Indonesia’s Bioethanol Goals: A Reality Check
Date:
23 December 2024Share Article:
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By Dr Alloysius Joko Purwanto, Energy Economist, and Dr Nuki Agya Utama, Head of the Asia Zero Emission Center: Indonesia’s abundant agricultural resources present a pivotal opportunity to transition from fossil fuels to bioethanol – a cleaner and renewable energy alternative. While the country has made strides in biodiesel, where a 35% blend mandate is already in place, bioethanol development lags significantly behind. Presidential Regulation No. 40 of 2023 includes a roadmap targeting 1.2 million kilolitres of bioethanol by 2030, yet the current bioethanol supply supports only limited availability of E5 (gasoline with 5% ethanol content) in Java, falling short of national aspirations. The regulation also sets ambitious goals to boost sugarcane production, improve farmer welfare, and support bioethanol expansion, yet significant barriers remain unresolved.
Gasoline consumption in the country is projected to reach around 41.3 million kilolitres by 2030, according to a recent study by ERIA on road transport biofuels in Indonesia. If Indonesia meets its target of producing 1.2 million kilolitres of bioethanol by that year, as set in the Regulation, the national blending rate would average just 2.9%, almost equivalent to an E3 (3% ethanol content) programme. Around 0.24 million kilolitres or one-fifth of this production target should be contributed by the government’s national strategic project of opening 2 million hectares of sugarcane plantation in South Papua expected to start producing by 2027. Ideally, this project and other potentially new opening sugarcane plantation must comply with the assigned land use classes, meet land suitability for sugarcane needs & land ownership, and most importantly must align with Indonesia’s commitment to stopping deforestation and mitigating its environmentally and socially negative impacts.
One primary bottleneck is the price disparity between bioethanol and gasoline. Intense market competition for bioethanol feedstock, particularly molasses, has driven prices up. According to data from the Ministry of Energy and Mineral Resources, the average market ceiling price for molasses rose 60% between 2018 and 2024, pushing bioethanol prices up by around 40% during that period, while the gasoline price increase was only 30%.
Competition for molasses remains a significant challenge for local bioethanol producers, as molasses are also used in food processing, monosodium glutamate production, and exports. Between 2018 and 2021, Indonesia’s molasses production grew at an average annual rate of 3.6%. While export volumes modestly increased by 3.9%, export value climbed 22%, reflecting molasses’ rising international appeal.
To ensure the success of its bioethanol programme, the Indonesian government is urged to adopt these strategies.
First, the government should work on closing the price gap between bioethanol and gasoline fuels. If the current trend persists, the price difference between bioethanol and the RON95 gasoline fuel could reach around Rp4,160 per litre by 2030 from the current Rp2,370 per litre. Closing this gap to absorb 1.2 million kilolitres of bioethanol will require an estimated Rp5 trillion (around US$315 million).
One possible strategy is to introduce feebate, a policy that involves charging fees for gasoline while providing rebates for bioethanol. Thailand has implemented this approach to subsidise its high-blended bioethanol (E85) fuel using funds collected from gasoline sales. In Indonesia, imposing a fee of Rp60 per litre for purchased gasoline should incentivise consumers to switch to bioethanol-blended gasoline products and cover half of the price gap to achieve the 1.2 million kilolitre target by 2030.
Second, on a more structural level, the remaining price difference can be narrowed by stabilising the domestic stock of molasses and reducing production costs. The government can levy an export fee on molasses. A fee of US$15 per ton of exported molasses in 2030, could generate over US$1.2 million while curbing export volumes, hence increasing domestic supply. The revenue should primarily support sugarcane farmers, helping to cut production costs.
Unlike the biodiesel financing mechanism, in which exports fee on crude palm oil can bridge the price gap between biodiesel and pure diesel, the market size and value of molasses exports are too small to be able to close the bioethanol price gap. Therefore, the proposed levy on molasses exports can only be implemented to avoid excessive molasses exports and to support domestic sugarcane production.
Finally, while Brazil and Thailand – the world’s bioethanol fuel frontrunners – produce bioethanol out of sugarcane oversupply, Indonesia’s bioethanol fuel is generated from molasses, a byproduct of refining sugarcane into sugar. However, Indonesia’s supply of sugarcane and its derivative commodities, i.e., sugar and molasses, fall short of their potential demand. The government must be more serious in developing feedstocks and technologies to produce non-sugarcane-based bioethanol, especially second-generation bioethanol.
Second-generation bioethanol is derived from non-edible crops, such as lignocellulosic plants. In Indonesia, several potential feedstocks are being studied to be converted into second-generation bioethanol. In the last decade, stakeholders including Pertamina have been exploring the use of cellulosic materials such as Napier or elephant grass and switchgrass. According to a 2022 ERIA study, other lignocellulosic feedstocks – such as sugarcane bagasse, rice straw, corn stover, sago hampas, and palm empty fruit bunches – could provide enough quantities to support a national 20% (E20) programme, blending bioethanol at 20% with gasoline.
The main challenge faced by global producers in developing second-generation bioethanol is the high cost of pre-treating cellulosic biomass and the necessary enzyme, which limits the feasibility of mass-producing bioethanol. International collaboration that involves not only the industry but also academia needs to be strengthened to accelerate advanced bioethanol development in Indonesia.
Indonesia’s bioethanol fuel programme in Indonesia is a pluri-sectoral issue. The programme’s success depends heavily on the country’s ability to comprehensively solve problems related to the production capacity of sugarcane and molasses, as well as the value chain and economic viability of these resources. Beyond that, diversification of feedstock and technological advancement are needed to overcome the limitations of relying on sugarcane production. Groundbreaking measures are urgently needed, as nearly 15 years of efforts to develop and use bioethanol have yielded little progress despite bioethanol’s significant potential to reduce Indonesia’s oil imports and greenhouse gas emissions.
This opinion piece was written by Dr Alloysius Joko Purwanto, Energy Economist, and Dr Nuki Agya Utama, Head of the Asia Zero Emission Center, ERIA, and has been published in The Jakarta Post. Click here to subscribe to the monthly newsletter.
Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of ERIA.