Indonesia's top diesel buyer says biofuel rule unworkable

JAKARTA (Reuters) - Indonesian state power firm PLN says it cannot comply with government rules on burning diesel with a bio content of at least 30 percent as it would damage generators, potentially curbing demand for biofuel ingredient palm oil in the world’s top producer of that commodity.

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Under regulations released in 2015, Jakarta mandated that the power industry should from this year use so-called B30 biodiesel, hoping to reduce its crude oil import bill, cut greenhouse gas emissions and stoke local appetite for palm oil.

Less-than-expected growth in bio consumption by Indonesia’s largest diesel buyer could weigh on palm prices as more supplies are diverted to the global market.

“It’s risky if we use B30 (because) machinery can shut down,” Chairani Rachmatullah, head of PLN’s fuel and gas procurement division, told Reuters in an interview late last month.

“Eventually the machinery gets clogged with residue like slagging causing blockages, and then it breaks down,” she said, adding that diesel with a bio content of 20 percent would be “safer”.

The official in charge of government biofuel policy said the biodiesel rule should be no problem for PLN, and that his office would investigate the issue and could apply sanctions. He did not specify what measures the ministry could take. “If there’s no problem for vehicles, logically there should be no problem for power,” said New and Renewable Energy Director Rida Mulyana. “I definitely don’t want to pull back from this mandatory regulation.”

Indonesia’s automotive industry association has said high biodiesel concentrations can lead to engines overheating and greater fuel consumption.

Indonesia’s efforts to diversify energy sources have faced criticism from power station developers.

Diesel contributes around 5 percent of Indonesia’s energy mix for electricity generation, and is the fuel of choice for smaller generators in many outer islands in eastern Indonesia.

A reduction of utilities’ biodiesel intake is one of many factors affecting palm oil prices, said Indonesian Palm Oil Association (GAPKI) executive director Fadhil Hasan, adding that transportation users consume more biodiesel than PLN. According to Paulus Tjakrawan, chairman of the Indonesian Biofuel Producers Association, without strict supervision domestic palm methyl ester (PME) consumption will fall well below half the government target of 6.93 million kilolitres this year. Palm oil is used to churn out PME, a popular ingredient for biodiesel.

While PLN still expects its PME consumption to more than double to 500,000 kl this year, growth will be less than it would have been if the utility was willing to push ahead with using B30 fuel.

Chairani added that the company expected its total diesel and marine fuel oil demand to shrink 15 percent to 5 million kl in 2016 and by a further 20 percent in 2017, as more coal and gas power comes online.

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Reporting by Bernadette Christina Munthe and Wilda Asmarini; Writing by Fergus Jensen; Editing by Joseph Radford