Energy Policy 61 (2013) 31–41

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Secure energy supply in 2025: Indonesia's need for an energy

policy strategy
Sugeng Mujiyanto, Günter Tiess n
Montanuniversität Leoben, Franz-Josef-Straße 18, 8700 Leoben, Austria

H I G H L I G H T S

 Indonesia aims at 17% renewable energy in energy mix 2025.

 Population growth exceeds increase of energy production.
 Investment incentives for new technologies, exploration and efficient production are necessary.
 Clear and comprehensive energy policy strategy and regulatory framework are crucial.

art ic l e i nf o a b s t r a c t

Article history: Indonesia as an emerging country with one of the fastest growing economies requires sufficient supply
Received 10 April 2012 with energy for national development. Domestic energy production cannot satisfy the domestic demand,
Accepted 30 May 2013 and the deficiency necessitates growing imports. The present energy mix consists of 96% from non-
Available online 25 June 2013
renewable sources, i.e. fossil fuels, less than 4% from renewables. Government Regulation 5/2006 aims at
Keywords: increasing the proportion of renewable sources to 17%. Two scenarios for the energy situation in 2025
Energy supply security have been elaborated and are discussed. An overall energy policy strategy and regulatory framework
Energy policy strategy covering non-renewable and renewable resources are crucial for securing energy demand.
Indonesia & 2013 Elsevier B.V. All rights reserved.

1. Introduction
Indonesia is an archipelago country comprising approximately
17,000 islands in area of 1,904,569 km2 of which 1,811,569 km2 is
covered by land and 93,000 km2 is covered by water. Administra-
tively, it is divided into 33 provinces, which consist of 440 regencies.
With more than 248 million people, Indonesia is the world's fourth
most populous country. It is the largest economy in Southeast Asia
and a member of the G-20 major economies. Indonesia created an
impressive economic growth for more than 18 years from 1980 to
1997 (the year of the onset of the Asian financial crisis), which is
reflected by increasing GDP per capita Power Purchasing Parity (GDP
PPP) by nearly 7.75% per year (http://www.tradingeconomics.com/
indonesia/gdp-per-capita-ppp).
Indonesia's strong economic growth caused an even faster
increase demand for energy. From 1980 to 2010, total primary
energy production grew 2.8 times, while energy consumption
grew to almost five times. In 2010, approximately 96% of the
national energy mix was dominated by fossil fuels. The renewable
sources, mainly hydropower and geothermal energy, amounted to
n
Corresponding author. Tel.: +43 38424022011.
E-mail address: guenter.tiess@unileoben.ac.at (G. Tiess).
less than 4%. Total energy demand in 2025 is predicted to be nearly
3 times higher than in 2010. The problem of natural depletion of
non-renewable resources, particularly oil, and their compensation
has to be solved. The Indonesian Government Regulation No.
5/2006 tries to cope with this situation by aiming at the energy
mix 2025: oilo20%, gas 30%, coal 33%, renewable resources 417%,
that is bio-fuel (5%), geothermal energy (5%), biomass, nuclear
power, hydropower, solar energy (5%) and coal-liquefaction (2%).
However, changing conditions since 2006 have caused amend-
ments. In order to secure the energy supply in 2025, a deliberately
balanced use of non-renewable and renewable energy resources is
crucial. Challenges like increasing the availability of renewable
energy resources, establishing grids of energy supply under
difficult transport conditions and fostering consumption of renew-
able energy sources can only be managed by establishing a clear
and comprehensive energy policy strategy and framework based
on an appropriate energy mix.
The paper is structured as follows: Section 2 discusses the
relationship of economic growth and energy consumption, Section
3 provides data of energy resources, reserves, production and
consumption. Section 4 describes national energy supply policies
based on the Government Regulation No. 5/2006 on National
Energy Policy. Section 5 provides an overview of the regulatory
and legal framework. Section 6 analyses and discusses the main

