In his master’s thesis, titled 'Assessing the Economic Viability of Biofuel Production in South Africa', University of the Western Cape student Denver Jacobs argues that a sharp drop in the prices of raw materials and strong policy guidance could help make biofuel production a more attractive investment.
Jacobs argues that the availability of biofuels could dramatically ease South Africa’s dependence on crude oil (the country currently imports around 70% of its crude oil needs) and ensure greater energy security amid fluctuating oil prices. It would also allow South Africa, currently the world’s 14th highest emitter of CO2, to cut back on its emissions.
South Africa’s National Biofuels Industrial Strategy, developed in 2007, envisages that smallholder farmers would grow the bulk of feedstock crops such as maize and sugarcane that would be converted into biofuels. This would direct much-needed investment in agriculture to South Africa’s impoverished rural areas.
Jacobs cites Brazil’s successful PróÁlcool programme as a good example of substantial job creation in both the biofuel and car manufacturing industries through the production of cheap ethanol from sugarcane. Brazil supports the use of flexible-fuel vehicles that can run on either biofuels or petrol. South Africa favours blending petrol with biofuels at a 9:1 ratio (known as an E10 fuel mixture), making the fuel suitable for standard petrol engines without modification.
Jacobs calculated the economic viability of biofuel production using three measures typically used to analyse the profitability of an investment – net present value (NPV), which is the difference between the current value of the cash earned from an investment in the future and the amount being invested; internal rate of return (IRR), the interest that can be earned on every Rand invested; and payback period, which is the period over which an investment will be recouped.
Jacobs applied these yardsticks to four potential feedstock crops: grain sorghum, sugarcane, soya beans and sunflowers (the national strategy currently regards maize primarily as a food crop, not as a feedstock).
Jacobs found that biofuel production using any of the four crops could not come close to matching the cost of petrol. This was mainly due to the currently high prices of feedstock crops as a result of recent poor harvests.
“If I had done my study a few years ago when crop prices were low, my results would probably have been very different,” says Jacobs. “My work clearly shows that the production of biofuel from these crops would only become viable if there was a substantial reduction in feedstock prices.”
Jacobs’s research suggests that strong policy and state support could help, perhaps through subsidising the cultivation of feedstock crops as in the USA and Europe, and initially in Brazil, or through tax rebates and incentives in the biofuels industry.