Indonesia Braces for a New Era of Energy Volatility
Indonesia will have to tolerate high and volatile energy prices in the next 20 years, while at the same time encouraging conservation and pushing for alternative energy sources, an official said in response to a McKinsey report.
McKinsey Global Institute, a research arm of global management consulting firm McKinsey & Company, said that the world might be at risk of entering a new era of high and volatile energy prices in the next two decades, as demand rises from emerging markets, particularly in Asia.
“Up to three billion people could join the middle class, up from 1.8 million currently, boosting demand at a time when obtaining new resources could become more difficult and costly,” the research firm said in its report, released on Tuesday.
“The stress on the resource system is likely to be compounded by increasing links between resources that mean that price shocks in one can swiftly transmit to others.”
Kardaya Warnika, director general of renewable energy at the Ministry of Energy and Mineral Resources, said Indonesia had two main strategies for dealing with rising demand for energy, which are conservation and alternative energy sources.
“It’s a basic fundamental of supply and demand,” Kardaya told the Jakarta Globe on Friday. “I think as demand rises, we have to control it or increase the supply as well.”
McKinsey argued that erasing subsidies, such as in energy, can catalyze further improvement and innovation in more efficient uses of resources.
“First they should look to history, which shows that strong sustained price signals are key drivers of improved performance in resource systems,” the report said. “Governments need to consider unwinding the more than $1 trillion on subsidies on resources, including energy and water, that today keep prices artificially low and encourage inefficient use of commodities.”
McKinsey praised Indonesia’s move in 2009 to reduce fuel subsidy, which caused prices to rise, while providing some mitigation funding for the poor.
The government, however, seems reluctant to repeat the move, saying that there are other ways to cope with the increasing demand for energy.
Kardaya said the government was preparing initiatives to encourage energy conservation, such as a regulation on energy-efficient buildings and limitations on fuel consumption.
When it comes to encouraging the production and use of alternative energies, he said the government would continue to offer incentives to companies participating in this area, such as fixed rates for alternative energy, to ensure profitability.
Do you think the strategy (reducing subsidies and increasing allocation for the poor) will work in Indonesia? In general I think this is a good strategy, of course there will still be some fears about the funds being corrupted before even reached to the poor; But in overall, I think such strategy will definitely contribute to the country’s economic growth. Then it leads us to another question, what about the inflation? can the Government control the inflation? By lifting up the subsidies, it will push up the energy’s prices in Indonesia. What do you say about this?