Quote: “In less than a decade, jatropha was transformed from a promising and commercially viable biofuel crop into a green-policy parasite, living on subsidies and green investments.”
One of the aspects of biofuel development that was severely overestimated was the profitability of the enterprise. “At the peak of the jatropha hype in 2005-2006, jatropha was portrayed as a profitable business while at the same time abating the climate, energy and poverty crisis” (1). However, jatropha’s economic viability proved to be low under the prevailing conditions.
The commercial viability of jatropha-based biofuel production depends on the costs of production, including the initial investment costs. It is also limited by the farm gate price of alternative agricultural commodities that can be produced by farmers, and the retail price of alternative fuels for consumers. Such an analysis does not yet include an overall evaluation of the feasibility of such an enterprise, including social factors (2). The production costs of biofuels, however, is strongly dependent on price developments in the international edible-oil market. The raw materials used in biofuel production processes, both for ethanol and biofuel, are also used for food and other applications such as chemical products, cosmetics and pharmaceuticals. In order to prevent the scarcity in domestic CPO supply, the government created export taxes for CPO. Export of CPO was further discouraged by a Domestic Market Obligation, forcing palm oil producers to reserve a certain percentage of the production for the domestic market. Jatropha was therefore an attractive alternative since, being a non-edible vegetable oil, it would avoid food-versus-fuel debates, and the price of the raw feedstock would not depend on fluctuations in the edible-oil market.
The combination of an overestimation of the productivity of jatropha plants and the oil content of jatropha seeds with an underestimation of the actual production costs of jatropha-based biofuel (including investment capital, operational costs and feedstock) led to disappointment in the profitability of jatropha-based biofuel as a substitute for fossil fuels. With regard to economic viability, there have been three main barriers: initial investment costs and actual production costs, fuel price regulation, and farmers’ opportunity costs.
Underestimation of the initial investment costs/production costs
First, the initial investment costs and production costs have been ignored by the policymakers. Not many studies are available regarding the economic feasibility of jatropha, one exception being a study by Van Eijck et al. (3). What seemed attractive was the relatively low investment costs needed for the rapid expansion of jatropha plantations in a short timespan. Government activities were focused on the distribution of seedlings and manual processing equipment. Even though the jatropha policy was officially directed towards remote areas, processing facilities for jatropha only appeared in the major cities near airports or seaports. In East Nusa Tenggara province, for example, the factories were built in the vicinity of major cities such as Kupang and Maumere. The location of these processing facilities indicates the importance of the availability of basic infrastructural provisions including roads, water and electricity. There are similar findings for other countries; see for example Schut et al. on Mozambique (4, p. 75). As infrastructure has not been well developed yet in the areas targeted for jatropha development, the initial investment costs for developing a supply chain will be much higher than anticipated. It also seems highly unlikely that the policymakers have taken into account all the costs related to the production process, including manual harvesting, collection, transportation, processing (de-hulling, roasting, pressing, filtering and refining) and storage.
Price ceiling created by fossil-fuel subsidy
Secondly, policymakers made no changes to the current fossil-fuel subsidy regime. As biofuel is a substitute for petrochemical-based fuels, the retail price needs to be competitive with that of other alternative fuels for consumers. In Indonesia, fuel retail prices are regulated and consumer retail prices are much lower than the market price due to subsidies. In order to make fuel economically accessible to the poor, the Indonesian government spends a significant part of its annual budget on fossil-fuel subsidies. Commercial enterprises, however, have to pay the industrial price for fuel. The efficiency of this subsidy instrument for supporting the poor is debated, as most of the subsidized fuel is used by people who own motorized vehicles and hence do not belong to the poorest of society (5, 6). The Indonesian government has repeatedly decreased subsidies for fossil fuels and has tried to reduce the use of such fuels in various sectors, including government vehicles, mining, plantation, fishery and sea transport.
Jatropha was portrayed as a pro-poor solution to diminish the use of subsidized fossil fuels, as people could produce jatropha oil themselves and could use it for their own consumption in cooking stoves (7), (stationary) diesel engines and water pumps, as an alternative to subsidized fuel. The Indonesian government’s current strategy for reducing fossil-fuel subsidies is to diminish the consumption of gasoline and kerosene by changing to LPG. The program aims to convert the use of subsidized gasoline by public transport and government vehicles to LPG. It also tries to diminish the use of subsidized kerosene by distributing LPG cooking stoves (8).
