Why have the mandatory blending targets and pricing subsidies not yet transformed the fuel market in Indonesia?

By Loes van Rooijen

Quote: “Eventually, he [the director of RNI] became influential in the creation of national energy policy that appointed jatropha as a major source of biodiesel and included mandatory biofuel blending targets.”

The Indonesian government has made use of a wide variety of economic regulation instruments in order to promote the domestic production and use of biofuel as substitute for fossil fuel. This strategy of oil import substitution is part of the macroeconomic policy in order to improve the account deficit and the exchange rate of the rupiah. These measures include tax exemptions, subsidies and mandatory blending targets (1). This article focuses on the instrument of blending targets. Blending targets are a signal to investors that the government is committed to the development of the biofuel sector in the long term. The aim is to guarantee market demand for biofuel through regulation in order to protect biofuel producers who invest in this emerging economy. The policy assumption is that mandatory blending targets will likely lead to higher feedstock prices and agricultural commodities in general, increase the production of biodiesel, and decrease oil imports (2, p. 9). Worldwide, governments have installed mandatory blending targets to stimulate the emerging biofuel industry, including in the EU, the USA, Brazil and China (3). These global mandatory targets have been criticized for their impact on agricultural commodity price rises and changes in land use (4, p. 11, 5, 6).

In Indonesia, the Ministry of Energy and Mineral Resources formulated obligatory blending targets for biofuel, bio-oil and bioethanol in 2008. These blending targets were to be implemented in various phases (see tables I-IIIa)(7). Several sectors are obliged to switch to biofuel and were given an ultimatum. The mining sector, for example, had to switch before July 2012 (8) and the steel and iron industry before 2013 (9). In the transport sector, Indonesia’s state-owned oil company PT Perusahaan Tambang Minyak Negara (Pertamina) has been contributing to achieving the biofuel blending targets. Despite these “mandatory” blending targets, the fuel market in Indonesia has not been transformed yet. Since 2006 Pertamina has been selling various blends of biofuel, including Biosolar (5% biodiesel blend), Biopremium (3% ethanol blend) and Biopertamax (3% bioethanol blend).

Besides the mandatory blending targets, the government also provides price subsidies to biofuel producers if the cost price of biofuels is higher than the cost price of fossil fuel. The price subsidy has been increasing slowly over the years from 1,000 Rp./liter to 3,500 Rp./liter. The benchmark used for determining fuel prices is the Mean of Platts Singapore (MOPS). As the cost price of biofuel is often higher than the fossil-fuel price, the government subsidizes the additional cost up to a fixed price/liter, capped with a maximum quota for biofuel subsidies per year. The total amount of the subsidies is established by Parliamentary Committee VII on Mining and Energy during discussion of the annual budget. Various political parties in the committee have protested against increasing subsidies for biofuel, as they claim that the effectiveness of this instrument is debatable and the allocation of pricing subsidies is lacking a legal basis. It could be argued that tax incentives are to be preferred over price subsidies in order to stimulate the industry to produce biofuel (10).

Price compatibility and the availability of biofuel

One of the main obstacles to reform in the fuel market is the competitiveness of biofuel with other fuel products. The subsidies for fossil fuel for consumers mean that biofuel is not price competitive. Biofuel is a substitute for fossil fuel: to attract consumers to choose biofuel as an alternative to fossil fuel the price needs to be competitive (e.g. less than the subsidized price for consumers). Up until now, the price of biofuel has exceeded the consumer prices for subsidized fossil fuel. Most biofuel produced in Indonesia is derived from palm oil. Due to a spike in crude palm oil prices and a lack of incentives from the government, Pertamina reduced its biofuel blend ratio to minimize its losses Pertamina reduced the biofuel blend quota from 5% in 2006 to 2.5% in 2007, and again to 1% in 2008, but has steadily been increasing the blend since then(1, p. 2).

Enforcement blending regulation

As the price of biofuel is still not competitive with fossil fuels, companies do not have an economic incentive to blend biofuel (11). The regulation contains administrative sanctions in order to enforce compliance, including written notices, the suspension or freezing of activities and eventually the revocation of the business permit (12). The Ministerial Regulation of 2008 contained administrative sanctions for companies who violated the terms of the biofuel business permit, however, it did not contain administrative sanctions for companies who failed to fulfill the obligatory blending target. The regulation also did not indicate how companies should operate if biofuel is not available on the market and thus the company is unable to comply with the regulation. This situation changed in August 2013 with the amendment of the Ministerial Regulation of Energy and Mineral Resources 32/2008 with No. 25/2013 (13).

