The issue of misallocated fuel and electricity subsidies has resurfaced through the comments of Minister of Energy and Mineral Resources (ESDM) Bahlil Lahadalia in an official statement on the ESDM website, Sunday (3/11). Around 20-30% of energy subsidies benefit non-poor and vulnerable groups, with leakage values reaching Rp 100 trillion.

This issue is not new. Since its initial implementation during President Sukarno's era in 1965, energy subsidies have been frequently criticized as a burden on the state budget. The challenge is that this social protection program is difficult to eliminate because its economic domino effect is widespread and has the potential to push the middle class into poverty due to fluctuations in the prices of basic commodities.

However, it must be remembered that subsidies only improve living standards in the short term. Long-term benefits? Not necessarily. In fact, subsidies limit the state's fiscal space for developing other vital long-term sectors. When the market is unstable, the government's options are limited to two: "bleeding" by continuing subsidies or reducing subsidies and burdening the people. Both harm the public—one sacrifices the future, and the other pressures the economy in the short term.

Long-term development visions, such as renewable energy, for example, can be neglected if subsidies dominate the budget. As a result, the diversification of the national energy mix stagnates, and Indonesia will continue to rely on fossil fuel imports. National energy governance clearly needs to be overhauled. So, how can Indonesia accelerate this transformation?

Proportional and Targeted

In essence, subsidies are an accelerator of purchasing power, not a form of social protection or price control. The mechanism is like a discount: sales increase because the price is lower, but the seller does not sell at a loss to sell out. In this context, energy subsidies should be proportional, and the distribution process should be targeted to avoid burdening the state budget.

However, in developing countries, energy subsidy reforms and budget reallocations are difficult to implement, but not impossible.

The reason for the difficulty is simple: low public trust in the transparency of direct assistance distribution processes (due to corruption). Targeted subsidies mandate delegation of power, which can decentralize corruption to the lowest levels. Moreover, excessive control over the distribution of assistance at the lower elite levels will be politicized for their own electoral interests.

The public has no guarantee that public officials will keep their promises to distribute these subsidies proportionally. There is also the risk of misallocated subsidies. Therefore, mechanisms like targeted subsidies must be backed by a mental revolution and institutional reform.

The concrete steps: establish a transparent and inclusive Subsidy Transition Task Force/Institution, led by the Corruption Eradication Commission (KPK) and NGOs such as ICW. This institution would be responsible for overseeing the assistance distribution process, from mapping recipients to evaluations, including creating a roadmap for gradual price transitions (2-3 years) and continuous socialization to avoid sudden socio-economic crises.

At the same time, the core issue of Indonesia’s energy sovereignty—lack of energy mix diversification—must be addressed in parallel. According to World Bank economist Jun Rentschler, fuel subsidies encourage opportunistic behavior/over-consumption among non-poor groups and hinder green energy initiatives. With oil and coal as the primary energy sources, imports and subsidies continue to be absorbed into "dirty" energy, neglecting the potential of new energy sources.

The solution: implement a carbon tax and reallocate fuel subsidies to research and development (R&D) of new energy. Models such as the 45Q carbon tax in the U.S. or China’s emissions trading scheme could be adopted. Revenue from the carbon tax and subsidy savings would be allocated for R&D in renewable energy (gas, nuclear, geothermal) and exploration of new fossil fuel fields. This approach would reduce dependence on imports (especially oil and coal), strengthen the economy, and address the energy trilemma—energy security, carbon neutrality, and economic growth.

Long-term Commitment

Reallocation of subsidies and energy sector transformation is a long-term commitment, so the transition must be supported by a regulatory framework for pricing and taxes. Political communication must be carried out continuously and gradually to create familiarity with the new system.

Speaking of price regulation, for example, the Indonesian energy market is practically monopolized. Instead of protecting natural resources, state-owned enterprises' (BUMN) monopoly rights actually eliminate market competition mechanisms and force the government to continuously intervene in price setting, prolonging the politicization of fuel price policies and high market concentration.

Further, according to a case study from the World Bank (2016), subsidies make it difficult to assess the commercial performance of BUMN, due to ambiguity in losses caused by internal inefficiencies and subsidies, and the lack of transparency in subsidy reporting. Therefore, regulated market liberalization should be a priority. For instance, implementing anti-monopoly regulations and removing the ambiguous clause "socio-economic crisis considerations" in determining fuel prices/subsidies.

In this context, the government must be prohibited from arbitrarily manipulating prices through BUMN to suppress the private sector by undercutting prices for "socio-economic crisis" reasons. Consistency in price regulation is what builds investor confidence and ensures that fuel prices naturally remain affordable based on competition.

Furthermore, the formula and data for fuel price/subsidy determination must be published transparently and regularly. Learning from Chile, a fuel tax and subsidy scheme can be implemented together to stabilize prices for small and medium users, with a subsidy component that is both fixed (adjusted for inflation) and variable (adjusted for import price gap and reference parity).

Price/subsidy calculation data and mechanisms should be published weekly and open to external audits. In addition, deficit limits must be established to prevent budget imbalances due to excessive variable subsidies. This government accountability will increase public trust in the reallocation of targeted subsidy budgets or fuel tax initiatives.

In short, a mixed Targeted Subsidy-Conditional BLT scheme is the most ideal model for Indonesia. A portion of these targeted subsidies can be reallocated to support strategic industries, such as food (agriculture and fisheries), energy, and infrastructure, through incentives such as tax reductions or exemptions, accelerated depreciation, capital allowances, or royalty concessions.

Fuel subsidies for end-users should be implemented proportionally per region, adjusted for poverty concentration levels, and accessed based on NIK through the MyPertamina platform. Conditional BLT should be distributed under the supervision of a transparent and inclusive Subsidy Transition Task Force/Institution. This approach is expected to reduce sudden socio-economic conflicts while facilitating Indonesia's energy sector transformation toward sustainability.

Energy Economics and Policy

Reallocation of Subsidies and Energy Sector Transformation

Analysis Center for BRICS+ and ASEAN