How Different Electricity Pricing Systems Affect the Energy Trilemma: Assessing Indonesia’s Electricity Market Transition

38 Pages Posted: 19 Mar 2021 Last revised: 24 Mar 2021

See all articles by Raphael J. Heffron

Raphael J. Heffron

University of Dundee

Marc-Fabian Körner

University of Bayreuth

Jonathan Wagner

Fraunhofer FIT

Martin Weibelzahl

University of Bayreuth

Gilbert Fridgen

Universite du Luxembourg

Date Written: January 18, 2021

Abstract

Many countries have a clear policy objective of increasing their share of renewable energy sources (RESs). However, a major impediment to higher RES penetration often lies in the historically grown structures of a country’s electricity sector. In Indonesia, policy makers have relied on cheap fossil fuels and state control to provide the population with access to both reliable and affordable electricity. However, this focus on only two of the three horns of the energy trilemma, namely energy security and energy equity (and not sustainability), may put Indonesia at risk of missing its ambitious RES targets. In this context, a number of small-scale reform attempts to promote RES integration in recent years have proved to be relatively unsuccessful. Like many other countries, Indonesia needs clear policy directions to avoid an unsustainable lock-in into a fossil fuel future. In the last decades, several other countries have successfully restructured their electricity sectors, for example by introducing a wholesale market for electricity under different electricity pricing systems, including nodal, zonal, or uniform pricing. These countries may hold valuable experiences of overcoming the historically grown barriers to successful RES integration through a greater role for market mechanisms. We develop three generic models that allow policy makers to analyze the impact of introducing either a nodal, a zonal, or a uniform pricing system on the three horns of the energy trilemma in their country. We evaluate our model using a simplified network representation of the Indonesian electricity sector. Our results indicate that each of the pricing systems is able to foster specific horns of the energy trilemma. Considering that any major reform intended to improve energy sustainability in Indonesia will only be a success if it also addresses energy security and energy equity, we also discuss our results from the perspective of energy justice and the need to balance the country’s energy trilemma. Ultimately, we illustrate a transformation pathway for a more sustainable and just transition to a low-carbon economy in Indonesia.

Keywords: electricity pricing system, electricity market liberalization, energy trilemma, energy justice, Indonesia, renewable energy sources

JEL Classification: Q400, Q410, Q420, Q480, L510, L110

Suggested Citation

Heffron, Raphael J. and Körner, Marc-Fabian and Wagner, Jonathan and Weibelzahl, Martin and Fridgen, Gilbert, How Different Electricity Pricing Systems Affect the Energy Trilemma: Assessing Indonesia’s Electricity Market Transition (January 18, 2021). ADBI Working Paper 1213, Available at SSRN: https://ssrn.com/abstract=3807059 or http://dx.doi.org/10.2139/ssrn.3807059

Raphael J. Heffron (Contact Author)

University of Dundee ( email )

University of Dundee
1 Perth Road
Dundee, DD1 4HN
United Kingdom

Marc-Fabian Körner

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Jonathan Wagner

Fraunhofer FIT ( email )

Germany

Martin Weibelzahl

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Gilbert Fridgen

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

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