•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   
•    EYEWITNESS   

The lack of adequate and reliable supplies of electric power is one of the most serious problems facing Indonesia today. In 2009, energy output was some 170 billion kilowatt hours (kwh), well short of the 260-290 billion kwh the country would have needed to avoid rationing.

And energy demands are only growing. Each percentage point in future GDP growth will demand a 2.5 percent increase in electric power output. If Indonesia is to reach a 6 percent annual growth rate, we will require a power increase of at least 15 percent every year.

The current plan to add 10,000 megawatts to the grid by 2012 would increase current capacity by about 40 percent, or half of the rise necessary to eliminate rationing. But the plan will also cost the government more than $17 billion, a steep price to pay if current subsidies keep domestic electricity prices well below the cost of production.

What our government needs is a comprehensive and creative approach to solving our energy crisis — one that addresses both supply and demand.

Approaching the situation on the supply side is theoretically simple but politically tricky. While the need for greater capacity is obvious, so is the reality that our government cannot afford it. Under the current arrangement, more output equals more subsidies, and more subsidies will cripple our government’s fiscal position.

The solution is to allow actual prices to rise, which will attract private investment and increase supply without forcing the government to dish out more subsidies. Some view the involvement of the private sector with cynicism, but it is the only sustainable solution.
Not only is private investment the only source of sufficient capital, it is also the answer to less expensive electricity production. Competition will reduce corruption and make operations more efficient. And unlike state-owned PT Perusahaan Listrik Negara, which depends mostly on fossil fuels, the private sector will invest in alternative and cheaper processes such as “clean” coal and geothermal energy.

Consumer electricity prices in Indonesia are currently the fourth cheapest in the region. The current subsidies are basically price controls. Any time you have price controls, prices are artificially suppressed and fewer people will be willing to produce, leading to shortages. Allowing prices to rise will increase supply and in turn allow prices to return to a sustainable level.

The business community’s opposition to price increases is understandable but shortsighted. Although a drastic increase in prices poses a challenge to companies, they stand to benefit from a reliable electricity supply. Furthermore, decreased subsidies will improve the government’s fiscal condition and lead to a healthier environment for businesses.

The government should also be mindful of the concerns of the poor. However, a better alternative to subsidizing electricity is to reallocate these subsidies to more targeted needs. Subsidies in electricity result in families having more cash than they would have otherwise. Some of it goes to good use in paying for food, medicine and education, but in some cases it goes toward alcohol, cigarettes and other nonproductive uses.

Adults should have the right to purchase what they want, of course, but not when the choices directly cost society in the form of wasteful subsidies. Instead of free power, perhaps a better solution would be to subsidize health care and education directly. The worst policy is to make electricity free for the poor. As we all know, free stuff — similar to eating at buffets — leads to vast overconsumption.

Increasing prices is politically challenging but there is no way around it. There is no way Indonesia can produce adequate supplies of power without prices reflecting its true cost. Similar to our fuel policy adopted last year, there can be a “lifeline” provision for the poor, which would allow subsidies for the first, say, 60 kwh and much higher prices beyond that.

In short, the supply side of the equation can be solved by gradually redirecting subsidies, which would allow the government to open up the sector to private investment. This is the only sustainable solution.

As for the demand side, there are a number of government policies that would encourage a reduction in electricity consumption.
First, our government should implement a one-time change in Indonesia’s time zone. Pushing our clocks back an hour would result in significant energy savings. Currently, the sun rises at about 6 a.m., but most activity doesn’t start for another two to three hours.

In the evening, the sun sets at about 6 p.m., while activities such as shopping and work continue until 8 or 9 p.m. Changing time zones by an hour would allow the use of more natural sunlight in the place of electricity. Countries with daylight savings schedules in effect see a 2 percent to 5 percent reduction in their energy consumption.

Countries on the same latitude as Jakarta, including Singapore and China, are already an hour behind Jakarta so changing our time zone would be consistent with the region. This change could also result in a reduction in traffic accidents and public crime, an increase in outdoor and leisure activities and an increase in retail and business activities.

Returning to the issue of subsidies, the government could also redirect subsidies to encourage more efficient energy use. With incentives, consumers would purchase more efficient air-conditioners, refrigerators and other appliances. This could be in the form of subsidies or tax breaks for the purchase of such goods.

Finally, the government could introduce a pricing mechanism that would encourage more efficient use of energy. All public places, such as malls, would be required to set their room temperature at above 26 degrees Celsius. This is similar to a policy that China has adopted. Those retail and mall operators who choose cooler temperatures out of a belief that they correlate with higher sales

It is difficult to overstate the challenge that our defunct energy policy poses on the development of our nation. PLN topped the list of money-losing state-owned enterprises in 2008 with a total loss of $1.2 billion.

Energy shortages are a constraint on economic growth, deterring foreign investment and causing a significant inconvenience to millions of citizens. Fortunately, this is a problem that can be solved. It may require making politically unpopular decisions, but it must be done.

John Riady is a lecturer at the Pelita Harapan University School of Law and editor at large at Globe Asia. He can be reached at john@globeasia.com.