PYC KNOWLEDGE SHARING SERIES 2018 – ENERGY CONDITION IN INDONESIA: AN ENERGY ECONOMICS PERSPECTIVE

Opening Speech by PYC Board Member

An Opening Speech Delivered by Prof. Purnomo Yusgiantoro, Ir., MSc., MA., Ph.D.

A Board Member of Purnomo Yusgiantoro Center (PYC)

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Prof. Purnomo Yusgiantoro greeted all of the Knowledge Sharing Series (KSS)’s participants. It was such an honor for PYC to be able to gather many Indonesia’s energy experts, university’s rectors, university’s head of departments, senior lecturers, and also energy economy practitioners.

In 1999, Prof. Purnomo published his very first Energy Economics book and followed by the second edition with minor data updated in 2009. After his retirement as being the Minister, he realized that there was only one thing left to achieve in his life; it was about sharing knowledge through publishing his own books. Thus, Prof. Purnomo and together with his son, Dr. Luky Yusgiantoro are writing a new Energy Economics book.

In 2010, Prof. Purnomo mentioned that he is one of the founders of the Indonesia Defense University (Universitas Pertahanan/UNHAN. He also opened a new department of Department of Energy Security at the university. In this new department, Mr. Purnomo gave a course on Energy Politics, which later gave him an idea about writing a book about Energy Politics besides the Energy Economics book. So for this year, he planned to finish two books; a book about Energy Economics and another one is about Energy Politic. Both books, however, have more theories and data relevance with the current energy conditions. Thus if all goes well, the launching of one of his books will be held during the second anniversary of Purnomo Yusgiantoro Center this year.

This session of Knowledge Sharing Series (KSS), with the theme “Energy Condition in Indonesia: An Energy Economics Perspective”, is relevant to improve the quality of his upcoming book of Energy Economics, and in hopes that all participants of the session could give their thoughts, suggestions as well as critics.

Presentations

A Presentation on the Draft of the Upcoming Energy Economics Book by Dr. Luky Yusgiantoro

A Board Member of Purnomo Yusgiantoro Center (PYC)

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Dr. Luky tried to give a general concept about the difference between the previous Energy Economics book authored by Prof Yusgiantoro and the upcoming one. He started by jokingly asked the audience if anyone had ever finished reading the previous Prof. Purnomo’s Energy Economics book, which he claimed to be the most comprehensive energy economics book in Indonesia. He explained and compared the specific contents of the previous book and the upcoming book. Briefly, there were nine chapters in the previous book, while there would be ten chapters in the upcoming one. Besides the different number of chapters, the difference lays on a more detail explanation about micro and macroeconomic theory as well as additional study about the economic evaluation of energy investment in the upcoming book. There will also be comprehensive illustrations using either national or global latest data in every theory written in the book. Moreover, the book would provide the application of new and renewable energy resources and its relationship with the existing fossil energy resources to adjust to the current situation of energy industries.

Chapter 1 contains the introduction of Energy Economics in various studies, for example, Energy Economics for the environment and the explanation of the sensitive issue such as the region seizure conflicts regarding the energy resources contents both in Indonesia and abroad. In Chapter 2, the study would be more focused on the application of microeconomic for the energy sector. There would be an explanation about econometrics using supply and demand model both in cross section and time series, cobweb theory, and non-equilibrium market. Chapter 3 would bring macroeconomic in the energy sector such as the relationship between energy sector with the Gross Domestic Product (GDP), Gross National Product (GNP), various type of inflations, Gini index and exchange rates. In Chapter 4, there would be many theories to be brought, especially about production function or Constant Elasticity of Substitution (CES) using Cobb-Douglas function. There would also be a theory of energy depletion both for the non-renewable using Hotelling Theory and renewable energy using Maximum Sustainable Yield. Chapter 5 would bring new studies about the economic criteria to measure the risk and uncertainty of energy investment such as Net Present Value (NPV), Rate of Return (RoR) and Payback Period (PB). Chapter 6 consists of theories of investment financing in the energy sector such as the Weighted Average Cost Of Capital (WACC), the scheme explanation of Public–Private Partnership (Kerjasama Pemerintah dan Swasta, KPS) and also financing scheme both in upstream and downstream for oil and gas industries. The discussion would not only about marginal costs, but it is necessary to consider the social costs of energy industries. In Chapter 7, there would be an explanation about how to measure the social which usually followed the energy industry through Marginal Private Cost (MPC), Marginal Social Cost (MSC), Marginal Cost Control (MCC) and Marginal Social Benefit (MSB). There would also be the explanation about energy conservation in each sector. Chapter 8 would be started by the explanation of the difference between State-Owned Enterprises (Badan Usaha Milik Negara, BUMN) and Private Owned Enterprises (Badan Usaha Milik Swasta, BUMS) as well as their decision-making system. Followed by the explanation of the Product Life Cycle and Technology Life Cycle inside the energy sector. Regarding the “cycle” term, Dr. Luky tried to give his thought about changing the term “cycle” with the “evolution” since in the energy sector both the product and technology life tend to evolve rather than back to the basic. Next, in Chapter 9, there would be an explanation about the difference between price subsidy (indirect subsidy) and direct subsidy, secondary pricing applications to the description of petroleum fund. In the last chapter, Chapter 10, it consists of the condition inside global energy markets such as global oil supply, oil price information system, global oil crisis, and oil and gas investment in Indonesia.

