CARENSA

Thematic Report 3: Markets

Bioenergy for Sustainable Development and Global Competitiveness: the case of Sugar Cane in Southern Africa A compilation of Results from the Thematic Research Network:

Cane Resources Network for Southern Africa (CARENSA)

F. Yamba Centre for Energy, Environment, and Engineering, Zambia G. Brown Imperial College, London F. X. Johnson Stockholm Environment Institute L. Jolly International Sugar Organisation J. Woods Imperial College, London

-1CARENSA/SEI special report series CARENSA/SEI 2008-03

November 2008

CARENSA

Thematic Report 3: Markets

This report along with related information is available on the CARENSA website:

www.carensa.net

This report is a part of the series of-2five Thematic Reports compiled under the CARENSA work programme, and should be thus cited.

CARENSA

Thematic Report 3: Markets

Bioenergy for Sustainable Development and Global Competitiveness: the case of Sugar Cane in southern Africa A compilation of Results from the Thematic Research Network:

Cane Resources Network for Southern Africa (CARENSA)

F. Yamba Centre for Energy, Environment, and Engineering, Zambia G. Brown Imperial College, London F. X. Johnson Stockholm Environment Institute L. Jolly International Sugar Organisation J. Woods Imperial College, London

-3CARENSA/SEI special report series CARENSA/SEI 2008-03

November 2008

CARENSA

Stockholm Environment Institute Kräftriket 2B SE -106 91 Stockholm Sweden Tel:+46 8 674 7070; Fax +46 8 674 7020 E-mail: [email protected] Web: www.sei.se

Scientific Editors: Bothwell Batidzirai, Chinhoyi University and Francis X. Johnson, Stockholm Environment Institute Technical Editor: Kanika Pal, Winrock International India Layout & Design: Jaison Jose, Winrock International India

This report is available on line (www.carensa.net)

Copyright 2008 by the Stockholm Environment Institute. This publication may be reproduced in whole or in part and in any form for educational or non-profit purposes, without special permission from the copyright holder(s) provided acknowledgement of the source is made. No use of this publication may be made for resale or other commercial purpose, without the written permission of the copyright holder(s). ISBN: 978-91-86125-02-8 -4-

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ACKNOWLEDGEMENTS AND DISCLAIMER This report was the result of several years of fruitful collaboration among the thirteen CARENSA partners along with subcontractors and others who contributed valuable ideas and detailed data. Many persons gave their time above and beyond what was called for in order to evaluate the role that sugar cane and other productive energy crops can play in supporting sustainable development and global competitiveness in southern Africa. Thanks are extended to those who conducted a scientific peer review of the report: •

Mr. P.J. Manohar Rao from India, one of the world’s foremost experts on sugar cane, who has authored several books on sugar cane and its co-products;

The scientific editor for this report was Bothwell Batidzirai (Chinhoyi University, Zimbabwe). The technical editor and layout artist for this report were Kanika Pal and Jaison Jose respectively (Winrock International India). Special thanks are extended to the University of Mauritius for hosting a workshop and stakeholders meeting in November 2004, which brought together academic, industry, and government representatives to present and debate the key issues on this topic, and which provided a solid foundation for completing the analysis in this report, as well as in the other reports in the CARENSA series. The research programme that led to this report was supported under Contract A-42001-10103 in the European Commission Fifth Framework Research Programme, under which the Cane Resources Network for Southern Africa (CARENSA) operated as a Thematic Research Network. Additional funds were provided through the Swedish International Development Cooperation Agency (Sida) and Stockholm Environment Institute (SEI). The views expressed in the report are strictly those of the authors and do not necessarily represent those of their respective organizations nor do they represent the views of the European Commission, the SEI or Sida.

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TABLE OF CONTENTS ACKNOWLEDGEMENTS AND DISCLAIMER.....................................................5 PREFACE

.........................................................................................................11

1.

INTRODUCTION..............................................................................................13

2.

MARKETS AND THE SUGAR INDUSTRY IN SOUTHERN AFRICA....15

3

4

5

2.1

SUGAR MARKETS .........................................................................................15 2.1.1 Sugar production and utilisation .....................................................16 2.1.2 Preferential access arrangements ....................................................18

2.2

SOUTHERN AFRICAN SUGAR INDUSTRY .......................................................20 2.2.1 Salient features of sugar industry structure and ownership ............20 2.2.2 Increased smallholder participation and land reform......................21 2.2.3 Regulation and Institutional Arrangements ....................................22

2.3

POLICY CHALLENGES...................................................................................23 2.3.1 Domestic sugar policy reform.........................................................23 2.3.2 Economic integration within SADC ...............................................24 2.3.3 EU sugar policy reform...................................................................25 2.3.4 WTO Doha Round outcome ...........................................................26 2.3.5 The challenges in the context of projected sugar consumption growth........................................................................27

2.4

CONCLUDING REMARKS ..............................................................................28

MARKETS FOR SUGAR BASED ELECTRICITY AND BIO-ETHANOL.................................................................................................30 3.1

ELECTRICITY MARKETS ...............................................................................30

3.2

ETHANOL MARKETS ....................................................................................32 3.2.1 Feedstocks for Ethanol Production .................................................33 3.2.2 Potential Ethanol Demand ..............................................................34

TECHNOLOGIES, INVESTMENTS AND ECONOMICS ..........................36 4.1

ELECTRICITY ................................................................................................36 4.1.1 Electricity production technologies ................................................36 4.1.2 Investments and economics for electricity generation....................38

4.2

Ethanol ........................................................................................................39 4.2.1 Ethanol production technologies.....................................................39 4.2.2 Commercial viability of ethanol production ...................................40 4.2.3 Investment and Economics for Ethanol Production........................44

IMPLEMENTATION STRATEGIES .............................................................49 5.1 Ethanol Scenarios 5.1.1 Ethanol and sugar production model ..............................................50 5.1.2 Strategies for ethanol programme development .............................58 5.2

COGENERATION SCENARIOS – ELECTRICITY POTENTIAL ..............................62 5.2.1 Strategies for Cogeneration Programme Development ..................65 -6-

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6

7

BARRIERS TO IMPLEMENTATION OF CANE RESOURCE UTILISATION...................................................................................................68 6.1

BARRIERS TO ETHANOL PRODUCTION..........................................................68

6.2

BARRIERS TO ELECTRICITY PRODUCTION ....................................................69

6.3

CONCLUDING REMARKS ..............................................................................70

THE ROLE OF THE CLEAN DEVELOPMENT MECHANISM (CDM) IN THE SUGAR INDUSTRY...........................................................................72 7.1

OVERVIEW OF CLEAN DEVELOPMENT MECHANISM .....................................72 7.1.1 Eligible project activities for CDM.................................................73 7.1.2 Classification of CDM project activities.........................................74 7.1.3 Small-scale CDM projects ..............................................................74 7.1.4 Status of CDM Projects ..................................................................75

7.2

POTENTIAL CDM PROJECTS IN SOUTHERN AFRICA .....................................76 7.2.1 Co-generation using Bagasse..........................................................77 7.2.2 Bio-ethanol under CDM .................................................................79

7.3

CLOSING REMARKS ......................................................................................81

REFERENCES .........................................................................................................82 APPENDIX A: CASE STUDY: SOUTH AFRICAN SUGAR INSTITUTIONAL ARRANGEMENTS .......85 APPENDIX B: THE SUCCESS OF COGENERATION POLICIES IN MAURITIUS .......87 APPENDIX C: DRIVERS OF SUGAR CONSUMPTION GROWTH ...................................................88 Consumption Prospects ..............................................................................................93

LIST OF TABLES Table 1:

SADC sugar production, consumption and exports to preferential markets: 2003-2005 average (thousand tonnes raw value)........................................17 Table 2: Market distribution of domestic production by country (%) ......................18 Table 3: Cane Resource Base in Southern Africa (2004) .........................................30 Table 4: Projected Bagasse Resource Availability ...................................................31 Table 5: Fossil Energy Balance for Selected Fuel Types .........................................33 Table 6: Ethanol production feedstocks requirements at 10% blending for selected SADC countries ..........................................................................................35 Table 7: Typical average Parameters of Sugar Factories..........................................37 Table 8: Co-generation plant parameters, investment, operations and maintenance costs.............................................................................................................38 Table 9: The Ethanol Threshold Price ......................................................................42 Table 10: Fuel Excise Exemptions..............................................................................44 Table 11: Ethanol yield from sugarcane by feedstock type ........................................45 Table 12: Ethanol production costs by country/region and feedstock ........................47 -7-

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Table 13: Table 14: Table 15: Table 16: Table 17: Table 18: Table 19: Table 20: Table 21: Table 22: Table 23: Table 24: Table 25: Table 26: Table 27: Table 28: Table 29: Table 30: Table 31: Table 32:

Production Parameters ................................................................................48 Electricity Demand Forecast for SADC .....................................................49 Ethanol Potentials from C-molasses ...........................................................52 Gross Ethanol Potentials from Total Sugarcane Production Dedicated to Ethanol ........................................................................................................53 Ethanol Potentials after Meeting Local Sugar Demand..............................54 Ethanol Potential with Sugar Exports Declining Linearly to Zero in 2015 55 Ethanol Potentials with Sugar Exports Stabilized at 2002 levels ...............56 Net Regional Ethanol Surpluses with Ethanol Production from C- molasses only and E5 Ethanol Blend .........................................................................57 Sweet Sorghum Requirements for Supplementing C-molasses and to Meet Regional E5 Ethanol Demand.....................................................................57 Projected Targets for Ethanol Provision .....................................................58 Distribution of Sugar Mill Sizes in Southern Africa ..................................61 Electricity generation potential from sugar mills using improved backpressure turbines (at 20 kWh/tonne cane and 20 bar).................................64 Electricity generation potential from sugar mills using CEST technology (at 92 kWh/tonne cane and 45 bar) ..................................................................64 Electricity generation potential from sugar mills using CEST technology (at 143 kWh/tonne cane and 82 bar) ................................................................64 Electricity generation potential from sugar mills using BIG-CC technology (at 650 kWh/tonne cane).............................................................................65 Projected Share of Electricity Demand to be Met From Bagasse...............65 Barriers to Production and Use of Bio-ethanol...........................................68 Barriers to Production of Electricity in Sugar Industries............................69 List of project categories eligible under the CDM......................................75 Ethanol Production Prices for Different Scenarios at 20% IRR .................80

LIST OF FIGURES Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15:

Sugarcane Resources ..................................................................................15 Distribution of sugar sales produced in Southern Africa............................17 Preferential exports as a share of production (average 2005/06)................19 Preferential prices over time. ......................................................................20 Sugar Consumption in 12 SADC Countries ...............................................27 Sugar Consumption in 12 SADC Countries Compared to S. Africa ..........28 SAPP Installed Electricity Generation Capacity (2006) (Total 45 GW) ....31 SADC Projected Electricity Supply Capacity in 2030 (Total 80.2 GW)....32 SADC projected sustainable electricity supply mix scenario for 2030 (Total 80.2 GW).....................................................................................................38 Variation of bagasse consumption with power capacity for selected sugar factory sizes ................................................................................................39 Trade-off Between Ethanol and Sugar Prices.............................................41 Wholesale ethanol prices in Brazil (Centre/South).....................................43 Distribution of Ethanol production costs –(C Molasses feedstock)............45 Comparison of Ethanol Production Costs...................................................46 Ethanol and Sugar Production Model .........................................................50 -8-

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Figure 16: Regional Distribution of Ethanol Surpluses with Ethanol Production from C-molasses only and E5 Ethanol Blend (million litres)..............................57 Figure 17: Ethanol Production Growth at Constant Rate to Meet 20% of Regional Gasoline Demand in 2030...........................................................................59 Figure 18: Number of mills and indicative mill sizes in Southern Africa (2004-05)...61 Figure 19: Mill Modification Flowchar........................................................................62 Figure 20: Flowchart for Switch to B-molasses Feedstock..........................................62 Figure 21: Growth of Cogenerated Electricity (2005 – 2030) assuming a constant 24% growth rate per annum ................................................................................66 Figure 22: Flowchart for Transition to Higher Surplus Electricity Production............67 Figure 23: Analysis of Registered Projects in UNFCCC till 6th March 2006 ..............76 Figure 24: Annual CER generation from fuel type in Renewable Sources..................76 Figure 25: Cogeneration electricity financials – BAU .................................................77 Figure 26: Cogeneration electricity financials – evenly spread CDM payments .........78 Figure 27: Cogeneration electricity financials for CDM with 33% down payments ...78 Figure 28: Ethanol financials for BAU Scenario .........................................................79 Figure 29: Ethanol financials for evenly spread CDM payments ................................80 Figure 30: Ethanol financials for CDM with 33% down payment...............................80

ACRONYMS ABARE ACP AfDB AREED BAU BIG/CC BTPF CARENSA CDM CEEEZ CER CERPA CEST CHP CIDE CIF COMESA DBSA DRC DTI EBA EU FAO FINESSE GHG HFC

The Australian Bureau of Agricultural and Resource Economics African, Caribbean and Pacific (states) African Development Bank African Rural Energy Enterprise Development Business As Usual (scenario) Biomass Integrated Gasifier – Combined Cycle Bagasse Transfer Price Fund Cane Resources Network for Southern Africa Clean Development Mechanism Centre for Energy, Environment and Engineering Zambia Certified Emission Reductions Certified Emissions Reduction Purchase Agreement Condensing Extraction Steam Turbine Combined Heat and Power Contribuição de Intervenção de Domínio Econômico (Intervention Contribution of the Economic Domain charge) of Brazil Cost, Insurance and Freight Common Market for Eastern and Southern Africa The Development Bank of Southern Africa Democratic Republic of Congo Department of Trade and Industry Everything But Arms (trade agreements) European Union Food and Agricultural Organization (of the United Nations) Financing Energy Services for Small Scale Energy-users Green House Gas Hydro-Fluoro-Carbon -9-

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ICMS IPP IRR LDC MMT MTBE PDD PIN PROALCOOL REEP RETs SACU SADC SASA SAPP SEFI SEI SIE SIT SMRI SPS SUCOMA TRQ UNFCCC WTO

Imposto sobre Circulação de Mercadorias e Serviços, a valueadded tax (of Brazil) Independent Power Producer Internal Rate of Return Least Developed Countries Methylcyclopentadienyl manganese carbonyl Methyl Tertiary Butyl Ether Project Design Document Project Idea Note Programa Nacional do Álcool (Brazil: National Alcohol Program) The Renewable Energy & Energy Efficiency Partnership Renewable Energy Technologies Southern African Customs Union Southern African Development Community South African Sugar Association Southern African Power Pool Sustainable Energy Finance Stockholm Environment Institute The Sugar Industry Efficiency Act (of Mauritius) Sugar Investment Trust (of Mauritius) Sugar Milling Research Institute Special Preferential Sugar (trade arrangements) Sugar Corporation of Malawi Tariff-rate quota (of the US) United Nations Framework Convention on Climate Change World Trade Organization

UNITS AND SYMBOLS AUD bbl GWh ha kWh ML Mpa MW R$ tc UHC USD

Australian dollar barrel (of crude oil) Gigawatt hours hectare kilowatt hours million litres MegaPascals Megawatt Brazilian Real tonnes of (sugar) cane Unburnt Hydrocarbons United States Dollar

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CARENSA

PREFACE This report covers the markets phase within the CARENSA work programme. The CARENSA series of reports provide a critical assessment on the role of sugar cane resources in promoting sustainable development and global competitiveness in southern Africa. Among the many agricultural sources of biomass, sugar cane has special significance for the developing world, due to its high photosynthetic efficiency, its limitation to tropical and sub-tropical climates, and the long experience with its cultivation in developing countries. The CARENSA reports also briefly consider— within a similar context—the role of other highly productive energy crops such as Sweet Sorghum. The CARENSA series includes the following reports: • Thematic Report 1: Agriculture • Thematic Report 2: Industry • Thematic Report 3: Markets • Thematic Report 4: Impacts • Thematic Report 5: International Experiences and Comparisons • Thematic Report 6: Synthesis and Integration Growing concerns worldwide about the impacts of climate change and the world’s increasing dependence on fossil fuels have intensified interest in bioenergy and biofuels. The potential expansion of sugar cane and other highly productive energy crops in the developing world highlights important linkages among energy, environment and development goals across all scales—from local to global. As global markets develop and expand, it remains important that such crops be grown in the regions where they are most productive, so as to maximize their benefits and minimize negative impacts. The CARENSA reports address key issues across all relevant scales—local, national, regional, and global—based on the recognition that sugar cane has become a truly global resource for renewable energy and sustainable development. The reports draw on the many topics (work packages) within the CARENSA work programme, including: • Agronomy & Land Resources • Harvesting and Delivery • Process Systems Analysis • Fibre Resources • Sugar Resources • Policies and Regulations • Trade, Financing, & Investment • Implementation and Strategies • Socio-economic Impacts • Environmental Impacts • Risk Analysis & Competitiveness • Sustainable Development • International Experiences & Comparisons • Industry Perspectives • Communications • Dissemination -11-

CARENSA

CARENSA brings together many different types of actors and stakeholders, representing government agencies, NGOs, industry, research institutes, university research groups, and international organizations: 1) SEI, Stockholm Environment Institute (Coordinator) 2) IC, Imperial College, London, UK (Principal Contractor) 3) UM, University of Mauritius, Chemical &Sugar Eng. Dept. (Principal Contractor) 4) UND, University of Natal, Durban, South Africa (Principal Contractor) 5) AUA, Agricultural University of Athens, Greece (Member) 6) CIRPS, Interuniversity Research Centre on Sustainable Development, Italy (Member) 7) BUN, Biomass Users Network, Zimbabwe (Member) 8) CEEEZ, Centre for Energy, Environment, and Engineering, Zambia (Member) 9) ISO, International Sugar Organisation (Member) 10) FAO, Food and Agricultural Organisation (FAO), United Nations (Member) 11) WII, Winrock International India (Member) 12) CENBIO, National Reference Centre for Biomass, Brazil (Member) 13) SADC, Southern African Development Community (Member) 14) UNICAMP, University of Campinas (Member) In addition to network members, representatives from many other organizations from both public and private sectors were invited to CARENSA workshops and seminars. Sugar cane has come to be associated with the production of bio-ethanol, particularly in Brazil, where bio-ethanol meets a significant share of the demand for transportation fuels. Sugar cane has also been associated with cogeneration of electricity from the significant amount of residues that remain after production of sugar, such as in Mauritius, where a significant share of the country’s electricity generation now comes from the efficient systems installed at sugar factories. Many other countries have been encouraged by developments in Brazil, Mauritius, and elsewhere, and have established new programmes for expanded energy generation from sugar cane. Indeed, some future scenarios are based on using sugar cane predominantly or even solely for its energy production, as it provides an economically competitive and climate-neutral renewable energy resource. Although the CARENSA reports focus on bio-ethanol and cogeneration because of their commercial significance, the reports also include some of the other “by-products” or “co-products” that can and have been produced from the sugar cane crop. Sugar cane is in fact also significant for its versatility as an economic resource; a wide variety of products have been developed from it to provide food, feed, and fibre as well as fuel. This versatility of sugar cane is valuable in economic terms, as it allows companies and investors to reduce the risk associated with relying mainly—or only— on one product, as has been the case with sugar markets, where rather complicated preferences and special arrangements have been used to protect certain segments of the market from competition. As these preferential markets are gradually removed, the discipline of market competition can help to unleash the potential of sugar cane as a global and sustainable resource. -12-

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1.

