Is adjusting the electricity tariff the answer for energy subsidy?

Is adjusting the electricity tariff the answer for energy subsidy? Ignasius Ryan Hasim ;   A researcher at The Abdul Latif Jameel Poverty Action Lab, Southeast Asia office

JAKARTA POST,  17 Desember 2014

                                                                                                                       

It has been nearly two months since President Joko “Jokowi” Widodo assumed office and several recent breakthroughs suggest he and his team do not want to waste a day. Consistent with his tagline of “kerja, kerja, kerja” (work, work, work), Jokowi risked his popularity over the decision to restructure fuel subsidies, which saw fuel prices increase during his first month in office. He strongly argued that the subsidy cut was vital to reshaping Indonesia’s state budget. As was long predicted, his efforts did not stop there. Energy and Mineral Resources Minister Sudirman Said recently issued a decree that will bring about an adjustment in the electricity tariff for most households in Indonesia. The decree, effective from Jan. 1, 2015, marks an era where the price that customers must pay for their electricity consumption will float and move according to the market price. This policy will aim to make the subsidies better-targeted. The floating tariff will only apply to households with a capacity 1,300 VA or more, a capacity that PLN (the state electricity firm) defines as the lower threshold for people to consume electricity as a luxury. Meanwhile, 450 VA and 900 VA households will continue paying the same price as the subsidy provided to them will not be lifted, at least until further notice. After the new regulation takes place, every month the tariff will be updated based on three indicators as disclosed by PLN officials: the exchange rate of the rupiah to the US dollar, the oil price, and the inflation rate confirmed by the Central Statistics Agency (BPS). People will not see this as unfamiliar, for it looks similar to the periodic price adjustment of Pertamax and other non-subsidized fuel that follows the real market price. The tariff adjustment, PLN reveals, will help the country retrench its subsidy spending by Rp 8.5 trillion (US$680 million), or 8.3 percent from the electricity subsidy budgeted in the 2014 state budget. The question is who does the policy affect the most? Similar to the recent fuel subsidy cuts, those affected the most are people who sit just above the poverty line and as a consequence, they are not eligible for social protection, but are still very sensitive to any price change. In this case, they are the people now in 1,300 VA households. To put it in context, prior to this policy, households with 1,300 VA had to pay Rp 1,352 per KWh (kilowatt hours) while 900-VA-consumers were only required to pay Rp 605. By doing the math, households consuming 1,300 VA must pay twice that of households with 900 VA for the same time they spend watching the same program on the same TV. Moreover, plenty of customers upgraded the electricity capacity for their households, responding to the recent PLN program to waive all fees related to this upgrade. While the program is perceived to be effective for giving people incentives to pay for what they can afford, the upgrade program annuls their right to enjoy the subsidy. The next question is whether this is the right answer for the swollen subsidy budget. Of course it is, but I am afraid that this is only the first step. One of the government’s energy policy objectives is to improve the electrification ratio in Indonesia. To date, all provinces on Java have achieved a level of more than 70 percent, while Papua and other provinces in Eastern Indonesia are still at 30-40 percent. Consequently, a large portion of the subsidy budget provided to households with 450 or 900 VA is still being enjoyed by people living in Java. There is no need to further discuss the importance of providing accurately targeted subsidies, as it remains crucial to keep the inflation rate under control. However, considering the new President’s mission to enhance the country’s maritime infrastructure by the likes of opening new ports in Eastern Indonesia, electricity availability in those areas is indispensable. The government must focus on increasing the electrification ratio to support development in these areas. The multiplier effect will be huge. Opening access by building proper infrastructure will lead to transportation costs being kept to a minimum and will prevent product prices from sky-rocketing. With such a large gap in the tariff being charged for two different types of households (900 VA and 1,300 VA), there must be a lot of room to revisit the subsidy policy aimed at these people. Indonesia must stop turning a blind eye to these disadvantaged areas. The subsidy cut will, of course, still hurt, but taking that pill may turn out to be the only way for our nation to get fit. The tariff adjustment will help the country retrench its subsidy spending by Rp 8.5 trillion. ●