Copyright is owned by the Author of the thesis. Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only. The thesis may not be reproduced elsewhere without the permission of the Author. Increasing Liquid Fuel Self-sufficiency in Indonesia through Utilization of Marginal Land and Appropriate Technology for Biofuel Production A thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Energy Management Massey University New Zealand Maslan Lamria 2019 ii ABSTRACT This study proposed a strategy for increasing self-sufficiency of liquid fuel in Indonesia. The novel approach not previously undertaken was to integrate the utilization of marginal land with innovative technology for drop-in biofuel (DBF) production. The strategy involves interdependent relationships, so a systems dynamics modelling approach was applied. The assessments generally cover the national scope, but also specifically used Sumba Island as a case study around the marginal land issue. From a number of potential energy crops considered for growing on Sumba Island, Pongamia pinnata was selected. Metal soap decarboxylation was chosen as the preferable conversion technology for this oil crop, even though it has not yet reached full commersialisation. A simulation framework was developed to explain the intrinsic interrelationship between elements. These comprised the preparation of feedstock from marginal land, preparation of more appropriate conversion technology, a liquid biofuel supply system, and liquid fuel import demands. A delay in any of the elements causes a delay in DBF uptake, and thus time becomes a crucial factor. Considering the time factor, this study assessed the political dimension of sustainability, which is lacking in other bioenergy studies. A model, Assessment Tool of Biofuel Strategy through Utilization of Marginal Land and Innovation in Conversion Technology (ABMIC) was developed to test the strategy outcomes in some priority sustainability indicators. The model consists of ten sub- models containing two feedback loops invented in this study: a) between the “sense of urgency for action by the President” (SU) and liquid biofuel supply and demand; and b) between the conventional biofuel production from palm oil and the DBF production. The ABMIC model was tested and validated for structural validity, behaviour validity, and model usefulness. The results from scenario-based simulations confirmed that a systems dynamics approach was suitable for assessing the strategy. It supported the hypothesis that a political element, namely SU level, critically affects the success in implementing a liquid biofuel strategy through marginal land use and conversion technology iii innovation to increase liquid fuel self-sufficiency, which in turn influences the political element itself. An increase in SU level leads to a significant increase in liquid fuel self- sufficiency, foreign exchange saving, gross regional domestic product, and CO2 emissions reduction. SU should be sustained by maximizing future vision intervention. With modifications, the SU structure could be applied in non-biofuel sectors. Finally, this study outlines opportunities for further research to improve the model including through disaggregation, endogenizing variables, building functions of effects between variables, improving the variable quantifications, and further exploration of the variables. iv ACKNOWLEDGEMENTS First and foremost, I thank God Almighty for all His blessings in my PhD study. My sincere and deep gratitude goes to my supervisors: Prof Ralph Sims, Dr Phil Murray and Dr Tatang Soerawidjaja, for so many valuable supports in working through this research until I eventually completed this thesis. I am very grateful to the New Zealand Ministry of Foreign Affairs and Trade for the generous NZ-ASEAN Scholars Award during my PhD study, and to Massey University for the three-years Massey University Doctoral Scholarship. I thank the School of Food and Advanced Technology for resources for this study. I thank Dr Muhammad Tasrif and Prof Kambiz Maani for helpful advice in systems thinking and systems dynamics. Thank Dr Saswinadi Sasmojo for valuable ideas in writing this thesis. I thank all the research participants for supplying inputs for this study. I thank the Indonesian Ministry of Energy and Mineral Resources for assigning me a PhD study. Last but not least, I thank my family, relatives and friends for mental supports during my PhD journey. v TABLE OF CONTENTS ABSTRACT ................................................................................................................ ii ACKNOWLEDGEMENTS ...................................................................................... iv TABLE OF CONTENTS ........................................................................................... v LIST OF FIGURES ................................................................................................ xiii LIST OF TABLES ................................................................................................ xviii LIST OF ABBREVIATIONS ................................................................................ xxi CHAPTER 1 ............................................................................................................... 1 INTRODUCTION ...................................................................................................... 1 1.1 Geographic, economic and political profile of Indonesia ................................. 1 1.1.1 Geographic ...................................................................................................... 1 1.1.2 Political ............................................................................................................ 1 1.1.3 Economic ......................................................................................................... 3 1.2 Strategy for sustainable liquid biofuel development ........................................ 3 1.3 The need for an integrated and modelling approach ........................................ 5 1.4 Research Hypothesis, Aim and Objectives ........................................................ 7 1.5 Thesis structure and methodology approach .................................................... 9 CHAPTER 2 ............................................................................................................. 12 A REVIEW OF LIQUID FUEL SUPPLY AND DEMAND IN INDONESIA ... 12 2.1 Introduction ........................................................................................................ 12 2.2 Fundamentals of liquid biofuel ......................................................................... 12 2.2.1 Pure plant oils ................................................................................................ 13 2.2.2 Fatty acid alkyl esters .................................................................................... 13 2.2.3 Alcohols ......................................................................................................... 14 2.2.4 Bio-oil ............................................................................................................ 14 vi 2.2.5 Biohydrocarbons ........................................................................................... 14 2.3 History and projection of liquid fuel supply and demand in Indonesia ....... 15 2.3.1 Historical production, use, export, and import .............................................. 15 2.3.2 Projection of future production, use, export, and import .............................. 18 2.4 Interrelationship between the liquid biofuel development and the economy in Indonesia ................................................................................................................ 20 2.4.1 Historical balance of trade ............................................................................. 20 2.4.2 Balance of trade versus biofuel development ................................................ 22 2.5 Impacts of liquid biofuel production and use in Indonesia ............................ 29 2.5.1 Socioeconomic impacts ................................................................................. 30 2.5.2 Environmental impacts .................................................................................. 31 2.5.3 Political impacts ............................................................................................ 33 2.6 Model inputs ....................................................................................................... 34 2.7 Conclusions ......................................................................................................... 35 CHAPTER 3 ............................................................................................................. 37 DEVELOPING A SIMULATION FRAMEWORK ............................................. 37 3.1 Introduction ........................................................................................................ 37 3.2 The rationale of a systems approach for assessing integrated marginal land- based feedstock and appropriate future technology ............................................. 37 3.2.1 The need for an integrated approach ............................................................. 37 3.2.2 The modelling approach needed .................................................................... 38 3.2.3 Using systems dynamics modelling for policy analysis ................................ 40 3.3 A review of existing assessments of liquid fuel development strategy including feedstock and conversion technology ..................................................................... 42 3.3.1 Existing studies on feedstock and technology for liquid biofuel production and use in Indonesia ...................................................................................................... 43 vii 3.3.2 Existing studies on feedstock and technology for liquid biofuel production and use outside Indonesia .............................................................................................. 44 3.4 Development of a simulation framework using an Indonesian case study ... 45 3.5 Conclusion ........................................................................................................... 46 CHAPTER 4 ............................................................................................................. 47 ASSESSMENT OF MARGINAL LAND USE AND CHOICE OF CROP FOR BIOENERGY IN INDONESIA .............................................................................. 47 4.1 Introduction ........................................................................................................ 47 4.2 Analysis of marginal land potential in Indonesia ............................................ 48 4.2.1 Rationale for using marginal land for energy crop ........................................ 48 4.2.2 Criteria of marginal land ............................................................................... 48 4.3 Causes and restoration of marginal land ......................................................... 52 4.3.1 Causes of marginal land ................................................................................ 52 4.3.2 Restoration of marginal land ......................................................................... 53 4.4 Choosing an energy crop for marginal land .................................................... 56 4.4.1 Rationale for choosing an energy crop .......................................................... 56 4.4.2 Potential crops ............................................................................................... 56 4.4.3 Pongamia pinnata .......................................................................................... 58 4.4.3.1 Properties ................................................................................................ 59 4.4.3.2 Land suitability ....................................................................................... 