High economic growth and energy challenges

Friday, 21 January 2011

The Jakarta Post

Coordinating Minister for  the Economy Hatta Rajasa, in closing 2010, restated his optimism that Indonesia’s economy would continuously grow and “it is not impossible that we will be one of 10 largest economies in the world by 2030.”  

The Economist (The World in 2011) predicted the Indonesian economy will surpass those of Turkey and the Netherlands, making us the 16th largest economic power in the world in 2011, a miracle compared to 2004 when we were at the 25th position.

The optimism, however, did not explain the relationship between economic growth and energy required to fuel growth.

Energy is the engine of economic growth. Without energy, economic growth would be impossible. The high economic growth of the present advanced nations was primarily due to abundant and cheap energy, particularly oil, some four to six decades ago. The success of the resources-poor East Asian industrial countries in maintaining high economic performances is attributed to their ability to import fossil fuels, including from Indonesia.

Our country is known as the world’s largest exporter of coal, recognized previously as an OPEC member and used to be the largest exporter of LNG.  The considerable exports, however, do not mean that we are in safe position to secure our own energy demand. Sadly, we have not prepared a strong energy supply system to meet the expected high growth.

Compared to those exports, energy provided to the domestic market is far from adequate. Our energy consumption per capita is still among the lowest in the region, our electrification ratio is quite poor (about 35 percent of households in this wide archipelago have not been connected to electricity), while oil and natural gas services have not reached many regions.

Studies (including by the National Energy Council) have predicted Indonesian energy demand in 2030 will have increased by about three fold from the current consumption of about 150 MTOE (million ton oil equivalent).  Clearly that it will not be an easy task to secure the energy required to fuel our future growth.

To make sure that our goals for long term growth prevail, it is necessary that energy supply is secured along our development journeys. Accelerating the provision of energy infrastructure, prudent exploitation of fossil fuels, boosting renewable energy development, practicing conservation and incorporating the role of energy in the state budget would be the strategic keys.  

Our present energy infrastructure is far from sufficient to facilitate efficient energy flow, not to mention for meeting the expected growing demand. Our infrastructure capacities (except for electricity) are in a stagnant condition. Natural gas infrastructure for domestic use – as well as for coal – lag behind that for exports. Worse, the insufficient infrastructure (oil refineries, electricity generating, natural gas pipelines, etc,) are aging and decaying in its performance and efficiency.

The inadequate, stagnant and decaying domestic energy infrastructure means that our dependency on imports increases. This is clear in the case of oil fuels and LPG.    

Diversified infrastructure would allow energy to flow more efficiently, reduce energy consumption costs and restrain exports. To anticipate future growth, the development of energy infrastructure has to be accelerated to connect our scattered resources to growing demand centers. The government has to establish clearer targets for such investments.

Demand for our fossil fuels is growing, coming not only from domestic sources and traditional customers, but also from giants like China and India. However, our fossil fuel reserves are not large enough to be exploited exhaustively. Environmental damage and the fact that this populous country needs bulk energy can be added to our incentive to enforce stricter mining practices, sustainable exploitation and a “domestic first” policy.   

There are considerable reserves of renewable energy available — geothermal for instance, where Indonesia’s reserves are the world’s largest — but we have not yet developed them effectively.  The currently precocious development of renewable energy technology and its application in the world (solar, wind, bio-fuels), as well as the ever-increasing fossil fuel prices might now be referred to boost our renewable energy development, while at the same time reducing our dependency on fossil fuels.

It is the time to exploit our energy conservation potentials more progressively by improving our ways of consuming energy and promoting a new culture of using energy more rationally and wisely.  

The state budget needs to change its perception of the economic role of energy from sources of direct revenues to drivers of economic growth.  

Energy resources exploited in this country have so far been used as sources of export earnings and government revenues through exports of primary commodities, but without significant attempts to make them to produce higher value added (including taxes and jobs) through the creation of related industries in domestic market. On the other side, energy consumption has burdened the government with a considerable subsidy budget as a consequence of pricing policies that place energy prices below economic levels for nearly all consumer groups.

Without efforts to secure energy supply, our dreams for high economic growth would be difficult to achieve.

The writer is a senior energy planner and an economist with the National Development Planning Agency. The opinions expressed are his own.