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Will biofuel projects in Southeast Asia become white elephants?
ARTICLE IN PRESS Energy Policy 38 (2010) 3847–3848
Contents lists available at ScienceDirect
Energy Policy journal homepage: www.elsevier.com/locate/enpol
Viewpoint
Will biofuel projects in Southeast Asia become white elephants? Chun Sheng Goh, Keat Teong Lee n School of Chemical Engineering, Engineering Campus, Universiti Sains Malaysia, Seri Ampangan, 14300 Nibong Tebal, Seberang Perai Selatan, Pulau Pinang, Malaysia
a r t i c l e in fo
abstract
Article history: Received 17 October 2009 Accepted 7 April 2010 Available online 27 April 2010
Southeast Asia’s attempt to join the global biofuel development has not been very successful, despite the large amount of subsidies and incentives allotted for biofuel projects. The outcome of these projects has failed to meet expectation due to overrated assumptions and shortsighted policies. Utilization of edible feedstock such as palm oil and sugar cane for biofuel has disrupted the fragile industry due to the fluctuations of feedstock prices. The appropriate research on jatropha to prove its economic and environmental feasibility as energy crop has not been performed. Biofuel development in Southeast Asia remains at an early stage of development and requires highly intensive monitoring and strict legal enforcement to ensure future success. & 2010 Elsevier Ltd. All rights reserved.
Keywords: Biofuel Policies Southeast Asia
As part of the plan to combat climate change, the European Union has shown global leadership by setting an ambitious target of including 10% biofuels in the transport fuel mix by 2020. Following this lead, Southeast Asian countries have shown the same level of optimism by setting their biofuel target at similar level. However, while Southeast Asian countries have shown considerable interest in renewable energy, particularly bioenergy, few renewable energy projects are actually in operation. This indicates weaknesses in the energy policies of the region. In 2005, Indonesia and Malaysia, which are the world’s largest producers of palm oil, utilized less than 1% of their biomass resource potential for renewable energy (Lidula et al., 2007). Despite the investment of a great deal of money in biofuel projects, the outcome has been disappointing, with little sign of future improvement. For example, to support the biodiesel industry, the Malaysian government allocated US$ 16 million in lowinterest loans in 2004, US$ 3.3 million in federal grants and US$ 3.8 million from Petronas (Malaysian Government-owned oil and gas company) for demonstration projects, and a further US$ 3.69 million for research and development in 2006 (GSI, 2009). The Indonesian government provided a comparatively larger budget of US$ 1.6 billion for biofuel between 2006 and 2008 (GSI, 2009). On paper, these figures are impressive, particularly because Malaysia and Indonesia are developing nations; however, the outcome of these projects remains uncertain. Conservationists are concerned that these attempts to promote renewable energy usage may result in another political fiasco, where money is spent without any tangible outcome. In addition, due to the singularity of feedstock, the intrinsic limitations of first generation biofuels
n
Corresponding author. Tel.: + 60 4 599 6467; fax: +60 4 594 1013. E-mail address: [email protected] (K.T. Lee).
0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.04.009
have disrupted the fragile industry due to the fluctuation of feedstock prices, particularly those of palm oil and sugar cane. Consequently, the industry has been unable to meet projected revenue levels and has required costly government takeovers. Although initially billed as a blueprint to mitigate global warming, the ‘‘low carbon society’’ concept promoted following the Kyoto Protocol, has become a difficult target to achieve in Southeast Asia. In the following section, we will review some of the renewable energy projects in Southeast Asia. Indonesia, which is the most populated country in Southeast Asia, is aggressively pursuing biofuel development. However, the supposed benefits of biofuel have been unable to stop the collapse in demand for biofuel in the country. The government has mandated that by 2025, at least 5% of the national energy mix must come from biofuel. The state energy company, Pertamina, has been instructed to mix at least 2% of biofuel into petrol fuel. However, because the biofuel market is fraught with uncertainty and due to the higher cost of biofuel, Pertamina has resisted incorporating biofuel (Zhou and Thomson, 2009). Although the Indonesian government has proposed an allocation of millions of USD in the form of subsidies for biofuel, its citizens remain cautious regarding the success as it is possible to obtain personal benefit by taking advantage of flaws in the system. The biofuel industry is also becoming weaker due to the unstable price of feedstock, mainly palm oil. In addition, land-use change and food vs. fuel issues have caused palm and jatropha biodiesel and sugar cane bioethanol projects to be withheld. Currently, Indonesia is producing biofuel at approximately one-tenth of the existing capacity. A similarly confused situation exists in Malaysia. The national biofuel policy of Malaysia is largely based on palm oil. As indicated previously, the volatile price of palm oil has impeded the implementation of palm-based biodiesel. During 2006 and
ARTICLE IN PRESS 3848
C.S. Goh, K.T. Lee / Energy Policy 38 (2010) 3847–3848
