Defining Investments in Indonesia’s Energy Sector

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By: Irwansyah and Fariz Panghegar, Traction Energy Asia

The main purpose of this article is to establish a definition of the energy sector in Indonesia, as well as a categorization of what products, activities and services it includes, that will be used by Traction Energy Asia (Traction) in subsequent research and advocacy to achieve a comprehensive understanding of investments in Indonesia’s energy sector.  

Indonesia has an abundance of potential energy resources, both from fossil and non-fossil sources. As the world’s fourth most populous nation, and one of the fastest growing economies amongst the group of emerging middle-income countries, Indonesia’s energy consumption has been increasing significantly, and is predicted to rise even more rapidly in future. As a result, Indonesia’s energy sector has become one of the most strategic sectors for investment. Given the significant potential economic, environmental, political, social and health impacts of investments in Indonesia’s energy sector, it is crucial to conduct comprehensive research analysis to assess both the negative and positive impacts, and to use this as a basis for recommending improvements.  

This is challenging because Indonesia’s Investment Coordinating Board (Badan Koordinasi Penanaman Modal/BKPM) has no agreed definition of the ‘energy sector’, nor any comprehensive categorization of what the sector includes, to guide its system of data collection on investment realizations. A definition of the energy sector needs to be formulated first to inform a comprehensive categorization of energy sector investments. This article attempts to formulate such a definition through desk research and analysis of literature discussing various definitions of energy sector investments, and to match these definitions with existing databases on investments in the energy sector. 

Existing Energy Sector Definitions in Indonesia 

In the majority of studies published by research and advocacy groups pertaining to issues of energy and environment, the energy sector has not been completely defined, both in its proper definition as well in the scope of its business activities. In a number of case studies on the social and environmental impacts of coal mining and power generation for example, the energy sector is used freely to refer to a specific group of business activities (AEER 20191; Auriga 20192, Walhi 20203). Meanwhile, in Indonesia’s regulatory framework, the definition of energy and its scope is established in Law No. 30 of 2007 on Energy, as follows: 

“Energy is the ability to do work that can be in the form of heat, light, mechanics, chemistry, and electromagnetism. An energy source is something that can produce energy, be it directly or through a process of conversion or transformation. An energy resource is a natural resource that can be used as a source of energy or as energy (Law No. 30/2007, Article 1, Paragraphs 1, 2, 3).” 

Energy sources are classified into three groups, namely new energy sources, renewable energy, and non-renewable energy. This classification is regulated in Law No. 30/2007, Article 1, Paragraphs 4, 6, and 8. 

There are at least three other regulations concerning energy, namely Law No. 22/2001 on Oil and Gas; Law No. 3 of 2020 on Mineral and Coal; and Law No. 30/2009 on Electricity. All of these regulations have differing definitions on the mapping of energy sector business activities, in the form of exploration and extraction of energy resources, transformation of energy resources into energy, and energy transmission and distribution. 

Through a literature review, we have found definitions of the energy sector in Law No. 30/2007 on Energy, Law No. 22/2001 on Oil and Gas, Law No. 3/2020 on Mineral and Coal, and Law No. 30/2009 on Electricity and IEA (2002), which we have summarized as follows: 

“The energy sector is the totality of energy provision business activities, consisting of the exploration and extraction of energy resources; the transformation of energy resources into energy; and energy transmission and distribution for both renewable and nonrenewable energy.”4 

We have also discovered a definition of energy sector activities in Law No. 30/2001 on Oil and Gas, Law No. 3/2020 on Mineral and Coal, Law No. 30/2009 on Electricity, and the Energy Balance Sheet of the Ministry of Energy and Mineral Resources (Kementerian Energi dan Sumber Daya Mineral/ESDM).5 The description of energy sector activities used in all of the above is as follows: The first is the exploration of energy resources, which refers to business activities conducted in order to acquire information on the location, form, dimension, spread, and quantified quality of energy resources, as well as information on the surrounding social and environmental areas. The second is the extraction of energy resources or exploitation, which refers to business activities encompassing mining, processing, and/or smelting of raw energy resource materials within a mining location and its auxiliary businesses. The third is transformation, which refers to a process of transformation of energy resources (primary and alternative energy resources) into a final form of energy. In the balance sheet of the Ministry of Energy and Mineral Resources, transformation activities include: oil refining, natural gas processing, power plants, biofuel blending, and regasification of natural gas. The fourth is energy transmission, which refers to the distribution of energy from transformation businesses (energy processing) and power plants to an energy distribution system. The last is energy distribution, which refers to the distribution of energy from a transmission system to consumer users of energy.  

