Energy and Climate Change 51752 Policy Brief Providing reliable, affordable and sustainable energy while mitigating contributions to climate change is a development challenge for Indonesia. Indonesia needs power and transport to grow. Sustained economic growth is driving the demand for electricity to grow at over seven percent per year. Yet electricity supply is not keeping pace with this strong rate of growth ­ electricity production has only been rising at around six percent annually. Even higher growth is foreseen if progress is made in providing household connections to the 70 million people currently without access to electricity. Indonesians' access to and consumption of electricity remain the lowest among large developing countries in East Asia. Current power generation methods ­ increasingly based on coal ­ are a growing contribution to greenhouse gas emissions. As electricity demand continues to rise, Indonesia's greenhouse gas emissions due to fossil fuel combustion are expected to rise rapidly also. Following current trends in the energy and transport sectors, Indonesia's fossil fuel- based emissions are likely to triple by 2030. Much of the increase will originate from the use of fossil fuels in the power generation sector. Although forest degradation and land- use conversion now dominate Indonesia's emissions, fossil fuel emissions will constitute a rapidly increasing share if business continues as usual. The challenge is how to meet g r o w i n g demand for electricity while curbing emissions from the p o w e r sector. To Coal-fired power plant on Java Photo: Endro Adinugroho reduce dependence on oil, current GOI plans would Subsidies also hinder the development of Indonesia's significantly increase the share of coal in the power abundant renewable energy resources. Indonesia has generation fuel mix, doubling from 35 to 70 percent by the world's largest potential for geothermal energy 2020. In terms of carbon emissions, coal is about twice production which, if developed, would put the country as `dirty' as natural gas. This shift to coal means that on a more sustainable energy path. Major efforts to greenhouse gas emissions from fossil fuel combustion expand renewable energy development that began (1994-2004) have grown faster than the economy. in the 1990s have been impeded by the high up-front Rather than becoming more energy efficient and capital cost of technology, lack of incentives, regulatory cleaner, Indonesia is using more energy and creating uncertainty, and inadequate institutional capacity. more emissions for every unit of economic growth Trends in the power sector clearly show the immediate (GDP). Per capita emissions from fossil fuel consumption effect of unsustainable policies. With increased global have grown faster than in China and India, countries oil prices and low domestic coal prices, Indonesia's with higher GDP growth than Indonesia in recent years. power sector has switched from oil to coal. Since 1994, Beyond climate effects, the rapid expansion of coal use there has been a five-fold increase in the use of coal. raises concerns about the likely environmental and In addition, many industries have installed their own, health impacts on heavily populated Java and Bali, and costlier electric power generating capacity due to slow environmentally sensitive areas in some outer islands. expansion and uneven reliability of the national power Indonesia has very rich renewable energy resources, supply system. Many of these independent plants use especially geothermal, hydropower and biomass. coal as their primary fuel. Yet, these resources are still largely unexploited or The figure on the next page illustrates how under-developed, despite their high potential as clean upstream policy distortions and pricing policies domestic energy resources. result in downstream disincentives and harmful or Energy sector subsidies and unsustainable environmental outcomes. unsustainable policies harm both the economy and the environment Better management and control of energy use will increase Indonesia's Fossil fuel subsidies hurt the Indonesian economy efficiency, competitiveness, and energy through impacts such as fiscal deficits, unpredictable security budget outlays and inequitable benefits for rich The country will benefit by reducing inefficient energy consumers. The same subsidies also harm the use, pollution and behavior-distorting subsidies -- environment. By keeping fossil fuel prices low, all of which impose costs on society. It will also gain consumers continue to use energy and electricity by developing its own abundant renewable energy inefficiently and excessively. This consumption pattern resources, reducing dependence on expensive causes high levels of greenhouse gas emissions along imported energy, and stimulating economic efficiency with significant environmental and health costs. and competitiveness. Improving energy use, Significant public and private sector investment efficiency and lowering emissions will also generate is needed to meet growing demand and improve secondary development benefits, such as cleaner air access. However, current pricing policies do not allow in cities and homes, reduced congestion, better waste PLN to cover the cost of supply, do not provide a management, and more competitive production strong incentive to private investors and create costly processes. To promote renewable energy, Indonesia government subsidies to support PLN's public service can also capitalize on carbon finance opportunities. obligation. 