Indonesia's Ministerial Regulation No. 32/2008, which took effect on January 1, 2009, introduced mandated minimum biofuel consumption in the domestic transport, industrial, and power generation sectors from 2009 to 2025. The regulation primarily provides for the following national biodiesel and bioethanol consumption targets (varying between sectors):
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Disappointing Results in 2009
The regulation's biofuel targets were not met in 2009, a year characterized by low levels of domestic biofuel demand, sharp falls in production, uncertainty for producers, and difficulty in securing feedstock, particularly crude palm oil ("CPO"). CPO prices rose 57 percent during the year, due to increased demand from China and India, and due to a global shortage of soybeans that caused CPO to be diverted to food consumption. As a result, biofuel output fell far short of the volume required to meet the regulation's mandated consumption levels.
Total production of biofuels was reportedly 104,100 kiloliters, a 96 percent reduction from the 2.56 million kiloliters produced in 2008 and well below prior projections. Another impediment to production was the delay in the government's implementation of a formula to calculate biofuel sale prices and subsidy levels. Given the high production costs of biofuels, and the fact that the government subsidizes sales of gasoline, diesel, and kerosene, subsidies granted to biofuel producers are critical in allowing them to compete against cheaper fossil fuels.
Uncertainty and Opportunities for 2010 and Beyond
The subsidies introduced by the government in mid-2009 have been doubled in 2010 to Rp 2,000/liter, which should have some impact on production. However, the government has been silent on any additional steps to address declining production levels and the resultant failure to meet the regulation's biofuel consumption mandates. It also remains to be seen whether and to what extent the failure to meet the "mandatory" targets will affect the overall credibility of the scheme.
Indonesia appears well-placed to exploit future biofuel opportunities—it is the world's leading producer of CPO and has sufficient land mass and climate for the commercial-scale cultivation of feedstocks to meet increasing energy demands for the foreseeable future. However, the Indonesian biofuels industry was unable to effectively compete with cheaper, subsidized fossil fuels in 2009, and it probably cannot do so in the future without significant additional subsidies, meaningful fiscal incentives, or a reduction in existing fossil fuel subsidies.