green transportation fuel for sustainable long term economic growth

Preview of Study | 1

Green Transportation Fuel for Sustainable Long Term Economic Growth

GREEN TRANSPORTATION FUEL FOR SUSTAINABLE LONG TERM ECONOMIC GROWTHPreview of StudyCrop to Energy on Degraded Land as a Step toward Energy Independence, Carbon Sink Agriculture and Protection of REDD+ Designated Areas

Artissa Panjaitan

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In the past, Indonesia was an oil exporting country. But, due to its declining oil production and rising demand, Indonesia has effectively been a nett oil importer country since 2003. In addition, Indonesia has been subsidizing most of its transportation fuel by setting fixed consumer prices. Such policy of fuel subsidy essentially puts Indonesia’s budget exposed to the risks of increasing global oil price, foreign exchange rate and the growth of fuel consumption.

Figure 2b shows that gasoline import volume grows while the opposite occurs for diesel and other fuel types. Between 2005 and 2011, gasoline import grew at 16.6% annually (CAGR) while diesel import dropped down at an average of -6.3% annually (CAGR). The oil and gas trade balance eventually reached a US$ 5.6 billion deficit in 2012, which predominantly due to growth of gasoline import. The combination of trade deficits and large proportion of budget spent on fuel subsidies put Indonesia’s economic growth at a risk of faltering.

1Source: World Bank; International Monetary Fund; Directorate General of Oil & Gas; 2012 PLN Statistics.2Source: Ministry of Trade (September 2013), Directorate General of Oil & Gas.

Indonesia experienced economic growth in 2008–2012 for an average of 5.9%, a rate that is much better than the world’s average. However, the economic growth came at energy elasticity in electricity and gasoline demand higher than 1 (Figure 1).

After the global crisis in 2008, gasoline consumption grew compoundingly at 13.8% per year and electricity consumption grew at 6.8% annually (CAGR) between 2008 and 2010. In transportation, there has been little success achieved by the Government of Indonesia (GOI) in promoting efficiency and greener fuel, either in the form of natural gas, biofuel or electric vehicles. Without strategically addressing the supply of greener fuel, transportation demand will contribute to a significant GHG growth in the future.

Figure – 1. Indonesia GDP & Energy Consumption Growth1

1. BACKGROUND

Figure – 2 Indonesia Oil and Gas Trade Balance Fuel Import Volume2

a) b)



In fuel grade bio-ethanol, GOI has initiated a blending ratio mandate through Presidential Regulation no. 5/2006 which formally established Indonesia’s National Energy Policy to substitute the use of gasoline and diesel. In conjunction with the Presidential Regulation, the Ministry of Energy and Mineral Resources (MEMR) issued a Regulation no. 32/2008. Figure–4 and 5 show the details of MEMR bio-ethanol and bio-diesel mandates through a progressive set of targets during the 2008-2025 period. However, since 2010, the production of fuel grade bio-ethanol has been halted due to non-competitive domestic production cost.

Bio-diesel production is more successful than bio-ethanol due to: 1. large volume and the least cost of CPO supplies from Indonesia which support Palm Methyl Esther (PME) bio-diesel price cheaper than Rapeseed Methyl Esther (RME); and 2. the bigger portion of fuel consumption of non-subsidized diesel compared to non-subsidized gasoline in the country’s transportation and industry sectors. These facts lead to government’s higher confidence in achieving biodiesel blending ratio relative to bioethanol, as depicted on Figure–5.

Figure – 4. Bio-ethanol Mandated Blending Ratio4

Figure – 3. Allocation of Fuel Subsidy in GOI’s spending3

Fuel subsidy apparently deters public consumer energy efficiency initiatives and, without a level supporting policy to biofuel investment, it raises biofuel production risks. As can be seen on Figure 3, Indonesia’s fuel subsidy grew at a rate that was much faster than the growth of Government budget since 2009. In 2012, there were 2 important marks:

1. The percentage of total fuel subsidy from the total budget was higher than that in 2008 when global crude oil price reached US$ 150/barrel.

2. The subsidy for RON 88 gasoline has surpassed 50% of the total fuel subsidy, including subsidies for household use of kerosene and LPG. This is clearly alarming to Indonesia’s growth capacity and also to its environmental sustainability.

