Brian Tait

July 2012

Financial models of bioethanol and biodiesel manufacture were constructed ◦ Bioethanol from grain sorghum (2% blending with petrol) ◦ Biodiesel from soya beans (2% blending with diesel) ◦ With and without ROA producer incentive proposed by Infinergy to

the DOE

Financial models (without incentive) were transformed into economic models using shadow pricing

All models are in real terms based on 2011 prices

CBAs were constructed for bioethanol and biodiesel individually

The following economic benefits are considered: ◦ Net revenue from bioethanol and biodiesel manufacture (pre-tax) ◦ Value of reduction in GHG emissions ◦ Value of increased energy security ◦ Value of additional direct job creation on the biofuels plants ◦ A separate analysis considers the value of economy-wide job creation

in addition to the above factors

The following economic costs are considered: ◦ Capital investment in the biofuels manufacturing plants ◦ Investment in working capital

Individual CBAs aggregated to present consolidated biofuels industry CBA

Capex ◦ Direct transfer payments (finance charges, interest, etc.)

were removed and a shadow exchange rate applied to those components that would be imported

Biofuel Selling Price ◦ Excludes any incentives/tax rebates ◦ Cost of blending is subtracted as an economic cost

Raw Materials ◦ Valued at export parity (alternative value)

By-Products ◦ Valued at market prices

Utilities ◦ Based on opportunity costs

Labour ◦ Direct plant labour valued at market prices (skilled/semi-

skilled nature of jobs)

Other Direct and Indirect Costs ◦ Valued at market prices

Carbon Dioxide ◦ Sourced from European Commission Guidelines ◦ Value = R252/t CO2eq

◦ Range: R70 – 454/t CO2eq

Energy Security ◦ Biofuels are local production from indigenous sources ◦ Based on avoided cost of strategic stockholding

(infrastructure and product cost) ◦ Value = 49 c/l of biofuel (less than 1 c/l over total fuel

pool) ◦ Range: 42 – 56 c/l

Direct Jobs ◦ Direct jobs created were included as a benefit to the economy

due to the current global recessionary environment, as well as the on-going high unemployment levels in South Africa, i.e. they are resources that have been added to the economy, and are hence a benefit

◦ Valued at actual cost of plant jobs only (excludes management and office staff)

Economy-wide Jobs ◦ Separate CBA analysis includes economy-wide job creation as

this is the main driver of biofuels in South Africa ◦ Based on shadow price of labour (R27 per hour) or R53,077

p.a. per job ◦ Range: R12,093 – R73,908 p.a. per job

Bioethanol

Biodiesel

Conservative estimate of 55,700 jobs based on direct plant jobs, raw material production and transport only

Bioethanol Industry without Incentives

Bioethanol Industry with Incentives

Incentives required (R/l bioethanol) – Real values

Discount Rate 8%NPV (R'000) -1,824,854 IRR 0.6%

Discount Rate 8%NPV (R'000) 262,903 IRR 9.1%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 20321.70 1.69 1.59 1.50 1.49 1.39 1.29 1.20 1.10 1.00 0.90 0.81 0.71 0.61 0.52 0.25 0.15 0.05 -

Biodiesel Industry without Incentives

Biodiesel Industry with Incentives

Incentives required (R/l biodiesel)* - Real values

* Excludes tax rebate of R0.76/l

Discount Rate 8%NPV (R'000) 451,000 IRR 10.2%

Discount Rate 8%NPV (R'000) 990,880 IRR 13.1%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 20320.77 0.69 0.62 0.54 0.47 0.39 0.32 0.24 0.17 0.09 0.02 - - - - - - - -

