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INDUSTRIAL STRATEGY UPDATE ON THE BIOFUELS

INDUSTRIAL STRATEGY UPDATE ON THE BIOFUELS. Presented by Mr. Muzi Mkhize Chief Director: Hydrocarbons Policy. PRESENTATION OUTLINE. INTRODUCTION SOUTH AFRICAN BIOFUELS ASPIRATIONS UPDATE ON LICENSING OF BIOFUELS MANUFACTURING FACILITIES BIOFUELS REGULATORY FRAMEWORK

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INDUSTRIAL STRATEGY UPDATE ON THE BIOFUELS

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  1. INDUSTRIAL STRATEGY UPDATE ON THE BIOFUELS Presented by Mr. Muzi Mkhize Chief Director: Hydrocarbons Policy 13 August 2013

  2. PRESENTATION OUTLINE INTRODUCTION SOUTH AFRICAN BIOFUELS ASPIRATIONS UPDATE ON LICENSING OF BIOFUELS MANUFACTURING FACILITIES BIOFUELS REGULATORY FRAMEWORK SOME ON-GOING AND OUTSTANDING BTT ACTIVITIES CABINET RESOLUTIONS OF 26 OCTOBER 2011 CLOSING REMARKS Brief historical overview of biofuels industry in SA - Evolution of policy, legislative and regulatory development for the biofuels sector in SA. Status quo – what is government doing, how far has business invested, investment prospects, etc. What are the challenges in the biofuels sector e.g. food security. Socio-economic benefits from bio fuels e.g. jobs, Potential contribution to supply of energy - % contribution of bio energy to total supply GHG emissions of bio-energy sources

  3. INTRODUCTION In the South African context, a specific requirement of the Biofuels Industrial Strategy was to create a link between the first and second economies, a requirement that entails creating jobs in under-developed areas. Government recognizes that clear government policy, regulations and incentives are a pre-requisite for the development of the biofuels industry. Even though biofuels, like most renewable fuels, require incentives in order to be cost-competitive with conventional fuels, their upside is that such incentives also account for benefits such as jobs creation, balance of payments savings, energy supply security, and economic growth that is fairly stable. The Biofuels Industrial Strategy of the Republic of South Africa was approved by Cabinet on 05-Dec-07. Five-year pilot phase envisaged.

  4. INTRODUCTION (contd.) All these benefits contribute to supporting a better life for all both now and in the future. Most importantly, the estimates as per the 2006 feasibility study (conducted by the then DME) revealed that the targeted 2% biofuels scenario can create about 25 000 jobs. Government’s intention is to only allocate the producer (investor) incentive to projects that involve expansion that assist in achieving the 2% target. Commendable ground has been covered in pursuit of realising South Africa’s biofuels aspirations. The 2% target was revised downward from a 4.5% target that was initially proposed in the draft Strategy document. Revision considered, inter alia, a new industry that would require subsidies & unintended consequences – incl. possible negative impacts on food security, water resources & the environment - for a penetration > 2%. Mabele Fuels has indicated that its R2.2 billion, 158 million litre per annum, sorghum-based bio-ethanol project will deliver 15,000 to 18,000 direct and indirect jobs to the Free State province.

  5. SOUTH AFRICAN BIOFUELS ASPIRATIONS 2013 target: 2% biofuels penetration (about 400 million liters per annum) into the national liquid fuels pool. South Africa’s biofuels objectives : Contribute towards the achievement of the national renewable energy policy targets; Contribute towards improving energy security in the country Contribute towards the reduction of greenhouse gas emissions; Facilitate rural economic development through job creation, SMME development, etc.; Stimulate agricultural production in the under-utilised agricultural areas of the country; and Integrate historically disadvantaged farmers, especially in the former homelands, into the mainstream agricultural and energy economies.

  6. UPDATE ON LICENSING OF BIOFUELS MANUFACTURING FACILITIES Granted means the applicant has not met all the requirements but is now in possession of a conditional manufacturing license. Issued means the applicant has met all the requirements and is now in possession of a manufacturing license.

