biofuels in Indonesia

The development, diffusion and stakeholder’s participation in the
biofuel development in Indonesia
Joni Jupesta 1, 2, Govindan Parayil 1, Yuko Harayama 2
1)
United Nations University Institute of Advanced Studies (UNU-IAS), 1-1-1, Minato Mirai,
Nishi-ku, Yokohama 220-8502, Japan
2)
Department of Management Science and Technology, Tohoku University
6-6-11-808 Aoba Yama, Sendai 980-8579, Japan
Abstract
One of the main challenges in sustainable development is to scale up production and use of
renewable energy in developing countries. The changed status from a net oil exporter to a net
importer in 2005, the costs of the high subsidies on fossil fuel, the depleting oil resources and a
strong dependency on oil for domestic production, are the driving forces for introducing biofuel
in Indonesia. The Indonesian government enacted a new energy policy in 2006, which aims to
partially shift from fossil fuel to renewable energy sources, including biofuel. However, till now,
biofuel did not achieve the aimed production target, for several reasons, e.g. higher cost of
production relative to fossil oil, distribution barriers due to geographical constraints, reluctance
from industries due to uncertain markets and low support by local government.
Problems in doing business in the development of biofuel, in developing countries as
Indonesia, are that the market suffers from a lack of information, infrastructure and institutions.
This paper provides an analysis for understanding the political context wherein the diffusion of
biofuel takes place in Indonesia and an analysis of the perceptions of the key stakeholders, at
local and national level. The framework conditions for the development of biofuel in Indonesia
are presented and the existing policies outlined. The diffusion process of biofuel is discussed, as
well as the key factors affecting the planning and implementation of biofuel in a local and
national context. The perception of biofuel schemes at a national level is based on interviews
with several experts on biofuel development in Indonesia and other developing countries. Based
on Indonesia’s policy and the experts’ opinion, a set of recommendations is made to ease the
integration of biofuel into Indonesia’s energy systems.
Keywords: energy policy, climate policy, technology diffusion, deforestation, economic
development.
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1.
Introduction
One of the main challenges in sustainable development is to scale up the production of
renewable energy in developing countries. The adoption and diffusion of low carbon
technologies need to be seen as innovation processes. A technology-innovation process has
several stages: R&D, demonstration, deployment and diffusion at commercial scale. Shifting
energy consumption from fossil fuel to biofuel is considered an option for climate change
mitigation. In case of a developing country, technology leapfrogging is one way to avoid the
resource intensive patterns of economic and energy development. One of the common features
of this technology leapfrogging is technology transfer. In the climate context, technology
transfer is defined as a broad set of processes covering the flow of know-how, experience and
equipment [1].
The changed status from a net oil exporter to net importer in 2004, the highly subsidized
price of fossil fuel, the depleting oil resources and a strong dependency on oil and gas export for
government`s revenues are the driving forces for introducing biofuel in Indonesia. Globally, the
development of renewable energy markets relies on political support in terms of subsidy and
carbon tax and on the decision maker interest, i.e.: voters in general elections, climate
agreement such as the Kyoto Protocol and the Copenhagen Accord, oil politics in the Middle
East, etc.
The new autonomy policy of the central Indonesian government gives a bigger role to the
local authorities. Spread over 33 provinces, the biofuel industries could be more competitive in
one region than other regions depending on the interests and support of the local authorities.
The Indonesian government enacted a new energy policy in 2006 which aims to partially
shift the use of fossil fuel into renewable energy sources, including biofuel. To show the
government’s strong commitment, just over 10 million hectares of land have been allocated to
the production of biofuel crops. The mandatory requirement to use biofuel and the given
subsidies will help to make biofuel competitive. However, till now, biofuel still did not achieve
the politically set targets, for several reasons, e.g. higher cost of production relative to fossil fuel,
distribution barriers due to geographical constraints, reluctance from industries due to uncertain
markets and a relative low participation from local government.
The objective of this chapter is to provide an in depth analysis of the Indonesian energy
system and to assess the possibilities for the diffusion of biofuel. This diffusion process involves
the perception by the key stakeholders at local and national level. The analytical framework
conditions for biofuel development in Indonesia will be presented and the existing policies will
2
be outlined. Based on the analytical framework, the problems for the diffusion process of
biofuel are discussed, as well as key factors affecting the planning and implementation of
biofuels in a local and national context.
This chapter uses an analytical framework for understanding the process of diffusion of
biofuel in Indonesia. Various factors which affect the diffusion and adoption of this new
technology are classified into technology, economics development, sustainability and policy.
The stakeholders in the biofuel industries are: producers, users, academics, policy makers and
the international market. The analytical categories are applied to an in depth study of the
diffusion of biofuel in Indonesia. Biofuel is now mainly used for transportation but will extend
into other demand sectors: power generation, industry and commercial use.
This chapter is structured as follows: Section 2 describes the mix energy policy in
Indonesia as the driving force for the biofuel development, section 3 describes an analytical
framework for studying the diffusion processes of biofuel development in Indonesia. Section 4.
outlines the diffusion process based on the analytical framework. The conclusions are given in
Section 5.
2.
