Alloysius Joko Purwanto and Nuki Agya Utama, Jakarta – 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 percent blend mandate is already in place, bioethanol development lags significantly behind. Presidential Regulation No. 40/2023 includes a road map targeting 1.2 million kiloliters of bioethanol by 2030, yet the current bioethanol supply supports only limited availability of E5 (gasoline with 5 percent 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 kl by 2030, according to a recent study by ERIA on road transportation biofuels in Indonesia. If Indonesia meets its target of producing 1.2 million kl of bioethanol by that year, as set in the presidential regulation, the national blending rate would average just 2.9 percent, almost equivalent to an E3 (3 percent ethanol content) program. Around 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 Merauke, Papua but this project should 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 Energy and Mineral Resources Ministry, the average market ceiling price for molasses rose 60 percent between 2018 and 2024, pushing bioethanol prices up by around 40 percent during that period, while the gasoline price increase was only 30 percent.
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 percent. While export volumes modestly increased by 3.9 percent, export value climbed 22 percent, reflecting molasses' rising international appeal.
Domestically, the molasses price is highly volatile due to sudden shifts in market demand. For example, the average price jumped by more than 45 percent between June and August 2020, driving a nearly 30 percent uptick in the bioethanol market ceiling price during the same period, the highest price since the 2016 bioethanol decree issuance. This surge during the early phase of the COVID-19 pandemic was likely related to the urgent demand for bioethanol for sanitizer production.
To ensure the success of its bioethanol program, the government is urged to adopt the following 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 Rp 4,160 per liter by 2030 from the current Rp 2,370 per liter. Closing this gap to absorb 1.2 million kl of bioethanol will require an estimated Rp 5 trillion (US$315 million).
One possible measure is charging fees for gasoline (a dirtier fuel) while providing rebates for bioethanol (a cleaner fuel). Thailand has implemented this approach to subsidize the cost of its high-blended bioethanol (E85) fuel using funds collected from gasoline sales. In Indonesia, imposing a fee of Rp 60 per liter for purchased gasoline should incentivize consumers to switch to bioethanol-blended gasoline products and cover half of the price gap to achieve the 1.2 million kl target by 2030.
Second, on a more structural level, the remaining price difference can be narrowed by stabilizing the domestic stock of molasses and reducing production costs. The government can levy an export fee on molasses. A fee of $15 per tonne of exported molasses in 2030, for example, could generate over $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 a levy 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 needs to start getting serious about developing feedstocks and technologies to produce non-sugarcane-based bioethanol, especially second-generation bioethanol.
Indonesia's bioethanol fuel program in Indonesia is a multi-sectoral issue. The program'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.
[Both writers are energy economists at the Economic Research Institute for ASEAN and East Asia (ERIA). The views expressed are personal.]
Source: https://www.thejakartapost.com/opinion/2024/12/23/indonesias-bioethanol-goals-a-reality-check.htm