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that reached equilibrium in economy simultaneously, given a change in the market, then it will affect other market in the economy.

This study analyses the impact of a whole economy when electricity sector is given more investment and fossil fuels are substituted for geothermal energy. According to Walras (1874), when there was a change on one sector,it would thus affect another sector and also affect the whole economy. The economic condition could reach equilibrium condition, if amount n -market in economy and amount n-1 -market have already reached their equilibrium condition.

2.1.1. Economic Growth and Energy

Stern (2010) modified the Solow Growth Theory (1) to observe the impact of economic growth when there was a substitution between energy and capital,

(1)

Y(t) represents output, K(t) represents capital, A(t) represents technology and L(t) represents labour, whereas A (t) L (t) represents effective labour.

The result shows that substituting capital to energy will increase employment opportunities and rising of income, thus it will affect to the increase of economic growth. The production function is,

(2)

Q is output (factory goods and services); X is input (capital and labour); E is several energy inputs (coal and fuel oil); and A shows indicator of total factor productivity (TFP).

2.1.2. Economic Growth and Investment in Infrastructure

According to Mankiw (2007), investment is divided into three types: a) business fixed investment (BFI), the elimination of goods and services that was done by the company, such as buying machine; (b) residential investment (RI), the investment that was done by household through buying property; and c) inventory investment (II), the changing on production factor, such as input that was used by company in the production process.

An investment discussed in this study is the business fixed investment by investing in infrastructure, power generation for increasing output production. The main function of investing for investor is, to get recompensation of capital production factor.

Fedderke et al. (2008) argued that investment on infrastructure will give a positive impact on economic growth. The relationship between infrastructure and economic growth could

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 157

be observed in two ways, directly or indirectly -related: 1) on directly related, infrastructure is observed as contributing sector to Gross Domestic Product (GDP) and as a production input to another sector, and 2) on indirectly related, when infrastructure was considered as complementary input on sector, thus it could increase productivity of other input factors.

2.2. Empirical Overview

There are numerous studies which explain the negative impact of the use of fossil energy on the environment. Aravena, et al. (2012) did a study on external cost that was caused by using fossil energy in a power plant. They suggested shifting to renewable energy to decrease carbon dioxide emission, and thus it would affect the external costs. Zou (2012) conducted a research to observe the negative impact of using fossil energy on power plant, thus there is a need to substitute fossil energy for hydroelectricity. Bravi and Basosi (2013), however, analysed that the used of renewable energy could in fact, increase CO2 emission.

Krozer (2011), Kose (2007) and Moreno et al (2012) used econometric methods to observe the impact of substituting fossil fuel energy for renewable energy on power plant, thus it could reduce electricity cost and make electricity cost cheaper for consumers. Ortega et al (2013) did approximation on cost and profit while using renewable energy for power plant.

Lu, et al. (2009) discussed the impact of investing in energy sector for increasing economic growth in one of provinces in China. Rose (1995) also analysed the positive impact on economic growth using the dynamic linear programming to get results from substituting fossil energy for renewable energy. Halkso and Tzeremes (2013) obtained a rather different result, though, that, utilization of renewable energy as input for power plant in the long term will only give positive impact for developed countries, and not for developing country. Ohler and Fetters (2014) also revealed that utilization geothermal energy to produce electricity will give small impact on GDP growth.

There are studies with CGE model which come up with different results. Aydin (2010), for instance, developed a dynamic CGE model for Turkey, called TurGEM-D, by simulating the increasing quantity of hydroelectricity to substitute the role of fossil energy that Turkey currently does not have. The result is that investment in renewable energy influences the rising of economic growth and reduces CO2 emission. Engida et al (2011) used static CGE model to show that investment in power plant gave positive results in economic growth. Dissou and Didic (2011) used recursive-dynamic CGE model to observe the impact of investing in infrastructure, including power plant, that give positive effect on economic growth. Borojo (2012) obtained a specific result by using recursive-dynamic CGE model that investing in power plant using foreign direct investment s increases economic growth.

There are several studies that used CGE model for modelling energy policy: 1) the impact of the energy pricing policy on the increase of electricity consumer price (Isdinarmiarti, 2011);

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2)the impact of energy policy to replace the use of fossil fuels with other energy (natural gas, coal, and other renewable energy) (Sugiyono, 2009); and 3) the impact of energy price changes in output of industrial sector (Nikensari (2001). However, the research on investment policy on the geothermal sector and its substitution with a static CGE model is something new for economics science in Indonesian context.