With regard to the definition of investment, the Law No. 25/2007 on Investment, defines investment as follows: 

“All forms of investment activity by both domestic and foreign investors, in order to conduct business within the state territory of the Republic of Indonesia.” 

Nonetheless, within the various laws and regulations concerning energy, no definition can be found on energy sector investment. Therefore, we need to place the definition of energy within an investment context by comparing it with other sources. 

Definiting Energy Sector Investments in Indonesia 

Universally, energy is defined as a material in various forms that must be transformed in order to conduct an activity (Smill 2017).6 The definition of energy is dynamic and experiences changes in accordance with developments in technology and social life. Wiser (2000) also emphasizes that the dynamic nature of energy is due to it working in accordance with the First Law of Thermodynamics, in that energy cannot be created nor destroyed, but can transform into other forms.7 

The United Nations Statistic Division (UNSD) formulated the International Recommendation for Energy Statistics (IRES), as a recommendation on methods of statistical data collection for the energy sector. IRES’ proposed energy flows are illustrated in the following diagram:8 
 

Diagram of Energy Flows 
International Recommendation for Energy Statistics (IRES), 
UN Statistic Division (2018) 

Source: International Recommendation for Energy Statistics (IRES) UN Statistic Division (2018) 

IRES uses a framework of production and consumption flows in the energy sector of a territory (a state or region). The energy product within a given territory will then be distributed as consumption goods. Energy products are also transferred in or out of a territory in the form of export and import transactions through transportation lines. In general, production flows are comprised of primary energy production (extraction of energy sources from nature), energy transformation (processing of energy resources into energy products), and final consumption (using an energy product, be it an energy product such as fuel/electricity, or a non-energy product such as lubricant).9 

Similar to the IRES framework, in the context of Indonesia, the Ministry of Energy and Mineral Resources has developed an energy balance table, which is a balance sheet that records the system of input and output flows of energy in Indonesia, that also comprises energy production and consumption, as well as the export and import of energy resources and final energy products.10

Diagram of Energy Flows:  

Energy Balance Table, Indonesia’s Ministry of Energy and Mineral Resources (2018)

Source: Based on the Energy Balance Table, Indonesia’s Ministry of Energy and Mineral Resources (2018) 

Identifying business activities in Indonesia’s energy sector is difficult using the current data system, The Central Bureau of Statistics (BPS) records economic activities, and BKPM records direct investment activities. However, both BPS and BKPM data system are missing a specific sector on energy investment. In addition, investment data published by BKPM does not depict the entirety of investment activities in Indonesia, because it does not encompass several investment sectors, such as Oil and Natural Gas.11  

“Investment activities, both by domestic and foreign investors, in all business activities of energy provision, comprised of exploration and extraction of energy resources; transformation of energy sources into energy; energy transmission and distribution of both renewable and non-renewable energy.” 

The Importance of a Comprehensive Energy Sector Database 

The Investment Coordinating Board (BKPM) database does not yet have a specific energy sector category. Energy sector investment data is spread out into various sectors, such as mining and chemical industries which transforms organic matter from agriculture products into energy and fuel feedstocks, as well as provision of electricity, gas, steam, and cold air. Tracing investments in the energy sector requires analysing the different sub-sectors, as in the following graph on the realization of foreign direct investment from China from 2005–July 2020 in the Electricity, Gas, and Steam/Cold air Provision Sector. 

FDI Realization from China 2005–July 2020  

Provision Sector of Electricity, Gas, Steam and Cold Air Source: NSWI BKPM (2020) 

Given the importance of monitoring and analysing energy investments in Indonesia, there should be a special classification for the energy sector. The Global Development Policy Center (GDPC) at Boston University has developed such a classification for the China Global Energy Finance Database’.12 The GDPC database was designed to collect data on energy sector investment projects carried out by the People’s Republic of China in other countries, through funding from the China Development Bank and the China Export-Import Bank. 

Classification of the Energy Sector in China Global Energy Finance Database,  
GDPC Boston University  

Source: Global Development Policy Center, Boston University (2018, 2020) 

GDPC Boston University (2018) categorizes projects in the energy sector into three groups, namely energy sources (produced energy resources), energy subsector (business activities conducted), and loan schemes (loan schemes provided by banks to energy sector projects). This data classification simplifies data tracing.13 In our assessment the GDPC Boston University database can be an excellent reference for Indonesia’s Investment Coordinating Board (BKPM) to classify investment within the energy sector.  