  7. EXISTENT BIOFUELS INCENTIVES Biofuels Pricing Mechanism being finalised: Biodiesel falls within the fuel tax net, and biodiesel manufacturers receives a rebate of 50% on the general fuel levy. Bio-ethanol falls outside the fuel tax net and therefore does not qualify for a rebate. All renewable energy projects (including biofuels) qualify for an Accelerated Depreciation Allowance of 50:30:20 over three years. Over the year, these incentives have proven not be sufficient to lure investments in the biofuels sector, hence the need to establish a more enabling and supportive regulatory framework.

  8. BIOFUELS REGULATORY FRAMEWORK (contd.) Regulations regarding the Mandatory Blending of Biofuels with Petrol and Diesel (the “Mandatory Blending Regulations”) : Promulgated on 23-Aug-12, in the Government Gazette (Gazette No. 9808 Vol.566 of 23 August 2012, Reg No. 35623) Not effective as regulation 6 thereof states that “they shall come into operation on a date to be determined by the Minister of Energy by notice in the Gazette” Draft Regulations were published for public comment on 16-Sep-11 until 18-Nov-11 A stakeholders’ workshop was held on 24-Feb-12

  9. BIOFUELS REGULATORY FRAMEWORK (contd.) Regulations regarding the Mandatory Blending of Biofuels with Petrol and Diesel (the “Mandatory Blending Regulations”) : Imminent Announcement: the effective date in view of delays in finalising the Pricing Framework, while taking due regard of the need to enable projects being developed Implementing Committee to work on the practical aspects of ensuring that blending does take place by the effective date Inaugural meeting scheduled to take place on 30-Aug-13 Cabinet-mandated Biofuels Task Team (BTT) will proceed with its work

  10. BIOFUELS REGULATORY FRAMEWORK (contd.) Regulations regarding Petroleum Products Specifications and Standards of 23rd June 2006 and amendments thereto supportive of Biofuels Production: Bio-ethanol’s concentration in blended petrol may range from 2% to about 10% on a volumetric basis. derived from the oxygenate volatility specifications for (blended) petrol; Biodiesel may be blended with conventional (mineral) diesel at conc. of 5% (B5), 10% (B10), 20% (B20), 30% (B30), 50% (B50) up to 100% (B100) biodiesel Removal of MON (motor octane number) penalty on and waiver on volatility spec for petrol blended with bio-ethanol

  11. BIOFUELS RELATED FRAMEWORK (contd.) Biofuels Pricing Framework (cont’): Biofuels Projects on their own are not financially attractive Initiated pricing studies (Bio-ethanol Blending Value & Break-Even price determination) in February 2011 & completed in December 2011; Hosted a stakeholders’ workshop on 16 March 2012; Convened a number of incentives discussions with National Treasury (NT) and the dti under the auspices of the Biofuels Task Team (BTT);

  12. BIOFUELS RELATED FRAMEWORK (contd.) Biofuels Pricing Framework (cont’): Delivered bio-ethanol price = Mogas 95 BFP + zone differential + fuel tax rebates + Blending Value + VAT  Bio-ethanol currently falls outside the fuel tax net and therefore no fuel tax rebates apply to ethanol for fuel blending purposes. Further engagements with NT and SARS et al for the development of an appropriate pricing mechanism Hydrocarbon Blending Value is the value of bio-ethanol as a petrol blend component to a blender (uptaker). It is dependent on the basic petrol price and can be expressed as a percentage of the unleaded petrol BFP SORGHUM TOPPED OTHER CROPS THEN

  13. BIOFUELS RELATED FRAMEWORK (contd.) Bio-ethanol Plant Feedstock: Most common feedstocks worldwide are sugarcane and maize Food security challenges and exclusion of maize in the Strategy In South Africa, grain sorghum and sugarcane are the most appropriate commercial crops Technical exclusion of others for support??? Large quantities of these potential feedstocks are grown locally and experience exists to expand production Sugarbeet has not been grown on a large scale in South Africa and no information exists in the public domain on costs, prices, etc. Economically sugarbeet would be valued on its intrinsic sugar content and hence the pricing analysis would be similar to sugar cane. FOOD SECURITY, ENVIRONMENTAL ISSUE, ETC. AS SELECTION CRITERIA

  14. BIOFUELS RELATED FRAMEWORK (contd.) Biofuels Pricing Framework (cont’): Delivered biodiesel price = Gasoil 50 ppm Sulphur BFP + zone differential + fuel tax rebates Fuel tax rebate on biodiesel is 50% general fuel levy

  15. BIOFUELS RELATED FRAMEWORK (contd.) Biodiesel Plant Feedstock: Most common feedstocks worldwide for biodiesel are soya beans, rapeseed and, to a lesser extent, palm oil In South Africa, soya beans and sunflower seed are the most appropriate commercial crops Large volumes of these potential feedstocks are grown locally and experience exists to expand production SOYA BEANS TOPS OTHERS. The exclusion of Jatropha is due to biodiversity concerns and the need to protect local bird and animal species from poisoning. - Jatropha is an alien plant with leaves and pods that are toxic.

