In Indonesia, the high subsidy on fossil fuel significantly burdens the country's economy. The partial replacement of fossil fuel by biofuel in the transportation sector would significantly reduce fossil oil consumption. To enable this replacement, a model was built to predict the effects of biofuel in the energy system. This paper examines the importance of technological changes in biofuel production. The objective is to find the optimal net energy balance under land and technology constraints. An optimization model to find this optimum was developed by using GAMS as a tool to provide the optimal answer about the potential of biofuel production in Indonesia in a scenario of technology development and a base scenario. The model shows that a net energy balance can be achieved with up to 3.8 kPJ in the technology scenario and 0.9 kPJ in the base scenario (a scenario describing present government policy). The export value could rise to 33 billion US$ in the technology scenario. In the base scenario, the export value of biofuel drops from 7 billion US$ in 2023 and further declines thereafter due to the low growth in land allocation whilst domestic demand is increasing. The lowest production cost is achieved with palm oil production at 9.5 US$/GJ in 2025. The net emission balance in the base scenario could achieve 54 Mtce, while in the technology scenario it could achieve 212 Mtce. The technology scenario relies on technological changes through R&D and economies of scale, which are not considered in the base scenario. The outcome of the model is that technological changes could have a positive impact on the introduction of biofuel in the transportation sector in Indonesia, i.e.: a higher net energy balance, higher export value, lower production cost and higher net emission balance. (C) 2011 Elsevier Ltd. All rights reserved.