Indonesia is one of the world’s biggest energy consumers, with the country’s energy sector accounting for almost 35 per cent  of the total greenhouse gas (GHG) emissions. In its Nationally Determined Contribution (NDC), Indonesia set targets to reduce GHG emissions by 29 per cent by 2030 and by 41 per cent with international assistance. To meet its NDC targets, the Government of Indonesia is increasingly focusing on new and renewable energy (NRE) sources. Among the renewable energy sources available, bio-energy is projected to account for nearly 51 per cent of Indonesia’s total energy consumption by 2030.

The development of biofuel first started in 2006 as a response to rising petroleum prices and increased fuel imports as domestic crude production fell. The 2006 National Energy Policy (KEN) established an energy diversification policy, which promoted the use of biofuels. Numerous major policies have been rolled-out since then, including the establishment of a blending mandate, pricing mechanism, and subsidy/incentive scheme. The biofuel mandate roadmap was formed in 2008, with targets for bioethanol, biodiesel, and pure vegetable oil blending specified. Many of these goals, however, have not been achieved, owing to pricing differences with petroleum. The biodiesel objective of 20 per cent of diesel consumption was very recently achieved in 2019.

Due to the rapid development of alternative technologies, particularly electric vehicles (EV), the future potential of biofuel demand has become uncertain. If current trends exist, the potential biofuel demand in 2050 might rise to 190 MTOE, up from the current demand of 8 MTOE. However, in the case of significant EV penetration by 2050, biofuel demand potential could be lowered to only 93 MTOE. In the latter case, heavy-duty transportation and industrial would be the remaining demand potential as light-duty vehicle demand declines.

The report published by the Institute for Essential Services Reform (IESR) called Critical review on the biofuel development policy in Indonesia aims to assess the Government’s efforts and policies towards accelerating the development of biofuel, its economic, environmental, and social impact on the country and its potential in the coming years. Excerpts…

Since the 2000s, Indonesia’s crude oil production has been on a continuing downward trend due to a lack of exploration and investment in this sector. The Government’s oil production target at the beginning of each year has not been achieved for several consecutive years because most of the oil production comes from old oil fields. This decline in oil production combined with increasing domestic demand, has turned Indonesia into a net oil importer. Indonesia’s demand for oil, either in the form of crude oil or refined products (diesel, gasoline, etc.), is steadily increasing.

From 2000 until 2019, Indonesia’s total oil import has increased from 25.4 million tons to 34.3 million tons, with the biggest total import occurring in 2013, reaching 45.6 million tons. Large oil imports will directly impact the Indonesian state budget because higher oil prices will result in more spending on imports, which ultimately burdens the state foreign exchange reserves. Therefore, to reduce pressure on the state budget as a direct result of the increase in oil prices, it is important to consider other energy sources to reduce oil consumption and replace it.


The first Government’s effort to encourage the reduction of petroleum oil is by encouraging the usage of biofuel as mandated by Presidential Regulation No. 5/2006 on National Energy Policy (KEN). This regulation was targeting the use of biofuel at least 5 per cent of total primary energy by 2025. The KEN was later upgraded into the higher level Government Regulation No. 79/2014. In the same year, the Government also established the National Team for Biofuel Development (Timnas BBN).

MEMR Regulation No. 12/2015 is the latest update of MEMR Regulation No. 32/2008, which set the biofuel mandatory blending rate. Under this regulation, biodiesel should be 30 per cent of the total diesel demand starting from January 2020. For bioethanol, the percentage varies depending on the sector and starting date, as shown below.

More recently, the Government has issued in public statements their intention to further expand the biofuel program. In mid-2019, the president publicly announced the plan to start 50 per cent biodiesel blending (B50) by the end of 2020, and further increased it to B100. However, it was later postponed due to lack of available funding for the subsidy (IESR, 2021). The Government has clarified that the higher blending rate might require drop-in biofuel, the HVO (or green diesel). The Government has also included the construction of a green diesel plant in the mid-term national development plan (RPJMN).

Status of biofuel development

Currently, only the biodiesel blending program works in Indonesia. Prior to 2018, the biodiesel blending has only been successful in the PSO segment, as the subsidy and incentive were provided only for this segment. The biodiesel blended with PSO diesel fuel was subsidized through the state budget with a subsidy ceiling up to IDR 1,000 per litre in 2008-2010, IDR 2,000 per litre in 2011, and IDR 2,500-3,000 per litre in 2012. Nevertheless, the actual subsidy was much lower, only about IDR 100-120 per litre, because the subsidy only covers the price difference between biodiesel and conventional diesel.

The biodiesel reference price was determined based on the petroleum diesel (MOPS) price. Additionally, the reference price did not take into account the transport fee, which reached USD 60-120 per ton biodiesel according to USDA (Slette & Wiyono, 2013) or USD 7-70. In 2015, the biodiesel subsidy from the state budget was halted, causing the biodiesel consumption to cease. The Government later introduced a new subsidy scheme through BPDPKS instead of the state budget, which managed to spur consumption in the last quarter of 2015. The Government also revised the formula to determine the biodiesel reference price based on CPO price, conversion factor, profit margin, and transport fee. After the implementation of BPDPKS subsidy, biodiesel consumption has been increasing.

However, since the subsidy only covered the PSO sector, the implementation in the non-PSO sector was still struggling. On the other hand, the PSO sector only contributed to about half of the total diesel consumption. With the expansion of the subsidy to non-PSO diesel fuel in late 2018, the biodiesel share increased to 20 per cent in 2019, which means that for the first time, the Government managed to achieve the overall blending target.

Potential environmental impact

GHG emissions are one of the environmental impacts that arise at various stages of the biofuel industry. Globally, research related to the use of several types of biofuels shows the reduction of GHG emissions to varying degrees compared to the use of fossil-based fuels due to various factors such as differences in production routes and data variations, methodological choices, etc. Biofuel based on palm oil (the most widely used feedstock in Indonesia) can reduce 50-85 per cent of GHG emissions compared to fossil-based fuels without considering the effect of land-use change.

However, the GHG emissions of palm-oil based biofuel (and all other first generation biofuel) will be much higher when considering the land-use change (LUC). The study also shows that second-generation biofuels can generally reduce GHG emissions due to the absence of LUC. In contrast, third-generation biofuels have higher GHG emissions than fossil fuels at the present state of development.

The Government reports that the use of biodiesel in Indonesia has succeeded in reducing GHG emissions by 22.3-23.3 million tons of CO2 in 2020.

Future demand

Liquid fuel is mostly consumed in the transport sector. In 2019, 91 per cent of the final liquid fuel consumption was from transportation, followed by industry (5.4 per cent), household (0.6 per cent), commercial (0.5 per cent), and other sectors (2.5 per cent). In sectors other than transportation, the consumption rate declines over the years. On the other hand, the share of the transportation sector in liquid fuel consumption has increased from 65.9 per cent in 2009 to 91 per cent in 2019.

Following this trend, the transportation sector is expected to be the main driver of future liquid fuel consumption. RUEN projection estimates that the share of petroleum fuel consumption in the industry sector would increase from 7.5 per cent in 2020 to 9.2 per cent in 2050. In the other sectors, including construction, agriculture, and mining, RUEN expects that liquid fuel (petroleum and biofuel) would supply all the energy required. The share of biofuel in these sectors is estimated to increase from 5 per cent in 2020 to 27 per cent in 2050. 

This article has been sourced from Southeast Asia Infrastructure and can be accessed here