Abstract

Formulating domestic prices for an integrated energy mix is a complicated business. In a developing country like Indonesia, energy pricing decisions are much influenced by economic, social and political objectives. Among these objectives are: supporting the national economy via domestic energy consumption; earning foreign exchange revenue via energy exports; providing an improved level of well being; benefiting domestic industry and transportation; promoting development of the outer islands; and so forth. It is this unique combination of opportunities and challenges that makes appropriate energy pricing so important.

This paper attempts to present a viable way to structure an appropriate energy pricing policy in a nation like Indonesia which possesses such abundant and various energy resources.

A useable economic methodology for establishing energy pricing policy consists of determining a range of optimal economic prices, a financial price and shadow prices. Optimal economic prices are identified from a purely economic point of view, supply and demand analysis. The financial price distorts economic prices from their economic values caused by market failure or government policy. The use of a shadow price would yield an economic opportunity value which is closer to the real value of the energy resource.

The decision-making problem faced in this methodology involves many economic variables. The modeling approach is then used to describe those economic concepts in a set of mathematical formulas. This technique should allow one to implement decisions effectively and provide interrelationships among variables.