Indonesia Mix Energy Policy
Energy Mix 2006
Hydro
3%
Energy Mix 2025
Geother
mal
1%
Biofuel
5%
Hydro,
others
5%
Gas
29%
Oil
20%
Gas
32%
Coal
15%
Geo
5%
Oil
52%
Coal
33%
Fig.1. Indonesia’s Mix Energy Policy.
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In 2008, the fuel and electricity subsidies amounted to 14 and 6 billion US$, respectively,
equaling the total central governmental capital and social spending. Oil and gas contributed to
~32% of government revenues in 2006, but decreased to ~20 % in 2008, in accordance with
depleting oil resources and an oil production decrease from 9×109 barrels in 1987 to half of that
in 2007 [4]. For these reasons, the government enacted the so-called Mix Energy Policy (in
2006), to reduce dependency on oil by the use of a mixture of energy sources. The government
hoped to utilize local resources to make renewable energy (e.g. biofuel). The target was to
reduce the share of fossil oil in providing energy from 52% of total energy consumption (as in
2006) to 20% by 2025. By that year, the remaining energy should come from coal (35%) and
gas (30%), whilst renewable energy sources are hoped to provide 15% of total energy
consumption.
Fig. 1. shows the Mix Energy Policy based on the Presidential Decree No. 5 (2006),
which states that the share of renewable (geothermal and hydropower) will increase from 4% to
15% within 20 years [2]. Biofuel was introduced with the objective of fulfilling 5% of the total
energy consumption by 2025. It was expected that biofuel development could create at least 4
and 7x106 jobs by 2010 and 2025, respectively. In 2008, the transportation sector consumed 26x
106 ton oil equivalent (Mtoe), as depicted in Table 1. The replacement of 5–20% of this oil by
biofuel will reduce 1.5–6 ×109 liters of fossil oil consumption per annum. Because the
transportation sector used 30% of the total energy consumed in 2008 (in this calculation,
biomass derived energy for cooking in rural areas is excluded), a mixture of biofuel with
gasoline and diesel fuel can significantly diminish oil consumption on a national scale [5].
Table 1. Fuel consumption in the transportation sector in Indonesia (in 106 ton oil
equivalent; Mtoe).
Gasoline
Diesel fuel
Others (biofuel)
Total Transportation
Final Energy
Consumption
3.
2000
2002
2004
2006
2008
10.6
8.4
n/a
19.0
11.9
8.8
n/a
20.7
14.6
9.7
n/a
24.3
14.6
7.9
0.2
23.2
17.2
7.9
0.9
26.1
Growth
(%)
7.43
–0.74
116.67
4.68
63.9
65.6
73.0
72.0
87.8
4.68
Analytical framework for the diffusion process of biofuel development
The analytical framework used to study the development of biofuel development in
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Indonesia is that of a technological innovation system (TIS) [2]. This section outlines the
structural components of such a system, and how the diffusion process is determined from
different perspectives, i.e.: technology, economics, sustainability and policy. The analytical
framework is depicted in Fig. 2. The various factors will influence the stakeholders in the
diffusion process.
3.1. Actors and knowledge creation
The biofuel framework can be characteristic as specialized and highly integrated. There
are a number of institutions (universities, research institutes and firms) involved in a range of
research and development activities, but the present cooperation and research coordination are
not optimal yet. The flow of information among the actors is limited and most of the times
fragmented. There is competition due to scarcity of funding sources and links. There are several
actors regarding the biofuel diffusion process: producers, users, academic, policy maker and
international market.
Sustainability
• Climate change
• Deforestation
• Food security
Economics
• Job creation
• Oil price
• Investment
• Producers
• Users
• Academics
• NGO
• Policy maker
• International
market
Policy
• Tax
• Subsidy
• Energy
• Climate
Technology
• Innovation R&D
• Process efficiency
• Energy efficiency
Fig. 2. The diffusion process in biofuel development in Indonesia
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The producers are the local farmers and the industries. While the industries usually own
the plantation and biofuel processing, the farmers usually only produce the biofuel crops and
sell it to industry. The biofuel industries in Indonesia are run by local companies and
international companies. The technology suppliers are from Lurgi (Germany), Japan Gasoline
Company (Japan), Delta (USA), Praj Industries (India), CAMC (China). Currently, there are 5
companies with production around 15% of total capacity due to raw material scarcity and low
domestic demand for biofuel [3]. There are five main producers: the Eterindo group, Molindo,
Wilmar, Sumiasih and Musim Mas.
PT Eterindo Wahanatama is a chemical industry. Established on 1992, the company has
been listed on the Jakarta Stock Exchange in 1997. This company uses Crude Palm Oil (CPO)
as feedstock to produce biodiesel in Gresik, East Java. The total capacity is 240,000 MT/ year.
PT Molindo is the largest ethanol producer in Indonesia. The company has developed biofuel
from molasses and produces 55 Ml/year. The company invested 25x106 US$ to increase ethanol
production capacity to 100 Kl/year by developing a new plant in Lampung area. PT Molindo
cooperates with PTPN X (sugar mills) to secure 100,000-150,000 tons of molasses for its
ethanol production. In addition, the company will open 7,000-10,000 hectares of cassava
plantation for alternatives feedstock.
