Political economy analysis for the Department of Foreign Affairs and Trade (DFAT) of Australia on fossil fuel subsidy reform and diesel replacement in Indonesia

TPP Director Neil McCulloch was in Indonesia in May 2026 leading a political economy analysis (PEA) for the Department of Foreign Affairs and Trade (DFAT) of Australia. He was supported by an Indonesian team including experts from the International Institute for Sustainable Development (IISD), the National Research and Innovation Agency (BRIN), and InfraIndo, a local think tank working on infrastructure. The PEA explored two challenging and contentious issues: fossil fuel subsidy reform; and progress in reducing the use of diesel and increasing solar and battery power for outlying islands and remote areas.

Indonesia heavily subsidises fossil fuels, including coal, gasoline, diesel, and Liquid Petroleum Gas (LPG) used for cooking. It does this by fixing the domestic price, even though most fuel is imported at the world price. The war in the Middle East has dramatically increased the world price so that subsidies represent a huge drain on the government’s budget. Reforming these subsidies would save billions of dollars which might be used for other public goods and services; but doing so would be hugely politically contentious as prices would rise substantially. The PEA explores the perspectives of all the key actors on the topic.

With 17,000 islands, Indonesia faces a major challenge in getting electricity to communities in remote areas. This is currently done by running diesel generators, but the growing cost of diesel led the government to launch a Diesel Replacement Program in 2022. However, progress has been very slow. The PEA tries to understand the technical, economic and political obstacles to accelerating the use of renewable energy for remote communities.