Industrial Strategy update on Biofuels & Transformation of the Gas Industry: briefing by Department of Energy

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed Members of the Committee and representatives from the Department of Energy (DoE) to the meeting.  The agenda would focus on biofuels and the biomass programmes. A briefing had been delivered on biofuels to the Committee in January 2013, but it would be the first time it had received a briefing from the DoE on the biomass programme.  DoE was, however, expected to provide the Committee with an update on biofuels, especially on the previous matters which had not been achieved by the DoE because of technical issues. An overview on bio energy was also in order, seeing that there were other categories in the sector, other than biofuels and biomass.

The Cabinet Resolution of October 2011 had raised a number of issues on biofuels, and so it was deemed necessary that the DoE engage with the Department of Agriculture, Fisheries and Forestry, as well as the Department of Trade and Industry, in a comprehensive manner, seeing that biofuels touched on all these departments. The DoE was also expected to brief the Committee on the progress made by the Department in transforming the gas industry, where progress had been slow.   During the briefing in January, the Committee had expressed its uneasiness with the slow rate of transformation, and the Chairperson wondered to what extent the DoE had responded to the Committee’s concerns.  National Treasury (NT) and the National Energy Regulator of South Africa (Nersa) had also been invited to participate in the meeting, and their responses were welcome at any point throughout the meeting.

Briefing by Department of Energy (DoE) on Industrial Strategy update on Biofuels
Mr Muzi Mkhize, Chief Director: Hydrocarbons Policy, DoE, explained that in the South African context, a specific requirement of the biofuels industrial strategy was to create a link between the first and second economies -- a requirement that entailed creating jobs in under-developed areas. Government policy, regulations and incentives were therefore a prerequisite for the development of the biofuels industry. The biofuels industrial strategy had been approved by the Cabinet on 5 December 2007. A five-year pilot phase had been envisaged. In addition, the 2006 feasibility study, conducted by the then Department of Minerals and Energy (DME), had revealed that the targeted 2% biofuels scenario could create about 25 000 jobs.

South Africa had set itself a target for 2013 that a 2% biofuels penetration would bring in about 400 million litres of fuel annually into the national liquid fuels pool. South Africa’s biofuels objectives were to:

• Contribute towards the achievement of the national  renewable energy policy targets;
• Contribute towards improving energy security in the country;
• Contribute towards the reduction of greenhouse gas emissions;
• Facilitate rural economic development through job creation, SMME development, etc;
• Stimulate agricultural production in the under-utilised agricultural areas of the country;
• Integrate historically disadvantaged farmers, especially in the former homelands, into the mainstream agricultural and energy economies.

Mr Mkhize said that out of eight manufacturing companies within the biofuels sector, five had been granted licences. This meant that the applicants had not met all the requirements, but were now in possession of a conditional manufacturing licence. The manufacturing companies which had been granted conditional licences were Arengo 316 (Pty) Ltd, Ubuhle Renewable Energy, Exol Oil Refinery, Basfour 3528 (Pty) Ltd and E10 Petroleum Africa cc. Two of the biofuels manufacturing companies had met all the requirements, and were now in possession of manufacturing licences. These companies were Mabele Fuels and Rainbow Nation Renewable Fuels Ltd.   Phyto Energy was still in the initial stages of its application process.

One of the main incentives in the biofuels industry was that all renewable energy projects (including biofuels) qualified for an accelerated depreciation allowance of 50:30:20 over three years.  Also, because Biodiesel fell outside the fuel tax net, biodiesel manufacturers received a 50% rebate on the general fuel levy.  However, incentives had still not proved to be sufficient to lure investments into the biofuels sector.  This was why there was a need to establish a more enabling and supportive regulatory framework.
The regulations regarding the mandatory blending of biofuels with petrol and diesel (the Mandatory Blending Regulations) had been promulgated on 23 August 2012, but had not yet been effective due to delays in finalising the pricing framework. Draft regulations had been published for public comment on 16 September 2011, and a stakeholder workshop had been held on 24 February 2012. In addition, an Implementing Committee had been established, tasked to work on the practical aspects of ensuring that blending took place within the effective date.  An inaugural meeting was scheduled for the 30 August 2013. A Cabinet-mandated Biofuels Task Team (BTT) was also in place.