60 4.4.3.3 Cost and Productivity ............................................................................. 61 4.4.3.4 Competition to non-energy use ............................................................... 63 4.4.3.5 The multipurpose capability of non-oil parts .......................................... 63 4.4.3.6 Environmental impacts ........................................................................... 64 4.4.3.7 Potential from growing pongamia on marginal land-based feedstock ... 65 4.5 Model inputs ....................................................................................................... 66 4.6 Lessons learned .................................................................................................. 67 viii 4.6.1 Tree-borne oilseeds policy for biofuels in India............................................ 67 4.6.2 Jatropha project for biofuel supply in Senegal .............................................. 68 4.6.3 Jatropha project for marginal land use in Indonesia ...................................... 69 4.6.4 Pongamia research for biofuel production in Australia ................................. 69 4.7 Conclusion ........................................................................................................... 70 CHAPTER 5 ............................................................................................................. 72 CONVERSION TECHNOLOGY OPTIONS FOR LIQUID BIOFUEL PRODUCTION ........................................................................................................ 72 5.1 Introduction ........................................................................................................ 72 5.2 Rationale for choosing a conversion technology type for liquid biofuel production ................................................................................................................. 72 5.3 Potential technological routes for drop-in biofuel (DBF) production ........... 73 5.3.1 Lignocellulosic thermolysis .......................................................................... 73 5.3.1.1 Pyrolysis ................................................................................................. 74 5.3.1.2 Gasification ............................................................................................. 74 5.3.1.3 Other processes of lignocellulosic thermolysis ...................................... 75 5.3.2 Oleochemical thermolysis ............................................................................. 75 5.3.2.1 Overview of oleochemical thermolysis .................................................. 75 5.3.2.2 Feedstock suitability for oleochemical thermolysis ............................... 75 5.3.2.3 Hydrodeoxygenation ............................................................................... 76 5.3.2.4 Metal soap decarboxylation .................................................................... 77 5.3.3 Combined thermolysis and biological ........................................................... 77 5.4 Choosing a DBF technology .............................................................................. 77 5.4.1 Criteria for choosing an appropriate DBF technology .................................. 77 5.4.2 Options for appropriate DBF technology in Indonesia ................................. 82 5.4.2.1 Development of hydrodeoxygenation technology .................................. 82 5.4.2.2 Development of metal soap decarboxylation technology ....................... 86 ix 5.4.2.3 Development of metal soap pyrolysis (dry distillation) ......................... 89 5.4.2.4 Choice of DBF technology by fuel type ................................................. 90 5.5 Improving liquid biofuel use through technology policy ................................ 90 5.6 Model inputs ....................................................................................................... 91 5.7 Conclusions. ........................................................................................................ 93 CHAPTER 6 ............................................................................................................. 94 SELECTION OF THE CASE STUDY .................................................................. 94 6.1 Introduction ........................................................................................................ 94 6.2 Profile of Sumba ................................................................................................. 94 6.3 Reasons for choosing Sumba as a case study ................................................... 96 6.4 Socioeconomic condition of selected regencies .......................................... 98 6.4.1 Social factors .............................................................................................. 98 6.4.2 Economic factors ........................................................................................... 98 6.5 Marginal land potential for energy crop .......................................................... 99 6.5.1 Marginal land characteristics ......................................................................... 99 6.5.2 Land suitability for energy crop .................................................................. 101 6.6 Factors that affect the progress of marginal land development .................. 107 6.6.1 Infrastructure readiness ............................................................................... 108 6.6.2 Local government coordination ................................................................... 108 6.6.3 Private landowners’ willingness to cultivate ............................................... 109 6.6.4 Land status clarity ....................................................................................... 111 6.7 Model Inputs ..................................................................................................... 111 6.8 Conclusions ....................................................................................................... 112 CHAPTER 7 ........................................................................................................... 114 DEVELOPING THE SYSTEMS DYNAMICS MODEL ................................... 114 7.1 Introduction ...................................................................................................... 114 x 7.2 Problem formulation ........................................................................................ 114 7.3 Causal loop modelling ...................................................................................... 115 7.3.1 Identification of main variables ................................................................... 115 7.3.2 Developing a causal loop diagram .............................................................. 116 7.3.3 Identification of system archetype .............................................................. 120 7.3.4 Identification of key leverage points ........................................................... 120 7.3.5 Developing intervention strategies .............................................................. 121 7.4 Model boundary ............................................................................................... 121 7.5 Data and information gathering ..................................................................... 123 7.5.1 Methods ....................................................................................................... 123 7.5.2 Ethical considerations .................................................................................. 124 7.6 Model structuring ............................................................................................ 125 7.6.1 Model description ........................................................................................ 125 7.6.2 Policy sub-model ......................................................................................... 126 7.6.3 Technology readiness sub-model ................................................................ 130 7.6.4 Sumba marginal land preparedness sub-model ........................................... 134 7.6.5 Sumba feedstock production sub-model ..................................................... 139 7.6.6 Sumba DBF Production from Marginal Land sub-model ........................... 144 7.6.7 Sumba DBF supply and demand sub-model ............................................... 147 7.6.8 Liquid biofuel transition sub-model ............................................................ 149 7.6.9 National liquid biofuel supply and demand sub-model ............................... 156 7.6.10 Economic sub-model ................................................................................. 158 7.6.11 CO2 emissions from marginal land use sub-model ................................... 161 7.7 Conclusions ....................................................................................................... 165 CHAPTER 8 ........................................................................................................... 167 MODELLING RESULTS AND ANALYSIS ...................................................... 167 xi 8.1 Introduction ...................................................................................................... 167 8.2 Reference Mode ................................................................................................ 167 8.3 Model validation ............................................................................................... 173 8.3.1 Structural validation .................................................................................... 174 8.3.1.1 Parametric appropriateness ................................................................... 174 8.3.1.2 Dimensional consistency ...................................................................... 174 8.3.1.3 Mass balance ......................................................................................... 175 8.3.1.4 Face validation ...................................................................................... 175 8.3.2 Behavioural validation ................................................................................ 175 8.3.2.1 Extreme condition test .......................................................................... 176 The model behaviour under this extreme condition was as anticipated in the real system, and thus, it improved the ABMIC model validity. .............................. 179 8.3.2.2 Sensitivity test ....................................................................................... 179 8.3.3 Model usefulness ......................................................................................... 181 8.4 Policy scenarios and analysis .......................................................................... 182 8.4.1 Vision scenarios (minimizing delay) ........................................................... 183 8.4.1.1 Design of vision scenarios .................................................................... 183 8.4.1.2 Implications for the main indicators across vision scenarios ............... 184 8.4.1.3 Implications in planting delay across vision scenarios ......................... 193 8.4.2 Crop rotation cycle (CRC) scenarios (trading-off oil feedstock benefit and climate benefit) ..................................................................................................... 196 8.4.2.1 Design of CRC scenarios ...................................................................... 196 8.4.2.2 Implications across CRC scenarios ...................................................... 197 CHAPTER 9 ........................................................................................................... 200 CONCLUSIONS AND RECOMMENDATIONS ............................................... 200 9.1 Introduction ...................................................................................................... 