups, whom the subsidies are supposedly targeted at. The subsidies do not help those they are intended to, and they also promote wasteful behaviour, and lull industry and businesses into complacency.
The need for a reorientation of the country's energy policy is vital. Indonesia relies far too heavily on fuel for generating power and meeting its energy needs.
Its policy was initiated in the 1970s, when Indonesia was a net exporter of oil and a member of the Organisation of Petroleum Exporting Countries.
Because oil was cheap and it had plenty of it, the government built power stations fuelled by oil and diesel, and offered subsidised fuel to all citizens. But 40 years ago, the country was poor and the middle class was minuscule.
Today, Indonesia is a net importer of oil, and global oil prices are nearly 10 times those in the 1970s. The country has enjoyed significant economic growth over the past 15 years, giving rise to a consumer class that is estimated at 66 million and growing rapidly.
According to business research company Katadata, 92 per cent of the subsidised fuel last year was consumed by privately owned vehicles.
Indonesia can lower its fuel bill and improve its economic competitiveness and power growth for the next 20 years if it refocuses its energy policy to change the basic source of power from oil to coal, a mineral that is abundant and affordable.
An expanding economy and a fast-growing middle class mean that power consumption is expected to rise significantly in the coming years. One of President Jokowi's first promises was to increase electricity supply over the next five years. He has outlined a programme to deliver 25,000MW of new power by 2019 to fuel economic growth and increase the country's electricity supply.
According to the state utility Perusahaan Listrik Negara (PLN), electricity demand growth is rising by 9.4 per cent a year. This means that the demand for power will double in eight years. Mr Nasri Sebayang, a director at the state-owned electricity supplier PLN, noted that household demand will dominate electricity demand until 2025, after which he expects this to be outstripped by industrial demand.
Indeed, Indonesia cannot build power plants fast enough. Rapid economic growth and population expansion are driving increased demand for electricity at both the household and industrial levels. In some parts of the country, especially in the less developed east, the electricity ration is only enough for one in two households to have power, which means there is much room to grow.
Relying on diesel and oil as the primary sources for power generation is no longer viable. On the bright side, the country has huge reserves of coal, estimated at 30 billion tonnes by the Ministry of Energy and Mineral Resources. With coal production today estimated at 370 million tonnes per annum, the country has decades' worth of fuel to power economic growth and meet rising consumer demand for more electricity.
There has been serious debate between policymakers, industry and consumers on the right energy mix for the country. It has been argued that Indonesia also has large amounts of natural gas, while renewables such as geo-thermal, solar and hydropower should also be given higher priority.
The key question is: How can the government incentivise private investors to build power plants, given the huge outlay needed? The answer lies in integrating the country's power grid with the source of power. Currently, there is a de-link between those who produce energy and those who supply power. This gap needs to be closed.
In doing so, Indonesia can follow the example of India - another emerging economy facing huge power shortages in the coming years due to rapid urbanisation and growth of the middle class. To ensure sufficient and reliable power supply, Indian policymakers have allocated coal blocks to industry and power producers.
Power licences are no longer handed to just anyone. Companies and investors bidding for power plants must either own coal mines or have ready access to sources of power.
India is relying on its huge reserves of coal to power the nation and build smart cities. The Andhra Pradesh government has just signed a memorandum of understanding with Singapore to build a world-class state capital city with a reliable, continued power supply.
This is possible only because of New Delhi's new energy policy which directly links coal mines to power producers.
Indonesia, too, needs to build new world-class cities. Jakarta must thus start to think about how it can guarantee power supply to industry, businesses and households, and power economic growth. Its new government must seriously look at integrating sources of energy with power supply and, indeed, industrial planning.
Indonesia, however, is more fortunate than India in having multiple sources of energy. The country is also rich in natural gas and thermal energy, but these will take some time to develop.
But given the more environmentally friendly elements of natural gas and thermal power stations, Jakarta should not forsake these sources of power. In fact, the government must pour more financial capital as well as resources into developing such power sources.
For Indonesia, as with India, the challenge is to provide higher living standards to millions of citizens who today do not have access to electricity.
The country has large reserves of energy locked underground which it needs to release in a controlled manner without damaging the environment. If Indonesia is able to manage this process prudently and smartly, it can look forward to decades of sustained economic growth.
The writer is the group executive director of Trimex International, a global mining and minerals conglomerate based in the United Arab Emirates.
This article was first published on Dec 19, 2014.
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