The biofuels funding incentive in South Africa is under review due to concerns that it has become unaffordable since global crude oil prices have halved over the past year, reported Reuters on Tuesday.
As a net importer of crude oil, the country wants biofuels to initially meet 2% of the country’s annual fuel consumption to wean itself off oil imports and improve the trade balance.
This equates to approximately 400 million litres of biofuels.
Biofuels regulatory framework
However, regulatory uncertainty centred on financial support incentives for manufacturers, has choked investment since the approval of a national biofuels strategy in 2007.
Ompi Aphane, deputy director-general of energy policy and planning said: “There is a fiscal risk posed by the subsidy under the circumstances of a declining crude oil price.
“The extent of the subsidy increases tremendously because of the low prevailing price, because the model works much better at very high crude prices.”
Instead of a first-come, first-served model, the new proposed subsidy will see producers compete directly against each other based on their individual needs.
Aphane added: “You tell us how much subsidy you need and that would be a competitive element in determining who gets the subsidy.
“That is a major departure [from the current biofuels framework].”
Biofuels market concern
Phillip Bouwer, chief executive of Mabele Fuels, which plans to build South Africa’s largest sorghum-to-ethanol plant at a cost of ZAR2.5 billion ($194 million), said it seemed the government wanted to replicate its successful renewable energy bidding scheme in other sectors.
Bouwer said: “They are using a one-size-fits-all approach and that may be problematic.
“The kind of equity return that players want in this [biofuels] market is going to be in the low 20s and I don’t think going a competitive bidding route is going to drive down that requirement because investors will simply not take the risk.”
The regulatory framework currently provides for financial support to biofuel manufacturers via a general fuel levy.
Between 4.5c and 6.5c per litre is being proposed for 20 years to give firms a 15% return on equity.
It is supposed to commence on 1 October, the government’s deadline for mandatory fuel blending to start if feedstock is available.
According to analysts, with a carbon tax due to be promulgated next year and tax increases announced earlier this year, the fuel levy proposal may prove unpalatable to the public and industry, reported Reuters.
Mduduzi Mamkeli, environmental and energy lawyer at ENS Africa, said: “It is likely that it will be difficult to introduce a levy at this stage.”