1. Electricity subsidy reform in Indonesia: Demand-side effects on electricity use
Paul Burke
Sandra Kurniawati
Australian National University
IAEE, June 2017
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2. 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
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3. 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
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4. Average electricity price, by consumer group
Recent reforms

5. 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

6. 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
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7. Same-year price elasticity of demand by consumer group

8. Effects of electricity subsidy reform7%
2012
~ 14 million tonnes of avoided CO2 emissions p.a.

9. 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
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10. Comments welcome Paul Burke paul.j.burke@anu.edu.au
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