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Economic Sustainability Assessment of Biofuels Production from Oil Palm Biomass

  • Keat Teong LeeEmail author
  • Cynthia Ofori-Boateng
Chapter
Part of the Green Energy and Technology book series (GREEN)

Abstract

The production of palm biofuels provides the prospects for new economic opportunities for most people in rural communities in developing countries. Oil palm cultivation and palm oil milling provide wide avenues for people in terms of job creation, investment opportunities, etc. In spite of all the benefits of palm biofuels, they are also found to cause negative socio-economic impacts to the society. The economic impacts of oil palm and palm biofuels production are elaborated in this chapter. Oil palm biomass is a cheap source of feedstock for palm biofuels compared to other feedstocks used for biofuel production. In this chapter, biodiesel production from palm oil and palm fatty acid distillate (PFAD) are found to be economically viable compared to fossil diesel and biodiesel from other oils. Bioethanol and biomethanol production from oil palm biomass are also found to be cost competitive compared to gasoline and other cellulosic ethanol. Other potential types of palm biofuels are assessed for economic sustainability and improvement options are also suggested in this chapter.

Keywords

Economic sustainability Sustainable development Palm biofuels Life cycle cost Economic impact assessment Oil palm cultivation Palm biodiesel Palm bioethanol Palm oil mill effluent Oil palm wastes 

6.1 Introduction

A system is termed economically sustainable when it is capable of containing or adapting to the conditions of the ecosystem on which it depends. The integration of economic sustainability with social and environmental aspects of sustainability helps generate long-term profit for the society. A society, which does not deplete the ecosystem’s resources and services but rather maintain the natural resources through energy efficient methods for the future generation to benefit, is said to be economically sustainable. In such a society, wastes are treated as economic resources at appropriate places and periods and waste minimization criteria may include small environmental penalties, low liability insurance, achieving savings from waste disposal cost, etc., which eventually lead to high market shares. Sustainability for the palm biofuel industry would be achieved through strategic means and technologies of breaking the linkage between negative economic impacts, environmental damages, and resource depletion.

Economic analysis is a major driving force, which supports the development of process technologies, and it can be used to predict the cost of a production plant through different process conditions and assumptions (You et al. 2008; Marchetti and Errazu 2008). Conventional economic sustainability assessment is centered mainly on economic growth and efficient allocation of resources while ecological economics focuses more on sustainable development, equitable distribution, and efficient allocation of resources. Nowadays, discussions and debates on economic sustainability focus on increasing the stock of man-made capital while decreasing other capital stocks to some degree (OECD 2001). Economic analysis results could help design policies that are used to govern the sustainability of biofuel production systems. Economic assessment results are again needed to evaluate the social cost and benefits of biofuel policies like tax credits, mandates, import tariffs, etc.

The palm oil industry, which is the sole source of feedstock for palm biofuels, is a notable agricultural industry with high economic gains in many tropical countries like Indonesia and Malaysia. For instance in Malaysia, the palm oil industry contributes about 8 % of the nation’s gross national income (GNI) per capita (PEMANDU 2010). However, Mumtaz et al. (2010) and Tan et al. (2010) have reported that though the oil palm remain the cheapest source of vegetable oil in the world, it is still inefficient in terms of cost when used especially for biofuels production. In the world presently, the relationship between energy prices and palm oil cost has been strong due to the increasing use of competing feedstocks for biofuels production and this has introduced a new paradigm for price volatility, which pose problems for smallholders. Though other factors determine the cost efficiencies of biofuel production systems, the cost of feedstock remain the major contributing factor, which needs to be improved. Most of the techno-economic assessments of biofuel production systems have excluded the economics of the feedstock production stages and have used the ex-factory prices of the feedstocks in their studies. However, the feedstock cost for palm biodiesel production for instance form about 70–80 % of the total production cost (Ong et al. 2012; Jegannathan et al. 2011) and it would be economically challenging to produce cost-effective biodiesel when the feedstock price becomes extremely higher. In such an instance, the government has to come in to support the biofuel industry in terms of subsidies and incentives in order to produce and market palm biofuels effectively. In view of this, Malaysia and Indonesia have collaborated and agreed to allocate about 40 % of their palm oil for palm biodiesel to replace fossil diesel in the near future.

The aim of this chapter is to identify various socio-economic impacts of palm biofuel production processes on the communities and as well assess the economic sustainability of palm biofuel production systems from different reports.

6.2 Economic Sustainability Assessment of Biofuels from Oil Palm Biomass

Many authors have assessed the economics of biofuel production systems which utilize oil palm biomass as feedstocks based on different economic indicators. However, three main economic factors are of great concern namely capital cost, operating cost, and maintenance cost. From these three factors or parameters, other cost benefit indicators can be assessed. The cost−benefit analysis of a biofuel production plant can be evaluated using various tools and techniques such as life cycle cost (LCC) analysis, Aspen Plus, Aspen HYSYS, etc.

With LCC analysis, the cost–benefit assessment can be done based on six factors as defined by Eq. (6.1):
$$ \begin{aligned} \text{LCC} = \, & {\text{capital cost }}\left( {\text{CC}} \right) \, + \,{\text{ operating cost }}\left( {\text{OC}} \right) \, + \,{\text{ maintenance cost }}\left( {\text{MC}} \right) \\ &\, + \,{\text{ feedstock cost }}\left( {\text{FC}} \right) \, - \,{\text{ salvage value }}\left( {\text{SV}} \right) \, -\,{\text{ byproduct credits}} \;\left( {\text{BP}} \right) \\ \end{aligned} $$
(6.1)
Equation (6.1) can be rewritten in a form of a present value (Eq. (6.2)) whose calculations are widely used in business and economics to evaluate and differentiate cash flows at different times.
$$ \text{LCC} + \text{CC} + \sum\limits_{i = 1}^{n} {\frac{{\text{OC}_{i} + \text{MC}_{i} + \text{FC}_{i} }}{{\left( {1 + r} \right)^{i} }}} - \frac{{\text{SV}}}{{\left( {1 + r} \right)^{n} }} - \sum\limits_{i = 1}^{n} {\frac{{\text{BP}_{i} }}{{\left( {1 + r} \right)^{i} }}} $$
(6.2)
where LCC = life cycle cost, CC = capital cost, OC = operating cost, MC = maintenance cost, FC = feedstock cost, SV = salvage value, BP = by product credits, r = interest rate, i = number of years, n = plants life time.
Alternatively, the LCC can be found from the initial investment cost (C i), annual payments (such as fuel cost, maintenance, and operation costs) which is discounted at their present value (P Vr) and the cost of replacements discounted at their present value (P Vs) as defined by Eqs. (6.3) and (6.4).
$$ \text{LCC} = C_{\rm{i}} + P_{{V_{\rm{r}} }} + P_{{V_{\rm{s}} }} $$
(6.3)
$$ \text{LCC} = C_{\rm{i}} + \left[ {\sum\limits_{1}^{n} {C_{ap} .} \left[ {\frac{{x\left( {1 - x} \right)}}{1 - x}} \right]} \right] + \left[ {C_{\rm{s}} \cdot \left[ {\frac{1 + i}{1 + d}} \right]^{n} } \right] $$
(6.4)
where C i = initial investment cost, C s = single future cost, P Vr = recurring annual payment, P Vs = single future payment, x = (1 + i)/(1 + d), i = interest rate, d = discounted rate, n = number of years for which the payment is made.
The LCC results can be expressed in terms of cost per annum by reverse of discounting called the annualized life cycle cost (ALCC). In another instance, the results could be expressed in levelized cost (Eq. (6.5)) which defines the LCC in terms of total production or unit energy cost over the project’s life.
$$ {\text{Levelized\,cost}} = \frac{{\text{LCC}}}{{\text{TBP}}} $$
(6.5)
where LCC = life cycle cost and TBP = total biodiesel production.
The future cash flow can also be gathered in order to attain the current present value of the production system, which is mostly represented by the Present Worth Factor (PWF). This factor is capable of justifying the feasibility or sustainability of the biofuel production system at a particular interest rate and can be written for a year, i by Eq. (6.6):
$$ \text{PWF} = \frac{1}{{\left( {1 + r} \right)^{i} }} $$
(6.6)
where PWF = present worth factor, r = interest rate, i = number of years.
Equation (6.7) defines the compound present worth factor of a plant whose life is n years:
$$ \text{CPW} = \sum\limits_{i = 1}^{n} {\frac{1}{{\left( {1 + r} \right)^{i} }}} = \frac{{\left( {1 + r} \right)^{n} - 1}}{{r\left( {1 + r} \right)^{n} }} $$
(6.7)
where CPW = compound present worth, r = interest rate, i = number of years, n = plants life time.

