Estimating the impact of vehicle modification costs on the demand for biofuels in Malaysia

The demand for oil palm-based biofuels is expected to increase rapidly in Malaysia over the next decade due to the country's extensive cultivation of oil palm. Plans are currently under development to promote the use of biomass-based fuels (i.e., bioethanol, biodiesel and straight vegetable oil) as a replacement for petroleum-derived fuels in the transport, industrial and power sectors. Predicting the exact amount of future biofuel demand is complicated by uncertainties in biofuel cost and availability, blending ratios, and consumer acceptance of a new fuel, which may require retrofitting of existing engines and fuel delivery systems. This paper examines the influence that vehicle modification cost and biofuel-blending ratio could have on consumer preference for either biomass- or petroleum-based fuels for the road transport sector. The analysis assumes that a consumer switches completely to a biofuel blend (including 100% biofuel) whenever the price of the blend plus an amortized technology modification cost is equivalent to the price of the petroleum alternative. This indifference price for biofuel, which is unique for a given technology and blending ratio, is calculated by estimating the technology modification cost for vegetable oil, biodiesel, and bioethanol for various vehicle types at different blending ratios. A biofuel demand curve is then constructed that shows the total quantity of biofuel demanded at different values of the pure biofuel price. At low blending ratios (5% for biodiesel and vegetable oil, and 10% for bioethanol) there are no modification costs and the indifference price is only slightly lower than the petroleum price due to the lower volumetric energy content of the biofuels. At higher blends, the indifference price drops significantly for vegetable oil and bioethanol, requiring a more substantial subsidy in order to increase available demand. For biodiesel, the indifference price remains high due to low modification costs for all blend ratios.