This chapter analyses the trend of the rural electrification programme in Indonesia. It presents analysis on the affordability dimension that is also linked to energy equity. The first part analyses the current position of electricity access from both regional and provincial perspectives. The second part investigates the affordability dimension of electricity and evaluates it both in nominal and real terms. The third part discusses the characteristics of households without electricity access using several indicators, such as housing and infrastructure conditions and social protection benefits from the government. The fourth section discusses the rural electrification programme in Indonesia, underlining the changing institutional actors and the outcome dimensions. Section five analyses the existing conditions of the rural electricity programme. Finally, the lessons learned from the rural electrification programme in Nusa Tenggara Province are discussed. To conclude, although Indonesia has contributed to reducing the number of people in the world without access to electricity and alleviating the huge disparity in electricity access and consumption among the provinces, the rural electrification programme has not yet devised a robust method or comprehensive strategies throughout the last six decades. The decision-makers seemed to lack an understanding of present and historical contexts in designing the programme. This affects the sustainability of electricity access. Resolving the problem of electricity access in Indonesia will require many more years.

CURRENT CONDITION OF ELECTRICITY ACCESS

The report of the Commission on Sustainable Development/CSD (2001) said that energy is central to achieving the goal of sustainable development. Access to affordable energy services is a prerequisite to reduce the number of people living on less than US$1 per day by 2015 (CSD 2001). The report also said that access to energy is crucial for economic and social development and the eradication of poverty. According to Birol (2007), there are three strategic challenges in global energy system, namely: (i) the growing risks of disruptions to energy supply; (ii) the threat of environmental damage caused by energy production and use; and (iii) persistent energy poverty, which is frequently overlooked in discussions. Birol (2007) has pointed out the vicious cycle of energy poverty and human under-development. Similarly, UNDP (2005) mentioned that access to electricity is a precondition to achieve the Millennium Development Goals (MDGs).

THE PRODUCTION SIDE

This chapter investigates electricity production and consumption in Indonesia since the First Five-Year Development Plan (Rencana Pembangunan Lima Tahun Repelita I) which began in April 1969. An analysis of the production process involves the development of electrical generation, transmission, and distribution, whereas a study of the consumption pattern involves the sectorial and regional dimensions. Electricity consumption is represented by the amount of electrical energy sold at any one time. As seen in Figure 3.1, between 1969 and 2012, electricity production and sales increased more than a hundred times. Electricity production is still predominantly generated by PLN. However, PLN can also purchase electricity from captive power plants and independent power producers (IPP). Between 1968 and 2012, the average growth of electricity production was about 11.3 percent, whereas the growth of electricity consumption was about 11.7 Percent. Before the 1998 economic crisis, electricity production increased by 13.3 Percent; however, after the crisis, it was about 6.3 Percent. The growth rates in electricity consumption before and after the economic crisis were about 14.1 Percent and 6.6 Percent respectively. This chapter analyses how the 1997/98 economic crisis had substantially affected the development of the power sector in Indonesia as the growth of electricity production and consumption had decreased from double-digit to single-digit growth. A detail analysis of the impact of the economic crisis on PLN is discussed in Chapter 4.

As mentioned in the previous chapter, the private sector had played an important role in the early stages of the development of the energy sector in Indonesia. After Indonesia gained its independence, the new government had adopted a gradual nationalization of the electricity sector; by the early 1960s, the entire electricity sector was under state control. As seen in Table 3.1, in 1973/74 or at the end of the first five years of development planning, hydropower made up a capacity of about 278.7 MW, or about 35 Percent of the total installed capacity (that was owned by PLN). As discussed in Chapter 2, in the early 1970s, the contribution of hydropower was about 30 Percent.

The analysis from the previous chapters indicated that economic growth and electricity consumption and production has a strong correlation. This chapter investigates empirically whether availability (in terms of power consumption) has a causality link to economic growth in Indonesia through the application of econometrics; more specifically, through a time series analysis. This assessment is important in understanding the long-term perspective on economic growth vis-a-vis electricity consumption between 1960 and 2012 (this is the longest time series analysis in the case of Indonesia). Interestingly, the data from the time series analysis approach has supported the conservative hypothesis; this is where electricity consumption conservation may be implemented with little or no adverse effect on economic growth. One can expand on these empirical results of the time series analysis for policy refinement. This analysis adds on to the data available on the issue as a larger data series has been used in comparison to previous studies on Indonesia, such as Squalli (2007) and Sambodo (2011). Furthermore, a diagnostic test has been carefully conducted in order to ensure that the model is econometrically robust.

