Equity and Efficiency: An Examination of Indonesia’s Energy Subsidy Policy and Pathways to Inclusive Reform

Abstract

The Indonesian Government’s substantial investment in energy subsidies, designed to assist poor and vulnerable households, ironically favors the wealthy and exacerbates inequality. This study delves into household-based energy subsidy policies in Indonesia, focusing on their effects on gender and social inclusiveness. By combining qualitative document analysis with micro-level data analysis—typically reserved for social protection programs—and national socioeconomic data, this study reveals significant access gaps to energy subsidies. The findings indicate that the existing policy benefits affluent households, leaving marginalized groups such as female-headed households, individuals with disabilities, and the elderly from low-income families without access to subsidies. This gap stems from the current price-based subsidy approach and the unequal distribution of energy services. The study recommends a fundamental shift from commodity-based subsidy policy to direct household subsidies, removing barriers to access and encouraging more equitable, gender-responsive, and inclusive policies. The benefits of these reforms can optimize subsidy budget allocation, increase targeting accuracy, and encourage pro-poor measures. In addition, this can spur the development of local alternative energy, thereby contributing to a just energy transition in Indonesia.

1. Introduction

The provision of subsidies by governments worldwide serves as a pivotal mechanism to alleviate financial burdens on communities, covering essential sectors such as food, education, health, and energy. Energy subsidies, in particular, play a crucial role in ensuring accessible and affordable energy for all, aligning with state obligations and legal mandates. These subsidies are not only instruments of social welfare; they are also integral to achieving energy security, characterized by supply security, competitive energy markets, and environmental protection [1].

As part of energy policies in general, energy subsidies are consistently viewed as instruments to assist the population, especially the less affluent, in gaining access to energy [2]. However, the implementation of energy subsidy policies, especially in developing countries, often sparks debate due to their paradoxical effects. While intended to assist the less affluent in gaining energy access, they can inadvertently lead to fiscal strain, environmental harm, and economic imbalances [3].

In Indonesia, energy subsidies are regulated by law, and the state is obliged to provide them to facilitate access to energy for the poor and vulnerable groups [4]. Due to this obligation, the Government invests heavily in energy subsidies, making Indonesia one of the countries that subsidizes energy commodities the most. For example, regarding electricity subsidies, Indonesia is ranked fourth globally after Russia, Iran, and Saudi Arabia [5].

However, poorly implemented policies could lead to various negative consequences. These adverse impacts include burdening the government budget, environmental damage, and economic distortions in energy prices. Additionally, poor policy implementation causes wastage in energy use and reduced incentives for developing eco-friendly energy [2]. According to a study by the International Institute for Sustainable Development (IISD), fossil fuel subsidies represent an inefficient method for redistributing resource rents. In Indonesia, these subsidies have primarily favored high-income households rather than low-income ones and have promoted the wasteful consumption of energy [3].

Several studies have relevant findings. Energy subsidies are perceived to lead to deadweight loss and reduce the well-being of energy consumers [6]. Inchauste, Victor, and David [7] also express a similar view that energy subsidies, although often intended to benefit low-income groups, mainly accrue to those with higher levels of well-being. Studies by Schaffitzel et al. [8] and Timilsinaa and Pargalb [9] also echo this sentiment, emphasizing that energy subsidies tend to be regressive and primarily favor affluent groups.

Several negative impacts of poorly implemented energy subsidy policies include distorting energy prices, leading to excessive energy consumption, promoting demand for subsidized energy products, and reducing demand for energy products with prices that more accurately reflect actual market conditions [2,7]. Furthermore, these subsidies diminish incentives for energy efficiency and the development of renewable energy sources [2].

In Indonesia, household-based energy subsidies such as electricity and LPG face related problems. The budget allocation for these subsidies amounted to IDR 54.8 trillion and IDR 49.4 trillion in 2020, making them the most significant components of assistance in the state budget [10]. This amount exceeds even the budget of government assistance for education, health, farmers, fishermen, small businesses, and other forms of assistance.

However, this policy is unclear regarding its effectiveness in addressing inequality in gender, disabilities, and other social inclusion (GEDSI) contexts. Inequality and equality are critical because improving the welfare of the poor and vulnerable groups should be the goal of any policy, including energy subsidies. Therefore, evaluating whether this significant government investment is achieving its intended purpose is essential.

This study foregrounds the Indonesian context, where energy subsidies, despite their substantial budgetary allocation, grapple with issues of effectiveness, particularly in addressing inequalities concerning gender, disabilities, and social inclusion. The Indonesian Government’s expenditure on household-based energy subsidies, such as electricity and LPG, surpasses its investment in other critical areas like education and health. However, the efficacy of these subsidies in enhancing the welfare of marginalized groups remains questionable.

The purpose of this study is to examine the existing household-based energy subsidies in Indonesia, especially from an equity and equality perspective, such as gender and social inclusivity. The study also explores the causes of inequality in accessing household-based energy subsidies in Indonesia. Through these examinations, this study identifies potential policy improvements to rectify these inequalities. It assesses the Government’s ability to implement the improved policy.

This study delves into the intricacies of household-based energy subsidies in Indonesia from a public policy perspective. It scrutinizes the current state of these policies, focusing on gender and social inequalities. The research investigates the root causes of inequities in accessing these subsidies and proposes policy improvements to address these disparities. This study stands out in its innovative use of micro-level data typically reserved for social protection programs, applying it to analyze energy subsidies, an approach not previously explored.

The significance of this study lies in its investigation of household-based energy subsidy policies in Indonesia, particularly within the context of gender and social inclusiveness, and their role in addressing inequalities in energy subsidies. This study utilizes micro-level data employed by the Indonesian Government for its social protection program. In Indonesia, this approach is considered innovative, as using this micro-level data for non-social protection program analyses, such as energy subsidies, has not been previously undertaken, and data access is typically constrained.

By identifying the inequality issue, the main motivation of this study is to provide concrete policy recommendations aimed at enhancing budget efficiency, stimulating local energy development, and aligning with the principles of a just energy transition. The findings of this study are not only relevant to Indonesia but also resonate with the global discourse on equitable and sustainable energy policies.

In this article, the material is further divided into several parts. Thus, Section 2 provides an overview of relevant previous studies. In Section 3, the research methodology is detailed, followed by the presentation of results in Section 4. These results are further divided into six subsections: inequality in electricity subsidies, inequality in LPG subsidies, the underlying reasons for these subsidy inequalities, possible enhancements to current policies, the Government’s capability to enact these improvements, and the expected outcomes of the improved policies. In Section 5, policy recommendations are presented, and in Section 5, conclusions and recommendations are offered.

2. Literature Review

On a macroeconomic scale, subsidies for energy products purchased by households and businesses disrupt long-term macroeconomic indicators. Additionally, they encourage excessive consumption of subsidized energy products. Furthermore, subsidies affects the relative prices of non-traded goods, causing them to decrease when the non-traded sector relies more on oil-intensive resources than the traded sector and vice versa [11].

Previous studies analyzing the impact of energy subsidy policies have primarily employed economic methodologies and analyses. These studies tend to limit their conceptual or theoretical approach to a financial perspective, focusing on the inefficiency of energy commodity markets or the concept of deadweight loss. This narrow focus restricts the scope of energy subsidy policies, typically limiting them to measures that raise the prices of energy commodities closer to production or market levels. Consequently, although increasing the prices of subsidized energy commodities benefits the economy, on the one hand, it also places a burden on poor and vulnerable households. From the previous studies, we can draw several conclusions:

• A targeted subsidy approach not only yields fiscal savings but also enhances the welfare of vulnerable communities [6].
• Ensuring that subsidies reach those truly entitled is crucial, as this minimizes socioeconomic impacts while achieving fiscal goals [12].
• Eliminating energy subsidies can benefit the economy and increase GDP, with the impact depending on how budget savings from subsidy removal are reallocated [9].
• The compensation mechanisms implemented in Iran’s energy subsidies were initially successful. However, they raised questions about the feasibility and sustainability of such approaches [13,14].
• Removing remaining electricity subsidies could lead to further improvements in electricity use efficiency and free up resources for other priorities, such as infrastructure spending [14].

