T

he palm oil industry can play a greater role in development by generating clean, cheap and reliable energy supply from its palm oil mill effluent (POME).

Due to the lack of willingness from palm oil companies and the absent of support facilities, the application of POME-to-energy is just about 10 percent of the total mills nationwide. The combination of effective government support and innovative private sector behavior can unleash the potential.

The electricity generation can be done by capturing methane gas contained in the POME and use the gas to fuel biogas engines to generate power. This activity can be implemented only by active involvement of the palm oil companies '€” with or without partnership with other parties '€” through the establishment of an independent power producer, which sells its excess power to PLN.

This activity can create number of benefits. It can help the company and the people living surrounding the company gain access to cheaper and reliable electricity.

Although all of palm oil mills are equipped with steam turbine producing electricity, many of them do not operate 24/7 (mainly due to fruit supply). Research conducted in Malaysia shows the processing of every ton of fresh fruit bunch requires 3 to 11 kilowatt/hour (kwh) in addition to the power produced by the steam turbine, which does not operate 24/7.

Since many of the POMEs are located in remote areas, which are not connected to the PLN power grid, the deficit power is supplied by diesel generator. POME-biogas power plant can produce electricity at a cost of Rp 700 (6 US cents) to Rp 900 per kwh, which is less than half of that from a diesel generator that costs between Rp 2,700 and Rp 4,000 per kwh. This cheap and reliable energy is also important for the surrounding villages in the remote areas.

The saving of diesel can save the depletion of foreign exchange reserves by reducing diesel fuel import. With the level of 2012 palm oil production, POME can produce approx. 3.3 million MWh per year. This can reduce 1.3 million kiloliter of diesel oil per year, which is around 4 percent of the annual diesel import volume, and can save between US$1 billion to $1.3 billion of foreign exchange reserve per annum.

Another benefit is the contribution to the government'€™s target to reduce greenhouse gas (GHG) emissions by 26 percent '€” 41 percent from business by 2020.

At the 2012 level of palm oil production, the application of POME-biogas in all palm oil mills in Indonesia could reduce the GHG emissions by up to 9.6 million tCo2e per year from the methane capture and another 2.4 million tCO2e per year from the diesel fuel burning avoidance.

The potential exceeds the emission reduction target from the renewable energy subsector as stated in the national strategy of GHG emission reduction (RAN-GRK), which aims to lower 4.5 million tCo2e for the period of 2010-2020.

Those benefits would be doubled in 2020 as predicted by a CIFOR scientist.

According to the Indonesia Palm Oil Mill Board, only about 10 percent of mills are equipped with biogas power plant facilities: This means there are more than 550 palm oil mills without.

The main impediments to reach the potential of POME-biogas application is the lack of willingness from the palm oil companies and the absence of supporting facilities from the government.

There is not much private incentive for palm oil companies to use POME-biogas unless there is a secured opportunity to sell its excess power. Palm oil mills that operate their steam turbine for 24 hours require less than 1 kwh of additional power to process every ton of fresh fruit.

The cost saving from diesel consumption is so small compared to the required investment of $2.5-3 million for one biogas power plant with the capacity of 1 MW.

During the high price of carbon emission reduction (CER) unit (equal to 1 ton CO2e) in the Clean Development mechanism (CDM) market, the revenue from CER selling could make the internal rate of return (IRR) exceed 20 percent even if the excess power is given to the local community for free.

The CER price is now only 40 euro cents, a massive decline compared to 2008'€™s price of ¤20 per CER.

The current feed-in-tariff (the price PT. PLN purchases from the power producer) as stipulated by the Energy and Mineral Resources Ministry can substitute the absence of the CDM market to some extent. At the current price, the IRR of a POME-biogas can reach 12 percent to 25 percent depending on the capital management, type of financing and the need of additional power other than that produced by the steam turbine.

The feed-in-tariff by itself is not enough to attract POME-biogas investment without the availability of the following supporting facilities: Power grid infrastructure connects the power plant with the PLN power grid and the villages nearby the mill; the transparent and efficient bureaucracy of power purchase agreement (PPA) making by PLN; and the availability of relatively cheap and accessible financing service.

This is important because POME-biogas requires high upfront investment and is considered as a risky business activity; the availability of information to provide different technology and technical service provider options; proactive promotion of POME-biogas business shares basic information about business feasibility and technical-know-how about how to start a POME-biogas business; and the support from the surrounding local community. The support facilities require a strong commitment from public sector.

The provision of support facilities by the public sector should go together with the willingness of the palm oil companies to be more innovative in doing business.

The innovations include efforts to reform the internal operations of business, the development of new business models, more investment in new technologies and adoption of new ways of thinking and making decisions. The innovation behavior is associated with some risks, which are managed to serve the long term vision of the business leader.

This business behavior will not only produce private benefits but also create public goods that are required to sustain the business in the long term future.

The writer is a climate policy adviser at the German International Cooperation (GIZ) Indonesia. The views expressed are personal.