2007, 92 biodiesel projects in Malaysia were approved, but only 14 functional biodiesel plants have since been built, eight being operational in 2008 (GSI, 2009). The remaining plants have been canceled or have suspended operation due to high feedstock prices; this includes four plants which have shut down. The failure to materialize B5 diesel (includes 5% biodiesel) epitomizes the haphazard planning of the biodiesel industry. This phenomenon reflects the over-optimization of projects’ output. The focus should be on fundamental technology and practicalities, rather than on unrealistic assumptions. From an economic viewpoint, the decision to concentrate on one feedstock shows a lack of foresight. However, because Malaysia has a large amount of biomass resources, the events experienced may stimulate the development of multi-feedstock and second-generation biofuel. Thailand has used Brazil as role model for its approach. The government has promoted the use of high percentage blends of gasohol and biodiesel by aggressively promoting and increasing plantation areas of sugar cane, cassava and oil palm. However, the expansion of oil palm plantations has not achieved much success due to a relative lack of incentives. In addition, farmers prefer to plant rubber, which provides a more attractive return. Converting cassava to fuel has ignited the food vs. fuel debate. In 2008, volatile sugar cane and oil palm prices resulted in biofuel supply surpluses as well as increased input prices. Consequently, some ethanol plants were running at only 70% of their production capacity, while others suspended production or switched to nonethanol products (Preechajarn et al., 2008). In the Philippines, the Biofuels Act of 2006 mandated mixing 1% biodiesel in petroleum diesel and 5% bioethanol in gasoline for the first 4 years after the signing of the bill into law (Zhou and Thomson, 2009). As an archipelagic country, the Philippines has a relatively small land area compared with other Southeast Asian countries (except Singapore). Production of biofuel from terrestrial crops is not favored as it tends to encroach on arable land used for food production. Despite the lack of adequate research and development, the government is aggressively pushing for the cultivation of jatropha in the southern islands, with the intention that it will become the future biofuel feedstock. Due to the intrinsic limitations of archipelagic geography, the salinity of soil and limited fresh water sources restrict the production of jatropha oil, which requires large amounts of water during the cultivation of young plants. Consequently, experts have predicted that the outcome of biofuel projects in the Philippines will be similar to those experienced in Indonesia. There have been disturbing reports of human rights issues related to the biofuel program of the Union of Myanmar (Burma). According to a report from the World Rainforest Movement (2008), farmers have been forced to change their crops to jatropha and are bound to production quotas enforced by strict laws. The situation is exacerbated by extensive crop failures caused by poor techniques and bad seed stock. The program has caused adverse health effects, increased starvation and has many citizens have fled the country (WRM, 2008). Although technological barriers have obstructed the development of biofuel in Southeast Asia, another crucial influential factor is the intentions of the corporate participants of biofuel projects. In some countries, public tendering does not occur and the decision-making processes for awarding biofuel projects lack transparency. It is therefore possible for individuals or organizations to launder illegal earnings. Some companies awarded biofuel projects may use the opportunity to make a quick profit from the monetary incentives and subsidies provided by the government. Weak laws and the flawed operation of the subsidies
system can be used for the benefit of a select collection of corporate interests. If this trend dominates, the fledgling industry will gradually collapse due to deceitful activities. In extreme cases, the government may have to take over the companies at a cost to all taxpayers. It is essential that policies be carefully planned within a transparent framework to prevent the collusion and corruption which have occurred elsewhere, such as the ‘‘ecocorruption’’ cases in Europe (Scott, 2009). After the initial enthusiasm for biofuel projects, the lack of foresight, follow-up and strict monitoring may have caused biofuel development in Southeast Asia to be a catastrophic failure. A more holistic approach is required to evaluate biofuel projects, and in particular, to examine their economic and technical viability. In the absence of careful analysis and logical forecasting, the formulation of a biofuel policy based on imprecise assumptions is very risky. Failure of previous projects may impede future projects, and engender objection to future biofuel projects in parliament and by the public. Unclear government coordination and ineffective monitoring systems provide the opportunity for speculators to abuse policies and the public purse. Transparency is vital to the framework of the prevailing energy policy objectives. The capability of companies to carry out biofuel projects should be clearly investigated and evaluated before licenses and incentives are awarded. Biofuel policies should be understandable, and clear in terms of the legal framework. Delivery of tangible output within the timeframe dictated by government will help to promote a positive profile of the biofuel industry. Through healthy competition, capable biofuel companies that deserve incentives and subsidies will ensure that the industry moves forward. Despite the findings of this report, the authors remain proud of the Southeast Asian countries because of their courage in setting biofuel targets comparable to those of the European Union, and of their relentless effort to promote biofuel. This shows that Southeast Asian countries are aware of their role in fulfilling the commitments of the Kyoto Protocol as a means to mitigate global warming. Although biofuel development in Southeast Asia remains at an early stage of development, with comprehensive far-sighted planning, concentrated effort, highly intensive monitoring and a system of strict legal enforcement, it is possible for Southeast Asia to develop a viable biofuel industry, and potentially become global leaders in the industry.
