Indonesia: Biofuels from palm oil and power from tree plantations?

These questions were raised at a recent national stakeholders workshop co-organized by the Center for International Forestry Research (CIFOR) and the Indonesian National Development Planning Agency BAPPENAS in Jakarta, Indonesia.

The lively day of exchanges involved key actors from the Indonesian Ministry of Environment and Forestry (MoEF), the Indonesian Ministry of Energy and Mineral Resources (MoEMR), the state-owned oil and gas company Pertamina, the state-owned Indonesian electricity company PLN, the Palm Oil Estate Fund, among various other producer associations and private investors.

Bioenergy is indeed an important component of the country’s New Energy Policy, which was enacted in 2014 to reduce carbon emissions and promote energy security in an era of declining oil and gas production and increasing energy imports.

Furthermore, areas in Indonesia lacking energy access, especially rural ones, are calling on the country to start seriously tapping into its vast natural resources.

Currently, Indonesia’s energy mix is currently dominated by fossil fuels.

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RUNNING ON BIOFUELS

Are current investments responding to this call?

In the biofuels sector, yes.

Indonesia possesses an extraordinarily large reservoir of oil palm plantations that span more than 10 million hectares and account for half of the world’s palm oil production. To ensure that this resource contributes to the national energy plan, the national government has worked out a Biodiesel Mandate that is among the most ambitious in the world.

As of 2016, liquid fuels must contain at least 20 percent of biofuels (and by 2025, 30 percent). A subsidy program has also been set up in order to account for the substantial difference in production costs between biofuel and conventional diesel. One can sense a fair amount of optimism as this funding is based on taxes on Crude Palm Oil (CPO) exports rather than on yearly-negotiated national budget expenditures.

Yet, caution prevails.

First, fossil fuel energy prices are low and the resulting price gap with biofuels and subsidy expenses are high. (Ironically, available funding for the subsidy is lower with the reallocation of CPO production to the domestic market for energy purposes and fewer exports taxed). Second, infrastructures remain insufficient and more refineries are urgently required. The role of Pertamina is going to be a key element of success, or failure, in seeing this through. A higher level of integration between oil palm plantations, CPO mills and biodiesel refineries is thus required.

WOOD-BASED POWER GENERATION

Another key topic of discussion at the workshop was the expansion of tree plantation estates to supply power plants.

However, proof of concept is still lacking. It might sound surprising that a country with such plentiful forest resources and expansive areas of degraded land waiting for development has not yet seen the creation of a network of power plants relying on tree plantations.

But major obstacles remain in the way of executing this. First off, the industrial tree plantations business has always been shaky in Indonesia, as demonstrated by the history of the Industrial Tree Plantation (HTI) program.

The situation on the ground has not improved either, with the unfinished One Map Policy and recurring conflicts with local communities, as underlined by representatives of the private sector. Assumed availability of degraded lands is often erroneous, and a number of factors tend to make it even more difficult for investors including difficult access, steep slopes and unfertile soils.

In regards to technology, there is room for improvement and higher efficiency despite the fact that the technology required to produce bioenergy from agricultural crops, trees, and organic waste is already available.

What’s more, the costs of supply for investors are currently too high per unit of kW produced. Yet, the government has taken action and a Feed-in-Tariff policy was put in place in 2014 in order to promote power plants running on biomass. According to this regulation, the state-owned electricity company PLN must buy power from these plants at a fixed price, which tends to be higher than from other sources.

Workshop participants found that the current regulatory prices are neither high nor low enough for producers and PLN respectively. On one hand, PLN remains largely reluctant to buy and argues that it is legally obliged to run a profitable business. On the other hand, producers complain that the prices remain insufficient compared to production costs, especially when risks are factored in. The good news is, this Feed-in-Tariff policy is being revised and one can expect much more attractive prices to be published soon (with more pressure on PLN to engage with producers).

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JOINING FORCES

One of the most positive recent signals the Indonesian government has sent is a memorandum of understanding (MoU) between the MoEF and the MoENR to foster more coordination between the two ministries.

The MoU accelerates the use of industrial tree plantations with more flexibility provided to HTI concession holders to revise their Forest Management Plans in order to include better species for energy needs. As of now, up to 32 concessionaires are involved. It is fair to say though, that progress is still limited as no integrated wood-based project is up and running yet. Only forest-based industries have so far developed operational power plants running on their own residues from forestry operations.

Discussions at the workshop converged toward the conclusion that integration was a necessary condition for wood-based power generation investments. Plantation forestry dedicated to electricity generation possesses the ability to provide sustainable and continuous feedstock supplies that are relatively independent from weather conditions as opposed to, for instance, solar or hydropower energy. Yet this assumption only holds when management is performing well, which in turn pleads for the buyer of the feedstock to have control over the field operations.

Indeed, if the plantation is not sufficiently well managed over the long term, or if power plants are dependent on markets to secure their raw materials (as exemplified by the rise in palm kernel prices that left some power plants low on supplies), funding will dry up. Moreover, with the largest share of the profits being made at the power plant level, participants explained that schemes such as Special Purpose Vehicles were pursued by investors in order to jointly run the business and to ensure that profits were appropriately distributed across the value chain.

Integration and lower risks for investors with more clarity in land tenure are key expectations from the nascent Forest Management Unit (KPH) system in Indonesia. These new institutions, yet to be fully operational across the country, might be able to remove a number of barriers.

They are in an opportune position today to translate the vision of the Indonesian government regarding wood-based energy to a reality on the ground.