7.1 Biofuels in Indonesia: How and Why
151
and inability to compete with (cheaper) palm oil as a feedstock (see Dillon et al.
2008). By the early 2010s, jatropha seeds for making one liter of vegetable oil would
cost on average IDR 8,000 (~US$ 0.90), in contrast to IDR 5,000 (~US$ 0.56) for
palm oil (Slette and Wiyono 2011). As such, the many smallholders who had been
approached were left without a buyer. Jatropha remains under R&D efforts to select
high-yielding and more tolerant varieties, but it has not (yet) reached commercial
viability.
Oil palm is considered the most efficient biodiesel feedstock crop, with yields
at least three times higher than any other vegetable oil crop per hectare (Tan et al.
2009; see also Sheil et al. 2009). Its cultivation takes place mostly as cash-crop
monocultures: 10% managed by the government, 55% by private companies, and
35% by smallholders (Suwastoyo 2018). However, independent smallholders can
hardly afford the high start-up costs of oil palm cultivation and bear the four years
of maturation period; therefore, most of them work under buy-back contracts called
“nucleus-plasma schemes.” The government mandates that smallholders manage at
least 20% of the land in oil palm plantations to reduce conflicts between companies
and rural communities (Feintrenie et al. 2010a; McCarthy et al. 2012).
1 Usually, the
company acquires 70% of the farmers’ land (to become the plantation “nucleus”)
and contracts their work on the remaining 30% (the “plasma”), providing seedlings,
inputs, and technical advice at a cost. A bank (usually public) provides credit to
the farmers, with the company acting as a guarantor to cover their needs during the
crop’s long maturation period. Once they start producing, farmers start to pay back
the debt as a fixed percentage of what they earn selling fresh fruit bunches (FFB) to
the company. The latter processes FFB into CPO and occasionally into more refined
products, and market it downstream (Feintrenie et al. 2010a, b; Rist et al. 2010).
The biodiesel industry has come as an add-on to an already thriving palm oil sector.
Therefore, this biofuel industry is not about new players coming in but existing ones
extending their activities to meet the demands of a new market. Private investments to
install capacity for processing palm oil into biodiesel began en masse in 2006–2007,
when international petroleum prices increased and CPO prices were low (Dillon
et al. 2008; Schoneveld 2010; Caroko et al. 2011). Market volatility, however, soon
revealed to be an issue when CPO prices rose in late 2007, and many processing
units downscaled or suspended their operations (Caroko et al. 2011, p. 17). Biofuel
production only resumed after the government agreed to provide further incentives
and procure biodiesel according to a formula that ties it to fluctuating CPO prices.
Indonesian biodiesel production and consumption would substantially increase
through the 2010s. With a mandatory consumption of 30% biodiesel blends (B30)
in 2020, production of this fuel was estimated at close to 10 billion liters (bl)—
essentially making Indonesia the world’s largest biodiesel producer and consumer.
Installed capacity for 2021 has reached 12.5–13bl, following growing domestic
demand. As for exports, while historically they have played a significant role,
1 See Ministry of Agriculture regulation No. 26/Permentan/OT.140/2/2007, superceded by regulation No. 98/Permentan/OT.140/9/2013, which maintained the requirement, so-called “plasma
obligation”.
151
and inability to compete with (cheaper) palm oil as a feedstock (see Dillon et al.
2008). By the early 2010s, jatropha seeds for making one liter of vegetable oil would
cost on average IDR 8,000 (~US$ 0.90), in contrast to IDR 5,000 (~US$ 0.56) for
palm oil (Slette and Wiyono 2011). As such, the many smallholders who had been
approached were left without a buyer. Jatropha remains under R&D efforts to select
high-yielding and more tolerant varieties, but it has not (yet) reached commercial
viability.
Oil palm is considered the most efficient biodiesel feedstock crop, with yields
at least three times higher than any other vegetable oil crop per hectare (Tan et al.
2009; see also Sheil et al. 2009). Its cultivation takes place mostly as cash-crop
monocultures: 10% managed by the government, 55% by private companies, and
35% by smallholders (Suwastoyo 2018). However, independent smallholders can
hardly afford the high start-up costs of oil palm cultivation and bear the four years
of maturation period; therefore, most of them work under buy-back contracts called
“nucleus-plasma schemes.” The government mandates that smallholders manage at
least 20% of the land in oil palm plantations to reduce conflicts between companies
and rural communities (Feintrenie et al. 2010a; McCarthy et al. 2012).
1 Usually, the
company acquires 70% of the farmers’ land (to become the plantation “nucleus”)
and contracts their work on the remaining 30% (the “plasma”), providing seedlings,
inputs, and technical advice at a cost. A bank (usually public) provides credit to
the farmers, with the company acting as a guarantor to cover their needs during the
crop’s long maturation period. Once they start producing, farmers start to pay back
the debt as a fixed percentage of what they earn selling fresh fruit bunches (FFB) to
the company. The latter processes FFB into CPO and occasionally into more refined
products, and market it downstream (Feintrenie et al. 2010a, b; Rist et al. 2010).
The biodiesel industry has come as an add-on to an already thriving palm oil sector.
Therefore, this biofuel industry is not about new players coming in but existing ones
extending their activities to meet the demands of a new market. Private investments to
install capacity for processing palm oil into biodiesel began en masse in 2006–2007,
when international petroleum prices increased and CPO prices were low (Dillon
et al. 2008; Schoneveld 2010; Caroko et al. 2011). Market volatility, however, soon
revealed to be an issue when CPO prices rose in late 2007, and many processing
units downscaled or suspended their operations (Caroko et al. 2011, p. 17). Biofuel
production only resumed after the government agreed to provide further incentives
and procure biodiesel according to a formula that ties it to fluctuating CPO prices.
Indonesian biodiesel production and consumption would substantially increase
through the 2010s. With a mandatory consumption of 30% biodiesel blends (B30)
in 2020, production of this fuel was estimated at close to 10 billion liters (bl)—
essentially making Indonesia the world’s largest biodiesel producer and consumer.
Installed capacity for 2021 has reached 12.5–13bl, following growing domestic
demand. As for exports, while historically they have played a significant role,
1 See Ministry of Agriculture regulation No. 26/Permentan/OT.140/2/2007, superceded by regulation No. 98/Permentan/OT.140/9/2013, which maintained the requirement, so-called “plasma
obligation”.