Boosting the biofuels industry

The energy minister recently gazetted the mandatory blending of biofuels at minimum concentrations of 5% for biodiesel and 2% to 10% for bio-ethanol. Once outstanding issues are resolved, this should kick-start investment in biofuels, says biofuels agricultural advisor Fanie Brink.

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The recent announcement by energy minister, Dipuo Peters, that the blending of biofuels in mineral fuels will become mandatory in the future is a big breakthrough. It is the only way to create a market for biofuels in South Africa. However, mandatory blending alone will not help establish a biofuels industry in the country.

The Biofuels Strategy that was approved by government in 2007 placed a ban on the use of maize as feedstock for biofuel production. It does, however, allow the use of grain sorghum, sugar cane and sugar beet for bio-ethanol production, and sunflower, canola and soya beans for biodiesel production.

The production of grain sorghum in South Africa during the past 10 years has never been higher than 400 000t/annum, mainly for the production of sorghum beer. At the least, this will have to double to build an economically optimal sized plant that can produce 150 million litres of bio-ethanol a year.

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The second most important requirement for the successful development of a biofuel industry is the formula on which biofuel prices will be based and regulated. The suggested price formula prescribed by the oil industry in 2006 and fully accommodated in the original Draft Biofuels Strategy is still on the table.

Independent pricing
This price formula restrains development of the biofuels industry as it is based on landed costs – the basic fuel price – and not on the price of the required feedstock. If biofuels prices are based on the basic fuel price, then the prices the biofuel plants will pay producers will be too low to produce the feedstock profitably, even if the crude oil price trades above US$100 a barrel. This scenario will not encourage farmers to produce more feedstock.

The profitability of the oil industry itself does not depend on the international crude oil price and the exchange rate, but on the retail and wholesale margins that oil companies receive, as well as the guaranteed return on their investment in marketing assets, after they have been fully rewarded for the total costs of importing and refining crude oil.

Until 2000 the local synthetic oil industry received very high government subsidies, whenever the international price of crude oil traded below certain minimum levels, to support the establishment and development of the industry. The biofuels industry should have the right to claim the same privileges. Biofuel prices should have nothing to do with the oil industry and the biofuels industry should be allowed to develop its own price formula which it can negotiate with government.

The oil industry does have an important role to play in the blending of biofuels and should be adequately compensated for the fixed and operating capital requirements for the blending process. If the oil industry finds that blending will be too expensive, government could allow the biofuels plants to perform the blending themselves.

Since the price of biofuel feedstock reached record levels in 2008 when the price of crude oil rose to above US$150/ barrel, independent of the demand for food, a very close correlation has developed between feedstock prices and the crude oil price. This resulted in the problem that feedstock became too expensive to produce biofuels every time the crude oil price rose above US$100 a barrel.

The record levels at which maize, grain sorghum, sunflower and soya beans are trading at the moment due to the severe drought in the US, while the price of crude oil trades at about US$100 a barrel, will present challenges to the profitable production of biofuels. In addition, prices will increase with higher demand for inputs such as seed, fertiliser, chemicals and machinery.

Profit drivers
The recapitalisation of farms for black farmer development by the Department of Rural Development and Land Reform is admirable, but the capital requirements to produce more feedstock for the production of biofuels or to build the plants are not the biggest problem. Profitability is the decisive factor. The two driving forces behind the profitability of the biofuels plants are the prices of the feedstock and the prices that the plants will receive for their biofuels.

Conversion efficiency is another factor that will determine the successful development of the biofuels industry in SA.
Government has granted certain tax incentives to encourage biofuels production. In 2005, the Treasury announced a 40% tax rebate on biodiesel, later increased to 50%. Such a rebate is unfortunately not yet applicable on bio-ethanol. The previous minister of finance, Trevor Manuel, made it clear in his 2008 budget speech that bio-ethanol did not qualify for the tax rebate.

In 2006, the Treasury announced an accelerated capital depreciation incentive on capital investment in biofuel plants. Earlier this year, minister of trade and industry Rob Davies announced further tax incentives to the value of R3,57 billion for biofuel plants in the Eastern Cape.

Bio-ethanol is no longer the best biofuel to blend with petrol and in the US many of the 250 plants have already been converted to biobutanol plants. Biobutanol has more carbon molecules (more energy), is less hygroscopic and flammable and can be more easily transported by pipeline than bio-ethanol.

Alternative avenues
Better opportunities to produce renewable energy in SA already exist and should be further investigated.

These include:

  • The production of bio-ethanol from plant material (celluloses) for the generation of renewable bio-electricity. The electricity industry is much more accessible to private investors than the oil industry and legislation is already in place. Stellenbosch University has made huge progress in researching the production of bio-ethanol from celluloses.
  • The generation of bio-electricity from biomass (plant material). Sorghum can produce high yields of plant material as a feedstock and could create many job opportunities in rural areas, especially if biomass was harvested and collected in a labour intensive manner.
  • The production of biodiesel, bio-ethanol or biobutanol from algae for the generation of bio-electricity. The mandatory blending of biofuels is without doubt a decisive step towards the establishment of a biofuels industry in SA. Unfortunately, the implementation date was not made public. 

The required policy framework will have to be fully regulated through the applicable legislation before progress and investment in the biofuels industry can happen. If the oil industry is allowed to control and prescribe prices and other support which biofuels producers could receive for their products, it could totally jeopardise the development and sustainability of the industry. 

Contact Fanie Brink on 082 573 5661 or at [email protected]

The views expressed in our weekly opinion piece do not necessarily reflect those of Farmer’s Weekly.