While these studies clearly state the benefits of the policy, they lack a comprehensive discussion on alternative forms of policy other than increasing energy commodity prices. Some studies suggest direct compensation as an antidote to price increases. However, in cases like Iran, this approach had limited impact.

In addition, there are numerous studies and literature that discuss aspects of equality in energy policy, including gender equality and social inclusion. From these studies, we can infer the following:

• Women have a crucial role in driving energy transformation to support energy justice and democracy [15].
• Providing small-scale electrical energy is insufficient to support the development of micro-businesses. Energy access in remote areas must be aligned with increasing community needs [16].
• The success of energy subsidies depends on available policies and adequate services. Subsidies that are sensitive to gender and poverty levels are extremely important [17].
• Higher gender inclusion in the energy sector can improve development outcomes, though the current focus is more on energy technology [18].
• Women’s access to stable employment and control over household expenditure decisions, especially related to the use of clean fuels, is significant [19].

These studies highlight the important role of gender inclusion in energy policy but do not thoroughly explain how this inclusion should be implemented or how energy policies, including subsidies, can encourage it. Additionally, discussions about the appropriate form of policy are not detailed enough to provide solutions for developing policies inclusive of marginalized societal groups. Thus, there are still several research gaps that need to be addressed through further study.

Many studies on energy, gender equality, and social inclusion have shown that equal access to energy and other essential services positively impacts welfare. For instance, Ding et al. [20] found that access to energy reduces energy poverty, improves efficiency, and promotes cultural change. This finding is consistent with Baltruszewicz et al. [21], who found that equal access to primary education, electricity, and sanitation is more important than ownership of goods or income. Sarkodie and Adams [22] also stated that access to electricity positively impacts economic growth. Therefore, access to electricity or LPG should be ensured to improve the welfare of the poor and vulnerable groups, including through energy subsidies.

These subsidies aim to make energy more affordable for the poor and vulnerable, enabling easy access. However, energy subsidies have the opposite effect in many countries [23]. According to Inchauste, Victor, and David [7], subsidies are primarily availed by affluent groups and not to assist the impoverished population. Schaffitzel et al. [12] and Timilsinaa and Pargalb [9] also found that energy subsidies are regressive and benefit the wealthy. However, reducing subsidies is also not an ideal choice, and it impacts the welfare of the poor and vulnerable groups. This finding is in line with Khalid and Salman [6], who argue that policy reforms through subsidy reduction make energy prices unaffordable for the less fortunate. Similarly, Acharya and Sadathb [24] stated that price hikes reduce actual income and could negatively affect overall welfare. Solaymania and Karib [25] also asserted that energy subsidy reforms through price hikes reduce household consumption and welfare.

One shortcoming in policymaking is the lack of consideration for gender. Schofield and Goodwin [12] stated that gender dynamics are not uniform across different situations, hindering the opportunity for change. Gender inclusiveness is also important, as women play a crucial role in promoting energy justice and democracy through driving energy transformation [26]. The role is also consistent with the theoretical perspective of feminism, as it suggests a new approach to replacing the patriarchal order with a system that prioritizes equal rights, equity, and justice [27].

Similar findings were also revealed by Setyowati’s research when looking at Indonesia’s context. The research shows that Indonesia’s energy justice efforts focus mainly on accessibility and affordability, overlooking procedural and recognition aspects. This approach favors large, on-grid solutions and limits funding for smaller renewable energy projects, leading to spatial inequality and excluding energy-poor communities [28]. Hence, the finding suggested developing policies that cover all aspects of energy justice and diversify financial support to combat energy poverty. Therefore, the study proposed a new method for gender-based public sector policymaking.

Lapniewska [29] found that gender equality is critical for providing electricity in Europe. However, the visibility of gender equality is often insufficient, and the participation of individuals in decision-making is limited to administrative tasks. This lack of involvement may be due to a deficiency in relevant educational backgrounds. In sub-Saharan Africa, Anditi et al. [30] found that the current analysis framework does not adequately address gender-specific needs and lacks specificity for informal urban settlement contexts. Furthermore, according to Ryan [31], when making decisions regarding the availability of energy sources, women and certain minority groups are often excluded. These groups also receive inadequate energy resources and are not protected by their right to access energy.

The need to pay more attention to social equality aspects in energy policy was also emphasized by Pueyo and DeMartino [16], Johnson et al. [32], Johnson, Gerber and Muhoza [18], Choudhuri and Desai [19], and Anditi et al. [30]. These studies showed the significant impacts of energy policy, including subsidies.

The policy dramatically impacts efforts to reduce poverty and inequality, promote gender equality, support identity and culture, develop small businesses, and strengthen the local economy, including informal urban settlements. Johnson, Gerber, and Muhoza [18] also highlighted the relationship between energy and gender. Therefore, a more precise policy is needed to incorporate gender considerations into energy policy. Besides measuring the potential reduction in poverty and inequality using the Gini ratio indicator, expanding access to energy could also reduce inequality [26]. Furthermore, a new measure of inequality based on electricity consumption could provide a comprehensive and balanced picture of overall welfare.

The need to have a tailored policy is also voiced by Zhang et al.’s study on the relationship between renewable energy use, financial development, and public health [33]. The study shows that renewable energy benefits health more in low-pollution and open-trade countries. However, financial growth can harm health in high-pollution, trade-limited areas. Hence, customizing energy and financial policies to local needs is necessary. One interesting suggestion for policy development is stated by Rahman et al.’s research findings [34]. The study argues that achieving energy equity requires continuous investment and effort from the Government through public-led market mechanisms. The involvement of a private sector approach to energy infrastructure that leads to an open market system would foster competition and eventually lead to more affordable energy prices.

3. Methods

This research utilizes a mixed-methods methodology, with its first component being a qualitative approach. Within this qualitative approach, document analysis is employed as the primary method for data collection. The selection of this method considers the availability of pre-existing data, whether published or unpublished. The analyzed documents are sourced from various ministries and government institutions, including the Ministry of Energy and Mineral Resources (ESDM) [35,36,37], the Fiscal Policy Agency (BKF) of the Ministry of Finance [38,39,40], and the National Team for the Acceleration of Poverty Reduction (TNP2K) [10,41,42,43,44,45,46,47,48], as well as from state-owned enterprises responsible for implementing energy subsidy policies, namely the state-owned Oil and Gas Company Pertamina [49] and the state-owned Electricity Company [50]. Some of the analyzed data remain unpublished. Publicly available data were obtained through the respective ministry and institution websites. In contrast, unpublished data were acquired during participatory observations where the authors were directly present at meetings and discussions related to energy subsidy policies.

The second component of this research involves data analysis of aggregation of micro-level data and the utilization of energy commodities data sourced from the National Socioeconomic Survey (SUSENAS), published by the Central Statistics Agency (BPS). The micro-level data originates from the Integrated Social Welfare Data (DTKS) under the administration of the Secretariat of the National Team for the Acceleration of Poverty Reduction. This dataset encompasses micro-level information, including particulars such as names, addresses, and other well-being indicators for demographic groups falling within the lowest 40 percent of social status. The Integrated Social Welfare Data employed used for analytical purposes in this research is overseen by the National Team for the Acceleration of Poverty Reduction (TNP2K) under Minister of Social Affairs Decree (Kepmensos) No. 8/HUK/2019. Data presentation is facilitated through the utilization of Tableau software (Tableau Desktop Version 2020.4.3), enabling the aggregation of diverse variables pertaining to energy access and GEDSI dimensions. Moreover, the data analysis procedure, employing a descriptive approach entailing cross-tabulation, is conducted through the utilization of Microsoft Excel software Version 2101 (Build 13628.20664). This process involves the organization of data based on variables furnished with the Tableau application, subsequently downloading them in Microsoft Excel format for manual cross-tabulation on a variable-by-variable basis.