Introduction

Modern use of biomass energy has increased in many parts of the world. The drivers have been mainly market based, particularly the soaring oil prices, and environmental concerns such as meeting the Kyoto Protocol commitments in greenhouse gases reduction (Faaij and Domac, 2006). A reliable supply and stable demand of bio-energy is vital to develop sustainable market activities. It is anticipated that the pressure on biomass resources will increase with the expected high energy demand both at national and global levels. With the relatively low biomass production costs in many developing countries, opportunities exist not only for socio-economic development, but also for export and trade of biomass. The exploitable bio-energy potential of the sub-Saharan Africa region is significant. Economic integration in southern Africa through the Southern African Development Community (SADC) makes the region particularly appealing for bio-energy development, given the efforts aimed at lowering trade barriers and the harmonization of standards and regulations in the SADC region. One area that is poised for great opportunities is the sugar industry. This is despite the fact that sugar production by itself is unlikely to be rewarding, given decisions to reduce preferential market access to the African Caribbean and Pacific (ACP) countries. Two lucrative coproducts are electricity from bagasse and bio-ethanol from cane sucrose. While the former may only have a domestic and regional market, bio-ethanol has an additional opportunity on international markets (Johnson and Matsika, 2006). In the sugar industry, analysis of bio-energy markets is complicated by the highly dynamic global sugar markets. With minor exceptions, there is very little "free trade" in sugar in the sense that production and trade are seldom free of government intervention (EDIS, 2006). Protectionist policies extend to the trade as well. Essentially all governments intervene in sugar trade with various policies, control devices, and/or exclusive trade agreements. These intervention policies insulate domestic sugar markets from the "free" international market. It is not surprising that, under these circumstances, the domestic price of sugar does not necessarily reflect the price of sugar on the world market. There are other examples of direct government intervention in many countries. The real world "free" market (only 15% of all sugar produced) is, thus, a residual market or a market of left-overs from domestic needs (75%), and/or pre-arranged deals (10%). This "free market" often becomes a dumping ground and remains relatively "thin" compared with world supply and demand (Alvarez and Polopolus, 2008). Like the rest of the world, the sugar industry in southern Africa has faced increasing competitive pressures in recent years due to factors such as, saturated demand in industrialized countries and competition from other sweeteners, which has resulted in low and/or fluctuating sugar prices. These difficulties have increased economic incentives for sugar producers to diversify their product portfolio by investing in renewable energy applications. Diversification of sugar companies into renewable energy has been slowed by institutional barriers, and by continued price supports for sugar production around the world (Morales and Johnson, 2002).

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Depending on the product under consideration, i.e sugar, electricity, or ethanol, the main driving forces for market diversification include the following: • Uncertainties in oil and sugar prices • Resource availability • Need for a sustainable electricity supply in the Southern African Power Pool (SAPP) countries • Environmental policies such as substitution of lead as an octane enhancer • Industry competitiveness • The role of CDM (Clean Development Mechanism) All these drivers favour diversification in the sugar industry into other co-products, particularly electricity and ethanol. However, there are challenges that come with diversification. These include national and international policies, market access, technological constraints, as well as other barriers that stifle the development of renewable energy. This report discusses key issues related to both commercial viability and technological feasibility of harnessing sugarcane resources in southern Africa. These include the following aspects: Markets; Technologies, Investments and Economics; Implementation Strategies; Barriers and Policy Issues.

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2.

Markets and the Sugar Industry in Southern Africa

The sugarcane plant is one of the world’s most cost effective and versatile renewable resource, offering many alternatives for production of food, energy, fibre and feed. Owing to climatic factors, sugarcane is found predominantly in the tropical developing world. It is a sustainable energy resource and offers new development alternatives. Sugarcane resources support a variety of uses and products based on different resource stream, viz, sugars, molasses/juice, and crop residues, as shown in Figure 1. Cogenerated electricity and ethanol are amongst the most important cane co-products in commercial terms, but there are other by-products shown in Figure 1. Sugar Cane

Sugar/Solids

Molasses/Juice

Crop Residues Steam & Electricity

Raw Sugar

Industrial Uses

Refined Sugar

Commercial Production

Paper industry Fuel Briquettes

Ethanol

Agricultural Prod.

Fertilizers Industrial Uses

Stillage

Industrial Prod.

Fertilizer Methane Figure 1: Sugarcane Resources

2.1

Sugar Markets

Southern Africa is home to some of the world’s most efficient and cost-competitive sugar industries, reflecting ideal growing conditions and efficient milling operations. However, not all countries have exploited their full potential. In the past, regional conflicts and internal strife resulted in the collapse of some industries (e.g. in Mozambique, now under rehabilitation), and at the same time hampered landlocked countries such as Malawi, Swaziland, Zambia and Zimbabwe from accessing the world market. The sugar industries of the region face new challenges and opportunities over the coming decade. These include reforms within and outside the 14 nation Southern African Development Community (SADC)1. 1

The 14 members countries of SADC: Angola, Botswana, Democratic Republic of Congo, Lesotho, Malawi, Madagascar, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe.

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Whilst sugar producers in southern Africa have little influence over these reforms, their outcomes and the way producers respond to them, will be crucial in determining whether the sugar industries of the region will be able to exploit their full potential, and to play a greater role in the world sugar economy. At the same time, outcomes relating to these reforms will also, as argued in this report, create significant new incentives for market diversification, and most particularly, will become a substantial driver for fuel ethanol production and cogeneration of heat and electricity. 2.1.1

Sugar production and utilisation

There are 10 sugar producing countries in southern Africa, the exceptions being Angola, Botswana, Lesotho, and Namibia. South Africa has the largest sugar industry, producing around half of SADC’s total sugar output. Other countries in SADC with sizeable sugar industries include Malawi, Mauritius, Swaziland, Zambia, and Zimbabwe. Tanzania and Mozambique are showing the fastest rates of growth, with significant rehabilitation of their factories over the past 5 years. The four countries in SADC that do not produce sugar meet their requirements through imports from both within and outside SADC. Table 1 presents an overview of the current sugar supply/demand balance in SADC countries. The last column shows each country’s overall surplus or deficit, after allowing for domestic consumption and preferential exports. In the table, countries that are part of the Southern African Customs Union (SACU)2 are identified also. The region as a whole produces over 5 million tonnes of sugar each year representing about 3.5% of world sugar output. Less than half of the production is consumed within the countries in which it is produced. Around 40% of SADC’s sugar exports are currently to the EU and the US under the four preferential access arrangements, which are discussed later in section 2.1.2. Table 1 also shows quantities of sugar produced within southern Africa and sold in domestic markets, preferential export markets and regional/world markets. Domestic market sales across the region (2.5 million tonnes) account for about 48% of regional output. Exports to regional/world markets (1.7 million tonnes) account for about 32% of output, while shipments to preferential markets (1.0 million tonnes) make up the remaining 21% (See Figure 2).

2 SACU is based on a revenue-sharing customs union between Botswana, Lesotho, Namibia, South Africa and Swaziland.

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Table 1: SADC sugar production, consumption and exports to preferential markets: 2003-2005 average (thousand tonnes raw value) Production

Consumption

Preferential exports

Surplus/ Deficit

EU sugar EU EU US Total protocol SPS EBA quota 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 29.9 29.9 119.6 32.7 0.0 19.9 172.2 119.6 32.7 0.0 49.8 202.1

Botswana Namibia South Africa Swaziland SACU

0.0 0.0 2 386.5 620.9 3 007.4

49.6 53.3 1 494.9 111.8 ‡ 1 709.6

(49.6) (53.3) 862.6 336.9 1096.6

Angola D.R Congo Madagascar Malawi Mauritius Mozambique Tanzania Zambia Zimbabwe Non-SACU SADC

0.0 63.3 26.9 259.0 545.2 231.9 235.6 240.9 456.0 2 058.8

208.3 85.0 125.9 133.8 40.4 135.3 235.7 111.9 299.6 1 375.9

0.0 0.0 11.7 25.0 501.6 6.0 10.6 7.5 29.3 591.7

0.0 0.0 2.0 10.8 18.2 5.7 1.7 9.4 24.3 72.1

0.0 0.0 0.0 10.7 0.0 19.5 31.3 9.7 0.0 71.2

0.0 0.0 0.0* 10.5 7.3 15.3 0.0 0.0 12.4 45.5

0.0 0.0 13.7 57.0 527.1 46.5 43.6 26.6 66.0 780.5

(208.3) (21.7) (112.7) 68.2 (22.3) 50.1 (43.7) 102.4 90.4 (97.6)

SADC

5 066.2

3 085.5

711.3

104.8

71.2

95.3

982.6

998.1

Source: ISO (2007a) Notes:

SPS = Special Preferential Sugar; EBA = Everything but Arms Initiative *Madagascar has not filled its quota allocation of 7,258 tonnes. ‡ ISO estimate. Swaziland sales to SACU amounted to an average of 322,900 tonnes. Note: There is no separate data available for Lesotho.

Regional & world markets 32%

Preferential exports 20%

Domestic markets 48%

Figure 2: Distribution of sugar sales produced in Southern Africa At a country level, the market distribution of locally produced sugar is as shown in Table 2. While the Democratic Republic of Congo (DRC) relies entirely on the -17-

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domestic market, Mauritius exports all its sugar to the preferential markets. Although South Africa exports 43% of its production, very little (1%) benefits from the preferential prices. Table 2: Market distribution of domestic production by country (%) Country D.R Congo Malawi Mauritius Mozambique South Africa Swaziland Tanzania Zambia Zimbabwe

Domestic Market 100 52 0 58 63 18 81 46 66

Preferential Export Markets 0 22 100 20 1 28 19 11 14

Regional & world markets 0 26 0 22 36 54 0 43 20

Derived from Table 1 above. 2.1.2

Preferential access arrangements

The amounts of sugar from southern Africa sold into preferential markets (EU and US markets) remains reasonably constant, while the world “free market” exports fluctuate relative to production. SADC sugar producers export sugar to the EU under three preferential access arrangements. • The Sugar Protocol3, for which there is a global quota of 1.4 million tonnes, of which around half is allocated to SADC sugar producers; • The Special Preferential Sugar (SPS) arrangement of the EU sugar regime, for which the global quota over the three year period was 0.2 million tonnes, of which SADC supplied 58%. • The EU’s Everything but Arms (EBA) initiative, which granted sugar producers in Least Developed Countries (LDCs) phased duty-free access to the EU sugar market. The countries qualifying for EBA under SADC are Angola, Democratic Republic of Congo, Malawi, Mozambique, Tanzania and Zambia. Over the past 3 years, EBA shipments have increased from 74,000 tonnes to 98,000 tonnes. Malawi, Mozambique, Tanzania, and Zambia accounted for 35 % of the trade volumes. However, increasing access for LDC’s under the EBA initiative has been at the expense of African, Caribbean and Pacific (ACP) countries supplying the EU under the SPS sugar access arrangements.

3 The ACP Sugar Group are the nineteen African, Caribbean and Pacific states signatories to the ACP/EU Sugar Protocol (Protocol 3 to Annex IV to the Cotonou agreement). The Sugar Protocol is an agreement between governments whereby the EU Member States guarantee to buy and import agreed quantities of sugar which the ACP Signatory States undertake to sell. See http://www.acpsugar.org/protocols.htm.

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Access to the US sugar market is granted through a tariff rate quota4, which has been set at the WTO minimum of 1.2 million tonnes annually. Only 0.1 million tonnes is allocated to SADC producers however. Of the 1 million tonnes that SADC countries export under preferential access arrangements, 76% is sold to the EU as part of the Sugar protocol. In Table 2 and Figure 3, the relative importance of preferential trade arrangements to each of the SADC countries is shown. Some countries (e.g. Mauritius), have very large EU and US quotas in relation to their production level, while others (e.g. South Africa), have negligible preferential access to the EU market compared to production. Preferential Exports as a share of production 120%

Export ratio

100% 80% 60% 40% 20%

M ad ag as ca M r al a M wi au M oz ritiu am s bi So qu ut e h Af r Sw ica az ila Ta n d nz an i Za a m Zi m bia ba bw e TO TA L

0%

Figure 3: Preferential exports as a share of production (average 2005/06) Source: ISO (2007a) The significance of these preferential markets is that the prices earned from sales of sugar in the EU and the US have been as much as two to three times higher than the world market price (see Figure 4). The guaranteed price for raw sugar under the ACPEU Sugar Protocol (since 1986) has been set at €523.70/tonne CIF, free out in bulk, European ports (basis 96 degrees polarization). For SPS, the price has been €496.80/tonne on the same basis since 2001. From 1995 to 2001, the SPS price was €442.70/tonne. Since 2000, the US raw sugar price has averaged USD 461 /tonne (€410/tonne). In stark contrast, world market prices have averaged €168/tonne (USD 183/tonne since 2000). Consequently, the future course of sugar prices in the EU and the US and the level of access will play an influential role in the future development of the sugar industries of southern Africa (and also incentives to diversity into fuel ethanol).

