After the launch of B20 biodiesel (a mixture of 80 percent petroleum and 20 percent crude palm oil or fatty acid methyl ester), the government had planned on increasing the program to B30 this year, to be followed by B40 in mid-2021 and ambitiously B100 several years later. The biofuel program is one of the government’s efforts to develop renewable energy and reduce dependence on highly volatile petroleum.
However, amid the COVID-19 outbreak that is leading the global economy into a recession, should this plan continue? What needs to be adjusted? What lessons should we learn for our biodiesel development?
The main characteristic of biodiesel development in Indonesia is big government intervention in providing economic incentives for producers. This is because production of biodiesel in Indonesia is economically uncompetitive compared to cheaper alternatives, such as fossil diesel. To address the situation, in 2015 the government enacted Presidential Regulation No. 61/2015 that imposes a levy on crude palm oil (CPO) exports when the CPO price exceeds the threshold set by the government in order to build up palm oil funds.
The funds are managed by the agency in charge of managing palm oil funds (BPDPKS). The collected funds have been used to subsidize biodiesel prices to make them competitive with fossil diesel oil.
But the huge subsidy for biodiesel has come under public criticism because most of the funds have been used for biodiesel subsidies and not for palm oil development. By December 2019, around 62 percent of the total CPO funds, amounting to Rp 47.23 trillion (US$3.1 billion), has been allocated to subsidize biodiesel production.
Meanwhile, Law No. 39/2014 on plantation development states that the levy funds should be used specifically for oil palm estate development, replanting, research and empowering smallholders.
Based on the government’s projection for 9.4 million kiloliters of B30 to be produced this year, the BPDPKS would have to provide Rp 37 trillion in subsidies. This amount is based on the Rp 3,929/liter subsidy, as the market index price (HIP) of biodiesel set by the government for the January-March period was Rp 9,079/liter, while the price of subsidized fossil diesel oil is Rp 5,150/liter. The problem, though, is that the price of CPO exports between March and December 2020 is unlikely to rise above the threshold level for palm oil fund collection. Hence, the BPDPKS cannot raise any funds for 10 months.
The biggest problem is the impact of the pandemic on the global economy; international oil prices have collapsed to historic lows of $10/barrel as most governments have imposed severe travel restrictions and strict physical distancing requirements to stop the spread of the virus.
Given the dropping international oil prices, observers believe fossil fuel prices in Indonesia should go down by Rp 2,000 to Rp 3,000 per liter from their current level. This would mean the gap between biodiesel and diesel prices that has to be compensated by the BPDPKS is increasing.
Assuming that lower fuel demand would prompt the government to reduce B30 biodiesel production this year to 7.2 million kiloliters and the government-set HIP price of biodiesel is Rp 8,019/liter, while the price of subsidized diesel oil is cut by Rp 3,000/liter to Rp 2,150, the B30 biodiesel subsidy will be Rp 5,869/liter. Hence, the BPDPKS would have to allocate a total of Rp 42.3 trillion to subsidize B30 diesel oil this year. This burden may eventually bankrupt the BPDPKS because international CPO prices would not likely rise above the threshold level for the levy imposition for the whole year.
The question now is should we postpone the B30 biodiesel development program and the ambitious B40 and B100 plans? The answer, we believe, is a big yes, given the big fiscal deficit, as the government has to allocate Rp 450 trillion in additional emergency spending to cope with the devastating impacts of COVID-19.
Ichsan Saif is a natural resource policy analyst and lecturer at the Bandung Institute of Technology (ITB) and Wiko Saputra is an independent researcher. These views are personal.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.