The data analyzed are poor and vulnerable households identified in the Integrated Social Welfare Data who do not have access to electricity and LPG subsidies. This analysis focuses on households categorized based on GEDSI (Gender and Social Inclusion) criteria. Specifically, this includes households with female heads of household, households with family members with disabilities (covering all types of disabilities), and households with elderly family members (those aged over 60 years). To find out that these households do not receive electricity subsidies, the variables analyzed are households that do not use electricity provided by the State Electricity Company (PLN) and do not have access to electricity at all. Meanwhile, to find out which households do not receive LPG subsidies, the variables analyzed are households that do not use LPG as the main energy source for cooking, including those that use other sources such as firewood and kerosene. This approach enables a comprehensive understanding of disparities in subsidy distribution, particularly with regard to marginalized groups and socially marginalized groups, thus providing insight into targeted policy interventions for underserved groups.

In general, the data analysis process comprises four distinct stages: (1) reviewing all available documents for categorization based on the analysis’s objectives, (2) analyzing the Integrated Social Welfare Data and the processed results from the National Socioeconomic Survey, (3) validating the analysis results from the initial stages through discussions with key stakeholders, and (4) conducting comprehensive combined analysis and concluding.

A visual representation of the research methodology is provided in the following research design framework (Figure 1):

4. Results

4.1. Inequality of the Policy of Electricity Subsidies

Indonesia’s Government allocates a significant portion of its budget to electricity subsidies. In 2012 and 2014, the subsidies amounted to IDR 103.3 trillion and IDR 101 trillion, respectively. These figures make electricity subsidies the most extensive form of government aid in the country. The large allocation for electricity subsidies has a ripple effect on the Government’s ability to fund other essential programs. Specifically, it limits the resources available for infrastructure development, education, health services, and poverty alleviation.

Despite the enormous size of the subsidy budget, its benefits are not evenly distributed among the population. A significant portion of the subsidies goes to the more affluent segments of society. In 2013, for instance, the less privileged community, representing the lowest 40 percent (decile 1 to 4) of the population, received only 26 percent of the total subsidies. In contrast, the more affluent groups (decile 5 to 10) enjoyed the lion’s share, taking up the remaining 74 percent (Figure 2). The inequality is further highlighted when looking at the subsidies enjoyed by the poorest and richest 10 percent of the population. The poorest 10 percent (decile 1) received subsidies of IDR 64,399 per month. Meanwhile, the richest 10 percent (decile 10) received nearly three times that amount (Figure 2).

In summary, while electricity subsidies in Indonesia are intended to aid the population, they consume a large part of the Government’s budget, limiting its ability to invest in other crucial sectors. Moreover, the distribution of these subsidies is skewed, benefiting the wealthier segments of society more than the less privileged. This fact raises questions about the effectiveness and fairness of such a large-scale subsidy program.

This inequality is caused by electricity subsidies channeled through the State Electricity Company (PLN) without considering the welfare level. Electricity subsidies are given to households in the 450 VA and 900 VA power categories. All households in these categories are initially eligible for subsidies regardless of their social welfare status. This state promotes energy access inequality, hindering the objective of helping the poor and vulnerable groups as mandated by the law.

In 2017, the Indonesian Government implemented a targeted electricity subsidy policy with the aim of more equitably distributing subsidies among different income groups. The targeted electricity subsidy policy was a response to the previously skewed distribution that primarily benefited the wealthier segments of society [42,45]. As a consequence of this policy, around 18 million households deemed ineligible were removed from the list of recipients. They should pay for their consumption at an economical rate. The Government believes the targeted policy has effectively improved the target’s accuracy.

According to data from The National Socioeconomic Survey, the new policy had a noticeable impact. The proportion of poor and vulnerable households—the lowest 40 percent of the population (decile 1 to 4)—receiving electricity subsidies increased significantly. Before the policy, only 26 percent of this group received subsidies. By 2018, this figure had risen to 42.3 percent, indicating a marked improvement in reaching the intended beneficiaries. However, despite the positive strides, the data also reveals that there is still work to be done. More than half of the subsidy recipients continue to come from the higher income group, specifically those in the 50 percent highest bracket (decile 5 to 10) (Figure 3).

These data underscore the ongoing challenge of ensuring the subsidies are better and more evenly distributed. In summary, the targeted electricity subsidy policy implemented in 2017 has positively impacted the distribution of subsidies among the lower-income groups in Indonesia. The proportion of poor and vulnerable households benefiting from these subsidies has increased significantly. However, most subsidies still go to the higher-income groups, indicating that further policy refinement is needed to achieve a more equitable distribution.

Despite the Indonesian Government’s efforts to distribute electricity subsidies more equitably through a targeted policy in 2017, inequality remains a significant issue. According to the Integrated Social Welfare Data (DTKS), around 7.6 million poor and vulnerable households still lack proper access to electricity and the associated subsidies from the State Electricity Company. The 7.6 million households facing this issue can be categorized into three distinct groups: (1) No Access to Electricity: approximately 2.27 million households do not have any access to electricity; (2) Unreliable Sources: about 1.04 million households do have electricity, but obtain it from unreliable sources, making their access inconsistent and potentially unsafe; and (3) Illegal Connections: a substantial number, around 4.26 million households, resort to illegal means to obtain electricity, meaning they either tap into the State Electricity Company’s grid unlawfully or connect to a neighbor’s electricity supply (Figure 4).

While the targeted electricity subsidy policy of 2017 aimed to improve the distribution of subsidies and access to electricity, it has not fully addressed the issue of inequality. Many poor and vulnerable households lack proper access to electricity and subsidies. This fact underscores the need for further policy refinement and implementation to ensure the benefits reach those most in need. The Integrated Social Welfare Data highlights specific groups disproportionately affected by the lack of access to subsidized electricity. These groups include female heads of households, households with disabilities, and households with elderly family members.

As presented in Figure 5, the extent of the inequality includes (1) Female Heads of Households: over 560,000 female-led households are without access to subsidized electricity; (2) Households with Disabilities: approximately 290,000 households that include members with disabilities are also not receiving electricity subsidies; and (3) Households with Elderly Members: around 490,000 households with elderly family members are in the same situation (Figure 5).

The lack of subsidized electricity among these groups indicates a significant policy failure. It suggests that the current subsidy policy has not adequately considered gender and social inclusiveness, leaving marginalized groups without the support they need. The fact underscores the ethical imperative that marginalized social groups should have the right to sufficient energy. Improving this condition is not just a matter of economic policy but also one of social justice and human rights.

In summary, while the electricity subsidy policy aims to support vulnerable populations, it falls short regarding gender and social inclusiveness. The data reveals that significant numbers of female-led households, households with disabilities, and those with elderly family members are left without access to subsidized electricity. This inequality highlights the urgent need for policy revisions to ensure that all social groups have equitable access to essential services like electricity.

4.2. The Inequity of the LPG Subsidy Policy

The LPG subsidy policy in Indonesia presents a paradox. While it commits a large budget to ensure the availability of LPG, it fails to direct these resources to the people who need them the most. This results in a situation where the affluent benefit more than the poor and vulnerable, thus defeating the primary purpose of the subsidy.

