7.1 Biofuels in Indonesia: How and Why
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7.1.3 Indonesia’s Biofuel Policy Framework
Indonesia’s policy of phasing-in biofuels began with the release of a blueprint for the
country’s energy planning in 2005, which became consolidated in the 2006 National
Energy Policy (Government of Indonesia 2006; Legowo et al. 2007). A presidential decree created the National Team for Biofuel Development (TIMNAS BBN), a
group of government and private sector representatives with the mission of drawing
up a roadmap with milestones of biofuel consumption targets until 2025 (Legowo
et al. 2007; Dillon et al. 2008; Caroko et al. 2011). The roadmap aimed at a 10%
replacement of diesel by 2010 and 20% by 2020, accompanied respectively by 5%
and 15% gasoline replacement with ethanol (Legowo et al. 2007).
To meet those targets, the government foresaw the expansion of feedstock plantations onto an additional 5.25 Mha of “unused land” by 2010, projected to increase
to 10.25Mha by 2015 (Caroko et al. 2011). The government offered two new lines
of subsidized credit through public banks as well as tax exemptions and other fiscal
incentives to biofuel industries (Dillon et al. 2008; Caroko et al. 2011). It also revised
regulations concerning private sector investments in plantations. In 2007, a new
investment law (Law 25/2007) simplified the land-leasing bureaucracy for agribusiness investors and extended the duration of the required land-use permits (HGU, hak
guna usaha, “right to cultivate”; and HGB, hak guna bangunan, the “right to build”
agricultural processing infrastructure).
3 Concurrently, the Ministry of Agriculture set
higher ceilings for the area sizes that can be leased for private plantations. These ceilings are crop-specific and, tellingly, are much higher for biofuel feedstocks. While
traditional—but non-feedstock—Indonesian commodities such as cocoa and coffee
are limited to 5,000 ha, jatropha’s ceiling is ten times higher (50,000 ha), as are
oil palm’s (100,000 ha) and sugarcane’s (150,000 ha). Only feedstock crops have
ceilings above 25,000 ha.
4 All these caps are twice as high for Papua, perceived by
the government as having abundant lands available.
5 Finally, the government sought
international cooperation on biofuels and signed 67 agreements in 2007, including
bilateral technological cooperation with Brazil (Dillon et al. 2008). These efforts
underscored the beginning of Indonesia’s biofuel strategy (see Table 7.1).
However, despite those incentives, biofuels remained uncompetitive due to fossil
fuel subsidization (Krismantari 2007). Then, in 2008 the government introduced
mandatory blending targets. Palm oil mills remained reluctant to produce biofuels,
as CPO prices were more attractive on the international market (Sasisitiya and Liem
2009). The Indonesian Biofuel Producers Association requested a benchmarked
biodiesel price based on that of CPO, a request to which the government acquiesced
later in 2009 (Wulandari 2009). Still, with the continuous increases in CPO market
prices, palm-oil biodiesel became too expensive to produce without further economic
3 It increased the duration of HGU permits from 35 years (with the possibility of renewal for
additional 25 years) to 60 years (renewal for 35 years), and HGB permits from 30 years (renewal
for 20 years) to 50 years (renewal for 30 years) (Caroko et al. 2011).
4 Ministry of Agriculture Decree No. 26/Permentan/Ot.140/2/2007, appendix 3.
5 Ministry of Agriculture Decree No. 26/Permentan/Ot.140/2/2007, Art. 12, par. 3.
153
7.1.3 Indonesia’s Biofuel Policy Framework
Indonesia’s policy of phasing-in biofuels began with the release of a blueprint for the
country’s energy planning in 2005, which became consolidated in the 2006 National
Energy Policy (Government of Indonesia 2006; Legowo et al. 2007). A presidential decree created the National Team for Biofuel Development (TIMNAS BBN), a
group of government and private sector representatives with the mission of drawing
up a roadmap with milestones of biofuel consumption targets until 2025 (Legowo
et al. 2007; Dillon et al. 2008; Caroko et al. 2011). The roadmap aimed at a 10%
replacement of diesel by 2010 and 20% by 2020, accompanied respectively by 5%
and 15% gasoline replacement with ethanol (Legowo et al. 2007).
To meet those targets, the government foresaw the expansion of feedstock plantations onto an additional 5.25 Mha of “unused land” by 2010, projected to increase
to 10.25Mha by 2015 (Caroko et al. 2011). The government offered two new lines
of subsidized credit through public banks as well as tax exemptions and other fiscal
incentives to biofuel industries (Dillon et al. 2008; Caroko et al. 2011). It also revised
regulations concerning private sector investments in plantations. In 2007, a new
investment law (Law 25/2007) simplified the land-leasing bureaucracy for agribusiness investors and extended the duration of the required land-use permits (HGU, hak
guna usaha, “right to cultivate”; and HGB, hak guna bangunan, the “right to build”
agricultural processing infrastructure).
3 Concurrently, the Ministry of Agriculture set
higher ceilings for the area sizes that can be leased for private plantations. These ceilings are crop-specific and, tellingly, are much higher for biofuel feedstocks. While
traditional—but non-feedstock—Indonesian commodities such as cocoa and coffee
are limited to 5,000 ha, jatropha’s ceiling is ten times higher (50,000 ha), as are
oil palm’s (100,000 ha) and sugarcane’s (150,000 ha). Only feedstock crops have
ceilings above 25,000 ha.
4 All these caps are twice as high for Papua, perceived by
the government as having abundant lands available.
5 Finally, the government sought
international cooperation on biofuels and signed 67 agreements in 2007, including
bilateral technological cooperation with Brazil (Dillon et al. 2008). These efforts
underscored the beginning of Indonesia’s biofuel strategy (see Table 7.1).
However, despite those incentives, biofuels remained uncompetitive due to fossil
fuel subsidization (Krismantari 2007). Then, in 2008 the government introduced
mandatory blending targets. Palm oil mills remained reluctant to produce biofuels,
as CPO prices were more attractive on the international market (Sasisitiya and Liem
2009). The Indonesian Biofuel Producers Association requested a benchmarked
biodiesel price based on that of CPO, a request to which the government acquiesced
later in 2009 (Wulandari 2009). Still, with the continuous increases in CPO market
prices, palm-oil biodiesel became too expensive to produce without further economic
3 It increased the duration of HGU permits from 35 years (with the possibility of renewal for
additional 25 years) to 60 years (renewal for 35 years), and HGB permits from 30 years (renewal
for 20 years) to 50 years (renewal for 30 years) (Caroko et al. 2011).
4 Ministry of Agriculture Decree No. 26/Permentan/Ot.140/2/2007, appendix 3.
5 Ministry of Agriculture Decree No. 26/Permentan/Ot.140/2/2007, Art. 12, par. 3.