1) South Africa has been working to develop a legal framework for renewable energies since 1998 in order to meet climate change obligations. However, implementation of biofuels regulation has faced challenges. 2) A Biofuels Industrial Strategy was published in 2007 aiming to develop the biofuels industry and decrease reliance on imports, but the financial viability of large-scale production is still uncertain under current market conditions and the government's proposed pricing mechanism. 3) A Draft Position Paper in 2014 outlined licensing requirements for producers to qualify for subsidies, but high costs and uncertainty around the finalized pricing framework have prevented construction of manufacturing plants.

1. Biofuels regulationin South Africa: Legal challenges and opportunities
Good afternoon ladies and gentlemen,
We have heard a lottoday about the challengesandissuessurroundingthe developmentof efficient
biofuelsindustriesaroundthe world.South Africaisnoexceptionandvariouschallengesare yettobe
answered. The law can be one of the most efficient ways of addressing challenges and affecting
change,dependentonwhetherthe relevantlegal principlesare developedintune withthe prevalent
needsandwhetherthe lawisimplementedasenvisioned.The purpose of thisdiscussion istoprovide
youwithanoverviewof thecurrentlegal frameworksurroundingbiofuelsinSouthAfricainanattempt
to identify the legal challenges and opportunities relevant to the biofuels industry.
Overview of renewable energies framework
South Africa’spathtowards developingalegal frameworkforrenewable energiesstartedasfar back
as 1998 when the then Department of Mineralsand Energy adopted the White Paper on the Energy
Policyof the Republicof SouthAfrica.In thispaper, the governmentsetthe goal of achievingat least
10000GWh of energy from renewable energy sources by 2013. This White Paper was adopted soon
after South Africa ratified the UN Framework Convention on Climate Change in 1997 and was the
government’sfirstattempttobringSouthAfrica’scarbonfootprintinline withthe obligationssetout
underthe KyotoProtocol,whichenteredintoforce in2005. In2004, SA releasedthe NationalClimate
Response Strategywhichsetsoutanumberof policyobjectiveslikecreatingsynergybetweennational
sustainable development objectives and climate change. The culminationof all previous policies was
achieved in the 2011 adoption of the National Climate Change Response White Paper which is the
document currently informing the government’s policy towards climate change. According to this
Paper, the government should develop its strategyto manage the inevitable climate change impacts
effectively through interventions that build and sustain the country’s social, economic and
environmental resilience and capacity to respond to emergencies. It also commits the country to
makinga fair contributiontothe global attempttostabilise greenhouse-gasconcentration withinina
time frame that enableseconomic,social andenvironmental resilience anddevelopmenttoproceed
in a sustainable manner.
The theoretical total result of these policygoals produces a relatively progressive legal environment;
conducive to the development of renewable energies. Unfortunately, as is often the case, the
implementation of the policy goals falls severely short of the ideal. Nowhere is this shortfall more
observable than in the regulation of biofuels. On top of all the other challenges facing biofuels
production, ranging from low crude oil prices to concerns over food security, the current legal
framework,orratheralackthereof, isstandinginthe wayof the establishmentof aneffective biofuels
sector in South Africa.
Biofuels regulation in South Africa
The government firstshowed formal interest indeveloping a biofuels industry when it published the
Biofuels Industrial Strategy in 2007; developed by the Biofuels Task Team consisting of officials from
the department of agriculture, environment, land affairs, energy, science, technology and treasury
department. The BIS indicated that the government saw biofuels as a viable option to address the

2. energyneedsof the countrywhilstsimultaneouslyachievingdevelopmental goalsthroughjobcreation
in rural areas. A major point of interest was the Task Team’s conviction that the country’s energy
profile could be diversified through the promotion of biofuels, which in turn would decrease the
country’sreliance onimportedenergyandincrease energysecurity.The BISsetagoal of achieving2%
penetration of biofuels in the national liquid fuel supply with the equivalent of 400million litres of
biofuel per annum. What became clear from the Strategy is that the Task Team was committed to
developingabiofuelsstrategywhichwouldbenefitrural areasof the countrybycreatingjobs. Suchan
approachwouldbe inline withthe NationalClimateChange Response WhitePaper’sgoal of achieving
synergy between national sustainable developmental goals and climate change obligations – but not
necessarilyinline withfreemarketprincipleswhichwouldensure the bestpossible functioningof the
industry.