Encouraging the use of LPG as the primary cooking fuel began in 2007 when the Government implemented a policy of converting kerosene into LPG. This policy aimed to promote energy diversification and reduce dependence on fossil fuels, especially kerosene [51]. Additionally, the policy reduces the misuse of subsidized kerosene, increases efficiency in providing subsidies, and provides a practical and clean fuel for households and micro-businesses [36].

After the policy’s implementation, the Government reduced the annual use of kerosene by 9.9 million kilotons in 2008. This policy saved IDR 40 trillion of the state budget. However, around IDR 20 trillion was invested in infrastructure and starter packages (LPG cylinder and stove) for kerosene users to switch to LPG. Besides cost savings, this policy also positively impacted the environment by reducing carbon gas emissions. This result is because the combustion efficiency of LPG gas is better than kerosene and produces cleaner heat energy [36].

The conversion policy aimed at promoting Liquefied Petroleum Gas (LPG) consumption has had both positive and negative ramifications. While it has led to increased usage of subsidized LPG, thereby fulfilling its immediate objectives, the policy has also engendered long-term challenges, including fiscal burdens and increased dependence on imported LPG. Although the conversion policy was implemented with the aim of promoting LPG consumption as a cleaner and more efficient energy source, an analysis of the data reveals that the policy has had unintended consequences that necessitate further scrutiny.

Data indicates a significant rise in the consumption of subsidized LPG over the past decade. In 2010, the total LPG consumption was approximately 3.56 million metric tons, divided into 0.85 million for subsidized and 2.71 million for non-subsidized LPG. By 2020, this figure had more than doubled to 7.75 million metric tons. Intriguingly, non-subsidized LPG consumption remained relatively stable, even decreasing to 0.62 million metric tons in 2020. It means that over 92 percent of LPG consumption is now subsidized (Figure 6).

The surge in subsidized LPG consumption has had a substantial impact on the state budget. In 2020, the allocation for LPG subsidies reached IDR 49.5 trillion, making it the second-largest subsidy in the state budget, only marginally smaller than the allocation for electricity subsidies, which stood at IDR 54.79 trillion. Another unintended consequence of the policy is the growing dependence on imported LPG. Between 2014 and 2020, the percentage of imported LPG rose from 58.9 percent to 72.1 percent, indicating an increasing reliance on external sources to meet domestic demand [38].

In a 2017 study, Indonesia’s Corruption Eradication Commission (KPK) analyzed the accuracy of the initial allocation of liquefied petroleum gas (LPG) subsidies. The findings of the study revealed a significant discrepancy between the intended and actual recipients of the subsidy. Specifically, the data indicated that a mere 26 million families (out of 57 million that receive starter packages of LPG cylinders and stoves) and 3 million micro-enterprises met the eligibility criteria for subsidy allocation, thereby highlighting a substantial misalignment in targeting [52].

While the conversion policy has succeeded in its immediate goal of increasing LPG consumption, it has also led to a series of long-term challenges. These include an unsustainable fiscal burden due to the rising cost of subsidies and an increasing dependence on imported LPG. These findings call for a reevaluation of the policy to address its unintended consequences and to ensure a more sustainable and equitable energy landscape.

The crux of the issue is that the LPG subsidy policy, despite its noble intentions, does not prioritize the groups it is supposed to help. Subsidies are generally implemented to assist those who are economically disadvantaged, providing them with access to essential services like affordable energy. However, the current policy fails to do this effectively.

As the Government allocates a significant budget for LPG subsidies, much of which is spent on imported LPG commodities, the policy has an ironic twist: instead of narrowing the access gap for LPG, it actually widens it. The subsidies, which are intended to make energy affordable for the less privileged, are enjoyed mainly by people who are already well-off. According to The National Socioeconomic Survey, the distribution of these subsidies is highly skewed. The data shows that only 32 percent of the subsidies reach the poor and vulnerable group, which comprises the lowest 40 percent of the population (decile 1 to 4). On the other hand, the more affluent group enjoys a disproportionate 68 percent of the subsidies (decile 5 to 10) (Figure 7).

In addition to that, the Integrated Social Welfare data reveal that an alarming 12.51 million households classified as poor and vulnerable continue to depend on firewood as their primary source of energy. Moreover, approximately 1.94 million households are compelled to utilize alternative forms of energy, which are presumably less clean. Additionally, an estimated 570,000 households rely on subsidized kerosene—a fuel source that is both less efficient and more environmentally detrimental than its alternatives (Figure 8).

Figure 9 adds another layer to this issue by breaking down the 12.51 million households using firewood. It shows that 2.7 million of these households are headed by females, 4.6 million include elderly individuals, and 760,000 have members with disabilities (Figure 9). These are groups that require special attention from the Government to gain access to clean energy, yet the current policy conspicuously neglects them.

This situation is ironic. While the Government is increasing its spending on LPG subsidies and imports, the intended beneficiaries—particularly the poor, vulnerable, and other marginalized groups—are not reaping the benefits. They continue to rely on less efficient and environmentally harmful energy sources. This glaring gap in policy effectiveness calls for an urgent reevaluation and restructuring to ensure that the subsidies reach and benefit those who are most in need.

4.3. Causes of Energy Subsidy Inequality

The findings show that household-based energy subsidies contribute to inequality because they do not consider gender and social inclusivity. The finding is supported by an analysis of the contributions of electricity and LPG subsidies compared to various other forms of government assistance in reducing inequality. Analysis conducted by the National Team for the Acceleration of Poverty Reduction [42] and the Fiscal Policy Agency, Ministry of Finance [39] using the Benefit Incidence Analysis shows that energy subsidies, including LPG, diesel, and kerosene, are not on target and do not reduce inequality.

Based on this analysis, it is evident that the conditional cash assistance program significantly impacts inequality reduction and is highly effective in enhancing welfare. Similarly, cash assistance aimed at impoverished students and subsidies for national health insurance premium payments positively contribute to welfare improvement. However, the situation differs with LPG and kerosene subsidies (Figure 10). As illustrated in Figure 10, these subsidies yield contrary effects. Increasing the budget or resources allocated to these subsidies does not correlate with welfare enhancement; instead, it may result in adverse or regressive outcomes. Notably, the analysis highlights that the electricity subsidy has shown progressive results.

The electricity subsidy is relatively better due to improved targets made in 2017 with the implementation of the targeted electricity subsidy policy. This policy led to the removal of 18 million ineligible households from wealthier segments from the list of subsidy recipients. As a result, the quality of targeting subsidies toward the poor and vulnerable groups (Deciles 1–4) improved significantly, increasing from a mere 26% (as shown in Figure 2) to 44.29% (as indicated in Figure 3). However, the overall distribution of subsidies remains inefficient, as the comparatively affluent groups (Deciles 5–10) continue to receive over 50% of the subsidies, highlighting an area for potential policy refinement. This analysis finds that the commodity-based subsidy mechanism is the leading cause of inequality.

Inequality in electricity provision stems from distributing subsidies through the State Electricity Company without considering household welfare levels. Specifically, subsidies are allocated with 450 VA and 900 VA power consumption categories. Therefore, households falling under these categories are entitled to subsidies, regardless of socioeconomic status. Since the subsidies are on a per kilowatt hour (kWh) basis, households consuming higher amounts of electricity receive more subsidies.

In Indonesia, the method for determining electricity subsidies is multifaceted. The subsidy process involves two distinct stages: (1) a “compensation” to bridge the gap between the electricity production cost by the State Electricity Company and the regulated price set by the Minister of Energy, and (2) a “subsidy” to offset the difference between the regulated price and the subsidized price. To elucidate, let us examine the 900 VA tariff group for the year 2021. The production cost of electricity is IDR 1530/kWh, while the regulated price is set at IDR 1352/kWh. Hence, the compensation amount is IDR 178/kWh. Simultaneously, the subsidized price is IDR 586/kWh, leading to an actual subsidy of IDR 766/kWh. Therefore, the total governmental financial support per kWh is IDR 944.