The capital cost of palm biofuel plant consists of the cost of construction, equipment, and instrumentation, which depend on the biofuel plant capacity. Howell (2005) has reported that high biofuel plant capacities require high initial capital cost. For instance, an estimated capital cost of US$15 million is required to put up a biofuel production plant with capacity of 70,000 tonnes (Howell 2005).

Operating costs include the cost of labor, utilities, laboratory services, supervision, transportation, factory expenses, administrative costs, as well as all other material and energy flows into the plant. When all the waste streams in the plant are considered to be treated before discharge, then the costs involved during these processes are part of the operating costs. With a known operating rate (OR) (US$/tonne biodiesel), the total operating cost can be calculated using Eq. (6.8):
$$ \text{TOC} = \text{OC} + \sum\limits_{i = 1}^{n} {\frac{{\text{OR} \times \text{PC}}}{{\left( {1 + r} \right)^{i} }}} $$
(6.8)
where TOC, OC, OR, and PC represent the total operating cost, operating cost, operating rate, and annual biodiesel production capacity, respectively; r = interest rate, i = number of years, n = plants life time.
The maintenance cost (MC) of a plant is mostly the cost associated with the repair, renovation, services, and other maintenance activities carried out on the plant and this is mostly taken as a specific percentage of the initial capital cost. The MC can also be calculated using Eq. (6.9):
$$ \text{MC} = \sum\limits_{i = 1}^{n} {\frac{{\text{MR} \times \text{CC}}}{{\left( {1 + r} \right)^{i} }}} $$
(6.9)
where MC, MR, CC, r, n, and i represent the maintenance cost, maintenance ratio, capital cost, interest rate, project life, and year, respectively.
The annual consumption of feedstock over the life of the plant can be found using Eq. (6.10) when feedstock price and feedstock costs are known.
$$ \text{FC} = \sum\limits_{i = 1}^{n} {\frac{{\text{FP} \times \text{FU}}}{{\left( {1 + r} \right)^{i} }}} $$
(6.10)
where FC, FP, and FU represent feedstock consumption, feedstock price, and feedstock cost, respectively; r = interest rate, i = number of years, n = plants life time.
The salvage value is the remaining value of the components and other assets of the plant at the end of the project’s lifetime. Depending on the depreciation rate, a model based on the replacement cost rather than the initial capital cost can be used to find the salvage value Eq. (6.11) and the present value of the salvage cost Eq. (6.12):
$$ \text{SV} = \text{RC}\left( {1 - d} \right)^{n - 1} $$
(6.11)
$$ {\text{SV}}_{{\text{PV}}} = \frac{{\text{RC} \times \left( {1 - d} \right)^{n - 1} }}{{\left( {1 + r} \right)^{n} }} $$
(6.12)
where SV, RC, and SVPV represent salvage value, replacement cost, and present value of salvage cost, respectively; r = interest rate, d = depreciation ratio, n = plants life time.
Byproduct credit refers to the amount of money obtained after the sales of all the co-products generated during the processing of oil palm into biofuels. For instance, in the mill and biodiesel production unit, co-products like palm kernel cake and glycerin can be sold, respectively to add to the profits of the plant. For instance in the palm biodiesel production unit, glycerin price can be fixed in order to determine the byproduct credit using the plant capacity and glycerol conversion factor over the life of the plant Eq. (6.13):
$$ \text{BP} = \sum\limits_{i = 1}^{n} {\frac{{\text{GP} \times \text{GCF} \times \text{PC} \times 1000}}{{\left( {1 + r} \right)^{i} }}} $$
(6.13)
where BP, GP, GCF, and PC represent byproduct credit, byproduct price, byproduct conversion factor from feedstock oil, and annual biofuel production capacity, respectively; r = interest rate, i = number of years, n = plants life time.
Payback time is the time taken to obtain a financial return that is equal to the original investment cost. Payback time is one of the factors used to determine the feasibility or sustainability of the production plant. Equation (6.14) can be used to determine the payback time of a plant.
$$ \text{PP} = \frac{{\text{CC}}}{{\text{TBS} - \text{TPS} - \text{TAX}}} $$
(6.14)
where PP is the payback period, TBS is the annual total biofuel sales, TPC is the annual total production cost, and TAX is the annual total tax.
Using Aspen Plus for economic assessment of a production plant, a model defined by Eq. (6.15) is able to estimate the bare model equipment cost in order to find the total capital cost (including the direct and indirect costs) (Turton et al. 2009):
$$ C_{{\text{BM}}} = C_{p}^{0} F_{{\text{BM}}} $$
(6.15)
where\( C_{{\text{BM}}} \) and \( F_{{\text{BM}}} \) are the bare module cost and bare module factor, respectively.
The purchase cost for base conditions, \( C_{p}^{0} \), can be calculated using Eq. (6.16)
$$ \log_{10} C_{p}^{0} = K_{1} + K{}_{2}\log_{10} \left( A \right) + K_{3} \left[ {\log_{10} \left( A \right)} \right]^{2} $$
(6.16)
where \( C_{p}^{0} \) is the purchase cost, K 1, K 2, and K 3 are constants to the equipment type; A is the parameter for the capacity or the size of the equipment. The bare module cost factor, \( F_{{\text{BM}}} \), the operating pressure and the construction materials are calculated using Eq. (6.17):
$$ F_{{\text{BM}}} = B_{1} + B_{2} F_{\rm{M}} F_{\rm{P}} $$
(6.17)
where B 1 and B 2 are constants which depend on the type of equipment, F M is the material factor which depend on the equipment type. F P is the pressure factor, which is defined by Eq. (6.18):
$$ \log_{10} F_{P} = C_{1} + C_{2} \log_{10} P + C_{3} \left( {\log_{10} P} \right)^{2} $$
(6.18)
where C 1 and C 2 are constants depending on the type of equipment and material it is made of. Other important factors which cannot be found in the database of Aspen Plus could be found from Lim et al. (2009) and Turton et al. (2009) who have calculated for parameters like K 1, B 1, C 1, etc. The total manufacturing or production cost can then be estimated based on mass balance, raw material costs, utility costs, operating labor, etc. (Turton et al. 2009).

