Indonesian Energy Policy: At the Crossroads of the Energy World

Indonesia’s energy market is fascinating: it lies at the center of global energy trading and has significant hydrocarbon reserves.

In addition, Indonesia has a huge geothermal energy potential and is well positioned to benefit from biomass as a fuel source.

1. At the crossroads of the modern energy world

Indonesia moves in tandem with global trade in Singapore and in the Strait of Malacca

The reason is geography. Indonesia is located next to the Strait of Malacca, which means that it is at the center of the modern energy world. Through the Strait of Malacca, most of the world’s hydrocarbon resources flow to East Asia and the countries of the Western Pacific. A gigantic economic zone is growing up in the northeast direction. In front of the Strait of Malacca rises the fastest growing economic region in the world. This is not a new phenomenon: we know that Indonesia has been participating in world trade for more than a thousand years. Rich trading networks, today energy trading networks, still exist in the Indian-Pacific region. The Indonesian archipelago was the easternmost edge of this vast and expanding trade network.

Trade is a defining characteristic of this region, just as trade played an important role for the Hanseatic cities of Northern Europe. It was an expanding commercial network of interconnections. Goods flowed in from the Arab world. Spices as well as products from the Middle East and India were traded.

At the same time, the people of the Indonesian archipelago traded goods and commodities with East Asia and the West Pacific region. There was a trade that connected Indonesia with the West. At the same time there were trade links that connected the Indonesian countries with the North. In the past, the wind was used to cross the seas. This has changed with the motorization of sea ships. Hydrocarbon fuels flow into this region, driving the Chinese energy industry and China’s industrial growth.   

2. Geothermal energy

Geothermal energy has the greatest potential of all when it comes to the Indonesian energy markets. Indonesia lies on a tectonic fault line, and the geothermal potential is greatest along the coast of Sumatra and Java and then extends to the northeastern islands. Geothermal energy is Indonesia’s renewable energy strength. 

3. Coal reserves

Indonesia also has considerable coal reserves, which means that the country is able to export most of its coal to other Asian markets. Indonesia’s coal reserves will certainly serve as a reserve option in the event of shortages of other energy resources. 

As a result of the coronavirus pandemic, we recorded lower demand for coal on foreign markets. Another important trend is that the industrialized nations have moved away from coal-fired power plants. In the industrialized nations we have seen continued growth in renewable energy infrastructure and natural gas power plants. Natural gas power plants today are operated with advanced engines and heat recovery. Renewable energy sources, wind and sun, have continued to move towards grid parity. This has dramatically limited the export options for Indonesian coal. 

What is currently left for Indonesian coal is the domestic market. Indonesia has a growing population and continues to industrialize. Due to the time horizon, it will be difficult to meet the energy requirements for growth in the urban agglomerations. This will probably lead to the construction of coal-fired power plants in Indonesia in the foreseeable future.

4. Natural gas reserves

There is growing recognition that Indonesia has great potential as a natural gas producer, and numerous international companies have invested in the exploration of natural gas deposits in Indonesia. This could partly be a reaction to falling income from oil exports. Indonesian oil production has declined rapidly. 

As for revenues from energy exports, it is unlikely that natural gas exports will be able to compensate for lost revenues from declining oil exports. The recent coronavirus pandemic has already lowered oil prices on world energy markets, contributing to lower revenue projections. Nevertheless, the Indonesian archipelago should have sufficient shale gas reserves. Foreign investment and technological expertise are needed to develop them.

5. Biofuels

Due to the equatorial latitude of Indonesia, the country has great potential for the production of biomass. Above all, the production of biofuels appears very promising. Biomass production could catch up with Brazil, where sugar cane production plays an important role in the energy sector and in the transport industry. Indonesia has one of the largest populations in the world, and because of its size, using agricultural land for biofuel production would be contrary to agricultural policy.

At present, the future of biofuels in Indonesia is tarnished by the drop in oil prices. In Indonesia, most biofuels are produced from palm oil. Sugar cane would be a good option for producing ethanol, but is not used as easily as in Brazil. Due to the falling oil prices, the demand for expensive biofuels from palm oil and for biofuels from vegetable oil is decreasing. With palm oil, the question arises whether the biofuel is more environmentally friendly. This is important since a large proportion of biofuels is exported internationally.

6. Summary

Indonesia has the opportunity to freely choose its energy policy. It can go many different ways, whichever way it wants to go. Indonesia has the choice of importing its fuel supply or investing in the exploitation of its geothermal energy potential. Alternatively, Indonesia can choose to use its domestic coal reserves to generate electricity. There is plenty of geothermal energy available for heat extraction. Indonesia has a real potential to become a major player in heavy industry. The implementation of an industrial strategy based on Indonesia’s abundant energy resources will be a competitive advantage. Indonesia has a strategic advantage in many respects that German energy policy does not allow because of Germany’s dependence on energy imports.

Many thanks for the shared interest in the energy world!

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