Mr Mkhize said that, on their own, biofuels projects were not financially attractive.  Various stakeholder workshops and incentives had since been held to discuss incentive options with NT and the Department of Trade and Industry (Dti) under the auspices of the BTT.

The most common feedstocks worldwide were sugar cane and maize.  However, due to food security challenges and the exclusion of maize in the strategy, grain sorghum and sugar cane were the most appropriate commercial crops.  Large quantities of these feedstocks were grown locally.  Sugar beet was not grown on a large scale in South Africa, however.  For biodiesel, soya beans and sunflower seeds were the most appropriate commercial crops.

There had been a significant delay in the development of a biofuels pricing framework. In recent engagements with the sugar industry, it had become very clear that potential users of crops other than sorghum as a feedstock, would not invest in a biofuels venture that had a subsidy based on sorghum as a reference feedstock / crop, and vice versa.  The Department and NT had therefore had to consider alternative means of accommodating other crops while taking into cognisance of the need not to put the fiscus under pressure. Large volumes of these potential feedstocks were grown locally, and experience existed to expand production.  Meanwhile documents on other related issues were still being developed, such as the use of the General Fuel Levy instead of an Equalization Fund levy to collect money, the criteria for manufacturers of biofuels to be eligible for the subsidy scheme, and the inclusion of other “comparable” feedstocks.

Mr Mkhize concluded that a number of outstanding issues/ deliverables were still work-in-progress, due to technical investigations.  Even though the 2013 target would be missed, the country was set to produce biofuels in excess of the originally set annual target when the overall enabling and supporting framework (mandatory blending regulations, pricing framework) takes effect.  Although the local biofuels industry was currently in its infancy stage, it had the long-term potential for growth.

Discussion
The Chairperson thanked Mr Mkhize for the presentation, but added there had been a lot of “cut and paste” from the January 2013 presentation. He welcomed Ms A Stein (DA) from the Portfolio Committee on Agriculture, and said participation by all was welcome.

Mr L Greyling (ID) said the biofuels issue was complicated. He recalled discussing the strategy about six years ago, but there did not seem to have been much improvement or implementation of the strategy since then. On the 3 to 4 cents per litre subsidy which would be extended for all fuels within the country, he asked what the breakeven point for the fuel price was in the fuels industry. The fuel price also had a bearing on the feedstock price.  At what stage did the subsidy kick in?   The Committee had conducted a study tour to Brazil, where the main crop was sugar cane; in South Africa however, there was little space for sugar crop production. He asked how the DoE encouraged new land cultivation and the entrants of new farmers to the industry.  Biodiesel was suitable for Brazil because of the small scale of farming -- why was it not attractive to South Africa?  What strategies could South Africa learn from a country such as Brazil?

Mr J Smalle (DA) expressed concern at the absence of timeframes in the plans of the DoE. Why was the DoE so hesitant in allocating timeframes for purposes of accountability?  On the breakeven point, he asked how much the DoE was asking the consumer to subsidise products.  Was the DoE considering cross-subsidization, like Brazil? On the fuel levy, he asked whether the DoE had done a cost analysis on what it would cost refineries to uptake; was the DoE looking to incentivise?  Another concern was that biofuels relied heavily on the agricultural market which had its own ups and downs. Had the DoE done a study to see if farmers would diversify their mix?  If the biofuels industry fell short of production, who would be expected to compensate for the shortfall? Who would back up the system? Where would the funding come from -- PetroSA or Nersa?

Ms N Mathibela (ANC) referred to the DoE’s aspirations to integrate historically disadvantaged farmers in the former homelands into the mainstream agricultural and energy economies, and asked whether any of these homelands had been looked at.  Were they able to grow all the crops needed in these economies? On the National Treasury subsidizing farmers, she asked whether farmers would have to wait for the subsidies before they began production.

