The Trouble with Indonesian Biofuels

Anyone taking a first look at the Indonesia bioenergy scene will find it very hard to sort out what is really happening with the industry. The government came out with a mighty push in 2006 and has since updated biofuel mandates regularly. Papers have been full of the potential of bioenergy for everything from reducing reliance on fossil fuels to reducing greenhouse emissions and alleviating poverty.

Without doubt Indonesia possesses enormous potential to become a leading player or even to become the Brazil of Southeast Asia. So why does Indonesia find itself in 2009 with so little actually being achieved? Let’s be honest and admit that almost every segment of this industry has fallen well short of expectations despite the government and media hype. The answer is both simple and at the same time quite complex.

The simple answer is that there is little profit for institutional investors. At the end of the day the mighty dollar – or in this case the mighty rupiah – will always have the last say. Without profit you will not see private companies making the required investment into feedstock and processing facilities, especially in the difficult climate world wide.

If there was good money to be made then we would have seen a much greater level of production than we see now. Of the more than 50 projects approved for development in 2006, virtually none have made any really significant progress.

So why have the profit levels not been there? To an outsider the extremely high oil prices of 2008 should have generated a rush for biofuel development. But this did not happen. First the price of CPO, which is by far the largest current and potential biofuel feedstock in Indonesia, also rose to record prices. This meant that no economic benefit was created for biodiesel and companies continued to sell to traditional markets.

Secondly, until very recently the government has never spoken about creating a level playing field for biofuels versus the subsidized fossil fuels. It must be hoped that the recent talk of subsidizing biofuels to an equivalent level goes ahead.

This also leads to the requirement for a price setting structure so that investors know what they are going to receive for their product. It is somewhat difficult to conduct a full feasibility study without knowing the probable income flows!

Next we move onto the distribution systems. How will the biofuels be transported and stored? How and where will they be distributed? Until now biofuel is only available commercially in Jakarta, Surabaya and Bali. This is inadequate to meet the government’s mandates for biofuel mix, so this must be addressed with some urgency.


The next key element is one that I describe as confusion. To potential investors, especially domestic companies, the rush of biofuel enthusiasm worldwide and the associated plethora of media reports both good and bad have left them feeling bewildered. They do not have the confidence to proceed.

Should they start now with first-generation technology or wait for second generation processing methods to become commercially available? What feedstock should they be looking at? What levels of investment do they need? Where can they find suitable investment partners? Where should they be looking to establish? Will bioenergy really be a key factor in future energy development in Indonesia and globally?

There are a great number of questions that need to be answered for these companies. One of the key reasons for this confusion has been the preference of companies to go it alone rather than working with experienced partners.

The plantation forestry industry for pulp & paper may be the closest related industry requiring a similar land base and infrastructural development. This industry only progressed into a major international force because it used professional know-how to develop strategies and infrastructure.

So what then for the future? There can be little doubt that bioenergy will play a key role in world energy supply in the coming years as fossil fuels run dry. There is no doubt that Indonesia possesses enormous potential to become a key player in the arena. Sooner or later the government will sort out the legislative, pricing and distribution systems required to provide the framework for a successful industry. Moves are being made now to seriously address these issues.

So what should companies be doing now? Right now may not yet be the correct time for major investment, but it is definitely the time for preparation so as the catch the next leap forward. For Indonesia the decision on whether to go for first or second generation technology is largely a moot one. Second generation is still years away but first generation is already here and working. The key is to set up with first generation technology as soon as possible in a way that will lead into second generation when it becomes viable.

Maybe the most critical factor at this juncture is to obtain the land for the feedstock production. Without an adequate and secure source of raw material no plant will become viable. Now is the time to find this land, decide upon feedstock and establish a base for future production.

The first initiatives need to come from the government, especially to address pricing, but private industry holds the key to the future of bioenergy development in Indonesia and these companies need to be preparing now to take advantage of new opportunities.

The future does look good if one is prepared to see beyond the current, hopefully short term, crisis.

Tony Wood is senior forest industry advisor to Cooperation for Development (Europe) Copyright Cooperation for Development Europe