Details Needed on Energy Fund Proposal

After nearly a month of drip-feeding scant details to the public, the government on January 4 said it had decided to postpone collecting a new levy on fossil fuels to support development of renewable energy resources and improve energy security, just a day before it was supposed to have come into effect.

While the concept of an energy fund represents a sound and sensible requirement for any country at a time of volatile oil prices and the increasing requirement to develop sustainable energy models, the aims of the fund remain unclear and a sound framework that sets out the mechanisms and goals is required before selling the idea to the public.

The government had planned to impose a Rp200 ($0.0147) tax per liter on sales of low-octane Premium gasoline and Rp300 per liter on diesel fuel, that would coincide with a planned reduction in fuel prices.

“Everyone agrees – it’s just the timing of the implementation that needs to be managed,” Energy and Mineral Resources Minister Sudirman Said told reporters, referring to a discussion of the matter with President Joko Widodo and other members of his cabinet.

Widodo had requested the levy be delayed until the revision of this year’s budget in order “to avoid controversy,” according to Said, who noted that the levy was needed to help bring electricity to 12,000 villages across the archipelago.

The decision to delay highlighted the difficulties the government faces in devising an energy policy for Southeast Asia’s largest economy. State power utility PLN recently had to be forced to provide a decent return to Pertamina’s geothermal subsidiary to take its power. PLN, along with consumers, is naturally reluctant to fund comparatively expensive renewable sources of energy when coal and oil are so cheap.


Indonesia’s coal producers – the country is the world’s top exporter of thermal coal – are keen to lock in sales of their product to PLN, which in turn is keen to reduce its costs to a minimum. Such short-term considerations make it difficult for the government to meet its environmental commitments and plan for long-term energy security.

Differences that emerged over the detail of the plan, meanwhile, indicate an ineffective communication strategy that has the potential to stir public confusion and protests over any premature policy announcement. Fuel prices are politically sensitive in Indonesia, and changes typically spark protests. Sharp rises in fuel prices in early 1998 sparked protests that contributed to the downfall of long-serving autocrat Suharto.

Plan 1: Tax the consumer
The government at the end of 2015 announced that it would lower fuel prices effective on January 5 to adjust to the shrinking global oil price, which at that stage was sitting at around $35 a barrel, down 35% from the price a year earlier.

Beginning on January 5, the price of Premium was lowered to Rp7,150 per liter from Rp7,400, while the price of diesel fuel was cut to Rp5,950 per liter from Rp6,700. The government had planned to simultaneously start collecting funds from the sale of fossil-based fuels and pool the proceeds as an energy security fund. Consumers would pay Rp200 per liter of Premium and Rp300 per liter of diesel fuel to support the fund.

Minister Said on December 23 said the low crude oil price represented a good time to introduce the fuel levy, adding that the government would raise between Rp15 trillion and Rp16 trillion (about $1.2 billion) a year in this way. The establishment of the security fund was based on the 2007 Energy Law and Article 27 of the 2014 Government Regulation on National Energy Policy.

According to Said, the government would soon draft a regulation related to the mechanisms and the details of the energy security fund. “The principle is to decide first (about the fund) and later design its mechanism (and other details),” he said, adding the Supreme Audit Agency (BPK) would take part by auditing the fund.

Plan 2: Tax the retailer
In a move that seemed to characterize the confused communication standards of the government, Said later updated reporters by stating that the government was considering imposing the fuel levy on retailers instead of the previous plan to make customers pay directly.

In a cabinet meeting on the eve of the scheduled implementation of the levy and the fuel price cut, Said revealed that the government would launch measures to allow adjustment to retailers’ profit margins in order to implement the plan.

“Companies have margins between 5% and 10%. They can use it” to pay the levy, the minister said on January 4, adding that the government would also consider extending the levy to coal, allocating part of the royalty paid by coal miners to the energy fund.

However only hours later, Said told reporters that the government would postpone the levy pending consultation with the House of Representatives.

Enny Sri Hartati of the Institute for Development of Economics and Finance (Indef) said the change in the plan would still impact customers as retailers would be likely to increase prices with the implementation of the levy. “The most crucial aspect about the levy is management transparency,” Hartati said on December 27.

Financing renewable energy development
The fuel levy was initially dubbed a fuel depletion premium, according to the 2007 Energy Law and the 2014 Government Regulation on energy policy. The fund was to be established to ensure that future generations would still enjoy benefits from the exploitation of fossil-based energy. Those benefits included allocation of more funds for the use of new and renewable sources of energy that would ensure sustainability.

Both the 2007 Energy Law and the 2014 Government Regulation decreed that by 2025 new and renewable energy must comprise 23% of the total energy used in Indonesia. Right now, that proportion is only 7%.

Said said the government also needed to speed up the development of energy access for 2,519 villages in remote areas, which could only be supplied by renewable sources. Likewise, energy access to another 12,659 villages can only be improved through the use of renewable sources.

“These projects can only be achieved if the government has additional resources to finance pilot programs on renewable energy, which cannot yet be handed over to private companies,” he said. The sources of the funds could vary, including payments for fossil-fuel exploitation, state hydrocarbon tax revenue and fees from businesses.

Saving for the future
The idea of the reserve fund follows an overhaul in energy subsidies in late 2014 aimed at reducing the burden on the state budget. In the overhaul, the government scrapped gasoline subsidies, trimmed the subsidy on diesel to a fixed Rp1,000 per liter, and agreed to regulate the price of the fuels in accordance with world oil prices.

Said has noted that oil-rich Norway has long had an energy security fund which is now worth $17 billion, plus a petroleum fund worth $836 billion. Britain and Australia have similar funds worth $1.5 billion and $1.8 billion respectively.