Wilmar Group is a foreign investment company from Malaysia and is the largest palm
biodiesel manufacturer in the world. In Indonesia, this company’s plant is located in Dumai and
produces 350,000 MT/year. The future expansion will reach 106 MT/year. PT Sumiasih was
established in 1982 as an oleo-chemical manufacturer from CPO. This company started to
produce biodiesel in 2006 with a production capacity of 36 kton per year. The plan is to expand
capacity of the biodiesel plant in West Java by an investment of 8x106 US$ and build a new
biodiesel plant in Lampung with a possible investment of 28x106 US$. PT Musim Mas is also
based on biodiesel palm oil and has an installed capacity of 300 kton.
The international investment are come from the US, Japan, China, India, South Korean,
Brazil, Malaysia and Germany. The US Agency for International Development (USAID),
through its Agribusiness Market and Support Activities (AMARTA) program, is interested in
partnership with Development Alternatives Inc. Japanese investment companies are from
Mitsubishi, Ithocu and Mitsui besides the Japanese bank for International Cooperation (JBIC).
China invests through the China National Offshore Oil Corporation (CNOOC) and Hong Kong
Energy and is considered to be one of the biggest investments in the biofuel sector. The
companies together with the local company Sinar Mas invest 5.5x109 US$ in Papua and the
Kalimantan region. This project is based on (palm oil) biodiesel and (sugarcane and cassava)
6
bio-ethanol. The Chinese government invests through the Malindo project. Each hectare of
plantation requires 3,297 US$ for palm oil, 1,648 US$ for sugarcane, 330 US$ for Jatropha
curcas and 3,846 US$ for cassava.
In future a huge expansion is expected for the biofuel processing plant due to the
mandatory use of biofuel in the domestic market and high international demand. The domestic
demand so far is in the transportation sector, but will expand soon into industries, commercial
and power generation. In 2007, 58 joint cooperation agreements were reportedly signed with a
total investment value of 12.5x109 US$. In 2008, several other companies committed
themselves to invest in the biofuel industry: Sinopec from China, the Sampoerna Group,
Bronzeak from the UK, and Samsung from South Korea.
The universities act as the center of research and development which provides the source
for skills and knowledge labor. There are four leading universities for technology
commercialization in Indonesia: the University of Indonesia, the University of Gajah Mada, the
Institute of Agriculture Bogor and the Bandung Institute of Technology. Environmental NGOs
act as watch dogs over biofuel production to ensure the suitability of biofuel production in terms
of environmental protection and sustainable production. Several NGOs are interested in biofuel
development in Indonesia: Greenpeace, Sawit Watch, Pelangi, etc. Most of the NGOs are
nonprofit organization with external funding from international donors.
The government is the policy maker; the wide spectrum stakeholder of biofuel
development is society at large, as the user and producer (local farmers). The policy makers are
local and central government. Local government sets up the infrastructure such as roads for
transportation of biofuel from plantations. The National Team of Biofuel Development acts as
the policy maker at the central level and the National Team of the SSEV Development acts as
the policy maker at the local level. Both reside under the Ministry of Energy and Coordinating
Ministry of Economy respectively.
The international markets consist of the external buyers: China, Japan and India are
(potential) buyers because of requirements derived from their climate policy for renewable
energy sources. The corporations such as Cargil, Ithocu and Marubeni show interest in being
traders for this commodity.
3.2. Regulatory framework for biofuel development
The legal basis for the biofuel development is through Presidential Instruction no.1/2006
regarding “Provision and utilization of Biofuel as Alternative Fuel” on 25th January 2006.
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Through this regulation there is incentive and tariff for biofuel development and to set simple
biofuel trade to incorporated into entire fuel trade system. Considering Indonesia is a vast land
there is no problem in finding locations for biofuel plantations. However, availability has
changed in May 2010 after the climate agreement between Indonesia with the Norwegian
government. In principle almost 13 million hectares land are available for biofuel production, as
shown in Table 2.; what part can be used depends on above mentioned agreement.
Table 2. Land provision for biofuel development
Provinces
South East Sulawesi
North Sulawesi
Nusa Tenggara Timur
Area ( ha)
212,123
34,812
101,830
Maluku
2,304,932
Papua
9,262,130
West Kalimantan
514,350
Central Sulawesi
251,856
South Kalimantan
65,638
Total
12,747,671
Land provision is complemented with seed supply. There are several big palm oil
companies which also produce seed such as the Palm Oil Center Medan (PPKS), PT. Socfin, PT.
Lonsum, Pt. Dami Mas, Pt. Tunggal Yunus, PT. Bina Sawit Makmur, PT. Tania Selatan which
sell 147 million seeds per year to be planted in 700,000 hectares of land. Other R&D centers
such as those of the Ministry of Agriculture, the Agency of Assessment and Application for
Technology (BPPT), Lemigas, and the Bandung Institute of Technology (ITB) also do extensive
research in biofuel technology. ITB focuses on conversion technology and the Ministry of
Agriculture through the Center for studies in Mechanization in Agriculture focuses on mixing
biodiesel and automotive diesel fuel for stationary machineries.
The government plans to spend 51 trillion US$ in five years to develop palm oil, rubber
and cocoa. Two third of the funds are to be allocated to palm oil plantations. Supported by this
policy and high demand, the biofuel development program has attracted private investors both
8
domestic and international. Early in 2007, sixty agreements on biofuel development projects
between various parties, including investors and 26 domestic investors have been signed.
