Indonesian Biofuels Subsidy Row

The Indonesian government, confronted with a collapse in demand for biofuels and resistance from the state energy company Pertamina to continue to sell biofuels at a loss, is attempting to push a proposal through the House of Representatives to allocate US$71 million to subsidize locally produced biodiesel and bioethanol.

However, the proposal is being delayed in the parliament, where lawmakers Alvin Lie and Effendi Simbolon, members of the parliamentary commission overseeing the energy and mining sector, say legislators are suspicious of the role of the Indonesian Biofuel Producers Association and raising questions over who would benefit from the subsidy -- the people or the biofuel producers.

The squabble over biofuels comes as Indonesia faces an energy supply crisis amid acute pressure to export from its once-vast gas and crude fields in the middle of burgeoning domestic demand for oil, gas and coal. Even despite flagging economic growth, which is forecast by government economists to fall to 5.4 percent for 2009, it cannot satisfy export demand and the industrial, commercial and household needs of over 230 million people with a rapidly rising middle class.

Paulus Tjakrawan, the biofuels association's secretary general, said biofuel producers have been selling to Pertamina at a loss. Indonesian petrol and diesel prices at the pump are low, because of low global oil prices, as well as Indonesian fuel subsidies on petrol and diesel.

Evita Legowo, Director General of oil and gas at the energy and mineral resources ministry, explained that subsidized biodiesel and bioethanol would be mixed in with the allocated quotas for subsidized premium gasoline and diesel.

Pertamina has been ordered by the government to mix at least 1 percent biopremium fuel with subsidized gasoline and up to 5 percent of biosolar with subsidized diesel. The average subsidy works out at Rp1,000 per liter (about US$10¢) but this is only paid out when the biofuel price is higher than the fossil fuel price.

The government is trying to underpin a weak biofuels industry which has been hard hit by low oil prices and recent fluctuations in the price of palm oil, which has fallen 39 percent from its cyclical high. Only bioethanol from sugar cane or cassava can now reach the market without subsidies whereas biodiesel from palm oil and jatropha financial props if Pertamina is to continue distribution. That is happening at a time when the world's environmentalists are increasingly critical of biofuels production, charging that diversion of agricultural lands from food to fuels is driving up food costs and risking starvation for the world's poor.

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But Indonesia appears determined to push forward, even if it is staggering – and there is little doubt of that. Hilmi Panigoro, Chairman of the Indonesian Renewable Energy Society, whose family founded the Medco Group, which is involved in oil and gas and energy, recently criticized the lack of follow-up after initial euphoria on biofuel development in 2006.

Panigoro was quoted as saying at a biofuels workshop in Jakarta earlier this month as saying investors are now confused and discouraged. His main criticism alleged a lack of clear government coordination and failure to provide effective leadership to drive all the related stakeholders into action.

Unggul Priyanto, director of energy resource development at the Agency of Assessment and Application of Technology (BPPT) agreed that "Biofuel development is just floating around without leadership".

The now defunct National Team for Biofuel Development previously had no authority to enforce policy. This related to a more fundamental problem, exacerbated by the negative impacts of the global economic slowdown, as to how Indonesia could make the transition from a command economy led by an authoritarian figure like Suharto to a modern democracy led by President Susilo Bambang Yudhoyono and still succeed in pushing new energy policies through the complex decentralized state bureaucracy, at the same time attracting investors.

The government has mandated that by 2025 biofuel consumption must contribute at least 5 percent to the national energy mix, from less than 1 percent now. But the country is only producing biofuels at 10 percent of existing capacity, while power stations prepared to use biodiesel cannot obtain reliable supplies.

Meanwhile, Indonesian lawmakers are holding back their agreement to the new subsidy policy amidst murmurs about collusion with producers and heightened sensitivities on government fuel and energy subsidies during the run up to the Indonesian general elections in April and presidential elections in June.

It is expected that the Indonesian parliament will approve the new subsidies soon and government will try to implement new regulations introduced since September 2008 to make use of biofuels compulsory for commercial businesses, fuel retailers and power plant operators.

However the Indonesian experience shows this is easier said than done, amidst wistful if fanciful hints by some lawmakers that Suharto would have got the job done.

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.