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Economics of Palm Oil Empty Fruit Bunches Bio Briquettes in Indonesia

Article in International Journal of Energy Economics and Policy · March 2016

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Economics of Palm Oil Empty Fruit Bunches Bio Briquettes in Indonesia

Mansoor Maitah1, Petr Prochazka1, Ales Pachmann2

1
Faculty of Economics and Management, Czech University of Life Sciences Prague,
Kamycka 129, Prague 6 16921, Czech Republic.
1
Faculty of Economics and Management, Czech University of Life Sciences Prague,
Kamycka 129, Prague 6 16921, Czech Republic.
2
President of APA, Civic Association, Prague.

Correspondence: Mansoor Maitah, Faculty of Economics and Management, Czech University

of Life Sciences Prague, Kamycka 129, 165 21 Praha 6 – Suchdol, Czech Republic. Tel:
+420-234 382 139.
E-mail: [email protected]

Abstract

This study provides background data and justification for the development of bio briquettes
from palm oil empty fruit bunches (EFB) and evaluates a pilot project utilizing this palm oil
industry waste by-product in Indonesia. This activity is also important from the environmental
standpoint since it helps in achievement of sustainable environment in Indonesia. This is due
to the fact that EFB that is left to decay and is not processed is a significant source of
pollution. (Chiew, Yoon Lin, and Sohei Shimada 2013)
Indonesia has become the world’s biggest palm oil producer with more than 20 million tons
crude palm oil (CPO). Annual growth rate is about of 10%. This helped to Indonesian
economic growth and poverty alleviation, provided benefits for big companies and thousands
of smallholders. But this led also to deforestation and reduction of biodiversity. The
Indonesian palm oil industry now still did not recover from palm oil prices drop down and use
of palm oil by products should be on the focus also to support this Indonesian main business.
Palm oil is facing criticism for using food crop as fuels, but EFB is absolutely non-food palm
oil production by product. This by-product is underestimated in economic way and relatively
huge amount is not used in Indonesia and could potentially contribute to sustainable green
energy production especially for power generation needs In Indonesia. (Mohammed, M.A.A
2012)

JEL Classification: Q2, Q4, Q5

Key words: Sustainable development, Crude Palm Oil, Briquettes, Renewable Energy,
Profitability

1. Indonesian Palm Oil Production

Oil palm tree (Elaeis Guineensis) is a tropical species that produces crude palm oil (CPO).
This tree originates in West Africa, but nowadays grows in many parts of the world, including
Indonesia. Crude palm oil became internationally traded commodity. Malaysia and Indonesia
covers more than 90 % of CPO global production. Indonesia is number one producer and
production is estimated to exceed 20 million metric tons with almost 10 million hectares
planted. CPO is used especially for production of cooking oil and related products and for
biodiesel production and as a biofuel. (McClanahan, Paige 2013)
For example, Indonesian state power company PT PLN has started to operate a 10 megawatts
power plant fired by crude palm oil (CPO) in Dumai, Riau Province. The power plant was
initially fuelled with diesel but was later converted to a crude palm oil (CPO)-fuelled power
plant by installing converter equipment at the plant. (Alfian 2008)
Sumatra is the leading CPO production center in Indonesia. Oil palm tree has made huge
contributions to poverty alleviation in Indonesia, helping to millions of smallholders.
(McClanahan, Paige 2013)
Oil palm tree is also produces big amount of biomass. 1 kg of CPO is accompanied
approximately by 4 kg of dry biomass which is produced. One third of this biomass are oil
palm empty fruit bunches (EFB) and the rest are fronds and oil palm trunks. Besides CPO
production, there is interest to create source of renewable energy by using oil palm biomass.
EFB is obviously used for composting and mulching on plantations. This article is focused on
EFB bio briquettes production. Advantages of using bio briquettes are also clear from the
following Figure 1 where key characteristics for briquettes are analyzed. (Chiew, Yoon Lin,
and Sohei Shimada 2013)

Table 1 Characteristics for Briquettes

Fuel Parameters Calorific Value Ash Content

Other Factors
Type (MJ / kg) (%)
Briquette 17.58 – 20.10 0.5 – 8 No sulphur and smoke
Aromatic contents and
Coal 15.07 – 18.84 30 – 50
sulphur
Fire
9.21 – 12.98 20 – 25 High smoke
wood

Source: (Chiew, Yoon Lin and Sohei Shimada 2013)

2. Briquettes from Palm Empty Fruit Bunches

Shredded fibers of EFB were collected at palm oil mill which belongs to state owned
Indonesian oil palm plantation company PT. Perkebunan Nusantara Indonesia in village
Dolok Sinumbah on North Sumatra. Shredded fibers of EFB were delivered to leading Czech
Republic bio briquette machine producer and the material was tested for bio briquettes
production. Final briquette´s density was from 0,83 kg/dm3 to 0,92 kg/dm3. Moisture of raw
material was 14,6 %. The briquettes have following properties that are summarized in Table
2.

