Biofuel Development in Indonesia

A Hot Tip about Energy in Indonesia

Posted on: 17 Feb 2010

Summary

Indonesia started to develop the biofuel industry in 2006. The increase in mineral oil prices and the subsequent reduction of the fuel subsidy have considerably improved the feasibility of biofuel in Indonesia. In promoting the production of biofuel, the Indonesian government already had a number of legal instruments, including the Presidential Decree No. 5/2006 on national policies for optimizing energy use and the Presidential Instruction No. 1/2006 on the use of biofuel. This report focuses on recent developments and opportunities for U.S. suppliers of products and services in the biofuel industry.

 

Market Demand

A few years back, biofuel had very limited recognition in Indonesia as an alternative source of energy. However, conditions are different now. Indonesia started to develop the biofuel industry in 2006 as a response to a progressive price increase of fossil based oil in the world, declining domestic crude oil production and considerable progressive increase in domestic oil consumption. Since then, various initiatives both from the government and private sectors underline efforts to develop biofuel industry in Indonesia.

The primary Indonesian government legal instruments/policies, include:

- Presidential Instruction No. 1/2006 on Provision and Utilization of Biofuel

- Presidential Regulation No. 5/2006 on National Energy Policy

- Presidential Decree No. 10/2006 on the Establishment of National Team for Biofuel Development

- Minister of Energy and Mineral Resources Decree No. 051/2006 on Guideline and Procedure for Biofuel Business

- Minister of Finance Decree No. 117/PMK.06/2006 on Credit for the Development of Biofuel Energy and Plantation Revitalization.

- Government Regulation No. 1/2007 on Income Tax Facilities for Investment Activities in Specific Industries and/or Particular Region

 

The recent increase in global oil prices and higher domestic demand are causing fuel shortage in several provinces in Indonesia and draining the government’s budget. The fuel subsidy federal costs increased from Rp. 64.2 trillion in 2006 to Rp. 83.8 trillion in 2007. It was estimated that the subsidy will reach Rp. 180.3 trillion in 2008. In 2009, the government plans to reduce fuel subsidy to Rp. 101.4 trillion. The biofuel development will need additional investment of $2.9 billion until 2025, which consists of $2.3 billion for biodiesel development and $6,124 million for bioethanol development.

 

Compared with other countries in the region, biofuel development in Indonesia remains sluggish. Beside lack of government support, there are several problems that have to be solved, such as:

- ability to produce high yield feedstock seeds, such as jatropha curcas, sweet sorghum and sugar cane,

- incomplete data on land ownership and land use,

- high price of biofuel feedstock especially Crude Palm Oil (CPO),

- high price of biofuel compared with subsidized fossil oil price,

- lack of national technologies capabilities on biofuel processing,

- an allegation that biofuel development will cause damages to Indonesia's forest

 

Indonesia has the potential to become a major producer of biofuel. There are around 60 crops that could be used as raw materials, including CPO, jatropha curcas, sweet sorghum, sugar cane and cassava. CPO canbe used to produce biodiesel, a replacement for diesel, while sugar and cassava can be used to produce bioethanol to replace gasoline. Besides biodiesel and bioethanol, the government would also promote the production of biooil made of vegetable oil and biogas, which can be used to replace gasoline.

 

CPO and molasses are the current primary feedstock used in Indonesia’s biofuel production. Cassava, jatropha and sweet sorghum are other potential feedstocks. However, the development of those commodities is still in the early stage. To increase biofuel production, the government encourages private companies to build more processing plants. Without preparing the input availability it can create competition between biofuel and food.

 

Indonesia, the world’s biggest palm oil producer, produced 700,000 tons of palm oil-based biodiesel in 2007 and is expected to nearly double to 1.3 million tons in 2008. However, the recent increase of CPO price has forced several manufacturers to cut their production capacities. PT Pertamina also has to cut the blend in its diesel fuel gradually from 5 percent to 2.5 percent and 1 percent. In 2007, the national bioethanol production reached 139,600 kiloliter, of which 80 percent was exported.

 

The government targeted that biodiesel and bioethanol production will reach 5.57 million kiloliter and 3.77 million kiloliter by 2010 respectively. In order to achieve this target, Ministry of Agriculture is preparing additional land for growing cassava, sugar cane and jatropha curcas. The area for cassava will be increased from 52,195 hectares in 2007 to 782,000 hectares in 2010. Sugar cane area will increase from 400,400 to 698,000 hectares and the area for jatropha will increase from 121,200 to 1,540,000 hectares and coconut. Several companies have expanded their areas for growing cassava such as PT Sungai Budi (25,000 Ha), PT Medco (10,000 Ha), PT Molindo (10,000 Ha), all of them in Lampung province and PT Sampurna (10,000 Ha) in Pawonsari. For sugar cane, PT Rajawali and PT PTPN 2,7,8,9,10, 11, 14 (state-owned plantation company) added 320,000 Ha, Sugar Group 70,000 Ha in Lampung and Salim Group 10,000 Ha in South Sumatera.

 

Through the Presidential Decree No. 10/2006, the government established a National Team for Biofuel Development. The team proposed several recommendations, including:

- the abolishment of VAT of 10% on pure ester ethyl acid as raw material for biofuel and

- the reduction of Motorized Vechicle Fuel Tax from 5 percent to 2.5 percent

- tax incentives for opening a bio diesel plant in certain areas

- a decree appointing PT PLN and PT Pertamina (both are the state-owned companies) as stand-by biofuel buyers

- the establishment of reliable and accurate data base of land use

- mandatory use for biofuel to constitute 1-3 percent of the nation's total fuel consumption. For industry 2.5%, transportation and power generation 1% for biodiesel and 3% for bioethanol.

 

The GOI is currently studying fiscal and non-fiscal incentives, or removing tax levies. In addition, the government promised to simplify the license process and reduce import tax for equipment used to produce biofuel in Indonesia. In order to secure domestic demand, the government plans to issue a new policy requiring fuel retailers to sell biodiesel at least one percent of their national fuel sales. The regulation will also require manufacturers to use at least 2.5 percent biofuel in their fuel consumption.

 

By Anasia Silviati

 

Read the full market research report


Posted: 17 February 2010

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