Furthermore, we strongly recommend that the BKPM database uses the energy subsector category which classifies business activities in the energy sector. GDPC Boston University divides the energy subsector into five categories, namely exploration and extraction, power plants, energy transmission and distribusion, multipurpose projects, and energy efficiency projects. 

Examples of energy efficiency projects within GDPC Boston University’s database include energy saving and the natural gas to coal conversion projects. Theoretically, energy efficiency is an attempt to use energy in a smaller amount in order to produce a larger economic output.14 Yang and Yu (2015) define energy efficiency as ’any practice or efforts that are related to saving or conserving energy’. 15  

In order to mitigate “the absence of a stringent definition on energy sector investment,” we compared GDPC definitions and categories with energy related activities included in the Indonesia Standard Industrial Classification (ISIC) Revision 4, KBLI (2017), and BKPM’s National Single Window for Investment (NSWI). Consequently, we propose a definition of energy sector activities that is divided into five activities. First, the exploration of energy resources, as business activities in order to acquire information on the location, form, dimension, distribution, and quantified quality of energy resources, as well as information on social and environmental surroundings. Second, the extraction of energy resources, also known as exploitation, as business activities encompassing mining, processing and/or smelting of raw energy resource materials in a mining location and its auxiliary businesses. 

Third, transformation, as a process of transforming energy resources (primary and alternative energy resources) into a final form of energy. In the Ministry of Energy and Mineral Resources’s energy balance sheet, transformation activities encompass: oil refining, natural gas processing, power plants, biofuel blending, and the process of natural gas regasification. Fourth, energy transmission, as the distribution of energy from transformation businesses (energy processing) and power plants into an energy distribution system. Fifth and last, the business activity of energy distribution, distributing energy to end consumers. 

Based on the above sub-sectors used to group energy sector investment in Indonesia, we propose the following classification of energy sector business activities. Traction Energy Asia’s proposed classification differs slightly from GDPC’s database as it is also based on the Investment Coordinating Board classification for the Indonesian context: 