200 9.2 Contributions .................................................................................................... 200 xii 9.3 Findings ............................................................................................................. 201 9.4 Policy recommendation ................................................................................... 204 9.5 Limitations and recommendations for further research .............................. 206 REFERENCES ....................................................................................................... 210 APPENDICES ........................................................................................................ 223 APPENDIX A : LETTERS AND FORMS .......................................................... 223 APPENDIX B: SOIL TEST RESULT ................................................................. 232 APPENDIX C: INTERVIEWS OF SUMBA MARGINAL LAND ................... 235 APPENDIX D: FOCUS GROUP OF DBF TECHNOLOGY ............................ 236 APPENDIX E: FOCUS GROUP OF POLICY ................................................... 237 APPENDIX F: MODEL FACE VALIDATION ................................................. 238 APPENDIX G: MODEL USEFULNESS TEST ................................................. 239 APPENDIX H : PERSONAL COMMUNICATIONS ........................................ 241 APPENDIX I : THE INDONESIAN DREAM 2015-2085 .................................. 242 APPENDIX J : ABMIC MODEL EQUATIONS ................................................ 243 xiii LIST OF FIGURES Fig. 1.1 Structure of political administration for legislative and executive institutions in Indonesia (BPS (2018b); Indonesia (2002)) ............................................................ 1 Fig. 1.2 Thesis structure and links between chapters ................................................. 11 Fig. 2.1 Crude oil production, exports and imports, and the consumption by oil refineries by Indonesia between 2007-2017 (MEMR, 2018)..................................... 15 Fig. 2.2 Export and import of oil products (top) and crude oil plus oil products (bottom) by Indonesia between 1996-2017 (BPS, 2018a) ....................................................... 16 Fig. 2.3 Import of refined petroleum products for Indonesia between 2007-2017 (MEMR, 2018) ........................................................................................................... 16 Fig. 2.4 Biodiesel supply and demand for Indonesia between 2007-2017 (MEMR, 2018) .......................................................................................................................... 17 Fig. 2.5 Production, consumption and import of CPO, and export and import of petroleum fuels by Indonesia between 2007-2017 (MOA (2016), BPS (2017); MEMR (2018); GAPKI (2018)) .............................................................................................. 17 Fig. 2.6 Projection of liquid fuel demand and oil fuels production by Indonesia by 2045 (BPPT, 2018) ............................................................................................................. 18 Fig. 2.7 Projection of crude oil supply and demand for Indonesia by 2045 (BPPT, 2018) .......................................................................................................................... 19 Fig. 2.8 Projection of liquid fuel import demand without biofuel use for Indonesia by 2045 (BPPT (2018), BPS (2017)) .............................................................................. 19 Fig. 2.9 National balance of trade for Indonesia between 1975-2017 (BPS, 2018a) . 20 Fig. 2.10 Oil & gas balance for Indonesia between 1996 - 2017 (BPS (2018a); MEMR (2018)) ........................................................................................................................ 21 Fig. 2.11 Crude oil price between 1996 - 2017 (BPS (2018a), IndexMundi (2019a)) .................................................................................................................................... 21 Fig. 2.12 A feedback loop of the sense of urgency and the biofuel use through BOT without a future vision ............................................................................................... 28 xiv Fig. 2.13 A feedback loop of the sense of urgency and the biofuel use through BOT with a future vision..................................................................................................... 29 Fig. 3.1 Interrelationships between elements in the proposed strategy...................... 38 Fig. 3.2 Causal loop diagram (left) and stock and flow diagram (right) .................... 39 Fig. 3.3 A generic mathematical model as an assessment in a control system (Shinners, 1972) .......................................................................................................................... 41 Fig. 3.4 Simulation framework for assessing the proposed strategy.......................... 46 Fig. 4.1 Distribution of critical land in Indonesia in 2013 (MOF, 2015) ................... 51 Fig. 4.2. Five year old pongamia tree plantation growing on critical land at Parung Panjang, West Java, Indonesia. (February 2016) ....................................................... 59 Fig. 4.3 Pongamia growth patterns over a 40 year period (lines, left-hand axis) and product yield (bars, right-hand axis). These estimates were used in the economic model for a scenario with the yield at an average of 20 kg seeds/tree/year (Murphy et al., 2012) .......................................................................................................................... 62 Fig. 5.1 Simplified flowchart of hydrodeoxygenation process to produce hydrotreated vegetable oil (HVO) from vegetable oils (Neste, 2016). ........................................... 83 Fig. 5.2. Laboratory scale production of green diesel from vegetable oil at ITB (12th May 2017). ................................................................................................................. 84 Fig. 5.3 Refined palm oil feedstock (left), catalyst (centre), and green diesel liquid biohydrocarbon production through hydrodeoxygenation (right) (T=450-550oC; atmospheric pressure; liquid biohydrocarbon yield=45-53%). (ITB laboratory, 12th May 2017) .................................................................................................................. 84 Fig. 5.4 Laboratory scale production of green gasoline from vegetable oil through hydrodeoxygenation (ITB laboratory, 12th May 2017) .............................................. 85 Fig. 5.5 Feedstock (left), catalyst (middle left), and green gasoline products before & after distillation (middle right and right) through hydrodeoxygenation of refined palm oil (T=450-550oC; atmospheric pressure; liquid biohydrocarbon yield=45-53%;). (ITB laboratory, 12th May 2017) ......................................................................................... 85 Fig. 5.6 Laboratory-scale production of green jet fuel from vegetable oil through hydrodeoxygenation at ITB Laboratory (Subagjo, 2018a) ........................................ 86 xv Fig. 5.7 Flow diagram of metal soap decarboxylation process to produce green diesel from palm stearin (Neonufa et al., 2017) ................................................................... 87 Fig. 5.8. Reactors for liquid biohydrocarbon production from fatty acid: (i) green diesel production through metal soap decarboxylation and (ii) green gasoline production through metal soap pyrolysis (ITB Indonesia, 2015, picture by ITB) ....................... 88 Fig. 5.9 A sample of liquid biohydrocarbon produced from decarboxylation of metal soap (T=370oC; P=atmospheric; yield=59.80%; feedstock: palm stearin). (ITB, 12th May 2017) .................................................................................................................. 88 Fig. 5.10 Sample of liquid products of metal soap pyrolysis from Reutealis oil (ITB, 2015) .......................................................................................................................... 89 Fig. 6.1. Location of Sumba (top); The four regions of Sumba and the main towns in each region (bottom). (GeospatialInformationAgency (2015); StatisticsIndonesia (2014); StatisticsIndonesia (2012); Winrock_International and Hivos (2010)) ....... 95 Fig. 6.2 Rainfall distribution across Sumba (UGM, 2013e) ..................................... 96 Fig. 6.3 Distribution of critical land in Sumba island in 2011 (left) and 2013 (right) after revision (UGM, 2013a) and (UGM, 2013b) .................................................... 100 Fig. 6.4 Distribution of critical land in Central Sumba (left) and East Sumba (right) in 2013 (UGM, 2013c), (UGM, 2013d) ....................................................................... 100 Fig. 6.5 Locations of the five critical land areas where soil samples were taken (retrieved 13th Aug 2018) ......................................................................................... 102 Fig. 6.6a Soil sampling on a critical land at Hamba Praing 1 (HP1), East Sumba (30th May 2016) ................................................................................................................ 104 Fig. 6.6b Soil sampling on a critical land at Hamba Praing 2 (HP2), East Sumba (30th May 2016) ................................................................................................................ 105 Fig. 6.6c Soil sampling on a critical land at Pambotanjara (PJ), East Sumba (30th May 2016) ........................................................................................................................ 105 Fig. 6.6d Soil sampling on a critical land at Laipori (LP), East Sumba (30th May 2016) .................................................................................................................................. 106 Fig. 6.6e Soil sampling on a critical land at Lawonda Maderi (LM), Central Sumba (1st June 2016) ................................................................................................................ 106 xvi Fig. 6.6f Soil sampling on a critical land at Cendana (CD), Central Sumba (1st June 2016) ........................................................................................................................ 107 Fig. 7.1 Simple causal loop diagram for liquid fuel self-sufficiency problem in Indonesia .................................................................................................................. 117 Fig. 7.2 Expanded causal loop diagram for liquid fuel self-sufficiency problem in Indonesia .................................................................................................................. 118 Fig. 7.3 Left: “Shifting the burden” archetype; Right: high-level causal patterns ... 120 Fig. 7.4 A stock and flow diagram using Stella® Architect v1.5.2 software ........... 125 Fig. 7.5 Ten sub-models in the ABMIC model ........................................................ 126 Fig. 7.6 Stock and flow diagram of policy sub-model ............................................. 129 Fig. 7.7 Stock and flow diagram of DBF technology readiness sub-model ............ 133 Fig. 7.8 Stock and flow diagram of marginal land preparedness sub-model ........... 137 Fig. 7.9 Stock and flow diagram of Sumba feedstock production sub-model ......... 142 Fig. 7.10 Stock and flow diagram of Sumba DBF production from marginal land sub- model ........................................................................................................................ 146 Fig. 7.11 Stock and flow diagram of Sumba DBF supply and demand sub-model . 148 Fig. 7.12 Stock and flow diagram of liquid biofuel transition sub-model ............... 154 Fig. 7.13 Stock and flow diagram of national liquid biofuel supply and demand sub- model ........................................................................................................................ 158 Fig. 7.14 Stock and flow diagram for economic sub-model .................................... 