Altogether, the project’s value was around 9 to 10 x109 US$. The banking sector also invests
3.7x109 US$ in this sector. There are several banks involved: Pt. Bank Negara Indonesia, bank
Republic Indonesia, Bank Mandiri, Bank Bukopin, Bank Daerah Sumatera Barat and Bank
Daerah Sumatera Utara. The bank interest rate for factories is 14-15% and for small holders
10%.
3.3.
Biofuel diffusion schemes
Biofuel in Indonesia started selling in 2006 as BioSolar, BioPertamax and BioPremium
through PT Pertamina, as shown in the table 7.1. BioSolar is a mix of 2.5% biodiesel in the
form of Fatty Acid Methyl Ester (FAME) and 97.5% diesel fuel. BioPremium and BioPertamax
both are a mixture of 3% ethanol and 97% gasoline. The difference between BioPremium and
BioPertamax is that the gasoline used has an octane number of 88 and 92, respectively.
Pertamax Plus has gasoline in it with an octane number of 95.
Table 3. The Biofuel Consumption in Indonesia [4]
(in 106 barrel oil equivalent)
No
Product
2006
2007
2008
1
BioSolar
1,408
5,692
6,029
2
BioPremium
9
326
257
3
BioPertamax
0
58
94
1,417
6,076
6,380
The framework integrates several elements with the aim of biofuel development:
technology, economics, policy, sustainability and the stakeholders. Technology considers
technical knowledge in terms of feedstock supply and energy conversion processes. The
innovative R&D is expected to increase the yield and quality of product. The process efficiency
addresses the simplification of the process production starting from agriculture and the
conversion process. Energy efficiency looks at the efficiency of the energy used in the process.
Economics addresses job creation, since biofuel plantations are labor intensive and one of the
aims is to alleviate poverty by reducing unemployment. The tax waives and subsidies on biofuel
are other aspects discussed. The expected investment should come from domestic and
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international sources. The biofuel consumption in Indonesia is shown in Table 3.
In terms of sustainability, biofuel is assumed to be carbon neutral; however, this depends
on the production process of biofuel. Present biofuel production may also threaten food security,
since land use could change from food to fuel production. The impact of deforestation due to the
expansion of biofuel plantations also is a factor in climate change. There are three related
policies in biofuel production: - agricultural policy, since all biofuels come from agriculture
products, - energy policy, as biofuel becomes one of the energy sources and - climate policy, as
biofuel production and consumption may contribute to climate change.
Society
Biofuel
chain
Policy makers
Environmental NGOs
Industries (processing, distribution)
Suppliers (local farmer and plantations)
Fig. 3. The stakeholders in biofuel in Indonesia.
All four elements interact through the stakeholders’ value. The stakeholders in the biofuel
supply chain are given in Fig. 3. The farmers act as the local supplier beside the plantation
industries. Private industries act as buyer and the state owned industries act as the distributor
(the oil state company Pertamina). NGOs act as the watchdogs to ensure that the biofuel
industries act with public interest in mind; Greenpeace’s actions versus Sinarmas is an example
of this: in 2010, Greenpeace, one of the foremost NGOs in environmental protection, accused
Sinarmas internationally that it does not practice sustainability at its palm oil plantation and this
pushed Sinarmas to implement sustainable practices. The policy maker at local level can
promote local investment in biofuel industries, while central government is responsible for the
tax and subsidy measures to promote biofuel.
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The National Team of Biofuel Development acts as the policy maker at central level and
the National Team of the SSEV Development acts as the policy maker at local level; they reside
under the Ministry of Energy and Coordinating Ministry of Economy, respectively. At central
government level, biofuel development is the responsibility of the National Team of Biofuel
Development. This team has the following objectives:
1) To design a blue print for biofuel production to accelerate poverty alleviation and job
creation,
2) To design a road map for biofuel development,
3) To prepare the technical implementation of biofuel and set up an institutional task
force,
4) To evaluate the biofuel development and the chances to alleviate poverty and create
jobs,
5) To periodically report on the biofuel development to the President.
4.
Diffusion process of biofuel development: Indonesia as case study
4.1. Technology
The use of biofuels as a transportation fuel has reasserted the linkages between energy
and agricultural output markets. Biofuels have multiple benefits related to energy security,
socio-economic and climate protection issues. Biofuel, which is mainly used as an energy
source for transportation, can improve the energy autonomy of an economy, reducing the
dependency on oil and gas. The use of biofuel shows a fast growth because it can curb
greenhouse gas emissions as they substitute fossil fuels.
One of the parameters used to measure how effective biofuel is in replacing fossil fuel is
the energy ratio, i.e. the ratio of energy contained in a biofuel, relative to the fossil fuel energy
used for its production. The energy ratio from sugarcane ethanol is 4.9, whilst that of palm oil
biodiesel is 3.6. Sugarcane processing technology has already been fully developed compared to
palm oil processing. However, the net energy balance, which is the difference between energy
output and energy input during production, has the highest value for palm oil compared to all
other biofuel crops. A problem that needs solving is balancing the supply and demand of crops
for food and fuel purposes. This can be achieved by directing the excess supply for food into
fuels, and vice versa.