For a household consuming 200 kWh in one month, the subsidy equates to IDR 188,800. If the same household increases its consumption to 300 kWh the following month, the subsidy rises to IDR 283,200. This means that higher consumption levels result in more significant subsidies. Consequently, households with higher incomes, who tend to consume more electricity, receive more significant subsidies. In contrast, poorer households, especially those in remote areas without access to state-provided electricity, receive lesser or no subsidies. It is essential to clarify that the initial “compensation” is not categorized as a “subsidy” in budgetary terms but is accounted for under a separate budget nomenclature. This research focuses exclusively on the second phase, which involves the actual subsidy provided to consumers.

Conversely, Liquefied Petroleum Gas (LPG) subsidies are administered as price subsidies, designed to narrow the financial disparity between the per-kilogram selling prices of non-subsidized and subsidized LPG. To illustrate, in the year 2014, the selling price for non-subsidized LPG was IDR 12,134 per kilogram, while the subsidized rate was IDR 4250 per kilogram. That makes the subsidy provided by the Government IDR 7884 per kilogram (Figure 11).

For a household consuming 15 kg of LPG in a single month, the subsidy would amount to IDR 118,260 for that month. If the same household were to increase its consumption to 20 kg, the subsidy would escalate to IDR 157,680. This subsidy structure mirrors that of electricity consumption, where higher levels of consumption yield more significant subsidies than the poor households that consume less. As a result, households with higher income levels, who are more likely to consume larger quantities of LPG, benefit from more substantial subsidies. In stark contrast, economically disadvantaged households, particularly those situated in remote areas without access to LPG, receive reduced subsidies or none at all.

In addition to the subsidy mechanisms, inequality in access to both electricity and LPG is further exacerbated by entry barriers that disproportionately affect poor and vulnerable households [53,54]. Three primary entry barriers hinder access to electricity: (1) Financial Constraints: the inability to afford the initial installation fee for electrical services; (2) Alternative Energy Sources: utilization of electricity sources not supplied by the State Electricity Company, such as solar, micro-hydro, and biomass energy; and (3) Geographical Limitations: residing in areas that lack an established electricity network from the State Electricity Company. Similarly, there are three main barriers to accessing LPG: (1) Initial Costs: insufficient funds to purchase LPG cylinders and stoves; (2) Availability: the absence of LPG distribution in specific areas; and (3) Alternative Fuels: the use of other readily available and inexpensive fuels, such as firewood. These findings highlight the persistent challenges faced by economically disadvantaged households in gaining equitable access to essential utilities like electricity and LPG.

4.4. Potential Policy Improvements

Some countries have implemented various energy subsidy reforms besides raising commodity prices. These reforms include implementing unconditional cash transfer policies for the poor groups affected by the increase in energy commodity prices [2,9,13]. Additionally, there is the distribution of coupons [5,8], allowing poor households to buy at a discounted price.

As compensation for reducing fuel subsidies, Indonesia implemented several unconditional cash assistance policies. These include the Direct Cash Assistance (BLT) program in 2005 and 2008, the Temporary Direct Assistance to the Community (BLSM) program in 2013, and the Prosperous Family Savings (PSKS) program in 2014 [44]. However, the Government still maintains energy policies through price subsidies or commodity-based subsidies.

In addition to revoking or reducing subsidies, energy subsidy policy reform can be carried out in two ways: (1) restricting subsidized energy consumption, specifically for the poor, where subsidies are still given as price subsidies but restrictions are made only for certain groups of society through self-targeting (voluntarily those who can afford not to buy subsidized LPG) or limited to only poor and vulnerable families by using data on poor people; or (2) changing the subsidy mechanism to direct household subsidies, in which subsidies are transferred directly to groups of people who are entitled to purchase energy commodities in the form of non-cash value.

The first approach will be politically more straightforward because the impression of subsidized prices will be maintained. Efforts to limit LPG purchases to people with low incomes, however, have never been successful in the past because cheaper LPG is still available. This fact has been demonstrated by various trials of limiting the use of subsidized LPG, known as the closed distribution LPG subsidy policy, which has consistently failed [42]. The second approach is politically more complicated than the first approach. Fundamental policy changes in Indonesia are generally not easy to implement because the decision-making process is often influenced by political factors [55], and the policy formulation mechanisms are not always structured [56]. However, it promises changes that address current policy issues.

The direct household subsidy policy has the effect of no longer giving the subsidy per kilogram of LPG. Instead, the value of the subsidy is transferred directly to poor and vulnerable households via the banking mechanism. The poor and vulnerable can still buy LPG at subsidized prices, thanks to this direct household subsidy mechanism (which is even cheaper than before). This policy is similar to the issuance of LPG coupons described by Schaffitzel et al. [8] and Clements [5] in the context of Ecuador’s energy subsidy reform. The difference lies in the transfer mechanism. With this approach, the Government can also control the amount of subsidies given to poor households based on community conditions and needs.

Furthermore, in order to address inequality, energy subsidy policy must meet the following requirements:

• A better-targeted mechanism, where only the poor and vulnerable groups receive energy subsidies. This mechanism is in line with Energy Law No. 30 of 2007, where the Government is obliged to provide energy subsidies only to poor households. Commodity or price subsidies still pose a risk of inaccurate targeting. Therefore, these mechanisms should aim to eliminate price disparities and provide direct subsidies to poor and vulnerable households. Targeting accuracy could be improved by enhancing the method of identifying eligible households. Furthermore, simple targeting criteria should be implemented and adopted from the social protection system in a unified registry or data integration to be effective [2,24].
• Poor and vulnerable groups must be given the freedom to utilize subsidized funds not only to purchase LPG and electricity commodities. These groups could use the funds to overcome the barriers. For instance, households living in areas with electricity networks from the State Electricity Company but who have not obtained access due to a lack of funds could use the value of subsidies for installation costs. Similarly, households living in areas with LPG but still using other cooking energy could purchase cylinders and LPG stoves. Poor and vulnerable households living in urban areas also benefit from this freedom to utilize funds. In the process, it provides a kind of ‘income’ that is particular to access energy and overcome inequality. Patnaik and Jha [57] stated that income inequality negatively impacts access to electricity. In the case of Sub-Saharan Africa, access positively impacts economic growth.
• Another requirement is to ensure that the recipient only uses the funds to access energy. Funds can be diverted to buy other commodities, such as cigarettes, or used for other purposes, such as paying debts if given in cash. As a result, the objective of providing energy subsidies to increase access to energy will not be achieved. Therefore, a transfer mechanism is needed to ensure that subsidies are only used to access energy.

Based on the findings and analysis conducted in this study, it is recommended that household-based energy subsidies should be provided through a Direct Targeted Subsidy mechanism, as outlined below:

4.4.1. Non-Cash Direct Subsidies

Subsidies should be directly provided to beneficiaries in a non-cash form. This approach aims to ensure that the subsidies are explicitly utilized for energy access, thereby mitigating the risk of funds being diverted for other purposes, such as purchasing cigarettes or other commodities. This approach is in line with Law No. 30 of 2007, which stipulates that energy subsidies are solely for enhancing energy access for underprivileged communities. The Government already has another non-cash assistance program for food (BPNT), cash education assistance program (PIP), healthcare assistance program (PBI JKN), and conditional cash transfers program (PKH). By targeting the same beneficiaries, these households will also receive these other forms of assistance. To further ensure that the subsidies are used exclusively for energy access, distribution through banking mechanisms and electronic transactions is essential.