Besides encouraging people to convert to other sources of non-subsidized energy, the government has made many attempts to reform fossil-fuel subsidies. These proposals have met with severe protest from the population. Fear of price inflation, the economic impact on poor and middle-class households and the unwillingness of politicians to push for unpopular decisions before elections have led to the postponement of reforms in the energy sector (6). There is a recurrent debate about how to compensate the poor efficiently and effectively for rising fossil-fuel prices and related price inflation (10).
The legal price of fuel is set by the government. Fuel subsidies for consumers are calculated with a formula based on the Mean of Platts Singapore (MOPS), multiplied by a fixed index for distribution costs and a margin, and allocated to fuel distributors (11). With the government subsidy on retail prices of fossil fuel for consumers, the government effectively creates a price ceiling. This retail price, however, does not cover the production costs.
Opportunity costs for farmers and the farm gate price of jatropha seeds
Thirdly, the policymakers did not take into account the opportunity costs for the farmers. What was overestimated was the willingness of farmers to cultivate jatropha for very low farm gate prices. In order to increase the margin for biofuel producers, production costs, especially for feedstock, need to be as low as possible. Farmers, however, have to consider the opportunity costs of investing their labor in cultivating jatropha instead of other crops. For farmers, the return on investment of their land and/or labor is the crucial factor. Farmers consider their own opportunity costs and tend to compare the price for jatropha with the price per kilo of alternative commodities, such as cashews, coconut and candlenuts. For them it makes more sense to invest their labor in other crops that yield higher revenue than jatropha. As the price of jatropha seeds is not attractive enough yet, farmers have ceased to invest their labor in jatropha cultivation. The farmers in Sikka were not interested in the production of jatropha for their own energy needs either, as they often lack experience in post-harvest processing techniques and prefer to invest their labor in cultivating other crops. As a result, biofuel producers have difficulties securing the raw material. In the factory in Bolok, an Industrial zone in Kupang, the biofuel producers have already chosen to use another feedstock instead of jatropha, namely the seeds of the Kusum tree (12) that are widely available in the area.
Biofuel producers do not view jatropha-based biofuel as economically viable as an alternative fuel, without external support from the government. The development of the jatropha sector so far has mainly been subsidy-driven. In Indonesia, jatropha-based biofuel has not yet proven to be commercially viable without external support. Biofuel entrepreneurs argue that it is not economically viable because of the current barriers, and urge the government to create supportive regulations (e.g. subsidies), and to enforce mandatory blending targets and diminish fossil-fuel subsidies.
References and notes
- J. A.C. Vel et al. (2013) “Jatropha: from an iconic biofuel crop to a green policy parasite”. IIAs Newsletter No. 66 p.15.
- L. Strydom, A biodiesel entrepreneur’s checklist for anyone considering entering his infant industry (2006); http://www.ecoworld.com/energy-fuels/growing-refining-biofuel.html
- J. Van Eijck, E. Smeets and A. Faaij, “The economic performance of Jatropha, Cassava and Eucalyptus production systems for energy in an East African smallholder setting”. Global Change Biology Bioenergy, 4 p.828-845.
- M.L.W. Schut, S. Bos, L. Machuama and M.A. Slingerland, Working towards sustainability- Learning experiences for sustainable biofuel strategies in Mozambique (Wageningen University and Research Centre, Wageningen The Netherlands in collaboration with CEPAGRI, Maputo Mozanbique. (2010); p1-103.
- A. A. Yusuf, B. B. Resosudarmo, Mitigating distributional impact of fuel pricing reform: The Indonesian experience. ASEAN Economic Bulletin 25(1) (2008); p. 32-47.
- International Institute for Sustainable Development (IISD) 2012. A citizen’s guide to energy subsidies in Indonesia: 2012 Update. http://www.iisd.org/gsi/sites/default/files/indonesia_czguide_eng_update_2012.pdf
- A Pertamina commercial about how to use LPG safely in cooking stoves can be found on http://www.youtube.com/watch?v=oJ-kqN9laGI.
- A. F. Pratama, “Kadin minta subsidi BBM dihapus,” Kompas, 4th of June 2013. http://bola.kompas.com/read/2013/06/04/13394519/Kadin.Minta.Subsidi.BBM.Dihapus
- Ministerial Decree No. 2046K/12/MEM/2013, issued by the Ministry of Energy and Mineral Resources