3Source: Statistics Indonesia (Badan Pusat Statistik), Ministry of Finance.4Ministry of Energy & Mineral Resources.

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The overall objective to adopt biofuel in transportation is to accelerate global development and uptake of key technologies to reach a 50% CO2e GHG emission reductions by 2050 based on Business As Usual (BAU) 2005 reference levels.6 To reach this target, IEA projects that sustainably produced biofuels will supply 27% of total transportation fuel.

In the above projection, we can see that non-fossil energy will provide 34% of transportation energy from biofuel (27%) and Hydrogen (7%). And if all electric cars use Renewable Energy (RE) as their primary source of power, there will only be about 53% of transportation energy from non-renewable sources. This projection of energy supply landscape will certainly change the global energy trade and be driven by a path of economically feasible and price competitive transportation biofuels.

2. INSIGHTS FROM THE GLOBAL BIOFUEL TECHNOLOGY ROAD MAP TO DEVELOP BIO-ETHANOL PRODUCTION IN INDONESIA

Figure – 6. Projection of Global Energy Consumption in Transport Sector (left) and Segments of Biofuels in Different Transportation Modes (right) in 20507

5Ministry of Energy and Mineral Resources6 Energy Technology Perspectives (ETP) 2010 BLUE Map Scenario, IEA.7Source: International Energy Agency.

Figure – 7. Projection of global land requirement to meet ETP 2010 BLUE Map Scenario.

Figure – 5. Bio-Diesel Mandated Blending Ratio5



As a consequence of the above targets8, IEA estimates the land requirements would reach a nett increase of 70 million ha by 2050 as presented on Figure–7. By nett increase, IEA is projecting a shrinkage of crop area in developed regions up to 50 million ha while there will be an increase of 120 million ha in developing countries. This projection shows the potential of international biofuel trade and rural economic development. Using its massive Degraded Land (DL) potentials, and by having an impartial resolution to settle conflicts of claims, Indonesia may have an opportunity to produce 20% of global biofuel market9 to fulfill its domestic demand and become a biofuel exporting country. To meet the land requirement sustainably, Indonesia should prioritize the use of its DL in- and out-side of forest areas first than the high carbon value forests.

Another important element learnt from ETP 2010 BLUE Map Scenario is the projection of sugar cane ethanol as the cheapest fuel (per liter of gasoline equivalent10 “lge” in retail price after 2015) even in the high fossil-fuel cost scenario after 2020 (Figure – 7). This projection will make the price of “greener” blended fuel up to 15% cheaper than fossil fuel, putting Indonesia as a target market instead of a producer if there is no strategic action taken. It also suggests that Cellulosic Ethanol (CE) retail price, in a high-cost scenario, will be just within a USD 0.10 range from petroleum gasoline after 2030.

Despite sugar cane will have the cheapest cost compared to other fuels until 2050, CE will have an advantage over sugar cane ethanol in terms of its range of feedstock sources. CE can use a range of feedstock from wood-based energy crops to residues and therefore can be achievable by many countries11.

Diversity of CE feedstock will help reduce the volatility of feedstock cost and allow utilization of wood-based crops from production forest areas in almost all Indonesia’s

Figure – 8. Assessment of biofuel price competitiveness versus petroleum gasoline.

8By using high-yield crops, improvements of processing and land-use efficiency as well as use of organic residues. 9Projected areas for global cane and cellulosic (1st and 2nd Generation) bio-ethanol at 42 Mha and bio-diesel at 30 Mha. Therefore, if Indonesia strategically plans to supply 20% of these biofuels, there need to be about 15 Mha land.10Lower Heating Value (LHV) of gasoline = 32,166 kJ/liter and LHV of ethanol = 21,100 kJ/liter. Energy content of Gasoline (LHV) = 1.52 Bio-ethanol (LHV).11The cost of production in each country will differ by scale of plant capacity, feedstock costs and technology selection.

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provinces. To further improve bio-ethanol value creation potentials, the use of co-products such as DDGS12, glycerin, bagasse, lignin and waste heat will reduce production costs up to 20%. The flexibility of cellulosic materials will also help accelerate the development of new energy crop varieties.