4.4.2. Market-Based Commodity Pricing

The price of subsidized energy commodities should be aligned with market prices to eliminate price disparities. This alignment applies to the subsidized 3 kg LPG cylinders, which should be priced similarly to non-subsidized sizes like 5 kg and 12 kg cylinders. The absence of price disparities will also facilitate distribution and monitoring by the Government and the state-owned Oil and Gas Company Pertamina while reducing the risk of hoarding and adulteration. The same principle applies to electricity tariffs for the 450 VA and 900 VA groups.

4.4.3. Fixed Monthly Subsidy Amounts

In the matter of LPG subsidies, it is advisable to employ an average annual consumption rate as the basis for a fixed monthly subsidy allocation. The subsidy can be calculated according to the mean subsidy accorded per kilogram of LPG. According to calculations by the National Team for the Acceleration of Poverty Reduction, the price differential between subsidized and non-subsidized LPG is approximately IDR 5000 per kilogram. Given that the average monthly consumption of LPG stands at approximately 9 kg, a fixed monthly subsidy of IDR 45,000 would be allocated to qualified beneficiaries [39,42].

In the context of electricity subsidies, the method of calculation can be predicated on the mean subsidy value. Utilizing data from the 2018 National Socioeconomic Survey, the average subsidy disbursed to households in the lowest 10 percent households (decile 1) amounts to IDR 70,654 per month. Meanwhile, the overall lowest 40 percent (decile 1 to 4) receive an average subsidy of IDR 81,101 per month. If we look at the data provided by the State Electricity Company, the average subsidy for tariff groups 450 VA and 900 VA—categories eligible for subsidies—stands at IDR 80,582 and IDR 94,984 per month, respectively. Consequently, a fixed monthly subsidy allocation of IDR 95,000 would exceed the average subsidy traditionally received by households on a monthly basis [42,45].

Moreover, the implementation of a fixed monthly subsidy system holds the potential to incentivize the conservation and efficient utilization of both LPG and electricity. For example, consider a scenario where a 3 kg LPG cylinder is priced at IDR 30,000. Under the fixed monthly subsidy model, households would effectively acquire their first cylinder at no cost, retaining a non-cash subsidy balance of IDR 15,000. Should these households employ energy-efficient cooking techniques, there exists the potential for them to offset their monthly LPG expenditure entirely. Similarly, households that maintain their monthly electricity consumption below IDR 95,000 would not incur additional out-of-pocket expenses for that period.

4.4.4. Flexibility in Subsidy Utilization

Communities without access to LPG and electricity should be allowed to use the transferred subsidy value to purchase LPG cylinders and regulators or to pay for electricity installation fees. In cases where electricity and LPG are not available, the subsidy can be used to finance locally available alternative energy sources. However, the subsidy should still be disbursed in a non-cash form and through banking and electronic transaction mechanisms to ensure targeted and efficient utilization.

An additional strategy to enhance the adaptability of using subsidies is to issue vouchers to households currently lacking access to government-provided LPG and electricity. These vouchers would enable them to avail of energy services once LPG or electricity becomes accessible in their area. Nevertheless, this voucher system should be considered a provisional measure, with the emphasis on the prompt and efficient provision of direct energy services and access being a priority.

By implementing these recommendations, the Government can better align its subsidy policies with the needs of the poor and vulnerable, thereby promoting social inclusivity and economic efficiency.

4.5. Government’s Ability to Improve Policy

The fundamental question is whether the Government can improve current energy subsidy policies in order to eliminate inequality and promote gender and social inclusivity. The issues to be discussed regarding this ability include the following (

Table 1. Conditions for improvement of energy subsidy policy and the Government’s ability to meet the conditions (author’s analysis).

Conditions for Improvement	Required Conditions
The accuracy of energy subsidy recipient target data	Availability of data on poor and vulnerable groups eligible for energy subsidies, with transparent criteria in the form of a unified registry [2,24].
Freedom in utilizing subsidy funds	Availability of a mechanism for disbursing and utilizing subsidies for the purchase of energy commodities other than electricity provided by the State Electricity Company (PLN) and LPG supplied by the State Oil and Gas Company (Pertamina) or a mechanism to pay the initial installation fee for electrical connection or a mechanism to purchase LPG cylinders and stoves. The purpose of this is to remove barriers to accessing the subsidies. It is in line with the perspective of the capability approach. It prioritizes individual freedom and opportunity, promotes sustainability, and ensures social justice [58,59].
Certainty of subsidy funds used only for energy subsidy	Availability of disbursement mechanism and technology to ensure that energy subsidies are only used for energy access, as stipulated in Law No. 30/2007 [4] that energy subsidies are only intended for energy access and not for other reasons.

):

For the first condition, the Indonesian Government possesses the Integrated Social Welfare Data comprising names, addresses, and multiple welfare variables of the 40 percent lowest social status groups. These data satisfy the requirements of a unified registry and has been used for government aid and subsidies since 2012. The aids and subsidies include the Conditional Cash Transfer Program for Family Welfare program (PKH), the Non-Cash Food Assistance program (BPNT), cash assistance for students from poor and vulnerable families under the Smart Indonesia Program (PIP), and Recipient of Health Insurance Subsidies (PBI) of the National Health Insurance Program (JKN) [44].

The Integrated Social Welfare Data was also used as the main data source for implementing the targeted electricity subsidy policy in 2017. Out of the 18.9 million households in the Integrated Social Welfare Data used for electricity subsidies in 2017, 95 percent were successfully matched with field data. This fact shows that the Integrated Social Welfare Data can be used as a data source for targeted recipients of LPG and electricity subsidies. In total, the Integrated Social Welfare Data contains information about 27 million, 29 million, and 95 million households, families, and individuals. Although the Integrated Social Welfare Data has faced several criticisms, these data could be used by the Government to reform the targeted policies.

However, the Integrated Social Welfare Data requires enhancements to achieve a high level of accuracy and to accommodate the dynamic nature of poverty conditions within society effectively. Methodological improvements for updating should be undertaken to encourage the inclusion of unrecorded household groups, such as those without a National Identity Card (KTP) or other population identity documents. Updating the DTKS, as well as synchronizing data with the names and addresses of other poor and vulnerable households, is highly necessary. In terms of household beneficiaries, the Government could also consider providing subsidies to micro and small enterprises (UMKs). In the data updating process, proxies for income criteria, tax payments (currently, the Indonesian Government has synchronized population data with tax data), ownership of other assets, location or access to energy, and the number of family members can also be considered as criteria for data improvement by the Government.

The transfer of subsidies can be facilitated by the banking mechanism used by the Non-Cash Food Assistance program, which is currently provided to 20 million poor and vulnerable households. It means that it only needs to add 10 million households to the Integrated Social Welfare Data to fulfill the lowest 40 percent social status. Additionally, distribution technology can also utilize existing debit cards or more advanced financial technology [41].

The Government may use currently accessible technology in this regard, such as debit cards or more sophisticated financial technology like biometrics. Several trials have been conducted, and they have produced positive findings. Since 2015, the Government has tested several technologies for providing subsidies, starting with debit cards, quick response (QR) codes, short message services (SMS), near field communicators (NFC), and biometrics. The debit card technology itself has been used to transform the Raskin (rice for the poor) program into the Non-Cash Food Assistance program [41,43]. The use of this technology can be a game-changer in determining the success of providing energy subsidies because the technological framework is important to support the program’s success [17].

The National Team for the Acceleration of Poverty Reduction, in collaboration with the Indonesian Fintech Association (AFTECH), recommends the use of fintech with facial biometric authentication as a channeling solution for aid and government subsidies [48]. In terms of transaction infrastructure, the use of facial biometric technology is not only simple, safe, and inexpensive, but it also does not require behavioral changes on the part of the beneficiary, such as storing debit cards, carrying debit cards when making energy commodity purchase transactions, and memorizing personal identification numbers (PINs). Additionally, people are not required to own a smartphone, and smartphone ownership is only needed at the merchant level [43,48].

