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Energy economics model to analyze the integration of biofuel into existing energy
systems: the Indonesian case
Overview
Biofuel perceived as the solution in midterm for transition into low carbon energy sources in particular in developing
countries. Indonesia, with the 4th largest population in the world, also shifts into a bio-based economy due to
depleting oil sources and increasing costs for subsidizing domestic fuel. Starting from 2006, the Indonesian
government enacts the Mix Energy Policy which aims to shift partially from oil into biofuel in the transportation
sector. It is expected that in Indonesia, biofuels can reduce the dependency of oil by partially replacing the fuel
demand for domestic transportation, empower local communities by creating jobs in the agriculture and industrial
sector, generate income by exporting excess production and lead to savings in carbon emissions. The government
has set the goal that biofuels must contribute 3% of the energy mix by 2015 and 5 % by 2025.
In this paper, an energy economic model is introduced to quantify the impact of the integration of biofuel into
existing energy systems which are now dominated by fossil fuels. The purpose of this paper is to describe the
perspective for biofuel and to give appropriate recommendations so that biofuel can be introduced in an effective,
efficient, profitable and sustainable way. This paper concentrates on biofuel (biodiesel and bioethanol) for the
transportation sector, which is still being dominated by fossil gasoline and diesel fuel.
Methods
The most relevant tool for energy planning purpose are models, which mathematically represent a simplification of
the real system. The tool for this study was the BIOFUEL2 model. This model is based on supply and demand side
with the purpose to balance the sources and macroeconomics parameters. The model uses partial equilibrium. This
dynamic non linear programming is written in GAMS (General Algebraic Modeling System) modeling language with
MINOS as the solver. The time set is 3 years intervals from 2007 until 2037.
The model structure is designed such that it has multiple crops supply chains; sugarcane and cassava to produce
bioethanol, palm oil and jatropha to produce biodiesel. To avoid a conflict between food and fuel allocation, land
allocation for food is secured and the remaining arable land is allocated to biofuel production. The first generation
technologies for biofuels are fermentation to produce bioethanol and esterification to produce biodiesel. Bioethanol
is used to substitute fossil gasoline while biodiesel is used to substitute fossil diesel fuel. The purpose of this model
is to quantify the whole energy supply and demand balances by introduction of the biofuel into the energy systems.
Results
Four scenarios are developed in terms of cost optimization for biofuel production, with data from 2008 or before.
The first scenario is `business as usual`, where nothing changes; the biofuel still subsidized and fossil fuels price, as
well, lack of investing in new technologies and the environmental benefit of biofuel due to unsustainable production
process. This subsidy amount is measure to reduce the price of biofuel at least equal with the fuel substituent
(gasoline and diesel fuel).
The second scenario is the `no oil subsidy` scenario which the fossil fuel subsidy is eliminated in Indonesia. Market
Analysis is done using a price model. The cost of biofuel derived from food crops is relative volatile and depends on
inflation rate. On the another hand, oil price is also uncertain due to geopolitics, supply and demand, management of
technology transfer, logistic problems, long term investment and subsidized fossil fuel price. By reduce the fossil
fuel price, thus the gap for biofuel subsidy reduced as well.
The third scenario is the `food` scenario which the price of biofuel is increasing due to conflict between food and
biofuel allocation. Presently, the hypothesis is that an increase in subsidy on biofuel could threaten food prices since
they are based on the same crops and food prices are increasing by the use of food crops for biofuel. Due to higher
price of fuel, a lot of farmers will switch their crops into fuel crops instead of food crops. This scenario will discuss
the impact of subsidy on biofuel price.
The fourth scenario is the combination of the second and the third scenarios.
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Conclusions
The opportunities for biofuel development in Indonesia are: biodiversity, technology and land availability, high yield
from crops and strongly growing demand for energy. The threats are: energy pricing is not yet well regulated,
geographical factor by isolated areas in the producer area, volatility market of raw materials price, and bio-fuel
prices still not competitive for transportation usage.
Renewable energy does not have a competitive advantage over fossil fuel prices as long as the Indonesian
government remains subsidizing fossil fuels, thus renewable energy from crops will remain unattractive. On the other
hand, if the oil price hikes, the biofuel will become preferred over food commodities. Corn in USA, sugar cane in
Brazil and palm oil in Indonesia are examples where food crops can switch between food and fuel. Due to higher
price of fuel, a lot of farmers switch their crops to fuel instead of domestic food supply. The time constraint and
policy factors are very important factors influencing the dynamics of the Indonesia’s bio-fuel energy systems
.
To penetrate biofuel into these energy systems, community involvement is necessary for efficient and rational use of
energy. Innovative energy systems could be developed in future by either horizontal development (focus on
diversifying energy sources) or vertically (by going radically from one to another energy source). The integrated
assessment model uses a multifaceted approach including technology, market and environment, to give a clearer
picture of the complexity of biomass system in Indonesia and supply flexible tools to apply in other developing
countries.
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