With Ministerial Regulation no. 25/2013, a few flaws in the previous blending regulation have been corrected. The regulation contains four major changes to previous policy (14). First, authority concerning the management of biofuel was transferred from the Directorate General for Oil and Gas to the Directorate General for New and Renewable Energy in order to improve intersecotral coordination, especially when it comes to enforcement. Secondly, the new regulation obligates companies with a biofuel business permit to develop infrastructure for the blending and ensure domestic distribution of biofuel (Art.3.3). Thirdly, the blending targets for biodiesel, bio-oil and bioethanol for the transport, industry and energy sectors were significantly increased (see tables I-III b). Fourth, the regulation extends the applicability of administrative sanctions for companies to provisions in the regulation including the mandatory blending targets. The Directorate General of New, Renewable Energy, and Energy Conservation (NREEC) can directly apply administrative sanctions to companies with a biofuel business permit (art.26) and can also propose administrative sanctions for oil & gas companies, mining companies and electricity companies, which are under the responsibility of the Directorate General for Oil and Gas, the DG for Mineral and Coal and the Directorate General for Electric Power respectively (Art.25.2-5).

Conclusion

The previous regulation concerning mandatory blending targets was not able to transform the fuel market. First, biofuel was still not compatible with fossil fuel, providing a financial disincentive for companies to blend biofuel with fossil fuel. Second, the availability of biofuel at the time could not fulfill the targets from the government. Third, there were not sufficient provisions for enforcement of the mandatory blending targets. Whether this new regulation provides enough handles for law enforcers to implement the mandatory blending targets remains to be seen. As a response to the new regulation, some state-owned enterprises and companies have taken serious steps towards compliance. Pertamina, for example, has invited Indonesian companies to participate in a tender for the procurement of 6.6 million KL of biofuel in order to fulfill the mandatory blending target of 10% in 2014 and 2015 (15).

References and notes

  1. H.S. Dillon, T. Laan and H.S. Dillon. 2008 Biofuels- at what cost? Government support for biodiesel and ethanol in Indonesia. One of a series of reports addressing subsidies for biofuels in developing countries. IISD, Geneva 2008.
  2. UNCTAD, “The biofuels market: Current situation and alternative scenarios” (2009); http://unctad.org/en/docs/ditcbcc20091_en.pdf.
  3. Sorda, Giovanni, Martin Banse, Claudia Kemfert, An overview of biofuel policies across the world. Energy Policy 38(11), 6977-6988 (2010).
  4. K. Deininger, D. Byerlee, Rising Global Interest in Farmland: Can It Yield Sustainable and Equitable Benefits? (World Bank, Washington, DC, 2010).
  5. Banse M. H. van Meijl, A. Tabeau, G. Woltjer, F. Hellman and P.H. Verburg, Impact of EU biofuel policies on world agricultural production and land use. Biomass and Bioenergy 35(6), 2385-2390 (2011).
  6. L. Levidow, EU criteria for sustainable biofuels: Accounting for carbon, depoliticising plunder, Geoforum 44, 211-223 (2013).
  7. Menteri Energi dan Sumber Daya Mineral. 2008. Peraturan Menteri Energi dan Sumbar Daya Alam No. 32 tahun 2008 tentang Penyediaan, Pemanfaatan dan Tata Niaga Bahan Bakar Nabati. Jakarta. http://prokum.esdm.go.id/permen/2008/permen-esdm-32-2008.pdf
  8. R. R. Dhany, “Perusahaan tambang wajib pakai bahan bakar nabati,” Detik Finance, March 27, 2012; http://finance.detik.com/read/2012/03/27/161742/1877962/1034/perusahaan-tambang-wajib-pakai-bahan-bakar-nabati-per-juli-2012. Last accessed on 17 february 2014.
  9. N. D. Wahyuni, “Industri besi dan baja wajib pakai bahan bakar nabati,” Bisnis Liputan 6, February 11, 2013; http://bisnis.liputan6.com/read/509098/industri-besi-dan-baja-wajib-pakai-bahan-bakar-nabati-mulai-2013. Last accessed on 17 february 2014.
  10. F. Hadi Suprapto, “Dewan tolak subsidi BBN,” Viva News, February 10, 2009; http://us.bisnis.news.viva.co.id/news/read/28541-dewan_tolak_subsidi_bbn. Last accessed on 17 february 2014.
  11. “Pertamina cuts amount of CPO in biosolar,” Jakarta Post, May 5, 2008; http://www.thejakartapost.com/news/2008/05/05/pertamina-cuts-amount-cpo-biosolar.html. Last accessed on 17 february 2014.
  12. R. R. Dhany, “Perusahaan tambang juga diusir kalau tak pakai BBN,” Detik Finance, May 22, 2012; http://finance.detik.com/read/2012/05/22/173757/1922094/1034/perusahaan-tambang-juga-diusir-kalau-tak-pakai-bbn. Last accessed on 17 february 2014.
  13. Peraturan Menteri ESDM No.25/2013 tentang perubahan atas Peraturan Menteri ESDM No. 32/2008 tentang penyediaan, pemanfaatan, dan tata niaga bahan bakar nabati (biofuel) sebagai bahan bakar lain; http://prokum.esdm.go.id/permen/2013/Permen%20ESDM%2025%202013.pdf
  14. http://www.pertamina.com/news-room/siaran-pers/pertamina-gelar-tender-pengadaan-fame-6,6-juta-kl/

Annex

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Why have the mandatory blending targets and pricing subsidies not yet transformed the fuel market in Indonesia? by JARAK the short history of Jatropha projects in Indonesia, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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