South African Biofuel Frameworks

Internationally, the growth of the biofuels industry has been driven by a number of factors which includes: the support for renewable energy, support for cleaner  and environmentally friendly energy sources in a bid to limit global warming; upliftment of the agricultural sector (through utilisation of surplus agricultural land to produce products in excess of food needs); promotion of sustainable development, exertion of downward pressure on global crude oil prices and the need to improve energy security. The biofuels programme has the potential to uplift agricultural sectors and to unlock substantial economic benefits in sub-Saharan Africa, South America and other developing regions, in particular by:

• Attracting investment into rural areas;


• Promoting agricultural development;


• Import substitution of foreign oil with balance of payment savings; and


• Overcoming the trade distorting effects that South Africa, African subcontinent and other developing countries have faced overtime because of subsidised agricultural production in developed countries.

The existing fuel levy exemption, for biodiesel that is a product (as opposed to producer) incentive should continue.

• Biodiesel currently enjoys a 40% fuel levy exemption.  It is proposed that once the Strategy is approved, this levy exemption be increased to 50% from the 2008/9 financial year. Thereafter the percentage will remain the same but the absolute value of the support will increase with increases in the fuel levy.  It is impractical to increase the exemption beyond 50% due to the impact of the current diesel tax refund scheme.


• A 100% fuel tax exemption is proposed for bioethanol as it can also be used in markets other than petrol e.g. ethanol gel that competes with illuminating paraffin. Illuminating paraffin carries no levies.

1.1 Development of Government policy on Energy

This section traces chronologically the development of Government policy on energy (including renewable energy and biofuels) and sustainable development that gave impetus for the development of a biofuels industry in the country.

• 1998 - The White Paper on Energy Policy set the country’s energy policy and acknowledged the importance of alternate transport fuels and a diversified energy supply mix.


• May 2001 - Department of Arts, Culture, Science and Technology completed a Technology Audit of the Transport Fuels Sector, which concluded that the largest energy saving potential lies in improving vehicle efficiencies; that biofuels need more investigation; and that the level of government support should be determined.


• 2002 - South Africa hosted the World Summit on Sustainable Development (WSSD). The outcome of the WSSD was the Johannesburg Plan of Implementation (JPoI), which commits South Africa to developing renewable energy technologies, including biofuels.


• 2003 - The White Paper on Renewable Energy sets a renewable-energy target of 10 000 GWh (equivalent to 0.8 Mtoe) to be achieved by 2013. In South Africa, transport fuels make up 30% of energy consumption (by energy content) and 70% (by value). Therefore  the  transport  sector  is  an  important  energy  sector  to  consider  the development of renewable energy sources and technologies.


• 2003 - The Petroleum Products Amendment Act, (Act No. 58 of 2004), authorises the Minister of Minerals and Energy to require licensed liquid fuel wholesalers and producers to supply and sell petroleum products made from “vegetable matter”. This is an important legislative vehicle for the biofuels development in the country.


• 16 February 2005 - The United Nations Framework Convention on Climate Change (UNFCCC) and its related Kyoto Protocol comes into effect. The Kyoto Protocol obliges industrialised countries (known as “Annex 1 countries”) to reduce their greenhouse gas emissions by at least 5% compared to 1990 levels over 2008 to 2012, primarily by investing in cleaner technologies in developing countries. South Africa acceded to the Kyoto Protocol in March 2002.  Although the Kyoto Protocol does not commit the non-Annex 1 countries (like South Africa) to any quantifiable emission targets, there is potential for future, low-cost emission reduction options in these countries. The Clean Development Mechanism (CDM) provides for trade in certified emission reductions (CERs) between non-Annex 1 countries and Annex 1 countries and thus supports sustainable development with respect to greenhouse-gas emissions reduction in developing countries. At the same time it helps Annex 1 countries to comply with their Kyoto Protocol commitments. Biofuels projects may apply for carbon emission reduction credits via mechanisms such as fuel switching.


• 2005 - The National Treasury approved the increase of the Fuel Levy exemption for biodiesel from 30% to 40%. The exemption was introduced in 2003. SARS allows for 100% exemption for small biodiesel producers (less than 300 m3 annually). Biofuels investments also qualify for a tax-depreciation write-off of 50:30:20 percent over three years. This equates to support of about 10 cpl.


• 2005 - A Department of Science and Technology (DST) led Bio-diesel Joint Implementation Committee conducted a detailed examination and concluded that government supported biodiesel production can be justified due to its environmental and socio-economic benefits.


