A system dynamics approach to biodiesel fund management in Indonesia

Indonesia, which is strongly supportive of renewable energy development, meets its obligation to extensively employ renewable energy through the mandatory mixing of palm oil-derived biodiesel with diesel, a fossil fuel. The success of the program is inseparable from the government's provision of incentives which involve paying the difference in cost between biodiesel and diesel through export taxes collected from producers of palm oil and its derivatives. However, the increase in the government's mandatory target is not in line with the higher revenue obtained with the result that under current policy conditions the government will not be able to provide incentives for the B30 plan during the next few years. This research presents a dynamic simulation modelling of Indonesia's biodiesel program and analyzes the policy applied in support of that program. A system dynamics model is proposed to enable decision-makers to understand the relationship between the different variables inherent in the system and the impact of different variables on the continuity of the biodiesel program in Indonesia. The system dynamics model consists of three sub-models: the palm oil production sub-model, the biodiesel demand and production sub-model and the biodiesel fund management sub-model. Fund management of biodiesel is specifically discussed, starting with the source of funds, through fund management, to the impact of fund availability on the biodiesel mandatory program's continuity. The simulation shows that increasing palm oil production capacity is insufficient in order to ensure the success of the government program. Simulations indicate that the biodiesel program will operate optimally if two prerequisites are satisfied; first, that the levy policy adopted is not dependent upon crude palm oil (CPO) prices and, second, that the provision of incentives is limited solely to those required by the prevailing Public Service Obligation (PSO).