In addition to the prospect of bio-ethanol from sugar cane, Indonesia has large natural habitats of sago-palm in Riau, Sulawesi, Maluku as well as in Papua. Swampy sago-palm habitats are usually unsuitable for other crops. But, sago-palm habitats are natural habitats of many aquatic species. The other concern is the presence of phenol in sago palm products and residues that can adversely affect microbes in fermentation process and the environment. Therefore, concessions and processing of natural sago-palm for biofuel production must be done sustainably.

Reducing GHG emissions from transportation sector will need efficiency improvements and conversion to low emission fuels, such as biofuel and natural gas. However, biofuels are still more expensive then fossil fuels despite the promising trend of cheaper biofuel prices in mid- and long-term. So, how will the introduction of biofuel today, in particular bio-ethanol, be beneficial for Indonesia’s developing economy? Can Indonesia learn from the success of other countries in these opportunities? We need to understand how to build economic value of bio-ethanol (or bio-fuel as a whole) in conjunction with environment, GHG emission reduction and social benefits.

In transportation fuel, Indonesia is facing a situation of fast growing gasoline import (Figure – 2b) and a downward trend of domestic oil supply. In 2012, Indonesia had a Rp. 190 trillion budget deficit (Figure – 9) that was a partial financing for the Rp. 212 trillion subsidy of oil & gas products (mostly transportation fuels) and Rp. 135 trillion for electricity subsidy. In calculating 2012 electricity subsidy, PLN’s average cost in power generation was Rp. 1,217.3/kWh13 against an average selling price of Rp. 728.3/kWh. The average cost of PLN’s diesel-powered generators in 2012 was Rp. 3,168.6/kWh.14

As the result of transportation fuel and electricity subsidies, in 2012 Indonesia had a US$ 5.6 billion trade deficit and fast growing GHG emissions. By September 2013, with the accelerating demand of gasoline, oil and gas trade deficits even worsened to US$ 9.7 billion. In regard to transportation bio-fuel opportunity, the country’s bio-ethanol blending mandates faltered and likewise Indonesia lost the opportunity to develop rural economy. Therefore, a combination of strategic moves to reduce (finally remove) the fuel subsidy and to build competitive bio-ethanol industry will allow Indonesia to have healthier trade and

Figure – 9. Biofuel solution to meet Indonesia Transportation demand and accelerate economic growth.

3. BENEFITS AND CHALLENGES OF DEVELOPING BIO-ETHANOL INDUSTRY IN INDONESIA

A. BENEFITS

12Dried Distillers’ Grains with Solubles. 13Source: 2012 PLN Statistics.14The average fuel cost was Rp. 8629.8/liter.



budget balance as well as to seize the opportunity to allocate necessary budget for infrastructure and rural economy developments.

Globally, bio-ethanol (bio-fuel) adoption is viewed as a way to: reduce dependency on imported oil, distribute the fuel demand to reduce price volatility, reduce GHG emissions and support the economic development in rural areas. In most of the cases, achieving these goals are accompanied by minimal changes to vehicle stocks and distribution infrastructure. And, in the cases of rural development, biofuel adoption on DL can also help avoid deforestation or forest encroachment.

Under Regulation of the Minister of Energy and Mineral Resources No 25 Year 2013, Electricity, Transportation and Industry sectors are mandated to increase their use of Biofuel. Substituting gasoline fuel with bio-ethanol can reduce GHG emissions, as the emissions from sustainable bio-ethanol production and usage are in the range of 40 – 60% lower emission than gasoline.

Challenges

Several potential issues may arise in social and legal aspects in the process to provide land for bio-fuel crop plantations on DL. Other issues will relate to political decisions to adopt bio-fuel strategy and support bio-fuel Research-Design & -Development (RDD).

In social aspect, issues may arise in relocation and/or inclusion process of the settlers on DL. What perceived as unfair compensation or inadequate condition in the relocation process can provoke settlers. There may also issues in the matter of employing locals to work at the plantation, if the locals have difficulties to get accustomed with agro-industry and the mechanized process in growing as well as harvesting the energy crops.