160 Fig. 7.15 Stock and flow diagram of CO2 emissions from marginal land use sub-model .................................................................................................................................. 164 Fig. 8.1 Dynamics of indicators for DBF production for Reference Mode of ABMIC model ........................................................................................................................ 171 Fig. 8.2 Dynamics of indicators for liquid fuel self-sufficiency for Reference Mode of ABMIC model .......................................................................................................... 171 Fig. 8.3 Dynamics of indicators for liquid biofuel share for Reference Mode of ABMIC model ........................................................................................................................ 172 xvii Fig. 8.4 Dynamics of indicators for selected socioeconomic impacts for Reference Mode of ABMIC model ........................................................................................... 172 Fig. 8.5 Dynamics of indicators for CO2 emissions for Reference Mode of ABMIC model ........................................................................................................................ 173 Fig. 8.6 Extreme condition test of ABMIC model for “no urgency” condition....... 177 Fig. 8.7 Assessment of national liquid biofuel actual share under the extreme condition test of no sense urgency by the President (SU) using ABMIC model ..................... 178 Fig. 8.8 Test of sensitivity of ABMIC model to the “future vision” parameters. .... 181 Fig. 8.9 Liquid biofuel implementation across the low (LV), medium (MV), and full (FV) vision scenarios ............................................................................................... 186 Fig. 8.10 Dynamics of national DBF production for the FV Scenario .................... 188 Fig. 8.11 Simulations output of oilseed crop planting delay across scenarios ......... 189 Fig. 8.12 Effect of marginal land available area to liquid biofuel (WVS 1, FVS 1, CRC 15) ............................................................................................................................ 190 Fig. 8.13 Selected socioeconomic impacts across the low (LV), medium (MV), and full (FV) vision scenarios. ........................................................................................ 191 Fig. 8.14 CO2 emissions across the low (LV), medium (MV), and full (FV) vision scenarios ................................................................................................................... 192 Fig. 8.15 Determination of planting delay across the low (LV), medium (MV), and full (FV) vision scenarios compared to Reference Mode ............................................... 194 Fig. 8.16 Trading-off oil feedstock benefit and climate benefit through CRC scenarios: oil feedstock benefit scenario (OBS), climate benefit scenario (CBS), and trade-off scenario (TOS) ......................................................................................................... 198 xviii LIST OF TABLES Table 2.1 Assessment of level of sense of urgency by the President (SU) for liquid fuel sovereignty based on the dynamics of economic situation ........................................ 23 Table 4.1. Area (ha) of land at various stages of degradation by province in Indonesia (MOF, 2015) .............................................................................................................. 50 Table 4.2. Key characteristics of potential energy crop for Indonesian marginal land .................................................................................................................................... 58 Table 4.3. Physico-chemical properties of pongamia oil at time of harvest (Wargadalam et al., 2015) .......................................................................................... 60 Table 4.4 Pongamia productivity based on Australian field trial research and observations (Murphy et al., 2012) ............................................................................ 62 Table 4.5 Trees growth and oilseeds yield of trees at different ages ......................... 67 Table 5.1. Potential technology routes for drop-in biofuel production from a range of biomass feedstocks ..................................................................................................... 79 Table 6.1 Results of soil fertility test for Sumba marginal land .............................. 104 Table 7.1 Supports and barriers in increasing liquid fuel self-sufficiency in Indonesia through the utilization of marginal land and appropriate technology for biofuel production ................................................................................................................ 116 Table 7.2 ABMIC model boundaries ....................................................................... 122 Table 7.3 Parameters used in policy sub-model....................................................... 129 Table 7.4 Input variables used in policy sub-model ................................................ 130 Table 7.5 Output variables from policy sub-model ................................................. 130 Table 7.6 Parameters used in the DBF technology readiness sub-model ................ 133 Table 7.7 Input variables used in the DBF technology readiness sub-model .......... 134 Table 7.8 Output variables from the DBF technology readiness sub-model ........... 134 Table 7.9 Parameters used in the Sumba marginal land preparedness sub-model ... 138 xix Table 7.10 Input variables used in the Sumba marginal land preparedness sub-model .................................................................................................................................. 139 Table 7.11 Output variables from the Sumba marginal land preparedness sub-model .................................................................................................................................. 139 Table 7.12 Parameters used in the Sumba feedstock production sub-model ........... 143 Table 7.13 Input variables used in the Sumba feedstock production sub-model ..... 144 Table 7.14 Output variables from the Sumba feedstock production sub-model ...... 144 Table 7.15 Parameters used in the Sumba DBF Production from marginal land sub- model ........................................................................................................................ 146 Table 7.16 Input variables used in the Sumba DBF Production from marginal land sub- model ........................................................................................................................ 146 Table 7.17 Output variables from the DBF Production from marginal land sub-model .................................................................................................................................. 147 Table 7.18 Parameters used in the Sumba DBF supply and demand sub-model ..... 149 Table 7.19 Input variables used in the Sumba DBF supply and demand sub-model .................................................................................................................................. 149 Table 7.20 Output variables from the Sumba DBF supply and demand sub-model 149 Table 7.21 Parameters used in liquid biofuel transition sub-model ......................... 155 Table 7.22 Input variables used in liquid biofuel transition sub-model ................... 156 Table 7.23 Output variables from the liquid biofuel transition sub-model .............. 156 Table 7.24 Parameters used in the national liquid biofuel supply and demand sub- model ........................................................................................................................ 158 Table 7.25 Input variables used in the national liquid biofuel supply and demand sub- model ........................................................................................................................ 158 Table 7.26 Output variables from the national liquid biofuel supply and demand sub- model ........................................................................................................................ 158 Table 7.27 Parameters used in economic sub-model ............................................... 161 Table 7.28 Input variables used in economic sub-model ......................................... 161 xx Table 7.29 Output variables from economic sub-model .......................................... 161 Table 7.30 Parameters used in the CO2 emissions from marginal land use sub-model .................................................................................................................................. 164 Table 7.31 Input variables used in the CO2 emissions from marginal land use sub- model ........................................................................................................................ 165 Table 8.1 Reference Mode policy parameters of ABMIC model ............................ 168 Table 8.2 Simulation output for Reference Mode of ABMIC model ...................... 170 Table 8.3 Result of model usefulness test in indicators rankings ............................ 182 Table 8.4 Design of vision scenarios: Full Vision (FV), Medium Vision (MV) and Low Vision (LV) .............................................................................................................. 184 Table 8.5 Policy implications across the low (LV), medium (MV), and full (FV) vision scenarios compared to Reference Mode .................................................................. 196 Table 8.6 Design of CRC Scenarios: oil feedstock benefit scenario (OBS), climate benefit scenario (CBS), and trade-off scenario (TOS) ............................................. 197 xxi LIST OF ABBREVIATIONS ABMIC Assessment Tool of Biofuel Strategy through Utilization of Marginal Land and Innovation in Conversion Technology bbl Barrel BEV Battery electric vehicles BOT Balance of trade BOV Balance of volume BPDPKS Badan Pengelola Dana Perkebunan Kelapa Sawit Agency for Collection and Use of Oil Palm Plantation Fund BPN Badan Pertanahan Nasional National Land Agency CAD Current account deficit CBS Climate benefit scenario CPO Crude palm oil CRC Crop rotation cycle DBF Drop-in biofuel DMO Domestic market obligation DPD Dewan Perwakilan Daerah Regional Representative Council DPR Dewan Perwakilan Rakyat House of Representatives ETI Energy-technology innovation FAME Fatty acid methyl esters FP Full Pressure FV Full Vision GHG Greenhouse gases Gl Giga litres GRDP Gross regional domestic product GWh Giga watt-hours IEA International Energy Agency ITB Institut Teknologi Bandung IV Iodine value / Initial value KOH Potassium hydroxide LPG Liquefied petroleum gas LV Low Vision xxii Mboe Thousand of barrels of oil equivalent MEMR Ministry / Minister of Energy and Mineral Resources Mha Mega hectare MJ Mega joule MMbbl Million barrels MPR Majelis Permusyawaratan Rakyat People’s Consultative Assembly MV Medium Vision MW Mega watt NDC Nationally Determined Contributions NGO Non-governmental organization OBS Oil feedstock benefit scenario PPO Pure plant oil SII Sumba Iconic Island SU Sense of urgency by the Indonesian President t ton TOS Trade-off scenario 1 CHAPTER 1 INTRODUCTION 1.1 Geographic, economic and political profile of Indonesia 1.1.1 Geographic Indonesia is a large archipelago with 16,056 islands and around 260 million population which is distributed on 1.9 million km2 area. It is located between 60 04’ 30” North Latitude - 110 00’ 36” South Latitude and 940 58’ 21” – 1410 01’ 10” East Longitude, that has tropical climate with rainy seasons in October-January and dry seasons in April-September. (BPS, 2018b) 1.1.2 Political Indonesian political system is based on Trias Politica principle that distinguishes legislative, executive, and judicative power (Indonesia, 2002). Structure of political administration for legislative and executive institutions is depicted