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

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

ENERGY CONSUMPTION

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

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

FUEL PRICE POLICY

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

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

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

KEROSENE SUBSTITUTION PROGRAM

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

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

EVALUATION

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

Program Implementation (2)

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

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

Concluding Remarks Data accuracy Planning Energy security perspective 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