Remarks Session

The remark by Dr. Widhyawan Prawiraatmadja

A Special Staff of the Minister of Energy and Mineral Resources; Board Member of Indonesian Institute of Energy Economics (IIEE)

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Dr. Widhyawan, who has an engineering background, and who usually played with modeling, admitted that he got confused when he was pushed to understand about energy economics. But then he realized studying economics should actually be understood by everyone, especially for the stakeholders to formulate proper regulations based on common sense in the economic study. This is probably one of the important factors for government in planning its implemented target. For example, for opportunity cost, he stated that “you can put any price on something, but if it is not representing its interesting value, someone has to pay whether now, sooner or later. So the opportunity cost is there, although most of the time people do not realize its existence.” Another example is about trade-offs. “We cannot have it all. It is impossible to want something while at the same time refusing its consequences.” In the economic study, both examples are understandable, especially in the energy economy sector, which required the advance understanding of the technical knowledge as well as the peculiarities conditions. Thus, the technology, as well as the current situation of energy sector advancement, should never be separated from the energy economics.

However, in reality, implementing the energy economy is challenging if it is related to politics. Dr. Widhyawan said that “We do not actually get to use it for decision making. How to deal with that?” It is important to be more proactive in sharing perspective regarding the importance of understanding the energy economy to the energy sector stakeholders. He also wished that PYC could be the bridge from the experts to the stakeholders so that the study of energy economics and also any kind of energy study could actually take part in the decision making of Indonesia’s energy sector.

The last point from Dr. Widhyawan was about the economic implementation in Indonesia itself. Which version of the economics do we take a side at this moment? Right now, we are facing an energy transition, from the scarcity concept to the abundance concept. There used to be a factor called peak oil, which means peak supply; but at this moment, it switches to peak demand. People used to predict that energy price will increase over time, but the energy cost is decreasing both for fossil and renewable energy nowadays. This situation makes energy no longer to be a part of liability aspects of the national economic growth. In the end, our goals are to achieve continuity, sustainability and public welfare to the nation, and energy could be used to fulfill those goals. Energy could be the enabler to achieve the economic prosperity for the sustainability of future generation. Another thing to be considered in managing energy is the earth capacity, which related to the environmental sustainability, emission, climate change and global warming. It is not about the limitation of energy supply; it is the earth capacity. Thus, the kind of energy we are going to use should highly consider the environmental impacts. The government, in this case, have an important part in giving incentive so that the investors and industry orientations became less destructive to the earth and the sustainability could be achieved.

Remarks Session

The remark by Dr. Pri Agung Rakhmanto

Founder of Reforminer Institute; Lecturer at Trisakti University

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Dr. Pri Agung confessed that one of his reasons why he chose to learn energy economics was because of the first edition of Prof. Purnomo’s Energy Economics book he read in 2000. Although he acknowledged that the book was one of the most exhaustive energy economics books in Indonesia, it was difficult to be understood by him as an engineer. Nevertheless, he decided to pursue his dream by studying energy economics in the same university as Prof. Purnomo had studied earlier, and which later led him to take another step in studying energy politics.

