The Systemic Risks of Indonesian Energy Sector Transition Pathways (A Case Study of Energy Transition in Indonesia)

Abstract

Indonesia is one of the big economy countries, with the share of global GDP ranked 7th in 2022. However, Indonesia is still categorized as a developing country. According to the UN and World Bank, developing countries are characterized as a country with relatively low standards of living which indicated from low to middle GNI per capita, underdeveloped industrialization relative to its population, and moderate to low Human Development Index (HDI). Based on the definition, Indonesia GNI per capita in 2022 is USD4,783.9, which based on World Bank standards in 2022 is still categorized as upper middle-income country. Then, Indonesian HDI is 0.7 which is categorized as high but ranked 130 out of 199 countries. Lastly, Indonesia experienced premature industrialization with a declining contribution of industry sector to GDP (figure 1). Nevertheless, Indonesia has a vision to become a developed country in 2045, as a 100-year commemoration of Indonesia independence. This vision, which referred to Vision of Indonesia 2045, became a national target as stated in the draft of National Long-Term Development Plan 2025-2045 (RPJPN). In the document, the Indonesian government aspires to achieve a high income country in 2045, with GNI per capita USD30,300 or nearly 5 times current condition. To achieve the aspiration, Indonesia requires GDP growth above historical average and structural transformation. The document also stated that, Indonesia should first improve the Total Factor Productivity (TFP) which in 2005-2019 grew negatively around 0.66, and to improve TFP, Indonesia requires HDI improvement, also research and innovation. Indonesia also requires growth in the industry sector as the most important factor to increase GDP, because Indonesia should pivot from hard commodities-based extraction and processing, especially coal and crude palm oil (CPO) which historically has had a positive major contribution to Indonesian balance of trade. Since energy has a strong link with the economy and is crucial in maintaining or improving lifestyle (Chontanawat et al., 2008; King & Van Den Bergh, 2018; Stern, 2019). Indonesia will require energy to support its economic growth. In the context of energy challenges, Indonesia should balance the energy trilemmas, which based on the World Energy Council are energy affordability, security, and sustainability. Based on the current condition, to ensure affordability, the Indonesian government subsidizes fossil energy sources, such as gasoline, LPG, natural gas for certain industries, and electricity which is based on coal. Then, to ensure security, Indonesia has plans to reduce its dependence on oil import and currently utilize coal as one of its abundance resources. Finally, to ensure sustainability, Indonesia pledged to develop its economy based on low carbon energy, as stated in the enhanced Nationally Determined Contribution (eNDC) that Indonesia will achieve Net Zero Emission (NZE) in 2060 or sooner. However, the commitment to energy sustainability will require rebalancing in energy affordability and security which are currently still heavily related to fossil energy. Therefore, both Vision of 2045 and NZE in 2060 or sooner, requires an overarching transformative long-term target in both Indonesia's energy and economy system.