Cover Story / December 2019

Perhutani Transforms into Green Company

Perum Perhutani has introduced the triple bottom line concept; People, Planet and Profit approaches for doing businesses while keeping the planet safe and conserving forested areas for future generations through sustainable forest management. The triple bottom line is an accounting framework with three parts: social, environmental (or ecological) and financial, a UK book writer, John Elkington interprets the triple bottom line as consisting of People, Planet and Profit. Several new ideas have come out, including the initiative for biomass development as renewable energy source, as it seeks to be in the forefront of environmental protection. “Every generation has its unique problem to address. In our generation, climate change is ranked as one of the top global issues that need urgent actions. Indonesia is amongst 10 countries in the world with the largest forest areas. It has around 125.9 million hectares of forestry resources, or about 63.7percent of Indonesia’s total land area. This is well above the global average of 30.6 percent [of forest to land ratio] as mentioned in the Global Forest Resources Assessment study coordinated by the United Nations’ Food and Agriculture Organization in 2018,” Denaldy said. “This makes Indonesia an important player in the global effort to find solutions to climate change. Perhutani, entrusted with the stewardship of the country’s forestry assets, will lead this initiative through sustainable development of our forestry resources.” Perhutani has recently concluded a feasibility study showing a promising internal rate of return (IRR) of well above 20 percent on the development of pellet fuels as clean and renewable energy source in Indonesia. Through the government-sponsored Social Forestry program (Perhutanan Sosial), Perhutani’s subsidiaries will allocate at least 120,000 hectares of land across Java, Sumatra, Kalimantan and Sulawesi to be planted with Gamal (gliricidia sepium) and Kaliandra (calliandra calothyrsus) trees.  These trees can be harvested after two years and processed into wood pellets, the most common type of pellet fuel. The trees can be replanted in a 15-year cycle as a renewable resource. This huge expansion is also based on the successful pilot project in Semarang, Central Java, where Perhutani began biomass plantations in 2013, covering an area of 2,000 hectares. There is another good reason for Perhutani move: a world thirsty of pellet fuels. In the global market today, 142 countries are using wood pellets for fuel, while only 96 countries exporting them. The compound annual growth rate (CAGR) of global wood pellet market has reached 21 percent since 2000, according to trade statistics website Trade Map.  Total wood pellet production was 36.1 million tons in 2016, with Europe as a major importer, supplied mainly from North America. In the Asian markets, the biggest importing countries are Japan and South Korea, who buy from Vietnam and Malaysia among other suppliers. Growth in Asia is expected to remain strong next year. It is estimated that by 2020, Japan’s annual demand for wood pellets will reach 15 million tons while Korea’s annual demand will grow by 2 million tons. Clean and Renewable Energy Based on the 2018 Trade Map data, the world’s largest wood pellet exporters included the United States (5.1 million tons), Canada (2.1 million tons), Latvia (1.6 million tons), Estonia (1.2 million tons) and Vietnam (0.9 million tons). The combined production from those countries accounts for almost 60% of the global wood pellet production. Meanwhile, the largest wood pellets consumers are United Kingdom (6.8 million tons), Denmark (3 million tons), South Korea (2.4 million tons), Italy (1.7 million tons) and Belgium (1 million tons), accounting for 80% of global wood pellet demands. “From the data above, we can see great opportunities for Indonesia to be a major exporter in the international markets. In addition to foreign markets, some factory owners in the Cikarang Industrial Estate recently mentioned that they are willing to pay slightly higher for electricity as long as it is generated from clean and renewable energy sources. Why is that? The industry players claimed that by using electricity from environmentally friendly power plants, their products will have the added value among consumers in developed countries who care about green industry,” Denaldy said. “Perhutani has the fundamentals – the mission for the People, Profit and Planet – and also great potential to produce wood pellets. In other words, the company does not think only about profit, but also about how we can contribute to the planet and society. From a loss in 2016, Perhutani has comeback with a strong profit growth in the last couple of years. Only with such a foundation can we think of contributing to the planet and the people.  “For the planet, we can think about current issues, for example climate change that always becomes a key subject at international scale; how climate change is caused by CO2, etc. And we see that forests can provide renewable energy in the form of biomass, an alternative energy source that is clean and renewable. This is our possible contribution to the planet. In other countries, we have seen successful development of biomass as an alternative energy,” Denaldy said. By developing biomass, Perhutani is able to implement its 3Ps slogan beyond lip service, he added. For the planet, contribution to global wood pellet supplies will help increase the use of clean energy sources that in turn will reduce the global warming effects and gradually replace fossil fuels with renewable sources. For the people, the biomass or wood pellet industry will involve local communities and farmers as Perhutani’s partners under the Social Forestry program. And of course, biomass or wood pellet is a lucrative industry with an ever-growing demand across the globe. Great Opportunities for Indonesia The value of Indonesia’s wood pellet exports has increased by an average of 20 percent from 2013 to 2017; with a massive surge of 75 percent in the 2016-2017 period alone. The export volume also grew by an average of 30 percent over the same period, signaling global confidence toward Indonesian-made wood pellets. However, Indonesia’s contribution to global wood pellet supplies remained small, accounting for only 0.72 percent or 131,000 tons.  