Photo Energy Group urges government to have holistic view in revamping biofuels funding incentive

Owing to the drop in global crude oil prices over the past year, the biofuels funding incentive is currently in a state of being revamped by government; however, global biofuels organisation PhytoEnergy Group has called for government to consider the possible gains of leaving the incentive as it stands currently.

Government believes that, as things stand, the initial incentive will be unaffordable owing to the country planning for biofuels to initially amount to 2% of the country’s yearly fuel consumption to alleviate pressures off oil imports and improve the trade balance.

The suggested 2% of biofuels – which is scheduled to be effective by October this year – equates to about 400-million litres of biofuels.

Commenting on this, PhytoEnergy Group notes that it is understandable that government is fearful of being forced to pay a greater premium for subsidies to the potential biofuels industry than was expected a year ago when the crude oil price was still around $80/bl, as opposed to the $40/bl it is currently at.

However, PhytoEnergy Group indicates that it hopes government takes a more holistic view on the matter.

“South Africa’s petrol and diesel consumption at the pump was around 24.5-billion litres in 2014, which increased by 10% in the first quarter of 2015. Assuming that the biofuels tax will be at 6.5c/ℓ – which, given the low oil price and dropping crude prices could easily be higher, owing to the opportunity presented by the low crude price – this would generate an additional income for the National Treasury of about R1.6-billion,” says PhytoEnergy Group chairperson Dr Gerald Danner.

As the incentive stands, between 4.5c/ℓ and 6.5c/ℓ is being proposed for 20 years to give firms a 15% return on equity. This is scheduled to commence in October this year.

Also, regulatory uncertainty centred on financial support incentives for manufacturers, has choked investment since the approval of a national biofuels strategy in 2007.

Further, Department of Energy energy policy and planning deputy director-general Ompi Aphane told ESI Africa last month that there was a fiscal risk posed by the subsidy under the circumstances of a declining crude oil price.

He also mentioned that the extent of the subsidy increased tremendously because of the low prevailing price, because the model worked better at very high crude prices.

“Instead of a first-come, first-served model, the new proposed subsidy will see producers compete directly against each other based on their individual needs,” Aphane indicated.

Moreover, Danner says that assuming that the subsidised amount of biofuels stays as it is promulgated for the 2% biofuels expected to be implemented in October and the calculated subsidy doubles from R2.50 to R5 a litre, this would be an expense for the Treasury of R400-million only.

“This will be so because the payment will only be due after the biofuels plants are in production, which will not be before the end of 2017 and then the crude oil price still must be as low as it is at the moment,” he explains.

Also to be considered, is that the expenditure will in return lead to multibillion-rand investments by the future biofuels industry, creating at minimum 15 000 to 20 000 new sustainable jobs. This is a massive swing in the balance of payments as well as significant additional corporate and employee taxes collected over many years into the future, Danner indicates.

“This job creation and the revenue out of the new biofuels industry will compensate by far any theoretical calculated loss for government to subsidise the industry; in reality, it will likely create more income than costs for the Treasury than without this new industry,” he points out.