Economic sustainability assessment of a production plant involves the evaluation of four major economic factors namely total capital investment (TCI), total production cost (TPC), profitability, and sensitivity indicators. TCI includes the amount of money required to finance the purchasing of equipment as well as its auxiliary parts, spare parts, construction of the plant, and the acquisition of items necessary for plant operation. TCI comprises of fixed capital investment (FCI) and working capital (WC). The FCI also called as the bare module cost (\( C_{{\text{BM}}} \)) is the cost involved or investment needed to supply all production facilities as well as supply of construction overheads and plant components that are directly or indirectly related to the production processes. WC is the amount of money needed to start the project. This is mostly estimated as 0.15 times the fixed capital investment (Sinnot 1986; Peters and Timmerhaus 1981). Total capital cost may include costs of land, equipment and installations, building and construction costs.

The total production cost involves the cost needed to run the project including marketing of the products. This indicator generally consists of the variable cost, fixed costs, and general expenses. Variable cost consists of direct and indirect costs. Generally, variable cost may include costs of raw materials, utilities, miscellaneous materials, shipping and packaging, etc. Fixed costs also include the cost of maintenance, operating labor, supervision, plant overheads, capital charges, Insurance rates, and Royalties. General expenses are made up of administrative costs, engineering and legal costs, office maintenance and communications, distribution, and selling cost (Prueksakorn et al. 2010; Jain and Sharma 2010).

The methods used in estimating the profitability of the project are rate of return on investment (ROI), payback period, breakeven point, discounted cash flow rate of return (DCCFRR), and the net present/future value. These indicators can clearly justify the economic feasibility of a production plant.

The ROI is defined as the ratio of the average cumulative cash flow to the total initial investment expressed as a percentage. This indicator is mathematically defined by Eq. (6.19) (Sinnot 1986):
$$ {{\text{ROI}}} = \frac{{(\text{cummulative\,net\,cash\,flow\,at\,end\,of\,plant\,life})}}{{(\text{plant\,life}) \times (\text{initial\,investment})}} \times 100\% $$
(6.19)
Payback period is the minimum length of time theoretically necessary to recover the original investment, without interest in the form of cash flow to the project based on total income less all costs excluding depreciation. Equation (6.20) defines the payback time mathematically (Sinnot 1986):
$$ {\text{payback\,period }} = \frac{{(\text{depreciable\,fixed\,capital\,investment})}}{{(\text{average\,profit}) + (\text{average\,depreciation})}} $$
(6.20)
The net present worth (NPW) also called as the net present value (NPV) accounts for the time value of money. The money earned in any year can be put to work (reinvested) as soon as it is available and start to earn a return. Thus, money earned in the early years of the project is more valuable than that earned in later years. This time value can be allowed for by using a variation of the familiar compound interest formula. The net cash flow in each year of the project is brought to its present worth at the start of the project by discounting it at some chosen compound interest rate (Tomomatsu and Swallow 2007). The discount rate is chosen to reflect the earning power of money. It would be roughly equivalent to the current interest rate that the money could earn if invested. Equation (6.21) defines the NPW (Sinnot 1986):
$$ {\text{net\,present\,worth }}\left( {{\text{NPW}}} \right){\text{ }} = \frac{{\text{estimated\,net\,cash\,flow\,in\,year}\,n\;({\text{NFW}})}}{{\left( {1 + r} \right)^{n} }} $$
(6.21)
where r = the discount rate (interest rate) in percentage. Equation (6.22) (Sinnot 1986) also expresses the total NPW mathematically:
$$ {\text{Total\,NPW\,of\,project }} = \sum\limits_{n = 1}^{n = t} {\frac{{\text{NFW}}}{{(1 + r)^{n} }}} $$
(6.22)
where NFW = the future worth of the net cash flow in year n, t = the life of the project, years
Break-even point (BEP) is the time of the plant’s life where there is neither net profit nor net loss. It is the level above which the production rate must be exceeded in order to make profit. The break-even point would vary as the sales and manufacturing cost varies over the years. Equation (6.23) defines break-even point:
$$ {\text{BEP }} = \frac{{\text{fixed\,costs}}}{{\text{total\,sales} - \text{varible\,cost}}} \times 100 $$
(6.23)
DCFRR is used to calculate the present worth of future earnings and it is sensitive to the interest rate. By calculating the NPW for various interest rates, it is possible to find an interest rate at which the cumulative net present worth at the end of the project is zero. This particular rate is called the DCFRR and is a measure of the maximum rate that the project could pay and still break even by the end of the project life. Equation (6.24) defines DCFRR mathematically:
$$ {\text{DCFRR}} = \sum\limits_{n = 1}^{n = t} {\frac{{\text{NFW}}}{{(1 + r^{\prime})^{n} }}} = 0 $$
(6.24)
where r′ = the discounted cash-flow rate of return in percentage,

NFW = the future worth of the net cash flow in year n,

t = the life of the project, years.

Normally, it is best to carry out sensitivity analysis for biofuel production plants in order to identify critical input resources or factors and assess their variability impacts on the LCC or economic analysis results. Sensitivity analysis is carried out on production plants to evaluate the variation of the projected performance of the plant with the main assumptions and conditions to which the projections are based. The uncertainty in the economics of the projects that are capable of affecting the outcomes of the plant are also assessed during sensitivity analysis (Gunawan et al. 2005). For palm biofuel production, factors like oil palm biomass price, interest rate, capital cost, etc., are vital to be selected appropriately in order to remove as much uncertainties that may result from the economic assessment. The palm feedstock price is highly sensitive to the cost of the biofuel produced and whenever the rate of feedstock growth outweighs that for biofuel production, the feedstock price may fall because there may be no request for them and vice versa when biofuel production capacity grows ahead of the palm feedstock.

6.2.1 Oil Palm Cultivation and Palm Oil Milling

Budidarsono et al. (2012) have assessed the economic sustainability of palm oil production for 23 plantations based on four economic components namely capital cost, labor requirement, profitability, and economic returns. The total production cost took into account the profit for every tonne of crude palm oil (CPO) and palm kernels processed.

The returns obtained from the economic analysis were higher than the average agricultural wage rate (US$3.27–4.67 per person per day) and this implies that oil palm agriculture is attractive to farmers. Out of the 23 plantation assessed, 13 were able to reach positive cash flow in year six or earlier. A total capital investment cost was estimated to be US$2,054 per hectare, which is very high for smallholders to attain without financial support. During the establishment, maintenance and harvesting stages of large-scale oil palm cultivation with high potential profitability, high labor force in the range of 332–2,542 persons/day/ha is required (Budidarsono et al. 2012). The returns to land and labor for smallholders over a 25-year period were US$9,044–14,059 per hectare and US$12–17 per person per day, respectively.

