Indonesia has long relied on energy subsidies to reduce poverty, expand access to modern energy and support industrial development. But a new report warns the policy is no longer fit for purpose, and is failing to deliver on its intended goals.
Released today by the Centre for Policy Development (CPD), Redirecting our Energy: A practical pathway for energy subsidy reform in Indonesia finds that household energy subsidies have become a growing burden on the state budget, with limited returns for equity, productivity or long-term development. The report argues subsidy reform should be a priority for the Prabowo administration.
Indonesia now spends IDR 203.5 trillion (USD 12.2 billion) each year on household LPG, electricity and fuel energy subsidies alone—around 40% of total social assistance spending, nearly 6% of the state budget, and roughly equivalent to the entire health budget.
While framed as a policy to support low-income households, the subsidies disproportionately benefit the wealthy. At the same time, artificially low prices are locking Indonesia into a fossil-fuel dominated energy mix—slowing growth in the clean energy sector and weakening Indonesia’s ability to meet its emission reduction goals.
The report highlights the government already has the tools needed to reform the system, and sets out a practical, phased pathway to shift from subsidising energy products to supporting people directly.
Key recommendations include:
The report estimates reform could free up around IDR 95.97 trillion (USD 5.8 billion) per year from the state budget, but cautions that successful implementation will require political will, bold leadership and strong public engagement. Resistance is likely from households and businesses that currently benefit from subsidised LPG prices, making clear communication about the broader societal and economic benefits essential.
Centre for Policy Development CEO Andrew Hudson said this reform would make the policy fairer and more effective.
“By providing support directly to eligible families, the majority of benefits would flow to vulnerable and lower-income households, rather than disproportionately to wealthier groups.
“Households in remote and underserved areas would also gain access to cleaner, more reliable energy sources.
“This is about making energy policy work for poverty reduction, economic resilience and long-term national development.”
Senior Adviser Ruddy Gobel said reform was critical to achieving Indonesia’s broader development ambitions.
“This would not only be a fairer and more effective way to support Indonesia’s most vulnerable citizens—it would help build a more productive, resilient and prosperous economy.
“The government has set ambitious goals for emissions reduction and building a world-leading clean energy industry. Reforming energy subsidies is essential to achieving both.”