0301-4215/$ - see front matter & 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.enpol.2013.05.119
32 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
Fig. 1. Energy consumption and GDP(PPP)/capita in Indonesia 1980–2009.
Source: BP Statistics (2010).
issues and challenges related to energy supply mix presently and
targeted in 2025. Finally, Section 7 includes the conclusions.
2. Economic growth and energy consumption
Energy consumption increases along with economic growth,
which is reflected by GDP per capita. Masih and Masih (1996)
analysed and confirmed the relationship of energy consumption
and economic growth of Indonesia from 1955 to 1990. Data from
1980 to 2009 in Fig. 1 indicate the parallel development of GDP
and energy consumption, with the consumption line exceeding
the GDP line until 2008.1
2.1. Production versus consumption (1980–2009)
While energy production grew to 2.8 times within 30 years,
energy consumption grew to almost 5 times. Total energy produc-
tion from non-renewable energy resources increased from 90
million tonnes oil equivalent (MTOE) in 1980 to 269 MTOE in
2009 (Figs. 2 and 3). Total primary energy consumption was
25.8 MTOE in 1980 and reached 128.2 MTOE in 2009. Although
total primary energy production is still higher than total domestic
energy consumption, the consumption upward trend is evident.
Therefore it is an important policy issue to balance domestic
demand and exports of gas and coal (see Sections 4–6).
3. Energy resources, reserves, production
3.1. Non-renewable sources
Indonesia has a wide variety of abundant energy resources. Its
economy was based on export of non-renewable resources for
more than four decades (Yusgiantoro, 2000), when in 2004 the
1
During the Asian Crisis of 1997–1998 energy consumption and GDP decreased
by −13.45%. Another drop of energy consumption during 2005/2006 had no impact
on economic growth. After a period of steadily growing GDP (2000–2008), at a rate
of 3.8% in 2000–2001 to 6.4% in 2006–2007, GDP growth slowed down to 4.6% in
2008–2009 due to the international economic crisis. The highest energy consump-
tion growth amounted to 12.24% in 2008–2009; the lowest was negative in 2007–
2008 (−5.4%). Since then, GDP has been growing and is predicted to reach 6000 US
$/c in 2016 (IMF, 2010/TradingEconomics.com). GDP Power Purchase Parity (GDP
PPP) rose from 726.51 US$/capita (UD$/c) in 1980 to 4150 US$/c in 2009.
country became to a net oil importer. With increasing domestic
energy need the export potential of coal and gas was also reduced,
which is reflected in the ‘New policy on domestic energy supply
obligation' (see Sections 4 and 5). The non-renewable energy
resources of oil, gas and coal are spread over the whole area of
the country, mainly in 128 sedimentary basins (MEMR-Geological
Agency, 2009).
Map 1 shows the distribution of Indonesia's energy resources.
Tables 1–3 show the amount of non-renewable energy resources
proven reserves and production2 as of end of 2010.
3.1.1. Oil and gas
Since the first discovery of oil in 1885, Indonesia's oil and gas
sector has made a substantial contribution to the economic
development of the country. In 2002, the known Indonesian oil
reserve represented about 1% of the total world reserves. The rate
of oil exploitation of 1.5 million barrels a day seemed to be
responsible for bringing about depletion in the near future, but
then 60 newly discovered hydrocarbon basins offered the prospect
of compensating the rapid exploitation of the oil fields (Suryantoro
and Manaf, 2002). After the Asian Crisis of 1998 and the new oil
and gas law of 2001 (see also Section 5), investment in exploration
of new fields declined and the sector shrank by 3.6% in 2010 (data
of Central Statistics Agency, in Global Business Guide Indonesia
(GBGI), 2011). At present, oil production is declining by 12% every
year. This is attributable to ageing fields and a lack of exploration.
Indonesia still has huge reserves of oil and gas, particularly in the
eastern part, where large deep sea deposits have been discovered.
Indonesia has the largest reserves of natural gas in the Asia
Pacific region at 108.4 trillion cubic feet (3.1 trillion cubic meter) of
proven reserves at the end of 2010; this is three times that of its oil
reserves. In the region of Minas and Duri on the east coast of
Sumatra the two largest oil fields by production are maturing with
over 80% of reserves realised for both. Presumably, the largest
potential gas reserves are situated in the same region. So far, only
one third of known gas basins have been explored.
2
Non-renewable energy production. Gas production increased from
16.7 MTOE in 1980 to 64.7 MTOE in 2009, coal production increased from
0.24 MTOE in 1981 to 155.3 MTOE in 2009. In contrast, oil production decreased
from 79.03 MTOE in 1980 to 49.0 MTOE in 2009.
 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41 33

Fig. 2. Non-renewable energy production and consumption.

Source: BP Statistics (2010).

Fig. 3. National energy mix 2005–2025.

Source: Sastratenaya and Sudi (2010).

Map 1. Energy resources of Indonesia.

Source: Ministry of Energy and Mineral Resources (2010).

3.1.1.1. Oil production and import. Indonesia depends highly on oil
and its derived products for fuelling the economic development.
The energy mix is dominated by oil as a major primary energy
source. In 2010, oil held a portion of 47.6% of total energy
consumption (BPS, 2010). Indonesia ranks 20th in the world as
an oil producer, providing 1.2% of total global production (BP
Statistical Review of World Energy, 2011). Oil production reached
its peak at 84.9 million tonnes in 1977. From 2000 to 2009,
production declined by 33%. Indonesia turned from oil exporter
to net oil importer in 2004, moreover in 2008 Indonesia
34 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41

suspended his OPEC membership. In 2005, rising oil prices,
declining production and lack of refinery capacity caused the
need for import of oil products. Indonesia's main sources of
imports are Asian countries and the Middle East, including Saudi
Arabia.
3.1.1.2. Gas production and export. In 2010, the share of gas in
domestic energy consumption was 21.4%. Indonesia's gas
production was 73.8 MTOE in 2010, while its share of global total
production was 2.6% (BP Statistical Review of World Energy, 2011).
Since 1980 gas production has exceeded domestic consumption
approximately twice. In response to rising oil prices and the
possible 50% reduction of carbon dioxide emissions of gas use
compared to solid fuels, since 2006 the Government has from
2006 onwards aimed to reorient domestic energy consumption
towards gas. Gas is needed for gas-fuelled power plants, for
refinery, city gas (with the highest growth rate) and industry.
Though gas production has increased considerably in the past
decade (by 14% in 2010 from 2009), the rising domestic demand
reduced the country's capacity for LNG exports (GBGI, 2011).
Indonesia began exporting LNG from the Bontang gas field
(operated by Badak LNG) in Kalimantan in 1977 as a pioneer in the
sector and positioned itself as the world's leading LNG exporter
until 2005. However, the capacity of the 30 years old gas field is
declining. In 2011, only around 15.5 million tonnes of LNG were
produced, which is a mere 65% of capacity due to the lack of feed
gas. The main production sites are in Arun Aceh, Bontang in East
Kalimantan and Tangguh in Papua (Widarmayana, 2007). In 2008,
52.2% of natural gas was exported to Japan, South Korea and
Taiwan. However, Indonesia now faces increased competition from
Qatar and Malaysia. New projects such as Tangguh in Papua under
BP (in 2009) and the Cepu block in Central Java by Exxon Mobil
and Pertamina are designed to give a boost to the country's role as
an LNG exporter. With adequate infrastructure development,
Indonesia is in an advantageous geographical position to further
export to the Chinese market as well as the west coast of the USA.
3.1.2. Coal
It is assumed that there are over 847 billion tonnes of proven
coal reserves worldwide. This means that there is enough coal to
last for about 118 years at current rates of production. In contrast,
proven oil and gas reserves are equivalent to around 46 and 59
years at current production levels. Indonesia’s proven coal reserves
are ranked on level 15 (Europe's Energy Portal, 2012). Indonesia
provides significant coal potential. Low-rank coals dominate
Indonesian reserves.
3.1.2.1. Coal production and export. Indonesian coal production
currently is the 6th largest in the world; in 2010 it amounted to
305.9 MT and 4% of global production or 188 MTOE, i.e. 5% of total
(BP Statistical review of world energy, 2011). As a producer of hard
coal, Indonesia ranks seventh (173 Mt per year); for brown coal it
ranks second (163 Mt) worldwide. In 2010, brown coal production
in the OECD countries continued to decline while non-OECD
brown coal production rose to a record level, led by Indonesia
which accounted for over 75% of global incremental growth (WCA,
2012). Coal is Indonesia’s largest fossil energy resource. In 2010,
the share of coal consumption in the energy mix was 26.3%.
Increasing coal consumption in 2009 is mainly to support coal
fired power plant due to fulfil 8% electricity growth. The
governmental first Fast Track programme of 2004 includes the
construction of 10,000 MW coal-fired power plants with a
capacity of 10,000 MW. Despite the efforts to diversify the
energy mix and prioritise renewable energy as part of the
second Fast Track Programme, coal is still dominant. In January
2011, the Ministry of Energy and Mineral Resources announced a
ban on exports of coal with a calorific value below 5400 cal/gram
by 2014, in order to conserve reserves as well as to urge producers
to upgrade the heating value before it is exported.
3.1.3. Coalbed methane
Indonesia has the second largest resources of coal bed methane
(CBM) after China with a reserve potential of 453 trillion cubic feet
(Tcf), more than double the country's total gas reserves. However,
plans to develop this source only came about as late as 2008. The
South Sumatra Basin, the largest CBM basin in Indonesia, is
estimated to contain in-place resources of approximately 183 Tcf;
the Kutai Basin is estimated to contain approximately 80 Tcf. The
eastern area of Kalimantan has numerous coal outcrops and open
pit coal mines, as well as several natural gas fields and the world’s