Between 2013 and 2016, the majority of Indonesia’s wood pellet exports went to Asia, while a much smaller portion was sent to Europe. Indonesia’s main Asian markets included South Korea, Japan, Chinese Taipei and China. In Europe, Indonesian wood pellets were sold mainly to Italy. But in 2017, Indonesia began to expand the market to Middle East countries such as Iraq, the United Arab Emirates, Saudi Arabia and Qatar. Farid Januardi, the head of Perhutani biomass project, said the cost to start the industry was surprisingly not very expensive. Moreover, the company has secured the funding after strong financial results in the past two years. “Perhutani has sufficient funds from the profits we have accumulated over the last two years. Developing biomass plantation and factory is not as costly as we have thought. The opening of a 3,000-hectare biomass plantation requires Rp60 billion investment that can generate a 70,000 tons per year. The factory itself only costs us less than Rp50 billion to build. We will prioritize the constructions of our factories in Central and East Java areas closer to shipping ports, so that we can reduce transportation costs,” he explained. The company and its partners will handle the entire production process of wood pellet or compacted sawdust, from growing the trees to the final stage of production. Perhutani has claimed the whole process doesn’t use any chemical. The wood itself produces lignin, a natural substance that functions like glue or wax, thus helping the compacting process. Independent tests have shown that burning wood pellets to produce electricity is cleaner than the similar process in coal-fired power plants. Perhutani is open to participation by the private sector or even foreign investors in developing wood pellets, both at the upstream and downstream. According to Denaldy, several companies and investors had shown interests in joining in the project, especially at the downstream area. But Perhutani requested them to get involved in the entire production chains. During recent visits to South Korea and Japan, Denaldy said he had met with representatives from several companies who expressed interests in wood pellet industry. “One company mentioned it requires an additional of 1 million to 1.5 million tons of wood pellet a year. I asked them not only to become buyers but also to become investors in the planting process, so that they can become part of the ‘ecosystem’ and at the same time maintain the sustainability of their supplies.  For example, they can involve in the research and development works to enhance the current calorific value of around 4,500 CV produced during the pilot project, and reduce ashes using advanced agronomic technologies. Higher calorific value will increase the chance of wood pellet to be an alternative fuel source. More importantly, compared to fossil fuel, a study shows that emissions from wood pellets are 10 times lower. Thus the competitiveness of our products will also increase in the international market.” Denaldy said. For the Planet and The People In accordance with the national energy policy stipulated in the Government Regulation No. 79, 2014, the government has set a target for renewable energy uses at 23 percent of total energy consumption by 2025, from the current rate of around 8 percent. The target will require supporting government policies and incentives to achieve. The use of wood pellets in power plants, or its combination with coal, could help the government achieve the target. Currently, state-run electricity company PLN gets a quota of approximately 100 million tons of coal at $70 per ton, with coal consumption reaching an estimate of 92 million tons this year. The government may take lessons from Japan and Korea in introducing renewable energy sources to generate electricity, so that at least 10 million tons of wood pellets can be absorbed by Indonesian power plants. At present, the National Energy Council is drafting a policy package for the government, supporting the mixture of wood pellets and coal in power plants. Korea adopted the Renewable Portfolio Standard policy in which electricity producers with a minimum capacity of 500 MW are obliged to supply a certain amount of electricity from renewable energy.  From only 2 percent of renewable energy in power plants in 2012, Korea has increased the targeted composition to 10 percent by 2022. Japan also adopted the so-called Feed in Tariff policy to encourage the use of renewable energy sources in power plants. Wood pellet prices are varied in the market depending on its quality. Premium quality of wood pellet is sold at above $200 per ton, and medium quality is between $100 and $200 per ton. Low quality product made from decomposed trees doesn’t have the export market. Perhutani focuses on premium quality wood pellet made only from specific tree families in biomass plantation. Moreover, the company has obtained the Forest Stewardship Council (FSC) certification, a global standard for sustainable forest management.  “To ensure that the project also benefits surrounding communities, we will employ local farmers during planting and harvesting seasons. We only use tree logs for wood pellet production. Perhutani will provide another incentive to local communities, that is, for every hectare of land that we plant, they can manage 30 percent and it is up to them to plant any kind of crops separated from the biomass plantation. So farmers will not only get wages from their work in managing Perhutani biomass plants, they will also earn profit from their crops on Perhutani’s lands. We have calculated that the combination of biomass plantations and agricultural crops will result in an increase of farmers’ income by at least 35 percent. This is the business model we will adopt to fulfill and enhance our 3Ps approach,” Farid added. “We are currently restructuring our plantation portfolios, which currently make up of long-cultivated crops with a harvest cycle of 20 to 40 years. This is good for the planet but may not serve the best interest of the people and the profit-making goals. Can the community wait that long? Would it boost welfare of the farmers? We have to recalibrate our plantation profile by introducing plants that can be harvested in a shorter period of time. That’s our main goal, fulfilling these three aspects. So we divide our portfolios based on the cultivation time: long, medium and short. Long-harvested cycle plants are teak and pine, medium-harvested plants are sengon or albizia (paraserianthes falcataria) and acacia mangium, whereas the biomass plantation is the short-harvested plants that we are currently developing.” “Today, long-cultivated plants make up about 70 percent of our plantations. We will gradually reduce the portion to around 30 percent. Long-cultivated plants carry many risks and challenges, as we are managing an open forest. Some of the teak we planted 30 or 40 years ago have vanished due to various factors such as illegal logging, natural disaster and illegal land occupation. We use idle lands for biomass crops.” Profit Perhutani booked a profit of Rp 400 billion in 2017 thanks to successful efficiency measures and business restructuring, despite slow growth in sales. Last year, the company saw its profit rose to more than Rp 600 billion, while sales also gained a pace. The wood pellet business alone is estimated to produce a profit of Rp 800 billion in 2025, assuming a conservative wood pellet price of $100 per ton. Wood pellet industry may become the backbone of Perhutani’s revenues although it only utilizes 120,000 hectares of land or 3.3 percent of the total area designated for the project. The company aims to produce more than 2 million tons of wood pellets by 2025 to earn Rp3.5 trillion in revenues. If all the products are sold to the export markets, the company will generate at least $250 million in foreign exchange revenues.