Table 2 Laboratory Tested Properties of Briquettes

Parameter Value
Dry mass (% mass) 93.70
Net calorific value
17.61
(MJ/kg)
Ash (% mass) 5.9
Nitrogen (%mass) 1.7
Carbon (% mass) 47.10
Sulphur (% mass) <0.10
Hydrogen (% mass) 6.20
Oxygen (% mass) 40.54
2ross calorific value
18.96
(MJ/kg)

Source: (Own research)

 2.1 Economy of Small Scale briquetting EFB Project in Indonesia

Below, economy of 100 kg per hour briquetting line (small scale project) is evaluated. These
calculations are based on assumption that the material is dried. In other case, it would be
needed to increase line capacity and invest into a drier with a boiler. It is also assumed that
already shredded EFB are used. For example, the palm oil mill in Indonesia has an EFB
shredder already in place since EFB compost is already produced there. Nevertheless, half of
EFB is unused. Therefore, there is a potential to use this for briquetting. Below, two scenarios
are analyzed. Firstly, a scenario with natural drying in the sun is considered. This is definitely
a less expensive option with lower initial capital requirement but it also may lead to uncertain
level of moisture in the input material. Secondly, a scenario with a dryer machine is
introduced. This is a costly option but it gives a certainty of desired level of humidity in the
input material. In order to evaluate economy of this project, it is necessary to determine key
dynamic profitability indicators. Net present value, payback period as well as turn even point
are evaluated through cost determination and output price evaluation.

2.2 Briquetting without a Dryer

Major economic variables are described in the Table 3 below for the case without a dryer.

Table 3 Briquetting without a Dryer

Costs Price
Electricity (USD per year) 4,130
Labour (USD per year) 4,082
Input material (USD per tonne) 10
Sales price of final briquettes (USD Ex
56
work)
Briquetting machine (EUR) 24,446
Land 0

Source: own compilation

This leads to calculation of variable and fixed costs, total revenue and profit that are presented
in Table 4 of this paper.

Table 4 Cost, Revenue and Profit Calculations

Costs Price
Costs of materials (USD per year) 5,760
Total costs (USD per year) 13,927
Total sales (USD per year) 32,256
Expected profit (USD per year /
18,329 / 13,295
EURO)

Source: own compilation

After determining cost, revenue and profit, it is possible to calculate some of the profitability
indicators (ROI, Payback period).
Return on investment (ROI) is the benefit to the investor that results from an investment into
some resource. A high ROI means the investment gains can be favourably compared to the
investment cost. As a performance measure, this indicator is used to evaluate the efficiency of
an investment or to compare the efficiency of a number of different investments. In purely
economic terms, it is one way of considering profits in relation to capital invested. (Farris,
Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein 2010)

(𝑔𝑎𝑖𝑛 𝑓𝑟𝑜𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 =
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Payback period in capital budgeting refers to the period of time required to recoup the funds
that are spent in an investment, or to reach the break-even point (Farris, Paul W.; Neil T.
Bendle; Phillip E. Pfeifer; David J. Reibstein 2010).

(𝑝 − 𝑛) 𝑛
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 = + 𝑛𝑦 = 1 + 𝑛𝑦 − (𝑢𝑛𝑖𝑡: 𝑦𝑒𝑎𝑟𝑠)
𝑝 𝑝

where ny is the number of years after the initial investment at which the last negative value of
cumulative cash flow occurs, n is the value of cumulative cash flow at which the last negative
value of cumulative cash flow occurs and p is the value of cash flow at which the first positive
value of cumulative cash flow occurs. (Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer;
David J. Reibstein 2010)

Payback period and ROI are summarized in Table 5.

