Driving Biofuel

The first decree is intended to increase the consumption of biofuel and is mandated by the Ministry of Energy and Mineral Resources, requiring the transportation sector to use petrol with at least 1% biofuel content starting in January 2009. This is set to increase to between 2.5% and 3% in 2010. Industries, meanwhile, will be required to use a biofuel blend of between 0.25% and 2.5% in 2009, and this could increase up to 5% in 2010.

Last month, a second initiative was announced through the allocation of a $70m subsidy to biofuel producers. The terms of the subsidy indicate that it will be allocated as compensation during periods in which the retail price of biofuel exceeds that of standard oil.

Recognising that biofuel supports local industry and employment, observers are applauding the moves towards a more supportive legislative environment. Indonesia is the world's leading producer of palm oil, and the sector is a vital contributor to the nation's exports, employment and rural development. With the global recession having brought about a slowing global appetite for export commodities, the selling price of crude palm and the palm industry as a whole has taken a significant hit in recent months. The market price of palm oil tends to follow that of fossil fuel and has accordingly dropped since oil prices peaked last July.

Critics point out that the subsidies indirectly support other net export-producing nations, whereas biofuel subsidies would directly benefit the local economy. Ambono Janurianto, the president director of Bakrie Sumatera, a local plantations company, told OBG, "If you let producers market biofuel at a commercially viable price through offering subsidies, the money stays in the country's banking system as the product is purely Indonesian."

To date, industry participants feel that the government's initiatives have been limited and actual production stands far below capacity. Heavy government subsidies make the retail price of petrol amongst the cheapest in Asia, and the nation's petrol stations and consumers have been reluctant to retail and purchase the more environmentally friendly fuel. While on the supply side, with the cost of production rising amidst declining selling prices, it has become increasingly uneconomical to invest in increased production.

"The government is spending fortunes in subsidising fossil fuel, yet biofuel is not receiving similar support. For investors to expand production further it must be bankable, and they must be able to charge a premium," Micky Hehuwat, the president director of Petrosea, an engineering, construction and mining company, and cofounder of the Indonesian Renewable Energy Society, told OBG.

However, some critics of the move point to the fact that palm remains a vital food crop and using it for biofuel production will increase its price and hurt the people who rely on it for food. Another concern, mainly from international non-governmental organisations, is the environmental damage associated with further deforestation. Indonesia currently has 7.1m ha of land allocated for palm oil estate land. In February, the Agriculture Ministry announced that it would allow a further 2m ha of land to be developed for palm oil, ending a freeze on expansion dating back to December 2007.

Overall, a number of international organisations are calling on Indonesia to implement more efficient estate management practices to generate higher yields from existing plantations rather than expand the land allocated to palm oil production. Indonesia currently yields two tonnes of palm oil per hectare (tph) compared with seven tph in Malaysia. Indonesia and Malaysia together dominate the industry, with 90% of the world's output coming from these two countries.