Table 1 Table 3
Non-renewable energy resources and reserves (end of 2010). Potential of renewable energy sources including utilization.
Source: BP Statistical review of world energy (2011). Source: MEMR (2011).

Non-renewable energy Resources Proven Production R/P Energy source Resource potential Installed capacity Development (%)
reserves ratio
Geothermal 28 GW 1189 MW 4.25
Oil (million barrels) 56.6 4.2 366.056 11.8 Hydropower 75.67 GW 4264 MW 5.63
Gas (trillion cubic feet) 334.5 108.4 7.9 37.4 Solar 4.8 kWh/m2/day 12.1 MW
Coal (million tonnes) 104.9 5529 275.2 18 Wind 9.19 GW 1.1 MW 0.01
Coalbed methane (trillion 453 Ocean 6 GW 0 MW 0
cubic feet) Biomass 49.8 GW 445 MW 0.89

Table 2
Coal resources and reserves in Indonesia based on calorific value.
Source: MEMR (Geological Agency), Clean Coal Day in Japan, Sept. 6–7, 2011.

Quality Resources (Million tons) Reserve (Million tons)

Class Calorific value (cal/gram) Total % Probable Proven Total (%)

Low o5100 21,227.63 20.18 7603.88 1105.40 8709.28 41.21

Medium 5100–6100 69,726.02 66.29 7063.52 2904.41 9967.93 47.17
High 6100–7100 13,220.61 12.57 861.73 1410.44 2272.17 10.75
Very high 47100 1013.19 0.96 73.29 109.18 182.47 0.87

