The determinants of energy intensity in Indonesia

Abstract

PurposeIndonesia is the fourth most populous country in the world, which has a strong effect on primary energy use and depletion of natural resources. This paper considers energy intensity (EI) defined as a measure of the amount of energy it takes to produce a dollar's worth of economic output. The purpose of the paper is to explore how different factors contributed to the decline in Indonesia's EI.Design/methodology/approachThe cointegration regression methodology is applied to explore the long-term nexus between EI and its factors in Indonesia during 1990–2016.FindingsResults show that domestic credit to the private sector, as well as the share of alternative energy, has a significant impact on the decline of EI in Indonesia.Research limitations/implicationsWe do not try to rule out other possible determinants of EI. We consider the determinants of EI using time series data, while an ideal analysis would be based on panel-level data. Another limitation is that the study covers only the small-time period from 1990 to 2016.Practical implicationsOur findings serve to aid the government and policymakers in prioritizing improvements in the sphere of energy policy. An important policy implication, regarding Indonesia, that arises from our study is that, for the country to be able to decrease its EI, it must be able to develop its financial market and zero-carbon energy sources, mainly geothermal energy with its huge potential.Originality/valueWe show that energy prices, financial development and the share of alternative energy sources contribute to EI decrease. Policy recommendations include geothermal and solar energy development as one of the most prospective sources of alternative energy in Indonesia.