Biofuel, at present, is produced in large quantities in other regions such as the USA,
Brazil and Western Europe. In the future, the restriction in the allocation of land and higher
11
feedstock cost in these regions will shift the production of biofuel to other regions that have
more land available and have lower feedstock cost, such as Indonesia, Malaysia, Thailand, etc.
First generation biofuels have already reached a competitive price in some regions, due to
economies of scale and technology learning such as in Brazil, where the price of bio-ethanol is
0.23 US$/l at an oil price 0.25 US$/l [5]. Second generation biofuels are produced from
non-food materials such as cellulosic biomass, e.g. wood, rice straw and grass. Another
non–food biofuel will be third generation biofuel to be produced from algae. This type of
biofuel will have even more advantages as the yield of product is higher than that from first and
second-generation technologies. The increasing price of oil will improve the competitiveness of
biofuel.
Biofuel in Indonesia is being produced with first generation technology. The use of biofuel
in Indonesia is expected to reduce energy consumption. Biofuel in Indonesia starts with
`bio-premium`, a mixture of gasoline and bio-ethanol, and `bio-solar` a mixture of diesel fuel
and biodiesel. In 2007, the mixture was introduced at low level as the infrastructure is still not
well equipped. The mixture is only available in big cities such as: Jakarta, Surabaya and
Bandung. Later it will expanded into other medium cities with inhabitants more than one
million people.
The first generation technology is a mature technology. The fermentation process to
produce bio-ethanol and the trans-esterification process were developed a century ago. The
knowhow of this technology could be adopted through training. Thus, an improvement of this
technology can be expected from process efficiency by simplifying the production process. The
biofuel yield is expected to be growing due to innovation by R&D. The conversion process is
one of the important steps in the whole production chain. A high yield and low energy
consumption are important considerations in promoting the future competitiveness of biofuels
with fossil fuel in the market.
Currently, Indonesia allocates biofuel mainly for biodiesel which is derived from palm oil.
Jatropha curcas is only cultivated in dry and arid climate area such as in Sumbawa and the
Nusa Tenggara area. Also, R&D is expected to produce seeds of Jatropha curcas with high
productivity and resistance to pests. The benefit of Jatropha curcas is that plantations do not
have a conflict with food production, since the land used is too infertile for agriculture and
currently used only for livestock feedstock. With the same land area, bio-ethanol production is
not as productive as biodiesel.
In addition, biofuel must compete with other energy resources and low carbon technologies
such as solar energy, wind and tidal power, new atomic energies, and other advanced
12
technologies. Later, second and third generation biofuel may be available on a large scale,
offering much better perspectives and competitive fuel prices in the long term, between 2020
and 2030. A competitive price may be achieved thanks to the relatively low cost for feedstock
and the reduction of production costs of biofuel from lignocelluloses and algae. Altogether, an
innovative energy system will create more efficient and effective energy systems by utilizing
domestic energy resources, using efficient processes and minimizing fossil fuel consumption
during the production process.
In general, the ability to produce high yield feedstock seeds in particular to Jatropha curcas
and sugarcane are crucial for the technology development for this biofuel and this is rely on the
R&D budget for this sector beside capacity development for high skills scientist. The lack of
distribution between biofuel production plants locations with feedstock location needs to be
resolved.
4.2. Economic development
One of the main reasons to push the development of biofuel industries is to minimize fossil
oil consumption. In Indonesia, as well as in other developing countries, domestic fuel is still
being subsidized. While the fuel subsidy in 2005 amounted to 4.4x109 US$, the fuel subsidies
rose to 17.6x109 US$ in 2008, which equals the total capital and social expenditure of
government. This is one of the compelling reasons to look at biofuel as a solution to offset the
oil subsidies. The economic motive, besides partially decreasing the domestic fossil fuel
consumption, is that biofuel could also generate income through export of the excess production
and could create jobs in related sectors (agriculture, industries, distribution, trading, etc). So far,
biofuel utilization has not reached its set target mainly because of the under-equipped
infrastructures (distribution, production and trading) and lack of political support. The
investment in biofuel development will be 2.9x109 US$ until 2025 which 2.3x109 US$ for
biodiesel development and the rest for bio-ethanol development.
The model in previous study showed that the replacement oil with biofuel in the
transportation sector could save up to 29x109 US$ in oil consumption in 2025 (at that time,
biodiesel produced will be 41 Gtoe and bio-ethanol 14 Gtoe, in the mix scenario) which is equal
to 6.7% of GDP in 2007 and 165% of oil subsidies in 2008 [6]. The market potential of biofuel
development is huge and has great potential to partially solve Indonesia`s poverty problem and
boost economic growth.
The price of biofuel in Indonesia is still not competitive with the oil price up to date. This
situation happens worldwide. Only in Brazil, has the price of sugarcane bio-ethanol achieved
13
economic competitiveness with gasoline. The biofuel price is the sum of the international price
for South-East Asia (factory on board) plus transportation cost, cost of blending, value added
tax of 10%, and a transportation vehicle tax of 2.5%. The transportation and blending cost are
set at 9% of the international price. On the other hand, the oil price in Indonesia is still being
subsidized. The retail price for gasoline is 0.472 US$/l while the retail price for bio-ethanol is
0.767 US$/l. The latest data (October 2005) from the World Bank show that the price of
gasoline and diesel in Indonesia is still 30% below the international price [7].