Total 105,187.44 100.00 15,602.41 5529.43 21,131.85 100.00

 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
second largest liquefied natural gas (LNG) facility, PT Badak’s
Bontang Plant. This plant is expected to be the most likely market
for CBM projects in the region. Rising demand for gas and LNG in
Asia Pacific countries has propelled development of the CBM
industry and pipeline projects across the continent (CBM Asia,
2012).
3.2. Renewable resources
The archipelago of Indonesia is rich with renewable energy
resources like geothermal energy, hydropower, solar energy, ocean
energy such as tidal energy, wave energy and current potential.
Nevertheless, in 2010 the portion of renewable energy in the
energy mix was only 4%, mainly geothermal energy and hydro-
power. Other renewables contribute only a very small amount
locally and are not on grid connection.
3.2.1. Geothermal energy
The nearly 200 volcanoes and 100 geothermal fields are the
cause for Indonesia having the largest estimated geothermal
energy reserves in the world at approximately 27 GW or 40% of
the global total. Almost half of this potential is located in Sumatra
(13.3 GW), one third in Java (9.7 GW). In the light of political
uncertainties in the Middle East and rising oil prices, geothermal
power represents an energy source that is not subject to volatility.
Though geothermal energy provides clean energy, it has some
disadvantages like its remote location from industry and settle-
ment centres, the transport problem, and high costs of develop-
ment. The financial crisis in 1997, however, led to the suspension
of seven of these projects. The development of the sector has been
delayed by numerous issues ranging from a lack of financing for
projects, conflict between central and local government as well as
the high risk for investors. The Geothermal Law issued in 2003
(Law No 27/2003) was expected to provide a conducive atmo-
sphere to geothermal development in Indonesia (Silviati, 2006).
Currently, Indonesia utilizes less than 5% of the estimated poten-
tial or 1190 MW and is the third largest producer of geothermal
energy behind America and the Philippines (in 2010 total world
power capacity was 10,906 MW; BP Statistical Review 2011).
Indonesia hosted the 2010 World Geothermal Congress, where
the Indonesian government announced the goal to reach
9000 MW from geothermal resources by 2025 and to be the
world’s largest producer of geothermal energy, ahead of the USA
(GEA, 2010)
3.2.2. Hydropower
Less than 6% of hydropower potential has yet been developed
so far. Hydropower potential is about 75 GW, with small hydro
projects accounting for only 500 MW. Largest hydropower
resources are located in Papua from the Memberamo river with
estimated resources of 10,000 MW (MEMR). The current installed
capacity for all hydropower plants is about 4260 MW, of which
small units contribute about 64 MW. The hydropower plants
comprise micro, mini, small and large units, with a significant
portfolio of small hydropower projects planned or under con-
struction. However, financing will remain a major challenge
because of the difficulty in negotiating long-term power purchase
agreements with PLN. Most of the existing micro hydropower
plants are installed off-grid as they are used in rural and remote
areas (Silviati, 2006). There are constraints in electricity transport
infrastructure due to the archipelago form of Indonesia.
3.2.3. Solar and photovoltaic energy
Solar resource potential is very significant due to Indonesia's
equatorial location, but with high investment and operational
35
costs. Photovoltaic solar energy is used in the rural areas for
generating electricity, while solar thermal energy is used for solar
stoves, water pumping, drying equipment for agricultural produce
and water heaters. Development of solar energy is still low
(12.1 MW), mostly in form of solar home systems (SHS) mounted
on roofs in urban areas, and in remote areas without any connec-
tion to the electricity grid. Installing photovoltaic energy is
relatively expensive compared to non-renewable energy, and the
technology requires intensive maintenance, which is a problem on
small islands or in remote areas. The primary weakness in the
Indonesian solar industry is the lack of local manufacturing
facilities for high quality batteries and PV modules, though the
government actively supports the development of solar PV
applications.
3.2.4. Biomass
Indonesia has a large potential of biomass energy, which
traditionally has been used through direct burning and later on
through modern conversion technology such as pyrolysis and
gasification. National studies estimate the electricity generation
potential from the roughly 150 Mt of biomass residues produced
per year to be about 50 GW or equivalent to roughly 470 GJ/year.
The main source of biomass energy in Indonesia could be rice
residues with a technical energy potential of 150 GJ/year. Yet rice
residues produced by rice mills have low bulk density and cause
high transport costs, so the economically viable potential has to be
considered. Other biomass resources are forest or plantation
residues (e.g. rubber wood, coconut residues), agricultural residues
(e.g. sugar mill residues, palm oil residues) and municipal waste.
Most mills are small and decentralized. So far, only 445 MW from
biomass resources have been commercially developed and are
used for electricity as well as for biofuel generation.
3.2.5. Ocean and wind energy
Ocean energy has not been intensively developed on a com-
mercial scale. The Agency for Assessment and Application of
Technologies (BPPT) examined more than 15 locations and indi-
cated the potential for tidal wave energy; three locations are
candidates for ocean thermal conversion development. At present,
Indonesia’s wave power capacity reaches 6 GW (Wahyuni, 2011).
Due to the lack of wind along the equator, wind energy potential is
very limited. The windiest area tends to be on the less populated
islands in the country. Therefore wind energy development con-
centrates on small or medium size projects mainly for rural
electricity supply, water pumping and battery charging.
4. Energy supply security
Indonesia's population is currently 238 million, with a growth
rate of 1.9% in 2010, and is expected to grow to around 265 million
by 2020 and 306 million by 2050. Domestic energy consumption is
predicted to increase threefold times from 2010 to 2030. Tradi-
tional energy production utilizing almost exclusively non-
renewable resources cannot keep pace with this growth. As an
effort to secure sufficient future energy supply, the Government
released the Presidential Regulation No. 5/2006 dated January 25,
2006 on National Energy Policy. This Regulation defines targets,
policies and actions for their implementation.
4.1. Targets
Article 2 of Regulation No. 5/2006 defines two targets, namely
the achievement of energy elasticity of less than 1 in 2005, and
secondly the creation of an energy mix optimally in 2025 with
diminished portions of oil, gas and coal and increased portions of
36 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
new and renewable energy in domestic consumption. Oil shall
become less than 20%, gas less than 30%, coal less than 33%; while
biofuel and geothermal shall each become more than 5%; other
“new energy” and renewable energy, particularly biomass, nuclear,
hydropower, solar power, and wind power shall become more
than 5%, liquefied coal more than 2%.
The target of Indonesian energy policy is to apply an optimum
energy mix comprising all viable prospective energy sources. The
amount of domestic energy consumption is assumed to rise
threefold by 2025. The 5% portion of non-fossil energy in 2005 is
scheduled to increase to 15% in 2025.
These targets, particularly concerning the proportions of the
energy mix, have since been modified and adapted according to
changing economic and political conditions and developments.
4.1.1. New scenarios