4

U.S. sugar policy is partly implemented through a tariff-rate quota (TRQ), which is continued under the 2002 Farm Act. The TRQ is a two-tiered tariff for which the tariff rate charged depends on the volume of imports. A lower (in-quota) tariff is charged on imports within the quota volume, and a higher (over-quota) tariff is charged on imports in excess of the quota volume. Each year, the Secretary of Agriculture announces the quantity of sugar that may be imported at the in-quota rate. Any quantity above that level would be imported at a higher tariff rate. The raw cane sugar TRQ is allocated to 40 countries. (Source: Haley and Suarez, 2002)

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Sugar price (Euro/ton)

600 500 400 300 200 100 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 US raw sugar price

EU SPS

EU sugar protocol

World market

Figure 4: Preferential prices over time. Source: ISO (2007a)

2.2

Southern African Sugar Industry

2.2.1

Salient features of sugar industry structure and ownership

There is a high and growing concentration of corporate ownership of sugar production within southern Africa. Only Mauritius has diverse corporate ownership. The two dominant companies (both South African) are Illovo Sugar Ltd and the Tongaat-Hulett Group Ltd. Illovo has consolidated its position as the dominant player in the region when early this decade it acquired Zambia Sugar Ltd. This built upon the company’s earlier acquisitions which included the purchase in 1997 of Lonrho’s sugar interests in Malawi, South Africa, and Swaziland (also Mauritius but has since divested), and more recently by investing in Mozambique and Tanzania. Tongaat-Hulett has invested in the Mozambique sugar industry (rehabilitating two mills) and has also acquired cane farming interests in Swaziland. Several Mauritian groups have entered into mainland southern Africa where they are investing in rehabilitation of sugar mills and estates in both Mozambique and Tanzania. These investments are underpinned by a common desire held by the dominant players to increase their presence in the region’s low cost sugar-producing countries. Importantly, cane land in both Mauritius and South Africa is mainly rain fed and cannot achieve the very high yields achieved in Malawi, Swaziland, Zimbabwe, and Zambia. In Swaziland, there is both private and government control of sugar industry. The Royal Swazi Sugar Corporation Limited (which incorporates Simunye Sugar Estate and Mhlumi mills), is Government owned although there are substantial private shareholders. On the other hand Ubombo Mill is a private company owned by Illovo Sugar South Africa (Whitehouse & Associates, 2003a). The Zimbabwean sugar industry is highly monopolised by four key players: Zimbabwe Sugar Refineries Corporation Ltd., Hippo Valley Estates Ltd. (Hippo), Zimbabwe Sugar Sales (P) Ltd., and Triangle Ltd. The industry is controlled by the Sugar Production Control Act of 1964, which effectively hinders the entry of any more players to the industry either at the milling or distribution end of the supply chain. Hippo Valley Estates Ltd is owned by Anglo American Corporation. Its mill processes -20-

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about 2.3 billion tonnes of cane to produce about 276,000 tonnes of sugar each season. The company produces 48% of Zimbabwe's raw sugar each year. Triangle Ltd is owned by the Tongaat Hulett Group and produces 296,000 tons of sugar per season (Whitehouse & Associates, 2003b). Mozambique’s sugar industry has been revived by a privatization programme, in which the country’s six sugar mills were put up for sale to private investors. The South African group, Tongaat Hulett took a 49% stake in two of these mills. The state owns the remaining share. A Mauritian firm, Compagnie de Sena took over a third and Illovo South Africa has taken over the Maragra Mill (Whitehouse & Associates, August 2003c). Sugar cane in Tanzania is primarily grown in four estates, namely Kilombero Sugar Company, Mtibwa Sugar Estate, Tanganyika Planting Company and Kagera Sugar Limited. Apart from these four, sugar cane is also grown by out growers at Kilombero and Mtibwa estates. On average, annual sugar production is in the region of 115,000 tonnes against local demand of 300,000 tonnes. Tanzania imports about 200,000 tonnes per annum to offset the shortfall. The industry is controlled by the Sugar Industry Act of 2001, which, amongst other things, established a National Sugar Board and a National Sugar Institute (Whitehouse & Associates, 2003d). Kilombero Sugar Co Ltd. is the largest sugar producer in Tanzania. Illovo Sugar SA has the majority shareholding in Kilembero with the Government also having shares in the company. Mtibwa Sugar Co Ltd was privatised in 1998, and has embarked on a 10 year development plan which intends to (among other expansion plans) establish a bagasse fired electricity generating plant, and to build a distillery for the production of industrial alcohol. Mtibwa is owned by Superdoll Trailer Manufacture Company Limited and managed by Agricultural Consultancy Services (Mauritius) Limited. Kagera Sugar Limited has operated a factory built in the 1950s, and was initially owned by private investors. In 1973, the Government took about 60 per cent of the company's shares, leaving the original owners with the remaining 40 per cent stake. It was privatized in 1998 and is now owned by the Super Group of Companies and Superdoll Trailer Manufacture Company Limited. Management is through The Agricultural Consultancy Services (Mauritius) Limited. Tanganyika Planting Company was bought in September 2000 by the Sucrerie des Mascarareignes Ltd., whose main shareholders are the Mauritian sugar company Deep River Beau Champ (60%) and Quartier Francais (40%) from Reunion. The company was nationalized in 1979, and privatised in 2000 (Whitehouse & Associates, 2002). The Malawian sugar industry is controlled by the South African company, Illovo Sugar who purchased the Malawi Sugar Corporation from Lonrho Africa. Illovo South Africa is the sole producer of sugar in Malawi, owning 61% of the Sugar Corporation of Malawi (SUCOMA), which operates two sugar mills- Dwangwa and Nchalo (Whitehouse & Associates, 2002). 2.2.2

Increased smallholder participation and land reform

The sugar industries in southern Africa are differentiated from the rest of the world by a high degree of vertical integration between cane growing and milling, except in South Africa. Smallholder participation in the sugar industry has been encouraged in some countries, but the contribution of the sector in terms of cane production is often small. -21-

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Smallholders account for around 25% of cane production in Mauritius, 20% in Zambia and 15% in South Africa. In Malawi, Swaziland, Zimbabwe, and Mozambique, smallholders typically account for less that 5% of cane output. In South Africa, the industry is responding to the government’s target of 30% Black freehold agriculture land ownership by 2015. This translates into the transfer of 78,000 ha of privately owned land in addition to the 18,000 ha transferred back into Black ownership over the past decade. The creation of the Inkezo Land Company in 2004 is expected to speed up land reform through the willing-seller-willing-buyer principle (Ministry for Agriculture & Land Affairs, 2006). Generally, sugar industries within SADC that are able to expand (primarily lower cost centers), will have the opportunity to offer greater smallholder participation. 2.2.3

Regulation and Institutional Arrangements

Sugar Industries worldwide are regulated. Regulation is mainly required to facilitate the relationship between the growers and millers. The way in which sugar industry revenues are shared between growers and millers is crucial. The division of revenues reflects the nature of the sugar industry where growers and millers are inter-dependent, and where the welfare of both parties is dependent on the performance of the other. Sugar industry institutional arrangements in each SADC country are, therefore, also important in understanding the way in which sugar industries might react to policy reform and deregulation outcomes, and to incentives for biofuels production. The economic reforms in SADC economies, accompanied by liberalization of the energy industries presents an attractive opportunity for the sugar industry to contribute to energy supply shortfall that are being experienced in several SADC countries. From 2007, the SADC region has begun to experience electricity shortfall and this will adversely affect industrial production. The entry of sugar industries as Independent Power Producers (IPPs) will go a long way in stabilizing localized and national electricity shortfall. There are tremendous technical, economic, and environmental benefits to be derived from the introduction of the embedded generator in the network. With embedded/distributed generation by isolated sugar mills, local quality and reliability of power is expected to improve, and complete blackouts can be avoided. The performance of local electricity distribution networks is expected to improve when the cogeneration plants are inter-connected to the grid. Local voltage profiles are improved and system losses are reduced. New investment in distribution and transmission infrastructure is avoided/ delayed, thereby reducing the price of electricity. In severely affected countries such as Zimbabwe, electricity blackouts have impacted severely on industrial production and discouraged investment. With stable electricity supplies, it is easier to promote the use of electricity, and promote national welfare improvement (Batidzirai, 2002). Mauritius represents a success story of utilizing cane based energy through cogeneration on a commercial scale. This has been attributed to close stakeholder cooperation in an environment with clearly defined government policy. However, some challenges encountered in the industry have been to do with revenue sharing between sugar cane farmers, millers, and the electricity utilities. The pricing formula for such sharing has even attracted protracted wrangling in the sector. See Appendix B for more details. -22-

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Appendix A gives an in-depth analysis of the regulatory framework in the South African sugar industry and the role played by the South African Sugar Association, the Sugar Act and Sugar Industry Agreement. It also provides a mechanism for sharing proceeds from sale of sugar products for all stakeholders including Growers and Millers.

2.3

Policy Challenges

A wide variety of national sugar policies exist within SADC and no two industries operate within the same institutional and policy framework. This poses significant challenges for closer economic integration and harmonization of sugar industry in the SADC region. Mauritius for instance, is very heavily exposed to the future course of sugar policy in the European Union. The prospect of significantly lower EU prices is providing strong incentives for millers to seek diversification. In South Africa, on the other hand, the key policy challenge is to adapt to the more liberal economic policy of its government, heightened in recent years by the appreciation of the Rand against the US dollar, which has reduced its level of protection on the domestic market. 2.3.1

Domestic sugar policy reform

SADC countries have liberalized their economies to varying extents and this is leading to deregulation of domestic sugar markets with consequent lower returns. For instance, the South African Sugar Association (SASA) and the Department of Trade and Industry (DTI) executed a Sugar Agreement in 2000 which deregulated the pricing of sugar. Previously the DTI was directly involved in setting the domestic sugar price, but with the new Agreement the domestic selling price was freed. Furthermore, SASA is no longer the single desk exporter of refined sugar. Instead, exports along with domestic sugar and all other bagged sugar exports are handled by the private sector (Economic Research Service, 2003). SASA retained single desk exporter status for bulk raw sugar exports. Importantly, a new sugar duty formula was adopted with the intention of making the sugar industry more responsive to world sugar prices. Duties are now based on the difference between the world price (20 day moving average of the London No. 5 price) and a set reference price (10 year moving average of the world price plus a 20% premium to compensate for protectionist policies in other sugar exporting countries). The tariff rate is then converted to Rand at the prevailing exchange rate, which means that the appreciation of the Rand over the past 2 years has directly led to a lower tariff and lower domestic prices (that is, millers and refiners price domestic sales in relation to the dollar-based reference pricing system which allows them to maintain domestic prices substantially above world market values) (SADC Technical Committee on Sugar, 2004). Consumer pressures (industrial users) together with the impact of WTO negotiations on agriculture (discussed below) means that the current high tariff levels benefiting South Africa’s sugar industry cannot be maintained in the future. Domestic sugar prices are set by different methods within SADC and all over the world. In most cases domestic prices are set in light of the cost of production of the local industry. -23-

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2.3.2

Economic integration within SADC

There will be strong and growing pressure to harmonise pricing policies within SADC in the longer term as the sugar industry becomes more fully integrated within SADC. The prospect of greater intra-regional trade as a result of SADC’s adoption of a free trade protocol in 1999 (effected in 2000) has been one of the reasons driving the dominant sugar companies in seeking investment in lower cost production countries. The objective of the protocol is to liberalise intra-regional trade, with a view to ensuring efficient production within the region in accordance with the economic principles of comparative advantage, thereby enhancing economic development in the region. Sugar is one of just three sensitive products that will not immediately be subjected to unrestricted free trade, for at least 10 years5. The provisional target date for free trade in sugar is 2012, subject to a mid-decade review. To regulate sugar trade within SADC, members negotiated a separate sugar trade protocol6. Negotiations between SACU and other non-SACU, SADC countries resulted in an agreement in October 2000, whereby SACU members granted nonreciprocal access to their markets as follows: • Each surplus producing country in SADC will be granted a pro rata share (according to that country’s production surplus in each year) of a quota that is equal to the annual growth in SACU sugar consumption. • An additional duty free quota of 20,000 tonnes is allocated among non-SACU members of SADC that are surplus sugar producers (Todd, 2001). Two key implications of this agreement are that: • The extent to which non-SACU SADC countries gain access to the SACU sugar market will depend primarily on the rate of growth of consumption within this market. • The quantitative access allocation for non-SACU countries of the SACU market growth will depend on their share of SADC’s production surplus. South Africa is the largest surplus producer within SADC and the only surplus sugar producers among the non-SACU SADC group are Malawi, Zambia and Zimbabwe. Swaziland, a SACU member, is the only other country producing a surplus in the region. Therefore, most of the growth in consumption within SACU will continue to be supplied by South Africa and Swaziland. Hence, other than the 20,000 tonnes that the SACU countries have granted exclusively to non-SACU SADC members, these countries will gain only a relatively small share of the SACU market. Over time, however, the volume of sugar supplied to SACU will grow as consumption grows. In addition, the number of non-SACU SADC countries supplying the SACU market is likely to increase, if as expected, the rehabilitation programs in Mozambique and Tanzania transform them into surplus producing countries. During the transition phase towards free trade, all SADC members aim for sugar trade to be in accordance with the terms of the protocol but retaining control of their domestic sugar policy and prices. Although sugar industries within the region could 5

The sensitive products include textiles and apparel, sugar, and motor vehicles. SADC countries wanted to regulate trade to ensure their respective industries would not be threatened by cross-border trade, reflecting disparities in the average level of domestic prices within SADC. Without the SADC trade protocol, South Africa and Mozambique in particular, with the region’s highest domestic prices would otherwise attract large quantities of sugar from regional producers. 6

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succeed in managing the transition to unrestricted free trade within the region, there will be strong and growing pressure to harmonize pricing policies. At the same time, WTO commitments and closer economic integration within Africa, under the Common Market for Eastern and Southern Africa (COMESA) trade zone, are also likely to lead to a gradual reduction in external tariffs (which support domestic prices). 2.3.3

EU sugar policy reform

The EU has been under pressure to reform its sugar policies which were ruled by the WTO to be in violation of the WTO Agreement on Agriculture “the EU failed to take the opportunity to provide developing countries with sufficient aid to help them develop their sugar industries to make them more efficient and sustainable...”. On 14 July 2004 the European Commission published its formal proposal for reforming the EU sugar sector in order to promote a more market-oriented and sustainable sugar sector. In February 2006, EU ministers formally adopted a reform on the EU sugar regime. The reforms came into force in July 2006, where the key point of reform was that Member States agree to a 36% cut in the guaranteed minimum sugar price. This will be accompanied by generous compensation for farmers and the establishment of a Restructuring Fund to encourage uncompetitive sugar producers to leave the sector. In order to implement this agreement, Member States in March 2006 endorsed the European Commission’s proposal for a one-year cut of 2.5 million tonnes (13.6%) in sugar production. The detailed reforms incorporate a number of radical changes in the sugar regime7, including reduction of EU sugar prices for domestic producers by 33% (from the current level of €632/tonne between 2005-06 and 2007-08), and a quota cut of 2.8 million tonnes over a four year period to 2008-09. The EU's production quota of 17.4 million tonnes would be initially reduced by 1.3 million tonnes and then in three annual reductions of 500,000 tonnes - bringing the cumulative quota cut to 2.8 million tonnes. As a result, by 2008-09 quota production would decrease to 14.5 million tonnes in order to bring the production in line with internal consumption. Subsidised sugar exports would fall by some 2.0 million tonnes during the phase-in period, to 0.4 million tonnes only. Access commitments would continue, along with a minimum price guarantee to ACP and LDC sugar exporters with the reference price at €329/tonne while refining aid will be repealed. For the time being, it remains uncertain what level of imports can be expected at the radically reduced price. EU sugar policy reform continues to receive a frosty reception from ACP countries including those in SADC (primarily Mauritius), whose economies depend on preferential sugar access, as well as by LDC countries expecting significant benefits from increased sugar access under the EBA Initiative. The SADC sugar industry most exposed to EU sugar policy reform is Mauritius: it sells more than 90% of its output to the EU, and its production costs are much higher than other regional producers. Sugar production costs elsewhere in the region is sufficiently low to survive far reaching reform of the EU sugar regime. In addition, other countries do not rely on the EU market to the same degree as Mauritius. Even so, 7

Communication from the Commission to the Council and the European Parliament “Accomplishing a Sustainable Agricultural Model for Europe through the Reformed CAP –Sugar Sector Reform”. CAM (2004) 499final of 14 July 2004.

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lower revenue from EU sales would depress all sugar producers’ profits and impact their willingness to expand. This is particularly relevant to Mozambique and Tanzania into which hundreds of millions of dollars have been invested over recent years to rehabilitate sugar cane plantations and mills. Expectations for other SADC counties to benefit substantially from the EBA are now under threat – including Angola and the Democratic Republic of Congo. On the positive side, the reforms will result in less sugar being grown in the EU, bring an end to production beyond quotas and subsidised export quotas, which lower the world price for sugar and encourage environmental standards applied to sugar grown in Europe. However, critics argue that the EU failed to take the opportunity to provide developing countries with sufficient aid to help them develop their sugar industries to make them more efficient and sustainable. Many ACP countries rely on exports to the EU for the income, yet while European farmers will receive generous compensation for the loss in earnings caused by the reform, the ACP countries will initially receive only €40 million a year between them. This amount may be increased to €190 million in 2007, but this is subject to further agreement by the EU Heads of State. WWF (2005) argues that the situation may become even worse for the LDCs, which are among the poorest in the world, especially those dependent on sugar. LDCs will not be offered any aid, and will only have access to EU markets from 2009 under the EBA scheme, which is designed to help developing countries obtain income through trade. However, there are concerns that the EU may severely limit imports under EBA, making it even harder for the LDCs to benefit from the scheme. Therefore critics regard the reforms as a betrayal of promises to give the poorest countries unlimited access to Europe’s markets. They cite that it will destroy industries and livelihoods, and will not guarantee an end to dumping by EU sugar producers. WWF and Oxfam also argue that the reforms will allow Europe to restrict imports from LDCs if they increase by more than 25 per cent each year. This is regarded as a direct betrayal of promises to grant full duty and quota free access for LDCs to Europe from 2009, under the EBA Initiative. As a result, full access could be delayed for another 11 years until 2020. Oxfam and WWF estimate that the losses to the LDCs from the potential limit on exports could be up to €1 billion annually (WWF, 2005). 2.3.4

WTO Doha Round outcome

Pressure from the WTO Doha Round8 to reduce tariffs and lower domestic support will be another factor ensuring closer alignment between domestic and world market sugar prices, even though four years of talks9 are yet to result in any agreement. The Doha Round has progressed slowly since it was resurrected following the collapse of the September 2003 Cancun Ministerial Conference, by the 'July Package' framework agreement announced in August 2004. Whilst the framework agreement certainly suggests that sugar will be more significantly affected than it was in the Uruguay Round, much will depend on the final detail of the modalities. This not only depends on the extent and speed of tariff reduction, opening-up markets, lowering domestic 8

The Doha Development Agenda was launched in November 2001, at the fourth WTO Ministerial Conference held in Qatar. 9 Agriculture negotiations started in 2000 under Article 20 of the Uruguay Round Agreement on Agriculture. Article 20 committed members to start negotiations on continuing the reform at the end of 1999 (or beginning of 2000). The 2001 Doha Ministerial Declaration set a new mandate by making the objectives more explicit and setting deadlines.

