On 3 September 2009, the Jakarta Post newspaper announced the latest development in Indonesia’s long struggle with energy subsidization: spending will increase, again.

Two decisions seem to have been made in close succession.

First, the ICP—the Indonesian Crude Price, an index based on five internationally traded crude oils—changed its estimates for 2010 prices from US$60 to US$65 per barrel.

Because the government has established a fixed price for the domestic sale of crude oil, this effectively means an increase in projected spending of Rp9.75 trillion (US$984 million). The Jakarta Post reports that this will take total spending on fuel subsidies in 2010 to Rp68.73 trillion (US$6.94 billion), equal to 7.2% of the state budget.

Second, Indonesia’s state electricity company, PT Perusahaan Listrik Negara (PLN), has won an appeal to the House of Representatives to increase by 5% the rate at which electricity is subsidized.  This Rp4.38 trillion (US$442 million) subsidy will compensate PLN for losses they have incurred this fiscal year. Total subsidies to PLN this year are reported to be Rp37.8 trillion (US$3.8 billion).

Indonesia has long struggled with high energy subsidies that drain a significant portion of the country’s public budget. Between 2001 and 2008, World Bank figures show that expenditure on subsidies made up between 10% and 28% of the national budget.  The two biggest items on this ticket are fuel and electricity subsidies, making up 90% of the transfers.

Needless to say, this spending is at the opportunity cost of investments in health, education, infrastructure and other social goods.  Its supposed purpose, being to help the poor, does not stand up to examination.  Research conducted by the Co-ordinating Ministry of Economic Affairs of Indonesia shows that the top 40% of high-income families—those more likely own cars and be connected to the electricity grid—receives 70% of the subsidies.

According to a review of energy subsidies by the United Nations Environment Program (UNEP), the distortions are many and far-reaching.  Large amounts of Indonesia’s wealth are foregone through overconsumption of domestic crude oil supplies and this in turn has implications for investment in the industry and even public health.

The biggest opposition to reform is the general population.  Energy prices are now considered an entitlement by Indonesians, many of whom live on under US$2 a day.  Price increases in the past have been met with public riots, despite policy mechanisms which have been designed to channel alternative forms of welfare payments to the poor. The IEA notes, however, that there were relatively low levels of opposition to reforms in October 2005 and May 2008—a sign that public awareness may be growing.

Earlier this year, energy-subsidy reform appeared to be on the horizon, following the landslide re-election of incumbent president Susilo Bambang Yudhoyono and a return to low world oil prices.  In July 2009, the Reuters news agency reported Agus Purnamo, head of Indonesia’s National Council on Climate Change, stating publically that he expected fossil fuel subsidies to drop within the year “below the distortion level that discourages renewable energy.” The Council warned that the country is currently in danger of failing to achieve its target of a 10% renewable-energy share by 2025.

The Council also suggested that Presdient Yudhoyono might introduce a new feed-in tariff policy, under which PLN would be required to buy a percentage of its electricity from renewable energy sources at a guaranteed price.