Meanwhile it seems to be unrealistic to reduce oil consumption
below 20% in 2025. In accordance with the Indonesian Ministry of
Energy and Mineral Resources two scenarios based on different
assumption on parameters were developed: high consumption or
business as usual (BAU) and low or efficient consumption (Fig. 4).
The development of the scenarios is based on the Market Alloca-
tion (Markal) model (Seebregts et al., 2001). Key parameters are:
population growth 0.8% in 2025; GDP growth 6.6–8%; electricity
consumption growth 7% in 2010 and 8.4% in 2025. As references,
indicators from World, OECD, Japan and the USA have been taken
into account. These two scenarios are recalculated based on a
progressive carbon emission reduction of 20%–26% in 2020, and
other parameters such as economic growth.
The High Scenario (BAU) assumes that the current policy will be
continued until 2025: high energy consumption, moderate renew-
able energy growth, high emissions. The BAU Scenario results in a
total energy consumption of 450 MTOE in 2025, that is 2.8 times
the amount of 2010 (159 MTOE). The energy mix in 2025 (see also
Fig. 4) shows for oil 22.2%, gas 17.8% gas, coal 37.0%, new energy
such as nuclear 4%, and 19.2% for renewable energy. The BAU
scenario for renewable energy is detailed as follows: biomass for
Fig. 4. Primary energy consumption, different scenarios.
Source: Ministry of Energy and Mineral Resources (graphic: S. Mujiyanto).
biofuel 6.7%, biomass waste for electricity 2.0%, geothermal 6.7%,
hydro 2.4%, other renewable energy 1.1%.
This scenario implies a high level of energy consumption and
creates energy reserve deplete quickly. Unmanaged energy con-
sumption, especially from non-renewable energy would stimulate
energy production. Energy production would drain energy reserves.
The more production, the more depletion rates would be. Depleting
energy reserves should be balanced by discovery of new reserve in
order to maintain stable ration between resource and reserve.
Decreasing energy reserve would reduce the availability of energy
and end up with weakening energy security. Besides that high
scenario means that more energy is utilized; therefore more carbon
dioxide (CO2) would be produced. Wasteful use of energy tends to
generate more negative impact to the environment.
The Low Scenario (Efficient Scenario) reflects high efficiency
and high diversity of energy sources, particularly renewable
energy. It assumes an increase of total energy consumption from
159 MTOE in 2010–380 MTOE in 2025 which is less than 2.4 times.
The energy mix consists of 23.7% oil, 19.7% gas, 30.7% coal and
25.9% new and renewable energy. Renewable energy will be as
follows: biomass for biofuel 7.9%, biomass waste for electricity
2.4%, geothermal 7.9%, hydro 2.9%, other renewable energy 1.8%;
and also 3.2% from new energy such as nuclear.
The low scenario would be eco-friendly due to intensive
renewable energy utilisation with broad in variety of energy
source such as geothermal, hydro and biomass. Widespread use
of renewable energy would reduce the depletion of non-
renewable energy reserves. This scenario requires efforts consist-
ing of strategies and implementation programs as well as mon-
itoring. Besides that this scenario requires lots of investment in
preparing the implementation. This investment would include:
installation of renewable energy infrastructure, energy transmis-
sion and distribution as well as energy switching from non-
renewable to renewable. Beneficiary of this scenario would be
obtained within the long run. These beneficiaries are: longer
lasting energy reserve, lower carbon emission which would lead
ultimately to long term energy sustainability and finally
strengthen energy security.
 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
4.2. Policy steps
The targets set out in Article 2 of the Presidential Regulation
No. 5/2006 are to be achieved through both the main policy and a
supporting policy (Article 3). The main policy consists of;
 Assurance of availability of domestic energy supply, optimiza-
tion of energy production and realization of energy conversion;
 Energy exploitation efficiency and energy diversification in
order to reduce dependence on oil by expanding the use of
coal, gas, renewable energy resources and new energy
resources such as nuclear, oil shale and coalbed methane;
 Stipulation of the economic energy price taking into considera-
tion the ability of small enterprises and aid to the poor within a
certain period. At present, energy subsidisation has become a
large burden for the state budget, has lead to increasing
reliance on imported energy and is a serious deterrent to
investment in energy efficiency, new infrastructure for electri-
city and development of Indonesia’s remaining significant oil
and gas resources. To mitigate the social impact of price rises,
additional social support programmes have been introduced. In
the Medium-Term Plan (RPMN) published in 2010, the govern-
ment has set a goal of reducing the cost of subsidies by 40% by
2013, and eliminating fuel subsidies entirely by 2014
(IEA, 2010).
 Environmental conservation by application of sustainable
development principles.
The Indonesian Government has made a commitment to
reduce emissions by 26% within 2020 as explained by the
President at the G-20 Forum in Pittsburgh, USA, in 2009. The
“low carbon society” should be realized as a strategy toward
significant emission reduction (Thavasi and Ramakrishna,
2009). Indonesia serves as the second largest source of China’s
coal imports and supplies considerable amounts of LNG. China
and Indonesia plan to intensify their cooperation in the clean
and recyclable energy sectors, to address energy security and
climate change. Over the years China has invested in develop-
ing Indonesia’s hydropower projects, oil and gas fields and coal
mines; in the years to come, the cooperation in the fields of
hydropower, wind power, solar power and geothermal energy
is to be expanded through investment in infrastructure, power
transmission and energy trade (Xinhua, 2010).
The supporting policy consists of the development of energy
infrastructure including an increase of consumers' access to
energy; partnership between government and the business world;
social empowerment; development of research and development
and education and training. Rural electrification is to bring
electricity to 90% of the population by 2020. Government and
the business world are to cooperate to mobilize public and private
capital from domestic sources and learning from India and China
concerning domestic financing of clean energy projects.
4.3. Policy actions
The Minister of Energy and Mineral Resources issued the
National Energy Management Blueprint (cp. Article 4 of the
Regulation No. 5/2006). It focuses on a policy regarding the
assurance of sufficiency of domestic energy supply and provides a
public service obligation policy. Management of energy sources
shall become the foundation for an arrangement of policy for
development and exploitation of each kind of energy. Moreover, the
National Energy Management Blueprint includes programs to
phase out subsidies and roadmaps for each alternative energy
sector. The general subsidies of the past are to be replaced with
more targeted incentive programmes to achieve social objectives
37
and encourage diversification. In 2006 the Government devised
the first Fast-Track programme for the construction of 10,000 MW
of coal-based power generation plants by PLN, which was viewed
as the only readily available solution for utilizing domestic coal
resources to displace high-cost generation units (fuel fired power
plant) in an affordable manner. This decision, along with existing
heavy use of diesel, will further increase the country’s dependence
on fossil fuels, exacerbating local and global environmental
impacts: an additional 10,000 MW of coal-fired power will add
55 million tonnes of CO2 per year (Clean Technology Fund