One interesting aspect is the possibility of integrating the LPG and electricity subsidies with other social assistance programs, such as the Non-Cash Food Assistance Program (BPNT), the Conditional Cash Transfer Program for Family Welfare (PKH), or the Smart Indonesia Program (PIP) [60].

4.6. Potential Impacts

Ensuring access to subsidies is expected to promote clean and modern energy. The freedom to utilize subsidies for energy access could positively impact women’s groups. The benefits include saving time for cooking, ranging from 8 to 61 min per day, and reducing time spent on collecting firewood by up to 4 h per week. Furthermore, women’s groups could have more time for productive activities. Having more time would increase opportunities and chances for employment, including the development of small and micro businesses [53,54]. The use of clean energy could also lower the risk of diseases caused by air pollution from burning wood due to exposure to solid fuel indoors with poor ventilation [53,54].

Regarding the impact of changing the policy with the approach described, the Fiscal Policy Agency of the Ministry of Finance, in 2019, found that LPG subsidies help reduce poverty and inequality [39]. The poverty rate could decrease from 9.82 percent to 9.75 percent when LPG subsidies are directly provided at IDR 45,000/month/household. Simultaneously, increasing the amount to IDR 60,000/month/household could reduce the poverty and inequality rate to 9.50 percent. The Gini ratio decreases from 0.392 to 0.388 when LPG subsidies are given at IDR 45,000/month/household. In this case, a decrease to 0.387 is expected from an increase to IDR 60,000/month/household [39]

Apart from the GEDSI-friendly aspects, the freedom to use subsidies to access alternative energy presents a great opportunity to promote the growth of local renewable energy sources, such as solar and micro-hydro microgrids, to diversify the energy supply. The freedom to use the subsidy not only results in cost savings for households in places without access to electricity or LPG but also inspires community involvement in the generation of energy from renewable sources, which may further promote the local economy.

According to the National team for the Acceleration of Poverty Reduction simulations, subsidies for the GEDSI group, if used to pay for locally available renewable energy, could cover the investment and operational costs of providing renewable energy in their area. For instance, the IDR 95,000/month/household electricity subsidies are enough to cover the investment costs of establishing micro-hydro facilities for the target populations in West Papua and Papua. The LPG subsidies of IDR 45,000 per household per month are also adequate to cover all the operating and capital expenses for constructing facilities for Local Waste Processing Sites. Overall, these policy reforms may help more children attend school, encourage the creation of jobs, and boost the local economy [61].

Strategically, this policy shift can help accelerate the energy transition to inclusive, sustainable energy. The majority of electricity generated in Indonesia is produced from coal, which accounts for approximately 40 percent of global greenhouse gas (GHG) emissions from fossil fuel use [62]. Similarly, LPG, while emitting fewer emissions, is still classified as a fossil fuel. As long as massive subsidies are given to electricity and LPG commodities derived from fossil fuels, prices for renewable energy commodities will remain uncompetitive, impeding the energy transition process. With this policy change, in addition to encouraging the use of renewable energy at the local level, subsidy savings can also be considered to provide incentives for the development of renewable energy.

5. Policy Recommendations

5.1. Policy Mechanism

Based on the findings and analysis in this study, the form of household-based energy subsidy policy should be given to direct beneficiaries or through direct targeted subsidies in the following manner:

• Subsidies are delivered directly to the beneficiaries in a non-cash form

This non-cash provision intends to ensure that the received subsidies are not used for purposes unrelated to energy access, such as the purchase of cigarettes or other commodities. Therefore, it is crucial to avoid distributing subsidies in cash form, as there is a significant likelihood that they will not be utilized for their intended purpose of energy access. This approach also aligns with the enforcement of regulations in accordance with Law No. 30 of 2007, which specifies that energy subsidies are solely for the purpose of facilitating energy access for the underprivileged.

• The price of subsidized energy commodities should be set at market rates.

This measure is essential to eliminate price disparities in the energy market. It should apply to 3 kg LPG products, which ought to be priced similarly to other sizes like 5 kg and 12 kg. Without price disparities, even wealthier groups might consider purchasing 3 kg LPG if it meets their needs. Consequently, 3 kg LPG will no longer be a solely subsidized product, allowing it to become a choice for consumers. Additionally, the elimination of price disparities simplifies distribution and supervision for the Government and PT Pertamina (Persero) while also reducing the risks associated with hoarding and adulteration practices. This principle extends to electricity as well. The rates for the 450 VA and 900 VA power groups, which have received subsidies, can be aligned with those of non-subsidized electricity, such as the rates for customer power above 1300 VA. Even though LPG and electricity are sold at market prices, the community can still purchase these energy commodities at a discounted rate or for less than the capable group, thanks to the non-cash assistance provided by the Government.

• The subsidy amount is calculated based on average usage and given in a fixed amount each month.

Suppose the current policy results in varying subsidy amounts for LPG and electricity consumers based on their monthly usage. In that case, the revised policy proposes calculating the subsidy value based on the average usage over a year, providing a fixed amount each month. This approach is designed to simplify distribution and promote savings and efficiency in energy usage. According to the subsidy calculation simulation by TNP2K, the LPG subsidy is set at IDR 45,000 per household per month. With the assumption that a 3 kg LPG cylinder costs IDR 30,000, poor and vulnerable households would effectively receive their first 3 kg LPG cylinder for free, retaining a non-cash subsidy value of IDR 15,000. If a household manages to reduce its LPG consumption to two cylinders per month, then its monthly LPG expenditure would be just IDR 15,000. The same principle applies to electricity. With a simulated subsidy value of IDR 95,000 per household per month and average usage by poor and vulnerable groups around IDR 78,000 per month, or if usage remains below IDR 95,000, the subsidy recipients effectively would not incur any monthly electricity costs. This incentive is aimed at reducing the financial burden on poor households, allowing them to allocate funds to other essential needs such as educational expenses and improved nutrition for family members.

• Freedom for the community to utilize the subsidy value

For communities that lack access to LPG and PLN electricity, the transferred subsidy value can be used to purchase LPG stove cylinders and regulators or pay for the installation of electricity. Furthermore, if electricity and LPG are unavailable in areas inhabited by the poor and vulnerable, recipients should have the freedom to use the subsidy value to finance the acquisition of alternative energy sources available locally. This approach is crucial for promoting inclusivity. However, it is important to note that while there is flexibility in utilizing the subsidy for purchasing different energy commodities or addressing access issues, the subsidy distribution remains in non-cash form, relying on banking mechanisms and electronic transactions.

5.2. Determining the Target Beneficiaries

The target beneficiaries can be identified using the Government’s data on the names and addresses of poor and vulnerable households, specifically the DTKS (Integrated Social Welfare Data). DTKS is a suitable choice as it has demonstrated a high degree of accuracy, evidenced by its 95 percent accuracy rate during the implementation of electricity subsidy policy reform in 2017. Nonetheless, there is a need for the Government to refine and update these data concerning poor and vulnerable communities further.

5.3. Integration with Other Assistance and Subsidies

Currently, the Indonesian Government is implementing several social assistance programs that aim to support households with similar objectives. These initiatives include the Family Hope Program (Program Keluarga Harapan—PKH), the Non-Cash Food Assistance Program (Program Bantuan Pangan Non-Tunai—BPNT) or Sembako Program, and the Smart Indonesia Program (Program Indonesia Pintar—PIP). By targeting the same groups, specifically poor and vulnerable households, it is possible to integrate electricity and LPG subsidies with these programs. Such integration can enhance the efficiency and effectiveness of distribution, allowing the Government to manage these initiatives through a single account for each poor and vulnerable household.

