The next administration forge ahead with innovative approaches and unwavering dedication to establish dominance in the renewable energy sector
Jakarta, IO – On October 20, 2024, if everything goes according to plan, Indonesia will welcome the new Prabowo-Gibran administration, succeeding the Jokowi-Ma’ruf government. Hundreds of millions of people place their hopes for a developed, fair and prosperous Indonesia on their shoulders. One crucial aspect of this is the achievement of energy security.
To realize energy self-sufficiency, one of the ambitious programs is the mandatory use of 50-percent biodiesel fuel (B50) and a 10-percent bioethanol fuel (E10) by 2029. The Government previously enacted the mandatory B35 program, and is currently heading toward B40. Meanwhile, the implementation of bioethanol fuel is less clear. The Energy and Mineral Resources (ESDM) Ministry is reportedly working on a trial of E5.
As a net oil importer since 2004, Indonesia is facing a large oil and gas trade deficit. Imports of fossil fuels continue to increase from year to year, in line with population growth and massive development. When prices of fossil fuel soar and the Rupiah weakens against the dollar, Indonesia is dealt a double blow. First, fuel subsidies will increase many-fold and erode the country’s fiscal space. Second, with the total fuel imports of 26.897 million kiloliters in 2023, a lot of hard-earned foreign exchange will be lost.
According to Prabowo-Gibran’s vision statement, mandatory B50 is one of the measures to reduce Indonesia’s dependence on fuel import and to save precious foreign exchange. Indonesia is currently among the top three producers and consumers of biodiesel in the world and number one in the production and consumption of palm-based biodiesel, after it consistently implemented a diesel substitution program since 2015. At that time, the Government issued policy incentives to encourage biodiesel consumption through a monthly subsidy of biodiesel and diesel, financed using the palm oil export duties managed by the Oil Palm Plantation Fund Management Agency (BPDPKS).
Thanks to this incentive, mandatory biodiesel is expanded to all sectors, especially public services. The blend ratio between palm biodiesel, technically known as Fatty Acid Methyl Ester (FAME) and petrodiesel has been gradually increased from B15 in 2015 to B35 in 2023. Based on the 2015-23 mandatory biodiesel policy, there are at least seven identified benefits – socially, economically and ecologically (Sipayung, 2024). First, building sustainable energy security. The policy is able to drastically reduce dependence on petrodiesel imports. In 2010, petrodiesel imports accounted for 41 percent of total domestic consumption, but by 2021 it was down to just 10 percent.
According to official figures from the Palm Oil Plantation Fund Management Agency (BPDPKS), the petrodiesel savings rate increased from around 915,000 kiloliters in 2015 to 3.8 million kiloliters in 2018, and further to 12.3 million kiloliters in 2023. By increasing the mandatory biodiesel blend ratio from B35 and B40, petrodiesel imports have fallen to just 7 percent (see Figure 1). Reducing Indonesia’s dependence on imported fossil fuels by increasing the share of biofuels is a critical step in the effort to achieve national energy security.
Second, it saves precious foreign exchange reserves and improves the oil and gas trade balance. In the past 20 years, Indonesia’s oil and gas trade deficit has continued to widen, due to increased petroleum imports – until the past five years. Foreign exchange savings resulting from petrodiesel import substitution increased steadily after the mandatory biodiesel program was enacted (see Figure 2). According to data from BPDPKS, foreign exchange saved from diesel imports increased from Rp3.7 trillion in 2015 to Rp26.7 trillion in 2018, and further to Rp121.5 trillion in 2023.
This in turn has reduced the oil and gas trade deficit. Even though it is still negative, the deficit has been narrowed to US$19.9 billion in 2023 (the deficit would be US$30.4 billion otherwise). This further proves that mandatory biodiesel has become an important instrument in reducing Indonesia’s oil and gas trade deficit.
Third, it promotes national and regional economic growth. The downstreaming of crude palm oil (CPO) into biodiesel creates added value for the economy (see Figure 3). The value added by domestic biodiesel increased from around Rp1.5 trillion in 2015 to Rp5.8 trillion in 2018 and further to Rp15.9 trillion in 2023, which helped to boost real GDP growth. On top of this, the biodiesel industry also has a positive impact on regional development in terms of gross regional domestic product (GRDP) growth, both in palm oil-producing provinces and those that do not, such as East Java, Central Java and West Java (Sahara et al, 2022). This points to a positive spillover effect.
Fourth, increasing employment opportunities and reducing poverty. The workforce absorbed as a result of the mandatory biodiesel program is not only at the industrial level (off farm), but also in the plantations (on farm). According to BPDPKS (2024), the number of workers in processing mills and plantations has increased from year to year. In 2015, the workforce in plantations and factories was merely 114,400 and 863 people, respectively. But in 2023, the figures soared to 1.5 million and 11,600. Many research papers have shown that the biodiesel program indeed reduces rural and urban poverty, directly or indirectly.
Fifth, stabilizing the price of fresh fruit bunches (FFB) in the domestic market, giving Indonesia leverage to manage the global palm oil market. As the world’s largest palm oil producer and exporter, the size of Indonesia’s palm oil export influences the commodity’s prices in global markets. Admittedly, the mandatory biodiesel program has become a game changer instrument in the international price dynamics of palm oil. The volume of palm oil absorbed by the program in 2023 hit 11 million tons. This subsequently reduced exports to the global market and thereby affected palm oil stocks aimed at maintaining excess demand in palm oil-importing countries.