Palm oil cultivation on mineral soils is profitable with high returns to labor compared to cultivation on peat lands (Budidarsono et al. 2012). Peat lands also require high initial capital investment with labor requirements of about 683 persons/day/ha which is about 4 % higher than cultivation on mineral soils (Budidarsono et al. 2012). Figure 6.1 shows the net present value and initial capital investment for oil palm cultivation on mineral soils and peat lands.
Fig. 6.1

NPV and capital investments for oil palm cultivation on peat lands and mineral soils

Budidarsono et al. (2012) again concluded that palm oil processing is profitable with a NPV for a 15-year investment ranging from US$13.8 to 102.9 million. For a tonne of CPO produced with credits from palm kernels, there is a profit of US$43–164. Budidarsono et al. (2012) have assessed the production of palm oil to be economically sustainable when there is constant flow of fresh fruits from the plantation assess palm oil production.

6.2.2 Biodiesel Production from Crude Palm Oil

Many authors (Ong et al. 2012; Jegannathan et al. 2011; Quintero et al. 2012; Mulugetta 2009; Cho et al. 2012; Lozada et al. 2010) have assessed the economic feasibility of biodiesel production from crude palm oil (CPO) and palm fatty acid distillate (PFAD) in different regions of the world.

Ong et al. (2012) used the methodology of life cycle cost (LCC) to assess the cost benefit of biodiesel production from palm oil based on a 50,000 tonnes of biodiesel plant located in Malaysia. Based on 10 % annual depreciation, 8 % interest rate, 15 % tax on biodiesel sales, palm biodiesel conversion efficiency of 98 %, and byproduct credit of US$0.25/kg, they estimated the palm biodiesel cost to be US$0.632/liter with a payback period of 3.52 years. In Malaysia, the retail price for fossil diesel is US$0.58 per liter, which is lower than palm biodiesel as estimated by Ong et al. (2012). For a liter of palm biodiesel produced, the estimated crude palm oil cost, operating cost, maintenance cost, salvage value, and glycerin credit were US$0.499, 0.131, 0.002, 0.0003, and 0.012, respectively. Palm oil price was about 79 % of the total production cost and it can be projected that any increase in the palm oil price by at least US$0.10/kg would cause a rise in palm biodiesel by US$0.05/liter (Ong et al. 2012). Thus, palm oil is a sensitive variable in determining the overall palm biodiesel cost (Huang et al. 2009). For a total production cost of US$665.15 million for palm biodiesel plant, the operating cost formed about 21 %, which makes it another important contributing factor (after palm oil price) to the cost of palm biodiesel. The sustainability of production plants have always improved when wastes are converted into value-added bioproducts. For a 20-year life of the palm biodiesel production plant, about US$12.33 million was obtained from the sales of glycerol, which contributed to the decrease in the biodiesel cost. Apart from the palm oil price, which was highly sensitive to the palm biodiesel cost, interest rate was also a determining factor. Though interest rate cannot be changed by the biodiesel industry, there are other dependent variables like biodiesel conversion efficiencies, waste conversion, etc., that could improve the sustainability of the palm biodiesel plant. The production of biodiesel from palm oil is found to be economically sustainable as the payback time was less than one-third of the plant’s life (Ong et al. 2012).

Lozada et al. (2010) have assessed a palm biodiesel production plant in Mexico with an annual capacity of 37.9 million liters/year (~34,000 tonnes/year) for economic viability. In their work, with palm oil price of US$0.289 per liter and total operating cost of US$0.369 per liter palm biodiesel, the cost of biodiesel produced was US$0.37 per liter which is almost half the price of biodiesel obtained from 50,000 tonnes/year capacity plant (Ong et al. 2012). Usually, higher capacity production plants should produce cost effective productions compared to small plants but in this case, it did not follow the trend. This implies that the cost of biodiesel depends on the location of the production plant as well as other basic assumptions and conditions. Though Malaysia is the second largest producer of palm oil in the world presently, hence a possible location of obtaining cheap source of palm biodiesel feedstock, other economic conditions in the country may increase the production cost of palm biodiesel. Mexican biodiesel is seen to be cheaper than Malaysian biodiesel both produced from palm oil. As seen from the work of Ong et al. (2012), interest rate is a sensitive variable that affects the cost of palm biodiesel produced in Malaysia.

Quintero et al. (2012) have done an extensive comparative economic assessment of biodiesel production from palm oil and J. curcas oil for different scenarios in Peru using Aspen Icarus Process Evaluator as the simulation software. The oil palm cultivation1 and palm oil milling stages were excluded from their studies but based on previous research results the average cost of palm oil2 was used to simulate the cost benefits of the biodiesel production system. For a plant capacity of 49 million liters (~43,000 tonnes) of biodiesel per year operating for 30 years, an estimated operating or production cost of US$0.227–0.314/liter biodiesel was obtained for two scenarios.3 This cost is lower than the production cost of fossil diesel at US$0.5/liter (EIA 2011) hence, palm biodiesel is a cost-effective alternative to fossil diesel. However, the selling of glycerin generated as co-product from the plant would reduce the total production cost by 12 % (Quintero et al. 2012). With an interest rate of 18 % and tax rate of 30 %, the average cost of palm biodiesel was estimated to be US$0.27 (with an ex-factory price 1.91/liter) which is about three times lower than that for J. curcas oil biodiesel (Quintero et al. 2012; Amigun et al. 2008) and rapeseed oil biodiesel (Apostolakou et al. 2009). The production of palm biodiesel is also found to generate about 7,534 direct jobs for every 43,000 tonnes capacity plant in Peru (Quintero et al. 2012). Palm biodiesel in Peru is found to be economically viable with high ratio of sale price4 to production cost at 5.97–8.37 (Quintero et al. 2012). The production of biodiesel from palm oil either on small- or large-scale is profitable as compared to jatropha biodiesel and when it is not considered for subsidies, it is still a competitive alternative to fossil fuel in terms of cost (Quintero et al. 2012). Generally, the major factors which affect the cost of palm biodiesel are raw material cost, production cost, and capital depreciation (Huang et al. 2009) of which the feedstock cost (palm oil) is the major contributor. The cost of palm oil forms about 73–79 % of the total production cost of palm biodiesel (Ong et al. 2012; Quintero et al. 2012).

In Ghana, palm biodiesel production was assessed to be economically viable only when the fossil diesel price falls below US$0.70/liter though the levelized palm biodiesel cost was estimated to be US$0.40–0.78/liter (Mulugetta 2009). With 9 % discount rate, palm oil cost, which was about 75 % of the total production cost, was found to be the dominant factor in determining the biodiesel cost. In 2004, with oil palm seed cost of US$160 per tonne, an annual operating cost of producing palm biodiesel was estimated at about US$112.6 million of which palm oil accounted for over 85 % (Mulugetta 2009). However, as suggested by many authors, the sales from co-products of the palm biodiesel plant may reduce the over production cost.