5.4. Subsidy Distribution Mechanism

The distribution mechanism should ideally utilize the banking system, wherein each beneficiary household is provided with a basic savings account (BSA). The establishment of a BSA can also foster greater inclusion of poor and vulnerable communities in financial services. For transaction purposes, modes based on financial technology (Fintech) can be employed in collaboration with technology-oriented financial institutions that are affiliated with banks.

5.5. Utilization of Technology

Biometric technology can be employed in the distribution and utilization of electricity and LPG subsidies. This approach offers several advantages over card-based distribution, such as reducing costs associated with card printing and distribution and eliminating the issue of lost cards. However, the use of biometric technology presents several challenges that the Government needs to address. These include the requirement for smartphones at the merchant level, which depends on an internet connection. A poor connection can adversely affect the transaction process. Additionally, the preparedness of store sellers is crucial, as many are not yet equipped to handle transactions using this technology. Just as important is the need for effective socialization and education regarding the implementation of biometric technology in the administration of electricity and LPG subsidies.

5.6. Complaint Mechanism

To support the implementation of accurately targeted electricity and LPG subsidy policies and to address public complaints effectively, it is essential to develop a mechanism for lodging complaints regarding electricity and LPG subsidy participation, available both online and offline. This mechanism will enable the community to submit complaints concerning eligibility and other aspects of the implementation.

5.7. Regulatory Changes

The transition to a policy of direct targeted subsidies necessitates several regulatory amendments. Regulations identified for revision include those related to the assignment of distribution tasks and sales pricing, regardless of whether they are presidential or ministerial regulations.

5.8. Other Aspects

The change in policy requires public understanding. Consequently, intensive and extensive public socialization and education should be undertaken. Education initiatives should start during the policy planning phase and continue throughout its implementation. Critical aspects to be communicated include the policy’s objectives, benefits, and communication strategies for behavioral change. Additionally, to ensure the effectiveness of the policy implementation, rigorous monitoring and evaluation are required. These processes should assess the policy’s effectiveness and provide feedback to policymakers for future policy enhancements.

6. Conclusions and Suggestion

This study demonstrates that, despite the Indonesian Government spending a large budget on energy subsidies and obtaining energy sources through imports, the household-based energy subsidy policy has not succeeded in becoming a welfare instrument. The policy creates access disparities based on gender and social status, which affects community welfare. Therefore, the policy should be transformed from commodity or price-based subsidies into direct households. The selling price of energy, electricity, and LPG could be set based on economical prices to eliminate disparities. Beneficiaries of subsidies must be given the freedom to use subsidies in order to remove barriers to accessing energy.

Based on the discussion in this study, the Government is able to meet the conditions required to change this policy, including the availability of data on poor and vulnerable households, as well as the availability of disbursement mechanisms and technology. The Government can use the existing Integrated Social Welfare Data, and the mechanism for distributing subsidies could use electronic banking transfers.

This change could result in various benefits, such as (1) improving the accuracy of energy subsidies, (2) promoting gender and social inclusivity, including in economic activities and alternative energy provision, (3) promoting renewable energy development to increase energy diversification, and (4) providing energy subsidies only to poor and vulnerable groups. Implementing this policy change can save the government money on energy subsidies, which can then fund other productive programs such as education, health, and poverty alleviation. In a broader sense, the policy shift may also contribute to the acceleration of Indonesia’s just energy transition.

However, this policy change requires reforming regulations, including Presidential and several Ministerial Regulations. Moreover, cross-ministry cooperation should be strengthened in implementing policy changes. These include the Ministry of Energy and Mineral Resources, the Ministry of Finance, and the Ministry of Social Affairs. Banking resources and financial technology service providers should also be mobilized to support subsidy distribution.

The most significant challenge posed by this policy change is that the price of subsidized LPG and electricity tariffs will rise in alignment with economic prices. This alignment naturally gives the impression that the Government is withdrawing subsidies because LPG is no longer available at subsidized prices, and there is an increase in electricity tariffs, which could contribute to temporary inflation. However, this problem should be overcome through intensive education and outreach. Learning from the implementation of the targeted electricity subsidy policy in 2017, which affected 18 million households, there was no public rejection due to intensive public education. The pressure group provided support for the policy [63]. Furthermore, this is a good thing because it eliminates opportunities for criminal activity due to price disparities.

The scientific novelty of this research is that it provides an alternative discussion in the realm of energy subsidy policy, shifting the focus from the traditional commodity-based energy subsidy paradigm to a more nuanced household-based energy subsidy approach characterized by a directly targeted subsidy concept. Historically, the discourse on energy subsidy policy has been largely centered around the commodity-based model, with limited exploration of alternative frameworks. This research breaks new ground by not only critiquing existing policy forms but also by offering pragmatic recommendations for governments and policymakers to refine energy subsidy policies. A key differentiator of this study is its innovative use of microdata aggregation in analyzing disparities in access to household-based energy subsidies. This approach is relatively underexplored in existing literature due to the often-confidential nature of microdata, leading to its sparse application in previous research. By effectively utilizing these data, the study provides a deeper, more detailed examination of the impacts and implications of energy subsidy policies at the household level, offering valuable insights for future policy development.

Furthermore, the findings of this research enrich the existing literature in several ways. Firstly, it offers a detailed analysis of Indonesia’s Energy Subsidy Policy, particularly highlighting how it affects various social groups, with a focus on those who are marginalized. Secondly, it underscores the gender and social inclusivity gaps in energy access, providing valuable insights for crafting more equitable energy policies. Additionally, the study proposes a pivotal policy shift from price-based to direct household subsidies, a recommendation with far-reaching implications for developing countries facing similar challenges. Finally, by incorporating socioeconomic and gender considerations, the research contributes to the conversation around a Just Energy Transition, addressing aspects often neglected in energy policy debates. These facets collectively provide fresh perspectives and practical insights, significantly advancing the discourse on energy policy, social equity, and gender inclusiveness.

Even though the study has attempted to provide insights and policy suggestions for improving energy subsidy policies in Indonesia, it is important to consider the study’s limitations. One significant limitation is the reliance on government data sources, especially the Integrated Social Welfare Data. These sources may not always be entirely accurate and reliable, potentially leading to errors in how subsidies are targeted and executed. Therefore, conducting further research on the accuracy of the data and how it can be improved is crucial. Future research should also broaden its data sources by leveraging independent surveys, conducting interviews with local communities, and utilizing information from non-governmental organizations. Such a diverse range of data sources would aid in cross-validating and supplementing government data, thereby ensuring a more accurate and comprehensive analysis.

Another limitation is the complex political environment in Indonesia, which can heavily influence policy decisions. Implementing substantial policy changes, as proposed in the study, may face significant political and bureaucratic challenges. Considering Indonesia’s dynamic political landscape, further research must delve deeper into these dynamics. A key component could be a political feasibility study of the suggested policy alterations. Collaboration with experts in political science and policy, particularly those with expertise in Indonesian politics, would be invaluable. Their insights could help in navigating the complexities of policy implementation and formulating effective advocacy strategies.

Additionally, while this study acknowledges that policy changes might temporarily increase inflation due to higher prices of subsidized energy, it does not conduct a comprehensive economic analysis. Such an analysis should examine the immediate and long-term economic effects, including their impact on inflation, household finances, and overall economic stability. Future research should conduct thorough evaluations of both short-term and long-term economic effects using more powerful statistical methods. Using more powerful statistical methods in future economic research can lead to more accurate, reliable, and insightful findings, which can contribute to a better understanding of the economic effects of the energy subsidy policy and facilitate more informed policy decisions. This analysis should prioritize areas such as inflation, the financial well-being of households, and overall economic stability. Economic modeling and simulation techniques would be beneficial in predicting the consequences of policy shifts.

Lastly, research emphasizing stakeholder engagement is essential. This approach should aim to gather diverse perspectives, identify potential hurdles and opportunities, and provide a more holistic view of the policy’s implications.