Biofuel program short of energy

Indonesia’s national energy strategy has set out energy diversification policies focusing on renewable resources to reduce dependence on fossil fuels, and conservation measures to improve the overall energy efficiency of the economy.

However, the implementation of these policies has never been consistent, tending instead to follow the boom-bust cycle of oil prices. When oil prices rose last year up to US$147 per barrel in July, the government suddenly trumpeted the vital role of palm oil-based biofuels and the urgent need to make energy conservation compulsory for industrial companies.

However, it was back to business as usual once oil prices dropped back to as low as $35 per barrel early this year. Most palm oil-based bio-diesel producers had reportedly either stopped production or slashed their operating capacity to 20 percent, because of policy inconsistency and an inability to compete with subsidized gasoline and diesel oil.

So, perhaps it should come as no surprise that since oil prices have surged again, approaching $70 a barrel, biofuels have resurfaced in the government energy policy loop.

Last week, the government proposed to the House of Representatives a 100 percent increase in biofuel subsidies for next year, to Rp 1.5 trillion ($125 million). But even though this amount is less than 1 percent of the subsidies it has allocated for fuels and electricity this year, politicians, seemingly ignorant of the crucial importance of such renewable energy sources as biofuel, balked at the request.   

Without the full support of the House, the government will never be able to achieve even its modest target to increase biofuel consumption in the transportation sector from 1 percent this year to 3 percent in 2010, and in other industries from 2.5 percent to 5 percent.     

Palm oil-based biodiesel is actually one of the most promising biofuel products to be developed in Indonesia because the country has more than seven million hectares of oil palm estates with an annual output of more than 19 million tons. The palm oil industry is also a vital contributor to exports, employment and rural development.

Since only about one-fifth of the total palm oil output is used domestically for food, soap and other non-energy uses, and the market price of palm oil tends to follow that of fossil fuels, promoting biodiesel offers great benefits to producers, including millions of smallholders, and the economy as a whole.  

However, as an infant industry biofuel production should be supported with tax breaks, subsidies and, at least initially, regulatory infrastructure to make the use of biofuel mandatory for industries.

As long as the government continues its current policy of heavily subsidizing gasoline and diesel oil, biofuels will never be able to compete with fossil fuels and petrol stations will remain reluctant to retail this more environmentally-friendly fuel option.

For the long-term good of the economy, it is better for the government to allocate much larger subsidies for biofuels, a local product, than for fossil fuels. Subsidies for biofuels will at least stay in the domestic economy, but those for fossil fuels will flow out of the country as we import more than one third of our fossil fuel consumption.

Investors who want to plunge into the biofuels industry also need clear-cut directives, and manufacturers of transport vehicles and farm equipment which will use biodiesel will need to know the roadmap for the future direction of biofuel development because they will have to make additional investments to adjust their engines to suit.