“Even our small neighboring country, East Timor, which only recently built its energy sector, has accumulated a petroleum fund worth up to $17 billion,” Said added.

The government is aiming to consolidate all existing funds, including the recently established crude palm oil (CPO) fund, and disburse the funds for exploration, infrastructure development, new and renewable energy development and even human resources development.

Respected economist Faisal Basri, the former head of a special task force overseeing oil and gas reform at the ministry, welcomed the idea of establishing the fund from the exploitation of non-renewable energy sources to ensure sustainability and security.

“The past and current generations have exploited crude oil reserves with limited consideration on sustainability. Reserves and production have been depleted while the number of proven new reserves could not meet the rapidly rising consumption, resulting in increasing imports,” Basri said in an interview with CNN Indonesia news website.

But Basri also advised the government to conduct a comprehensive study before launching the new policy, which could affect the livelihood of all Indonesians.

Creating a price buffer
The fuel levy is part of larger efforts to establish a better mechanism for coping with fluctuating fuel prices. The scheme was expected to consolidate management to support the government’s aim of improving energy security.

As no mechanism is currently in place to anticipate potential shocks due to a sudden spike in global oil prices, observers have pointed out that the government might start subsidizing fuel again when prices rose.

The energy subsidy reform that largely removed such subsidies went well at the beginning amid declining oil price but problems arose in mid-2015 when oil prices increased. However the initial plan to adjust prices each month caused so much confusion in the marketplace that the government switched first to quarterly adjustments, then abandoned automatic adjustments altogether. It decided not to raise gasoline prices, forcing state-owned enterprise Pertamina, which is in charge of most fuel distribution nationwide, to shoulder the losses.

Limited supply capacity
Another problem facing the government and major retailers is the low level of fuel reserves caused by high reliance on imported oil. Pertamina typically only holds fuel reserves for around 20 days and any changes in prices could result in nationwide fuel shortages, partly due to rampant speculation and hoarding.

Gas stations reported depleted supplies following the fuel price cuts on January 5, despite Pertamina’s insistence that suppliers were running normally. Many suspected that profit-takers were piling up stocks in the hope that prices would rise again.

Indonesia’s low fuel stocks compare very poorly with other countries, making it susceptible to such speculation. The US has a fuel reserve adequate for seven months of supplies, Japan for six months, Myanmar four months, Thailand 80 days and Vietnam 47 days.

Adding to the confusion about Indonesia’s fuel policies, talks were reportedly held to set an upper or lower threshold for global oil price trends in order to be better able to determine changes in domestic fuel prices.  The discussions have gone nowhere fast, leaving the country without an effective fuel pricing policy well over a year after the removal of the fuel subsidy regime in November 2014.

Director General of Oil and Gas at the Energy and Mineral Resources Ministry, I Gusti Nyoman Wiratmaja Puja, said on January 11 that the government was still studying the scheme, which would incorporate the reserve fund, set thresholds and provide for quarterly domestic price evaluation.

With such price limitations, the government would not necessarily decrease fuel prices even when global oil prices were plunging. “Profits from the move will go to the energy reserve fund and can be later disbursed as a subsidy when oil prices exceed the upper limit, or to finance renewable energy project development,” said Rinaldy Dalimi, a member of the National Energy Council, according to a report by Kompas daily.

Dalimi, however, stressed that the government needed to strengthen the legal basis for the concept and clarify the mechanism and purpose of the energy fund. The lack of a legal basis for the move was the main point of criticism of the energy reserve fund, a gaping vacuum that provided ammunition to the government’s detractors.

A more important issue for the longer term is the confusion about what the fund will do. Discussion on the proposal suggests a number of goals: to provide a source of subsidies for renewable energy to improve electrification rates; to subsidize the cost of development of renewable power sources; to provide a source of funding for future subsidies of fuel to the general public if global prices rise; and to fund increases in storage capacity. It is difficult to see how all four goals can be met by a single fund.

Doubts over transparency
Another major flaw in the fuel levy plan is the question of who will manage the fund.  Said initially said that it would be managed by his office but then changed his mind and said the government was considering the establishment of a special agency to oversee the funds.  Then on January 7, he said the government planned to establish a new utility company focused on developing renewable energy.

The government was still studying the model of such a body, he said, without elaborating on steps the government would take to execute the plan. He gave no indication that the government would transform an existing SOE into the planned utility firm.

Through the creation of a special corporate entity, the government would aim to provide subsidies to achieve an economic price for new and renewable energy, he said. It remains unclear, however, whether the planned agency will be responsible for the management of the energy security fund.

Said will undoubtedly need to work hard to convince the public and the House of Representatives to grant his ministry authority to manage the fund given that it has been implicated in major graft cases in the past. Said’s predecessor, Jero Wacik, is currently on trial for alleged graft and extortion, while former ministry secretary general Waryono Karno has been sentenced to six years in jail for corruption.

If the confusion about the goals of the fund can be clarified, House approval for establishing the energy reserve fund would mean that the country would for the first time have a reserve for emergency situations and potentially a means of funding the development of sustainable energy resources.

The minister clearly spoke out far too soon and apparently without any consideration of the technicalities that such a fund would require, suggesting that he and his ministry need to work out exactly what they want to do with the fund and then create a major communication campaign to publicize the advantages of establishing such a fund.

He has at least sparked a debate on the need for such a fund, and assuming he can satisfactorily provide answers to issues regarding the governance and management of the fund, the country might finally be on the way to finding a means of encouraging the development of sustainable energy sources and a more resilient national energy framework.