There are two main reasons why it is important to investigate the relationship between electricity consumption and economic growth. Firstly, Indonesia has a chronic power shortage problem. This has led to unexpected blackouts and forced the government to implement a fast track programme and demand side management, such as by replacing conventional lamps with energy saving lamps. The second reason is because the electricity sector has a direct impact on global warming. In 2008, calculations made at the global level indicated that the proportion of electricity and heat generation to total carbon dioxide emissions amounted to 41 Percent, which made up the highest category when compared to other contributors (IEA 2010). There are three main ways to control carbon dioxide emissions from the electricity sector (IEA 2009): (i) improving energy efficiency for electricity end users; (ii) providing policy incentives (such as through a tax on carbon dioxide emissions or providing subsidies that promote low carbon technology); (iii) enhancing research and development in low carbon generation technologies.

Since the past influences the institutional setting of the power sector in Indonesia, understanding the history of the electricity sector will help us understand the current situation and analyse the future path. This chapter briefly describes the conditions of organizational and institutional settings of the electricity sector in Indonesia, starting from before the Independence to the present. The pre-Independence period, before the Second World War, and the Japanese Occupation will be discussed. After the Independence period, there are three important periods in the electricity sector, according to the Ministry of Energy and Mineral Resources (DPE 2000): (i) 1945–50 (the formation of electricity and gas department); (ii) 1951–67 (the nationalization and organizational growth of Dutch electricity companies); and (iii) 1968–2014. In addition, between 1961 and now, there are three important organizational changes that need to be discussed: (i) the formation of State Electricity Company Management Agency (Badan Pimpinan Umum Perusahaan Listrik Negara/BPU-PLN) in 1961; (ii) the formation of Perusahaan Umum Listrik Negara in June 1972; and (iii) the formation of PT. PLN (Persero) (limited company) in June 1994. This chapter analysed the critical elements from each of these episodes of history.

THE PRE-INDEPENDENCE PERIOD

The first electricity trading company in Indonesia (Netherlands East Indies) was established in May 1897 by the Netherlands Indies Electricity Company (Netherlandsch-Indisch Electriciteit Maatschappij/ NIEM) in Batavia. However, according to McCawley (1971, p. 1), the Dutch plantation companies had developed power generation for their own use even before that time. Developing power generation was important for Dutch companies to run businesses such as sugar factories, tea factories, and other plantations (DPE 2000). Most of these commodities were intended for the export market (see Table 2.1). Hydropower was an important source of power supply for Dutch companies because it required the least cost based on the state of technology at that time and there were abundant supplies of water.

Following the 1890 Ordinance No. 190 dated 13 September 1890, Dutch private sector companies could operate electricity business for public utilities (DPE 2000).

After seventy years of Independence, Indonesia still struggles to solve four main challenges. Firstly, Indonesia has the highest number of people without electricity access in the Asian region, after India (IEA 2013). Secondly, out of the ten Southeast Asian countries, Indonesia has the lowest electrification rate, after Cambodia, Myanmar, and the Philippines (IEA 2013). Thirdly, in terms of electricity consumption per capita, out of 135 countries, Indonesia ranked 28th from the bottom in 2011, after the Philippines and before India. Fourthly, in terms of carbon dioxide emissions from electricity and heat production, Indonesia was one of the top emitters, placed at 16th out of 133 countries in 2011. The emissions will increase if Indonesia becomes more dependent on coal power plants in the future. As the demand for electricity in Indonesia is expected to rise, this has consequences not only in terms of the provision of primary energy supply for power generation, but also in terms of electricity transmission and distribution, intended improvements regarding the quality of electricity supply, the maintenance and sustainability of power supply, the reduction of electricity poverty, and finally, the creation of a green (more environmentally sustainable) power system.

Nowadays, the challenges of the power sector can be quite complex and decision-makers would need to take multidimensional objectives into consideration. These include the economic, environmental, social, and human (safety) factors. Further, there is also the trade-offs for some criteria. For example, from an economic perspective, the power system would need to be developed using the least cost principle and following the structure of current generating cost in Indonesia, coal power plants have the lowest cost. However, from the environmental perspective, this policy is not strongly advisable as the coal-based power plants emit more carbon dioxide compared to gas- or oil-based plants. In addition, the power system planning would need to address issues such as reducing energy poverty, regional disparity, and income inequality in order to meet social objectives. Considering the challenges on the geographical and topography situation, and varieties in the population density, there is a need to combine both on-grid and off-grid connection to electrify the most remote parts of Indonesia.

