29 June 2016 KTH Energy and Climate Studies (1) Division of Energy and Climate Studies KTH Royal Institute of Technology, Sweden (2) Agricultural Economics and Rural Policy Group Wageningen University, the Netherlands the 20th International Consortium on Applied Bioeconomy Research (ICABR) Conference, June, 2016 (Ravello, Italy) Analyzing the economics of palm oil biodiesel production in Indonesia Dilip Khatiwada (1), Dusan Drabik (2), Fumi Harahap (1), Semida Silveira (1)

Study background KTH Energy and Climate Studies Indonesia is the largest palm oil producer and exporter in the world. The country has enacted rules and regulations for biofuel production, for example mandatory biodiesel mandates.. Economic competiveness, volatile international prices of petroleum, international trade/exports of palm oil, and fossil fuel subsidies have hindered the development of a domestic market for biodiesel. The government of Indonesia provides subsidies to palm oil feedstock producers, processing industries, and fuel consumers. Other regulations include a new funding mechanism for biofuel subsidies, a levy on palm oil exports…

KTH Energy and Climate Studies Objectives of the study / research questions?? 3  To develop an empirical biofuel economic model of palm oil biodiesel production and use in Indonesia.  To examine the interlinkages between policy, technological, and market impacts of palm oil and biodiesel production. (also prices linkages: crop-biofuel-energy-crude oil)  How subsidies and tax credit would affect biodiesel market in Indonesia? How do biofuel mandates and tax policies interact in relation to developing the palm oil industry in terms of energy security and socioeconomic development?  How do we find interlinkages between different biofuel policy options and their export?

Shift from oil exporter to importer KTH Energy and Climate Studies Source: EIA,2013

KTH Energy and Climate Studies Sector July 2014* April 2015 January 2016 January 2020 January 2025 Transportation10%15%20%30% Electricity20%25%30% Source: * MEMR Regulation 25/2013, MEMR Regulation 12/2015 Note: Blend rate is % of total diesel consumption Biofuel policy and programs in Indonesia  Indonesian set/updated ambitious biofuel targets in 2015 that aims to diversify domestic fuel consumption beyond the transport sector  The share of biodiesel was 7.2% in 2015 (3.7% in 2012 and 0.5% in 2009)

Where palm oil and biodiesel produced in Indonesia? KTH Energy and Climate Studies Source: MODIS data

Palm-oil-based bioenergy systems KTH Energy and Climate Studies Biomass for electricity Biogas for electricity Biodiesel Total plantation area: 10.5 million hectares (2014) Fresh fruit bunch (20-26 ton/ha/y) Oil palm fronds (10-16 ton/ha) Oil palm trunk (70 ton/ha/30y) Empty fruit bunch (5 ton/ha/y, dry wt: 2 ton/ha/y)) Palm fruit Mesocarp Palm kernel Shell Crude palm oil (4-5 ton/ha/y) Crude palm kernel oil (0.6 ton/ha/y) Palm kernel cake Fiber Source: IOPRI 2014 Palm oil mill effluent (14 ton/ha/y)

KTH Energy and Climate Studies Manual irrigation at main nursery The young oil palms are planted in the field which holds around 140 plants/ha. The plant has a continual productive lifespan of years (economic lifetime). One oil palm tree produces about fruit bunches per year and one fruit bunch weights around kg. Harvesting is done on a perennial basis. Fertilizer application at a plantation Fresh fruit bunches Picutres: Ylva and Jannik, 2015

Production chains of palm oil biodiesel in Indonesia KTH Energy and Climate Studies

10 The zero marginal profit condition for FFB crushing requires that the revenues from sales of CPO and PKO equal to the cost of FFB and the processing cost (C FFB ) Model overview – economics of biodiesel Fresh fruit bunch Crude palm oil Crude palm kernel In a market equilibrium, the supply of the CPO has to be equal to its uses price of FFB price of CPO Price of PKO Agricultural subsidy CPO export levy Export amount CPO for food CPO for biodiesel CPO for indus.

KTH Energy and Climate Studies A zero marginal profit condition for biodiesel production requires that the revenues be equal to the cost We model biodiesel exports as the residual of biodiesel production, B, after the domestic biodiesel demand, αD F (P F ), has been satisfied Model overview (contd.) Biodiesel Conv. Eff. Production subsidy Price of biodiesel Glycerin Conv. Eff. Price of glycerin Price of CPO Price of methanol Consumptin of methanol processing cost Biodiesel export Total biodiesel Blending rate Total domestic biodiesel consumption

Model overview (contd.) KTH Energy and Climate Studies Fuel consumers in Indonesia benefit from a consumption subsidy s F per liter of the fuel blend. Incorporating the value added tax (VAT) the consumers have to pay, the final fuel price is given by Price of fuel Value added tax Blending rate Price of biodiesel Price of of diesel consumption subsidy of blended fuel

KTH Energy and Climate Studies Endogenous biodiesel price Model overview (contd.)

KTH Energy and Climate Studies Exogenous biodiesel price Model overview (contd.)

Data sources and model inputs KTH Energy and Climate Studies Policy variables CPO export levytXtX 50$/metric ton Biodiesel export taxtBtB 0,0176$/liter Value added tax on fuelVAT 1 0,10 Car taxVAT 2 0,05 Fuel (diesel + biodiesel) consumption subsidysF'sF' 0,0730$/liter Fuel (diesel + biodiesel) consumption subsidy (energy)sFsF 0,0735$/liter Oil palm production fertilizer subsidys OP 2,88$/metric ton (FFB) Production and Export Production of oil palmS OP 146,5million tons FFB Exports of CPOX CPO 21,7million tons CPO Food use of CPOD_ food _ CPO 5,5million tons CPO Biodiesel productionB_prod' 3300million liters Diesel useD 22600million liters Domestic biodiesel consumption (volume)B' 1600million liters

Model calibration KTH Energy and Climate Studies Value of variables at the calibrated point Price of oil palmP FFB 92,59$/metric ton FFB Price of palm kernel oilP PKO 1213$/metric ton PKO Price of CPOP CPO 553,3$/metric ton CPO Price of glycerinPGPG 0,25 $/kilogram glycerin Price of methanolPMPM 0,249 $/kilogram methanol Price of dieselPDPD 0,25$/liter diesel Processing cost of biodieselcBcB 0,11$/liter Parameters used to calibrate the model Value Elasticity of CPO used in food-0,4 Elasticity of CPO used in industry-0,4 Elasticity of export demand for CPO-0,54 Elasticity of supply of oil palm-0,195 Fuel demand elasticity-0,4 Elasticity of export demand for biodiesel-0,9

Results and disucssions (preliminary!) KTH Energy and Climate Studies Exogenous biodiesel price: The price of biodiesel is fixed..(outside Indonesia)

Conclusions and future works.. KTH Energy and Climate Studies  An empirical economic model: showing the interlinkages between policy, technological, and market impacts of palm oil and biodiesel production are derived and the link between biodiesel and diesel prices is established.  The framework model helps in analyzing the impacts of government policies on biofuel mandates, biofuel support/subsidies, fuel subsidies and tax, and trade. Also, in performing economic welfare analysis  Since the government aims to meet the mandated biodiesel targets by providing taxes on CPO and biodiesel exports, the model can be applied to both the endogenous and exogenous prices of biodiesel.  The market of kernel products and other valuable co-products such as residual biomass can also be considered in the model.

Thank you for your attention!! Comments and questions ??? KTH Energy and Climate Studies