Investment Plan for Indonesia, 2010).
5. Energy regulatory framework
The hierarchy of sources of law in Indonesia is as follows: the
Constitution of 1945, as amended; People’s Consultative Assembly
(MPR) Resolution; laws enacted by the People’s Representative
Council (DPR—also called the House of Representatives); govern-
mental regulations; presidential decrees and regional regulations.
Other sources of law include Presidential instructions and circular
letters. At times, there are inconsistencies between specific instru-
ments. Under Indonesia's legislative system, laws generally pre-
sent only brief guidelines. Implementing ‘operating regulations’
that determine the detail are written and enacted in subsequent
years (IEA, 2008). In the following paragraphs, the main laws and
regulations are described.
Law No. 30/2007 on Energy sets the National Energy Policy
(Government Regulation 5/2006) on course to secure energy
security and pursue greater reliance on renewable energy by
providing incentives for its development. The Law requires that
the country maintains ‘energy stockpiles’ to mitigate shortages
and heighten energy security. Energy prices are to be based on fair
economic value and a subsidy fund for poor people is to be
created. The law also marked a shift in the country's attitude
towards energy reserves by establishing the National Energy
Council aimed at furthering the exploitation of renewable energy
sources and reducing reliance on fossil fuels by 2025.
Law No. 22/2001 on Petroleum and Natural Gas governs the
activities of the oil and gas sector in Indonesia. BP Migas is the
regulatory body for upstream activities in oil and gas such as
exploration and exploitation through Production Sharing Con-
tracts between BP Migas and the company involved which may
be state owned, a branch of a foreign company or a private local
company. BPH Migas also covers the downstream sector such as
processing transport and storage through joint cooperation con-
tracts which are normally PSCs. New regulations introduced at the
end of 2010 were designed to encourage more investment into the
oil and gas sector. Ministerial Regulation No. 6/2010 introduced a
5% tax on transfers of contracts during the exploratory stage,
thereby penalizing companies trying to share the risk. Companies
engaging in oil and gas activities must be set up as a Permanent
Entity and branch of a foreign company. The Investment Law No
25/2007 and Company Law 40/2007 detail how dividends may be
taken by business entities by allowing the transfer and repatria-
tion of profits.
Law No. 4/2009 on Mineral and Coal Mining includes a
domestic supply obligation; local mining companies are obliged
to sell at least 24.2% of their production to the local market. Law
No. 30/2009 on Electricity decentralizes the authority on the
electrical sector and hands over power to local and regional
authorities. Ministerial Regulation No. 9/2009 stipulates that PLN
is obliged to buy energy from renewable power plants below
10 MW and ensures a higher pricing system for mini and micro
plants outside of Java and the eastern area. Regulation No. 2 of
2011 on the assignment of PLN to purchase electricity from
38 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
geothermal power plants and setting a benchmark price for the
purchase of electricity replaces the previous Regulation No. 32/2009.
Law No. 10/1997 on the Basic Provision of Nuclear Energy
stipulated among others the separation of the executing function
on the beneficial applications of nuclear energy (BATAN) from the
regulatory function, which was to be held by a new Nuclear Energy
Regulatory Agency (BAPETEN). BAPETEN was established in 1998
(Presidential Decree No. 76/1998) and is responsible for regulating
and controlling the use of radioactive materials, radiation sources,
nuclear reactors and nuclear materials. In accordance with the
latest Presidential Decree No. 64/2005, BATAN has been stipulated
as a non-Departmental Government Institution which is respon-
sible to the President. BATAN has to conduct government activities
in research, development, and the beneficial application of nuclear
energy.
Environmental responsibility of coal producers in Indonesia has
become a highly charged political issue as the impact of unregu-
lated mining has become apparent in some areas. The Environ-
mental Law No. 32/2009 and the Law on Mining and Minerals No.
4/2009 were designed to address these issues. The Forestry Law
No. 39/2004 prohibits open mining in forest areas and places
protected forests off limits. This law has been a major hindrance to
the development of geothermal exploration. A Presidential Decree
in February 2010 derived from this law and permitted geothermal
mining and power plants of strategic importance in areas of
protected forest.
The National Long Term Development Plan 2005–2025 (RPJP),
based on Law No. 17/2007, declares that the management of
natural resources including energy resources is treated as an input
for the production process like fuel or raw materials, which can
bring added value for the country.
Under the Law No. 27/2003 on Geothermal, all developers must
work with the local governments which are responsible for issuing
the licenses for concessions.
Presidential Regulation No. 4/2010 stipulates the acceleration
of the use of renewable energy alongside coal and gas, to be
carried out by PLN and private investors. The regulation invites
private investors to participate in electricity power plants and
transmission infrastructure. Land acquisition for power generation
projects is to be carried out within 120 days, but this concerns only
projects in which PLN is participating.
Ministry of Energy and Mineral Resources Regulation No.
31/2009 on Power Purchase by PT PLN is related to new small
and medium scale power plants using renewable energy sources.
Ministry of Finance Regulation No. 24/PMK.011/2010 regards tax
concessions for renewable energy projects (tax is reduced by 5%
for 6 years, reduced tax rate on dividend payments for interna-
tional investors, projects exempted from VAT and import duties for
equipment). Presidential Instruction No. 1/2006 was issued on the
Supply and Use of Biofuel. The road map aims to develop biofuel
projects fostering economic growth, alleviation of poverty, and
creating jobs in a multi-sectoral approach.
Decentralisation or regional autonomy was part of the political
and structural reforms in 1998. The Laws No. 22/1999 and No. 25/
1999 introduced the decentralisation of power after a long period
of a highly centralised and controlling government. Local govern-
ments were authorised to regulate many affairs of local commu-
nities, including the authority to formulate local energy policies
and plans. The sharing of revenues from oil and natural gas
between the central and local governments was radically reallo-
cated. The royalties from coal mining are paid to the central
government and then allocated according to the formula of 20%
for the central government, 16% for the provincial government,
32% for the district government, and 32% disbursed across
the other district governments in the same province. Law No.
22/1999 and Law No. 25/1999 have since been amended in 2004.
The amendments redress some of the strengths conferred on local
governments and enable decision making to be taken from the
authority of local governments and referred to a higher level of
government.
6. Analysis and discussion
Section 6 is structured in general and specific issues taking into
account the following criteria: governmental structure, investment
security, infrastructure, overlapping of regulations, substitution of
energy, fuel subsidies and domestic supply obligation for gas/coal
versus exports.
6.1. General issues
Energy source reliance as per 2010 was more than 95% on fossil
fuels and the remainder on geothermal and hydropower. By 2025,
the dependency on fossil energy is to be reduced significantly
while renewable and alternative forms of energy are to grow to
