Cheaper oil forces South Africa to rework biofuels subsidy
South Africa’s biofuels funding incentive is being revamped over concerns that it is unaffordable after a halving of global crude oil prices over the past year, officials said on Tuesday. A net importer of crude, Africa’s most advanced economy wants biofuels initially to meet 2%, or around 400-million litres, of the country’s annual fuel consumption to wean itself off oil imports and improve the trade balance. Print Send to Friend 0 0 However, regulatory uncertainty centred on financial support incentives to manufacturers has choked investment since the approval of a national biofuels strategy in 2007.
“There is a fiscal risk posed by the subsidy under the circumstances of a declining crude oil price,” said 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,” he told Reuters. Instead of a first-come, first-served model, the new proposed subsidy will see producers compete directly against each other on the basis of 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 said.
Prospective producers are wary.
Phillip Bouwer, chief executive at Mabele Fuels, which plans to build South Africa’s largest sorghum-to-ethanol plant at a cost of R2.5-billion ($196-million), said it seemed the government wanted to replicate its successful renewable energy bidding scheme in other sectors. “They are using a one-size-fits-all approach and that may be problematic,” he said. “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.” The regulatory framework currently provides for financial support to biofuel manufacturers via a general fuel levy.
Between 4.5 and 6.5 cents per litre is being proposed for 20 years to give firms a 15% return on equity. It is supposed to commence on Oct. 1, the government’s deadline for mandatory fuel blending to start if feedstock is available. However, with a carbon tax looming and a raft of tax increases announced earlier this year, the fuel levy proposal may prove unpalatable to the public and industry, analysts said. “It is likely that it will be difficult to introduce a levy at this stage,” ENSafrica environmental and energy lawyer Mduduzi Mamkeli said.