Jegannathan et al. (2011) have carried out the economic analyses of different methods of producing biodiesel from palm oil. In their studies, palm oil cost was US$0.56/kg (~US$0.493/liters). Based on a 1000 tonne capacity plant for palm biodiesel production using alkaline, soluble enzyme, and immobilized enzymes as catalyst for the transesterification reaction, about US$634,000–997,000 was estimated as the total plant cost including operation costs. Alkaline catalyzed transesterification method evolved as the cost-effective method for producing palm biodiesel with a total production cost of about US$1166.67 which is about seven times and two times less than the plant utilizing soluble enzyme and immobilized enzymes as catalyst, respectively.

The economic analysis of 8,000 tonne/year capacity plant for producing biodiesel from palm fatty acid distillate (PFAD) has been investigated by Cho et al. (2012) using Aspen Plus software. A noncatalytic esterification process was used to convert the PFAD into biodiesel, which attracted a capital investment of US$1.63 million per year. This cost is about 21 % more than the capital investment required for alkaline-catalyzed transesterification of wastes cooking oil (WCO) (Zhang et al. 2003) but about 22 % less than that of supercritical process for biodiesel production (He et al. 2007). Some contributing factors to the high investment cost for biodiesel production from PFAD include the slow rate of reaction and high-pressure requirement.

The total production cost for the PFAD biodiesel production plant was estimated at US$8.59 million per year which is also about 25 % less than alkaline catalyzed and supercritical processes for similar plant size (Cho et al. 2012). PFAD is a very cheap source of feedstock which when utilized for biodiesel through the alkaline catalyzed process, would be economically viable. Table 6.1 summarizes the economic assessment of various biodiesel production plants.
Table 6.1

Comparative economic analysis of biodiesel production from different feedstocks

Plant capacity (tonnes/yr)

Location

Type of catalyst

Feedstock

Feedstock cost (US$/l)

Biodiesel cost (US$/l)

Glycerol credit (US$/tonne)

1000a

India

Alkaline

Palm oil

0.493

1.857

100.000

1000a

India

Soluble enzyme

Palm oil

0.493

2.908

100.000

1000a

India

Immobilized enzyme

Palm oil

0.493

2.920

100.000

50,000b

Malaysia

Alkaline

Palm oil

0.499

0.632

34,000c

Mexico

alkaline

Palm oil

0.289

0.370

33.500

43,000d

Peru

Alkaline

Palm oil

0.270

Ghanae

Alkaline

Palm oil

0.590

52,800f

Alkaline

Palm oil

0.730

0.880

0.120#

62,480f

Alkaline

Palm oil

0.730

0.860

0.120#

125,840f

Alkaline

Palm oil

0.730

0.820

0.120#

8000g

Korea

Non-catalytic esterification

PFAD

0.376

0.832

36,000h

Argentina

Alkaline

WCO

445*

0.510

73.800

36,000i

Argentina

Supercritical

WCO

905*

0.980

67.500

8000j

Canada

Alkaline

WCO

525*

0.950

91.300

7300k

Japan

Alkaline

WCO

248*

0.580

50,000l

Greece

NA

Rapeseed oil

1158*

1.150

8000m

Denmark

Enzyme

Rapeseed oil

3042*

2.040

2215.000

36,000n

USA

Alkaline

Soybean oil

486*

0.530

35.800

8000p

USA

Alkaline

Soybean oil

779*

0.780

380.000

62,031f

Alkaline

Tallow fat

0.400

0.640

0.120#

aJegannathan et al. (2011)

bOng et al. (2012)

cLozada et al. (2010)

dQuintero et al. (2012)

eMulugetta (2009)

fRFA (2007)

gCho et al. (2012)

hMarchetti et al. (2008)

iMarchetti and Errazu (2008)

j Zhang et al. (2003)

k Sakai et al. (2009)

lApostolakou et al. (2009)

mSotoft et al. (2010)

nHaas et al. (2006)

pYou et al. (2008)

* \( \text{US}\$ /{\text{tonne}} \)

#US$/liter

Generally, palm biodiesel production plants are economically viable compared to many biodiesel produced from other feedstocks like rapeseed oil and soybean oil. However, tax-exemption policies to support palm biodiesel would make them the best alternatives for fossil diesel. You et al. (2008) and Haas et al. (2006) estimated the cost of soybean oil biodiesel to be about US$0.78 per liter and US$0.53 per liter, respectively, when the conventional alkaline catalyzed transesterification was used. Comparing these costs to palm biodiesel of similar production capacities, palm biodiesel is found to be economically competitive (see Table 6.1).

The type of method used for the oil conversion into biodiesel is a major contributing factor to the overall production cost of the plant. For instance, a biodiesel plant using rapeseed oil as feedstock and using enzymes as catalysts was found to produce very expensive biodiesel (US$1.15–2.04 per liter) (Apostolakou et al. 2009; Sotoft et al. 2010). Palm biodiesel produced using enzymes as catalysts in lower plant capacities have almost the same cost as that for rapeseed oil biodiesel produced under similar conditions but high plant capacities (see Table 6.1). This means that, scaling up palm biodiesel plants for enzyme-catalyzed processes would be cheap compared to rapeseed oil biodiesel produced using enzymes as catalysts.

An economic analysis performed on algal biodiesel production plant by Brian (2011) shows that an economically viable algae-to-biodiesel commercialization would largely depend on government subsidies and the future price of crude oil as well as optimized biomass yields. The results from the analysis showed that positive net present value (NPV) with reasonable rates of return would be possible only if moderately high yields of algal biodiesel and extremely high prices (>US$100 per barrel) of fossil diesel are realized with substantial subsidies or tax breaks on renewable energy systems. For a low algal yield (67 tonne/ha), low subsidy (US$0.50/gal), and low crude oil price (US$74/barrel), net present value of US$125.2 million was recorded. With a high oil yield (134 tonne/ha), high subsidy (US$1.50/gal), and high crude oil price (US$108/barrel), a higher NPV of US$126.5 million was recorded. For a moderate oil yield (101 tonne/ha), moderate subsidy (US$101/gal), and moderate crude oil price (US$84/barrel), an NPV of US$56.6 million was recorded. The lowest NPV (US$2.5 million) occurs when there is moderate oil yield, high subsidy, and high crude oil price. This data indicates that, biodiesel production depends largely on subsidies and without these incentives, they become unsustainable.

Moreover, an economic analysis by Wiskerke (2008) on Jatropha curcas L. cultivation indicates that the total production cost for 1 kg of seeds is US$0.10. His calculations also revealed a negative NPV of −US$229/ha. Currently in Tanzania where Jatropha curcas L. is grown on commercial scale, a kilogram of jatropha seeds costs US$0.26 (Messemaker 2008). Economic analysis carried out by Marchetti et al. (2008) on spent oil transesterification shows that 76–80 % of the operating cost is associated with the cost of raw material. Thus, the cost of J. curcas oil (US$0.324 per liter) has a great impact on the profitability of the plant.

A low cost raw material and the use of heterogeneous catalyst can help improve increase productivity and sustainability of the production plant. Again, the conventional alkaline catalyzed transesterification is found to be the most economically sustainable means of producing low cost palm biodiesel.