The author sees that the use of fossil energy has given a negative impact on the Indonesia’s air quality. Thus the government should begin to take action to start replacing fossil energy to renewable energy, namely geothermal energy, as an input source for the production of electricity generation.

III. METHODOLOGY AND DATA

3.1. Computable General Equilibrium Model

Computable General Equilibrium (CGE) Model uses basic foundation General Equilibrium Theory as mentioned above. This model is functioned to analyse interactions between consumers, producers, and market equilibrium conditions in the economy. A market equilibrium condition is a market-clearing condition that is occurred when consumers can consume all of the output produced by producers (Lewis, 1991).

The CGE model used is the standard model for Indonesia (see Appendix 1). Similar models can be seen on the Inter-Regional Model System of Analysis for Indonesia in 5 Regions (IRSA-INDONESIA 5). The model developed by Resosudarmo et al. (2009) for regional analysis. This CGE Model assumed Indonesia as an open economy whose was a price taker that did not contribute impact for global price.

Figure 2 shows the standard model of CGE related to the linkage across blocks on the model. The diagram flow is described the followings:

•Capital and Land are aggregated using Constant Elasticity Substitution function to form the composite input;

•Composite input is combined with intermediate inputs (energy & non-energy) to produce domestic gross output, using the Leontief function;

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 159

Output

Leontif

Intermediate input		Primary Input

CESCES

Import		Domestic		Capital		Land

Energy&

Non- energy

Source: Resosudarmo, et al., 2009

Figure 2.

Model Structure of Open Economy CGE Model

This model has several equation systems which are divided into five blocks of equation. These blocks are: (1) production block,equations in this block reflect the structure of production activity and producers’ behavior; (2) consumption block,equations in this block reflect the structure of household behavior and others institutions; (3) export - import block equations in this block describe the decision of country/region to invest in economy and demand of goods and services that was used on the new capital formation; (4) market-clearing block, equations in this block determine market-clearing conditions for labor, goods and services in economy, national payment balance is included into this block too.

3.2. Data

Social Accounting Matrix (SAM) 2008 is used as data for this research. The utilisation of this data source is particularly important due to SAM, as one of data collection systems, is an essential analytical tool that was developed to observe and analyse whether an economic policy can boost economic growth and create more equitable income distribution in a country. SAM is an economic balance of traditional double-entry which is shaped into matrix partition that recorded all economic transactions between agents, particularly between sectors within

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production blocks, sectors within institution blocks (including households), and sectors within production factor blocks in economy (Pyatt and Round, 1979; Sadoulet and de Janvry, 1995; Hartono and Resosudarmo, 1998).

Furthermore, SAM is a useful data collection system due to: (1) SAM summarizes all of economic transaction that was occurred in economy system for a certain period. Thus, SAM could provide a general overview of economic system in the region; and (2) SAM describes social-economic structure. Thus, SAM is reliable to provide poverty and income distribution issue in economy (Hartono and Resosudarmo, 1998).

SAM is also an important analysis tools, because: (1) It could show substantial impact of economic policy towards household income. Thus, it could discover impact of economic policy towards poverty and income distribution issue. (2) It is relatively simple. Thus, the application could be easily done in various countries (Hartono and Resosudarmo, 1998).

In this study, we modified Indonesian SAM that is published by Central Agency on Statistics of Indonesia in 2008. There are two main differences between published Indonesian SAM and our modified Indonesian SAM: (i) It modifies ten household groups into two groups of households (decile groups of urban and rural households); (ii) It disaggregates sectors and commodities, hence generating more detailed sectors related to the energy, namely geothermal, natural gas, coal, gasoline, kerosene, high speed diesel oil (HSDO) and diesel oil. There are fourty four sector that are used in this study.

To conduct disaggregation of Indonesia SAM 2008 (published by BPS), this study used several information and supporting data, such as Input-Output tables and statistics of energy. The information about the structure of output and input follow the assumptions contained in those data.

IV. RESULT AND ANALYSIS 4.2. Simulation Scenarios

Based on energy mix data of power plant in 2008, this research applies simulation scenarios. The main scenario is increasing the amount of investment for developing geothermal power generations and substituting a portion of fossil energy (coal and oil) for geothermal energy as an energy source for power plants, so that the electricity production will increase. There will be four scenarios which will be used for observing the impact of investing and substituting in geothermal sector for economic growth.