in Fig. 1.1 Fig. 1.1 Structure of political administration for legislative and executive institutions in Indonesia (BPS (2018b); Indonesia (2002)) President Provincial House of Representatives (DPRD I) House of Representatives (DPR) Governors Regency/Municipal House of Representatives (DPRD II) Regents/Mayors EXECUTIVES LEGISLATIVES People’s Consultative Assembly (MPR) Regional Representative Council (DPD) Vice President Ministerial Cabinet 2 At national level, executive power is held by President. Legislative institutions consist of The People’s Consultative Assembly (MPR), The House of Representatives (DPR), and The Regional Representative Council (DPD). President’s rights include proposing a bill to DPR, passing the law and establishing a governmental regulation to implement the law. In implementing the law, President is assisted by a Vice President and cabinet ministers. MPR consist of DPR and DPD and has rights for amending and establishing The 1945 Constitution of The Republic of Indonesia. DPR’s rights includes drafting a bill through discussions with the President to reach an agreement. DPD members are non- partisans who represent each province. DPD can propose a bill to DPR and supervise the law implementation that relates to certain subjects including management of natural resources and other economic resources, and state budget. At local levels, local governments do their own governance based on full autonomy on any areas except those are regulated by laws as the federal government’s authority such as tax, education and religion affairs. They have local House of Representatives (DPRD I at provincial level or DPRD II at regency/municipal level) who have rights for establishing regional government regulations and other regulations for the law implementation. In pressing situation, DPRD I and DPRD II can establish a local governmental regulation to replace a law. In implementation of biofuel program, President gives an instruction (could be through a Presidential Instruction) to relevant ministers that includes the Minister of Energy and Mineral Resources. Based on evaluation, the President satisfactory on the progress would determine the ministers’ continuation in their job. As an example, in 2005 a Presidential Instruction was enacted to be followed up by relevant ministers that include Minister of Energy and Mineral Resources (MEMR). Then, in 2008, MEMR launched an MEMR Regulation containing biofuel target mandatory. The MEMR regulation was revised in 2013 and 2015 in terms of the concentration level and the reward and penalties. The success of biofuel implementation which is multisectoral would be determined by the level of sense of urgency by the President (SU). Urgency is defined as “the quality of being very important and needing attention immediately” (CambrigeDictionary, 2019). The higher SU would trigger more and better involvement of related ministers. 3 SU is subjective and can easily change by existing situations. To maintain a good SU level, an anticipative driver is required, such as a future vision for the nation. Vision (view of the future) is defined as “the ability to imagine how a country, society, industry, etc, could develop in the future and to plan for this” (CambridgeDictionary, 2019). 1.1.3 Economic in 2017, Indonesian economic growth reached 5.1% and the GDP per capita was IDR 51.9 million. The main economic sectors are processing industries, trading, construction, and agriculture (BPS, 2018b). In energy sector, crude oil resources is declining, while renewable energy including biomass abundant. 1.2 Strategy for sustainable liquid biofuel development Liquid biofuel is a liquid fuel that is generated from biomass. It is the only non-fossil energy available in liquid form that can be used to decarbonise the transport sector. As well as in developed countries (RAE, 2017), biofuels are projected to play a significant role in the long term in developing countries including Indonesia (Oberman, Dobbs, Budiman, Thompson, & Rosse, 2012). However, liquid biofuel is perceived in the sustainability context to have some main concerns including conflicts with food crop production and greenhouse gases (GHG) net emission from land use. A potential strategy to cope with these issues is using marginal land to grow non-edible energy crops as has been widely studied and tried in several countries. “Marginal” land is a land area which soil condition such as the fertility and water are inadequate to sustain cultivation of an expected crop, due to the degradation process. In comparison, “degraded” land is a land area that has lost part or whole of its production capacity (UNEP, 2007), that makes the land being in a degradation process to become marginal land (Wiegmann, Hennenberg, & Fritsche, 2008). It means that a land categorised marginal for a certain crop might not be marginal for another crop. Potential benefits from utilizing marginal land for growing biomass feedstock are significant, such as energy security, economic growth and GHG mitigation: 4 • Energy security Oilseeds and wood-fuels produced from marginal land will increase the availability of biomass feedstock for liquid biofuels as well as bioelectricity and bioheat that will support energy security. Liquid fuel self-sufficiency of a country indicates the country’s ability to fulfil liquid fuel demand domestically using its own feedstock resources. The world demand for petroleum fuels is projected to rise from 5,049 Gl (87 Mboe) per day in 2010 to 6,906 Gl (119 Mboe) per day in 2040 (EIA, 2014), mainly by developing countries in Asia and the Middle East. Indonesia’s liquid fuel demand is projected to reach 260 Gl which the halved needs to be imported (BPPT, 2018). By increasing biomass feedstock quantity through marginal land use, energy security enhancement is affected through a more controllable feedstock price, especially if the land is owned and well managed by the government. This is of great importance as feedstock cost usually dominates the total production cost of liquid biofuels. In light of the fact that renewable sources for liquid fuels are only from biomass, it is essential to prepare the biofuel supply in a sustainable way. • Economic growth Utilizing marginal land for bioenergy feedstock can improve the economy at the local level as well as national level. In term of food crop purpose, which is considered more important than energy use for human well-being, marginal land can be categorized as unproductive land due to its economic infeasibility to grow food crop, so that earning revenue through energy crop grown there can improve the local economy. At the national level, it can substantially improve national economic growth by reducing dependence on imported oil. To exemplify, between 1973 and 1979 the combined economic shocks from world price increases in crude oil caused the oil- importing developing countries lost up to 22% of their annual GDP growth (Chichilnisky, 1985). Indonesia economic growth has been relatively high compared to most other countries in the last decade. It is clear that in order to minimize importation burden which is detrimental to its economic growth, Indonesia should do appropriate strategy using its potential such as liquid biofuel utilization. 5 • GHG mitigation As mentioned earlier, one of the sustainability indicators is the capability for decreasing greenhouse gas (GHG) level in the atmosphere. This can be carried out through marginal land use due to lower or zero carbon stock compared to the level in the land’s initial condition. To combat global warming, the Paris Climate Agreement from the 21st United Nations Framework Convention on Climate Change Conference of the Parties (UNFCCC COP 21) was established in December 2015 and since then has been ratified by 185 parties including Indonesia (UNFCCC, 2019). It set an objective to limit the atmospheric temperature increase to be below 2oC compared to the pre- industrial era before the end of this century (UN, 2015). In achieving the target, it is critical to speed up low carbon energy utilization as one of the most reasonable efforts, especially for Indonesia that has high fossil fuel share in its energy mix whereas renewable fuel resources are abundant. Thus, producing biomass through marginal land use can simultaneously handle multiple important issues, namely economic growth, energy security and GHG mitigation. However, its implementation success is dependent on several factors, including strategic choice of right energy crop before cultivation which is crucial because it will be impacting for up to decades. Another important issue for increasing liquid fuel self-sufficiency in Indonesia is the fuel characteristics. Liquid biofuel products that are currently available in the commercial market have properties that cause limitation for being mixed with petroleum fuels in the existing engines. To allow higher utilization and its benefits, it is necessary to implement appropriate technology for liquid biofuel products that have similar properties to petroleum fuels. The appropriate conversion technology used to produce the biofuels from the biomass feedstock should be strategically determined. 1.3 The need for an integrated and modelling approach Utilizing marginal land normally takes several years since the identification and preparation of the available area until the crop is planted and then harvested. During the period of land preparation and plantation growth, liquid fuel demand keeps increasing and thus the requirement of liquid biofuel that can be used at high concentration, such as drop-in biofuel (DBF) (Chapter 5) which has equivalent 6 characteristics with petroleum fuels. As the development of the appropriate conversion technology will also take time, it is necessary to integrate the assessment of the preparation of marginal land as well as the appropriate technology to assess when both preparations are ready for starting the commercial DBF production to realize a more sustainable liquid biofuel development. Dealing with sustainability involves interrelated aspects which cover interdependent elements. This creates complexity in systems of the proposed integrated liquid biofuel strategies. Many studies on liquid biofuel group sustainability dimensions into economic, environmental and social aspects (GBEP, 2011). However, sustainability can have four criteria to be met; ecological, economic, social and political (Sachs (1999) in Musango (2012)). There is also a broader definition of sustainability by the Massachusets Institute of Technology as the interdependent systems of economy, society, politics, the environment, and the individual (MIT, 2015). Musango (2012) stated that political sustainability issues as in Sachs (1999) classification are often included in social sustainability. It is hard to find any research on how political sustainability interrelates with other elements of sustainability, particularly in the energy sector. On the other hand, (it is argued in this thesis that) in many cases, including bioenergy development in Indonesia, the political dimension plays a critical role. Therefore, it was assessed explicitly here to better understand the systems and help with providing more effective solutions. In addressing policy-related issues in the proposed strategy for liquid biofuel development, this study covers multidisciplinary subjects including energy, economy, environment, social, biofuel production technology, management, and politics that have relationships to one another. Also, due to its cross-sectoral nature, policy formulation on bioenergy in Indonesia involves multi-sectoral government and non- government institutions at various regional levels. This issue, plus the limited resources and knowledge available, have become major challenges in developing this young sector. Therefore, assessment on this study needs to be carried out in an integrated fashion. The complex characteristics of the problem due to the existence of feedback loops make it challenging to understand the nature and the significant interrelationships of the systems without the aid of a computer model (Maani and Cavana (2007); Sterman 7 (2000)). Building a simulation model can be an important tool in policy formulation or analysis for liquid biofuel in Indonesia which so far has not been utilised when establishing existing policies and measures. The system dynamics approach has been recognized as capable of performing computer modelling of policy which commonly consists of feedback loops. System dynamics modelling can assist with understanding interconnections, identifying significant variables or loops, trade-offs between sectors, and short versus long term impacts in the system. These all will help with improving the real-world systems (Maani and Cavana (2007); Sterman (2000)). 