Indonesian Energy: Black Future?

Indonesia is facing a long-term energy shortage that may well be worse than anybody envisions at the moment, and appears to be doing little to face the needs. Despite lip service to a green future, the latest long-range projections from the Ministry of Mines and Energy show growing dependence on coal, rising from 36.5 percent now, to 52 percent in 2025 and 86 percent by2050.

Thus the future will likely be black, or coal will have to be greened. What has happened to all this renewable energy we are supposed to develop? The number of gigawatts (GW) or bundles of 10,000 megawatts (MW) that Indonesia will need to install only for the Java-Madura-Bali area system run by state power firm PLN is projected to rise from 36 GW in 2010 to 94 GW by 2025, leaping to an astounding 519 GW by 2050.

After 2025 demand for power is expected to grow geometrically, requiring an increase of 8 GW per year until 2030; 10.5 GW per year until 2035 and 15 GW per year up to 2040. As of 2008, only 65 percent of Indonesia's population had access to electrical power. Thus these projections do not include the needs of 82 million Indonesians representing 35 percent of the domestic power market who now have no electricity at all. If the economy continues to develop at its current pace, they will come into the consumer energy market as their incomes rise. In addition, an estimated 20,000 tiny, small, medium and larger captive power stations run by everything from big industry to remote communities must be upgraded and replaced.

The country has already faced nagging power shortages in some areas due to inadequate transmission and distribution infrastructure. The first "fast-track power program," started in 2006, was designed to add 10,000 megawatts to the power grid. It is years behind schedule and was seriously delayed by unduly low pricing for power, volatile coal supply prices and huge logistical problems, additional problems convincing Chinese export banks to lend in the face of a lack of state guarantees. The second phase, which is designed to include considerably more environmentally friendly energy sources such as geothermal, wind, etc, is equally far behind schedule. The whole program is reportedly mired in multi-ministry delays on permits, permissions and procedures, plus the negative impact of a tradition of corruption and inefficiency extending to PLN, the state monopoly power utility and much of public administration.

When a transitional economy grows as fast as Indonesia's is – currently gross domestic product is expected to grow at 7 percent for 2010 - its demand for power does not grow proportionally to its economic growth rate of 6 or 7 percent, but grows at a disproportionately higher speed as personal incomes take off.

By mid-century about 285 million Indonesians will be struggling for a better life and higger incomes and will not be denied their shopping centers, electronic and white goods and hybrid electric cars. The long range estimates predict by 2025, 4.5 GW of hydro, 4 GW of nuclear power and 3 GW of geothermal and no mention of wind, solar or biomass. This simply isn't good enough, with renewables including nuclear supplying only 12 percent of total energy needs for the Java Bali system, and this falls to 6 percent by 2050.

But Indonesia has an estimated 27 GW of geothermal reserves, and could do much better on expansion of renewable and nuclear energy. The long-range projections say the two combined will only contribute 6 percent of energy by 2050 and two thirds of this will be nuclear. Renewables will contribute 2 only percent. This is peanuts. Total estimated world capacity for geothermal development might be 70 GW for the 21st century. Indonesia will need this much between 2035 and 2040.

Looking at these figures Hilmi Panigoro, chairman of Medco, Indonesia's largest local power company, now focusing on upstream oil and gas, predicted that by 2015 more than half of the company's energy development business would be outside Indonesia in countries like Libya, with a big push at home into renewables, especially geothermal, alongside diversification into agriculture for fuel crops and food.

Asked why there is so much emphasis on overseas energy development, and whether that reflects falling energy resources, or a poor business environment, Hilmi replied, "A bit of both." Hilmi said the Indonesian power sector needs certainty, clearer fiscal policies and better energy pricing.

After all in the Donggi-Senoro gas field case the government effectively said to Medco, that you can't sell abroad, you must sell in Indonesia probably at a lower price and you must wait for us to install the infrastructure so you can do it.

But you dont have to wait to invest in Libya. You do not have to be a rocket scientist to work this out. So Indonesia needs new energy policies, more renewables, more energy efficiency, better regulations, more certainty, better energy pricing, green incentives instead of fossil fuel subsidy disincentives, more liberalization, a bigger role for the private sector. And much faster government decisions.

Terry Lacey is a development economist who writes from Jakarta.