Indonesia is seeking to blend more palm oil with diesel to cut its use of fossil fuels, with the ambitious target raising the risk of tightening supply of the tropical oil.

The nation wants to increase the mix of palm-based biofuels with diesel to 50%, according to the Agriculture Ministry. The current blend is 35% - known as B35 - and Indonesia plans to expand that to B40 next year, provided trials on trains, ships and mining and agricultural machines are completed by December.

The biggest palm oil producer plans to commission economic and technical studies, conduct road trials and prepare necessary infrastructure to further cut its dependence on fossil fuels, the ministry said in a statement on Sunday. Such a move will also help the Southeast Asian nation reduce its trade deficit and boost farmer income, it added.

Indonesia’s green fuel plan raises the risk of a palm oil shortage and could boost prices, hurting countries like India, which imports about 60% of its vegetable oil needs. Palm oil exports from Indonesia fell about 3% to 32.2 million tons in 2023. Domestic consumption totalled 23.2 million tons, while 10.7 million tons were used to produce biofuels. Production is seen stagnating this year due to ageing trees and adverse weather conditions.

The Agriculture Ministry said it will seek to secure palm oil for biofuels without disrupting its use in food, local industry and exports. The government is working with private companies to develop “degraded” land for palm cultivation exclusively for the energy sector, it said, without elaborating further. 

The country needs to increase its biofuel production capacity and improve technology to achieve the expected fuel quality, Andi Nur Alamsyah, the chairman of the B50 Working Group, said in the statement. Indonesia will also adjust incentives for the use of biodiesel and amend some regulations before implementing the B50 programme.

A higher biofuel blending programme poses challenges for automobile makers as vehicle engines need to be modified to run on blended fuels, raising costs for manufacturers. Several countries are going slow on their green fuel initiatives. India, which imports nearly 90% of its oil demand, currently mixes about 16% of ethanol with gasoline, and targets to raise the ratio to 20% by 2026.   

Indonesia has been lagging in its targets, but the nation’s biofuel policy is more robust than countries such as Brazil, which is seeking to increase its ethanol blend to 30% from 27.5%. 

  - Bloomberg