1.4 Research Hypothesis, Aim and Objectives The problem identified here is that Indonesia’s indigenous oil reserves are dwindling; importing more petroleum products in future to meet the growing demand will lead to greater insecurity of energy supply; and as the transport sector continues to grow, combustion of petroleum-based fuels will result in higher greenhouse gas emissions making it more difficult for Indonesia to meet its mitigation targets. To provide a solution to the problem, this thesis proposes an integrated strategy of utilisation of marginal land and appropriate technology for biofuel production to increase liquid fuel self-sufficiency in fulfilling its long-term liquid fuel demand more sustainably. To support the implementation of executing the proposed strategy, it is necessary to do an integrated assessment using a modelling approach by which the policymakers understand the nature of the problem and all the involved systems. This research hypothesizes that if liquid biofuels are produced in Indonesia as low- carbon alternatives to petroleum fuels, a political element will critically affect the success of implementing a liquid biofuel strategy that includes marginal land use and conversion technology innovation to increase liquid fuel self-sufficiency, which in turn influences the political element itself. The overall aim of this research is to understand better how policy implementation could affect liquid biofuel implementation and thus liquid fuel self-sufficiency, through utilization of marginal land and innovation in conversion technology, and vice versa. 8 An assessment tool of the strategy to increase liquid fuel self-sufficiency in Indonesia was developed through system dynamics modelling. The model developed as part of the study was utilized for providing policy analysis and recommendation to improve liquid biofuel development through the proposed strategy. Some actual specific issues related to sustainable liquid biofuel implementation were addressed within an integrated framework including: • how can the liquid biofuel supply through proposed strategy increase the liquid fuel self-sufficiency? • how can the liquid biofuel supply (and delay) through the proposed strategy affect the economy? and • how can the liquid biofuel supply through proposed strategy meet the GHG reduction pledge of Indonesia to the Paris Agreement? • how can a policy or political aspect influence liquid fuel self-sufficiency as well as other impacts, with regards to a delay in executing the proposed strategy? To achieve the research aim, seven specific objectives were established to: (i) provide a review on liquid fuel supply and demand in Indonesia; (ii) conceptualize a simulation framework for assessing the proposed strategy for increasing liquid fuel self-sufficiency in Indonesia; (iii) analyse marginal land use for growing energy crop; (iv) assess technology options for liquid biofuel production; (v) provide a case study of the Indonesian island of Sumba as an example when developing the model; (vi) build a system dynamics model for assessing the proposed strategy, and (vii) develop and compare policy scenarios using the model. To address the research objectives, the computer model was developed using data and information collected through literature analysis, focus-group discussions, and interviews at both national and local levels on the case study island. Stella® Architect software was used for the modelling work. Before building the system dynamics model, a set of analyses were conducted to determine a specific case that allows 9 valuation of inputs to the models, for example choosing a preferable energy crop, the appropriate biofuel production technology, and the case study island. To validate the model, a set of systematic and standardized methods was used that also made use of data and information collected through literature analysis, interviews, and personal communications with stakeholders that includes policymakers, landowners/farmers, and local experts. 1.5 Thesis structure and methodology approach To address the research objectives, the thesis is structured as depicted in Fig. 1.1. Chapter Two presents an overview of Indonesia’s liquid fuel supply and demand. This includes identification of priority indicators for liquid biofuel sustainability based on a vision for Indonesia which is strongly related to the political system and examines impacts of bioenergy using selected indicators. Chapter Three proposes a simulation framework for developing a model as an assessment tool for the proposed liquid biofuel strategy. An analysis of the priority sustainability indicators from Chapter 2 leads to a conceptualization of marginal land use and future technology availability as an integrative strategy for more sustainable liquid biofuel implementation. Chapter Four provides analysis on marginal land use for biomass feedstock production, particularly to assess the potential area of marginal land for bioenergy and a suitable energy crop for marginal land. Chapter Five analyses existing and potential bioenergy conversion technologies, which are likely to become available in the future. It strategically proposes the most suitable one based on analysis result from Chapters 2 and 4. Then Chapter Six assesses the characteristics of Sumba Island to show why it was chosen as a case study location for developing the model at the local level. This also shows the importance of local resource management. Chapter Seven describes the development of the systems dynamics model that includes the process of data and information gathering, the explanation of the reference mode, and the design of the intervention. Chapter Eight provides the modelling results and analysis. It presents a series of indicator variables that were used when modelling the policy scenarios. The results of 10 different scenarios are compared to suggest what would be the policy implications and decisions needed in dealing with the problems that emerge from each scenario. Finally, Chapter Nine summarises the study, presents the contributions and findings, discusses the model limitations, and identifies future research required for the improvement or advancement of the model. 11 Fig. 1.2 Thesis structure and links between chapters Ch. 2 A review on liquid fuel supply and demand in Indonesia Ch. 5 Options for conversion technology . Ch. 3 Developing a simulation framework Ch. 4 Analysis of marginal land use for energy crops Ch. 6 Choosing a case study island Ch. 7 Developing a systems dynamics model Ch. 8 Modeling results and analysis Ch. 9 Conclusions and recommendations 12 CHAPTER 2 A REVIEW OF LIQUID FUEL SUPPLY AND DEMAND IN INDONESIA 2.1 Introduction This chapter reviews liquid fuel supply and demand in Indonesia. The demand for liquid fuel is increasing while domestic oil extraction and fuel production is declining. Therefore, liquid biofuel production and utilization will be crucial in future for supporting national energy security as well as the economy by improving the balance of trade. Section 2.2 provides fundamentals of liquid biofuels; Section 2.3 describes historical data and projections of liquid biofuel supply and demand in Indonesia; Section 2.4 shows the interrelationship between the liquid biofuel development and the economic situation in Indonesia; then Section 2.5 discusses impacts of liquid biofuel production and use in Indonesia. Finally, Section 2.6 outlines the inputs from this chapter to be included in the system dynamics model developed in Chapter 7. 2.2 Fundamentals of liquid biofuel Liquid fuels can be supplied from petroleum fuels as well as renewable biomass materials. Compared to gaseous or solid fuels, liquid fuels have some advantages such as ease of transport, storage and distribution, high energy density, and the low risk of explosion hazards (Soerawidjaja, 2001). Liquid fuels have been widely used historically in transport, power plant, heating and industry sectors. Existing liquid petroleum fuels include (i) gas-oil (diesel fuel) and gasoline for land transport vehicles; (ii) heavy fuel oil for marine transport; diesel fuel for stationery engines in power plants and industries, and (iii) jet fuel for air transport. At the global level, liquid biofuels, the only form of renewable liquid fuel, have the potential to provide low-carbon fuel for marine and air transports as well as heavy- duty vehicles. In developing countries such as Indonesia, liquid fuels will still probably play a substantial role in future land transport due to the other alternatives such as gases and electricity not being fully commercially viable (BPPT, 2016). In the long-term, liquid biofuels will still be key for various energy uses due to no other competitive alternative. In some developing countries including Indonesia, 13 biofuels will be mostly irreplaceable in all sectors. At the global level, they will be vital for shipping, aviation, and heavy-duty vehicles (DECC (2012), IRENA (2017)). Based on the chemical structure, liquid biofuel types include pure plant oil (PPO), fatty acid alkyl ester (FAAE, such as fatty acid methyl esters (FAME)), alcohols (such as methanol, ethanol, butanol), bio-oil, and biohydrocarbons. These biofuels, except for biohydrocarbons, are oxygenated and can partially substitute for petroleum fuels in most of the existing infrastructure. Oxygenated biofuels can partially substitute for petroleum fuels, while biohydrocarbons can be used at any concentration with petroleum fuels. The type of liquid biofuel used should enable a high concentration level in the mixture with petroleum fuels. One of the ways is by using drop-in biofuels (DBF) which have equivalent characteristics to gasoline, diesel, or jet fuel (Chapter 5). Oxygenated biofuels can play an important role in the transition to drop-in biofuel use. 2.2.1 Pure plant oils PPO or straight vegetable oils are obtained from the original plant source through mechanical processes, such as pressing and degumming. The oil chemical properties are then similar as in the plant. PPO biofuels from oilseed rape, oil palms, sunflower etc. can be used for heating, cooking, and fuelling compression ignition engines with low rotation speeds such as used in ships, power plants, and industrial equipment. In the engines, PPO can be used as the whole substitute for fuel oil or as partial replacement of the diesel fuel. 2.2.2 Fatty acid alkyl esters FAAE (termed biodiesel) are made from vegetable oils or animal fats mixed with alcohols through the trans-esterification process using an alkaline catalyst. Biodiesel is mostly used as fuel for diesel engines in vehicles and can also be used for engines with lower rotation speed. The maximum concentration of biodiesel mixed with diesel that is accepted for most vehicle engines without any modification is 20-30%, while in lower speed engines it is unlimited. In Indonesia, a large biodiesel producer and user, biodiesel is produced from crude palm oil (CPO) and methanol. The cost of converting CPO to biodiesel in Indonesia is around USD 125/t (MEMR, 2016b). Using palm oil as biodiesel feedstock has raised 14 environmental debates such as on deforestation issue which impact to the net CO2 emissions reduction. 