1. KEROSENE SUBSTITUTION PROGRAMS IN INDONESIA: INSTITUTIONS AND PUBLIC POLICIES
Asclepias Rachmi
Indonesian Institute for Energy Economics
31st IAEE Pre Conference on Clean Cooking Fuels & Technology
Istanbul, June 2008

2. Agenda Energy Consumption Fuel Price Policy
Kerosene substitution program
The Program in brief
Role of institutions
Evaluation:
Program Implementation
Complicating Factors
Energy Security
Concluding Remarks

3. ENERGY CONSUMPTION

4. Energy Consumption in 2005 (1)
Source: Handbook Statistik Ekonomi Energi Indonesia 2006
LPG consumption in 2005:
Industry, Household, Commercial
Household is recorded as major user
Small overall share (1%)
Small market -- limited infrastructure
Available in bulk and retail in 50kg, 12 kg,
and 6 kg units
Kerosene Consumption in 2005:
Used by all consumer groups: as is and mixed with other fuels
Household is recorded as major user
Available in bulk and retail in flexible sizes
Relatively easy to handle, wide spread uses

5. Energy Consumption in 2005 (2)
Household:
Use 28% modern energy type mostly
kerosene, and 72% conventional biomass
Kerosene for cooking, lighting, initiate fire
for all kinds of purpose, etc
Industry:
Consumes various energy types
Kerosene and LPG: recorded share in
the sector energy mix is only 1% each
Substituting kerosene with LPG implies significant change in both markets:
Market size
Infrastructure for production & distribution
Operational details for both the supply
and demand side actors
Source: Handbook Statistik Ekonomi Energi Indonesia 2006

6. FUEL PRICE POLICY

7. Fuel Pricing Policy (1)
As stated in the Blue Print of Kerosene to LPG Substitution
Program:
Certain fuels (Bahan Bakar Tertentu) which requires subsidy: price setting by the Government through laws and regulations
Fuels for national needs: to be determined B-to-B, approved by the Government
Fuels used by large amount of people but unsubsidized: prices are based on certain formulas
General fuels: no price regulation, treated similar to general commodities

8. Fuel Pricing Policy (2) Kerosene prices: Price differentiation
Kerosene Prices Apr 2001-Mar 2008
Kerosene prices:
Price differentiation
Varying systems & formulas
Current prices:
- Industry = MOPS +15%
- Retail IDR 2500

9. Fuel Pricing Policy (3)
Source: IIEE, compiled from various sources
Implications: uncontrollable subsidy allocation
Fuel price subsidy encourage more consumption & increase imports of products
Domestic price differential provides incentives for misuse,
High and volatile international price is translated to unstable state budget

10. KEROSENE SUBSTITUTION PROGRAM

11. The Substitution Program in Brief
Targets:
‘Zero Kero in 2012’:
No subsidized kerosene for cooking in 2012
Kerosene available at economic price and in a higher value form (e.g., aviation turbine)
Distribution of 3kg LPG to 6 million household in 2007 and 42 million household in 2012
Implementation strategy:
Reduce kerosene subsidy gradually, distribute LPG 3kg package based on priority lists
Develop LPG infrastructure
Involve local businesses
Prudent supply capping of subsidized kerosene
Intensive campaign on using LPG safely
Improve government role (central, provincial, municipal, community level) in monitoring the distribution package
Distribution of LPG package:
2007: pilot project in Jakarta, initial step in 13 municipalities in Java, then other areas in Java-Bali
2008 onward: Sumatera and other islands in steps

12. Role of Institutions As stated in Blue Print:
Dept of EMR: coordinator, policy
Dept of Finance: budget
Dept of Industry: LPG canister
Ministry of Women Empowerment: public outreach
Ministry of Cooperation and Small Business: LPG stove
Dept of Social Affairs: business shift of kerosene distributors & retailers
BPH Migas: reduction of kerosene supply
Pertamina: program implementor

13. EVALUATION

14. Program Implementation (1)
News monitoring indicates unclear work division & shift in tasks
Difficulty in carrying duties, some links to budget constraints
Increasing responsibility of the program implementor
Outcome below target
Scarcity in kerosene and LPG 3kg supplies
Both in locations of program implementation as well as other areas
Lead to adjustment in kerosene supply reduction at locations of program implementation
Induced market operations (extra supply)
Impact in more hardship & people complaints

15. Program Implementation (2)

16. Complicating Factors Energy price adjustments
Government increase general fuel prices in May 2008
Pertamina:
Regular adjustment of fuel prices for industry (non-susbidized, MOPS as reference)
Price of LPG 50kg (non-subsidized) increased by 20-25% in January 2008
Subsidy package (compensation program)
Increase in general fuel prices is accompanied by a set of compensation package: direct money transfer for household, subsidy for schools and university students, subsidy for supply of basic food staples, etc.
Increase in kerosene consumption:
Relatively larger increase in price of other fuels
Natural disaster in various areas
Scarcity of supply of both kerosene and LPG lead to panic buying

17. Energy Security New paradigm of energy security:
Each one in the business chain may have different perspective on what energy security means for each of them
It is not only about physical supply of energy
4As as indicators:
Availability
Accessibility
Affordability
Acceptability
It is in fact in line with Sustainable Development concept: balancing social-economic-environmental concerns
Energy security and sustainable development together:
More aspects to be considered,
Indicates ways to address concerns of parties in the energy value chain
Important for addressing the national interest

18. Concluding Remarks Data accuracy Planning Energy security perspective
Energy consumption: size, users, area
Subsidy target
Planning
Program design: substance, institutions, budget
Implementation strategy: coordination, public awareness & acceptance, monitoring
Energy security perspective
To balance social-environmental-economic interests
To address short & long term concerns
To be more realistic: take into account position & perspective of everyone in the value chain