Legal issues in bio-ethanol industry development have been seen in various aspects of its production and distribution, for example: bio-ethanol production, blending mandates and product pricing in Indonesia are currently regulated under Presidential and Ministerial Decree only. During our Focus Group Discussions (FGD), prospective players believe that for an effective biofuel program in economic and GHG abatement to start, GOI needs to develop a regulation that is at a level of a Law (Undang-undang) or Perppu (Emergency Government Decree in Lieu of a Law).15 The law must clearly regulate all key business-value chains of bio-ethanol industry in long-term perspectives16, such as: Land Availability; Feedstock; Bio-ethanol Technology Development; Pricing; Distribution Mechanism; Industry Standard; Incentives (tax, subsidy, etc.); and Domestic Market Obligation (Figure – 10).

15Perppu can circumvent impending regula-tions for bioethanol industry development at the beginning.16Meeting the demand till 2050 and beyond.

Figure – 10. Comprehensive legal & economic system to promote bio-ethanol for GHG abatement.

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To select the potential crops for available DL, we suggest selection criteria of agro-climatic interests and processing technology that minimize the risks. For the First-Generation technology, the potential crops to grow on DL as feedstock for bio-ethanol are sugar cane, cassava, sweet sorghum, corn and sago-palm. However, Indonesia as a country needs to support crops that are most economically competitive and suitable for rural developments, such as sugarcane. Figure – 11 summarizing the general information and the screening criteria to select the potential feedstock.

As mentioned above, sago-palm is an alternative for energy feedstock in Indonesia. Indonesia has 1.2 million ha from 2.2 million-sago stands in the world. One hectare of sago-palm can produce 25 ton of starch annually18. With an estimated conversion rate of 0.6 liter/kg, 1 ha of sago-palm can produce 15 kl/ha annually. This productivity number is higher than other potential crops. Another advantage of sago-palm is that they can be harvested sustainably for numerous times over tens of years.

There are currently various technologies in commercial and development stages. Indonesia needs to select a technology for its bio-ethanol (bio-fuel) strategy. The global bio-fuel industry is still commercially using the first generation technology but is about to launch the second generation. Government will need to support bio-ethanol (bio-fuel) RDD to become more independent and profitable in domestic and international trades.

Figure – 11. General Information of Potential Biofuel Crops17

17Hermiati, Mangunwijaya, Sunarti, Su-parno, Prasetya (2011), “Potential utilization of cassava pulp for ethanol production in Indonesia”; Brown,Lester R., (2006), “Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble”18Source: Ishizaki, 1996.19Source: Modified from Bauen et al., 2009.Figure – 12. Commercialization Status of Main Bio-fuel Technologies.19



Under the bio-ethanol mandatory blending ratio, Indonesia will require at least 10 million kiloliters of bio-ethanol by 2025. This study estimates the land requirement using the first generation technology for sugarcane as the feedstock. We project a minimum of 1.5 million ha of DL areas, that are suitable for sugarcane agro-climate conditions, will be required to supply the mandated bioethanol consumption, as shown on Figure – 13.

To minimize competition between crop for food and crop for energy, car engine manufacturers should produce flexible gasoline engines. By such scheme, the balancing action for optimum farmers’/growers’ income can be managed between the optimum price of sugar and bio-ethanol. Whenever the price of sugar drops, producers can shift the final product more into bio-ethanol and vice versa. This scheme will also allow bio-ethanol producers to manage the blending ratio in response to variations of growers’ output but with a target of minimum blending ratio.

The size of DL in Indonesia is estimated around 78.43 million ha that is equivalent to 58.75% of total forest area, of which 48.71 millions ha are inside designated forest areas while the other 29.72 millions ha are outside the forest area. Forest areas are categorized into 5 groups based on their functions. Each type of DL in forest area (different legal status) has advantages and disadvantages.

Figure – 13. Bioethanol DL Area Requirement Estimates20

Figure – 14. Degraded Land conditions and potential targets of screening.

