Electricity subsidy reform in Indonesia: Demand-side effects on electricity use Paul Burke Sandra Kurniawati Australian National University IAEE, June 2017 paul.j.burke@anu.edu.au Image: http://www.rambuenergy.com/file/2014/10/PT-PJB-500x330.jpg

Indonesia’s recent electricity subsidy reforms One of the world’s largest episodes of electricity subsidy reform Large tariff increases since 2013, differing by consumer group Exemption for poor households Move to monthly automatic adjustment Electricity subsidies as % of central government expenditure & transfers: 6% in 2012 2% in 2016 Image: http://nasional.kompas.com/read/2013/06/22/1411126/Faisal.Basri.Harga.BBM.Naik.Imbas.Ulah.Masa.Lalu.SBY, http://www.bloomberg.com/news/articles/2015-06-16/widodo-to-switch-off-middle-class-power-subsidy-in-budget-reform

Identification strategy Research question What are the demand-side effects of Indonesia’s recent electricity subsidy reforms? Method Econometrically estimate electricity demand functions using data of up to three dimensions Identification strategy Control for non-price factors, including multiple dimensions of fixed effects Instrumental variable approach Image: http://blog.worldagroforestry.org/index.php/2016/02/17/bioenergy-can-bring-clean-power-to-remote-areas-of-indonesia/

Average electricity price, by consumer group Recent reforms

Estimation equation (3D) ∆ln𝐸 𝑔,𝑟,𝑦 =𝛼+ 𝛽∆ln𝑃 𝑔,𝑟,𝑦 +∆ 𝑿 𝑔,𝑟,𝑦 ′ 𝜽+ 𝜂 𝑔,𝑟 + 𝜂 𝑟,𝑦 + 𝜂 𝑔,𝑦 + 𝑢 𝑔,𝑟,𝑦 Two-dimensional fixed effects Same-year price elasticity of demand Error Average price Electricity use Controls Ln GDP per capita Ln Population Ln Diesel price Temperature +++ g = consumer group r = region y = year

Results Same-year price elasticity of electricity demand: –0.15 to –0.2*** Four-year elasticity: –0.4*** Negative; inelastic Similar to evidence from other countries Robustness checks: similar results Image: https://commons.wikimedia.org/wiki/File:Jakarta_cityscape_during_night_time,_taken_from_27th_floor;_2013.jpg

Same-year price elasticity of demand by consumer group

Effects of electricity subsidy reform 7% 2012 ~ 14 million tonnes of avoided CO2 emissions p.a.

Discussion Government has plan to phase out almost all remaining electricity subsidies Completing the reform process => additional electricity savings of ~ 6% Benefits: Improved efficiency Reduced emissions Free up resources for other priorities Better incentives for the electricity utility There are more efficient pro-poor policies than electricity subsidies Image: http://www.powermag.com/indonesia-inaugurates-three-coal-plants/

Comments welcome Paul Burke paul.j.burke@anu.edu.au Image: http://www.powermag.com/indonesia-energy-rich-and-electricity-poor/