Setyawan, Dhani (2019) Energy Intensity in Indonesia: Four Empirical Studies with Policy Implications. PhD thesis, Victoria University.

Abstract

Indonesia is a large energy user, with energy supply heavily based on fossil fuels and with a long history of subsidies to energy use. The Indonesian Government has set out to make the country more energy-efficient, in the process reducing energy use per unit of real GDP (energy intensity), while reducing the reliance on fossil fuels. To contribute to improved policy development, this study attempts to identify the determinants of the changes in energy intensity across industries and relative to other countries in Indonesia's region and analyse the factors that affect energy efficiency. To support this process, this thesis sets out to analyse changing trends in energy intensity in Indonesia relative to its ASEAN neighbours, to improve understanding of changes in energy use and energy intensity in key industries within Indonesia, to document variations in energy intensity across Indonesia’s 34 provinces and to draw from these analyses some lessons about the future direction of energy policies in Indonesia. The analysis is based on final energy consumption rather than total final energy supply, and hence excludes energy used in the production of final energy. It draws mainly on data on real value-added and energy consumption by industry from various sources. The analysis also relies heavily on decomposition analysis, enabling the change in energy intensity to be split between changes in the structure of economic activity and changes in the within-industry energy intensity. The first research problem compares the energy intensity performance in Indonesia to other ASEAN-6 countries from 1971 to 2016. In terms of structure and industry effects on aggregate energy intensity, all the ASEAN-6 countries showed a shift in industry value added to more energy-intensive industries, which was to varying degrees offset by falling within-industry energy intensity. However, the analysis shows that both element of this trend was most pronounced in Indonesia. As the energy intensity of manufacturing and, particularly, transport, is much higher than that of the rest of the economy, by 2016 over 90% of total final energy consumption was from the manufacturing and transport sectors. For this reason, this study concentrates more detailed analysis on the manufacturing sector and transport sector. The second research problem discusses energy intensity in the manufacturing sector from 1980 to 2015. The overall energy intensity of Indonesia’s manufacturing sectors has seen a strong and continuous decline, with a reduction of 65% over the 35 years, reinforced by some limited changes in industry structure towards lower intensity. Over the whole period, this reduction was dominated by increases in energy efficiency within industries, as indicated by a 62% fall in the within-industry intensive index. By contrast, the effect of moving to a less intensive industry structure was much less important (a 9% fall in the structural index). The greatest rise in energy efficiency within the industry happened before the Financial Crisis (from 1980 to 97). The shock of the Financial Crisis saw an unexpected reaction when value-added fell by 13% but energy use remained largely unchanged, implying a rise in energy intensity. From 2000 to 2015 the earlier trends resumed, but at a more subdued pace, where over this period aggregate intensity fell by 23%. The third research problem presents a review of energy intensity in the transportation sector from 2000 to 2016. Energy use in transport grew more slowly than overall energy use in Indonesia for about 30 years after 1971, falling from 58% of the total in 1971 to only 38% in 2000, but since surged back to 51% by 2016. Over 2000 to 2016 total final energy consumption in transport has grown by 10% per annum so that transport now provides a large and rapidly growing component of total energy use. In 2016, almost all passenger kilometres are travelled on roads (95.6%), with virtually no rail (0.5%) or water (0.3%) passenger travel, but with a small but rising share of air travel (3.6%). Rail is also absent in freight movements in Indonesia, accounting for only 0.2% of total tonne-kilometre movements in 2016, which are mainly divided between road for 41.1% and water for 53.6% in 2016, although air freight is rising rapidly, reaching 5.0% in 2016. The fourth research problem investigates the disparities of energy usage levels specifically in energy intensity amongst 33 provinces in Indonesia from 2010 to 2015. The results capture the existence of a convergence process and the shrinking in energy usage disparities across the 33 provinces in Indonesia from 2010 to 2015. In addition to the inequality measures, the decomposition analysis was also applied to explore the driving forces of the energy intensity across provinces in Indonesia. The results show that the structural effect was the main factor resulting in the increase in energy intensity in most provinces, while the role of intensity effect has differed in different provinces. Regarding policy in the transport sector, the government needs to encourage rail, discourage air and continue to focus on the reduced energy intensity of road (prices, vehicle technology, and better roads). In freight, the central dynamic over 2000 to 2016 has been the modal shift from the energy-efficient water and rail to road and air. Energy efficiency policy should encourage continued freight movements by water, discourage the rise of air freight and encourage rail developments. By comparison with transport, manufacturing has seen, over the period since 1971, a steady fall in overall energy intensity, and this has continued after 2000. This has been due to strong declines in within-industry energy-intensive, with falling energy intensity across most industries at the three-digit level, and some structural changes (such as the falling share of value- added in the high energy using cement and lime sector) and more general industry upgrading. Continued attention to the modernisation of industrial technologies and structure seems necessary.

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