ICCC team investigates which DL area to be considered as the core for plantation of bio-ethanol crops. The underlying business interests for crop plantations will be large areas with minimum conflict of claims and low cost of land acquisition, and they correspond with approved spatial plan. As such, DL in Convertible Production Forest (CPF) is the more likely area prioritized as plantations for bio-ethanol crops. The near-by Other Land Use areas (owned by potential local growers) will be the supporting zones and used as a scheme to distribute economic values to rural/native inhabitants. Figure – 14 shows that currently there is approximately 14 million ha of DL inside CPF area21.

20Various Sources.21National Forestry Plan (RKTN) 2011 – 2030 provides a direction to allow 4 million ha of CPF be converted and used for non-forestry crops. It is important to identify the suitability of this allocated CPF land.

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The challenge is to over-lay agro-climate suitable target-areas with free and clear land. After we ran a GIS map screening using 6 criteria depicted on Figure – 15, the required 1.5 million ha land may be available in the top 6 provinces. Apparently, these 6 provinces do not have a history of sugarcane plantations and relatively have low density of population. In logistics, these 6 provinces also have relatively equal potential target areas in West and East of Indonesia22 but with much larger market in the West.

In addition to CPF, Ministry of Forestry also has a procedure to allow Fixed Production Forest (FPF) used for bio-ethanol (from sugar cane or other crops) using a mechanism of Forest-Use Permit. This will be similar to the Ministry’s support in mining industry to allow FPF used for an agreed time with a guaranteed future reclamation/reforestation. The reforestation process of ex-sugarcane FPF for cellulosic ethanol will then be in line with Ministry’s program for reforestation and as a protection for REDD+ forest areas.

Indonesia’s bio-ethanol initiative needs to consider the availability of fertilizers for the 1.5 million ha of the crop plantations. Once a favorable bio-ethanol (fuel) law is in place, the industry will take place at a pace driven by land clearing, supply of cane stems and plant construction. Looking at Figure–16 above, it will be more likely that fertilizer need for sugarcane plantation in Indonesia similar to Thailand. This fertilizer demand could even become smaller if growers use potassium and phosphorous solubilizer microbes23. To meet current ethanol blending ratio, Indonesia will need urea at 138,000 ton; P2O5 at 92,000 tons and KCl at 112,000 tons.

Figure – 15. Screening criteria to target DL area for sustainable energy crop plantation.

Figure – 16. Indicative fertilizer requirement for bio-energy farms.

22Kalimantan and Sulawesi strait is the line of West and East Indonesia.23Bio-fertilizers with indigenous microbes.



By considering the challenges, such as: conceivable conflict-resolution, infrastructure development, bio-ethanol technology development, crop lifecycle and maximizing GHG abatement efforts, GOI needs to develop standard procedures to provide land (DL areas) for bio-ethanol crops as soon as possible. Land availability is the fundamental element to ensure the quantity of feedstock with cost efficient supply for 2025 blending mandate.

B. PRICING THE PRODUCTS

Indonesia’s fuel grade bio-ethanol is still more expensive than the same products from other producing countries. In other countries, feedstock cost represents about 60% of the total ethanol production cost. To have a similar cost structure, land ownership is essential. Land ownership allows control on feedstock cost and supply efficiency.

In 2010, MEMR set the price index for bio-ethanol price at 105% of Argus FOB Thailand while Indonesian bio-ethanol producers demanded for 132% of Argus FOB Thailand. If the 32% difference from Argus price was allowed, it would have certainly made Indonesian market as a target by overseas producers.

Some possible ways to reduce production costs for bio-ethanol producers include: maximizing the co-product market solutions, improving the economics of biomass conversion and GOI support in infrastructure development. The economics of biomass conversion processes must be continuously improved/researched to make biofuels competitive with fossil fuels. In the long term, removing variable fuel subsidies, pricing of CO2 emissions, giving a comprehensive framework and stable energy policy will be the essentials for Indonesia economic growth.

Since the majority of Indonesian bio-ethanol producers currently do not grow their own feedstock, their production cost fluctuates significantly due to competition. For feedstock from sugarcane, competition occurs with the protected market of sugar. In addition, gasoline price has a variable subsidy above the price peg. Therefore, GOI needs to realign the goal of using bio-ethanol for energy independence by securing land availability, appropriate retail fuel/energy price and GHG abatement target.