2 Key Policy Distortions Impede Potential for Low Carbon Options in Energy Sector Summarized and Adapted from WB IDPL (2007) and from WB CEA (2009) As part of a lower carbon development agenda for transit bus systems could reduce urban congestion, the energy sector, Indonesia could adjust prices to contribute to labor mobility, and improve the quality opportunity costs and use low-cost climate financing of life in Indonesia's rapidly growing urban centers. to create incentives for renewable energy, reduce The GOI is already working on three areas for electricity unhealthy emissions, stimulate new investment sector reform: system expansion, household access and jobs, and improve energy security. Pricing and and environmental sustainability. This includes a fiscal incentives (e.g. depreciation) could also help plan for a shift in the energy mix, with an increased industries/exporters become more energy efficient role for renewable energy sources such as geothermal, and competitive. Building capacity in energy service biofuels, hydro, biomass, wind and solar. A second companies could create jobs and provide benefits program to develop an additional 10,000 MW power to manufacturers. Trade policies could promote the generation is under development and will rely to a importation of cleaner technologies and stimulate greater extent on geothermal and other renewable Indonesia's own clean technology exports such as energy sources. Energy conservation measures have compact fluorescent lamps. Improving fuel quality already been identified with the potential to offset could help to reduce health costs and productivity the need to install power generation capacity of over losses from urban air pollution. Expanding affordable 2,500 MW. 3 For further information, please contact: World Bank Office Jakarta Indonesia Stock Exchange Building, Tower 2, 12th floor Jl. Jenderal Sudirman Kav. 52-53, Jakarta 12190 - Indonesia Ph. 62-21 5299 3000 fax. 62-21 5299 3111 To download the full report "Investing in a More Sustainable Indonesia", visit our website: www.worldbank.org/id In addition, many policy options are under Many international financing schemes have been consideration for reducing Indonesia's emissions. The set up to assist developing countries to deal with GOI has developed a National Action Plan for Climate challenges in anticipating and preventing increased Change and a National Development Planning carbon emissions. Indonesia has full access to these Response to Climate Change. The Ministry of Finance schemes. For example, the international carbon has commissioned several studies, and BAPPENAS market can provide payments to offset or lower costs is integrating climate change into the medium term to help Indonesia meet its climate change mitigation development planning framework. objectives. Indonesia has already requested support from the Clean Technology Fund to facilitate Towards a sustainable energy strategy development of clean energy sources. Indonesia's A more sustainable, lower carbon energy strategy major development partners are actively involved in would send a clear message to investors, producers such international financing schemes and are ready and consumers. Such a strategy would also encourage to assist Indonesia in realizing its sustainable energy renewable energy for power generation and energy goals. efficiency in industry, transport and households. This could be achieved by putting in place the right policies Background information on CEA Report and incentives to encourage investment in renewable The Country Environmental Analysis (CEA) report energy resources. An integrated policy approach highlights underlying challenges to Indonesia's could include a more in-depth look at banking sector environment and management of its natural resources. policies, tax and depreciation incentives, and trade The initial purpose in preparing the report was to guide World Bank support to Indonesian institutions for policies that help the use of cleaner technologies. The more sustainable development. However, the report strategy would also revisit energy pricing to improve also provides information that may contribute to the energy efficiency, conserve on increasingly expensive Government's medium term development plans under fossil fuels and reduce greenhouse gas emissions. the policies of the new administration. A MORE SUSTAINABLE INDONESIA is one where: · The costs of environmental degradation and climate change are lowered so that less wealth is diverted from growth; · Good environmental management contributes to poverty alleviation by reducing impacts on the poor and better sharing of benefits; · Renewable resources are used sustainably while non-renewable ones are wisely developed for investment in human and physical capital; and · Citizens are aware of and participating in environmental issues directly or through their representatives and other organizations. Printed on cyclus offset (recycled paper) 4