Ms B Ferguson (COPE) asked whether the subsidy would end up being an indefinite subsidy. What were the DoE’s timeframes in matters such as these?   Biofuels was heavily dependent on agriculture -- what job studies had been conducted by the DoE, and who would monitor these? How would the DoE ensure the growth of small farmers?  What were the outcomes of the biofuels water policy which had been facilitated by the Department of Water and Environmental Affairs? On crop rotation, she raised a concern about food security; how would the DoE make sure that farmers did not see production for biofuels as being more lucrative than food production? Who would monitor to ensure that farmers did not move away from food security being a priority?

Mr S Radebe (ANC) reminded members that one of the objectives of the DoE was to make sure that biofuels were a contributory element in achieving national renewable energy. He suggested that in order to stimulate agricultural production, which had been underutilised, the DoE should include traditional leaders in its plans. The DoE should involve rural residents, who would benefit from the involvement of small, medium and micro enterprises (SMMEs).  What studies had been undertaken by the DoE to prevent the challenge of food stock shortages, particularly that of maize?  The DoE should clarify what it meant when it said that the biofuels industry had a potential for long-term growth. Reference had been made to how mining rights were currently being distributed all over, and this would have a negative impact on fertile land.  Instead of growing the biofuels industry, it seemed as if trends such as these would hinder it.

Mr Smalle asked whether the 2% blending would take place at refineries, or at depots of the downstream industry. How would the DoE regulate the quality of blending?  What measures were there to improve regulation? He asked whether Nersa or the South African Petroleum Industry Association (SAPIA) would be involved in drafting the regulations.

Ms Stein (DA) asked what plant type the DoE would be predominantly using.

Mr Mkhize responded to the question on the Implementation Committee, and said a cost benefit analysis had been conducted by NT, in collaboration with the BTT.  On sugar cane production, he said there was scope for new business in the country -- the DoE had made several engagements with the sugar industry and several pieces of land had been identified for the DoE’s use. The period of green harvesting would also be lengthened.  On the incentives in Brazil, he said biodiesel was not big in Brazil. On time frames, he replied that the DoE had been engaged in several discussions with NT, and the Committee would receive a proper briefing before the end of the third quarter.  Draft documents were still out for public and stakeholder comments, and unfortunately people did not attend to these matters urgently. Blending would take place at blending refineries (depots), but the work would also include both depots and refineries.  On the question of the biofuels programme’s dependence on the Department of Agriculture, the DoE had looked at the Department of Agriculture for its involvement with subsistence farmers.   Farmers would not need to wait on the National Treasury before commencing with their work. However, there were certain things which the industry needed to address first, such as regulations.  Agreements with crop producers were already in place, and only the price mechanism needed to be finalised.

The DoE, together with the Department of Agriculture and the Biofuels Task Team, was prioritising the growth of small scale farmers. Water and food security would be given high priorityin the criteria. The DoE would not subsidise any situation which would jeopardize the food situation in the country.  The DoE would be working very closely with Cooperative Governance and Traditional Affairs (COGTA)  and traditional leaders at various rural communities to facilitate SMME development and growth.  On the long term growth potential of the biofuels sector, he said there was a huge job creation potential within the industry, even though there were a number of areas which still needed to be considered. On the plant type, he said sorghum and sugar-based plants were designed in such a way that they could be handled in crop production.  Farmers would not be stopped from switching a crop, as long as they still maintained and respected the set criteria outlined in the licensing agreements.

The Chairperson said a research initiative conducted in Stellenbosch, under the auspices of the International Energy Agency, had revealed that there were more than 200 small entrepreneurs who produced crops. He asked how the DoE planned to factor these small-scale farmers into the mainstream industry. Why had the 50% rebate not worked in the past? He also enquired about who made up the DoE’s Implementation Committee.   

Mr Smalle raised a concern about the flexibility allowed to farmers in terms of switching crops. It was concerning that the DoE would allow farmers to change their licence agreements on which crops they could produce.  Licensing was there to protect certain industries.  He asked that the Committee and the DoE to put aside time to discuss the 2% blending matter further.