In Indonesia, there are not many people whom he would call as an energy economics expert, but Prof. Purnomo is one of the limited energy economics experts in Indonesia. In Indonesia, the understanding of energy economics within the energy industry itself mostly is poorly limited on the measuring project economic only. In his lecture, Dr. Pri Agung always stated that the economics of energy was more than merely NPV and IRR, but it is more complex and even more comprehensive. The fundamental of energy economics came from great thoughts which nowadays people tried to represent it using modeling. And for him, the previous Energy Economics book authored by Prof. Purnomo has more than enough content to learn the fundamental of the energy economics. Dr. Pri Agung also made an energy economics book himself, but it is limited to the basic theory of energy economics that he can use in his class. Meanwhile, the Energy Economics book from Prof. Purnomo has already contained theories, application and even the fundamental thought of energy economics. For the people with economics or statistics background, they might already have a grasp on the book rather than those who have a background in engineering. That is why energy economics became unpopular among energy industry practitioners. As a matter of fact, many of the issues in the energy sector in Indonesia could be analyzed using energy economics. For example, in the upstream sector when the government determined the ROR or IRR should be 12 percent. In the non-energy market, 12 percent of ROR could be considered economic, but the high risk and uncertainty of energy sector made it not enough to cover the loss due to some drillings failure. Another example is in premium scarcity. The willingness to provide premium should be achieved either using incentives or subsidies to prevent the scarcity. This two example will not be a problem if the stakeholders understand the fundamental knowledge of energy economics. The stakeholder’s indifference could lead to regulatory failure. Dr. Pri Agung still remembers the previous regulation in about 1999 – 2000 when Prof. Purnomo served as the Minister of Energy and Mineral Resources, it was stated that the fuel price could be arranged by the market price respectively, with the government’s control on the floor price and ceiling price. He believed that regulation was the most proper regulation so far, as the win-win solution. Politics will always be a challenge. However, it is our duty to introduce energy economics to energy societies.

Discussions Session

Dr. Yanif Dwi Kuntjoro

Indonesia Defense University

The concept of energy promoting defense and vice versa would lead to a favorable reciprocal relationship. The defense is an intangible function that could be added to the discussion about energy conservation, evolution theory or what he called tangibilizing the intangible. Such as the sense of security that could be quantified using qualitative data. The national defense would also affect national sovereignty which builds upon of two aspects, national integrity, and safety. Thus, in chapter 1 under global issues, he suggested to add a discussion about national defense to promote energy, and energy to promote the national defense. Furthermore, it is better to add a theory on how to tangibilizing the intangible, evolution, or conversion so that national defense could help the improvement of national sovereignty as well as national integrity and national safety. According to the national defense law, the national defense could be split into three pillars, national integrity, national safety and national sovereignty. The application of this theory could be seen on the 3T (Terdepan, Terluar, Tertinggal) zone which represented the most frontier and lagging regions in Indonesia. Defense institution itself had a program called “ABRI Masuk Desa” which aims to develop the potency and energy infrastructure in 3T zones. Dr. Yanif wished that this kind of study and discussion would be added into the upcoming Energy Economics book so that the book could be used on the Energy Economics class for 2nd-semester students of Indonesia Defense University. Furthermore, in Indonesia Defense University the 1st-semester students should take Energy Defence class, while in the 3rd semester they would take Energy Politics class. Currently, Prof. Purnomo already wrote Defense Economics book, so that Dr. Yanif tried to create another book about Energy Defence.

 

Dr. RS Trijana Kartoatmodjo

Universitas Trisakti

As an engineer, Dr. Trijana questions would represent some sort of engineer questions. Some said that the uncertainty terms on the energy economy represented the economic uncertainty while he also herds from Prof. Purnomo that the uncertainty means the reserves uncertainty. So the explorationist stated that there are only two options, huge or zero reserves. In the engineering side, the uncertainty is related to the economy, someone who could forecast the tomorrow energy price would be rich. In the previous presentation, Dr. Luky addressed about Interest Rate of Return (IRR) and Payout time, but he had not heard about Expected Monetary Value (EMV). EMV is the first factor for decision making to decide whether to continue the drilling or cease it. Thus, if it has not been discussed yet in the book, he wished that it would be added because it is important for explorationist as the investment premises to the economists.
Dr. Luky Yusgiantoro

Board Member of Purnomo Yusgiantoro Center

 

Discussion about national defense is always interesting and important. There was a story about the longest-serving British Prime Minister (1979 – 1990) Margaret Thatcher when she was asked by the parliament about the reason behind the Malvinas invaded, and she said that it was because of the national sovereignty. Based on Margaret Thatcher story, it is clear how national sovereignty has a big impact on the nation. Winston S. Churchill ever said that “The longer you look back, the farther you can look forward.” Dr. Luky has many stories to be shared regarding the role of defense in the energy sector, and he also agreed on how important the defense sector and should be added to the book.
Dr. Widhyawan Prawiraatmadja

Special Staff of the Minister of Energy and Mineral Resources

Since this book would be used as the teaching material as well, it is better to split the collection of cases and the theory book on the different book. While the small cases still could be mixed with the theory book in the separate box.

