Low oil prices force South Africa to remodel biofuels policy

South Africa is reforming its biofuels funding incentive in the wake of global crude oil prices dropping by half over the past year.

The South African government is concerned that the funding programme is becoming unaffordable.

The country has set an initial target of having 2% of its annual fuel consumption – totalling at around 400 million litres – come from domestic fuel supplies in order to improve its trade balance.

Since the approval of a national biofuels strategy in 2007, however, regulatory volatility centring on financial support incentives to manufacturers has stunted investment in biofuels.

‘There is a fiscal risk posed by the subsidy under the circumstances of a declining crude oil price,’ says Ompi Aphane, deputy director general of energy policy and planning. ‘The extent of the subsidy increases tremendously because of the low prevailing price, because the model works much better at very high crude prices.’

Whereas the old system worked on a ‘first come, first served’ principle, the new proposed subsidy system would have producers compete with each directly to be awarded aid based on their individual needs.

‘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,’ Aphane says.

But biofuels producer are less than excited.

Phillip Bouwer, chief executive at Mabele Fuels, which plans to build South Africa’s largest sorghum-to-ethanol plant at a cost of 2.5 billion rand (€175 million), says the government seems to want to replicate its successful renewable energy bidding scheme with other industries.

‘They are using a one-size-fits-all approach and that may be problematic. The kind of equity return that players want in this 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,’ he says

The regulatory framework currently provides for financial support to biofuel manufacturers via a general fuel levy.