Biodiesel producers announced earlier this week that their total production has dropped by 85 percent since December.
The producers blamed the drop on "inconsistent policy making" by the government, particularly the fact that Pertamina's total spending on biodiesel had not been defined as an expense item eligible for a government subsidy by the Finance Ministry.
"This situation has led Pertamina to reduce the portion of biodiesel in a liter of Biosolar by half," PT Indo Biofuels Energy operational director Lucia Liemesak told The Jakarta Post on Wednesday.
Pertamina reduced the percentage of biofuel in its Biosolar and Biopertamax products from 5 percent to 2.5 percent, after announcing it was being forced to scale down its biofuel operations due to losses of Rp 16.9 billion (about US$1.8 million) in 2006.
As a result of the crash in demand, Biofuel Producers Association chairman Purnardi Djojosudirdjo said earlier this week that 17 biofuel companies were postponing their investment developments.
He said that there are five biofuel companies in operation today, with a combined production capacity of about 1.1 million tons per year, only about 15 percent of which is in use now.
"We invested in the business after the presidential instruction on biofuel promotion was introduced back in 2006, promising a lot of incentives for the alternative energy industry,"
"But apparently, no regulatory support followed the instruction. After making hundreds of millions of dollars worth of investments, the government leaves us, just like that," Lucia said.
Lucia said it took about $5 million to $6 million of investment to run a biofuel factory with a production capacity of 20,000 tons per year.
Pertamina deputy marketing director Hanung Budia explained that the subsidy for Biosolar was the same as for regular Solar fuel. Currently Solar at gas stations is being sold at Rp 4,100, from an orginal price of Rp 8,695, which means that the government is providing a subsidy of Rp 4,595 per liter.
"If the production cost of Biosolar is higher than Solar, Pertamina must cover the gap," he said.
National Biofuel Development Committee chairman Alhilal Hamdi, also a commissioner at state power company PLN, said that the problem was not about regulatory issue at the Finance Ministry, but had more to do with the increasing price of ethanol and CPO and the government's lack of political will.
"CPO now costs more than $1000 per ton, making the production cost of Biosolar higher than Solar. If the government were to absorb all the production capacity of the biofuel producers, it would put greater pressure on the subsidy budget," he said, without giving the exact figures.
To help boost domestic demand, Alhilal said that the committee was planning to propose legislation on the mandatory use of biofuels in industry as has been implemented at other countries such as in the Philippines and Malaysia.
He said that the plan was still being discussed with the government, particularly on the level of consumption that should be mandated.
"We propose of about 1 percent of the total national fuel usage of 60 million kiloliters," he said.