The Chairperson thanked Mr Mkhize for the presentation, as well as the Members for their contributions. He said there seemed to be some job prospects which were attractive in the industry, even though it was still in its infancy stages. The strategy had been adopted in 2001 and was supposed to have been reviewed long ago, but this had not yet taken place. It was taking longer than expected to move the strategy forward. What strategy did the government have in place to move the biofuels industry from its infancy phase?  How were SMMEs being supported and why had there been no mention of them throughout the presentation?  Biofuels needed to be sensitive to food security as well. He asked that the Biofuels Task Team schedule a meeting with the Committee to brief the Members on its work, and also suggested that public hearings, preceded by a workshop, needed to be conducted to educate the public more about biofuels.  There was still a lot of uneasiness from the Committee about the industry, and how it linked to the renewable energy Independent Power Producer (IPP) programme. None of the eight companies listed had started any construction – what was needed to close these gaps. Why had there been no mention of biomass during the presentation?

Transformation of the gas sector
The Chairperson said the presentation on the transformation of the gas sector was a follow-up on the DoE’s briefing to the Committee last year. The Committee’s main expectation was that the DoE outline the extent to which the country was investing in gas, and what progress had been made since last year’s briefing.

Mr Mkhize said that South Africa’s energy supply was characterized by unequal access to modern energy, such as electricity and liquid petroleum gas (LPG). Low income households lacked access to affordable, safe and cleaner energy sources for cooking and space heating. Power shortfalls in recent years had therefore emphasised the need for an energy mix which would reduce the heavy dependence on electricity. Government had identified LPG as an alternative energy carrier of choice for household thermal needs. One of the basic challenges in the LPG industry, which constrained domestic supply, was the local dependence on LPG refineries only.   LPG was not proving to be a developing market. Secondly, constraints on the importation and storage of LPG were also proving to be a challenge, while the ever increasing energy costs were still an area of serious concern. On transformation, the industry still seemed to be seeking to distance itself from the Liquid Fuels Industry Charter, as refineries remained in the “upstream” portion of the LPG value chain. Safety and cylinder management were other challenges faced by the gas industry. In descending order, the main sources of cooking were: electricity, firewood, paraffin, gas, solar systems, coal and generators.

Market analysis indicated that demand for LPG was expected to grow as more households diversified their energy mix in response to rising electricity prices/tariffs.  In 2008, 337 000 tons of LPG had been produced in South Africa, with consumption at approximately 365 000 tons. The demand for LPG was also influenced by increases in electricity prices. However, the high price of LPG had resulted in the majority of poorer households switching to fuels such as coal, paraffin and wood. Since 2012, however, the government had regulated the maximum retail price of LPG supplied to residential consumers.
Factors influencing the supply of LPG were the crude oil type or feedstock diet, vapour pressure specifications for petrol (winter and summer differences), refinery economics – the complexity of the various refineries and their LPG conversion ability, availability of imports, storage and distribution infrastructure, and environmental regulations

With regard to localisation, he said there was a 100% black-owned company, Mmapho Gas and Energy, which supplied locally-manufactured LPG cylinders. The total number of wholesalers was not known, however. The majority of wholesalers and bulk distributors included Afrox, BP, Easigas, Total Gas and Reatile.

Looking at international benchmarks, approximately 42 million households in Brazil used LPG. The country practised cross-subsidization in order to make LPG more affordable.  In India, 162 million households used LPG for cooking, and in Indonesia there were more than 5.3 million users of LPG. 

Mr Mkhize explained that the LPG Expansion Strategy had been put on hold in 2012 to focus on LPG supply issues. The objectives of the strategy were to:
• Target 1.2 million households from all income groups over a period of five years;
• Provide access to safe, cleaner, efficient, environmentally benign and affordable thermal fuel;
• Switch low income households from the use of coal, paraffin and biomass, to LPG as the thermal fuel;
• Contribute to demand side management, by minimizing the use of electricity in cooking and space heating;
• Enhance the level and quality of energy services currently available to residential users;
• Contribute to green economy programmes which aimed to reduce greenhouse gas emissions.