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 161

Water

Geothermal

Energy

Fuel Oil

33%

Coal 38%

Gas 14%

Source: Handbook of Energy and Economics Statistics Indonesia (2009)

Figure 3. Power Plants Energy Mix 2008

The amount of investment required by the PLN to increase the electricity production of geothermal power plant is 10%. In 2008, electricity produced by geothermal power plant was only 3390.66 GWh, with a production cost of IDR 746.61 per kWh, thus the total production cost in 2008 amounted IDR 2.5 trillion. The 2008 GDP in nominal terms itself is IDR 4,778 trillion. If we expect the electricity production with geothermal energy to increase by 10% (which the electricity output will increase amounted 339.066 gWh), the government require investment of around IDR 0.25 trillion for the geothermal energy power plant (10% of total cost production for 3390.66 GWh). The calculation is presented in Table 2 below.

Table 2.

Calculation of Electricity Production Cost per kWh (IDR)

Year		Electricity	Production	Total Cost (IDR
		Output	Cost per kWh	trillion)
		(gWh)	(IDR)
2008		3390.66	746.61	2.5
Increasing		339.066	746.61	0.25
10% of 2008
Source: Statistik PLN 2008

The contribution of geothermal energy on power plant was only 3% of energy mix total in 2008. The biggest contribution of energy mix in 2008 was coal amounted 38% and followed by fuel oil, 33%. Based on energy mix data in 2008, the authors wish to observe what would occur if contribution of geothermal energy was increased and fossil energy was decreased.

This study uses four scenarios, denoted by SIM, to simulate investment policy and substitute energy with energy mix data for power plant in 2008. Those are:

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1.SIM 1: invest to increase electricity production output of geothermal power plant by 10%.

2.SIM 2: invest to increase electricity production output of geothermal power plant by 10% and also substitute contribution of oil to geothermal energy by 10% as power plant energy source.

3.SIM 3: invest to increase electricity production output of geothermal power plant by 10% and also substitute contribution coal to geothermal energy by 10% as power plant energy source.

4.SIM 4: invest to increase electricity production output of geothermal power plant by 10% and also substitute oil and coal to geothermal energy by 5% for each fossil energy as power plant energy source.

4.2. Results and Analysis

The results of those simulation scenarios is analysed into two parts: (1) impact analysis of investment and substitution energy policy to Indonesia’s economy; and (2) impact analysis of substitution energy policy to CO2 emission level.

4.2.1. Impact Analysis of Policy to Indonesia’s Economy

a) On Gross Domestic Product

This part analyses the impact of investment policy for geothermal power plants to increase electricity production output and substitute energy for Indonesia economic growth.

Table 3.

The Impact of Investment Policy for Geothermal Energy and Substitution

Fossil Energy to Geothermal Energy for GDP

	SIM 1	SIM 2	SIM 3	SIM 4
GDP	0.236%	0.013%	0.013%	0.013%
Increase of	11.27608	0.62114	0.62114	0.62114
GDP in 2008
(IDR trillion)

Source: results of model calculations with software

From Table 3, we can see that Simulation 1 causes an increase on GDP by 0.236% whereas Simulation 2, 3, and 4 do not influence economic growth due to GDP increase of only 0.013%.

The authors use percentage of increasing GDP to calculate the nominal of increasing GDP. As an impact of investment on geothermal power plant, GDP increases more than IDR 11.27

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 163

trillion, meaning that investment in geothermal power plants amounted IDR 0.25 trillion will give profit as much as IDR 11.02 trillion for GDP in 2008. In the case of substitution of fossil energy for geothermal energy, nominal of GDP increases to IDR 0.37 trillion.

b) On Sectoral Output

SIM1 brings result that rail transport sector is the most affected by investment policy and substitution fossil energy to geothermal energy, the GDP increase is amounted 2.012%. The impacts are also happened in city-gas sector and non-subsidized energy sector with amount of increasing 1.894% and 0.781%, respectively. While, SIM 2, SIM 3, and SIM4 does not show significant impact for output sectoral, due to increasing portion geothermal energy in power plants energy mix of only 10%.

c) On Household Income

The household income that is mostly affected by increasing investment in a geothermal power plant, is the household within the category of urban-not poor, which increases by 0.528%. Meanwhile, the impacts on household income caused by substitution energy are felt by poor people in the village category, or increases by 0.020%. Poor households are defined as those with incomes below 20% (in decile 1 to decile 2)1, while the non-poor households is the rest.

