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Tuesday, 25 February 2014

Economics of Biofuels

A recent World Bank paper by Sinkala et al examines the economics of biofuels in Zambia. Here are their broad conclusions:

With increased global interest in biofuels, Zambia, a Sub- Saharan African country that entirely depends on imports for its petroleum supply, is planning to implement blending mandates for biofuels. But, a large number of issues—including production costs of biofuels, land requirements to meet the mandates, and environmental benefits—have not yet been explored.

This study aims to contribute in filling this gap. It finds that depending on feedstock type, costs of ethanol production range from US$0.360 a liter to US$0.680 a liter while the costs for biodiesel production range from US$0.612 a liter to US$0.952 a liter. Even if lower energy contents of biofuels are taken into account, the analysis shows that biofuels are cheaper than their petroleum counterparts.

Considering the cost advantage of these biofuels over petroleum products and the availability of surplus agricultural land, Zambia is likely to benefit from the development of a biofuel industry. Biofuels is expected to reduce Zambia’s petroleum import bill, which currently stands at more than US$700 million, enhance food security by providing incentives to increase yields, and increase affordability and accessibility to modern energy in the country where 77 percent of the population still lacks access to modern energy. It could also stimulate rural employment and development.

(Source: World Bank Policy Research, June 2013)
Essentially what they seem to be saying is that biofuels make economic sense in Zambia. According to the authors biofuels would be very competitive against the current GRZ strategy of procuring petroleum via current supply chain. With the current wholesale price around $1 per litre. Sinkala et al say biofuels would have a production cost less than $0.65 per litre. The wider economic benefits would also be huge in terms of employment.

The analysis can certainly be improved but it is broadly persuasive. But presumably not persuasive enough for the current government to do anything about it. What is clear is that GRZ do not seem to think biofuels are the solution towards energy independence. Although it has sounded off interest in encouraging biofuels there’s nothing on the table before 2016. It January Government signed an MoU with Zambia Sugar to facilitate the negotiations for an off-take contract for ethanol production in order to “reduce the escalating prices of fuel”. But crucially Zambia sugar does not this a plant can be constructed before 2017.

Most importantly the negotiations will be around how much ethanol the Zambia sugar produce and what sort of pricing it can expect before the construction of the plant begins. This will guarantee a market for future production of ethanol and improve chances of getting the necessary financing for the construction of the plant. Zambia sugar are wary of undertaking any investment which will not generate significant returns. As long as Government is bent on protecting its current inefficient supply chains it won't invest in biofuels.


AUTHOR
Chola Mukanga | Economist Copyright © Zambian Economist 2013

5 comments:

  1. What would make far more sense for Zambia would be to encourage electric vehicles. Electric vehicles would run at 10% of the cost of fueled vehicles at current electricity prices. They have some limitations for speed and distance but are fine for most purposes. ZRA's unreasonable import duty is currently the biggest block to their widespread adoption. Second is lack of reliable information on quality.

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  2. R Henson your comment shows you do not understand Zambia. The electricity supply is erratic and charging points could only be located along the line of rail and in major urban centres. ALso the great distances travelled daily given that most of our towns are not geographically compact impose significant hurdles in the adoption of electric vehicles

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  3. Coincidentally, I have spent the month researching the biofuel (ethanol specifically) industry/market for automotive purposes in Zambia for a client so I actually read the paper along with others authored by Thomson Sinkala.
    Based on my preliminary research, it appears that one of the major hurdles hindering commercial production of biofuels in Zambia is guidance on pricing. Other hurdles have been the inability for the private sector to access financing for biofuel distilleries so I don’t know that I entirely agree with your statement asserting that “GRZ do not seem to think biofuels are the solution towards energy independence” I have not come across any proof suggesting this and if I missed it perhaps you may point me to your sources.
    In fact Sinkala wrote “In Zambia, the cost of lending at 16% is relatively high and the biofuels industry is very new to local banks so that the industry faces investment hurdles. Government policy intervention would be needed to reduce this financial hurdle (as mentioned above). While the government could set up a dedicated fund to support new and emerging industries, other option that does not cost the government is to find a market for carbon mitigated through the use of biofuels.”
    This suggests to there a plenty of options on the table for the industry to take off.
    Further, you wrote: “January Government signed an MoU with Zambia Sugar to facilitate the negotiations for an off-take contract for ethanol production in order to “reduce the escalating prices of fuel”. But crucially Zambia sugar does not this a plant can be constructed before 2017.”
    Your statement seems to suggest that a biofuel production project can be undertaken in a relatively short period of time when the reality is that such a project requires a substantial initial capital injection north of USD100million! If one factors in the level of risk associated with such a project and the fact that this is a nascent industry in Zambia, it’s clear to see that your expectations are way out of line with the industry realities. I respectfully disagree with your assessment but thank you for shining a spotlight on Thomson Sinkala’s et al study either way.

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  4. For biofuel to take off, we need clear guidelines and bylaws to enable investment and incentives. We also think of only ethanol and biodiesel as biofuels!!

    There are very good renewable fuel alternatives from vegetable oil (in addition to biodiesel) which can be successfully introduced in Zambia. This industry is new to Zambia and therefore it will grow only cautiously. Small but profitable investments are possible that can grow as policy is placed and awareness and market gets established. All that is needed is locating the right product based on sustained availability of raw materials, locally as well as within the close neighborhood.

    I am actually working out setting up a small biofuel unit in Zambia to produce biofuel from waste veg oil that can compete with bio-diesel on energy content. Biodiesel is modifying veg oil chemically, involving hazardous raw materials and producing effluents that need additional investment for disposal or value addition. There are methods where waste veg oil can be physically modified to produce biofuel oil with better performance parameters and with no effluents for disposal.

    We need info flow and education to find suitable biofuel alternatives and Govt activism to make this a sustaining industry over a medium term.

    Raw material availability, sustained market, ideal end-user pricing and encouraging margins for investors, clear policy guidelines are the essential ingredients for the success.

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  5. I did a little research on biofuel in Zambia and my findings were that lack of clear policy guidelines from government is the major hold for this industry that presents so many wonderful opportunities

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