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support and phasing out export subsidies, but also final agreement on base periods for reduction commitments and transition periods will be just as important. All of these issues are likely to be decided at the concluding stages, as part of an overall Doha package. The possible outcomes of the talks are: • A negotiated cap on domestic support for sugar (and every other commodity) in each country based on a historical base period. • A set deadline for parallel elimination of all forms of export support, including that for sugar. • Negotiated improvements in market access in each commodity sector including sugar, even though there will be flexibility for “sensitive products”, which will most undoubtedly include sugar. 2.3.5

The challenges in the context of projected sugar consumption growth

The policy challenges discussed above, together with likely outcomes of trade agreements and possible industry responses need to be considered in the context of prospective growth in sugar demand in SADC over coming years. Closer alignment of domestic prices to world market prices, and a growing SADC market could mean a shrinking share of sugar produced for export. This further complicates the choice of either producing sugar or ethanol. Indeed to some within SADC, narrowing the gap between production and consumption of sugar within their country is perceived as a challenge for the future. This challenge is likely to be met by expansion and investing in new growing and production facilities (Growth will be sensitive to future level of prices on the domestic market and the availability of irrigation water). In addition, improved productivity is likely to play an important role (this will also lower the unit costs of production). Sugar consumption in the 12 countries that are signatories to the SADC Sugar Protocol totalled 3.2 million tonnes10 in 2005, and has been growing at around 1.36 percent annually (see Figure 5), slower than the world average level of 2 percent annually. 3,500,000

Raw value (tons)

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Figure 5: Sugar Consumption in 12 SADC Countries Source: ISO (2007a) 10

The two SADC counties not signatories to the Protocol are the Seychelles and Lesotho.

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South Africa dominates both sugar production and consumption within SADC, reflecting a high per capita consumption level and a large sugar industry. As can be seen in Figure 6, the regional year to year variation in consumption is heavily influenced by the dynamics of sugar consumption in South Africa.

SADC (ktons raw value)

3,500 1,500 3,000 1,000

2,500 2,000

500 1,500 1,000

South Africa (ktons raw value)

2,000

4,000

0

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

SADC-12

South Africa

Figure 6: Sugar Consumption in 12 SADC Countries Compared to S. Africa Source: ISO (2007a) This SADC average annual growth rate masks significant differences amongst member countries. It is readily evident that there is little consistency among countries in terms of the dynamics of consumption growth since the mid 1980s. Understanding the drivers of consumption and the factors explaining the differences in consumption dynamics amongst SADC countries, is a precursor to understanding the potential for consumption growth within SADC over the remainder of this decade and beyond. This is further elaborated in Appendix C. In essence however, the two key drivers are population growth and changes in per capita consumption levels, which in turn are determined by the level of income and economic development, the price of sugar and its substitutes, and in some instances by cultural habits. Assuming constant average sugar consumption growth rate of the past decade, an additional 290 thousand tonnes of sugar (10% absolute growth to 2010) would be consumed within SADC by the turn of the decade, as against the annual level observed during 2003.

2.4

Concluding Remarks

The complex mix of domestic, regional and international issues, affecting the southern African sugar industry will certainly alter the shape of the industry over the coming decade. Domestic policy reform, integration under SADC, reform of the EU sugar regime and WTO outcomes under the Doha Development Round, will gradually lead to increased competition and generally lower sugar prices in the region. These developments will present challenges and opportunities for the sugar industries of the region. The rate of sugar industry expansion in SADC will be dictated by several factors. Political stability, investment in dams and irrigation infrastructure; -28-

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expectations about the future level of sugar prices are amongst the most important, regardless of whether a viable fuel ethanol sector can be created in SADC. Likely winners as policy reform begins to take effect are the lower cost producers - Malawi, Mozambique, Swaziland, Zambia, Zimbabwe and Tanzania. The extent to which Angola, the Democratic Republic of Congo, Malawi, Mozambique, Tanzania and Zambia can benefit from the EBA Initiative in the EU is now uncertain given the likely reform of EU sugar policy. It is important to note that in Angola and Democratic Republic of Congo, the sugar industries are strongly underdeveloped and need significant investment to increase production and productivity. Losers are likely to be Mauritius and the rain fed areas of South Africa. However, whilst there may be pressures for a shift in the geographic focus of sugar production to the lower cost countries within SADC, this may not happen if diversification into biofuel is possible. To varying degrees, sugar producers in southern Africa presently benefit from domestic prices and preferential trade that return prices considerably higher than world sugar market levels. Consequently, the opportunity cost of using sugar crops for ethanol production is generally too high (not withstanding the profitability of ethanol production discussed later). Prospective policy reforms and further possible deregulation of sugar industries create stronger incentives for sugar producers to diversify into bioenergy production (such as ethanol and cogeneration11) because sugar returns from preferential trade and domestic markets are likely to be significantly eroded. In short, the emerging nexus between sugar policy reform and incentives for bioenergy production is extremely important for sugar producers worldwide and not just to the sugar industry in southern Africa.

11

Cogeneration is the simultaneous production of power, either electrical or mechanical, and useful thermal energy from a single fuel source with an overall efficiency normally exceeding 70%.

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3

Markets for Sugar based Electricity and Bio-ethanol

3.1

Electricity Markets

Cane residues, namely bagasse and cane trash, are valued for their fibre content and organic residues, as well as their use as fuel in cogeneration plants. The former has enormous potential as a renewable fuel. Table 3 shows the bagasse available from the SADC sugarcane factories. We assume a SADC average bagasse content in the cane of 30%. The current cane resource base in southern African countries is about 47 million tonnes annually as shown in Table 3 (Johnson & Matsika, 2006). Table 3: Cane Resource Base in Southern Africa (2004) Production Area ('000 tc) ('000 ha) 2100 20 5199 72 20419 326 4500 48 2000 17 1800 17 4533 45 360 10 1786 43 2460 69 400 30 2426 73 47983 770 1,258,531 19,186 3.8% 4% Source: Matsika & Johnson (2006)

Country Malawi Mauritius South Africa Swaziland Tanzania Zambia Zimbabwe Angola DR Congo Madagascar Mozambique Others SADC Total World Total

Bagasse Availability Average Yield ('000 tonnes wet (tc/ha) basis (50% water)) 105 630 73 1560 63 6126 93 1350 118 600 106 540 101 1360 38 108 42 536 36 738 13 120 33 728 14395 68 66

It should be noted that for South Africa, the area of 326,000 ha refers to estimated area harvested in 2004. The actual area under cane is 4, 100,000 ha If sugar demand in SADC is to be met in the next two to three decades, there is need for expansion of existing factories and investment in new factories. The prospect for expansion are very bright given the adequate availability of land and infrastructure in the region (Cornland, et al., 2001). Assuming an average per capita consumption of 15kg/person/year (Cornland, et al., 2001), and a projected growth rate of 2.0% per annum in sugarcane production, the projected cane production will increase from the present level of 45 million tonnes per annum to 55.1, 67.0 and 82.0 million tonnes in 2010, 2020 and 2030, respectively. Based on the above assumptions, the projected bagasse resource availability in SADC is as given in Table 4.

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Table 4: Projected Bagasse Resource Availability Bagasse Resource (Million tonnes wet basis) 13.5 16.5 20.1 24.5

Year 2000 2010 2020 2030

Southern Africa’s electricity supply industry is based on power sector collaboration under the Southern African Power Pool (SAPP), which was created in 1995 through an inter-utility Memorandum of Understanding among 12 of the SADC utilities. Currently, SAPP has an operational installed electricity generation capacity of about 45,000MW, of which 84% is thermal power (Musaba, 2006). Coal based electricity generation is predominant, representing about 74% of total supply. Installed hydro electric capacity stands at about 20% of total SAPP interconnected supply, while the contribution from biomass is currently negligible (See Figure 7).

Natural Gas 0% Diesel/Gas Turbine 2%

Wind 0%

Biomass 0% Other/Nuclear 4%

Hydro 20% Coal 74%

Figure 7: SAPP Installed Electricity Generation Capacity (2006) (Total 45 GW) Source: Musaba, 2006 Electricity demand in the region for the period 2015 to 2020 is expected to grow at a rate of 2.0% in South Africa and 3.5% for the rest of SADC. In the period 2020 to 2050, electricity demand is expected to grow at a rate of 1.5% and 2.5% for South Africa and the rest of the SADC region respectively (Yamba and Matsika, 2004). The projected regional electricity generation installed capacity takes into account national utility plans and expert assessment on the energy resource potential of each SADC country. The results of the supply projections are shown in Figure 8.

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Natural Gas/CBM 6.2%

Wind 0.6%

Biomass 0.4% Other/Nuclear 5.0%

Diesel/Gas Turbine 1.2%

Coal 57.6%

Hydro 29.0%

Figure 8: SADC Projected Electricity Supply Capacity in 2030 (Total 80.2 GW) Source: Musaba, 2006. It is evident from the SAPP’s power generation mix that the role of bio-energy is negligible accounting for only about 0.4% of the total capacity in 2030. However, with the availability of state-of-the-art biomass to energy based technologies, the sugar industry in southern Africa can contribute significantly to an increase in the share of bioenergy in electricity generation. The sugar industry in southern Africa mostly uses the traditional cogeneration approach which inefficiently incinerates bagasse in low pressure boilers and uses back pressure steam turbo-altenators to co-generate just enough steam and electricity to meet on-site needs (Cornland, et al., 2001). Higher efficiency cogeneration plants are now available which use high pressure and temperature steam, as well as extraction/condensing steam turbines. These can be used by the sugar industries to generate surplus power which can be exported to the public grid.

3.2

Ethanol Markets

The overall drive towards production and use of bio-ethanol stems from the demands for sustainable socio-economic development, poverty reduction and increased global environment concerns. Specific drivers include sustainability and competitiveness of the sugar industry, as well as local and global pollution, especially, climate change. The sugar industry is a major worldwide industry that faces many problems, since sugar prices are extremely volatile. In addition, the industry faces difficulties accessing saturated markets in industrialized countries, and competition from other sweeteners (Rosillo-calle, 2003). For the industry to be sustainable and competitive there is increased need for it to diversify its product portfolio by investing in co-products such as ethanol. At a global level, the industry needs to contribute to efforts to reduce greenhouse gas (GHG) emissions aimed at achieving stabilization of GHG concentrations in the atmosphere. Accumulation of GHGs in the atmosphere results in global warming, which has far reaching negative environmental impacts on the earth’s biosphere. At a regional level, local pollution from gaseous emissions (such as CO, NOx, UHC, SO2, particulates) is a major concern. -32-

CARENSA

If wider regional socio-economic development is considered, the following issues provide excellent incentives to implement bio-ethanol programmes in southern Africa: • • •

Petroleum products imports are a major drain on foreign exchange Local pollution (CO, NOx, UHC, SO2, particulates) Phasing out of leaded gasoline12

In most parts of the world, use of lead additives in gasoline has been eliminated, except for most parts of Africa. Instead of lead, other commonly used additives like MTBE (methyl tertiary butyl ether) can be blended with gasoline. However, MTBE is increasingly becoming unpopular, because it leads to significant ground water contamination. Another possible additive is MMT, a manganese compound, but it also controversial due to potential health risks. Another approach is for refineries to manufacture high octane gasoline using catalytic reforming units. For many refineries in Africa, this will require upgrades and large capital outlays, which may not be affordable (Hodes, et al., 2003). Fortunately, the octane number can be boosted from renewable and environmentally friendly sources, such as ethanol from crops (e.g. sugarcane and sweet sorghum). Discussion in the next section focuses on ethanol for transportation. 3.2.1

Feedstocks for Ethanol Production

Ethanol can be obtained from many different sugar containing feedstocks. The feedstocks can be classified into three main groups: (i) Sugars: (i.e. sugarcane, molasses, fruits, etc), that can be converted to ethanol through fermentation and distillation. (ii) Starches: (i.e. grains like maize, root crops like cassava), which first must be hydrolyzed to fermentable sugars. (iii) Cellulose: (i.e. woody material, agricultural waste, black liquor from pulp and paper), which must be converted to sugars by action of mineral acids. The ethanol production energy balance varies by feedstock type. As can be seen in Table 5, advances in technology have improved production efficiency, giving virtually all current biofuels a positive fossil energy balance. Not only is the efficiency of the conversion process advancing steadily, but bioenergy is increasingly being used for feedstock processing as well. Both approaches reduce the amount of fossil fuels used to convert crops into biofuels. Table 5: Fossil Energy Balance for Selected Fuel Types Fuel (Feedstock) Fossil Energy Balance Cellulosic ethanol 2 – 36 Ethanol (sugarcane) ∼8 Ethanol (wheat, sugar beet) ∼2 Ethanol (corn) ∼ 1.5 Gasoline (crude oil) 0.8 Gasoline (tar sands) ∼ 0.75 Source: (Hunt and Förster, 2006) 12

Lead has historically been used an octane enhancer but it has been identified as a dangerous pollutant since low levels of exposure to lead causes a range of learning and neurological defects especially in children.

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CARENSA

Energy fossil balance means total amount of fuel used to produce ethanol Very few materials are currently considered economically viable feedstocks. In southern Africa, sugarcane and sweet sorghum offer the best feedstock options. In the region, countries with experience in ethanol production from sugarcane include Malawi and Zimbabwe. Elsewhere in the world Brazil, and India have successful ethanol production programmes. Currently, ethanol is mostly produced from cane molasses, which, however, have limited availability, being a by-product of sugar factories; and has limitations on waste water control. In view of such limitations, there is need to exploit new agro-based feedstocks. For such feedstocks to be attractive, they need to be sugar bearing, remunerative for the farmers, low cultivation costs, viable for alcohol production and giving zero discharge of waste water. Taking into account the climate and soils in southern Africa, one such feedstock that can be effectively exploited is sweet sorghum which has following characteristics: • Sugar bearing crop • Short cycle crop –3.5 months • Can be grown across warm climate regions • Easier to grow and handle (compared to sugarcane) • Low cultivation costs since two crops can be harvested in a year • Known to farmers – Robust crop- Practices similar to sugarcane • Source of fodder for cattle • Provides bagasse similar to sugarcane – Energy for distilleries Having a high photosynthetic efficiency, sweet sorghum can synthesise quantities of carbohydrate to produce ethanol at 48 l/ha/day, while that of maize, wheat and grain sorghum can only produce 15, 3 and 9 l/ha/day respectively (Dajue, 2005). The ethanol conversion for sweet sorghum is therefore higher than most crops typically used as feedstocks (including sugarcane and sweet beet). A comparison of the characteristics and production requirements for sweet sorghum and sugarcane indicates that overall, the former is a better source of ethanol production. The total cost to include seed cost, land preparation, sowing, weeding, fertilisers, miscellaneous labour cost, water, electricity, harvesting and transport, is typically US$306/ha for sugarcane, while it is US$90 for sweet sorghum (Praj, 2004). A recent study in Zambia showed that sweet sorghum yields of over 25 tonnes/ha and sugar content of over 20% are possible, and the yields increased to between 90 to 100tha due to complimentary irrigation (Yamba and Munyinda, 2005). Internationally, impressive yields have been experienced, where findings show that the sugar content can reach as high as 28 – 32%, with stem yields of 38 – 90 t/ha (Dajue, 2005), leading to ethanol yields of 2 to 5 t/ha. 3.2.2

Potential Ethanol Demand

Ethanol demand in the region (and hence feedstock) depends on the amount of gasoline consumed and the level of blending required. Blending policies may vary by country, common ratios include 5%, 10% and 15%. Blending is also driven by policies to find a gasoline octane enhancer to replace lead. Most countries in the region are in the process of phasing out leaded gasoline, and ethanol is an attractive alternative. This programme will require considerable amount of feedstock to produce ethanol -34-

CARENSA

equivalent with lead. Table 6 shows a list of selected countries in southern Africa, with lead requirement, ethanol equivalent and possible GHG savings per annum, at 10% ethanol blending (Yamba and Matsika, 2004). Ideally, E10 gives an octane number of about 91, which is acceptable regionally. Table 6: Ethanol production feedstocks requirements at 10% blending for selected SADC countries Country Mozambique Namibia South Africa Zambia Zimbabwe Totals

Gasoline Consumed (million litres/yr) 71 331 10,358 187 433 11,380

Lead concentration (g/litre) 0.5 0.4 0.2 0.7 0.8

Total lead used (t/yr) 40 180 2100 130 350 2800

Ethanol Equiv. (million litres/yr) 7.1 33.1 1035.8 18.7 43.3 1138

Ethanol Availability (million litres) 3.6 216.0 19.0 38.0 273.0

Ethanol Deficit (million litres) (3.5) (33.1) (819.8) 5.3 861.7

GHG Saving (tonnes) 15757 73458 2298715 41500 96094 2525524

Source: Hodes, et al., 2003 Table 6 shows that at 10% ethanol blending (the minimum required to meet the ethanol equivalent to replace lead), there is an regional ethanol deficit of 862 million litres. To meet the deficit, it is going to require an expansion of current sugarcane production. However, since expansion of sugarcane estates can only grow at a rate of about 2% per annum due to various constraints (see CARENSA, 2004), alternative feedstocks like sweet sorghum can be used as substitutes. To meet the deficit through use of sweet sorghum will require land availability of about 400,000 – 500,000ha. Southern Africa has abundant land to accommodate this demand.

