Economic Update

Published 18 Oct 2018

Regulations mandating the use of palm oil in diesel fuel could help ease Indonesia’s dependence on energy imports and stabilise the local currency, while improving prospects for local palm oil producers.

In late August President Joko Widodo ratified a regulation mandating the compulsory use of 20% blended biodiesel (B20), which uses palm oil as a feedstock, for all vehicles and heavy machinery.

To support greater use of the fuel, in early September the government also announced an amendment to regulations governing the Estate Crop Fund, allowing it greater scope to bridge the price gap between biodiesel – Rp7600 ($0.50) per litre – and standard diesel – Rp5150 ($0.34) per litre.

The fund, which generates capital from levies imposed on palm oil exporters and had an annual budget of around Rp14.2trn ($972m) in 2017, was previously limited to supporting sustainability projects, such as crop replanting and welfare support for small farmers. It also provided subsidies for biodiesel, but was restricted to public service obligation sectors. Now the fund has the freedom to meet B20 demand in all sectors.

In addition to transport and industry, greater use of B20 could also be seen in the power sector.

In mid-September Ignasius Jonan, minister of energy and mineral resources, said he expects state electricity producer PLN to convert some of its fossil fuel power stations to use biodiesel as feedstock to encourage greater energy self-sufficiency.

The conversion of some PLN generational capacity, in particular its lower output 2000-MW power stations, could be undertaken within two years, according to Jonan.

The utility firm had already flagged its willingness to incorporate B20 into its feedstock mix, with PLN officials saying the company would buy up to 2.2m kl of biodiesel to fire its existing diesel-fuelled power stations.

B20 initiatives to reduce energy imports, support palm oil industry

The drive to expand biodiesel use across sectors comes as the government looks to boost Indonesia’s energy self-sufficiency and reduce its reliance on energy imports that, due to the higher oil price environment, are taking a toll on the economy.

According to official estimates, biodiesel has the potential to reduce the energy import bill by around $6bn per year. This would ease the current account deficit, which is projected to reach $25bn – approximately 2.7% of GDP – this year and alleviate pressure on the rupiah, which is currently at levels not seen since the Asian economic crisis in 1997.

The measure is one of several steps the government has taken to stabilise the rupiah and reduce imports. In early September, for example, it imposed higher import tariffs – up to 10% in some instances – on more than 1100 products, many of which are already manufactured locally.

In addition to rebalancing public finances, the B20 programme also aims to boost domestic consumption of palm oil, on the back of a decline in prices this year.

Crude palm oil (CPO) prices have fallen nearly 14% since the start of 2018, according to a recent report from Moody’s, and could be further dampened in the short term if Indonesia and Malaysia, which together account for 85% of the world’s CPO output, are unable to reduce current stockpiles.

Indonesian palm oil output hit 4m tonnes in August, a four-year high, according to local media reports. In the same month domestic palm oil consumption increased from 950,000 tonnes to 1.05m tonnes, while exports dipped by 2% to 2.8m tonnes.

Although Moody’s expects demand for palm oil in key markets, including China and India, to drive CPO prices up over the medium term, Indonesia’s palm oil industry could face additional pressure from a proposal currently before the European Parliament that promises to phase out the use of palm oil in biofuels by 2030.

If ratified, Indonesia may need to seek new markets to soak up excess output.