Though palm biodiesel cost are generally found to be cheaper than fossil diesel, the initial investment needed is huge thus the need for incentives and subsidies policies to be implemented. For various subsidy scenarios for biodiesel production that were considered by Ong et al. (2012) in their work, they concluded that the final cost of palm biodiesel with subsidies of US$0.10 and 0.18 per liter are compatible and lower than fossil diesel when palm oil price is not more than US$0.924 per liter. However, when the price of palm oil goes up to US$1.056 per liter, it no more becomes competitive with fossil diesel because the biodiesel production price becomes higher than fossil diesel although a subsidy of US$0.18 per liter is still provided.

Lozada et al. (2010) also concluded that palm biodiesel would be competitive with fossil diesel when there is value added tax (VAT) exemption and the government grants a fiscal incentive for palm biodiesel. Palm biodiesel production plant is again found to have better economic performance than jatropha and castor oil biodiesel in Africa due the high productivity of the oil palm (Mulugetta 2009).

6.2.3 Bioethanol Production from Oil Palm Fronds (OPF) Juice: Cost–Benefit Assessment

Bioethanol can be produced from OPF using either the juice (from the fresh OPF) or cellulose from the fibers (e.g., dried fronds) as feedstocks. Many authors (Goh et al. 2010; Fazilah et al. 2009) have used hydrothermal pretreatment and enzymatic hydrolysis for cellulosic ethanol production from OPF. On the other hand, these pretreatment methods for cellulosic ethanol production are costly because they involve the use of chemicals, high temperature and pressure. Extracting OPF juice for bioethanol do not need harsh treatments steps or chemicals hence a cost-effective and sustainable approach thus in this study, the juice from OPF is extracted and utilized for bioethanol. Cost benefit assessment of bioethanol from palm wastes like OPF, empty fruit bunches (EFB), oil palm trunk (OPT), etc., has not been reported.

6.2.3.1 Process Description and Economic Evaluation Method

In the plant, there are three OPF storage tanks with hoppers, which are transported to the juice extraction unit by means of conveyors. During the pretreatment stage, the OPF undergo size reduction by wet milling at room temperature. The OPF is then pressed to obtain an unrefined juice (about 97 % sugar recovery), which is further purified in using vibrating screen to remove fibers, particles, etc., that can affect the yield and quality of bioethanol produced. The juice is then sterilized in a two-stage heat exchangers (at temperature 90–95 °C using steam as exchange medium) in order to avoid contaminations and generation of unnecessary metabolites during the fermentation stage. The sugar in the juice is then hydrolyzed into glucose, which can then be easily assimilated by the microorganisms during fermentation (Quintero et al. 2008). It is assumed that after sterilization, the juice from the OPF has a concentration of about 25 wt %. The composition of OPF is given in  Chap. 3 ( Sect. 3.4.4) and the juice from OPF have also been analyzed by Zahari et al. (2012) to contain about 76.09 g/l total free sugars with glucose content of 53.95 g/l juice. The sugars in the sterilized and hydrolyzed OPF juice are fermented (at 35 °C) using hexose-fermenting yeast (e.g., Saccharomyces cerevisiae) to produce bioethanol. In the fermenter (a jacketed stirred tank bioreactor), phosphate and urea solutions are added to the broth. About 95 g/l bioethanol can be produced from every 200 g/l of total sugars (Sánchez et al. 2010). The bioethanol from the fermenter was concentrated to about 91 wt% using strippers and a rectifier before purification to about 99.5 wt% using molecular sieves (to obtain fuel-grade ethanol) in order to break the ethanol–water azeotrope. The fibers and other solid wastes (co-products) left after the milling, extraction or filtration processes are dried in a rotary oven to about 12 % moisture and sold to the cogeneration plant in the palm oil mill.

Table 6.2 shows the annual inputs and outputs of the bioethanol production plant which formed the bases for the economic assessment in this study. An annual production capacity of 65,000 tonnes of OPF (to produce 14,400 tonnes of bioethanol annually) was assumed for the base case process and the plant is considered to operate 330 days per year. Literature data from Sánchez et al. (2010) and Humbird et al. (2011) were used for some of the economic assessment of OPF bioethanol.
Table 6.2

Annual resource inputs, outputs and discounted cash flow data for bioethanol production from OPF

Item

Unit

Value

Project life time

years

20

Plant capacity

tonnes OPF/year

65,000

Discount rate

%

8

Financing

% equity

30

Plant depreciation

% declining balance

200

Plant recovery period

years

5

Corporation tax rate

%

25

Construction period

years

2.5

Startup time

months

2

Energy and utilities

  

Electricity

GWh/year

25.96

Process water

m3/year

290.54

Labor

hr/year

100,573.54

Chemicals/raw materials

  

Urea

tonnes/year

140.98

Yeast

tonnes/year

217.82

Phosphate

tonnes/year

143.88

Products

  

Bioethanol

tonnes/year

14,400

OPF fibers (after juice extraction)

tonnes/year

28,778

Carbon dioxide

tonnes/year

13,766

For the economic assessment, the capital costs were estimated from the cost of individual equipment used in the plant using the Chilton method (Peters et al. 2003). The compilations of standard equipment like pumps, heat exchangers, distillation columns, fermenters, tanks and vessels, etc., were obtained from Gerrard (2000) while material factors for stainless steel equipment were also obtained from Coulson et al. (1999). The vendor quotations for sophisticated equipment like filter presses, milling machines, molecular sieve column, etc., were obtained from Aden et al. (2002). The equipment shipping cost was assumed a negligible percentage of the capital cost of the equipment. Equipment, chemicals/raw materials, and labor costs were indexed to 2009 using Marshall and Swift cost index (Chemical Engineering 2010).

Working capital was 40 % of the fixed capital investment while the annual inflation and residual value were taken as 4 and 50 %, respectively (Brown 2007). Using the recommendations from Branan (2002) and Brown (2007), the equipment sizing was done based on material balancing. Bioethanol production cost were estimated using the ex-factory selling price of ethanol which makes the NPV of the production process equal to zero (Lohrasbi et al. 2010). Table 6.3 shows the operating costs for the economic assessment of the bioethanol production plant.
Table 6.3

Operating cost used in the estimation of palm bioethanol production cost

Item

Unit

Value

Feedstock

  

OPF

US$/kg

0.020

Chemicals

  

Urea

US$/kg

0.76

Yeast

US$/kg

0.57

Phosphate

US$/kg

1.05

Energy and utilities

  

Electricity

US$/kWh

0.06

Process water

US$/tonne

0.36

By-products credits

  

OPF fiber (after juice extraction)

US$/kg

0.020

Other cost

  

Labor

US$/employee⋅yr

53,886

Maintenance

% FCI

2

Insurance

% FCI

1

Sources Chemical Market Report (2010); Kabir et al. (2010); Lohrasbi et al. (2010); Gomes (2011)

6.2.3.2 Economic Assessment Results

The summary of the economic evaluation of the bioethanol production plant is shown in Table 6.4. The capital investment for the plant is highly dependent on the type of feedstock, plant capacity, and economic conditions of the location of the plant. For a plant capacity of 14,400 tonnes of bioethanol per year, the fixed capital cost was estimated to be US$57.68 million.
Table 6.4

