The Minister of Energy published the Draft Position Paper on the South African Biofuels Regulatory Framework (Draft Position Paper) to establish a biofuels pricing framework and rules for the administration of biofuel prices. 

“This is a major step towards establishing a regulatory environment conducive to the creation of a sustainable biofuels industry in South Africa that is aimed at stimulating South Africa's underdeveloped rural communities.  This step is also in line with South Africa's aim of moving towards using cleaner fuels that have lower sulphur content and produce less greenhouse-gas emissions by 2017,” explains Emma Dempster, Senior Associate in the Projects and Infrastructure practice at Cliffe Dekker Hofmeyr.

Dempster says that the publication of the Draft Position Paper represents a milestone in the development of the South African biofuels industry given that - despite the approval of the Biofuels Industrial Strategy of the Republic of SA in 2007 followed by the Mandatory Blending of Biofuels with Petrol and Diesel (Regulations), which will come into effect on 1 October 2015 - to date there are still no large scale biofuel industry players in South Africa, despite eight biofuel manufacturers having being granted manufacturing licences.

“The delay in implementation appears to be as a result of biofuel projects not being financially attractive at the prevailing feedstock and crude oil/liquid fuel prices. Accordingly, the publication of the Draft Position Paper seeks to address this issue by financially incentivising the production of biofuels in South Africa through the establishment of a Biofuels Pricing Framework developed by the Department of Energy (DOE), together with National Treasury and other economic sector departments,” she explains.

Dempster notes that the Draft Position Paper seeks to stimulate the South African biofuels industry by making provision for efficient investments in bio-ethanol (produced from sugar and starch crops) and biodiesel (produced from vegetable oils) manufacturing facilities. The Draft Position Paper also seeks to guarantee a return on investments, as well as guaranteeing  the levels at which eligible biofuels manufacturing entities will be subsidised. The Paper also seeks to regulate the monthly biofuels transfer pricing to compensate the petroleum industry for the investment in infrastructure upgrades.

“Amongst its positive attributes, the creation of a sustainable biofuels industry through the introduction of a regulatory framework guaranteeing the uptake, by licensed petroleum manufactures, of biofuel products supplied by licensed biofuel manufacturers in, as well as the introduction of a Biofuels Pricing Mechanism under the Draft Position Paper is intended to stimulate the secondary economy. This will mean the creation of  jobs, assistance  with energy security by creating a more energy secure environment by means of a local fuel production industry, and  the production of cleaner fuels.  All of these developments will be beneficial to South Africa as a whole,” she says.

“A concern for motorists, however, will be the fact that the subsidy will be afforded to manufacturers of biofuels through an additional fuel levy on petrol and diesel price structures, currently proposed to be between 4.5 cpl and 6.5 cpl on all petrol and diesel sold for domestic consumption in South Africa. This will be for a period of 20 years from the start of the provision of financial support to the first manufacturers of biofuels. 

“On a more positive note, in the long-term the local supply of bio-ethanol should displace the equivalent amount of imports on which South Africa is currently reliant meaning less risk of uncompetitive import pricing negatively affecting the petrol price,” she explains.

“Further, the DOE has targeted a 2% penetration level of biofuels in the national liquid fuels (petrol and biodiesel) pool which translates to approximately 400 million litres per annum. However, having regard to fact that the combined plant capacity of the eight (four biodiesel and four bio-ethanol) plants already granted manufacturing licences is about 1,262 million litres per annum, which once operational, will exceed the 2% penetration level.

Dempster notes that from various feasibility studies conducted, it is cautioned that an increase above the 2% penetration level may have unintended consequences in the form of more subsidy payments than anticipated, as well as pressure being exerted on food and water resources to the extent that resources are diverted from food production to biofuel production through the expansion of cultivated areas and, given that some feedstocks are highly water intensive, their expansion may create greater competition for this already scarce resource.

“At this stage,” she adds, “the Draft Position Paper still remains subject to public comment and finalisation by the DOE.  It remains to be seen what agreed financial incentives will be available to licensed biofuel manufacturing entities and petroleum producers to stimulate the biofuels industry.  Given that the construction period for a biofuel plant is approximately two years, in order to meet the fast approaching 1 October 2015 deadline, the final position paper regulating the Biofuels Pricing Framework will need to be finalised and gazetted shortly.”