Table 5 Summary of Economic Results

Payback period
1.33
(years)
Expected ROI (%) 75

Source: own compilation

Finally, using the data, break-even point is graphically represented in Figure 1 below.
The break-even point (BEP) in economics, business, and specifically cost accounting, is the
point at which total cost and total revenue are equal: there is no net loss or gain, and one has
"broken even." A profit or a loss has not been made, although opportunity costs have been
"paid", and capital has received the risk-adjusted, expected return. In short, all costs that
needs to be paid are paid by the firm but the profit is equal to 0. (Farris, Paul W.; Neil T.
Bendle; Phillip E. Pfeifer; David J. Reibstein 2010)

Figure 1 Break-even Point No Dryer

Source: own compilation

Some of the drawbacks of these calculations are that investment into a shredder is not
calculated. Also, assumption is made that drying is done in the sun rather than by a dryer.
Therefore, since also a raining season must be taken into consideration, the second scenario
deals with a case when a dryer is purchased. (Own compilation)

2.3 Briquetting with a Dryer

Economic calculations while a dryer is utilized.

For this scenario a machinery that does both drying and briquetting is purchased with a
production capacity of 1 ton per hour. In Table 6, key economic variables are introduced for
the calculations.

Table 6 Dryer and Briquetting Machine

Costs Price
Electricity (USD per year) 102,150
Labour (USD per year) 12,246
Costs of material (USD per year) 57,600
Total cost (USD per year) 171,996
Total sales (USD) 322,560
Expected profit (USD per year / EURO) 150,564 / 113,556
Price for briquetting dryer including
422,500
transportation (EURO)

Source: own computation

These data are further analyzed using indicators of ROI and payback period which are
presented in the Table 7 below.

Table 7 Payback Period, Return on Investment

Payback period
3.72
(years)
Expected ROI(%) 26.87
Source: own computation

Finally, similarly to no dryer option, also for the dryer scenario, break-even point is calculated
and graphically represented in the Figure 2 below.

Figure 2 Break-even Point Dryer

Source: own compilation

2.4 Analysis of Output Prices

For the analyzed project, one of the most important variables is the potential development of
the output price. As there are no data on price of briquettes made from palm trees, authors of
this article found data on producer price index of pellets, briquettes, logs or similar forms
made of wood shavings and other sawing by-products (Biomass Briquette Systems). This
producer price index is graphically demonstrated in Figure 3 below.

Figure 3 Producer Price Index for Pellets, Briquettes, Logs or Similar Forms Made of
Wood Shavings and Other Sawing By-products

Index
140
y = 7,7655x + 51,84
120
100
80
60
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
years
Source of data: Biomass Briquette Systems, Own compilation.

Trend analysis in Figure 3 shows a positive result with an increasing trend that may further
enhance profitability of the analyzed project. Finally, it is important to mention also the risk
of this project. Investment risk can be defined as the probability or likelihood of occurrence of
losses relative to the expected return on any particular investment. (McNeil, Alexander J.;
Frey, Rüdiger; Embrechts, Paul 2005). Authors of this research consider one of the highest
risk to ensure sufficient supply of residues to the briquetting machine.

3. Conclusion

Evaluation of briquetting is positive in both cases – w/o and with a dryer with fast payback
period. In our opinion drying on concrete of shredded EFB on the sun would be possible and
therefore first option seems to be more feasible. For example, coffee producers have long
term experience with drying material on the sun in Indonesia (Marsh, T, 2006). Also, analysis
of output price shows increasing trend which is positive for the investment. Authors consider
this project very interesting of such a project could be done on North Sumatra where so many
palm plantations are located and power plants which use biomass and coal difficult to obtain
for a good price (not many mining sites in that location) (Nasution, Muhammad Ansori,
Tjahjono Herawan, and Meta Rivani 2014). Also, this topic is related to the issue of the
construction of biomass power plants in Indonesia generally (Nasution, Muhammad Ansori,
Tjahjono Herawan, and Meta Rivani 2014). This is dependent largely upon support of
government. "The government can also intervene in the pricing of different types of biomass
feedstocks so that a regular supply of raw materials for biomass-based power plants is
assured. If investors have the assurance of regular and equitable supply of raw material prices,
the financial risk will go down drastically and will invest more in the creation of new biomass
plants. The Ministry of Energy should also be involved in setting the rules governing market
and the old power plant on the oil / coal power plant to convert biomass. The introduction of
specific incentives for the combined combustion of coal based power plants to biomass as a
co - fuels will create interest. When using a fuel mixture of 95% carbon and 5% biomass,
other infrastructure investments are required, and these projects should be strongly
encouraged by the government. The Indonesian government could also consider providing tax
benefits and subsidies and low interest rate financing for biomass power. All these regulations
and incentives are very important for biomass energy, to realize their hidden potential."
(Thacker 2013)

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