Indonesia’s electricity subsidy reforms led to improved efficiency

Indonesia has been home to some of the world’s largest subsidies for electricity use. Electricity prices have been set at low levels, with the government making transfers to Indonesia’s electricity utility, Perusahaan Listrik Negara (PLN), to cover its losses. In 2012, electricity subsidies cost the government US$10 billion.

In an ambitious reform program, since 2013 Indonesia has taken major strides to reduce this subsidy bill. The reforms have involved raising electricity prices to levels that reflect costs, with exemptions for customers with small electricity connections, including the poor. Subsidies for road transport fuels were also reduced.

In a new paper in Energy Policy, Sandra Kurniawati and Paul Burke find that Indonesia’s electricity subsidy reforms have led to a notable improvement in the efficiency of electricity use.

One of the ingredients to Indonesia’s success has been relatively clear communication of the benefits of reform. Emphasis on protecting the poor has also helped to shore up community support.

Looking forward, Indonesia could feasibly move away from fuel and electricity subsidies entirely, turning instead to other forms of social assistance for those in need. Doing so would deliver a variety of benefits, including for the environment.

Published in the Jakarta Post, 22nd March, 2018