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9 Aug 2019

Energy

Closely watch the State Oil Fund Act 2019 ... and future of biofuels (Current Issue No.3019)

            The State Oil Fund Act 2019, effective on September 24, 2019, will terminate price subsidies for biofuels within three years. Nonetheless, the government has not announced criteria or regulations in the aftermath of price subsidy abrogation. KResearch views that the termination of the price subsidy may eventually result in the end of certain types of biofuels. In fact, the demand for certain biofuels is set to drop regardless of the subsidy termination due to technological evolution and growing environment concerns in the future.

                 Due to the abovementioned reasons together with a lack of competitive pricing of biofuels, which tend to be more expensive than fossil fuels during the slump in crude oil prices, KResearch projects that the supply chains of palm oil biodiesel will be most vulnerable to risks. This is because almost half of domestic palm oil production is absorbed by the biodiesel industry. Moreover, demand for palm oil products for consumption, i.e., edible vegetable oil, has also dropped both at home and abroad. The effort to manage risks by promoting the use of palm oil in other industries may not be a good solution. Nonetheless, contract farming may present a feasible option to manage the production cost to promote efficiency by selection of good palm oil varieties and systematic plantation via research and development, diversifying risks for farmers and power producers.

                 In theory, subsidy reduction is desirable to avoid unfair price setting and allow market mechanisms to function effectively. Nonetheless, it is essential for related parties in the supply chains to be able to adapt to these changes within the limited timeframe. Therefore, the government should establish policies or measures which are responsive to the situations and set clear guidelines for the biofuel price subsidy reduction as well as other supportive measures, including the amendment of the Alternative Energy Development Plan (AEDP) and Energy Efficiency Plan (EEP). To encourage industries to make necessary upgrades to meet the needs of the Thailand 4.0 plan, innovation should be increasingly used to create high value product based on agricultural products. This will  generate sustainable income for farmers in order for every party involved to be able to readily adapt to the transition and pass through this experience, while minimizing the negative impact on them.