Assessing the economic viability of biofuel production in South Africa

Magister Economicae - MEconAgainst the backdrop of rising fuel prices and increasing transport fuel demand, biofuel production, driven by the potential to contribute to energy security, climate change mitigation and rural development has experience rapid growth in recent years. Apart from a few private initiatives, South Africa has no commercialized biofuel industry to date. The concerns are that economic, environmental and socio economic issues can be a hindrance to the success of the industry. In response to these concerns this research intends to ascertain whether biofuel production could offer a viable economic alternative to fossil fuels in South Africa. For decision makers it is hard to find reliable reference material and solid guidance. Uncertainty over the potential risks and benefits has left potential investors unsure whether biofuel production could be a viable investment opportunity. The aim of this study was to determine if the benefits derived from biofuel production are significant enough to justify the substantial investment required. The findings reveal that in the absence of clear government strategies and the availability of low cost feedstocks the production of biofuel cannot be viewed as viable. The results show that bioethanol from grain sorghum and sugarcane are not economically viable since the results turn out to be negative in terms of both net present values (NPV) and internal rate of return (IRR) calculations, thus rendering a viable payback (PBP) period as unattainable. Similarly, the NPV and IRR for biodiesel from soya beans and sunflower is negative and the PBP also unattainable. Sensitivity analyses indicate that these crops (except for sunflowers) could only become viable if there were to be a substantial reduction in feedstock prices. All other changes in parameters would not render any of the production plant viable