Based on the energy security framework analysis, this book came to the conclusion that although the five dimensions (regulation and governance, availability, technology development and efficiency, environmental sustainability, and affordability) are interconnected, they need to be treated with different priorities. This book pointed out that regulation and governance needs to be at the centre of electricity sector discussion in Indonesia. This implies that scholars need to set different weights when assessing the ranks of the five dimensions in the case of Indonesia. The analysis suggested that regulation and governance needs to be placed as the core of improving energy security, followed by availability, technology development and efficiency, environmental sustainability, and affordability dimensions.

Reviews on the historical perspective indicated that since the first trading of electricity in Indonesia in May 1897, in terms of the regulation and governance dimension, Indonesia has not developed a mature and stable environment for electricity business. We need to highlight that the period of Japanese colonization, political struggle in the early independence period, the economic crisis at the end of the old order regime, internal conflict within PLN organization, the economic crisis in 1997/98, the collapse of the Soeharto regime, and increasing electricity subsidies have affected the development of the electricity sector in Indonesia. Lack in incorporating the national interest into a clear policy direction and lack in institutionalizing good policies had led to inefficiency and spread of rent-seeking behaviour. Good governance and good corporate governance need to move in the same direction, one needs to reinforce the other in a positive way. The future performance of the electricity sector depends on how regulation and governance can create business opportunities and economic stability.

Although the New Order period could have created a certain level of political and economic stability that was necessary for the development of the power sector, the strategies were constructed under two weak foundations. First, in order to improve the availability of power supply, the government has allowed the private sector to generate electricity and sell it to PLN. Unfortunately, improper contract agreements (a lack of transparency) and the strong involvement of Soeharto's cronies in some of the dealings caused PLN problems which later became complex and serious. Currently, the government has prepared regulations and standard procedures for independent power producer (IPP) procurement, but this will not automatically result in better outcomes.

Chapter 3 indicated that between 1969 and before the economic crisis in 1997/98, the electricity sector in Indonesia grew healthily in terms of production, consumption, and efficiency (declining in transmission and distribution losses). This period can be considered as the period with the best performance of the electricy sector after independence. However, the rapid development of the power sector was not based on strong foundations of good governance and good corporate governance. As a result, after the economic crisis in 1997/98, the power sector was under critical conditions with poor performance and a lack of investment. This chapter highlights that PLN still needs to resolve the financial problem due to pricing and exchange rate policy. Mishandling of the situation and inappropriate strategies to overcome the challenges will lead to more problems in the power sector in the future.

Indonesia experienced two major economic crises in the mid-1960s and late 1990s. The two crises led to deep economic contractions. Economic growth was –3.0 Percent in 1963 and –13.1 Percent in 1998; the two crises increased the number of poor people in absolute terms (Thee 2012). The origins of the two crises were different. The economic crisis in the mid-1960s was due to a mismanagement of the domestic economy while that in the late 1990s was due to the creditor and investor panic that began in Thailand in mid-1997 and spread to other Asian countries such as Malaysia, the Philippines, and Indonesia (Thee 2012). The two crises led to a serious political predicament which resulted in the downfall of the first and second Indonesian presidents. Thee (2012) also noted the major differences between the two crises: the mid-1960s crisis was preceded by a steady economic decline during the previous five or six years, while the crisis in the late 1990s was preceded by three decades of rapid and sustained economic growth.

As seen in the previous chapter, the 1997/98 economic crisis caused a substantial decline in the growth of sold electricity and most of the decreases were from the industrial sector. This indicates that the industrial sector was hit more severely than the other sectors. Even though the electricity consumption from the industrial sector rapidly increased after the crisis, the consumption from the household sector increased much faster than that of the industrial sector.

INTRODUCTION

ASEAN achieved a milestone with the launch of the ASEAN Free Trade Area (AFTA) Agreement in 1992. Establishing an ASEAN Economic Community (AEC) in 2015 is the next logical goal after the relatively successful implementation of AFTA. ASEAN has set its objectives of building an AEC that is premised on the free flow of goods, services, investment and skilled labour and freer flow of capital in order to move towards a single market and production base. Creating a competitive economic region, equitable economic development, and integration into the global economy are the other elements of the AEC.