Acknowledgement The authors would like to acknowledge Universiti Sains Malaysia (Research University Grant No. 814062, Postgraduate Research Grant Scheme and USM Fellowship) that made this work possible. References GSI (Global Subsidies Initiative), 2009. Available at: /http://www.globalsubsidies. org/en/research/biofuel-subsidiesS. Lidula, N.W.A., Mithulananthan, N., Ongsakul, W., Widjaya, C., Henson, R., 2007. ASEAN towards clean and sustainable energy: potentials, utilization and barriers. Renewable Energy 32, 1441–1452. Preechajarn, S., Prasertsri, P., Kunasirirat, M., 2008. Thailand Bio-Fuels Annual 2008 USDA Foreign Agricultural Service. Scott M., 2009. Spain: the rise of eco-corruption? Bloomberg Business Week, 23 March 2009.Available at: /http://www.businessweek.com/investing/green_ business/archives/2009/03/spain_the_rise.htmlS. WRM (World Rainforest Movement), 2008. Burma: generals go berserk on biofuels. WRM’s bulletin No. 130, May 2008. Editor: Ricardo Carrere. Zhou, A., Thomson, E., 2009. The development of biofuels in Asia. Applied Energy 86, S11–S20.
Contents lists available at ScienceDirect
Energy Policy journal homepage: www.elsevier.com/locate/enpol
Viewpoint
Will biofuel projects in Southeast Asia become white elephants? Chun Sheng Goh, Keat Teong Lee n School of Chemical Engineering, Engineering Campus, Universiti Sains Malaysia, Seri Ampangan, 14300 Nibong Tebal, Seberang Perai Selatan, Pulau Pinang, Malaysia
a r t i c l e in fo
abstract
Article history: Received 17 October 2009 Accepted 7 April 2010 Available online 27 April 2010
Southeast Asia’s attempt to join the global biofuel development has not been very successful, despite the large amount of subsidies and incentives allotted for biofuel projects. The outcome of these projects has failed to meet expectation due to overrated assumptions and shortsighted policies. Utilization of edible feedstock such as palm oil and sugar cane for biofuel has disrupted the fragile industry due to the fluctuations of feedstock prices. The appropriate research on jatropha to prove its economic and environmental feasibility as energy crop has not been performed. Biofuel development in Southeast Asia remains at an early stage of development and requires highly intensive monitoring and strict legal enforcement to ensure future success. & 2010 Elsevier Ltd. All rights reserved.
Keywords: Biofuel Policies Southeast Asia
As part of the plan to combat climate change, the European Union has shown global leadership by setting an ambitious target of including 10% biofuels in the transport fuel mix by 2020. Following this lead, Southeast Asian countries have shown the same level of optimism by setting their biofuel target at similar level. However, while Southeast Asian countries have shown considerable interest in renewable energy, particularly bioenergy, few renewable energy projects are actually in operation. This indicates weaknesses in the energy policies of the region. In 2005, Indonesia and Malaysia, which are the world’s largest producers of palm oil, utilized less than 1% of their biomass resource potential for renewable energy (Lidula et al., 2007). Despite the investment of a great deal of money in biofuel projects, the outcome has been disappointing, with little sign of future improvement. For example, to support the biodiesel industry, the Malaysian government allocated US$ 16 million in lowinterest loans in 2004, US$ 3.3 million in federal grants and US$ 3.8 million from Petronas (Malaysian Government-owned oil and gas company) for demonstration projects, and a further US$ 3.69 million for research and development in 2006 (GSI, 2009). The Indonesian government provided a comparatively larger budget of US$ 1.6 billion for biofuel between 2006 and 2008 (GSI, 2009). On paper, these figures are impressive, particularly because Malaysia and Indonesia are developing nations; however, the outcome of these projects remains uncertain. Conservationists are concerned that these attempts to promote renewable energy usage may result in another political fiasco, where money is spent without any tangible outcome. In addition, due to the singularity of feedstock, the intrinsic limitations of first generation biofuels
n
Corresponding author. Tel.: + 60 4 599 6467; fax: +60 4 594 1013. E-mail address: [email protected] (K.T. Lee).