4.2.2. Analysis Impact of Policy for Carbon Dioxide Emission

This part explains the impact of investment and substitution policy on power plants towards total of CO2 emission produced. Table 4 shows result of CO2 emission caused by energy substitution.

Substitution energy from coal to geothermal as an energy source for power plants by

10% affects decreasing of carbon dioxide emission by 5.92%. Whereas, energy substitution from oil to geothermal only decreases carbon dioxide emission by 1.56%. Substitution between a combination of coal and oil for geothermal energy as an energy source for power plants, though, decreases carbon dioxide emission by 3.74%.

The figure from SIM 3 indicates that replacing coal to geothermal energy will give significant impact for the decrease of CO2. It is due to the fact that coal is the biggest producer of CO2 when was used as the source of power plants in comparison with fuel oil.

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Table 4. The Impact of Geothermal Energy Investment

Policy and Substitutions Fossil Energy for Geothermal Energy on Reducing

Carbon Dioxide Emission

Amount of	SIM 2	SIM 3	SIM 4
Carbon
Dioxide
Emission 2008
(million tons CO2)
102	-1.56%	-5.92%	-3.74%

V. CONCLUSIONS

This study aims to explain the electricity sector’s problems in Indonesia, especially environmental problem—increasing CO2 emission—that was produced by fossil energy power plants. Using a CGE model, we develop model to analyse the impact of policy towards economic condition and the amount of CO2 emission created, to support the development of geothermal energy as a source for power plants.

The simulation provides us several findings, first, the investment policy to increase geothermal power plant production increases GDP amounted IDR 11.02 trillion. The result is similar with Aydin (2010), Engida et al, (2011), Dissou and Didic (2011), and Borojo (2012) that investment in energy sector will give impact towards positive economic growth. Substitution from fossil energy to geothermal energy has insignificant effect, but still increases nominal of GDP amounted IDR 0.37 trillion.

Second finding from simulation is each sector increases when there is investment in geothermal power plants, the highest increase occurrs in transportation sector, which is the rail transport. Third, the household income affected the most by this investment policy is the household in urban-not poor category. Nonetheless, the substitution of fossil energy for geothermal energy does not affect significantly. Lastly, the substitutions energy from coal to geothermal energy affects more than that of oil to geothermal energy in the case of decreasing CO2 emission.

Investment and substitution policy to increase electricity production that is produced by geothermal energy has proven to give positive impact for economic growth and output sectoral. Substitution from fossil energy to geothermal energy is also confirmed to decrease total CO2 emission. This result could be the basis for the government to develop geothermal energy sector.

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 165

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Appendix 1. Basic Equations in CGE Model

Zero profit in sourcing

(1)

Price of foreign goods

(2)

Armington domestic-import composition

(3)

Aggregatting domestic-import composite (total demand)

(4)

Intermediate demand

(5)

Household demad

(6)

Other institution’s demand

(7)

Export demand to ROW

(8)

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 169

Demand for factors of production

(9)

Price of value-added (factor composite)

(10)

Demand for value-added (Leontief)

(11)

Market clearing for factors

(12)

Total factor income

(13)

Zero profit in production

(14)

Market clearing for commodities produced

(15)

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Household income

(16)

Household disposable income for consumption

(17)

Household saving

(18)

Income of government

(19)

Expenditure of other’s institution

(20)

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Aggregate saving

(27)

Aggregate investment

(28)

Investment demand

(29)

Consumer’s price index

(30)

Appendix 2. Equations for CO2 Emission in CGE Model

CO2 Emissions by industry

(31)

CO2 Emissions by household

(32)

National CO2 emissions

(33)