Summary of economic analysis of OPF bioethanol

Item

Unit

Value

Descriptiona

Equipment cost (EC)

Million US$

24.85

Equipment installation cost

Million US$

8.70

35 % of EC

Pipeline installation cost

Million US$

14.91

60 % of EC

Instrumentation

Million US$

2.49

10 % of EC

Electrical installations

Million US$

0.33

Isolation

Million US$

2.49

10 % of EC

Land cost

Million US$

0.651

US$48.44/m2

Buildings

Million US$

3.72

15 % of EC

Auxiliary services

Million US$

6.21

25 % of EC

Total installed cost (TIC)

Million US$

39.50

Project and site management

Million US$

9.88

25 % of TIC

Contingencies

Million US$

5.93

15 % of TIC

Other costs

Million US$

2.37

6 % of TIC

Fixed capital investment

Million US$

57.68

aDescriptions were taken from Branan (2002) and Brown (2007)

A sensitivity analysis was carried out to choose a suitable discounted cash flow rate of return to analyze the bioethanol production cost. The cost of utilities and labor were considered to be constant while the bioethanol production cost and feedstock costs were fixed at US$0.70 per liter bioethanol (based on fixed capital investment and plant capacity) and US$0.020 per kg OPF. Bioethanol costs were evaluated based on the method of discounted cash flow rate of return with values between 5 and 12 % as shown in Figure 6.2. A minimum bioethanol production cost of US$0.662 per liter was obtained at a discounted cash flow rate of return of 8 % which is a little higher than those obtained for many other feedstocks like wheat, sugar beet, and cellulosic ethanol (see Table 6.5). Plant capacities above 43,000 tonnes per year was found to be the potential one for good investment.
Fig. 6.2

Variation of bioethanol production cost with the discounted cash flow rate of return (Plant capacity 14,400 tonnes of bioethanol per year; OPF price of US$0.020/kg)

Table 6.5

Comparison of bioethanol cost from different feedstocks

Feedstock

Bioethanol price (US$/liter)

References

Sugar cane juice

0.48

Balat and Balat (2009)

Wheat

0.87

Balat and Balat (2009)

Sugar beet

0.87

Balat and Balat (2009)

Wheat straw

0.55

Littlewood et al. (2013)

Corn

1.03

Balat and Balat (2009)

Molasses

1.00

Quintero et al. (2012)

Sugarcane juice

0.75

Quintero et al. (2012)

OPF

0.70

This study

Cellulosic ethanol is found to have the highest price compared to the other types of biofuels. Most researches on economics of bioethanol production suggest the possibility of considerable spatial heterogeneity in the correct choice of feedstock for cellulosic ethanol production. Though the feedstocks for cellulosic ethanol may be extremely cheap, low ethanol yield would affect the economic viability of the plant (Perrin et al. 2008).

On the other hand, Gómez et al. (2011) have assessed biomethanol from oil palm wastes for economic feasibility. According to their results, a biomethanol production plant of capacity 193,000 tonnes per year located in Colombia, has a total production cost of US$151.72 per tonne biomethanol (~US$7.62 per GJ biomethanol). Comparing this value to biomethanol cost on the international market in 2010 (US$339–832 per tonne biomethanol), it can be concluded that biomethanol production from oil palm biomass is economically feasible (Gómez et al. 2011) though there are more room for economic improvement of the plant.

6.2.4 Economic Sustainability Assessment of Biogas from Palm Oil Mill Effluent (POME)

Yeoh (2004) assessed the economic feasibility of producing biogas and electricity from the POME generated by a palm oil mill of production capacity of 45 tonnes palm fresh fruit bunches (FFB) per hour for 350 operating hours per month with annual capacity of 189,000 tonnes FFB. About 240–450 m3 per day of POME could be generated from the processing of this amount of FFB based on 25 working days per month. The anaerobic reactor was a stainless steel closed type while the biogas storage system comprised pressurized storage vessels, scrubbers, compressors, piping, and housing. For a 189,000 tonnes FFB processing plant for biogas generation, Yeoh (2004) estimated a capital cost of US$609,050, annual operating cost of US$95.950, annual cost benefit of US$187.310, and payback time of 2.5 years based on 8 % interest rate and plant life of 15 years. He concluded that there is substantial annual rate of return on investment from the anaerobic treatment system with 58 % returns. However, with the generation of electricity from the biogas, the economic benefits reduced but were still comparable to other heat generation systems. Pay back periods of 5–7 years were estimated for the integrated system for biogas and bioelectricity production from POME, which is normal with most biomass-based renewable energy systems for electricity generation Yeoh (2004) and Begum and Saad (2013). A return on investment of 3–6 % is a reasonable value showing that an integrated system for biogas and bioelectricity generation from POME is economically viable though there may be the need to improve the purity of methane produced during anaerobic digestion of POME.

Begum and Saad (2013) have also assessed the techno-economic feasibility of an integrated system which produces biogas and bioelectricity from POME generated from 30 tonnes of FFB per hour. They concluded that the plant is technically and economically feasible to operate as reported by Yeoh (2004). At chosen discount factors of 5, 10, and 15 %, the plant capacity of 30 tonne FFB/hr was found to be viable. However, plant capacities over 60 tonnes FFB/hr was found to be the potential one for investment. The payback period was 3.17 years when the capacity factor was 100 (Begum and Saad 2013).

6.3 Economic Impacts of Biofuels from Oil Palm Biomass and Improvement Options

Though it is always said that employers and employees of oil palm industries are rich, only about one-third have better living (Marti 2008; Colchester et al. 2006). The palm biofuel industry is a potential industry for rural development, job creation, and poverty alleviation (Hunt 2010; Schwarz 2010) but there may be other negative impacts on the society and the ecosystem at large. One main positive socio-economic impact of oil palm and palm biofuels production is the improvement that are realized in infrastructure establishment like schools, hospitals, religious centers, etc., which are easily accessible by the rural communities involved in the oil palm cultivation and processing. Income levels of these rural people are satisfactory due to fair compensations for transferred lands, regular income from plasma plantations, and other external income. Again, main roads leading to plantation communities are developed for facilitation of broad access to nearby markets hence increase in economic gains. The results from the survey of Andriani et al. (2011) in Indonesia show that the socio-economic impacts from palm biofuel production are more positive than environmental impact. Most smallholder families have benefited from high returns and incomes compared to their former livelihood activities (Rist et al. 2010). Other socio-economic benefits of palm biofuels include:
  • Existence of an alternative source of energy, which is greener, compared to fossil fuels.

  • Progress in research and development in fining alternative technologies for producing green energy through environmental, economic, and social sustainable ways (De Paula and Cristian 2009).

  • Cost-effective biofuel compared to most biofuels produced from different feedstocks like rapeseed oil.

  • Demand growth and improvement in developed countries due to emerging economies.

  • Rationalized green energy utilization in industries, homes, etc., hence clean environment.

