Biofuels: Indonesian Dilemma

Indonesia's massive four-year-old commitment to promote biofuels faces problems in the wake of the 2008 collapse of commodity prices, with at least 17 Indonesian biofuels companies postponing investment as demand has crashed, according to an industry association spokesman, Biofuel Producers Association Chairman Purnadi Djojosudirjo.

It has been a roller-coaster ride, with wild fluctuations in palm oil prices. By January 2008, prices had risen so high that biodiesel had become too expensive to produce and Hanung Budia, the marketing director for the national oil company Pertamina, warned that biodiesel needed the same subsidy as conventional diesel fuel. Then, later in 2008, the stock market and oil and palm oil prices collapsed, with oil prices falling so far that biodiesel and bioethanol could not compete with it, knocking small CPO producers out of the market.

Certainly, Indonesia started out with ambitious goals for what, to environmentalists, would be a seriously controversial program. In 2007, the government, with its once-rich crude supplies running out, announced it would seek to produce 17 percent of the country's energy needs from renewable resources by 2025. By early 2007, according to an analysis of the industry by Business Watch Indonesia, some 60 agreements had been signed between investors including 14 foreign investors and 26 domestic ones with an estimated value of US$9-10 billion. The Indonesian banking sector poured an estimated Rp34 trillion (US$3.09 billion) into the sector, according to the report.

Initially the government stressed biodiesel rather than bioethonol for power generation rather than vehicles. Longer-term Asia prospects also include biofuels for vehicles rather than power, including bioethanol rather than biodiesel, as in Brazil. This balance may become clearer once second generation biofuel technologies get under way. In total, the US$17 billion in foreign and domestic investment for the program, much of it from palm oil-starved China, but also underwent considerable criticism from both domestic and international green groups because of the threat to Indonesia's tropical rainforest, some of the most extensive in the world and considered to be a so-called "green lung" against global warming.

Indonesia's rainforests are estimated to contain 60 percent of the world's tropical peat, one of the earth's most important carbon sinks, according to the environmental organization Climate Ark. These forests play a vital role in helping to regulate the global climate. They are also rich in biodiversity and a refuge for species like orang-utan.

The burning off of peat forest is considered to be one of the planet's major sources of carbon dioxide, the biggest of the so-called greenhouse gases.

Indonesia and Malaysia between produce some 70 percent of the world's crude palm oil. Theoretically, some 40 percent of CPO could go to biofuels production, the government said. Given the head start of the CPO industry it is not surprising that Indonesia planned to produce 2.41 million kiloliters of biodiesel by 2010, alongside 1.48 million kiloliters of bioethanol, according to Imelda Maidir, writing in local media on Jan. 19.


Initial dependence on CPO for biodiesel may prove to be the right move in Indonesian conditions or a false start. Other feed stocks may prove more sustainable. Biofuels are attractive because they contribute to energy security, economic development and poverty reduction and are intended to help reduce greenhouse gas emissions and air pollution. Advocates say developed countries can reduce GHG emissions and comply with the Kyoto Protocol. Developing countries, they say, can reduce oil imports.

However the rush to biofuels can be counterproductive if they are not sustainably produced. There are widespread concerns that biofuels could hurt food security, induce water shortages, worsen water pollution or actually increase greenhouse gas emissions and negatively affect biodiversity. Biofuel production has also been criticized for consuming about as much energy as it produces.

In addition to the damage wrought by gyrating prices, the wider problems include inconsistencies in policy and regulatory frameworks (including the negative impact of the subsidies on fossil fuels), and uncertainties in pricing and markets – especially since the recent global financial crisis and commodity price fluctuations.

Competition between domestic and export markets and related problems on pricing and domestic supply obligations present similar issues to other energy sources where exports are in competition with new domestic markets (as with coal and gas).

"The euphoria for biofuel development…has appeared to miss its stated purposes as well as neglecting its negative impact, both short-term and long-term," according to Business Watch Asia. The project, the organization wrote, "is perceived solely from the point of view of energy provision, while practically it makes use of the very agricultural resources of food production. Using arable land for biofuel commodities will ultimately lead to shortage in food supply at local level. Economically, the project, especially CPO-based biofuel development, has been biased towards big business. Since producing commodities for biofuel absolutely should take a massive scale (economy of scale), only big players fo enormous capital reserve have the chance to make the best benefit out of it."

One step towards more coherent, renewed national effort to promote sustainable biofuels development would be to improve coordination of research-based biofuel development in cooperation between researchers, the private sector and government, analysts say. Asian sustainable biofuels development need to be articulated so that feed stocks, processing, production, and distribution to markets with realistic prices can be planned and promoted as one chain, addressing linkages as well as being informed on advantages and disadvantages.

Nonetheless, Indonesia appears committed to moving ahead. More than a year ago, Ing Evita Legowo, now Director General Oil and Gas, explained that by late 2007 the Indonesian Government had hoped to create 3.5 million jobs from biofuel development by 2010, rising eventually to 40 million largely rural jobs. Biodiesel has already been sold to 200 biofuel gas stations in Jakarta. Up to 24 power stations were already using some biodiesel by 2007 but continuing fuel supply has been problematic.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.