The global market for biofuel is pushed by a rising demand by the EU, US, China, India,
etc. These countries put biofuel as a contribution in their strategic plan in climate and energy
policy. The higher production cost in the EU and other developed countries causes a rising
demand for international biofuel products. While one of the targets for biofuel is to secure
energy supply, the domestic market obligation is a prudent policy to ensure domestic demand of
biofuel. This is discussed in section 4.4.
On the national level, the geographical situation of Indonesia makes for additional cost for
distribution and transportation which in the end create higher cost of production. Theses cost
could range from 10-30% of total production cost depending on the distance and the mode of
logistics of distribution. Biofuel plantations are usually located in a remote area and the
customers live mainly in urban areas. One solution to cope with this is through utilization of
local resources, which means that biofuel is produced and consumed locally. The `Self
Sufficient Energy Villages Program` is one of the policy instruments to cope with this and is
discussed in section 4.4.
Technology innovation makes processes more efficient and economies of scale are to
reduce the cost of production. The feedstock cost of bio-ethanol could be reduced by utilizing
bagasses and molasses for heating in the biofuel industries. This system is already implemented
in Brazil and shows significantly lower external energy consumption. Also, the alcohol used in
the trans-esterification process to produce biodiesel, could be replaced with bio-ethanol. This
integrated biofuel system could reduce the cost of production, since the distribution cost for the
raw material will become zero.
As technology becomes viable, global demand of biofuel will continue to grow. As a result,
concerns are being expressed that bio-energy could have a huge impact on agricultural markets
and consequently on food prices. This may particularly affect the poor and the least developed
countries that must buy food on the international market. To avoid this, there is intense pressure
to reduce costs of and increase profits from biofuels, striving for higher yields and minimizing
fossil fuel consumption in production through technology improvements.
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In Indonesia, the government facilitates the development by assigning millions of hectares
land for plantations and opening the sector for private and foreign investment. Conflicts could
also arise since there are no clear data on land ownership and land use. Some of the land
belongs to local authority based on historical data, but it is given a free land status by the
Government of Indonesia: land without ownership. While the Government of Indonesia gave
licenses to big companies to operate plantations, the opening of a plantation could provoke
conflict between the plantation companies and the local community. Frequently reported are
conflicts between companies and workers regarding labor rights, in particular wages and
working conditions. Also, plantation development is likely to lead to changes in the ecosystem,
which affects the communities in available water sources and biodiversity.
4.3.
Sustainability
Policies for climate mitigation, together with the current expansion of the energy market
in the transportation sector, have boosted biofuel demand. For example, China and the European
Union want biofuels to provide 10% of their transportation demand by 2020. Nevertheless, the
huge growth of biofuel demand for the transportation sector has brought along negative
consequences. There are two concerns regarding the sustainability issues for the biofuel
production: deforestation and food security. The expansion of cultivation of fuel crops
plantation has promoted land clearing in forests [8]. Deforestation and land clearing have been
identified as the largest source of CO2 emission by Wetlands International [9]. Converting
lowland tropical rainforest in Indonesia to palm biodiesel plantation would result in a biofuel
carbon debt of ~610 ton of CO2 per ha, which could take ~86 years to repay. Thus, if produced
in converted land, in the short and medium term, biofuel could be a net GHG emitter.
Sustainable production must attend to this by avoiding deforestation. According to the
IEA, Indonesia emitted 377x106 ton CO2 in 2007, compared to 265x106 ton CO2 in 2000 [10].
Indonesia is the second highest deforestation area in the world after Brazil. The latest reports
show that CO2 emission by including deforestation will become 300x106 ton CO2/year. To
compare, the emission could save up to 212x106 ton CO2/year based on the technology learning
scenario, the impact of deforestation could contribute even more.
In addition, competition between crops for energy and food has resulted in increasing
food prices. Most of the crops used for biofuel production are originally grown for food
consumption. In addition, competition between crops for energy and food has resulted in
increasing food prices. This situation is often referred to as the ‘food versus fuel’ dilemma [11].
15
There is no available study regarding the impact of biofuel on food prices in Indonesia. Since
biofuel in Indonesia is based on 1st generation technologies, the biofuel crops used are
sugarcane, cassava and palm oil which also food commodities. Only Jatropha curcas does not
compete with food production as Jatropha curcas is not edible.
Several researchers believe that in the long term, the expansion of biofuels would have
long term implications for food supplies and prices. A study on the International Food Policy,
carried out between 2000-2007, showed that an increase in biofuel demand increases 30% of the
weighted average price of grain [12]. Also, a IIASA study, sponsored by OPEC Fund for
International Development (OFID) reported that increasing biofuel expansion has the risk to
increase hunger for 140 million people by 2020 [13]. To cope with this, an appropriate system
must be designed to minimize the friction between food and fuel production, e.g. by a flexible
interchange between food and fuel purposes based on the international market. The domestic
demand must be secured first before go export can be considered.