• July 2005 - The National Treasury released a Discussion Paper on Environmental Taxes, which proposed an extension of the fuel levy exemption incentive to bioethanol, and that the basis for incentives should be linked to external benefits.


• September 2005 - The National Treasury approved a Renewable Energy Capital Subsidy Scheme administered by the DME. In 2006/7. The Subsidy provides for 16.7 c/l subsidy for bioethanol and 27.3 c/l for biodiesel, up to a maximum of R20 million.         However, cost competitive world scale projects typically require an investment in the order of R1 billion. Effectively this proposed support amounts to 2% of the required investments.


• 2006 - The DST supported the South African Bureau of Standards to develop the required analytical and technical capacity to perform bio-fuels analysis.


• 2006 - The Cleaner Fuels Programme phased-out leaded petrol and reduced sulphur in diesel to a maximum of 0,05% (mass). Regulations gazetted under the Petroleum Products Amendment Act in June 2006 in support of this programme included a specific allowance for biodiesel addition and mandates fuel specifications according to South African National Standards (SANS). SANS has finalised specifications for biodiesel and fuel ethanol, and is developing a standard for ethanol gel fuel. The standards are in line with European, United States of America and Japanese standards. These countries were selected because the automotive industry is dominated by manufacturers from these markets. The revision of standards and their deployment fits in with the measures proposed in this document, which will enhance the development of cleaner fuels into the South African petroleum pool.


• November 2006 - A draft National Biofuels Strategy submitted to Cabinet, was subsequently issued for public comment until May 2007. This document reflects the changes made to the draft Strategy based on the Biofuels Task Team’s analysis of stakeholder comments and inputs.


• 2008 – BFAP Biofuels Report stated that The Strategy is not clear as to what the biofuels mandate will be and how serious it will be when it comes to enforcement. The strategy mentions an overall mandate of 2 % for all biofuels and refers to this rate as the “penetration level of biofuels into the national liquid fuel supply”. Thereafter it is mentioned that “[t]he option of enforcing or mandating biofuels uptake in the initial phase is not favoured” and yet it refers to “the proposed blending ratio for South Africa is B2, 2 % biodiesel, and E8, 8 % bioethanol”. A 2 % national blend could result in some petrol stations selling a blend of up to 8 % while others will not sell bioethanol, since such requirements will not be enforced in the initial phase of the industry’s establishment.  The question remains, though, whether oil refineries will take the risk of incurring additional capital expenditure costs in terms of refining capacity when in fact there is no mandate compelling them to uptake biofuels? Is this a viable option for a business and are the incentives sufficient?  In terms of industry revenue generation, the Strategy document outlines a revenue-sharing scheme, called the Slate Account.  This account would be generated from the sale of biofuels at retail level, which oil companies will then submit claims against. This will only be possible if the respective oil companies are contracted and if they can provide receipted of proof of sales. It is further proposed that petrol containing bioethanol should retail at a deregulated price to facilitate off-take.  It is envisaged that this will contribute to oil industry liberalisation and will give support to new entrants in the market.

1.2 Issues Involved

The Biofuels Industrial Strategy is premised on the development of partnerships along the value chain and across the affected sectors. Firstly, the Strategy envisages the creation of a reliable market for fuels from biological sources and the fuels market. Biofuels can be used as blending components in both petrol and diesel production. The proposed blending ratio for South Africa is B2 or 2% biodiesel and E8 or 8% Bioethanol blend. In the case of petrol, bio-ethanol can substitute a number of octane boosters currently used by the oil industry and biodiesel can be used by the synthetic fuels producers and other producers as a blending stock.

1.3 Specific Interventions

1.3.1 Licensing of Producers

Biofuels producers, like any other petroleum product producers, need to be licensed by the Petroleum Products Controller: “A person may not- (a) manufacture petroleum products without a manufacturing licence… issued by the Controller of Petroleum Products”. Thus under the act all petroleum producers small and large will have to apply for a manufacturing licence. Biodiesel producers are already registered with SARS for the fuel levy exemption. This registration needs to be extended to bio-ethanol producers.

The licence will apply only to qualifying producers up to a 2% penetration level of locally produced biofuels, for qualifying litres. Once the required level of production and biofuels penetration level has been reached, the licensing will be reviewed and adjusted accordingly. Biofuels producers will have to meet the licensing condition which will include amongst others, crop selection, feedstock availability, quality requirements, environmental standards (Environmental Impact Assessment) and water restrictions.