Proposed Classification of Energy Sector Business Activities 

No. Energy Subsector Categories GDPC Boston University Business Activity Categories KBLI 2017 KBLI Number Code Business Activity Categories ISIC Rev 4 ISIC Number Code Investment Coordinating Board Sectors Investment Coordinating Board Subsectors (KBLI 2015) Investment Coordinating Board Subsector Number Code (KBLI 2015) 
Exploration and Extraction Coal Mining 05101 Mining of Hard Coal 0510 Mining Coal and lignite mining 05 
Exploration and Extraction Coal Gasification in Mining Location  05102   Mining of Hard Coal 0510 Mining Coal and lignite mining 05 
Exploration and Extraction Lignite Mining 05200 Mining of lignite 0520 Mining Coal and lignite mining 05 
Exploration and Extraction Crude Oil Mining  06100 Extraction of crude petroleum  0610 Mining Crude oil, natural gas, and geothermal mining 06 
Exploration and Extraction Natural Gas Mining 06201 Extraction of natural gas  0620 Mining Crude oil, natural gas, and geothermal mining 06 
Exploration and Extraction Geothermal Enterprises 06202 Electric power generation, transmission and distribution  3510 Mining Crude oil, natural gas, and geothermal mining 06 
Exploration and Extraction Mining of Uranium and Thorium Ores 07210 Mining of uranium and thorium ores  0721 Mining Mining of metal ores 07 
Exploration and Extraction Mining of Lead Ores 07291 Mining of other non-ferrous metal ores  0729 Mining Mining of metal ores 07 
Exploration and Extraction Mining of Lead Oxide Ores 07292 Mining of other non-ferrous metal ores  0729 Mining Mining of metal ores 07 
10 Exploration and Extraction Mining of Bauxite/Aluminium Ores  07293 Mining of other non-ferrous metal ores  0729 Mining Mining of metal ores 07 
11 Exploration and Extraction Mining of Copper Ores 07294 Mining of other non-ferrous metal ores  0729 Mining Mining of metal ores 07 
12 Exploration and Extraction Mining of Nickel Ores 07295 Mining of other non-ferrous metal ores  0729 Mining Mining of metal ores 07 
13 Exploration and Extraction Mining of Manganese Ores  07296 Mining of other non-ferrous metal ores  0729 Mining Mining of metal ores 07 
14 Exploration and Extraction Auxiliary Activities in Crude Oil and Natural Gas Mining 09100 Support activities for petroleum and natural gas extraction  0910 Mining Auxiliary mining services 09 
15 Exploration and Extraction Auxiliary Activities in Mining and Other Extraction  09900 Support activities for other mining and quarrying  0900 Mining Auxiliary mining services 09 
16 Multipurpose projects Industry of Coal-based Products 19100 Manufacture of coke oven products  1910 Chemical and Pharmaceutical Industries  Industry of products derived from coal and crude oil refining 19 
17 Multipurpose projects Industry of Fuels from Crude Oil Distillation and Refining 19211 Manufacture of refined petroleum products  1920 Chemical and Pharmaceutical Industries  Industry of products derived from coal and crude oil refining 19 
18 Multipurpose Projects Industry of  Other Products from Oil Refining16 19291 Manufacture of refined petroleum products   1920  Chemical and Pharmaceutical Industries  Industry of products derived from coal and crude oil refining 19 
19 Multipurpose projects Industry of Coal Briquettes 19292 Manufacture of refined petroleum products  1920 Chemical and Pharmaceutical Industries  Industry of products derived from coal and crude oil refining 19 
20 Multipurpose projects Industry of Organic Basic Chemicals from Agricultural Crops17 20115 Manufacture of basic chemicals  2011 Chemical and Pharmaceutical Industries  Industry of chemical material and chemically-derived goods 20 
21 Multipurpose projects* Industry of Uranium and Uranium Ore Processing  24206 Manufacture of basic chemicals  2011 Industry of Basic Metals, Metal Goods, Non-Machinery Products and Tools Industry of basic metals 24 
22 Multipurpose projects Industry of Batteries 27201 Manufacture of batteries and accumulators  2720 Industry of Basic Metals, Metal Goods, Non-Machinery Products and Tools Industry of electrical appliances 27 
23 Multipurpose projects Industry of Electrical Accumulators 27202 Manufacture of batteries and accumulators  2720 Industry of Basic Metals, Metal Goods, Non-Machinery Products and Tools Industry of electrical appliances 27 
24 Power Plants Electric Power Generation   35101 Electric power generation, transmission and distribution  3510 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and cold air 35 
25 Transmission and Distribution Electric Power Transmission   35102 Electric power generation, transmission and distribution  3510 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and cold air 35 
26 Transmission and Distribution Electric Power Distribution   35103 Electric power generation, transmission and distribution  3510 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and cold air 35 
27 Transmission and Distribution Auxiliary Acitivities for Electric Power 35104 Electric power generation, transmission and distribution  3510 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and cold air 35 
28 Multipurpose projects Provision of Natural and Artificial Gas 35201 Manufacture of gas; distribution of gaseous fuels through mains  3520 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and co cold air 35 
29 Transmission and Distribution Distribution of Natural and Artificial Gas  35202 Manufacture of gas; distribution of gaseous fuels through mains  3520 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and cold air 35 
30 Multipurpose projects Provision of Biogas 35203 Treatment and disposal of non-hazardous waste  3821 Electricity, Gas, and Water Provision of electricity, gas, steam/hot air and cold air  35 
31 Transmission and Distribution** Transport via Pipelines 49300 Transport via pipeline  4930 Warehouse Transport and Telecommunications Land transport and transport via pipelines 49 

 
SourceTraction Energy Asia based on GDPC Boston University; KBLI 2015; KBLI 2017; NSWI BKPM 2020. 

* We propose removing this from the classification because it is already included in non-energy usage. Nuclear power plants have already been included in KBLI category number 35101, “Electric Power Generation” 

**We propose removing this because it is included in the Investment Coordinating Board’s data with pipelines for other materials that are not included as energy commodities. 

Conclusion 

The main objective of this article is to establish a definition of energy sector investment, and within that, a classification of sub-sectors for Traction’s reference in order to identify investment projects within the Indonesian Investment Coordinating Board’s database. It is hoped that our subsequent monitoring and analysis of energy investment projects, using the definition and classification outlined in this article, can enhance the applicability of other similar existing databases, such as the Global Development Policy Center’s (GDPC), China Global Energy Finance Database, in the Indonesian context.  

It is crucial that investments in Indonesia’s energy sector are tracked as accurately and comprehensively as possible, given the huge potential economic, environmental, political, social and health impacts that they could have. Improving the way that energy investment data is collected and analysed will in turn improve assessment of the impacts, both negative and positive, and enable better decision-making.