T

he administration of Joko '€œJokowi'€ Widodo has ambitious targets for both the electrification ratio and the renewable energy share in the energy mix. According to the mid-term development plan (RPJMN) 2014-2019 '€” the official document outlining the president'€™s development targets '€” by the end of his tenure the electrification ratio should reach 96.6 to 100 percent while the share of renewable energy of the national energy mix should be 10 to 16 percent.

The achievement of these two targets is interdependent when it comes to rural electrification. Most of the households without electricity '€” between eight and 11 million households '€” are located in remote rural areas, where renewables are the most efficient resources for small-scale, decentralized power generation.

Connecting remote rural areas to the main power grid will cause power losses in between, while establishing a low-cost coal power plant dedicated to rural villages is not economically viable due to the low number of inhabitants.

The common solution for these areas is an isolated grid powered by diesel generators that require a low upfront investment but a very high cost through the course of its operation. A careful calculation made by the Indonesia Climate Change Center shows that with a diesel price of Rp 8,629 (60 US cents) per liter in 2012 the cost to generate a kilowatt-hour (kWh) of electricity was more than Rp 3,000.

Biogas from palm oil mill effluent (POME) is among the least cost renewable and is available in some remote rural areas in palm oil producing regions. The high organic content effluent '€” produced alongside with the crude palm oil production, which is mainly located in remote rural areas '€” results in a high volume of biogas.

A palm oil mill processing fresh fruit from 10,000 ha to 15,000 ha of mature oil palm estates can produce biogas that is sufficient to fuel biogas engines with an installed capacity of more than 1 megawatt (MW), enough to electrify 2,000 households with 24 hours of electricity.

In the case of East Kalimantan, for example, each of 12 potential '€” out of the total 62 '€” mills could generate 1 MW or more, all of which are close to villages with enough inhabitants to absorb the additional produced power.

Those villages currently have no electricity or have less than 15 hours of supply per day from diesel generators. The marginal cost to generate a kWh of power from POME biogas is less than half of that from diesel.

This opportunity has gained much attention from the governor of East Kalimantan, the regents of East Kutai and Berau and the general manager of state-electricity company PLN Regional Office for East and North Kalimantan. They establish the POME-biogas for Rural Electrification Partnership last May with the commitment to provide joint facilities for POME-biogas power plant developers.

Apart from support for the transaction process to get a power purchase agreement with PLN, the partnership will provide power grid infrastructure required in the developing areas.

Moreover, the partnership could provide technical assistance for pre-feasibility studies and could offer trainings for the mill and biogas power plant operators to measure and report their emission reduction to the government.

The partnership facilities complement the feed-in-tariff (FIT) policy, the rate of which was increased just last year in October. Both the higher FIT rate (at national level) and the partnership facilities (in the East Kalimantan case) are there to incentivize POME-biogas developers to invest in this initiative.

Despite the higher FIT and partnership facilities in East Kalimantan, the initiative has not strongly attracted the interest of palm oil companies. Since the establishment of the partnership last year a series of promotion activities have been conducted by the partnership parties.

But the result is not very promising. Out of the 12 potential mills, only four of them (subsidiaries of two groups) have confirmed their interest, of which two of them have a clear development schedule.

The following two reasons explain the low attractiveness. First, most palm oil companies '€” the '€œgate keepers'€ of POME-biogas resources '€” are not familiar with the energy business.

Although they produce energy from the solid waste that results from their operations, generating power from biogas is a new idea for most of them. But, most importantly, almost all palm oil companies have no experience in starting a business with PLN for selling power through the FIT policy.

Second, while the FIT rate has been increased and can make the initiative become financially viable, it is still less attractive than the core business of the palm oil companies. An assessment by Winrock International shows that with the current FIT rate for Kalimantan the project internal rate of return (IRR) is '€œonly'€ between 13 to 14 percent.

In addition, the long-term fixed-rate contract in rupiah creates some risks related to the fluctuation of inflation and exchange rate during the 20-year contract period. With today'€™s low liquidity in the financial institutions in Indonesia, the level of IRR is not very attractive.

Alternative investment in their core businesses is more promising. Reports show palm oil estates in Indonesia get 18 percent of IRR after land charges, while estates in Selangor, Malaysia, can achieve 67 percent of IRR.

Interestingly, some renewable energy development companies have expressed interests to invest in the potential sites. Their interests may be due to their specialty and familiarity in the renewable energy business, which allows them to operate in a more efficient way and, therefore, create higher returns.

The involvement of renewable energy development companies can be implemented through various kinds of partnership models with the gate keepers of the biogas. For example, joint-venture and build-operate-transfer (BOT).

The partnership will allow the palm oil firms to save limited investment funds and transfer most of the investment risks to the business partner who can better handle them.

However, these efficient renewable developers cannot enter the market without the palm oil companies opening the gate for them to get access to the biogas. Without utilization, the biogas '€” 60 percent of which is methane '€” is just emitted into the atmosphere contributing to global warming.

To achieve resource-efficiency the government should ensure the high utilization of the POME-biogas to support rural electrification in palm oil regions. There is the soft approach and the hard one.

The soft approach is by facilitating voluntary partnerships through creating connections between the palm oil companies and the interested renewable energy developers.

The hard approach is by controlling the access to biogas resources and tendering the utilization of the biogas transparently if the producing palm oil company has no interest in utilizing them.