Publications

Formulating domestic prices for an integrated energy mix is a complicated business. In a developing country like Indonesia, energy pricing decisions are much influenced by economic, social and political objectives. Among these objectives are: supporting the national economy via domestic energy consumption, earning foreign exchange revenue via energy exports, providing an improved level of well being, benefiting domestic industry and transportation, promoting development of the outer islands, and so forth. It is this unique combination of opportunities and challenges that makes appropriate energy pricing so important.This paper attempts to present a viable way to structure an appropriate energy pricing policy in a nation like Indonesia which possesses such abundant and various energy resources.A useable economic methodology for establishing energy pricing policy consists of determining a range of optimal economic prices, a financial price and shadow prices. Optimal economic prices are identified from a purely economic point of view, supply and demand analysis. The financial price distorts economic prices from their economic values caused by market failure or government policy. The use of a shadow price would yield an economic opportunity value which is closer to the real value of the energy resource.The decision-making problem faced in this methodology involves many economic variables. The modeling approach is then used to describe those economic concepts in a set of mathematical formulas. This technique should allow one to implement decisions effectively and provide interrelationships among variables.