In August2013, the governmentadoptedthe MandatoryBlendingFramework,whichidentified 1st
of
October 2015 as the date on which mandatory blending requirements would enter into force. In
practice,thiswouldmeanthatall licensedpetroleummanufacturerswouldhave topurchase biofuels
exclusively from licensed biofuels manufacturers in order to implement a blending concentrationof
5% biodiesel blendingwithdiesel and2-10% concentrationof bioethanolblendingwithpetrol.Asyou
are most probablyaware,thisdate has come and passed,yetnot one licensedbiofuelsmanufacturer
has even started with the construction of their plants. Most estimates indicate that a large-scale
biofuelsproducingplantwouldtake atleasttwoyearstobe operative,thusthe earliestdate thatthis
required blend could materialize is early 2018, as the Department of Energy is yet to publish a final
position paper on biofuels.
Accordingtosourcesinthe biofuelsindustry,the singlemostpreventativefactoristhe factthat large-
scale biofuel production is not financiallyviable at current crude oil and feedstock prices, and the
government’sproposed pricingmechanism does not provide enough financial incentive to cover the
difference. Essentially, the proposed regulated biofuels transfer price between manufacturer and oil
company and the regulated incentive mechanism is preventing producers from embarking on such a
major project as constructing a biofuels manufacturing plant.
In January of 2014, the Department of Energy published the Draft Position Paper on Biofuels
Regulatory Framework in attempt to provide a more coherent legal framework for biofuels by
addressing the concerns of financial viability. In addition to addressing financial viability, the
frameworkalsocodifiedthe requirementsforaproducertobecome licensed,andthusqualifyforthe
subsidy.I don’twant to spendtoo much time on this,as the allocatednumberof licenseshave been
granted, so I will just run through the basics:
 A company that wants to qualify for subsidies will have to make a contribution to the
transformationof the liquidfuelsindustry-whichmeansatleast25% of control andownership
of the plants have to belong historically disadvantaged South Africans.
 Secondly, the producers needs to facilitate social inclusion by sourcing at least 10% of its
feedstock from local farmers within 4 years of start-up op plant operations.
 Manufacturerswouldhave toprotectagriculturallandrightsbyobtainingsignedconsentfrom
landowners participating in the programme.
 The manufacturerwill have tomake apositive contributiontorural developmentbyensuring
thatat least70% of unskilledlabourandatleast10% of skilledlabourare procuredfromSouth
African citizens and by being involved in local initiatives through mandatory spending.

3.  Theyhave toimplementobtaincertificationfromthe Departmentof Agriculture,Forestryand
Fisheries that the feedstock used will not lead to diverting of commercial farmlands as a
measure to avoid food security threats
 They have to take measures to avoid deforestation and to control feedstock irrigation to
ensure protection of scarce natural resources
 Andfinally,theyhave toproduce biofuelsinasustainablemanner,whichincludesprovidinga
summary business plan to the DoE.
Thus far 4 licenses have been issued and another 4 provisionally granted. As you can imagine,
complying with these requirements add extra financial strain to prospective manufacturers, and
therefore the need for a pricing mechanism and financial incentives. The first attempt to ensure
financial viability was to guarantee the uptake of all biofuels produced through means of the
MandatoryBlendingRegulations –thiswouldcompelmanufacturersof petroleumproductstobuythe
available supply of biofuels. Potential biofuel producers would thus be ensured that their entire
inventory would be sold.
In additiontoensuringthatall biofuelsproducedwouldbe sold,the Departmentof Energydeveloped
a BiofuelsPricingFrameworktoserveasanincentivetopotential producersandinvestorstoenterthe
biofuels market. The Pricing Framework is based on the rather major assumption that the producer
will operate on the level of the benchmark plant. This means that the model was formulated on the
assumptionthatthe variablecostsandaverage local pricingof feedstockandthe fixedcostsassociated
with the operation of a plant requiring the subsidy will be the same as the benchmark plant. These
costs are calculated with reference to turnover and capital expenditure,and the DoE has decided on
guaranteeing a return on assets of 15% to entice investors into entering the market.