One other technical problem directly linked to the economic sustainability of palm biofuels is associated with palm oil yield. Though there are many efforts in increasing the oil yield by growers and palm oil researchers, the actual yields and the national productivity of the oil have stood still between 3.0 and 4.5 tonnes oil per hectare since the late 1990s (Tinker 2000; Rosediana 2009). However, about 8.6 tonnes oil/ha is possible using certain species (Henson 1990) though very difficult to achieve. Smallholders mostly have about 35–40 % lower yields compared to the private and government-owned palm companies (Rosediana 2009). These gap disparities in yield between private companies and smallholders may result from the differences in farming practices as well as the kind of input resources (that may be costly) into the cultivation and milling of the oil. With these challenges coupled with the escalating prices of inputs (like fertilizers) into palm oil production, the prices of palm oil keep rising though is remains the cheapest source of vegetable oil in the world.

Though palm oil and palm biofuels are better off in terms of cost compared to other biofuel types, oil palm growers and palm oil producers especially are not getting improved in their financial status. Mostly, the employers of private and public companies involved in the oil palm industry are well off compared to the rural people who are actually on the ground working. Over the past decade, research reports on oil palm and palm biofuel production have shown that the conditions of smallholders and workers are getting poorer and poorer (Wakker 2005; Colchester et al. 2006; Marti 2008). As reported by Colchester et al. (2006), over 92,000 people staying in an oil palm plantation community of population of about 504,000 are living in poverty and hunger with about 778 children malnourished. Figure 6.3 shows the socio-economic impacts of oil palm cultivation and palm oil milling in an Indonesian palm cultivation community. Figure 6.4 shows economic impacts of oil palm agriculture on landowners or customary users in Indonesia.
Fig. 6.3

Socio-economic Impacts of oil palm expansion in Indonesia. LCF—loss of customary access to forest products; LCU—loss of customary access to underutilized land for cropping; LCW—loss of customary access to water resources; WP—water pollution; AP—air pollution; H/CP—increased incidence of human or crop pest and diseases; LPL—loss of primary crop land; DP/RS—displacement/resettlement; FLD—flood; EMP—employment opportunities; TR—transportation and access to cities nearby (Andriani et al. 2011)

Fig. 6.4

Socio-economic impacts of palm oil production on landowners or customary users in rural communities of Indonesia (Andriani et al. 2011)

The highest socio-economic impact resulted from floods (68 %) followed by water pollution (65 %). Most communities in Indonesia are affected by floods after heavy rains and the clearing of forests and lands for oil palm cultivation may intensify this hence the high impacts from floods. The impacts from employment and easy access to good roads were 41 and 47 %, respectively. The impacts from resettlements and displacement of communities were low at 5 % probably due to supports given to the rural folks upon land transfers.

Generally, palm oil production as a preliminary yet vital stage of palm biofuel production is assessed to have positive economic impacts on the rural communities of Indonesia though there are significant negative impacts. Though some researches have reported report that oil palm production could take away food cropland, in most rural communities where palm oil is cultivated, their access to food is appreciable with a positive impact of 76 % (Andriani et al. 2011). However, the quality of social networks of importance to livelihoods was very low. This means that oil palm production took away larger portions of the rural people’s livelihood. Some memorable sites like gardens, etc., in the rural communities, which give them entertainments, were greatly affected.

There are many ways of improving the economic benefits of the oil palm industry for sustainable palm biofuel development. It is imperative to link and discuss economic issues pertaining to oil palm development with its environmental and social impacts in order to achieve sustainable development in the sector. As a way to improve the industry for sustainable palm biofuels production, enabling environment must be created within all the sectors of the industry. Areas with poor governance and weak institutions, which create economic barriers, must be improved for sustainability. Laws that govern land rights and overlapping institutional mandates between the central and regional governments, which create loose investment environment leading to high cost of establishing businesses, must be clearly outlined and implemented. Land allocations must be carried out in fair manner to avoid conflicts which would eventually lead to low economic lives.

In order to close the wide gap between private companies and smallholders’ oil palm productivity, the private companies who have the financial resources and ability to address these issues should help the smallholders in this regard through appropriate training and technical supports. Again, smallholder must be funded in order to be certified for sustainable palm oil so that they can also have access to tools to implement best management practices to achieve sustainable palm oil development.

Again, the industry can be improved economically by expanding its downstream processing activities especially for palm oil milling. Most of the palm oil producing countries do not make proper economic use of the wastes (like PFAD, POME, PKC, etc.) generated during palm oil refining and FFB processing. The transformation of these wastes into value added bio-products would add employment opportunities to the industry hence increase in gross domestic product (GDP) (see Appendix G). For challenges associated with employments, more work could be done to identify major conditions which contribute positively to the number and quality of jobs created. Economic modeling is found to help predict how rural communities could embrace profit and bear the risks associated with oil palm cultivation, processing and palm biofuels production in order to help estimate the multiplier effect which can forecast job growth and improvement.

The development of biofuels from oil palm biomass carries with it many challenges and uncertainties regarding oil palm growers’ stability, market prices, constant flow of feedstock, etc. The uncertain market prices of oil prices and lack of market outlets can make the profitability of biofuel dependent on volatile oil prices and plant location. Again, rapid innovation in production technology and new varieties of energy crops may result in uncertainties, which would affect biofuel investment decisions. Thus, there is the need for extensive research and development in biofuels advancement in order to accommodate the involving economic risks and uncertainties. Research is again important in implementing policies to support sustainable palm biofuel production in order to manage alternative methods of feedstock cultivation, insurance, safety mechanisms and other economic risks.

6.4 Conclusion

The economic sustainability of palm biofuels was assessed and compared with biofuels from other feedstocks. Palm biodiesel is found to be cost-competitive with fossil diesel even without policy subsidies but requires high initial capital investment for large capacity plants. Compared to biodiesel from tallow fat, rapeseed oil, soybean oil, etc., palm biodiesel is found to be cheaper for high capacity biodiesel production plants above 30,000 tonnes biodiesel per annum. Palm bioethanol (from OPF juice) is highly competitive to gasoline and bioethanol from other feedstock in terms of cost. Biogas production from POME for electricity generation has also been found to be economically sustainable. Though palm biofuels are found have positive economic impacts on the society, there are few other socio-economic issues which need to be improved for sustainable development. Improvement in management practices would reduce the negative impacts that palm biofuels have on the society for sustainable palm biofuels development.

Footnotes

  1. 1.

    The agricultural cost per tonne of oil palm fresh fruit bunch (FFB) from smallholders and big companies were US$46.99 and 22.32, respectively, according to the studies of Quintero et al. (2012).

  2. 2.

    The price of palm oil from a commercial mill that generates its own electricity from the palm wastes was US$92.50 (ex-factory price).

  3. 3.

    Scenario 1: Both smallholders and commercial producers; Scenario 2: Only commercial producers.

  4. 4.

    Palm biodiesel price is lower (US$1.33) than the prices of soybean oil biodiesel (US$1.42) (Quintero et al. 2012) and jatropha biodiesel (US$1.96) (Quintero et al. 2012).

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Copyright information

© Springer Science+Business Media Singapore 2013

Authors and Affiliations

  1. 1.School of Chemical Engineering CampusUniversiti Sains MalaysiaSPS PenangMalaysia

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