17% of the total. The reorientation of the energy mix, particularly
in reducing the contribution of oil, is a great challenge. In order to
develop geothermal, hydro energy and coalbed methane, wide
scale investment and infrastructure will be required. In view of the
fast growing demand for electricity, meeting domestic energy
needs has obtained priority in energy production. This is reflected
in the Law on Mineral and Coal Mining of 2009 and the Law on
Petroleum and Natural Gas which commit local companies to sell a
considerable portion of their respective production to the local
market. Consequently, domestic utilization is more and more
constraining the amount available for export. Shortage in capacity
as well as investment capital means a hindrance to industrial
development. Electricity generation has shifted from oil to coal
and aims to finally place more weight on renewable resources,
mainly geothermal energy.
The development of renewable energy potential requires spe-
cific planning in terms of cost and price regarding the market, and
economic and technical aspects (Verbruggen et al., 2010). Energy
substitution efforts in terms of non-renewable by renewable
energy or low CO2 emission energy and substituting subsidised
by unsubsidised energy have been implemented for some years.
The most important conversion programme comprises conversion
of kerosene to LPG. Budya and Arofat (2011) explain the strategy of
Pertamina as programme implementer in this mega-project. A
new project for saving of subsidised fuel and boosting gas
consumption is going to commence in April 2012.
Significant problems for energy supply are high transport costs
between the islands and primary energy production centres,
insufficient capacity of the existing energy infrastructure such as
coal terminals, electricity transmission network, gas distribution
pipelines and energy storage capacity. Exploration for oil and gas
as well as geothermal has been neglected in the last years as a
consequence of the reduced investment of foreign companies after
the implementation of the new mining law in 2008.
6.2. Specific issues
6.2.1. Non-renewable sources
6.2.1.1. Oil and gas sector. The gap between declining domestic oil
production and increasing consumption is growing, this implies
the need for oil imports. Indonesia has embarked on a multi-
faceted programme to reduce import dependency, offering
incentives to encourage greater private investment in
exploration. Energy companies face regulatory hurdles, stalled
coordination between ministries and local government,
difficulties in land acquisition while land prices continue to
 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
increase. Domestic gas demand will increase due to the
government policy on substituting kerosene with gas for
household, transport and industrial use, responding to falling oil
production and rising international oil prices, especially since
2008. Major investment in logistical infrastructure is required, as
more than 70 of Indonesia’s gas fields are located offshore, in areas
at great distance from the electricity grid network and the main
population centres. The Indonesia Economic Corridors Master Plan
to 2025 aims to position refineries and industrial production sites
at the sources of primary energy production.
Oil refining capacity is weak. The state oil and gas company,
Pertamina, is aiming to diminish the reliance on imports. Expan-
sion of existing facilities and construction of eight new refineries is
to double current production. Foreign investors such as the Kuwait
Petroleum Corporation (KPC) have expressed their interest in
building a refinery at Balongan, West Java, in 2011. Under current
conditions it is uncertain if KPC might withdraw from the expan-
sion project and the Indonesian government will have to seek
other investors (Jakarta Post, 8 March 2012).
The investment climate has to be improved to incentivize
investors and guarantee cost recovery for exploring new blocks.
Renewed focus has been placed on production and exploration.
Ministerial Regulation No. 6/2010 introduced a 5% tax on transfers
of contracts during the exploratory stage thereby penalizing
companies trying to share the risk (see also Section 5). An
improvement in the investment climate that has already been
made was the introduction of direct bidding as opposed to
tendering blocks and the increase in production splits for compa-
nies to 25% for oil and 40% for gas. Fuel subsidies endanger the
commercial viability of new projects for independent power
producers. Attempts to raise fuel prices have sparked riots and
created political divisions. As a result of high international energy
prices, subsidies for oil products and electricity in Indonesia
peaked in 2008 at 3.5% of the GDP or 20% of the total national
budget. In the Medium-Term Plan (RPJM) of 2010, the government
has set a goal of reducing subsidies by 40% by 2013, and eliminat-
ing fuel subsidies entirely by 2014 (IEA, 2010).
Uncertainty remains over discussions on changes to the Oil and
Gas Law No. 22/2001, which is deemed too liberal. The revision
shall include the fortification of the role of national oil and gas
companies, and is to be completed mid 2012. As several Ministries
and other bodies are involved, possible investors face partly
overlapping governmental and local authorities.
6.2.1.2. Coal. The Government of Indonesia plans to rapidly expand
domestic use of coal for electricity generation. Coal briquettes are
to displace diesel for home cooking, and possibilities for liquefied
coal as alternative transport fuels are investigated. An increase of
coal production will require intensive investment in exploration
and improvement of transport infrastructure, furthermore
clarification of the implementation of the new coal and mining
law, particularly concerning the domestic supply obligation. A
183 km coal railway planned for 2013 in Central Kalimantan is
being offered under the Public Private Partnership scheme to
replace the current transport method on private roads and rivers
that is constraining coal production (Jakarta Post, 9 Feb 2012).
However, the coal sector faces global pressure to reduce
greenhouse gases and carbon emissions.
6.2.1.3. Coalbed methane. Indonesia seeks to capitalize on its vast
reserves of coalbed methane for electricity generation in order to
realize its goals to be a low cost, low carbon economy. Highly
prospective areas that have attracted international CBM
companies are situated in South and Central Sumatra and East
Kalimantan. The Government has been encouraging investment
39
into CBM by offering a 45% production split. In East Kalimantan,
Sangatta West I Block is expected to supply first sales in 2012.
Natural gas prices are increasing on the global market, while
pricing of CBM power for the domestic market is highly
competitive compared to diesel. The production targets are set at
2000 MW of power by 2015. However, infrastructure for
distribution has yet to be improved. The necessary legal
framework has to be developed, considering the environmental
impact of CBM extraction.
6.2.2. Renewable sources
The road map for renewable energy created by the Ministry of
Energy and Mineral Resources postulates policy actions for giving
incentives for renewable energy development, spreading knowl-
edge to the rural communities as the end-users, and monitoring
and evaluation of the actions taken. Implementation programmes
to speed up utilization of renewable resources focus particularly
on geothermal energy, hydropower and biogas.
6.2.2.1. Geothermal energy. The sector has so far developed less
than 5% of reserves, although there is great interest from investors.
Overlapping government regulations cause uncertainties, lack of
knowledge among local authorities and the need of a Power
Purchasing Agreement with PLN that determines the commercial
viability of a project, form obstacles. Under the Geothermal Law of