Unfortunately, there is still quite a bit of uncertainty surrounding the pricing framework and this is
preventing manufacturers from embarking on the construction of manufacturing plants. To my
knowledge, the DoE is yet to finalize the exact levels of subsidies that will be granted to biofuels
manufacturingentities.The DPPestablishedtwoprojectsaimedatcalculatingthe subsidytobe paid.
 The first is the Biofuels Break-even Price Determination Project. The goal of this project is to
determine the break-even prince for producing biofuels by an optimallysizedand efficiently
operated biofuel manufacturing plant with a rate of return on assets of 15%.
 The second is the Bio-ethanol BlendingValue project to the value-add of blending BE with
conventional petrol andsupplyingthe blendedpetroltoendusers.For blendingtobecome a
reality,the majoroil companieswill havetomake certaininvestmentstoensure thattheycan
blendthe BE intoregularfuels.Because the value-addhasbeenfoundtobe negative inmost
cases,the transferprice ofBEfromBEmanufacturerstomajoroilcompanieswill needtomake
provisionforthe blendingof petrol andBE, andmanufacturersargue that that cost shouldbe
included in the subsidy.
The combination of these two projects should then amount to the final subsidy payable to biofuels
producers.The governmentusesthe pricingmodel todetermine the amount neededtomake up the
gap between the market related earnings and the earning required to achieve the 15% return on
interest.The incentivepayablebythe governmentisthencalculatedonaperlitrebasisandthe subsidy
is paid to the producerbasedon the total volume of biofuelsproduced.Iam unfortunatelynotprivy
to the currentexactsubsidyproposedbythe government,butthe 2014 Draft proposedthata levyof
between3.5cand4.5c perlitre be placedonnational fuelpricestofinance thesubsidy.Manufacturers

4. do not believe that this amount is sufficient to achieve financial viability, and they view the
assumptions used in the pricing framework is too ambitious to be practical.
The final PositionPaper that would formallyoutline the final pricing framework was supposedto be
published in May of this year, but here we are in November and there is still no indication of when
such a Paper might be published. The latest development, announced in August, is that the current
lowoil prices has forcedthe governmenttoreworkthe biofuelssubsidy.The model proposed bythe
2014 DraftPaperisbasedonhighcrude prices,butatcurrentcrude oil pricesthe subsidywouldplainly
not be affordable and the fiscal risk is too great for it to be implemented as is.
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. The producer would tell the
governmentbyhowmuchitsproductionneedstobe subsidized,andthe governmentwouldthenhave
to decide whethertograntthe subsidy. Whilstthisprinciplehasbeensuccessfullyimplementinother
sectors of the renewable energies industry through the Renewable Energy Independent Power
ProducersProcurementProgramme,thisone size-fits-allapproachmaybe severelyproblematicinthe
biofuelssector. For this approach to work, the subsidywill have to increase to between 4.5 and 6.5c
per litre of fuel,andwith the newcarbon and othertax increases,consumersmightrallyagainstsuch
a subsidy.Subsequently,thereturnon assetscannotactuallybe guaranteedandinvestmentinbiofuels
manufacturing may prove to be just too risky for investors.
Conclusion
Despite all the potential of a biofuels industry in South Africa, I am not entirely convinced that the
currentlegal framework,orlackthereof,isconducivetoactuallyachievingthe goal. Underthe current
framework,the establishmentof a functioningindustrywill require massive amountsof government
funds, which will have to be generated through taxes for which consumers will ultimately be
responsible.Onthe otherhand,the successof the industryiscontingentoninitial private investment.
Private investors will only be willing to part with their money once a clear framework which clearly
outlines the pricing model is in place. With the recent increase of the repo rate, it’s hard to see a
situation where consumers will actually be willing to carry the financial burden of subsidizing the
biofuels industry, and it might thus be time to reconsider the current framework.