Indonesia’s Energy and Mineral Resources Ministry says it plans to increase its subsidy for biodiesel and bioethanol, pending approval by the House of Representatives. High production costs, as well as the plummeting global crude oil prices, have created a less competitive environment for biofuel production.

In the proposal submitted to the House, the biodiesel subsidy will increase to IDR5,000 (USD0.39) per litre, more than three times the earlier proposal of IDR1,500 (USD0.12) per litre. The bioethanol subsidy, initially proposed at IDR 2,000 per litre (USD0.16) has now been raised to IDR3,000 (USD0.24) per litre.

Indonesia has had a biofuel mandate since late 2013 of 10% biodiesel component in diesel fuel and a 0.5-1% bioethanol component in gasoline. The mandate was put in place to reduce the use of fossil fuels. The country, while an oil producer, is a net importer. However, only 1.17 million kilolitres of biodiesel were realised in 2014, from a target of 1.57 million kilolitres. The realisation for bioethanol was zero.

One reason for the low realisation of the biofuel blends was state-owned Pertamina’s failure to hold a tender on procuring fatty acid methyl ester (FAME), a key biodiesel ingredient. Pertamina’s Marketing Director Amhad Bambang commented, “no one participated in the tender because the FAME price was too low.”

Increasing the subsidy could boost demand for palm oil, whose prices have fallen by about one-quarter since their peak in March 2014. Also, according to Rida Mulyana, the Ministry’s director general for renewable energy, the government could save up to IDR20 trillion (USD1.58 million) from lower crude oil imports.