0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.04.009
have disrupted the fragile industry due to the fluctuation of feedstock prices, particularly those of palm oil and sugar cane. Consequently, the industry has been unable to meet projected revenue levels and has required costly government takeovers. Although initially billed as a blueprint to mitigate global warming, the ‘‘low carbon society’’ concept promoted following the Kyoto Protocol, has become a difficult target to achieve in Southeast Asia. In the following section, we will review some of the renewable energy projects in Southeast Asia. Indonesia, which is the most populated country in Southeast Asia, is aggressively pursuing biofuel development. However, the supposed benefits of biofuel have been unable to stop the collapse in demand for biofuel in the country. The government has mandated that by 2025, at least 5% of the national energy mix must come from biofuel. The state energy company, Pertamina, has been instructed to mix at least 2% of biofuel into petrol fuel. However, because the biofuel market is fraught with uncertainty and due to the higher cost of biofuel, Pertamina has resisted incorporating biofuel (Zhou and Thomson, 2009). Although the Indonesian government has proposed an allocation of millions of USD in the form of subsidies for biofuel, its citizens remain cautious regarding the success as it is possible to obtain personal benefit by taking advantage of flaws in the system. The biofuel industry is also becoming weaker due to the unstable price of feedstock, mainly palm oil. In addition, land-use change and food vs. fuel issues have caused palm and jatropha biodiesel and sugar cane bioethanol projects to be withheld. Currently, Indonesia is producing biofuel at approximately one-tenth of the existing capacity. A similarly confused situation exists in Malaysia. The national biofuel policy of Malaysia is largely based on palm oil. As indicated previously, the volatile price of palm oil has impeded the implementation of palm-based biodiesel. During 2006 and
ARTICLE IN PRESS 3848
C.S. Goh, K.T. Lee / Energy Policy 38 (2010) 3847–3848
2007, 92 biodiesel projects in Malaysia were approved, but only 14 functional biodiesel plants have since been built, eight being operational in 2008 (GSI, 2009). The remaining plants have been canceled or have suspended operation due to high feedstock prices; this includes four plants which have shut down. The failure to materialize B5 diesel (includes 5% biodiesel) epitomizes the haphazard planning of the biodiesel industry. This phenomenon reflects the over-optimization of projects’ output. The focus should be on fundamental technology and practicalities, rather than on unrealistic assumptions. From an economic viewpoint, the decision to concentrate on one feedstock shows a lack of foresight. However, because Malaysia has a large amount of biomass resources, the events experienced may stimulate the development of multi-feedstock and second-generation biofuel. Thailand has used Brazil as role model for its approach. The government has promoted the use of high percentage blends of gasohol and biodiesel by aggressively promoting and increasing plantation areas of sugar cane, cassava and oil palm. However, the expansion of oil palm plantations has not achieved much success due to a relative lack of incentives. In addition, farmers prefer to plant rubber, which provides a more attractive return. Converting cassava to fuel has ignited the food vs. fuel debate. In 2008, volatile sugar cane and oil palm prices resulted in biofuel supply surpluses as well as increased input prices. Consequently, some ethanol plants were running at only 70% of their production capacity, while others suspended production or switched to nonethanol products (Preechajarn et al., 2008). In the Philippines, the Biofuels Act of 2006 mandated mixing 1% biodiesel in petroleum diesel and 5% bioethanol in gasoline for the first 4 years after the signing of the bill into law (Zhou and Thomson, 2009). As an archipelagic country, the Philippines has a relatively small land area compared with other Southeast Asian countries (except Singapore). Production of biofuel from terrestrial crops is not favored as it tends to encroach on arable land used for food production. Despite the lack of adequate research and development, the government is aggressively pushing for the cultivation of jatropha in the southern islands, with the intention that it will become the future biofuel feedstock. Due to the intrinsic limitations of archipelagic geography, the salinity of soil and limited fresh water sources restrict the production of jatropha oil, which requires large amounts of water during the cultivation of young plants. Consequently, experts have predicted that the outcome of biofuel projects in the Philippines will be