The DoE was planning to launch a major concerted awareness campaign to assist the development of the LPG market. Consumers and retailer were encouraged to avoid any mixing of cylinders of competing companies and the swapping of cylinders. Cooperation with stakeholders would also be strengthened.  COGTA would be encouraged to motivate municipalities to support the rollout of projects throughout the country, the Department of Environmental Affairs (DEA) would be asked to prioritize the assessment of Environmental Impact Assessments, Nersa would be involved with regard to possible subsidies, and the Transnet National Ports Authority (TNPA) would be encouraged to facilitate the development of import infrastructure at the identified ports.

Some of the benefits of increased LPG usage were: savings in electricity consumption in the residential sector; its contribution to the green economy; LPG could be transported by sea, rail and road, it was an energy-rich fuel source, and it reduced energy poverty by providing a modern alternative to traditional cooking fuels, such as firewood and charcoal.

Mr Mkhize concluded that the Working Rules for the Maximum Retail Price for LPG were under review for LPG supply to residential customers. On transformation within the industry, a Liquid Fuels Industry Charter Compliance Audit had been conducted, and the results had been published on 5 July 2012. However no audit had been conducted on the on LPG performance in the industry. Enterprise development, skills development, preferential crude procurement and employment equity were the bottom four performing elements within the gas industry. Technical skills transfer was also a huge challenge.

Discussion
The Chairperson asked what the key features and/or performance indicators were for the transformation of the industry.

Ms Mathibela asked how far the country was in the local manufacture of gas cylinders. She also asked about the holding of cylinders which belonged to different manufacturing companies, when customers went to fill them up.

Mr S Mayathula (ANC) asked why cylinders had to be so heavy -- why could they not be manufactured to be lighter?  He added that Afrox was usually cheaper than other brands -- was the content of the cylinders different?  Why did some brands cost more than others?

Mr Greyling said transformation needed to occur around the household energy strategy. The problem with the presentation was that there had been no indication that there was a move towards an optimum outcome. What was the LPG expansion strategy?  How did it link up with the broader energy plan? How do we transform the way in which poor households consume energy such a coal and paraffin? How to we facilitate the transition from coal and paraffin to gas? What strategies were in place to tackle such matters? He asked what progress the DoE had made in overcoming the problems of the size of canisters and the price of gas. He asked about the tender at the Saldanha importation terminal -- which companies were allowed to import gas from there?

The Chairperson said the DoE needed to provide the Committee with a full report on the Saldanha Bay procurements.

Ms Ferguson said gas in South Africa was still priced too high. What strategy did the DoE have in place to ensure that gas was accessible even to ordinary South Africans?  Could the Brazilian cross-subsidization strategy work here in South Africa?  She asked whether the DoE had any plans to facilitate a move from solar geysers to gas geysers. Was the environment an enabling one for new entrants?  She asked whether the DoE had noted the fact that some industries were also making use of gas -- what mechanisms were in place to facilitate a move towards gas in South African industries? How would the DoE ensure adequate supply?

Ms B Tinto (ANC) asked about blackouts and load shedding in the Western Cape, and whether the gas industry could be of any support in the matter. She agreed with Members that there had not been much transformation within the gas industry -- the only transformation was that of increased prices. Gas was an alternative to paraffin, yet it was still not accessible to ordinary residents. She asked about the outcome of the pilot projects in Khayelitsha and Langa.

Mr J Selau (ANC) asked for clarity on the regulatory framework in the gas industry.  What was the relationship between Nersa and the regulatory framework? Who regulated gas and what was its regulated price? On the business model, he asked why players in the industry were regulated. He said there were too many players involved in the pricing element of the gas sector. How was gas traded locally? Was there a database of who the main players in the industry were? How was transformation progressing?  He raised concern about the Integrated Energy Centres (IECs) in the country, and said it was worrying that pricing was being left to the discretion of these retailers.  What guidance did they receive? What potential business was there for cooperatives and SMMEs? What was the relationship between these energy centres and gas distribution? He asked that the DoE elaborate on the pricing mechanism used to calculate coastal and inland transportation costs. What criteria were used to determine these price differences?