1.3.2 Off-take by Petroleum Wholesalers Based on Discounting

Biofuels economics are optimised when logistics and costs are minimised. Hence the preferred off-takers, excluding own use by producers and directly by consumers close to biofuels plants, will be via the existing oil industry at the depots, or refineries closest to the biofuels plants. This would involve blending biofuels components in accordance with SANS standards. Currently this amounts to 5% for biodiesel and up to about 10% for fuel ethanol. Higher levels, particularly of biodiesel, could be used in dedicated fleets. Using the existing oil industry helps ensure quality control. With some level of discounting to the Basic Fuel Price (BFP) of the competing mineral petroleum product, oil wholesalers should take biofuels.

Mandatory blending is not recommended for the 2% incubation phase. Over time, as the biofuels industry matures, the existing wholesale licences can be amended to mandate the uptake of biofuels. However, the mandating of biofuels could be done under the section 9(g) of the Petroleum Products Wholesale Licence regulations (R287, 27 March 2006) or via an instruction from the Controller of Petroleum Products in terms of section 12(3)(h)(ii) of the regulations. The price for such licensed volumes could be based on BFP. A discount can be included to account for the actual relative value and to cater for additional depot and market handling costs. Section 2(1) (c) of the Petroleum Products Amendment Act provides for the regulation of petroleum products prices, should this be required.

1.3.3 Fuel Levy Exemption

The existing Fuel Levy exemption should continue. Based on job creation benefits, an increase in the exemption to 100% is justified. It is proposed that the biodiesel exemption be fixed at 50% from the 2008 financial year, taking into account the limitations imposed by the diesel tax refund. Bioethanol producers, on the other hand, should receive a 100% fuel levy exemption from 2008. The increased support for bioethanol producers will be balanced by the higher oil price floor for biodiesel producers. This will ensure that both sets of biofuels producers receive equal support per litre of qualifying production.

Biofuels production should also include participation by small investors and producers. Currently biodiesel plants producing under 300 000 litres/annum are fuel tax exempt, and it is recommended that this fuel tax exemption continue. This level was motivated by the need to simplify administrative procedures and is very low when seen against the oil industry, where a typical refinery produces 20 000 times this volume (exempted biodiesel volumes would constitute 0.005 % of oil refinery volumes) and there is an allowance for product losses of about 0.05 %. Accordingly it is recommended that the small producers’ threshold be raised to 1.2 million litres per annum for administrative fairness.

1.3.4 Agricultural Support

The Department of Agriculture has a number of programmes to support development of local agricultural production and value addition. These include programmes for small-scale and emerging farmers. Such programmes can be targeted to support farmers in crop selection, hedging, agricultural methods, logistics, infrastructure, research and development, and in negotiating contracts with biofuels manufacturers.

1.3.5 Government Agencies

Bringing under utilised agricultural land into production not only creates greater macro-economic benefits but also entails higher investment risk. To ensure such development takes place, which may correspond with poverty nodes, government agencies, such as the Central Energy Fund (CEF) and the Industrial Development Corporation (IDC) should become involved, with support from the provincial agricultural departments. The CEF and IDC should maximise Black Economic Empowerment (BEE) in such developments, particularly by including exit strategies allowing them to sell their investments to BEE players. These BEE investors could be assisted by the National Empowerment Fund and any other programmes that may be introduced.

State Owned Entities (SOEs) can play an important if not a leading role in getting the infant biofuels industry off the ground. Their roles will be different according to their various functions. On the supply side, Central Energy Fund (CEF) and the Industrial Development Corporation (IDC) will play a role as investors in public private partnerships or even as investment consortium leaders or indeed even as individual investors. They might even consider playing a role as lenders to biofuels projects. The strengths they bring to bear are a commercial approach and project evaluation which could be useful to small and medium enterprises. The Land Bank can play a crucial role in financing small farmers or small farmer cooperatives.

On the demand side some SOEs and Government Departments and agencies are large consumers of fuels. Examples are Transnet, Eskom and the Department of Defence. Again, Government wishes to play a role on the demand side by, for example, specifying in tender requirements that biofuels constitute a part of the fuel supply contract. A key requirement for all such SOEs or Departments is that their shareholder compacts or Departmental strategic plans reflect their roles in carrying forward the implementation of the Biofuels Strategy.  This requirement places the onus on the “shareholder departments” to ensure that the shareholder compacts contain such provisions.

1.3.6 National Development Plan

This is a key document developed by the Planning Commission tracing the Vision for SA to 2030. The only reference to biofuels is that: “Bio-fuels are also a possibility, but because South Africa is largely s dry country, production is more likely to be located elsewhere in the southern African region”