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Technologies, Investments and Economics

4.1

Electricity

4.1.1

Electricity production technologies

Currently, most sugar industries in southern Africa use the traditional approach (conventional back pressure turbines) through use of medium pressure (15 – 25 bars) bagasse –fired boilers/steam turbine systems to co-generate just enough steam to meet the on-site needs. Boilers and steam generators are typically run inefficiently in order to dispose of as much of the bagasse produced from crushing the canes as possible (Cornland, et al., 2001). With the availability of the state-of-the-art technologies, sugar factories can harness the on-site bagasse resource to go beyond meeting their own requirements, and produce surplus electricity for sale to the national grid including the SAPP interconnected system. Three technologies suitable for cogeneration in the sugar industry and allowing for export of surplus electricity include: • Improved combustion in traditional boilers • CEST (Condensing Extraction Steam Turbine) • BIG/CC (Biomass Integrated Gasifier Combined Cycle) (Cornland, et al., 2001). The key to production of surplus electricity in sugar factories is to optimise factory steam generation and utilisation so as to be able to save bagasse through improved combustion. The approach involves efficient firing of bagasse fuel through maximum use of heat as steam, control of combustion temperatures and corresponding air-fuel ratios, and load management through use of combustion efficiency monitoring equipment (Groenewald, 2002; Southern Centre, 1999). CEST, which uses more efficient steam turbines operating at high pressures, with exhaust at pressures below atmospheric is now available on the market (Cornland, et al., 2001), and can significantly increase electricity production at sugar factories. A typical CEST operates at 40 – 80 bars and has a series of expansion turbines. These systems produce enough steam to supply a typical sugar factory, and export surplus electricity to the national grid. The key innovation of CEST is that it will yield greater energy production using the same fuel input as traditional boilers. For example, these systems produce enough steam to supply a typical sugar factory and distillery, and export 30 – 100 kWh of electricity per tonne of cane (kWh/tc) to the national grid (Beehary and Baguant, 1996). The BIG/CC system involves gasification of biomass for use in a high efficiency gas turbine. The system is based on a combination of two technologies: a biomass gasifier unit feeding a gas turbine and a steam turbine utilising steam generated from hot exhaust gases from the gas turbine. The combination of the two systems is the “Biomass Integrated Gasifier – Combined Cycle (BIG/CC)”. These systems produce over twice as much power per tonne of cane as CEST systems. However, unlike CEST systems, BIG-CC systems have high capital costs and are not yet commercially mature at present. Based

on

the

current

and

projected -36-

bagasse

resource

availability

from

CARENSA

Table 4, surplus electricity from southern Africa is estimated based on three technologies, i.e. the Traditional boilers with improved combustion, CEST, and BIGCC. Traditional boilers with improved combustion technology Surplus electricity from traditional boilers with improved combustion is estimated using the empirical relation (see Williams and Larson, 1993; Southern Centre, 1999):

E ex

Yc

(

)

⎧ ⎫ = 0.278 × ⎨η elec × (17643 − 203 × wb ) × ⎡ b − 1.05 × SSC ⎤ − Ef ⎬ r 100 ⎢ ⎥ sb ⎦ ⎣ ⎩ ⎭

where, Eex/Yc

ηelect

wb b SSC rsb TCH Ef

- surplus electricity potential (kWh/tonne cane) - electricity production efficiency fraction - bagasse moisture content (%) - bagasse percent in cane (%) - specific steam consumption (kg/kWh) - steam to bagasse ratio - annual cane crushing capacity (tonnes) - electricity for use in factory (kWh/tonne cane)

Based on experience from typical factories in eastern and southern Africa, and Mauritius in particular, the following average values in Table 7 were used for estimating electricity production. Table 7: Typical average Parameters of Sugar Factories Parameter Value 0.31 ηelect wb 50% b 30% SSC 0.50 kg/kWh rsb 2.2 Ef 20kWh/tonne Source: Larson, et al., 2001.

In turn, surplus electricity is obtained with knowledge of total cane crushed per annum in southern Africa, excluding Mauritius. This does not take into account existing alternative uses for bagasse which, in South Africa, include two paper factories, a furfural factory, a board factory, and fuel for five back-end refineries. Approximately 9% of the total bagasse is used in paper, board and furfural factories, and the factories with refineries do not have surplus bagasse when using existing boiler equipment. CEST technology Surplus electricity from CEST plants is estimated based on a comparison of energy output. Energy output for CEST is 50-100 kwh/tonne cane compared to 10-15 kwh/ tonne cane for traditional team cycle plants when operated during milling season only of 160 days, and 285 kwh/ tonne cane when operated year round (Cornland, et al., 2001; Beehary and Baguant, 1996). -37-

CARENSA

BIG-CC technology Surplus electricity from BIG-CC is estimated as 660- 677kwh/tonne, on the basis of design and operational experience of such systems. The electricity generated (index) for BIG-CC is twice that of the CEST system (Cornland et al., 2006; Metz, B. et al., 2001). Of the three technologies, the CEST system is the most promising for the region since it is a proven and cheaper technology, and its output is much higher than traditional technologies. Figure 9 shows the regional electricity generation mix capacity scenario in which bioenergy based electricity plays a more significant role.

Natural Gas/CBM 6.2%

Wind 0.6%

Biomass 2.5% Other/Nuclear 5.0%

Diesel/Gas Turbine 1.2%

Hydro 29.0%

Coal 55.5%

Figure 9: SADC projected sustainable electricity supply mix scenario for 2030 (Total 80.2 GW) 4.1.2

Investments and economics for electricity generation

The sugar industry in southern Africa produces about 45 million tonnes of sugar cane annually and has varied factory capacities ranging from 75 tonnes cane/hr to 500 tonnes cane/hr. Given in Table 8 are typical factory capacities and their respective cogeneration parameters, including technology investment, plant running costs. Table 8: Co-generation plant parameters, investment, operations and maintenance costs Typical Actual Factory Annual Size output (tonne (tonne/ cane /hr) cane an) 100

Bagasse Cogeneration Specifications Investment content Costs, and O&M in cane Investm O&M Boiler Multi-stage Turbine (%) ent (% of Bagasse Op. Steam Power Op. Power Surplus (US$/ Invest. (t/hr) Pres. (t/hr) (kW) Pres. (kW) (kW) kW) /yr) (bars) (bars) 462,294 30.0 21.23 60 46.7 450 60 4590 3530 730 5

150

688,226

30.0

35.51

60

78.0 450

60

7670

5900

640

5

250

1,007,183

30.0

55.65

60

122.3 450

60

12020

9260

570

5

300

1,211,236

30.0

68.78

80

148.9 480

80

16550

13170

525

5

350

1,655,682

30.0

80.18

80

173.6 480

80

19300

15300

500

5

400

2,217,396

30.0

92.08

80

199.3 480

80

22150

17600

485

5

500

2,193,737

30.0

110.97

80

240.2 480

80

26700

21250

475

5

-38-

CARENSA

The data provided in Table 8 was obtained from ethanol manufacturers from Brazil and India. Figure 10 shows the relationship between bagasse consumption and power output for selected sugar factory sizes. Bagasse Consumption Vs Power Capacity for Selected Sugar Factory Sizes 50000

100

150

250

300

350

400

500

68,78

80,18

92,08

110,97

45000 Pow er Capacity Pow er Capacity (Surplus)

40000

Power Capacity (kW)

35000 30000 25000 20000 15000 10000 5000 0 21,23

35,51

55,65

Bagasse consum ption (tonne/h) / Factory Size

Figure 10: Variation of bagasse consumption with power capacity for selected sugar factory sizes

4.2

Ethanol

4.2.1

Ethanol production technologies

Various technology configurations are available on the market for ethanol production. Their concepts are largely influenced by the feedstocks used and final product composition, i.e. whether anhydrous or hydrous. The former is suitable for production of fuel as a transport fuel. The type of technology used can either be annexed or autonomous. For southern Africa, annexed distillery has the greatest potential, in view of the structure of the sugar industry. The traditional ethanol production process is well known and has been employed in several countries. The main processes involve fermentation of either molasses or cane juice with yeast to produce 10-15% ethanol, followed by distillation to separate ethanol from water, and thereafter rectification to produce anhydrous ethanol, suitable as a transport fuel (See Appendix D for an overview of ethanol production routes). The technology, although suitable, cannot sufficiently meet the high ethanol demand required for blending with gasoline in the whole region. -39-

CARENSA

Recent R&D efforts have been targeted at producing a technology that provides higher ethanol conversion efficiency, and which can handle a wider range of feedstocks that include both cane and lignocellulosic. Lignocellulosic feedstocks have to be pretreated prior to fermentation using the extractive hydrolysis process (Praj, 2004). The hydrolysis process involves conversion of cellulosic material into fermentable sugars under the effect of mineral acids. The sugars produced are then fermented and distilled as in the traditional approach. 4.2.2

Commercial viability of ethanol production

Commercial viability and commercial feasibility are terms normally used interchangeably and refer to there being sufficient expected profitability from ethanol production, which may be conditional on government support. It is also important to be mindful of commercial viability related to the continued operation of existing capacity as opposed to commercial viability of planned investment in expansion of an industry. Three key factors that affect commercial viability of fuel ethanol from sugar cane are the price of sugar, price of crude oil and government support for biofuels. There are other factors that, however, will not be fully dealt with here. These include market acceptance, optimisation of co-products, optimal use of vinasse, and availability of imported ethanol. The first driver of commercial viability (i.e. price of sugar) represents the opportunity cost of the sugar crop used to produce ethanol. The second is the price of crude oil – which drives the price of gasoline, providing a benchmark against which to gauge the competitiveness of ethanol. The other key determinant of commercial viability is the existing level of government support, expectations about its continuance, and possible new forms of future support. Opportunity Cost: sugar or ethanol The opportunity cost for ethanol production from sugar crops is the return otherwise achievable from sucrose production. In other words, determining the commercial feasibility of producing ethanol from sugar crops involves a comparison of alternative revenue streams from ethanol or raw/white sugar product forms. In the case of sugar cane, the implied opportunity cost of ethanol production depends on the feedstock used. The value of the embodied sucrose in C molasses is far less than in A and B molasses (Brazil uses the latter), whilst the cost of sugarcane juice as a fermentation feedstock would be the raw sugar cost less savings (in operating, energy, capital) relating to the operation of the “process end” of the sugar factory. Opportunity cost also varies with changes in sugar price. B molasses might be used for ethanol production when the export price of raw sugar is very low. It is important to note that the opportunity cost of ethanol production is not of theoretical relevance. On the contrary, relative returns such as between sucrose and fuel ethanol is of practical significance and an issue considered every day by the world’s biggest sugar/ethanol industries. In fact, the relative ex-mill prices of ethanol and sugar in Brazil are a key determinant of the volume of sugar that Brazil produces for export to the world market (see Figure 11).

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CARENSA

Ethanol Price Vs Sugar Price

Ethanol US$/litre

0,60 0,50 0,40 0,30 0,20 0,10 0,00 0

100

200

300

400

Sugar US$/tonne

Figure 11: Trade-off between Ethanol and Sugar Prices Source: Jolly (2001)

The trade-off between sugar and ethanol returns (ex-mill) is illustrated in Figure 11. The curve shows the break-even points between the two products. To the left of this line, the profitability of ethanol is greater, and to the right, the profitability of producing sugar is greater. The position of breakeven of course depends on the yields of ethanol and sugar per tonne of cane crushed (average assumed to be 74.5 litres of ethanol and 0.14 tonnes of sugar). Because of the sugar support policy in the US and the EU, the opportunity cost of using beet and cane for fuel ethanol is generally too high when compared to using sugar crops for their sucrose content. With a 33% fall in the value of EU sugar access, the opportunity cost declines. The threshold price of sugar is expected to fall from €632/t to €423/t by 2007-08. This makes ethanol production more attractive. Effect of Price of crude oil What is important to biofuel schemes is the expected long-run equilibrium price of oil, as it provides a benchmark against which to compare the cost of fuel ethanol production. Advocates of biofuels have consistently argued that fossil fuels, particularly oil, are severely under- priced because a variety of externalities associated with fuel use are not fully taken into account in their pricing. Externalities most directly linked to fuel use are pollution of the biosphere associated with prospecting, extracting, processing and distribution and use of fossil fuel, including GHGs. But the market price of oil is unlikely to reflect such externalities in the short term, so the benchmark will remain. In a free ethanol market – a market without ethanol subsidies – the true value of ethanol would be equal to the price of unleaded gasoline. That is, profitability is directly tied to ethanol prices and their relationship to gasoline price. Or put another way, the commercial viability of fuel ethanol is sensitive to the price of gasoline for which it substitutes in a fuel blend. Market prices for ethanol would also be influenced by its own supply and demand dynamics. -41-

CARENSA

Over the past two decades, despite technological progress in bio-ethanol production process that has lowered the unit costs of production, the economics always favoured conventional fossil fuels. Therefore, the profitability of bio-ethanol production has depended heavily on subsidies or other fiscal incentives afforded them by governments, and the taxation levels imposed upon fossil fuels. With the recent rise of crude oil prices to over USD50/barrel, the situation is beginning to change. This has markedly boosted the relative competitiveness of fuel ethanol against gasoline and a key question is whether fuel ethanol can now be produced from biomass without government assistance. In discussing the interrelation between oil and ethanol prices, an important parameter is the ethanol threshold price. This is the gasoline price against which ethanol competitiveness is measured. It represents the ex-refinery cost of gasoline for countries with domestic refineries. For countries that import crude oil and products, it is the CIF import cost of gasoline, in which case the impact of fluctuations in national currency against the USD can also be an important determinant of the dynamics of the threshold price (see Table 9). The ethanol threshold price is a convenient benchmark and can be determined on a simple volumetric basis for ethanol, intended for blending with gasoline (e.g. E5 and E10). But where ethanol substitutes gasoline in far greater quantities, the threshold price has to be discounted to energy equivalency, since ethanol contains less energy per litre than gasoline. Illustrative threshold prices are shown in the table below. Table 9: The Ethanol Threshold Price Ethanol Ethanol Crude Oil Price Volumetric equivalency Energy equivalency USD/bbl US cents/litre US cents/litre 10 10.0 6.8 20 17.1 11.6 30 24.1 16.4 40 31.1 21.2 50 38.2 25.9 Source: Author’s own calculations. Spreadsheet available upon request.

If prospective ethanol production costs from sugar crops or any other feedstock are greater than the threshold price (and keeping in mind that the selling price of ethanol has to allow a suitable margin to yield a satisfactory return on the high capital cost of ethanol production), then commercial viability can only be achieved with government support. Government Support The third key driver of commercial viability is the existing level of government support, expectations about its continuance, and possible new forms of future support. For investors, there is a strong link between government policy and investment risk. The question of the current government’s limitations or ability to bind successive governments to the ethanol support mechanisms must be addressed. If government policy is expressed clearly and includes long-term mechanisms for phasing in biofuels, -42-

CARENSA

then the risk to investment decreases and the need for short payback periods diminishes. The importance of long-term government support to biofuels simply reflects the fact already established above: that the costs of ethanol has historically exceeded the price of gasoline it replaces, or the price of other oxygenates. Indeed the well established fuel ethanol schemes of Brazil and the United States have relied on a number of government support measures. Below are some examples of government-supported biofuels programmes. Brazil: A long history under PROALCOOL Brazil’s massive ethanol programme is now operating more or less in a deregulated environment (apart from the mandatory inclusion of ethanol in gasoline). But deregulation and reform of the fuel alcohol sector only began in the late 1990s, whereas PROALCOOL was launched in 1975 with massive support from the government of the day. Today, the reformed ethanol sector still benefits from a captive market for anhydrous alcohol but prices are freely determined by the market. Crucial also is the fact that ethanol still benefits from a favourable tax excise arrangement compared to gasoline. The government applies differential rates of the CIDE tax, i.e., R$0.28/litre on gasoline but none on ethanol. In addition, the value-added tax (ICMS) is not paid on anhydrous alcohol blended with gasoline (see Figure 12).

1,2

BRL/litre

1 0,8 0,6

Anhydrous Hydrous

0,4 0,2

2004-0810

2004-0510

2004-0210

2003-1110

2003-0810

2003-0510

2003-0210

2002-1110

2002-0810

2002-0510

0

Figure 12: Wholesale ethanol prices in Brazil (Centre/South)

Of importance however, is that Brazil’s cane ethanol distillers receive the market clearing price which varies considerably according to the demand and supply dynamics, complicated by the relative returns between ethanol and export sugar. United States: Tax breaks and mandated markets In the United States, the key production incentive is the 52 cents per gallon tax concession for fuel ethanol (currently mandated until 2010). Without it, production of ethanol would not be viable against its main competitor, gasoline. Ethanol output increased strongly during the 1990s because of the US Clean Air Act which mandated use of oxygenates in gasoline to attain urban air quality standards. Rapid growth in demand over the past few years has been driven by the phasing out of MTBE as an -43-

CARENSA

oxygenate because of fears over human health, as well as prospects of a Renewable Energy Mandate being adopted. European Union: Renewable energy targets and tax exemptions Under the EU Biofuels Directive adopted in 2004 and associated taxation legislation, considerable fuel excise exemptions have been afforded to biofuels – as illustrated in Table 10. Table 10: Fuel Excise Exemptions Country % €/litre Spain 100 0.42 Germany 100 0.63 Sweden 100 0.52 France 60 0.37 Finland 51 0.30 UK 39 0.296 Italy 42 0.23 Source: ISO (2007b)

Fledgling Schemes None of the fledgling schemes in India, Thailand, or Australia for example, envisage fully applying the Brazilian model of mandated blending ratios of as high as 25%. Australia at most will blend 10% ethanol in gasoline. However, development of a large cane-based fuel ethanol programme in Australia remains uncertain even though the government policy clearly outlines its long-term excise tax arrangements: zero excise until 2011 and then gradually rising to AUD12.5 cents/litre in 2015. India’s previous government had approved a 5% blend but the present government has removed the mandate in light of the serious shortages of molasses feedstock and disagreements over the price of ethanol with refiners. Thailand’s government has offered a fuel tax exemption together with a package of fiscal incentives (such as a corporate tax holiday) to ensure interest in building new ethanol production capacity. The long-term success of these government incentives in ensuring a commercially viable and sustainable ethanol sector in each country remains to be seen. Lessons from existing schemes on government support From this review of existing schemes, the most effective instruments of government assistance are mandatory blending of ethanol and suitable fiscal incentives, particularly fuel excise exemptions (over a sufficient length of time). Provision of capital grants is also important to kick start fuel ethanol programmes and to provide support to domestic producers, unlike imported ethanol. This is an advantage not conferred by fuel tax exemptions. Mandated exemptions give a very clear signal as it creates demand and gives the petroleum industry no option but to collaborate. 4.2.3

Investment and Economics for Ethanol Production

Ethanol production costs In general, estimating the cost of ethanol is complicated because of the large number of specific factors involved. Actual production costs are site and plant specific and will reflect underlying feedstock costs, scale of production, and the adopted conversion technology. -44-

CARENSA

The key elements of ex-distillery costs for fuel ethanol include feedstock costs, plant operating costs, capital cost recovery, and profit. These four key cost components hold true for ethanol produced from sugar crops or from starch sources such as cereals. The relationship between the four key cost components and plant size is illustrated in Figure 13 for ethanol from C molasses (given specific assumptions regarding the cost of C molasses, ethanol yields, project life, project financing and the required internal rate of return – 10% in this case). As shown in, Figure 13 operating and capital costs reduce markedly per litre of ethanol produced, as plant capacity increases. But feedstock costs remain constant in absolute terms, irrespective of capacity. This shows that feedstock costs make up the largest part of the overall cost of ethanol and shows how important low feedstock costs are to achieving a competitive cost level for ethanol.