There are two points of view about the polemic causality of increasing food price due to
biofuel production. According to Fresco, the price of agriculture produce will achieve an
equilibrium level and will not rise as high as has been previously seen, since the market can
adapt to the entrance of these crops [14]. In contrast, Doornbosch and Steenblik observe that a
rapid growth of the biofuel industry may keep farm commodity prices stable and a lower price
is not foreseen [15]. In fact, despite the barriers to securing a stable stock for the supply of
biofuel, at a price of oil above 40 US$/barrel, biofuels are cost competitive over fossil fuels.
Several doubts exist about the sustainability of palm oil production in Indonesia; one of the
major doubts is that the land used comes from land changed from forest to plantation, see the
case of Greenpeace versus Sinar Mas. One way to avoid this doubt is through the utilization of
the degraded land for palm oil plantations. However the Ministry of Forestry must clearly define
the category of land [16].
4.4. Policy
In terms of political measures, it must be noted that the introduction of biofuels in the
transportation sector is done predominantly by means of subsidies and incentive policies. These
incentives include excise duty exemptions, support for the production of biofuels and
agricultural subsidies, etc. The increasing price of oil will improve the competitiveness of
biofuel.
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a). Central Government
Since the global demand for biofuel is high, the export potential for Indonesia is promising.
To protect domestic demand, there is a policy which is called `domestic market obligation`.
This policy means that the biofuel producers have to sell a certain percentage of biofuel
products in domestic markets before they can export. This policy will minimize the risk since
the supply stabilizes to fulfill the obligation of domestic demand. The mandatory percentage
blends for biodiesel are 2.5%, 5% and 20% for 2010, 2015 and 2020, respectively, for Public
Service Obligation (PSO) transportation. The mandatory percentage blends for bio-ethanol are
3%, 5% and 15%, respectively, for PSO transportation.
The target in January 2010 was 1% biofuel in the PSO transportation, 3% in the non PSO
transportation, 2.5% for industry and commercial and 0.25% in the power plants. Financial
incentives to boost the production of biofuel also exist: Indonesia’s government agreed in 2009
to pay the Oil State Enterprise (Pertamina) for the discrepancy in price between biofuel prices
and the price of the fuel mixture which is sold to consumers. In Indonesia, all the fuel is sold
through Pertamina to the distributors (gas stations). Other policies that could help to boost
biofuel development are removing the subsidies on fossil fuels and internalize the local
externalities. Fossil fuel consumption in developed countries considers these externalities in the
form of carbon tax. Since fossil fuel prices are still being subsidized, a carbon tax would
dramatically burden the consumers, thus this policy should be introduced gradually after the
fossil fuel subsidized price is removed. Apart from fuel, Indonesia also subsidizes electricity
[17]. All of these subsidies discouraged energy savings and added a significant burden to the
government`s budget.
Removing fossil fuels would reduce energy use, encourage cleaner energy and lower CO2
emissions. A study by the World Bank shows that the removal of existing subsidies on fossil
fuels can contribute a 6% emission reduction toward the emission stabilization in East Asia. A
further progressive removal of subsidies started in 2006 would reduce emission in Indonesia by
3%, as a result of lower energy use and relative price increases of fossil fuels. The Indonesian
government prepared a `Cash Transfer Program` to compensate this subsidy to the poor in cash.
Still, this program needs careful assessment to ensure the program reaches all poor people.
Based on the data from the Indonesian National Council on Climate Change between
2008-2012, Indonesia has the potential to trade about 125x106 tons of non emitted carbon, or
25x106 tons per year from the energy sector and up to 23x106 tons per year from the forestry
sector. The emission trading from energy sector was the result from renewable energy such as
biofuel, solar, wind, geothermal, etc. The emission trading from forest sector resulted from 88
17
million hectares of forests with a potential carbon market value of 850 x106 US$ [18]. The
energy sector could get another 400x106 US$ from global climate funds. This will help
Indonesia to provide access to electricity from the present 65% to 90% of the population by
2020.
Since May 2010, an agreement is operative between the Government of Indonesia and the
Norwegian government to protect Indonesian forests: land expansion for biofuel production will
stop as part of the agreement and thus biofuel development will be not as targeted. The
agreement also enacts a forest moratorium (primary and peat land based forest) starting on the
1st of January 2011. In 2010, 7.5 million hectares of palm oil have already been planted and are
at the production stage. The expansion of land for palm oil production could be 300,000
hectares per year. With a ratio of 1 person labor for each 2 hectares, the palm oil industry may
create jobs for 3.75 million people. The representative of the Industry Association of Indonesian
Palm Oil expressed his concern that due to moratorium 300,000 people may lose their job as an
unwanted side effect of the forest moratorium [19].
b). Local government
Another policy instrument to boost biofuel production is the `Self Sufficient Energy Village
(SSEV) ` program. This program is based on the Presidential Instruction No.1 from 2006. 45%
of the 70,000 villages in Indonesia are considered under-developed and have poor access to
energy, water and education. The SSEV program aims are: to increase productivity, provide
jobs and increase welfare. Not limited to biofuel as a renewable energy, the SSEV also utilizes
local resources such as wind, solar, micro-hydro power and biomass (wood, biogas). This
program has a unique value: empower local community to rely on self sufficiency in terms of
resources management and utilization. The funding for the SSEV program is by the central
government, local government and international environmental organizations: the World Bank,
UNEP, JICA, etc. The latest status (June 2009) is shown in Table 4. Of the 633 SSEV units in
2009, 252 units are based on biofuel, while the rest are based on micro-hydro, wind, solar,
biogas, biomass, and renewable energy. Still, 633 units is far from the target set by the
Government of Indonesia which was 850 villages in 2009 [20].