For the EMV, it is always one of the most crucial terms in the energy economy. However, it is based on what method would be used later in the decision making.  Dr. Widhyawan believes that EMV had already put on the upcoming energy book, even though the terminology might be different.

Dr. Pri Agung Rakhmanto

Reforminer Institute

EMV had a strong relationship with the decision making and uncertainty, so it should be in the book already. Moreover, EMV is a basic theory of engineering economics. For the previous Prof. Purnomo Energy Economic book, he noted that the theory and cases were already more than enough. The beginner would find it difficult to separate between the basic and advanced theory. That was why Dr. Pri Agung made another book which contains the basic theory. However, overall, the book is already covered everything to accommodate energy practicians both engineer and economist in Indonesia.
Ir. Bambang Irjanto, MBA.

Universitas Proklamasi 45 (UP45), Jogjakarta

In UP45 Jogjakarta, Mr. Bambang gives a lecture about energy economics, which he found hard since there is almost no reference book to be followed. He wished that the upcoming book would be out very soon so that he could use it in his lecture. Furthermore, it is better to state the limitation and the focus of discussion only on Indonesia. The discussion boundary statement is necessary since Indonesia’s condition 5 years ago, at the moment, and 5 years later will be different. Such as energy law and RUEN would be changed, so that the reader would understand the time frame and the original context. Mr. Bambang also happy to know that there would be another upcoming book, he hoped that it would enrich the literature.
Anggun Andreyani

Indonesia Defense University

As an Indonesia Defense University (UNHAN) alumnus, Ms. Anggun had attended Prof. Purnomo energy economics class and many of her friends using the previous energy economics book as their reference. However, the discussion about new and renewable energy (NRE) in the previous book is not enough to accommodate the current situation analysis. She wished on the new book; there would be much more discussion about NRE especially. The discussion about NRE such as the relation between oil price and NRE development is important since right now there are various different statements about it.
Dr. Luky Yusgiantoro

Board Member of Purnomo Yusgiantoro Center

 

In the upcoming book, the cases are mixed both from national and global, because it is impossible to separate the energy discussion only within a certain country.

There are many theory and cases of NRE that have been discussed in the book such as the NRE pricing and technology. In the case about the relationship between oil price and NRE development, it could be analyzed using the theory called “option value.” However, the option value theory is more into statistic rather than energy economy, so it is not much explained in the book.

 

Dr. Widhyawan Prawiraatmadja

Special Staff of the Minister of Energy and Mineral Resources

The energy economics book should be outreach to many stakeholders. Unfortunately, the stakeholders who ought to read and understand the energy economics book tend to be ignorant about it. In the US, there is a book, titled “Energy for President” which is updated every year with recent news on energy. So he hopes that the upcoming book could be the most reliable and established references for energy economics literature. The NRE is an essential topic to be discussed in the energy sector right now. Although the price is still high compared to fossil fuel, it is the future energy resource. Sometimes people forgot how the energy price worked trajectory. Although it might take a long time to lower the price, it should still be supported by the government regulation. In the beginning, it needs some subsidies and incentives, but it gives many advantages not only for the energy sector but also for national security.
Dr. Pri Agung Rakhmanto

Reforminer Institute

It is hard to select the right material in the new book. The basic study for the energy economics come from microeconomics and industry economics. All materials are already available in the book; the next step is dependent on the readers of how they collect the knowledge they need. Although the book has some flaws, it is the most comprehensive energy economics book in Indonesia so far.
Dr. RS Trijana Kartoatmodjo

Universitas Trisakti

As a person who used to say that geothermal is very expensive, he now realized how significant the geothermal potency in Indonesia. So it would be good to discuss geothermal as one of the potential energy resources in Indonesia in the new book.

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