Profit Operating Capital Feedstock

120 100

Index

80 60 40 20 0

10ML/year

30ML/year

100 ML/year

Plant Size

Figure 13: Distribution of Ethanol production costs –(C Molasses feedstock) Source: ISO (2002)

Feedstock costs Ethanol feedstock costs from sugar cane vary from C molasses, B molasses or A molasses, or sugar syrup. Each has different market prices (which are also volatile) and a different opportunity cost. Further, ethanol yields from each feedstock differ significantly, and typical yields are given below (ABARE, 2001). Table 11: Ethanol yield from sugarcane by feedstock type Feedstock Ethanol yield (litres/tonne) Sugar Content (%) C molasses 270 55 B Molasses 350 72 A Molasses 410 83 Sugar Syrup 425 Sugar 620‡ Source: ABARE (2001) ‡ The theoretical yield from the fermentation of sugar is 630 litres per tonne of sugar. Allowing for 95% efficiency in an industrial plant gives 620 litres.

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CARENSA

C molasses are often the cheapest feedstock because their value is normally set by their worth in livestock feed applications. But where availability of C molasses is limited, their price will rise and consequently there may be sufficient incentive to use A and B molasses as a feedstock. Extracted cane juice containing around 13.5% fermentables is also another alternative feedstock. Operating Costs and Capital Charges In addition to feedstock costs, other major cost components including capital charges, labour, process energy costs, etc. Operating costs for ethanol facilities using sugar cane as a feedstock are lower as energy input costs are minimised by using bagasse to provide process energy requirements. Capital charges vary by project but in general terms investors target a rate of return commensurate with their perception of risk in that particular project. If there is a perception of high risk, investors factor in a corresponding higher risk premium, and perhaps a shorter payback period on their initial investment also. Up-front capital expenditure and consequent capital charges are also driven by the technology chosen for fermentation, distillation and waste disposal selected, and by the mode of operation.

USD/litre

Ethanol Production Cost Estimates Figure 14 shows indicative ethanol production costs and its relative competitiveness in seven existing and potential producers.

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Australia (C molasses)

Brazil (cane)

Thailand (cane)

India (C molasses)

United States (corn)

EU sugar beet

EU Wheat

Figure 14: Comparison of Ethanol Production Costs Source: IEA (2005)

These production costs were estimated based on recent literature (see Table 12 for details). The estimates for different countries were not derived using the same analytical framework and same timeframe due to data unavailability. Consequently, the relative competitiveness only gives a general indication of underlying costs structures in each country. The highlight is the strong competitiveness of Brazil, compared to both gasoline and other ethanol producers. According to a leading Brazilian analyst (Natari), even in 2000 Brazil’s ethanol was competitive with crude oil at a price lower than -46-

CARENSA

USD22/barrel (or USD 0.14/litre of gasoline). This is due to Brazil’s very low feedstock costs and the achievement of substantial scale economies. Brazilian distillers operate large-scale ethanol processing units achieving significant economies of scale and throughput, utilising state of the art technology, and using bagasse as the main fuel for distillation. In addition to scale effects, the last two decades have seen new technologies which have increased sugar and fermentation yields significantly in Brazil. Along with better cane production practices in the fields, ethanol productivity has increased from 3-4 m3/ha to 5-10 m3/hectare. Although, the cost reduction achieved in Brazil could, in theory, be replicated in countries of similar setting, the transformation would not be easy to achieve. Costs could still be significantly higher, especially for smaller scale distillers in other countries, such as in southern Africa. Table 12: Ethanol production costs by country/region and feedstock United States • Variable costs @USD 0.25/litre from corn1 • Cash costs @USD 0.33/litre from corn2 Brazil ●USD 0.15-0.21/litre from sugarcane juice/molasses3 ●Cash costs USD 0.17/litre3 ●USD 0.16/litre from sugar cane, including by-product credit for vinasse4 Australia ●USD 0.21/litre: C molasses5 ●USD 0.32/litre: B molasses from new capacity5 ●USD 0.48/litre: A molasses from new capacity5 ●USD 0.26/litre from C molasses at AUD50/tonne6 ●USD 0.33/litre from B molasses at AUD 105/tonne6 ●USD 0.35/litre from cane juice- cane at AUD 20/tonne6 European Union ●USD 0.48/litre from sugar beet ●USD 0.60 if beet valued at EU quota value7 ●USD 0.73/litre from beet net of byproduct revenue8 ●USD 0.68/litre from wheat net of byproduct revenue8 Thailand ●Cash costs @USD 0.25/litre from molasses (first half 2004)2 ● USD 0.30/litre molasses/cane juice for 30 ML annual capacity6 ● USD 0.28/litre molasses/cane juice for 100 ML annual capacity6 India • Cash costs @USD 23/litre from molasses (first half 2004)2 China ●USD 0.39/litre from corn, net of byproduct revenue6 All cost estimates higher if expressed in terms of gasoline equivalent. The energy density of a litre of fuel ethanol is 70% that of gasoline. Sources: 1. Shapouri, et al., 2002 2. Berg, 2004 3. Correa Carvalho, 2003 5. Short and Dickson, 2004 6. Henniges & Zeddies, 2005 (2004 average AUD/US exchange rate). 7. Woods, and Bauen, 2003 8. Henniges & Zeddies, 2003. (2004 average €/USD exchange rate)

In the United States, production costs remain relatively higher but the industry attains profitability because of the 52 cents/gallon tax exemption (13.7 cents/litre). -47-

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In Australia, an ABARE study (cited in the above table) estimated production costs for ethanol from C molasses from existing and new capacity, at AUD 0.28/litre (feedstocks costs plus operating costs). This is considered as viable when compared to future expected gasoline prices, after factoring in the country’s fuel excise exemption. Ethanol from higher grades of molasses was however not viable. Ethanol from B molasses was estimated at AUD 0.43/litre and from A molasses at AUD 66/litre. The study pointed to the variability of C molasses feed stock supply as a crucial issue. Redirection of first express juice to ethanol production would greatly increase the cost of ethanol production. The European Commission in framing its draft legislation on targeted biofuels noted that at the 2003 oil prices (USD25/barrel), biofuels were not competitive in the European Union. Biofuel production costs were put at €0.50/litre. Henniges & Zeddies (2003) estimated higher production costs in Germany, at €0.59/litre from beet and €0.55/litre from wheat. Ethanol production costs in Thailand are estimated at between USD0.25 and 0.30/litre, using C molasses and cane juice respectively. Energy costs are assumed to be met through burning cane bagasse during the crushing season, and by burning rice husks and other waste products during the off season. India’s ethanol production costs using C molasses are also around USD0.25/litre, but this was before the surge in molasses values during the second half of 2004. Clearly production costs estimates are sensitive to the volatility in the price of molasses. Typical Production Parameters To determine the project economics of an ethanol production facility and financial viability (through the IRR route), requires knowledge of investment costs, operations and maintenance costs, and production parameters of typical sugar factories in the region. Table 13 shows typical production parameters and costs of an ethanol plant. Table 13: Production Parameters Typical Factory Size (tc/hr)

Actual output (tc/ hr)

Actual output (tonne/y)

Molas sescane output ratio

Molasses production (tonnes / hr)

Alcohol production, (litres per day)

100 150 250 300 350 400 500

95.69 160.04 250.84 305.47 356.1 408.96 492.86

462,294 688,226 1,007,183 1,211,236 1,655,682 2,217,396 2,193,737

0.04 0.04 0.04 0.04 0.04 0.04 0.04

4 6 10 12 14 16 20

21600 32400 54000 64800 75600 86400 108000

Source: Yamba (2003)

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Investment Cost Molasses to Ethanol (Anhydrous) Installed Investment, capacity, (US$m) kL/day 20 2.30 30 2.93 50 3.99 60 4.45 70 4.88 80 5.29 100 6.04

O+M % of investment or output related 5 5 5 5 5 5 5

CARENSA

5

Implementation Strategies

Although there is some commercial production of bioenergy from sugarcane in southern Africa, (e.g. electricity exports from sugar factories in Mauritius and Zimbabwe and fuel ethanol production in Malawi and Zimbabwe), in general, sugarcane has been under-utilised as an energy crop in the region. This study demonstrates that the potential for increased bioenergy production in all the caneproducing countries in SADC is considerable. However, quantifying the potential requires parallel projections of a range of complex supply and demand-side factors. To aid understanding of the scope for development of commercial bioenergy from sugarcane throughout SADC, a number of scenarios representing a range of alternative routes for cane-based ethanol and electricity production were developed and analysed. The scenarios are not predictions, but of possible ways in which the sugarcane resource might be utilized for bioenergy given appropriate market and policy drivers. The most important factors informing the development of the scenarios are: • The continuing technological improvements and the experience of other countries (e.g. Brazil and India as well as Mauritius, Malawi and Zimbabwe) in advanced sugarcane-based bioenergy production, • The widely held expectation of significant changes in the world sugar markets, and; • Increasing awareness of the great potential benefits of bioenergy for rural development, the environment and fuel security. All the scenarios outlined here envisage expansion in bioenergy production driven by demands set through national energy policy mechanisms such as mandated fuel blending and obligations for a share of electricity provision from renewables, in this case bio-electricity from sugarcane. The countries analysed in detail are Malawi, Mauritius, Mozambique, South Africa, Swaziland, Zambia and Zimbabwe. Other countries are grouped under ‘other SADC’. For projecting business-as-usual sugarcane production and energy consumption, 2000 was chosen as the base year and the following assumptions were made: 1. Projected growth in sugarcane production – 2% per year from 2000 base. 2. Projected growth in electricity consumption – (see Table 14) 3. Projected growth in transport energy consumption (petrol and diesel)- 2.1% per year (all countries). 4. Projected growth in sugar demand – based on average per capita consumption (2000-2002) and FAO projections for population growth (FAOSTAT, 2004). Table 14: Electricity Demand Forecast for SADC 2000-2020 South Africa 2.0% Rest of SADC 3.5% Source: Musaba, 2006

2021-2030 1.5% 2.5%

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5.1

Ethanol Scenarios

Sugar mills traditionally try to extract as much crystallisable sugar (sucrose) from the cane as is economically possible. Sugarcane stems also contain small amounts of other sugars in addition to sucrose, some of which are good substrates for ethanol production using standard yeast-based fermentation. However, when co-producing ethanol and crystalline sugar from sugarcane, it may be preferable to divert some of the sucrose in the cane to ethanol production, reducing the yield of crystalline sugar. The different ethanol production scenarios considered in this study differ in the amount of sucrose diverted to make ethanol. A number of market factors determine the optimal choice in each case. All the scenarios have a basic condition that the local demand for crystalline sugar must be met before any sugars can be diverted to ethanol production. It is also assumed that no other feedstocks (such as maize) are used. 5.1.1

Ethanol and sugar production model

Juice fraction to A strike

A massecuite

Juice fraction (0-100%) direct to ethanol

A-molasses fraction to B strike

ar C

B

A Clear Juice

su g

su g

su ga r

ar

In order to calculate the potential for ethanol (and sugar) production for a given quantity of sugarcane crushed and choice of feedstock streams for ethanol production, a spreadsheet model of a standard 3-massecuite raw sugar production process was developed. The model uses as inputs standard factory control parameters as presented in the mill data spreadsheet for southern African factories provided by SMRI covering the seasons from 1981 to 2001 (SMRI, 2003). The SMRI data are used in the model to calculate representative cane quality and mill operating parameters for use in the projections. The model allows for any combination of feedstock to be used for ethanol production (e.g. C-molasses and clear juice), but the scenarios being considered only involve the use of one feedstock at a time. Figure 15 shows the diagrammatic representation of the model.

B massecuite

A-molasses fraction (0-100%) direct to ethanol

B-molasses fraction to C strike

B-molasses fraction (0-100%) direct to ethanol

Fermentation to Ethanol

Figure 15: Ethanol and Sugar Production Model

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C massecuite

C-molasses to ethanol

CARENSA

Scenario 1: Maximum Sugar Production If crystalline sugar production is to be maximized, a sugar mill typically carries out three strikes, extracting all the economically viable sucrose and leaving only Cmolasses available for ethanol production. Given projected sugarcane production and gasoline consumption, the quantities of ethanol that could be produced from Cmolasses and the extents to which the ethanol is able to substitute for national gasoline consumption are as shown in Table 15.

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Table 15: Ethanol Potentials from C-molasses Country Ethanol potential from Cmolasses (ML) Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

18.0 46.0 3.6 214.9 36.0 14.4 38.0 370.9

2000 % of gasoline consumption (energy basis) a 12.1 21.0 3.5 1.3 25.1 5.2 5.3 2.1

% of gasoline consumption (volume basis) 18.7 32.5 5.4 2.1 38.8 8.1 8.1 3.2

Ethanol potential from Cmolasses (ML) 21.7 59.3 20.9 235.1 45.7 20.5 46.8 450.1

2015 % of gasoline consumption (energy basis) 10.7 19.9 14.3 1.1 23.7 5.3 5.2 1.9

% of gasoline consumption (volume basis) 16.6 30.9 22.2 1.7 36.8 8.2 8.1 3.0

Ethanol potential from Cmolasses (ML) 29.2 79.9 28.2 316.5 61.4 27.7 63.0 605.8

2030 % of gasoline consumption (energy basis) 10.6 19.6 14.1 1.1 23.4 5.2 5.1 1.9

% of gasoline consumption (volume basis) 16.4 30.4 21.9 1.7 36.2 8.1 7.9 3.0

a

Note: The energy content of ethanol is significantly lower than petrol on a volumetric or mass basis, e.g. ethanol = 21 MJ per litre and petrol = 33 MJ per litre

Scenario 2: Maximum Ethanol Production The maximum amount of ethanol that could be produced if the total sugar cane production in the different countries were used exclusively for ethanol production is shown in Table 16 This represents the theoretical upper limits to production of ethanol from sugarcane using current fermentation technology.

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Table 16: Gross Ethanol Potentials from Total Sugarcane Production Dedicated to Ethanol Country

Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

Ethanol potential from available sugarcane (ML) 154.0 393.4 30.6 1838.5 299.1 123.2 325.5 3164.3

2000 % of total gasoline consumption (energy basis) 103.5 179.5 29.6 11.4 208.2 44.8 45.0 17.9

% of total gasoline consumption (volume basis) 160.2 278.0 45.8 17.7 322.3 69.4 69.7 27.7

Ethanol potential from available sugarcane (ML) 185.5 507.7 179.2 2011.8 390.6 175.8 400.4 3851.0

2015 % of total gasoline consumption (energy basis) 91.7 170.5 122.7 9.6 203.1 45.3 44.5 16.6

% of total gasoline consumption (volume basis) 142.1 264.0 190.0 14.8 314.5 70.2 69.0 25.8

Ethanol potential from available sugarcane (ML) 249.7 683.3 241.2 2707.6 525.7 236.6 538.9 5183.0

2030 % of total gasoline consumption (energy basis) 90.4 168.0 120.9 9.4 200.1 44.7 43.9 16.4

% of total gasoline consumption (volume basis) 140.0 260.2 187.2 14.6 309.9 69.2 68.0 25.4

Scenario 3: Maximum Ethanol Production after meeting local demand If these maximum ethanol potentials were to be realized, all local demand for crystalline sugar would have to be met by imports. Since such a situation is very unlikely, a more realistic picture of maximum ethanol production would be to ensure that all the projected local sugar demand is met first (i.e no imports allowed), and all the remaining sugar resource is then used for ethanol production. Table 17 , shows that in this case just over 18% of the regional petroleum consumption could be met by ethanol in 2015 on a volumetric basis compared to over 25% when all the sugarcane is used exclusively for ethanol production.