Figure – 17. A snapshot of Bio-ethanol producing countries.

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In our FGD, we learnt that the term of “fuel subsidy” (specified by type of fuel) would be better changed to “energy incentive” scheme. The incentives will be provided to all kinds of energy-market participants based on certain conditions/targets. To realign the goals for energy independence and food security, the scheme will better implemented by rebalancing gasoline and bio-ethanol price, i.e. by reducing (removing) gasoline price-subsidy to allow bio-ethanol viability. In the future, bio-ethanol price may be set regionally different instead of a uniform countrywide price.

Figure – 18 shows gasoline subsidy-variation from the average market price in order to fulfill the demand for gasoline budget “allocation”. With a Rp. 1000/liter short-term increase in 2008, Indonesia practically had a 6-year period with the same gasoline price.

In 2010, MESM issued a regulation of Argus indexed bio-ethanol price (to be blended with gasoline) but failed to come to an agreement with the producers until today. This regulation implies a comparable gasoline consumer price subsidy for blended gasoline.

The failure of bio-ethanol producers to meet 105% of Argus Thailand price indicates a weakness in production cost competitiveness. Our analysis infers that the weakness occurred due to competition with food supplies and producers did not grow their own feedstock.

24Ministry of Energy & Mineral Resources.

Figure – 18. Fuel Price Policy Dynamics24



C. SUGGESTION & PLANS FOR IMPLEMENTATION

The prove of bio-ethanol industry attractiveness for Indonesia energy independence is in implemented business plans. The best indication to see if this idea will be implemented is GOI policies to support for land availability and infrastructure development combined with a favorable policy to achieve energy independence. It is believed that effective GOI policies will be indicated by applications for investment license.

We identify at least 8 core enablers to make bio-ethanol industry in Indonesia viable. There are 5 out of 8 enablers related to GOI policies and supports. Coordination between Ministries and Agencies to assist implementation of bio-ethanol industry will be essential for the success of this policy.

We conducted site visits to identify potential areas for sugarcane-based ethanol. Site visit target areas were selected by looking at the size of DL areas depicted on Figure – 15. But the actual routes of survey were determined by taking into account the input from local/district forestry office.

In addition to criteria used to screen the potential, we checked the suitability of available land, complexity and cost of land acquisition, social condition, access to infrastructure and market as well as minimum competition with other industries. As the result of our site visits, we would suggest prioritizing the potentials in Central Kalimantan province for the start of sugarcane bio-ethanol industry25.

Figure – 19. Bio-ethanol success driven by Policy.

25For sago-palm ethanol, Riau and Papua are the naturally suitabe. But care should be taken to minimize environmental impacts of harvesting and production.

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Artissa Panjaitan is the Coordinator of Low Emission Development Strategy (LEDS) cluster in ICCC. LEDS cluster primarily focuses on mitigation aspects of power (electricity), transportation and agriculture developments. Contact: [email protected]

About the AuthorICCC is a platform of channels and networks between scientific community, international organizations, the government of Indonesia and academics to support scientific based policy. It was created in 2011 under United States-Indonesia Comprehensive Partnership; ICCC supports the Government of the Republic of Indonesia through policy recommendations related to climate change based on scientific findings focusing on climate resilience, low emission development strategies, peatland and peatland mapping, and measurement, reporting and verification (MRV) of climate change in Indonesia.

Feedback and suggestion can be sent to email [email protected] or address Gedung Badan Pengkajian dan Penerapan Teknologi (BPPT) 1, 16th Fl. Jl. M.H.Thamrin 8, Jakarta 10340. Further information of ICCC is available on www.ICCC-network.net.

DNPI (Dewan Nasional Perubahan Iklim), the National Council on Climate Change, established in July 2008, is a government organization mandated by the President to formulate national policies, strategies, programs and activities on climate change; coordinate activities in the implementation of climate change tasks; formulate national policies, mechanism and procedure on carbon trade; monitor and evaluate policy implementation on climate change management and control; and to support the negotiations on UNFCCC and compile Indonesia’s position for each international negotiation meetings.

green transportation fuel for sustainable long term economic growth

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