KEROSENE SUBSTITUTION PROGRAMS IN INDONESIA: INSTITUTIONS AND PUBLIC POLICIES

1. KEROSENE SUBSTITUTION PROGRAMS IN INDONESIA:INSTITUTIONS AND PUBLIC POLICIES Asclepias Rachmi Indonesian Institute for Energy Economics 31st IAEE Pre Conference on Clean Cooking Fuels & Technology Istanbul, 16-17 June 2008

2. Agenda • Energy Consumption • Fuel Price Policy • Kerosene substitution program • The Program in brief • Role of institutions • Evaluation: • Program Implementation • Complicating Factors • Energy Security • Concluding Remarks

3. ENERGY CONSUMPTION

4. Energy Consumption in 2005(1) Source: Handbook Statistik Ekonomi Energi Indonesia 2006 • LPG consumption in 2005: • Industry, Household, Commercial • Household is recorded as major user • Small overall share (1%) • Small market -- limited infrastructure • Available in bulk and retail in 50kg, 12 kg, • and 6 kg units • Kerosene Consumption in 2005: • Used by all consumer groups: as is and mixed with other fuels • Household is recorded as major user • Available in bulk and retail in flexible sizes • Relatively easy to handle, wide spread uses

5. Energy Consumption in 2005(2) • Household: • Use 28% modern energy type mostly • kerosene, and 72% conventional biomass • Kerosene for cooking, lighting, initiate fire • for all kinds of purpose, etc • Industry: • Consumes various energy types • Kerosene and LPG: recorded share in • the sector energy mix is only 1% each • Substituting kerosene with LPG implies significant change in both markets: • Market size • Infrastructure for production & distribution • Operational details for both the supply • and demand side actors Source: Handbook Statistik Ekonomi Energi Indonesia 2006

6. FUEL PRICE POLICY

7. Fuel Pricing Policy (1) As stated in the Blue Print of Kerosene to LPG Substitution Program: • Certain fuels (Bahan Bakar Tertentu) which requires subsidy: price setting by the Government through laws and regulations • Fuels for national needs: to be determined B-to-B, approved by the Government • Fuels used by large amount of people but unsubsidized: prices are based on certain formulas • General fuels: no price regulation, treated similar to general commodities

8. Fuel Pricing Policy (2) Kerosene Prices Apr 2001-Mar 2008 • Kerosene prices: • Price differentiation • Varying systems & formulas • Current prices: • - Industry = MOPS +15% • - Retail IDR 2500

9. Fuel Pricing Policy (3) Source: IIEE, compiled from various sources • Implications: uncontrollable subsidy allocation • Fuel price subsidy encourage more consumption & increase imports of products • Domestic price differential provides incentives for misuse, • High and volatile international price is translated to unstable state budget

10. KEROSENE SUBSTITUTION PROGRAM

11. The Substitution Program in Brief • Targets: • ‘Zero Kero in 2012’: • No subsidized kerosene for cooking in 2012 • Kerosene available at economic price and in a higher value form (e.g., aviation turbine) • Distribution of 3kg LPG to 6 million household in 2007 and 42 million household in 2012 • Implementation strategy: • Reduce kerosene subsidy gradually, distribute LPG 3kg package based on priority lists • Develop LPG infrastructure • Involve local businesses • Prudent supply capping of subsidized kerosene • Intensive campaign on using LPG safely • Improve government role (central, provincial, municipal, community level) in monitoring the distribution package • Distribution of LPG package: • 2007: pilot project in Jakarta, initial step in 13 municipalities in Java, then other areas in Java-Bali • 2008 onward: Sumatera and other islands in steps

12. Role of Institutions As stated in Blue Print: • Dept of EMR: coordinator, policy • Dept of Finance: budget • Dept of Industry: LPG canister • Ministry of Women Empowerment: public outreach • Ministry of Cooperation and Small Business: LPG stove • Dept of Social Affairs: business shift of kerosene distributors & retailers • BPH Migas: reduction of kerosene supply • Pertamina: program implementor

13. EVALUATION

14. Program Implementation (1) • News monitoring indicates unclear work division & shift in tasks • Difficulty in carrying duties, some links to budget constraints • Increasing responsibility of the program implementor • Outcome below target • Scarcity in kerosene and LPG 3kg supplies • Both in locations of program implementation as well as other areas • Lead to adjustment in kerosene supply reduction at locations of program implementation • Induced market operations (extra supply) • Impact in more hardship & people complaints

15. Program Implementation (2)

16. Complicating Factors • Energy price adjustments • Government increase general fuel prices in May 2008 • Pertamina: • Regular adjustment of fuel prices for industry (non-susbidized, MOPS as reference) • Price of LPG 50kg (non-subsidized) increased by 20-25% in January 2008 • Subsidy package (compensation program) • Increase in general fuel prices is accompanied by a set of compensation package: direct money transfer for household, subsidy for schools and university students, subsidy for supply of basic food staples, etc. • Increase in kerosene consumption: • Relatively larger increase in price of other fuels • Natural disaster in various areas • Scarcity of supply of both kerosene and LPG lead to panic buying

17. Energy Security • New paradigm of energy security: • Each one in the business chain may have different perspective on what energy security means for each of them • It is not only about physical supply of energy • 4As as indicators: • Availability • Accessibility • Affordability • Acceptability • It is in fact in line with Sustainable Development concept: balancing social-economic-environmental concerns • Energy security and sustainable development together: • More aspects to be considered, • Indicates ways to address concerns of parties in the energy value chain • Important for addressing the national interest

18. Concluding Remarks • Data accuracy • Energy consumption: size, users, area • Subsidy target • Planning • Program design: substance, institutions, budget • Implementation strategy: coordination, public awareness & acceptance, monitoring • Energy security perspective • To balance social-environmental-economic interests • To address short & long term concerns • To be more realistic: take into account position & perspective of everyone in the value chain