Thailand has recently prioritized the AEC in its national agenda and will continue to do so in the coming years (“Policy Statement of the Council of Ministers” 2014). At the same time, the Thai government has been trying to pursue significant economic and institutional reforms aimed at improving the domestic economic structure for a more integrated ASEAN region. Even though some of the literature indicates that Thailand will benefit from the AEC (Plummer and Chia 2009; Intaravitak, Ongkttikul and Lucksahapanyakul 2012), economic integration in ASEAN has had a different impact on different groups of people in the country. Overall, for example, large firms and multinational corporations (MNCs) are supposed to form the main group that gains from the AEC compared to small and medium-sized enterprises (SMEs). Once liberalization deepens, uncompetitive firms in a more integrated region might have to leave the industry if they are unable to adjust to a borderless AEC. This creates a conflict of interest between winners and losers of the AEC.

Policy-makers and academics (Mayer 1992) like to argue that the toughest bargaining during the negotiation process takes place not between nations but within them. Since the impact from proposed international agreements differs across various stakeholders, the liberalized economy is likely to be divided between losers and winners. Possible losers tend to resist complete implementation of trade agreements, thereby limiting a country from benefiting from an international agreement's full potential. Taking this concept and applying it to the Thai case, the AEC 2015 will certainly divide the domestic economy between winners and losers in the years to come. The question then arises: who represents the winners and losers, and how can Thailand resolve the different impact that these groups in the domestic economy will encounter?

As we draw to the end of 2015 and the date of completion of the ASEAN Economic Community (AEC), there is a lot of analysis regarding what happens post 2015. Most analysis involve a review of the achievements and progress measured against the AEC Blueprint and then make recommendations on the way forward. Most of the recommendations are made up of completing the unfinished business of AEC 2015 and then go on to outline how to widen and deepen AEC 2015 so ASEAN can be an integrated production base and market. Only a few try to understand the root causes of the slower than desired progress towards this end goal. This book fills the gap by exploring how domestic conflicts at the level of each ASEAN country have impacted on each country's AEC commitments.

Therefore, the editors of this volume and ISEAS–Yusof Ishak Institute should be congratulated on choosing such a topic in a timely way. This publication is a very welcome publication because it attempts to get at the root causes of domestic constraints on the commitments that each ASEAN economy can make. Despite the acceptance of the vision at the very top level and the long-term process of development in ASEAN, it is a fact that the lack of appreciation for the ASEAN process in a country and that the benefits are not directly felt in the country, means that there has been lack of support domestically. Furthermore, despite the fact that the AEC has four pillars including an equitable ASEAN, there is not much in terms of commitments and concrete actions in this pillar. Most of the AEC commitments and actions have been in the first pillar of a single production base and market, which involves liberalization and facilitation.

In 2011 when Indonesia was the Chair of ASEAN, it was recognized that without strengthening of the equitable pillar it would be hard to have the confidence to progress on the first pillar and other pillars related to a competitive ASEAN and the way ASEAN engages externally. Without addressing the inequitable development due to economic integration within and between ASEAN countries, it was difficult to get more support to speed up opening up and integration.

INTRODUCTION

The date 31 December 2015 will mark the formal establishment of the ASEAN Economic Community (AEC), and the commitments behind it. While it is generally understood that the AEC is likely to liberalize the region to create a single market, most often people forget to look at other aspects of the AEC: the creation of a competitive economic region; equitable economic development; and integration with a global economy. The other three pillars of this community depend upon the commitments of member countries to facilitate economic activities and conduct regulatory harmonization instead of simply liberalizing their markets.

The facilitation and harmonization aspects of the AEC Blueprint (“the Blueprint”) are often overlooked and difficult to implement as they require changes or revisions to behind-the-border measures. For example, the implementation of the ASEAN Single Window (ASW) has been delayed due to incomplete related national initiatives. While the AEC Scorecard indicates that progress within Pillar I (measures for Single Market and Production Base) and II (measures for Competitive Economic Region) has reached 75 per cent and 86 per cent respectively in Phase III of implementation (2008–13), many of the reform measures under both these Pillars have yet to result in concrete positive outcomes. Nevertheless, they are critical for enabling member countries to gain from the AEC and to ensure greater coverage of such gains.

There are many factors behind the difficulties in implementing the facilitation and harmonization measures. These range from technical and human resource capacity to political willingness and a reluctance to undertake reforms. Some countries in ASEAN face additional challenges as they have a large population and land area as well as a relatively dispersed decision making system, as in the case of Indonesia and the Philippines. It is harder for these countries to implement behind-the-border commitments and to align domestic policy with international practices due to a decentralized governance system and a fragmented political situation.

This chapter discusses the challenges that Indonesia faces in implementing the AEC's behind-the-border commitments. The current state of implementation is highlighted to provide some background to the situation. This chapter then examines several factors behind the country's readiness (or lack of it), taking into account political economy issues and perceptions towards the AEC and economic integration in general.