2003, geothermal concession tenders are done at a national level,
while the local governments are responsible for issuing the
licenses, but in many cases do not have the expertise to gather
the data on potential sites and to administer tenders effectively.
Around 80% of potential sites are in conserved forest (Ministry of
Industry, 2011), where open mining is prohibited by the Forestry
Law No. 39/2004. This law has been a major hindrance to the
development of geothermal exploration. A Presidential Decree in
February 2010 has derived from this law and permitted
geothermal mining and power plants of strategic importance in
areas of protected forest to encourage investment into the sector.
Exploration costs are extremely high, the capital expenditure for a
geothermal project is far higher than a gas or coal fired power
plant. The pricing of electricity and the abolition of subsidies, as
announced by 2014–2015, will therefore be a critical factor in the
further development of geothermal energy.
6.2.2.2. Hydropower. Indonesia has so far utilized less than 6% of
its hydropower capacity. Although the Electrical Supply Business
Power Plan aims to have 5140 MW of hydropowered electricity on
stream by 2019, there were only three large scale projects being
executed at the end of 2010. The varied sizes and lack of
experience has led to most projects not making it past the pre-
feasibility study. Bureaucracy regarding contradictions of land
ownership around river areas between central and regional
government is a further obstacle. The remote location of sources
makes the connection to the electricity grid a difficult task, albeit
international organizations like the UNDP (United Nations
Development Program) and the GIZ (Deutsche Gesellschaft für
internationale Zusammenarbeit) have provided support to
improve the situation.
6.2.2.3. Biomass. The conflict of landuse for food or for biofuel
production, and the environmental impact through deforestation
and loss of biodiversity cannot be neglected. Regulation is required
to reduce the negative impacts of large-scale production, as well as
to ensure that the most effective technologies are used. A village
self-sufficiency energy programme (Desa Mandiri Energi or DME)
has been developed to create jobs and eliminate poverty in remote
or isolated regions, while empowering the inhabitants to produce
40 S. Mujiyanto, G. Tiess / Energy Policy 61 (2013) 31–41
their own energy needs (ICAERD, 2008). As Indonesia is the
world’s second largest palm oil producer after Malaysia, the
significant rise of global fuel prices caused the Government to
boost alternative energy industries, including biofuels produced
from palm oil and jatropha oil, to reduce the need for liquid fuel
like gasoline and diesel oil. In an effort to reduce fuel consumption
and to support green economy movement starting in April 2012,
the Indonesian government is going to further limit subsidized
fuel and to encourage people to switch to gas consumption. The
pilot project of subsidized fuel saving is starting on Java and
Sumatra, the islands where the majority of population in the
country lives (Aprilianto, 2012).
6.2.3. Nuclear energy
Presidential Regulation No. 5/2006 explicitly names nuclear
energy as a target of national energy policy. Nuclear activity in
Indonesia began in the 1950s with the establishment of the State
Committee for the Investigation of Radioactivity, the Atomic
Energy Council and the Atomic Energy Institute. By 1987, several
nuclear research and development and engineering facilities were
built. In cooperation with the International Atomic Energy Agency
(IAEA) and friendly states like USA, France and Italy feasibility
studies and evaluation of sites for nuclear power plants were
performed. In 2002, a new long-term study on electricity genera-
tion identified nuclear power as “the third principal generation
option behind gas and coal”. In line with Law No. 17/2007 on the
Long-term National Development Plan 2005–2025, nuclear elec-
tricity generation should commence operation 2015–2019. A
regulatory framework for financing, human resources develop-
ment, licensing, waste management and future NPP decommis-
sioning was to be established in collaboration with foreign experts
and the IAEA (IEA, 2008).
Currently, Indonesia operates three research reactors and has
determined two possible locations for a NPP. Uranium mines in
Kalimantan and Borneo could supply the nuclear fuel, additional
imports from friendly nations are taken into account if necessary.
After the shock of the Fukushima catastrophe of February 2011,
Indonesia continues its plans to build the country’s first NPP.
Within the presidential advisory board, the National Energy
Council, opinions are split. Some say that Indonesia with its
hundreds of volcanoes is earthquake prone and should not
proceed with its nuclear plans; others are convinced that modern
technology can cope with these risks, and that Indonesia with its
energy demand in the long term has no other choice (Belford,
2011).
6.3. Short summary
Several actions and programmes have been implemented based
on the energy policy and regulatory framework, and many of them
in cooperation with friendly countries, international companies
and organisations. The question arises if these are interrelated and
coordinated. Also the question of efficiency is evident: The way of
issuing regulations and making amendments during the process of
implementation whenever the situation affords them, might be
too inefficient and slow to solve the problem of rapidly growing
domestic energy demand and imminent depletion of resources.
Moreover, it seems that an overall strategy which covers and
coordinates non-renewable and renewable resources is missing.
Such a strategy should include objectives, actions and a monitor-
ing plan for non-renewable as well as renewable energy resources.
It should consider energy diversification, possible substitution of
energy sources, development of technologies for efficient and
sustainable energy production and utilization.
7. Conclusions
Energy consumption is driven by GDP; therefore the future
availability of energy corresponds with economic development
and growth. Given the current annual population growth rate of
1.9%, the task to secure sufficient energy supply will be a
tremendous challenge. Until about 1980, Indonesia had been a
mainly agricultural economy. Thus intensive industrial develop-
ment commenced at a time when limitation of global resources
was already recognizable and sustainability became a concept of
crucial significance. Indonesia has the chance to fully imply
appropriate policies for energy production and supply at a rela-
tively early stage of development, compared to other nations. The
abundant energy resource potential needs to be further developed,
especially the country's renewable sources, as is clearly expressed
in the ideal scenario of energy mix 2025. Adequate infrastructure
and a comprehensive distribution network are as important as
price affordability for consumers. The ongoing decentralization
process transferring competence and responsibility from govern-
mental to regional authorities could help to avoid the overlapping
of regulations. Capital investment in the energy sector can be
made more attractive by eliminating uncertainties and offering
greater transparency to planning. The role of stakeholder involve-
ment and the action of each stakeholder has to be defined. Finally,
Indonesia seems to be in urgent need of a written clear and
comprehensive energy policy strategy and framework (Tiess and
Mujiyanto, 2011), which covers non-renewable as well as renew-
able energy resources. Such a framework should consider the
country's development beyond the year 2025.
Acknowledgment
We would like to thank Professor Peter Cameron, Director,
Centre for Energy, Petroleum and Mineral Law & Policy, University
of Dundee, UK, for his valuable comments.
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