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Table 17: Ethanol Potentials after Meeting Local Sugar Demand Country

Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

Ethanol potential from available sugarcane (ML) 92.9 411.5 -21.6 1144.8 267.6 47.3 130.8 2073.2

2000 % of total gasoline consumption (energy basis) 62.4 187.8 -20.9 7.1 186.2 17.2 18.1 11.7

% of total gasoline consumption (volume basis) 96.6 290.7 -32.4 11.0 288.3 26.6 28.0 18.1

Ethanol potential from available sugarcan e (ML) 66.5 534.8 116.0 1317.4 413.4 110.7 232.4 2791.2

2015 % of total gasoline consumption (energy basis) 32.9 179.6 79.4 6.3 215.0 28.6 25.9 12.1

% of total gasoline consumption (volume basis) 50.9 278.1 123.0 9.7 332.9 44.2 40.0 18.7

Ethanol potential from available sugarcane (ML) 44.2 726.1 163.1 2133.9 564.6 160.0 390.5 4182.4

2030 % of total gasoline consumption (energy basis) 16.0 178.5 81.8 7.4 214.9 30.2 31.8 13.2

% of total gasoline consumption (volume basis) 24.8 276.5 126.6 11.5 332.8 46.8 49.3 20.5

Scenario 4: Declining Sugar Exports All the countries considered export significant amounts of crystalline sugar. If ethanol production were to become more commercially attractive than production of crystalline sugar for export, then a shift from exporting sugar to local ethanol production would be expected. Assuming that sugar exports decline linearly to zero in 2015, then the ethanol potentials would be as presented in Table 18.

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Table 18: Ethanol Potential with Sugar Exports Declining Linearly to Zero in 2015 Country

Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

Total ethanol potential from available sugarcane (ML) 18.3 83.1 83.5 199.8 153.7 21.7 64.0 624.2

2005 % of total gasoline consumption (energy basis)

% of total gasoline consumption (volume basis)

12.3 37.9 80.8 1.2 107.0 7.9 8.8 3.5

19.1 58.7 125.1 1.9 165.6 12.2 13.7 5.5

Total ethanol potential from available sugarcan e (ML) 66.5 534.8 116.0 1317.4 413.4 110.7 232.4 2791.2

2015 % of total gasoline consumption (energy basis)

% of total gasoline consumption (volume basis)

32.9 179.6 79.4 6.3 215.0 28.6 25.9 12.1

50.9 278.1 123.0 9.7 332.9 44.2 40.0 18.7

Total ethanol potential from available sugarcane (ML) 44.2 726.1 163.1 2133.9 564.6 160.0 390.5 4182.4

2030 % of total gasoline consumption (energy basis) 16.0 178.5 81.8 7.4 214.9 30.2 31.8 13.2

% of total gasoline consumption (volume basis) 24.8 276.5 126.6 11.5 332.8 46.8 49.3 20.5

Scenario 5: Sugar Exports Frozen at 2002 Levels Great uncertainty exists over the future of the preferential markets for sugar (one of the most important drivers for the current rate of sugar exports from the southern African region). Continuing support from preferential markets or higher global sugar spot market prices in the future might mean that exports are unlikely to decline. If sugar exports did not decline or increase, but were frozen at 2002 levels, the ethanol potentials would then be as shown in Table 19. Freezing exports at current levels effectively halves the projected regional ethanol production potential by the year 2015.

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Table 19: Ethanol Potentials with Sugar Exports Stabilized at 2002 levels Country

Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

Total ethanol potential from available sugarcane (ML) 18.3 83.1 83.5 199.8 153.7 21.7 64.0 624.2

2005 % of total gasoline consumption (energy basis)

% of total gasoline consumption (volume basis)

12.3 37.9 80.8 1.2 107.0 7.9 8.8 3.5

19.1 58.7 125.1 1.9 165.6 12.2 13.7 5.5

Total ethanol potential from available sugarcan e (ML) 14.9 182.2 107.3 597.7 231.3 46.4 139.7 1319.6

2015 % of total gasoline consumption (energy basis)

% of total gasoline consumption (volume basis)

7.4 61.2 73.5 2.8 120.3 12.0 15.5 5.7

11.4 94.7 113.8 4.4 186.2 18.6 24.1 8.8

Total ethanol potential from available sugarcane (ML) -7.3 373.5 154.4 1414.2 382.4 95.7 297.8 2710.8

2030 % of total gasoline consumption (energy basis)

% of total gasoline consumption (volume basis)

-2.7 91.8 77.4 4.9 145.6 18.1 24.3 8.6

-4.1 142.2 119.9 7.6 225.4 28.0 37.6 13.3

As the previous tables of ethanol potentials show, the percentage of national gasoline that can be substituted by locally produced ethanol from sugarcane varies considerably from one country to another. While South Africa would be unable to meet a 5% volumetric blend from Cmolasses in any of the years considered, all the other countries would be able. Swaziland and Mauritius would be able to meet requirements for blends in excess of 30% (Table 15). Figure 16 shows the ethanol surpluses that could be produced by each country after meeting national E5 blend requirements and using C- molasses only.

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CARENSA

(

)

12.5

6.7

15.2

20.3

10.6

8.0

MALAWI

ZAMBIA 14.8

17.8

23.3

13.4

16.2

21.8

40.9

ZIMBABWE

49.7

66.7

MOZAMBIQUE MAURITIUS 32.4

39.4

53.0

SWAZILAND

-358 -443 -610

SOUTH AFRICA

Figure 16: Regional Distribution of Ethanol Surpluses with Ethanol Production from C-molasses only and E5 Ethanol Blend (million litres)

As shown in Table 20, the total of the surpluses from all other countries would be insufficient to make up the deficit in South Africa. Table 20: Net Regional Ethanol Surpluses with Ethanol Production from Cmolasses only and E5 Ethanol Blend 2005 2015 2030 Year (238) (297) (414) Net Surplus Scenario 6: Use of Sweet Sorghum If sweet sorghum is grown and used for ethanol production, the regional production levels required to make up for the deficit in South Africa are as shown in Table 21. Table 21: Sweet Sorghum Requirements for Supplementing C-molasses and to Meet Regional E5 Ethanol Demand Requirement 2005 2015 2030 Sweet sorghum (t) 5,059,246 6,260,629 8,616,936 Land (ha) 202,370 250,425 344,677 Assumptions: • Sweet sorghum yields of 25t /ha (Yamba and Munyinda, 2005)

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•

Sweet sorghum cultivated once per annum

5.1.2

Strategies for ethanol programme development

The possible transition of the sugar industry in southern Africa from the present focus on crystalline sugar to an increased focus on ethanol production is explored on the basis of: 1. The growth rates of ethanol production necessary to meet ethanol blending targets., 2. Evaluation of options to increase the ethanol production capacity in the existing mills in the region. Regional Ethanol Production Growth On the basis of the gross ethanol production potentials in Table 16 and Table 17, a target of 25% substitution of gasoline by ethanol in 2030 was set. Production was assumed to grow at constant annual rates (of 20%) from 2005 to achieve these targets in 2030. This is summarized in Table 22. Table 22: Projected Targets for Ethanol Provision Year 2000 (base year) % of national gasoline consumption 0 substituted by ethanol

2005

2015

2030

0.1

0.91

25.0

Note: transport energy demand is assumed to increase for all countries by 2.1% per year (World Energy Outlook, 2002)

The actual quantities of ethanol that would be produced to cover the demand would rise from 34 million litres in 2005 to over 8 billion litres in 2030 (see Figure 17). 9000 8077

Ethanol Production (Ml)

8000 7000 6000 5000 4000 3000

2443.1

2000 752.18

1000 34.05

84.15

241.15

2005

2010

2015

0

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2020

2025

2030

CARENSA

Figure 17: Ethanol Production Growth at Constant Rate to Meet 20% of Regional Gasoline Demand in 2030

Decision process for mill modification This process attempts to determine the most favourable transitions to ethanol production given the existing mill sets in the countries considered. It involves a progression in the use of feedstocks for ethanol production from C-molasses to Bmolasses to A-molasses to cane juice, as required over time to meet the increasing ethanol demand. The methodology assumes that the local sugar industry will select the most suitable mills for conversion to large-scale ethanol production using specific criteria based on local conditions. Distillery introduction flow-scheme For the region to meet projected sugarcane production and ethanol demand, possible feedstock and mill modification routes, to achieve the transition, were determined using a decision flow-scheme as described below. The scheme is based on the characteristics of the existing sugar mills and utilizes the 3-strike model. Methodology For each country, the procedure for determining the potential for ethanol production is the following steps (see summary in Figure 19): For each year being considered: 1) The ethanol yield from C-molasses is determined from sugarcane data (using factory specific data if available, or country averages if not). 2) Ethanol demand is compared with the calculated ethanol yield from C-molasses. It should be noted that for South Africa, some of the molasses is used for other purposes mainly animal feed and potable alcohol. 3) If ethanol demand exceeds ethanol yields from C-molasses alone, then B-molasses are chosen as feedstock (for ethanol production in as many mills as required, starting with the largest mills, but only if national sugar demand is still met13). If crystalline sugar demand is not met then see (5) below. 4) As long as sugar demand is met, ethanol continues to be derived (and yields estimated) from higher-sugars feedstocks. The procedures for calculating ethanol potential from A-molasses and from juice are similar to that for B-molasses. 5) Where ethanol and sugar demand are not met, there is need to calculate additional sugarcane production required to meet demand and ascertain whether this would be feasible. This may include considering the need for additional factories. 6) If expanding the cane growing area is not feasible, alternative feedstocks (e.g. sorghum, maize, etc) may be considered. Imports may also be considered.

13

The assumption that it would be best to switch to using B-molasses for ethanol at the largest mills first seems reasonable but may need further assessment. There may well be other criteria which the industry considers more important in such a decision, and input would be required here from regional industry experts. Here the criteria for deciding which mills should use B-molasses for ethanol are covered by the idea of a viable mode of operation.

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The sugar mills in the region, shown in Table 23 have been categorized according to size in order to determine the order in which the mills are adapted to produce ethanol from B-molasses, A-molasses or juice.

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Table 23: Distribution of Sugar Mill Sizes in Southern Africa Up to 3000 3001 - 5000 5001 - 7000 7001 and greater Capacity (tc/day) Malawi 0 1 1 0 Mauritius 5 4 2 0 Mozambique 3 1 0 0 South Africa 2 4 5 4 Swaziland 0 0 1 2 Zambia 0 0 0 1 Zimbabwe 0 0 0 2 Source: SADC Technical Committee on Sugar (2004)

In the milling sector, South Africa and Mauritius presently have the highest number of mills, but as seen in Figure 18, annual capacity levels are far apart. The average output in Mauritius was around 47 thousand tonnes in 2004-05 whereas South Africa’s 14 mills average 178 thousand tonnes of sugar (see Figure 18). Differences in productivity and mill size translate directly into different cost levels amongst SADC sugar producers. 16

200

14

180

No of mills

140

10

120

8

100

6

80 60

4

40 20

0

0

M al aw i M au rit iu M s oz am bi qu So e ut h Af ric a Sw az ila nd Ta nz an ia Za m bi a Zi m ba bw e

2

Mill output (ktons)

160

12

No of mills

Mill size

Figure 18: Number of mills and indicative mill sizes in Southern Africa (2004-05) Source: ISO (2007a)

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CARENSA

DETERMINE QUANTITY OF ETHANOL REQUIRED (BY MANDATE?)

OVERVIEW OF PROCEDURE FOR ESTABLISHING POTENTIAL FOR SUGAR INDUSTRY TO MEET MANDATED ETHANOL DEMAND IN ADDITION TO NATIONAL SUGAR DEMAND

CALCULATE ETHANOL POTENTIAL FROM AVAILABLE C-MOLASSES (NORMAL 3-BOILING SCHEME) *see Chart 2 DOES ETHANOL POTENTIAL MEET DEMAND?

NO

CALCULATE POTENTIAL FROM B-MOLASSES

DOES ETHANOL POTENTIAL MEET DEMAND?

CALCULATE POTENTIAL FROM A-MOLASSES

NO

DOES ETHANOL POTENTIAL MEET DEMAND?

NO

CALCULATE POTENTIAL FROM JUICE

YES YES YES

YES

DOES SUGAR PRODUCTION WITH THIS SCHEME MEET DEMAND?

NO

CALCULATE ADDITIONAL CANE PRODUCTION REQUIRED

REQUIRED LAND AVAILABLE?

ESTABLISH VIABILITY AND POLICY ENVIRONMENT

YES

RECOMMEND DEVELOPMENT OF NEW CAPACITY

NO DETERMINE AVAILABILITY OF ALTERNATIVES/IMPORTS

Figure 19: Mill Modification Flowchart PROCEDURE FOR CALCULATION OF ETHANOL POTENTIAL FROM B-MOLASSES

SET NEXT MOST VIABLE MILL TO 2-STRIKE OPERATION

NO

LIST OF VIABLE MILLS EXHAUSTED?

YES

NO DETERMINE SET OF MILLS FOR WHICH 2-STRIKE PROCESS IS VIABLE, RANK IN TERMS OF VIABILITY

CALCULATE ETHANOL POTENTIAL WITH MOST VIABLE MILL USING ONLY 2 STRIKES

DOES ETHANOL POTENTIAL MEET DEMAND?

YES

CALCULATE TOTAL ETHANOL AND SUGAR POTENTIAL FOR MILL SET WITH BOILING SCHEMES AS DETERMINED

Figure 20: Flowchart for Switch to B-molasses Feedstock

5.2

Cogeneration Scenarios – electricity potential

To determine the potential for electricity export from sugar mills in the region, several proven technologies and operating practices were examined. The experience of the

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Mauritian sugar industry was drawn upon, where significant amounts of electricity are exported to the grid and a vigorous policy environment exists to promote greater efficiency in the production of electricity from cane fibre. The following technological options and corresponding unit electricity yields were considered in the analysis: a. 20 kWh/tc – optimization of current back-pressure turbines, 2.0 MPa (20Bar) & 350°C (CFC Technical Paper No12, 2001). b. 92 kWh/tc – Condensing-extraction steam turbine (CEST), 4.6 MPa (45Bar) & 440°C (Seebaluck - CARENSA, 2003). c. 143 kWh/tc – CEST, 8.3 MPa (82Bar) & 525°C (Seebaluck - CARENSA, 2003). d. 650 kWh/tc – future optimum – biomass gasification combined cycle. The electricity export potentials for each case are indicated in Table 24 to Table 27.

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Table 24: Electricity generation potential from sugar mills using improved backpressure turbines (at 20 kWh/tonne cane and 20 bar) 2000 Country Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

Cogen Potential (GWh) 40 102 8 478 78 32 85 822

2015

% of total electricity 4.5 5.8 0.5 0.3 8.6 0.5 0.7 0.4

Cogen Potential (GWh) 54 138 11 643 105 43 114 1,106

2030

% of total electricity 3.6 4.6 0.4 0.3 8.6 0.4 0.6 0.4

Cogen Potential (GWh) 72 185 14 865 141 58 153 1,489

% of total electricity 3.2 4.1 0.4 0.3 8.6 0.4 0.5 0.4

Table 25: Electricity generation potential from sugar mills using CEST technology (at 92 kWh/tonne cane and 45 bar) Country Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

2000 Cogen % of Potential total (GWh) electricity 184 470 37 2,197 357 147 389 3,781

2015 Cogen % of Potential total (GWh) electricity

20.8 26.5 2.3 1.3 39.7 2.4 3.2 2.0

248 633 49 2,956 481 198 523 5,088

2030 Cogen % of Potential total (GWh) electricity

16.7 21.3 1.9 1.3 39.7 2.0 2.6 1.9

333 851 66 3,979 647 267 704 6,848

14.8 18.8 1.7 1.4 39.7 1.7 2.3 1.9

Table 26: Electricity generation potential from sugar mills using CEST technology (at 143 kWh/tonne cane and 82 bar) 2000 Country Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

Cogen Potential (GWh) 286 731 57 3,414 555 229 605 5,877

2015

% of total electricity 32.4 41.1 3.6 2.0 61.7 3.8 5.0 3.0

Cogen Potential (GWh) 385 983 76 4,595 748 308 814 7,909

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% of total electricity 26.0 33.0 2.9 2.0 61.7 3.1 4.0 3.0

Cogen Potential (GWh) 518 1,323 103 6,185 1,006 414 1,095 10,645

% of total electricity 23.0 29.2 2.6 2.1 61.7 2.7 3.6 3.0

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Table 27: Electricity generation potential from sugar mills using BIG-CC technology (at 650 kWh/tonne cane) 2000 Country Malawi Mauritius Mozambique South Africa Swaziland Zambia Zimbabwe Total

5.2.1

Cogen Potential (GWh) 1,300 3,321 258 15,520 2,525 1,040 2,748 26,712

2015

% of total electricity 147.1 186.9 16.5 9.1 280.3 17.3 22.7 13.8

Cogen Potential (GWh) 1,750 4,470 348 20,887 3,398 1,400 3,698 35,951

2030

% of total electricity 118.1 150.1 13.3 9.1 280.3 13.9 18.2 13.4

Cogen Potential (GWh) 2,355 6,016 468 28,111 4,574 1,884 4,977 48,385

% of total electricity 104.6 132.9 11.8 9.6 280.3 12.3 16.1 13.7

Strategies for Cogeneration Programme Development

Constant rates of growth Based on the electricity generation potentials for the different cogeneration scenarios given above, a regional target of 10% of total electricity provided by sugar mills was assigned in order to investigate possible rates of introduction of advanced technologies for increased electricity generation. A constant annual rate of growth from 2005 was assumed. The production targets are summarized in Table 28. Table 28: Projected Share of Electricity Demand to be met From Bagasse Year 2000 (base year) 2005 2015 2030 % of national electricity 0 0.1 0.61 10 consumption Note: assumes that 0.1% of demand is met in 2005 and is followed by a constant 24% annual growth rate until 2030.

