KUALA LUMPUR: Biodiesel’s use as an alternative source of fuel has lost its lustre as it can for now only form a small part of the solution to finding a substitute for conventional fossil fuels, said CIMB Standard Strategic Asset Advisor Sdn Bhd chief executive officer, Vijay Sethu.

“It may eventually find a niche market, but the ‘food for fuel’ debate is an issue that will hamper extensive usage,” he said.

Vijay said when the government pushed for biodiesel usage, it had unintended consequences.

“As a result of the hype, there was massive planting of palm oil, which may lead to excess inventories, as these plantations are still maturing. Companies that are investing in biodiesel are losing money.

“At the moment, we have factories in Malaysia that can produce two million tonnes of biodiesel per annum that are mostly idle. All these represent sunk costs that can’t be recovered. The bus has left the station, so to speak,” he told The Edge Financial Daily.

When the government first announced that it would implement a B5 biodiesel programme for domestic consumption by 2010, and started handing out licences, Carotech Bhd along with plantation companies such as Sime Darby Bhd saw their share prices surging.

However, the economic feasibility of biodiesel became an issue when the price of the feedstock, palm oil, started to trend upwards along with the oil price. Now, with crude oil prices hovering around US$50 (RM178.50) per barrel, the demand for biodiesel has petered out.

Vijay said the demand for biodiesel in Asia was still very low, while in Europe the “food for fuel” debate had put up barriers to its widespread use.

“Also, there were concerns on how environmental friendly palm oil biodiesel is after it was reported that huge tracts of forest in Indonesia were cleared to make way for plantations,” said Vijay.

One of the casualties of biodiesel hype is Australian-based renewable energy company Natural Fuel Ltd, which was placed in the hands of administrators early last month. The company, which has biodiesel factories in Singapore and Darwin, is in the midst of restructuring its business.

However, analysts opined that the Malaysian government would continue to push its biodiesel agenda. In fact, the 5% mandatory blend ruling has already taken effect as of February this year.

“This is in order to underpin the price of palm oil, so this would ensure that supply levels are kept down,” said a plantation analyst.

There is evidence of companies still seeing a future in biodiesel. Mission NewEnergy Ltd, a global renewable energy company, is looking to invest RM130 million to increase the capacity of its biodiesel refinery in Port Kuantan, according to recent reports.

The current capacity of the factory is 100,000 tonnes per annum and the company is planning to increase it by another 250,000 tonnes by June.

However, Vijay said the country could do well to look beyond just biodiesel and look into alternative renewable energy sources, which included solar, biomass and second-generation biodiesel made from non-food sources such as palm fronds and husks.

“But for that to happen, there needs to be a drastic shift in policy for it to be truly effective. While Malaysia’s current tariff for energy from biomass of about 21 sen per kW is reasonable, it is capped at 10MW and that does not allow for economies of scale,” said Vijay.

Asked if it was possible for biofuels to be economically feasible, he said it was possible but only through subsidies.

“But it can be achieved. Power from wind was heavily subsidised 10 years ago, but now it is at grid parity thanks to advancements in technology,” said Vijay.

He explained that grid parity meant that the electricity from renewable energy sources was at the same cost or cheaper compared to traditional fossil fuels such as gas or coal.

But he admitted that at the moment, the market seems pessimistic about the future of the industry.

“We have been looking for biofuel projects in Malaysia to invest and so far we have not identified any that is suitable,” said Vijay.

The Southeast Asia Strategic Assets Fund, which he heads, is a US$150 million fund with focus on energy, infrastructure and natural resources projects in Asean.

Among the projects that the organisation had undertaken in the past included the privatisation of Malakoff Bhd, the country’s largest independent power producer, by MMC Corporation Bhd.

This article appeared in The Edge Financial Daily, May 4, 2009.