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 173

Appendix 3 List of Parameters and Variables of the CGE Model

List of Parameters

aintci	aint(c,i)	Coefficients of intermediate input Leontief
aprimi	aprim(i)	Coefficients of value added Leontief
betach	beta(c,h)	Budget/ expenditure share household
bdgsrgovc	bdgsrgov(c)	Budget share household government
expelasc	expelas(c)	Elasticity of exports
alpexpc	alpexp(c)	Shift parameter demand for export
itxi	itx(i)	Rate of indirect tax
delarmcs	delarm(c,s)	Share parameter CES Armington
alparmc	alparm(c)	Shift parameter CES Armington
rhoarmc	rhoarm(c)	Parameter CES Armington
sigarmc	sigarm(c)	Elasticity of substition CES Armington
alpprimi	alpprim(i)	Shift parameter value added CES
rhoprimi	rhoprim(i)	Parameter of value-added CES
sigprimi	sigprim(i)	Elasticity of substitution value-added
delprimfi	delprim(f,i)	Share parameter value-added CES
sfachhhf	sfachh(h,f)	Share of households factor income
sfacentf	sfacent(f)	Share of corporate enterprises factor income
sfacrof	sfacro(f)	Share of RoW (from abroad) factor income
strgovhh	strgovh(h)	Share of government revenue transfered to households
strgovent	strgovent	Share of government revenue transfered to corporate enterprises
strgovro	strgovro	Share of government revenue transfered to abroad/ RoW
strenthh	strenth(h)	Share of corporate enterprises revenue transfered to households
strentgov	strentgov	Share of corporate enterprises revenue transfered to government
strentro	strentro	Share of corporate enterprises revenue transfered to abroad/ RoW
ytaxhh	ytaxh(h)	Rate of income tax for households
strhhhhh	strhh(hh,h)	Share of households income transfered to other households
savhh	savh(h)	Rate of households saving
savent	savent	Rate of corporate enterprises saving
strrohh	strroh(h)	Share of RoW income transfered to households
strroent	strroent	Share of RoW income transfered to corporate enterprises
strhrh	strhr(h)	Share of households income transfered to abroad/ RoW
strhenth	strhent(h)	Share of households income transfered to corporate enterprises
strrgov	strrgov	Share of RoW income transfered to government
sfacgovf	sfacgov(f)	Share of government factor income
strgovgov	strgovgov	Share of government revenue transfered to other government

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strgovr	strgovr	Share of government revenue transfered to abroad/ RoW
savgov	savgov	Rate of government saving
sfacrof	sfacro(f)	Share of factor income as part of abroad/ RoW
lambdac	lambda(c)	Investment coefficient
wgtcpic	wgtcpi(c)	Weighted CPI (consumer price index)
shxcoiei	shxcoi(e,i)	share of co2 emitting energy consumption in industry
shxcoheh	shxcoh(e,h)	share of co2 emitting energy consumption in household
cciei	cci(e,i)	carbon content for industry
ccheh	cch(e,h)	carbon content for household

List of Variables

PQcs	PQ(c,s)	Price of commodities, domestic and import
PQ_Sc	PQ_S(c)	Price of composite commodities, domestic and import
PFIMPc	PFIMP(c)	Price of global import
PFEXPc	PFEXP(c)	Price of global export
PFACf	PFAC(f)	Price of production factors
PPRIMi	PPRIM(i)	Price of primary factors
CPI	CPI	Consumer price index
EXR	EXR	Exchange rate
XDcs	XD(c,s)	Demand for commodity (domestic and import)
XD_Sc	XD_S(c)	Demand for composite commodity
XINT_Sci	XINT_S(c,i)	Demand for intermediate input by sector
XHOU_Sch	XHOU_S(c,h)	Household demand for commodity
XGOV_Sc	XGOV_Sc	Government demand for commodity
XOTH_Sc	XOTH_S(c)	Other institution demand for commodity
XINV_Sc	XINV_S(c)	Composite investment goods
XTOTi	XTOT(i)	Total output
XEXPc	XEXP(c)	Demand for export
XFACfi	XFAC(f,i)	Demand for production factor
XPRIMi	XPRIM(i)	Demand for primary factor
XFACSUPf	XFACSUP(f)	Total supply of production factors
YFACf	YFAC(f)	Total income from production factor
YFACROf	YFACROf	Income received from abroad
WDISTfi	WDISTf i	Price of production factor of labor by sectors
YHh	YH(h)	Household income
YGOV	YGOV	Government revenue
YENT	YENT	Corporate enterprise/ company income
YRO	YRO	Transfer/ revenue from abroad

The Impact Of Geothermal Energy Sector Development On Electricity Sector In Indonesia Economy 175

EHh	EH(h)	Household disposable income
EGOV	EGOV	Government expenditures/ consumption
EENT	EENT	Corporate enterprise expenditure
ERO	ERO	Expenditure from abroad
SGOV	SGOV	Government saving
SHh	SH(h)	Household saving
SRO	SRO	Saving from abroad
SENT	SENT	Corporate enterprise saving
SAV	SAV	Total saving
ANV	ANV	Total investment
XCOIei	XCOI(e,i)	CO2 Emissions by industry
XCOHeh	XCOH(e,h)	CO2 Emissions by household
XCO	XCO	National CO2 emissions