  16. BIOFUELS RELATED FRAMEWORK (contd.) Bioethanol-Biodiesel Comparison

  17. BIOFUELS RELATED FRAMEWORK (contd.) Biofuels Pricing Framework (cont’): Extract of Budget Review Chapter 4 - Revenue trends and tax proposals “Biofuels production incentive The South African biofuels strategy proposes to establish eight biofuels manufacturing plants. As in other countries, a fiscal incentive is required to overcome the initial capital cost hurdles and offset risks. The proposed incentive is based on benchmark costs of hypothetical world-scale plants in South Africa, and will compensate for monthly movements in benchmark feedstock and output prices. It will serve as an “infant industry” support mechanism and will be phased out over an assumed 20-year lifetime of a benchmark plant. The initial cost of the incentive will be 3.5c/l to 4c/l of petrol or diesel, recovered through a levy included in the monthly price determination.”

  18. BIOFUELS RELATED FRAMEWORK (contd.) Cause of delay in the development of a Biofuels Pricing Framework: In recent engagements with the sugar industry it became very clear that potential users of crops other than sorghum as feedstock would not invest in a biofuels venture that has a subsidy that is based on sorghum as a reference feedstock / crop and vice versa. Hence the Department and National Treasury have to consider alternative means of accommodate other crops whilst taking into cognizance not to put the fiscus under pressure. Large volumes of these potential feedstocks are grown locally and experience exists to expand production. Meanwhile other related documents are still being developed: The use of the General Fuel Levy instead of an Equalisation Fund levy to collect the money; the Criteria for Manufacturers of Biofuels to be eligible for the subsidy scheme; Inclusion of other “comparable” feedstocks SOYA BEANS TOPS OTHERS

  19. SOME ON-GOING & OUTSTANDING BTT ACTIVITIES BTT – A Cabinet mandated Inter-departmental Biofuels Task team established in 2005

  20. SOME ON-GOING & OUTSTANDING BTT ACTIVITIES

  21. CABINET RESOLUTIONS OF 26 OCTOBER 2011 Purpose: To brief Cabinet on the steps to be taken to implement the Cabinet Lekgotla decision on action Plan 7 to unblock investments in the biofuels industry. Noted the imminent publication of the mandatory blending regulations by the Department of Energy; Requested the urgent finalisation of the financial incentive measures taking into account economic costs and benefits; Agreed that the Minister of Trade and Industry reviews the previous list of approved allowable feedstock to include, amongst others, sugar and sorghum and the potential of importing such feedstock in future;

  22. CABINET RESOLUTIONS OF 26 OCTOBER 2011 Agreed that explicit conditionalities be linked to subsidies and licensing, especially as it relates to the promotion of small scale farming and job creation, amongst others; Requested the Department of Water and Environmental Affairs to convene a meeting of the Directors General of the Department of Energy, of Economic Development, of Rural Development and Land Reform, of Agriculture, Forestry and Fisheries , of Science and Technology , of Higher Education and Training and of trade and Industry within a period of two weeks to develop a biofuels water policy position for biofuel feedstock farmers; and

  23. CABINET RESOLUTIONS OF 26 OCTOBER 2011 (contd.) Requested the Department of Science and Technology to develop a national priority strategic research thrust to place South Africa at the forefront of 2nd and 3rd generation biofuel research.

  24. CLOSING REMARKS A number of outstanding issues/deliverables are still work-in-progress due to the required technical investigations. Even though the 2013 target will be missed, the country is set to produce biofuels in excess of the originally set annual target when the overall enabling & supporting framework (mandatory blending regulations, pricing framework) takes effect. As much as the local biofuel industry is currently in its infancy stage, it does posses long term potential for growth. Both the upside and downside issues need to be considered.

  25. THANK YOU

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