Bioethanol Industry

Bioethanol Industry including Economy-Wide Job Creation

Discount Rate 8%NPV (R'000) 347,191 IRR 9.2%BENEFIT-COST RATIO 1.20

Discount Rate 8%NPV (R'000) 6,592,468 IRR 27.3%BENEFIT-COST RATIO 3.44

Biodiesel Industry

Biodiesel Industry including Economy-Wide Job Creation

Discount Rate 8%NPV (R'000) 3,616,076 IRR 22.5%BENEFIT-COST RATIO 2.78

Discount Rate 8%NPV (R'000) 23,442,661 IRR 81.4%BENEFIT-COST RATIO 12.07

Consolidated Biofuel Industry

Biofuel Industry including Economy-Wide Job Creation

Discount Rate 8%NPV (R'000) 3,963,260 IRR 15.3%BENEFIT-COST RATIO 1.89

Discount Rate 8%NPV (R'000) 30,035,122 IRR 52.0%BENEFIT-COST RATIO 7.18

Note effect of ROA incentive in reducing price risk to biofuel manufacturer, who must accept a regulated selling price

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Financial Model of Industry Without Incentive - IRR

Capital Cost Raw Material price Ethanol Price DDGS Price

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Financial Model of Industry With Incentive - IRR

Capital Cost Raw Material price Ethanol Price DDGS Price

Note the extreme sensitivity of biodiesel to soya meal price. If the soya meal price falls to export parity because of biodiesel production in excess of 2% blending, the ROA incentive would have to increase substantially in order for the manufacturer to remain viable

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Financial Model of Industry Without Incentive - IRR

Capital Cost Raw Material price Biodiesel Price Soya Meal Price

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Financial Model of Industry With Incentive - IRR

Capital Cost Raw Material price Biodiesel Price Soya Meal Price

Monte Carlo simulation performed on CBA by defining probability distributions for all the elements. Ranges of the surrogate prices were indicated previously

Standard deviation of Net Revenue was calculated from historical data

A standard deviation of 10% was applied to capex and direct labour

Biofuel industry excluding economy-wide job creation: ◦ 80% probability that NPV > R3.8 billion ◦ 99.97% probability that NPV > 0 ◦ 80% probability that IRR > 14.7% ◦ 99.97% probability that IRR > 8% (social discount rate) ◦ 80% probability that BCR > 1.84

Biofuel industry including economy-wide job creation ◦ 80% probability that NPV > R16.9 billion ◦ 80% probability that IRR > 34.7% ◦ 80% probability that BCR > 4.5

Total Output estimated from Input-Output tables of the South African economy

Total economic impact ±0.5% of GDP

Annual Value in R millions

Direct Income 901

Labour 152

Profits 749

Total Output 14,654

Total Operational Expenditure 6,224

Indirect and Induced Output 8,430

Total Taxes 628

Direct Taxes 174

Indirect Taxes 454

TOTAL ECONOMIC IMPACT 16,183

Localised impacts Distribution effects between income groups South Africa’s reputation Reduction in welfare payments Pollutant impacts of vehicle tailpipe emissions Population movements Clean Fuels II savings Vegetable oil production Eutrophication Higher sorghum and soya prices

Macro-economic effects are positive with improvements to South Africa’s Balance of Payments (import substitution), contribution to GDP and job creation

Economic impact analysis indicates a total economic impact of R16.2 billion, of which R14.7 billion is the result of an increase in total output. Total job creation is estimated at least 55,700 new jobs

The results of the financial analysis confirm that a producer ROA incentive would be appropriate in terms of ensuring the financial sustainability of the investments. The incentive accomplishes this by mitigating commodity price risk

The individual biodiesel and bioethanol cost benefit analyses confirm that these industries have a net benefit to South Africa – and by extension the consolidated biofuels industry has a NPV of R3,963 million with an IRR of 15.3%

If economy-wide job creation is taken into consideration, the NPV increases to R30 billion and the IRR increases to 52.0%

Non-quantified costs and benefits are also listed and in balance it appears that the positive externalities outweigh the negative impacts, but these effects could not be quantified

Hence, it is recommended that the biofuels industry in South Africa be supported by all stakeholders and at all levels of Government

Financial support is recommended as per the ROA incentive to ensure industry sustainability. The incentive represents a direct transfer within the economy and is not considered an economic cost

The value generated by the industry represents a transfer of wealth from motorists (fuel costs and possibly increased levies) to the second economy and is consistent with all South African policies including the IPAP II and the New Growth Path