2.2.3 Alcohols Alcohols can be produced via a chemical process as well as sugar fermentation. The common types of alcohol that have been used as liquid biofuels as substitutes for gasoline are methanol, ethanol, butanol and isobutanol. Ethanol is the most widely utilized. The largest global producers and users of ethanol are the USA based on corn (maize) feedstock, and Brazil using sugarcane feedstock. In most gasoline engines, ethanol can be used up to 30% in a blend with gasoline. In flex-cars that have been available in some countries such as Brazil, it can be used as 100% pure ethanol which has energy value by 34% lower than gasoline (GNHCCC, 2017). Production costs were reported as USD cent 28 /l for sugarcane feedstock in Brazil and USD cent 45 /l for corn feedstock in the USA (Andreoli & Souza, 2007). The key to economic production of bioethanol from sugarcane is the integrated production of sugar, ethanol through molasses, and bio-electricity from the residual bagasse. The problem of bioethanol use in Indonesia is that the feedstock such as molasses and cassava have been more economically attractive for non-energy use. 2.2.4 Bio-oil Bio-oil is a liquid product resulting from the thermolysis (or pyrolysis) of ligno- cellulosic biomass. It contains oxygenated components such as phenolic compounds, alcohols, ketones and aldehydes. After a refining and upgrading process, it can be used at any level in the mixture with the associated petroleum fuel, which is a characteristic of a drop-in biofuel (DBF). Without upgrading, bio-oil is utilizable in stationery engines for heat/power generation. The technology of bio-oil production is discussed in Chapter 5. 2.2.5 Biohydrocarbons This hydrocarbon, similar to the components of fossil fuels, is produced from biological materials, such as vegetable oils, fats or fatty acids. Unlike other biofuels, biohydrocarbons can be used directly as a DBF to substitute for gasoline, diesel, or jet fuel, which are also hydrocarbons. The production technologies of biohydrocarbon fuels are discussed in Chapter 5. 15 2.3 History and projection of liquid fuel supply and demand in Indonesia 2.3.1 Historical production, use, export, and import Indonesia’s crude oil production is declining while the consumption for oil refinery input is increasing. Hence, crude oil exports are decreasing, while imports are going up. In 2017, crude oil production was around 300 million barrels (MMbbl), of which around 100 MMbbl were exported, with an additional 150 MMbbl imported. The import of refined petroleum products reached around 370 MMbbl (Fig. 2.1). Fig. 2.1 Crude oil production, exports and imports, and the consumption by oil refineries by Indonesia between 2007-2017 (MEMR, 2018) Crude oil products consist of fuels and non-fuels. Indonesia has been a net-importer of oil products since 1997, and of crude oil plus oil products since 2004 (Fig. 2.2). Import of crude oil products increased from around 25 Gl (160 MMbbl) in 2007 to around 30 Gl (190 MMbbl) in 2017 (Fig. 2.3). The import volume has been dominated by gasoline which long-term trend is increasing. Existing biofuels at commercial scale in Indonesia consist of biodiesel and bioethanol. In 2017, the oil refinery capacity was 1.2 MMbbl per day or around 70 Gl/yr, while the biofuel industry capacity was 12 Gl/yr biodiesel and 40 Ml/yr bioethanol (MEMR, 2018). For economic feasibility, the only productive biofuel has been biodiesel from palm oil, although demand for gasoline imports has been much higher than for diesel fuels (Fig. 2.3). Cassava and molasses feedstocks for ethanol production are more economically viable for non-energy uses. 16 Fig. 2.2 Export and import of oil products (top) and crude oil plus oil products (bottom) by Indonesia between 1996-2017 (BPS, 2018a) Fig. 2.3 Import of refined petroleum products for Indonesia between 2007-2017 (MEMR, 2018) 17 Biodiesel has been produced since 2009, following up the Minister of Energy and Mineral Resources (MEMR) Regulation Number 32/2008 which regulates the minimum level of biofuels use. In 2017, the installed capacity for biodiesel was 11.6 Mt or around 13 Gl, and the production rate was 3.42 Gl increased from 0.19 Gl in 2009 (Fig. 2.4). The consumption in 2017 was 2.57 Gl, increased from 0.12 Gl in 2007. The surplus biodiesel produced was exported. Biodiesel production and consumption fluctuations were affected by the economic situation (Section 2.4.2). Fig. 2.4 Biodiesel supply and demand for Indonesia between 2007-2017 (MEMR, 2018) CPO is currently the only feedstock used for biodiesel production. Indonesia is the world’s largest CPO producer with around 38 Mt produced in 2017 (Fig. 2.5). Despite this large production, domestic consumption is around 20-25% of the total, so that most is exported. Fig. 2.5 Production, consumption and import of CPO, and export and import of petroleum fuels by Indonesia between 2007-2017 (MOA (2016), BPS (2017); MEMR (2018); GAPKI (2018)) 18 2.3.2 Projection of future production, use, export, and import World petroleum and liquid fuels use are projected to increase by 38% from 87 MMbbl/d (around 32 billion barrel in 2010) to 119 MMbbl/d (43 billion barrel in 2040). The growth outlook of liquid fuels use will be mostly driven by demand in developing countries, especially in Asia and the Middle East, at an 85% share (EIA, 2014). Indonesia’s liquid petroleum fuel demand is projected to increase from around 75 Gl in 2018 to around 260 Gl in 2045, while the oil fuels production is projected to increase at a much lower rate, from around 50 Gl in 2018 to around 135 Gl in 2045 (Fig. 2.6). This means the crude oil deficit by 2045 will reach 125 Gl and this will need to be filled by crude oil imports or alternative substitutes such as liquid biofuels (Section 2.5.2). Fig. 2.6 Projection of liquid fuel demand and oil fuels production by Indonesia by 2045 (BPPT, 2018) The crude oil production is projected to go down from around 300 MMbbl (48 Gl/yr) in 2018 to slightly below 100 MMbbl (15 Gl/yr) in 2045. Therefore, to supply crude oil for the oil refinery input, the crude oil import is projected to increase from around 180 MMbbl (28 Gl) in 2018 to around 950 MMbbl (151 Gl) in 2045 (Fig. 2.7). Thus, the total import demand by 2045 is projected to reach around 125 Gl petroleum fuels and 151 Gl crude oil, less any biofuel or other substitutes implemented. 19 Fig. 2.7 Projection of crude oil supply and demand for Indonesia by 2045 (BPPT, 2018) CPO is the main feedstock for biodiesel production which is also suitable for the production of drop-in biofuel (DBF) to substitute for petroleum fuels in Indonesia (Chapter 5). It is projected that in 2045 CPO production will reach 60 Mt (70 Gl), when crude oil imports will be around 135 Gl (Fig. 2.8). Assuming the rate of CPO use for non-biofuel keeps the same by 2045, the potentially remaining CPO can only meet around one-third of the crude oil import demand (Fig. 2.8). Fig. 2.8 Projection of liquid fuel import demand without biofuel use for Indonesia by 2045 (BPPT (2018), BPS (2017)) 20 2.4 Interrelationship between the liquid biofuel development and the economy in Indonesia 2.4.1 Historical balance of trade The dynamics of liquid biofuel development including the policy/measures (Section 2.4.1) and actions have been influenced by the dynamics of economic condition especially the current account deficit (CAD) or a deficit status of the national balance of trade. Balance of trade (BOT) is defined as “the difference between the money that a country receives from exports and the money it spends on imports” (CBED, 2018). The exports and imports consist of fossil oil & gas (oil & gas) and non-oil & gas components (Fig. 2.9). Fig. 2.9 shows values of BOT and components between 1975 and 2017. The annual growth for BOT of non-oil & gas in the last two decades was 13.68% for exports and 21.87% for imports, while in last decade was 4.19% for exports and 3.45% for imports. It seems uneasy to change values of the non-oil & gas export as well as the import. When the non-oil & gas export increased sharply, so did the non-oil & gas import. It is because to produce export goods it requires import of several materials. Therefore, it is projected that the difference between non-oil & gas export and import will keep similar to the current trend. In 2012, the BOT was in deficit for the first time since 1976, which was mainly impacted by the deficit in BOT of oil & gas especially oil products. The only former deficit happened in 1975 which was caused by BOT of non-oil & gas. Fig. 2.9 National balance of trade for Indonesia between 1975-2017 (BPS, 2018a) BOT is calculated by multiplying the volume balance with the price. Fig. 2.10 shows the export and import volumes of oil & gas and the balances, compared to oil & gas BOT and national BOT. The oil & gas export volume is decreasing while the import is increasing, has brought Indonesia to become a net-importer of oil & gas since 2004. 21 Fig. 2.10 Oil & gas balance for Indonesia between 1996 - 2017 (BPS (2018a); MEMR (2018)) Liquid biofuel production and utilization in Indonesia will reduce petroleum fuels imports and hence save foreign exchange expense and improve BOT of oil & gas and thus national BOT. However, biofuel development is challenged by a low oil price. When oil price was low, the liquid biofuels price was usually higher which increased oil fuels import and thus decreased BOT (Fig. 2.11). The national BOT fluctuation pattern followed BOT of non-oil & gas due to BOT of non-oil & gas dominates the national BOT. However, the major trend of national BOT follows BOT of oil & gas due to BOT of oil & gas plays a larger role over time (Fig. 2.11). Fig. 2.11 Crude oil price between 1996 - 2017 (BPS (2018a), IndexMundi (2019a)) 22 2.4.2 Balance of trade versus biofuel development The policy and measures in liquid biofuel development in Indonesia have developed dynamically. The role of liquid biofuels in national energy security has been recognized by policymakers since 1990s. However, the efforts for the implementation was not significant unless pressure from BOT existed. This study did a yearly-based observation from 2003 until 2018 using reports and news, which shows the dynamics of the economic condition and the actions taken for liquid biofuel development. The economic variables cover crude oil price, CPO price, oil & gas balance of volume (BOV), and national BOT. The actions were indicated by the progress in the policies and measures development, and the consumption of palm biodiesel as the only type of liquid biofuel which was available significantly in the market. The details of the observation are described in Table 2.1. It is shown that significant actions were demonstrated only when the national BOT was a deficit that raised a sense of urgency for national liquid fuel sovereignty as expressed by the President. In showing the relationship of liquid biofuel development with the economic situation as driven by the sense of urgency by the President (SU), this study classified the SU level of existence into low and high. The model in this study uses oil price projections by World Bank for 2018-2020 (WorldBank, 2018), and by IEA “Sustainable Development Scenario” for 2021-2040 that ranges from USD 57-72/bbl (IEA, 2017b) and extrapolated up to 2045. The oil price in 2018 was assessed without reflecting the market fundamentals. Therefore, the World Bank adjusted the oil price projection for 2018-2030 to USD 67-70/bbl (WorldBank, 2018). Projected BOT was calculated by multiplying BOV using time series from previous sections, with the crude oil price. The dynamics of biofuel development show an interrelationship with the economic situation: • In 2003 the international oil price hit a record at USD 29/bbl, but oil & gas BOT and national BOT stayed positive. • In 2004 the oil price hit a new record at USD 38/bbl, an increase of USD 10/bbl over 2003. The Indonesian oil & gas balance of volume (BOV) was negative for the first time (that made Indonesia an oil net-importer country), while oil & gas BOT and national BOT kept positive. A sense of urgency was emerging. 