Mr Smalle said Saldanha Bay brought with it 80% extra storage capacity, and asked how this would influence the price of gas, and whether this would entail a long-term supply of gas from the coast to inland. What were the possibilities for future pipelines to support gas uptake to industrialisation?

Mr K Moloto (ANC) said the information presented by the DoE was not new. However, for the purpose of oversight, the DoE needed to provide the Committee with the milestones it had achieved so far, as well as progress reports. The DoE needed to indicate timelines and its performance indicators so that the Committee would better able to judge the work of the DoE. On the regulatory model, he asked whether all regulatory work was done by Nersa and, if not, what was the purpose of the framework?

The Chairperson reiterated the Members’ arguments that the DoE needed to present its key features and performance indicators to the Committee.

Mr Mkhize replied that the DoE was still addressing issues of ownership and control, and this was one of the reasons for the delayed performance indicators.  Some issues in the LPG Charter still needed to be articulated to the LPG industry. Alignment with the BEE codes was still under way. On the question of the DoE’s role in regulation, he said Nersa was dealing with regulation matters, while the DoE dealt with policy matters and the regulation of prices. Nersa issued construction licences and operations regarding infrastructure development. Tariffs were handled through the Petroleum Pipelines Act. The function of pricing would be migrated to Nersa in the near future, however.  The list of players in the biofuels industry was available, because they all needed to be licensed.

There was a relationship between IEC’s and regulation. Most distribution centres were at petrol stations, and the IEC’s distributed LPG. The problems pertained mostly to the ownership models of these IEC’s. Community members still needed to receive training on managing cooperatives in order to ensure sustainability. The DoE therefore would still have to conduct a needs assessment for IECs, as there was a need to improve opportunities in this regard. On the criteria used for transportation costs, he replied that the cost of trucking from the coast to inland were high, and this was stipulated in the working rules.  Therefore, transporting gas from the coast to rural areas would be relatively higher than transporting gas from the coast to urban areas. On the DoE’s business model, he said bulk storage brought products closer to the people, and this was why distribution needed to be near residential areas. On the question on cylinder holders, he said gas could be bought from different suppliers. The weight of the cylinders was still being discussed by manufacturers, but the costs of production and the costs of materials needed to be considered.  The report on Saldanha Bay would be presented to the Committee soon.

The Chairperson said the DoE should present the report in four weeks.

Mr Mkhize replied to the question on solar vs gas geysers, and said the technology was expensive, while the high cost of gas was another factor which needed to be taken into account.   The DoE was thinking along the lines of introducing gas geysers in the near future. LPG could not be looked at in isolation, so even though the use of gas by industry would be ideal, the infrastructure would still need to be developed. On the subsidy scheme, he said the DoE was looking into subsidising gas appliances because they were still expensive, and the challenges of affordability were still a major concern. On the progress made by the DoE, he replied that the Maximum Refinery Gate Price (MRGP) Review still needed to be concluded, together with the working rules. The expansion strategy would also be provided.

The Chairperson said there were a number of matters which had been raised by Members, and because there was not enough time to tackle them all, follow-up questions would be forwarded to the DoE in writing. Transformation went beyond issues of ownership and black economic empowerment -- issues of legislation were also very important. On infrastructure, he asked about the Gas Amendment Act. On transportation, he asked what the differences in prices were between road and rail.  The supply chain seemed to be a very complicated arrangement.  When it came to pricing, the DoE also needed to consider the issue of household appliances as well.
The DoE was asked to revert back to the Committee with a two-page outline of its performance indicators for the gas industry, especially pertaining to issues of transformation. To what extent were Integrated Energy Centres selling gas? The IEC experts were asked to brief the Committee on all its areas of concern.

The meeting was adjourned.