Regulated petrol prices have long been a feature of the government’s fuel strategy, but this is starting to change. The draft biofuels strategy, approved by Cabinet last week, proposes that petrol containing bio-ethanol should retail at a deregulated price.
Fuel price deregulation for bio-ethanol will encourage uptake, contribute to oil industry liberalisation and support new BEE wholesaler entrants, according to the Biofuels Industrial Strategy of the Republic of South Africa report.
Biofuels will benefit from fuel levy exemptions. Biodiesel enjoys a 40% fuel levy exemption and the strategy proposes increasing this to 50% from the beginning of the 2008 financial year. A 100% fuel-tax exemption is proposed for bio-ethanol, which can be used for products other than petrol.
A producer-support mechanism will be used to balance the difference in fuel-tax support to bio-ethanol and biodiesel by setting a fixed margin price. A 100% petrol-tax exemption amounts to an effective saving of R1,21 a litre and a 50% diesel fuel-levy exemption amounts to 53c a litre.
Government has decided to scale down the target for biofuel penetration levels from 4,5% to 2%, or 400-million litres a year, for the next five years. Sugar cane and sugar beet are proposed as bio-ethanol crops, while sunflower, canola and soya beans are proposed as biodiesel crops.
The 2% target will create 25 000 jobs, with a capital spend per job of about 65% less than the industrial development corporation target. This will reduce unemployment by 0,6% (mainly in rural areas), boost economic growth by 0,05% (or 2,5% of the Asgisa target increase), achieve a balance-of-payments saving of R1,7-billion and a greenhouse gas emissions saving of R100-million a year.
The jobs-to-investment ratio is about 100 times higher than for crude oil refineries. All this will require investment of R4-billion over five years and, in turn, a favourable investment climate. Support will be reduced in the long term once the industry is established. “The 2% biofuels target includes a reasonable return that will apply only until 2020 for approved projects … and will enable debt to be repaid,” the report says.
It says the 2% target can be achieved without jeopardising food security, as it will focus on new and additional land, requiring about 1,4% of South Africa’s arable land. Fourteen percent of arable land, mainly in the former homelands, is underutilised.
“Biofuels supply requires low-cost, high-yield and surplus agricultural production, generally not destined for food consumption, as well as government support, particularly when crude oil prices are low,” the report says. About 10% of this land is irrigated, which uses 60% of the national water supply.
At present, three-million hectares of underutilised, high-potential land is available, mainly in the former homelands. Just one million hectares of this land could produce biofuels to cater for 5% of national diesel use, according to feasibility study findings explained in the report. But production will vary according to climate and soil characteristics and co-production markets will limit biofuels capacity and affect costs.
Sales prices of bio-ethanol and biodiesel as blending components in fuel will be pegged at a price that covers the cost of running a biofuels plant, maintaining agricultural feedstock and transport. The cost of biofuels will be ring-fenced and remunerated separately, as the biofuels will be blended at wholesale level.
Emerging farmers can organise themselves into cooperatives and have shares in biofuels plants. The price at which biofuel plants buy crops will be the same as the price paid by the food sector.