23 Table 2.1 Assessment of level of sense of urgency by the President (SU) for liquid fuel sovereignty based on the dynamics of economic situation Year Crude oil price averaged a), (Brent, USD/bbl) Crude palm oil price Jan- Dec b) (USD/t) BOV of oil & gas (exports- imports) c) (kt) BOT of national and oil & gas c) (million USD) Biodiesel use d) (Gl) Highlight Assessment on SU 2003 29 400-500 3,537 28,508 & 6,041 N/A Last positive BOV baseline 2004 38 400-500 (-4,634) 25,060 & 3,913 N/A Urgency rose by deficit in oil & gas BOV low 2005 55 400-500 (-9,233) 25,979 & 1,774 N/A BOT of oil & gas and national stayed positive low 2006 65 400-600 (-8,126) 39,733 & 2,247 N/A BOT of oil & gas and national stayed positive low 2007 72 600-950 (-10,182) 39,628 & 156 N/A Oil & gas BOT was slightly above zero low 2008 97 1050-500 (-11,181) 7,823 & (-1,427) N/A Oil & gas BOT went negative for the first time high 2009 62 550-800 (-11,663) 19,681 & 38 0.12 Oil & gas BOT returned positive low 2010 80 790-1250 (-13,918) 22,116 & 627 0.22 BOT increased low 2011 111 1250-1050 (-17,343) 26,061 & 776 0.36 BOT increased low 2012 112 1181-776 (-20,482) (-1,669) & (-5,587) 0.67 Deficit in oil & gas BOT was threefold of 2008 high 2013 109 800-900 (-26,696) (-4,077) & (-12,633) 1.03 Biofuel mandatory was accelerated high 2014 99 700-800 (-27,323) (-2,199) & (-13,441) 1.78 Preparation of funding from palm oil export fee to support biodiesel pricing high 2015 52 500-600 (-23,952) 7,672 & (-6,039) 0.92 National BOT stayed positive low 2016 44 500-700 (-24,067) 9,533 & (-5,634) 3.01 Significant biodiesel efforts to strengthen palm oil market which had weakened for last several years. high 2017 54 700-600 (-27,252) 11,843 & (-8,572) 2.57 National BOT increased low 2018 55-80 650-500 no data (-8,496) & (-12,464) no data BOT was the worst ever; Additional pressure from weakening palm oil market high a) IndexMundi (2019b); b) IndexMundi (2019a); c) BPS (2018a); MOT (2019) d) 24 • In 2005 oil & gas BOT and national BOT were significantly lower than the previous year but remained positive. The sense of urgency was assessed as low and kept as it existed. • In 2006 both oil & gas BOT and national BOT got higher. The Presidential Instruction Number 5/2006 concerning provision and utilization of biofuel as other fuel was enacted. The sense of urgency was assessed as low and moved efforts to improve BOT. • In 2007 national BOT was slightly lower than the previous year, while oil & gas BOT decreased to slightly above zero, which was a critical point. Law No. 30/2007 on Energy was enacted, although The Presidential Instruction 5/2006 had not been implemented. Urgency was assessed as low. • In 2008 the oil price peaked at USD 97/bbl, and oil & gas BOT was negative for the first time. MEMR Regulation 32/2008 concerning provision, utilization, and business of biofuels as an alternative fuel was established to accelerate biofuel provision and utilization. Urgency was assessed as high. • In 2009 oil & gas BOT increased to slightly above zero as the oil price decreased to USD 62/bbl. MEMR Regulation 32/2008 started the implementation but at a far lower level than the mandatory. Urgency was assessed as low. • Biodiesel was used for the first time, sold as a blend at pump stations of PT.Pertamina (a state-owned energy company) when marketed as a blend. • In 2010 biodiesel use doubled yet was still far lower than the regulation as mandated in MEMR Regulation 32/2008. Oil price increased to USD 80/bbl. The oil & gas BOT slightly increased. Urgency was assessed as low. • In 2011 biodiesel use doubled yet was still far lower than the regulation mandatory. The oil price rocketed to USD 111/bbl. The oil & gas BOT slightly increased. Urgency was assessed as low. • In 2012 the oil price reached a new peak at USD 112/bbl, and the oil & gas BOT was in deficit for the second time but at more than threefold of 2008. The national BOT was negative for the first time since 1976, at USD -1,669. The biofuel use was almost doubled from 359 Ml in 2011 to 669 Ml. Urgency was assessed as high. • In 2013 national BOT was negative and doubled than the previous year, hit a new record at USD (-4,077). Oil price kept high at above USD 100/bbl. The President 25 instructed the coordinating ministers for accelerating biofuel implementation. MEMR Regulation 25/2013 was enacted to accelerate the increase level and area of biofuel use to support macroeconomy policy and reducing oil fuels import. The target of biodiesel use in transportation by 2025 was increased from 20% to 25%, even though the previous mandate of 2008 had not yet well implemented. Biodiesel use increased to slightly above 1 Gl. The urgency was assessed as high. • In 2014 national BOT was better than in 2013 but still negative. Oil price slightly decreased. Biodiesel use increased significantly to 1.8 Gl. The Agency for Collection and Use of Oil Palm Plantation Fund (BPDPKS) was in preparation to collect an export fee from palm oil that can be used for supporting sustainable oil palm such as replanting, R&D, promotion, infrastructure, and downstream industry, and to pay for any price difference between biodiesel and diesel fuel. To promote biofuel use, Government Regulation 79/2014 on National Energy Policy was enacted. A guide for incentive provision from oil palm plantations was provided in Law 39 2014. Road testing of vehicles using B20 over 40,000 km (diesel motor endurance) was accomplished, after being initiated in 2012. The urgency was assessed as high. • In 2015 the oil price plummeted to USD 52/bbl, and the national BOT was back to positive, while oil & gas kept negative at USD (-6,039) billion. Biodiesel use halved to 915 Ml and the CPO price went down due to decreasing demand for exports. The 2008 target was revised higher to absorb more palm-biodiesel. BPDPKS was established and have become the provider of biodiesel subsidy since August 2015, replacing the state budget in the previous implementation. Efforts were driven by the weakened CPO export market. MEMR Regulation 12/2015, the second amendment on MEMR Regulation 32/2008 was enacted to support macroeconomy policy, reducing oil fuels import, and saving foreign exchange through accelerating increase level and area of biofuel use. Besides, some instruments were enacted to elaborate incentives provision by the palm oil industry, namely Government Regulation 24/2015, Presidential Regulation 61/2015, Minister of Finance Regulation 113/2015, and Minister of Trade Regulation 54/2015. The target of transport biodiesel use by 2025 was increased from 25% to 30% of blend, even though the previous mandate had not yet well implemented. The urgency was assessed as low. 26 • In 2016 the oil price decreased, and the national BOT increased. The biodiesel use was high and hit a new record at 3.0 Gl. Biofuel efforts were driven by weakened CPO export market. MEMR Regulation 26/2016 on using incentives from the palm oil industry in biodiesel utilization, was established. The fund collected by BPDPKS started the full implementation. The urgency was assessed as high. • In 2017 the oil price stayed low at USD 54/bbl, and the national BOT kept positive. CPO price increased, and biodiesel use decreased by around 15% to 2.6 Gl. Efforts were driven by weakening CPO export market. Presidential Regulation 22/2017 concerning General Planning for National Energy (RUEN) was enacted, which set actions for supplying 11.6 Gl biodiesel and 3.4 Gl bioethanol (lower than the mandatory in MEMR Regulation 12/2015). The urgency was assessed as low. • In 2018 oil price increased and the national BOT started to be in deficit in January, and the monthly BOT hit five-years record in July 2018. The national BOT by September was around USD (-15,000) million, while the full year BOT was around USD (-8,500) million which was the worst BOT ever. The BOT of oil and gas hit a new record at around USD (-12,500) million. As the main cause of the deficit was the oil & gas BOT, the situation drove extraordinary efforts to maximize biofuel utilization, including any opportunities for implementing drop-in biofuels. At the same time, the CPO export market weakened so that the domestic use through biodiesel implementation was pushed. Additional pressure also came from the approaching deadline for the target of 23% renewable energy in 2025, where liquid biofuel was considered one of the easiest solutions. All efforts were maximized but restricted due to biodiesel availability caused by transport limitations over the archipelago and the limitation for increasing the mandated blend concentration due to engine technology constraints. The President urged for implementation of 100% biofuel using palm oil feedstock on 4th August 2018 (Nugroho, 2018) and technologies for producing DBF production was seriously discussed at the national level. On 1st September 2018, biodiesel blends of 20% with diesel (B20) were implemented in all sectors. Three regulations were enacted in 2018: 27 (i) Presidential Regulation 66 aimed to amend Presidential Regulation 61/2015 concerning collection and use of oil palm estate fund; (ii) MEMR Regulation 41 concerning the provision and utilization of biodiesel in the financing framework of the Indonesian oil palm estate fund, and (iii) MEMR Regulation 1770/2018 on 2nd amendment of MEMR Regulation 6034/2016 on the market price index of biofuel mixed with fossil fuels. Besides the regulations mentioned, several lower-level measures were also established to support technical issues such as defining biodiesel specifications. The technology for DBF production developed at Institut Teknologi Bandung (ITB) (Chapter 5), a tertiary education institution in Indonesia, was discussed in many places and the R&D facilities visited by relevant ministers. In November, the stakeholders produced palm oil-based DBF using ITB technology through co- processing a 12 Ml/batch in three oil refinery units of Pertamina, the national oil company. The co-processing 5-10% palm oil was successfully accomplished (DGNREEC, 2018). Bio-jetfuel use in aviation engines was also prepared. Urgency was assessed as extremely high. The assessment on the sense of urgency level for liquid fuel sovereignty by The President and the economic conditions were shown in Table 2.1. Overall, the urgency was drastically up and down. The danger of current account deficit (CAD) was not being awared of until it became a reality. Unless the current account went into deficit, it was not believed that the system had a problem. The oil & gas BOV and BOT tended to get worse after each became negative for the first time. It means, without adequate efforts, the national BOT would be becoming negative not long after the negative oil & gas BOV and BOT. The sense of urgency by the President in making and implementing decisions determined biofuel implementation. Unfortunately, the sense of urgency was only an action responding the negative balance of trade and the low CPO price. Fig. 2.12 shows the feedback loop between national BOT and biofuel use. 28 Fig. 2.12 A feedback loop of the sense of urgency and the biofuel use through BOT without a future vision Indonesian economic growth by 2018 had continued strongly so that more imports of capital goods and intermediary goods (inputs in producing other goods) were resulted. Consequently the current account deficit (CAD) fell further (Sebayang & Natalia, 2018). As the Indonesian economic growth is projected relatively high up to long-term, the non-oil & gas BOT is estimated to change hardly. Considering the projection of oil fuel demand (Section 2.3.2) and the oil price projection by IEA and World Bank (IEA (2017b); WorldBank (2018)), the oil & gas BOT is likely to stay deficit in the long term. Thus, the national BOT seems to be in deficit in most of the upcoming years, in the condition of a similar level of biofuel use. The nation