indonesia

The central energy policy challenge for Indonesia is meeting rising domestic energy demand.
There is no shortage of natural resource potential to supply this rising demand, but greater
policy coordination and investment are needed in order to boost production of all energy
resources if Indonesia wants to avoid becoming a net importer of energy. Meanwhile, the
country’s rapid economic development has brought into sharper focus the tension between this rise
in energy demand and concerns over the environment and climate change. Although Indonesia’s
commitment to reduce greenhouse gas emissions by 26% by 2020 is significant, current policies
that emphasize greater production and consumption of coal and palm oil without pursuing
sustainable practices, clean-coal technology, and carbon capture and sequestration will almost
certainly undermine this goal.
With this context in mind, this essay offers an overview of how Indonesia is approaching
its energy policy challenges and offers recommendations for public policy. The essay begins by
offering some brief historical background on the role that energy has played in Indonesia’s
economic rise and reviewing the country’s current supply and demand picture. It then assesses
the energy goals stated in Indonesia’s national energy policy and discusses the major developments
under the Joko “Jokowi” Widodo administration to address these challenges. The essay concludes
by providing recommendations for Indonesia to pursue further reforms.
Indonesia’s Energy Outlook
Economic Transition
Indonesia is a vast archipelago with a population of 250 million people. It is the largest economy
in Southeast Asia, the sixteenth-largest economy in the world, and a member of the Group of
Twenty (G-20). Endowed with an abundance and diversity of natural resources, Indonesia has
historically produced more energy than it could consume and has been a leading energy supplier
in the Asia-Pacific. Even today, oil and gas revenues alone account for around 20% of government
revenues. 1 Yet over the last ten years, domestic demand for energy has increased rapidly as a result
of steady economic expansion, rising living standards, population growth, and urbanization.
During this period, the Indonesian economy grew at an average rate of 6%, having benefitted from
high commodity prices. Since the end of 2012, however, the downturn in the commodity cycle
has affected demand for Indonesian commodities. Economic growth slowed to 4.7% in 2015, and
Indonesia continues to be buffeted by a decline in its terms of trade.
To diversify and strengthen its economy, the country has been attempting to shift away
from commodity-supported growth and is pursuing an economy-wide policy of value-added
industrialization. 2 As Indonesia pursues this economic transition, the Jokowi government’s
current national energy policy emphasizes redirecting resources away from exports toward
domestic consumption, as well as rebalancing the energy mix toward indigenous supplies. As
more resources are routed toward domestic consumption, energy exports will account for a
declining share of export revenue. Energy exports were 35% of GDP in 2000 but declined to less
than 25% in 2012. 3
1 “Hit to Indonesia’s Oil and Gas Revenue Threatens Deficit, Crude Output,” Reuters, April 30, 2015.
2 International Monetary Fund (IMF), “Indonesia: 2014 Article IV Consultation-Staff Report,” March 19, 2015, 6.
3 International Energy Agency (IEA), Indonesia 2015 (OECD/IEA: Paris, 2015), 18, https://www.iea.org/bookshop/704-Indonesia_2015.
INDONESIA’S ENERGY POLICY u STUART
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