Biofuel is perceived as an alternative energy source which is of strategic importance in the
future to build the energy self sufficiency at local level. While the first generation technology at
local level could rely on Jatropha curcas and cassava, advanced level biofuels such as algae
could be utilized later. In the SSEV development, support from the province and regional
government is urgently required. The field initiator at local level could help the community to
18
build their own SSEV. The innovative energy system is based on the provision of reliable and
affordable energy sources in the respective local areas. Some areas which have abundant water
streams could be suitable for micro-hydro source, while for flat areas plantations for biofuel are
more suitable. Plantations for Jatropha curcas in particular are fitting in semi-arid land such as
in Lombok and the Nusa Tenggara province.
In the diffusion process of this SSEV, the stages are:
1) Availability of the mature technology,
2) Technical implementation,
3) Supporting activities.
The activities starts from R&D are field tests, pilot plants and dissemination of
technology. Fully implemented technology is still lacking, just as room for participation by local
community; also leadership for SSEV at regional and local scale is still missing. The targets to
achieve are rarely well defined, and corruption by the stakeholder’s local village authority,
project leader and participants is a possible threat. The criteria for any SSEV project should be
well designed and need to be assessed more precisely to minimize the risk of implementation.
Beside the continuous improvement of the system, other aspect such as coordination of the
project needs to be simplified.
Table 4. The SSEV data based on the alternative energy sources [20]
Alternative energy
5.
Location numbers
Total investment (106 US$)
1 Hydropower
244
42
2 Solar power
125
22
3 Wind power
12
5
4 Biofuel
237
30
5 Biogas
14
0.4
6 Biomass
1
0
Total
633
99.4
Conclusions
An analytical framework of diffusion was developed based on the current situation of the
development of biofuel production and use in Indonesia. This framework integrates biofuel
development with several elements: technology, economics, policy, sustainability and the
stakeholders.
19
The stakeholders of the biofuel industries are: producers, users, community, academics,
policy makers and international market. The producers are the local farmers and the industries.
The key players in biofuel producers are: the Eterindo group, Molindo, Wilmar, Sumiasih and
Musim Mas. The users are the transportation users but the market will expand to electricity
users since biofuel will later also be used for power generation. The academics are from
universities and research institutes. There are four leading universities: the University of
Indonesia, the University of Gajah Mada, the Institute of Agriculture Bogor and the Bandung
Institute of technology. The policy makers are local and central government. In central
government level, biofuel development is the responsibility of the National team of Biofuel
Development. At local level, the National Team of the SSEV defines the implementation at
technical level.
There are several problems in the introduction of biofuel in Indonesia in technology (low
yields), economics (competitiveness), sustainability (fuel versus food) and policy (tax and
subsidies). These problems can lead to a slow diffusion process and should be overcome. In
technology, innovation is expected to increase the yield of the product, to enhance the efficiency
of the process and to innovate the system by integrating systems. R&D budget for biofuel
development is allocated for higher yield biofuel seed crops. From the economics point of view,
the economies of scale and a reduction of the oil subsidies is expected to make biofuel achieve
competitiveness. The highly volatility of the feedstock price also could lead to higher price of
biofuel. This is because the high demand of feedstock since biofuel feedstock could be used for
food as well. The sustainability of biofuel production is related to food security and
deforestation. More expansion of land to produce biofuel will lead to higher food prices and a
higher deforestation rate. Expansion of land for biofuel production and its impact on food price
in Indonesia must be further studied in detail.
In terms of policy, it must be noted that in Indonesia and other countries the introduction
of biofuels in the transportation sector is done predominantly by means of subsidies and
incentive policies. The increasing price of oil, the reducing subsidy for domestic gasoline and
diesel fuel and technological change will improve the competitiveness of biofuel in Indonesia.
The new climate policy between the Government of Indonesia and the Norwegian government
from May 2010 could reduce the land expansion for biofuel production and lead to a loss of
300,000 jobs as an unwanted side effect of the forest moratorium. At local level, SSEV
development is expected to boost economic development at local scale by local participation,
leading to job creation and hence poverty alleviation. There are several points to consider in this
local implementation: lack of technology maturity, the room for participation by the local
20
community, and leadership in the SSEV development. The system also needs to ensure the
project funding is disbursed in an efficient and effective way, with good coordination.
The development of biofuel production in Indonesia is still in its infancy. Planning at
technical level and implementation at local scale will be urgently required to make the diffusion
process work well. The potential of its development must be carefully assessed by considering
all related parties: the biofuel industries, the workers, local communities and government.
Involving the local community by hiring and training local people to plant biofuel crops in as
sustainable way and buying the crops from local farmers could be an option for the biofuel
industry.
Acknowledgement
This paper was based on PhD dissertation of Joni Jupesta at Department of Management
Science and Technology, Graduate School of Engineering, Tohoku University under financial
support from Japanese Ministry of Education, Culture, Sports, Science and Technology
(Monbukagakusho). The authors thank to Dr. H.J. Doddema for support in editing.
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