similar to those experienced in Indonesia. There have been disturbing reports of human rights issues related to the biofuel program of the Union of Myanmar (Burma). According to a report from the World Rainforest Movement (2008), farmers have been forced to change their crops to jatropha and are bound to production quotas enforced by strict laws. The situation is exacerbated by extensive crop failures caused by poor techniques and bad seed stock. The program has caused adverse health effects, increased starvation and has many citizens have fled the country (WRM, 2008). Although technological barriers have obstructed the development of biofuel in Southeast Asia, another crucial influential factor is the intentions of the corporate participants of biofuel projects. In some countries, public tendering does not occur and the decision-making processes for awarding biofuel projects lack transparency. It is therefore possible for individuals or organizations to launder illegal earnings. Some companies awarded biofuel projects may use the opportunity to make a quick profit from the monetary incentives and subsidies provided by the government. Weak laws and the flawed operation of the subsidies
system can be used for the benefit of a select collection of corporate interests. If this trend dominates, the fledgling industry will gradually collapse due to deceitful activities. In extreme cases, the government may have to take over the companies at a cost to all taxpayers. It is essential that policies be carefully planned within a transparent framework to prevent the collusion and corruption which have occurred elsewhere, such as the ‘‘ecocorruption’’ cases in Europe (Scott, 2009). After the initial enthusiasm for biofuel projects, the lack of foresight, follow-up and strict monitoring may have caused biofuel development in Southeast Asia to be a catastrophic failure. A more holistic approach is required to evaluate biofuel projects, and in particular, to examine their economic and technical viability. In the absence of careful analysis and logical forecasting, the formulation of a biofuel policy based on imprecise assumptions is very risky. Failure of previous projects may impede future projects, and engender objection to future biofuel projects in parliament and by the public. Unclear government coordination and ineffective monitoring systems provide the opportunity for speculators to abuse policies and the public purse. Transparency is vital to the framework of the prevailing energy policy objectives. The capability of companies to carry out biofuel projects should be clearly investigated and evaluated before licenses and incentives are awarded. Biofuel policies should be understandable, and clear in terms of the legal framework. Delivery of tangible output within the timeframe dictated by government will help to promote a positive profile of the biofuel industry. Through healthy competition, capable biofuel companies that deserve incentives and subsidies will ensure that the industry moves forward. Despite the findings of this report, the authors remain proud of the Southeast Asian countries because of their courage in setting biofuel targets comparable to those of the European Union, and of their relentless effort to promote biofuel. This shows that Southeast Asian countries are aware of their role in fulfilling the commitments of the Kyoto Protocol as a means to mitigate global warming. Although biofuel development in Southeast Asia remains at an early stage of development, with comprehensive far-sighted planning, concentrated effort, highly intensive monitoring and a system of strict legal enforcement, it is possible for Southeast Asia to develop a viable biofuel industry, and potentially become global leaders in the industry.
Acknowledgement The authors would like to acknowledge Universiti Sains Malaysia (Research University Grant No. 814062, Postgraduate Research Grant Scheme and USM Fellowship) that made this work possible. References GSI (Global Subsidies Initiative), 2009. Available at: /http://www.globalsubsidies. org/en/research/biofuel-subsidiesS. Lidula, N.W.A., Mithulananthan, N., Ongsakul, W., Widjaya, C., Henson, R., 2007. ASEAN towards clean and sustainable energy: potentials, utilization and barriers. Renewable Energy 32, 1441–1452. Preechajarn, S., Prasertsri, P., Kunasirirat, M., 2008. Thailand Bio-Fuels Annual 2008 USDA Foreign Agricultural Service. Scott M., 2009. Spain: the rise of eco-corruption? Bloomberg Business Week, 23 March 2009.Available at: /http://www.businessweek.com/investing/green_ business/archives/2009/03/spain_the_rise.htmlS. WRM (World Rainforest Movement), 2008. Burma: generals go berserk on biofuels. WRM’s bulletin No. 130, May 2008. Editor: Ricardo Carrere. Zhou, A., Thomson, E., 2009. The development of biofuels in Asia. Applied Energy 86, S11–S20.