The actual quantities of cogenerated electricity that would be required would rise from 610 GWh in 2005 to 36.6 TWh in 2030 (see Figure 21).

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40.00 36.58

Surplus Electricity Production (TWh)

35.00 30.00 25.00 20.00 13.88

15.00 10.00 5.52 5.00 0.61

1.13

2005

2010

2.37

0.00 2015

2020

2025

2030

Figure 21: Growth of Cogenerated Electricity (2005 – 2030) assuming a constant 24% growth rate per annum

Decision process for increasing surplus electricity generation For the projected sugarcane production and electricity demand, possible options for implementing the transitions to meet electricity production targets were determined using a decision flow-scheme as described below (see Figure 22). Methodology Following the same logic used for ethanol scenarios, the largest mills are considered the most suitable for early modification to produce surplus electricity. For the years 2000, 2015 and 2030, the procedure involves the following steps (for each country): 1) Determination of surplus electricity demand from the sugar industry. 2) Determination of surplus electricity that could be generated if all factories optimized their existing boilers and back-pressure steam turbines, and improved efficiency in the use of steam. 3) If surplus electricity does not meet demand, potential electricity generation is estimated with largest mill retrofitted to use condensing extraction steam turbines (CEST), and the highest boiler pressures deemed technically and economically viable for that mill by local experts. 4) If surplus electricity still does not meet demand, electricity production from the next largest CEST-powered mill is estimated until demand is met or mill set is exhausted. 5) If after all viable mills are converted to using CEST and demand is still not met, possible new cane production and factories are considered.

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DETERMINE ELECTRICITY DEMAND (REQUIRED BY RENEWABLES OBLIGATION?)

PROCEDURE FOR DETERMINATION OF SURPLUS ELECTRICITY POTENTIAL

CALCULATE SURPLUS ELECTRICITY GENERATION WITH ALL MILLS USING BP TURBINES, IMPROVED COMBUSTION

YES

DOES ELECTRICITY POTENTIAL MEET DEMAND? NO DETERMINE SET OF MILLS FOR WHICH CONVERSION TO CEST WOULD BE VIABLE

CALCULATE ELECTRICITY POTENTIAL WITH LARGEST MILL USING CEST, OPTIMUM OPERATING PRESSURE

YES

ESTABLISH VIABILITY AND POLICY ENVIRONMENT

DOES ELECTRICITY POTENTIAL MEET DEMAND? NO

YES

LIST OF VIABLE MILLS EXHAUSTED? NO SET NEXT LARGEST MILL TO GENERATION USING CEST, OPTIMUM OPERATING PRESSURE

CALCULATE ADDITIONAL CANE PRODUCTION REQUIRED

YES

REQUIRED LAND AVAILABLE?

RECOMMEND DEVELOPMENT OF NEW CAPACITY

NO

DETERMINE AVAILABILITY OF ALTERNATIVES/IMPORTS

Figure 22: Flowchart for Transition to Higher Surplus Electricity Production

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6

Barriers to Implementation of Cane Resource Utilisation

Over the past 30 years, the world has acknowledged the great potential that lies in sugar factories, whose co-products, particularly ethanol and electricity have a ready market as they contribute to crucial energy security. Because of the renewable nature of these products, they invariably contribute to environmental integrity. For many developing countries, where most sugar factories are found, the sugar industry has great potential to contribute to sustainable development at a local level, in line with Africa’s development goals. There are also opportunities for additional revenue stream by selling carbon credits under the Clean Development Mechanism (CDM).

6.1

Barriers to Ethanol Production

With the ever increasing prices of petroleum based fuels, which is finite in nature, bioethanol, which can be produced locally, presents the best sustainable development path for the oil industry. However, various barriers currently inhibit the penetration of ethanol as a commodity in southern Africa. Presented in Table 29 are the key barriers. Table 29: Barriers to Production and Use of Bio-ethanol Category Barriers • Limited awareness of the benefits to accrue from investment in bio-ethanol producing technologies • Limited awareness of benefits of ethanol as a renewable energy source and its relationship to business by Government, NGOs and Private Sector Policy • Tariff and non-tariff barriers to movement of energy products like ethanol • Limited awareness of CDM objectives and its cycle in Government, NGOs and Private Sector • Limited awareness of availability of information on ethanol producing technologies • Limited and sometimes non-existence of knowledge of selection of appropriate ethanol producing technologies as potential renewable energy sources Technology • Limited human resource in the development of a bankable business proposals under sustainable energy path development • Few support services for PIN and PDD elaboration and conducting feasibility studies, and formulation of business plans related to Renewable Energy Technologies (RETs) • Lack of financial base from local investors to contribute to equity for project implementation Financial • Limited, and sometimes no, awareness of local/regional institutions of the need to invest in ethanol projects • Limited awareness of availability of international investment

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sources • Under CDM, low market value of carbon credits and hence no financial attractiveness for business • Limited, and sometimes no, awareness of legal issues in the development of RETs projects at all levels (Government, NGO and Privates Sector) Legal • Limited, and sometimes no, awareness of the Kyoto Protocol as an international law that promotes renewable energy sources under CDM • Lack of capacity in most countries to negotiate for a CERPA Source: CDM for Southern Africa (2004)

6.2

Barriers to Electricity Production

This report has shown the high potential of co-generation to contribute to the energy security under the SAPP, and SADC as a whole. In a few years, the electricity demand for most countries will outstrip supply. Despite the aforesaid, production of electricity in sugar factories has not been fully exploited. Listed below are some barriers that have hindered the full potential of co-generation in the sugar industry. Table 30: Barriers to Production of Electricity in Sugar Industries Category

• • • • • Policy

• • • • • Technology and Human capacity

• •

Barriers Inadequate political support for renewable energy Lack of data and information to support better policy making Most existing energy policies are inadequate especially on renewable sources Energy institutions are ineffective, mainly as a result of insufficient budget allocation to carry out the various activities There is no effective government institutional interaction in the energy sector Lack of private sector investment in electricity mainly due to the commercially unviable low grid based tariffs Limited awareness of the benefits to accrue from investment in advanced electricity producing technologies Limited awareness of benefits of bagasse-generated electricity as a renewable energy source and its relationship to business under environmental programmes like CDM Limited awareness of availability of information on renewable energy technologies Limited and sometimes non-existent knowledge of selection of appropriate potential renewable energy technologies Limited human resource in the development of a bankable business proposals under sustainable energy path development Limited human capacity in renewable energy technologies in key institutions like Departments of Energy, and NGOs who are key to the development and deployment of RETs

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• Limited learning institutions providing in-depth system design in renewable energy technologies • Research and Development: ƒ There is an inadequate number of projects to demonstrate the applicability of some of the available energy technologies ƒ Technological obstacles related to applied research, development and demonstration • Private sector participation in energy service development programs has been lacking because rural energy projects tend to be less attractive and the investment incentives have not been Financial operational • Renewable energy technology costs have unrewarded environmental benefits • Lack of appropriate and innovative financing mechanisms for long term financial benefits • Lack of fiscal incentives to enable renewable energy projects become financially attractive due to distorted competition from big hydro schemes. • Relatively low grid based tariffs make it difficult to commercialize renewable energy making unviable for sugar factories to produce export electricity to the public grid. Investment in advanced combustion technologies would be meaningful if revenue from the electricity generation there from would provide a positive return on investment. Otherwise, sugar factories will continue with inefficient bagasse combustion, while buying their additional electricity needs from the national grid. • In most SADC countries, high interest rates inhibit private investment in renewable energy technologies • Lack of financial base from local investors to contribute to equity for project implementation • Limited, and sometimes no, awareness of local/regional institutions of the need to invest in renewable energy projects • Limited awareness of availability of international investment sources • Under CDM, low market value of carbon credits and hence no financial attractiveness for business Legal • Similar to ethanol barriers Source: Matsika (2006), CDM for Southern Africa (2004)

6.3

Concluding Remarks

From the barriers listed above, a number of policy issues arise. Such policy issues would be aimed at enhancing sustainable development. For ethanol production and use, key policy issues include the use of ethanol as an octane enhancer; development

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of standards for ethanol blending and agricultural policy on out grower schemes. To meet the increasing demand of ethanol and improve the livelihoods of the growers requires promotion of private sector participation in ethanol blending and the need for governments to offer fiscal incentives. For isolated electricity generation, low level of electricity tariffs (currently at US-cents 2 to 4 in most SAPP countries), which in most cases do not take into account environmental externalities, need to be reviewed. Studies have shown that on commercial basis, the tariff should be above 5 US-cents (Yamba and Matsika, 2003). In order to promote private sector participation, therefore, a policy on Independent Power Producers (IPPs) needs to be implemented which takes into account the disparity between the prevailing (usually subsidized) tariffs and commercial ones. From the list of identified barriers, three specific barrier removal strategies have been recommended namely: awareness and information on the benefits for integrated use of sugarcane resources under sustainable energy path development and CDM arrangements, capacity to develop bankable projects, and conducive fiscal and financial environment for easy implementation of such projects.

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7

The Role of the Clean Development Mechanism (CDM) in the Sugar Industry

The availability of financing for renewable energy projects is a major constraint to realizing sustainable energy development in the context of supplying energy for rural development and poverty reduction. Project developers are often unable to raise adequate funding for the large initial investment required in renewable energy projects. Additionally, traditional banks are unwilling to finance such projects regarded as risky. For decentralized rural energy projects, the scales are usually too low and this increases the transaction costs. Taking into account the aforesaid, it is necessary to avail financing mechanisms to support such projects, and to take into account the following pertinent issues: • Risks (both financial and technical) • Collateral and security issues • Revolving funds with start-up capital • Support for bankable proposal preparations, including system design and technology choice Fortunately, innovative financing mechanisms have been developed which are suitable for application in the region. The following programmes and institutions are already available to finance sustainable energy projects: • African Rural Energy Enterprise Development (AREED) • African Development Bank (AfDB) Financing Energy Services for Small-Scale Energy Users (FINESSE) • Sustainable Energy Finance (SEFI) • World Bank Rural Transformation in Africa • Development Bank of Southern Africa (DBSA) • Triodos Bank • Renewable Energy and Energy Efficiency Partnership (REEEP) (CEEEZ, 2005). Additionally, national financial institutions in most African countries are being made aware and encouraged to invest in energy projects (e.g. the Infrastructural Development Bank of Zimbabwe has a portfolio for developing energy projects). Due to the energy-environment concerns (especially in the context of climate change), global efforts have focused on promoting investment in clean energy. International mechanisms such as the Clean Development Mechanism (CDM) under the Kyoto Protocol have been developed to address this.

7.1

Overview of Clean Development Mechanism

The Clean Development Mechanism (CDM) is one of the innovative features of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) (Article 12 of the Protocol). It is a cooperative mechanism where the so-

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called Annex I countries14 with specific GHG emission reduction obligations invests in so-called non-Annex I countries in project activities that reduce or absorb (sequester) at least one of six GHGs. The Annex I investor is credited with certified emission reductions (CERs) equivalent to the reduced amount of GHGs, The CERs are then used to meet the investor’s emission reduction targets under the protocol (UNFCCC, 1997). Although there are no immediate GHG reduction targets for the developing countries, CDM can be seen as an additional source of foreign direct investment into national mitigation projects, which would contribute to local sustainable development while contributing to worldwide GHG emission reductions. According to the Kyoto Protocol, project activities that qualify for the CDM are those related to specific GHGs and to the sources and sectors responsible for the majority of emissions, as established in Annex A of the Kyoto Protocol15. During the last few years the mechanisms have aroused international interest in carbon investment and carbon markets, which are growing as companies and governments have started purchasing emissions credits through voluntary trading schemes, carbon investment funds, and government procurement tenders. 7.1.1

Eligible project activities for CDM

CDM project activities must result in real and measurable reductions or absorption (sequestering) of GHGs that would not have occurred in the absence of the proposed project activity and they also must meet the host country’s sustainable development criteria. Existing or newly built facilities already under commission can still be registered as CDM project activities, provided the following conditions are met: • • •

The proposed project activity started between January 1, 2000, and the date the first CDM project activity was registered (November 18, 2004); The project activity is submitted for registration to the CDM Executive Board, the supervisory body of the CDM, before December 31, 2005; and Proof is given for the CDM being considered at the project's design stage.

Sugar factories would have two options for two periods for crediting periods namely: • Years with the option of renewing twice (total crediting period = 21 years) • 10 years without the renewal option

14

Annex I countries are the developed countries while non-Annex I countries consist of primarily developing countries 15 The six GHGs and gas classes coming from varied sources of the economy are: Carbon dioxide – CO2 (source: fossil fuel combustion; deforestation; agriculture); Methane – CH4 (source: agriculture; land use change; biomass burning; landfills); Nitrous oxide – N2O (source: fossil fuel combustion; industrial; agriculture); Hydrofluorocarbons – HFCs (source: industrial/manufacturing); Perfluorocarbons – PFCs (source: industrial/manufacturing); Sulphur hexafluoride – SF6 (source: electricity transmission; manufacturing).

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7.1.2

Classification of CDM project activities

The mode of investment in CDM projects has a bearing on the nature of risks likely to be faced by the participants in the projects. As a result, four basic forms of CDM investment can be developed: 1. Full or Partial Equity: a company finances all or co-finances part of a CDM project in return for full or shared financial returns and certified emissions reductions (CERs); 2. Certified Emissions Reduction Purchase Agreement (CERPA): a company agrees to buy CERs as they are produced by the project 3. Loan: a company provides loan or lease financing at concessional rates in return for CERs; or, 4. Financial Contribution: a company financially contributes towards the cost of a CDM project equal to some portion of the incremental cost of the project over and above the baseline technology, or finances the removal of market barriers, in return for CERs; (Pembina, 2003). Shown in Table 31 are the eligible projects under the two classifications of GHG emission reduction and sequestration. 7.1.3

Small-scale CDM projects

In order to leverage the development of small-scale CDM project activities, the UNFCCC introduced fast-track procedures to expedite the implementation of small scale CDM projects. A project activity can be qualified as small-scale CDM if it meets one of the three following conditions: • Type I: renewable energy project activities with a maximum output capacity equivalent to up to 15 MW (or an appropriate equivalent) • Type II: energy-efficiency improvement project activities which reduce energy consumption on the supply and/or demand side by up to the equivalent of 15 GWh/year • Type III: other project activities that both reduce anthropogenic emissions and directly emit less than 15 kilo tonnes of CO2 equivalent annually. Some of the sugar factories in southern Africa would benefit from this due to their small size.

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Table 31: List of project categories eligible under the CDM Sectoral scope Energy industries (renewable/nonrenewable sources)

Examples Renewable energy/ Non-renewable energy

2 3 4

Energy distribution Energy demand Manufacturing industries

5 6

Chemical industries Construction

Electricity Energy efficiency Energy efficiency/ Fuel switching Process change Material substitution

7

Transport

8

Mining/mineral production Metal production

9 10

11

12 13 14 15

Sequestration Emission reductions activities

1

Energy efficiency/ Fuel substitution Fuel substitution

Fugitive emissions from fuels (solid, oil, and gas) Sectoral scope Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride Solvent use Waste handling disposal Afforestation and reforestation Agriculture

and

Energy efficiency Process change Fuel substitution Examples HFCs

Material substitution Fuel substitution

Wind power, solar photovoltaic (PV), hydro, geothermal Combined Heat and Power (CHP); fuel switching from coal or fuel oil to natural gas Transmission and distribution lines High-efficiency equipment and lighting High-efficiency equipment From coal to natural gas; clean coal technology Nitrous oxide abatement Energy-saving measures; shorter transport distance for trucks Improved vehicle efficiency, transit expansion biofuels, natural gas fuels Coal mine methane recovery Improved process efficiency Dry coke quenching Recovery and utilization of gas from oil wells Incineration of HFC-23 waste streams

Replacement with less GHG-emitting materials Landfill gas recovery, wastewater treatment, animal waste treatment

Afforestation Reforestation Methane production avoidance from biomass decay

Source: UNFCCC (2006); Pembina Institute (2003); editor’s contribution. 7.1.4

Status of CDM Projects

A total of 134 projects were registered with UNFCCC as on March 8, 2006, accounting for a total 39,357,745 CERs. Out of this, CERs from renewable energy sources accounted for 2,922,122. The analysis of registered projects till 6th March 2006 is shown below in Figure 23.

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Projects by Fuel type Wood, 3, 2.24%

, Energy Efficiency 2.99%, 4 , Fuel switch, 4 2.99%

Wind, 7, 5.22%

, Fugitive emissions 6.72%, 9

, Bagasse, 23 17.16%

Solar, 1, 0.75%

, Waste handling 25.37%, 34

, Rice Husk, 11 8.21% Mustard, 2, 1.49% Biogas, 3, 2.24%

Fibres, 1, 0.75% Hydro, 32, 23.88%

Figure 23: Analysis of Registered Projects in UNFCCC till 6th March 2006

Thousands

As can be seen, a total of 23 projects are registered under sugarcane/bagasse sector with a share of 17.2% in total CER, which is a significant portion of total CDM business, although ethanol might be a small percentage of the already small fuel switch at 3.0%. Figure 24 shows that CERs from bagasse cogeneration projects amount to 581,000. 1200 972

1000 800

581

600 400

591

316 242 72

Rice Husk

Mustard

Fibres

Hydro

Biogas

Wood

4

Wind

33

0

Bagasse

113

Solar

200

Figure 24: Annual CER generation from fuel type in Renewable Sources

7.2

Potential CDM Projects in Southern Africa

Although there are countries in the region like Zambia which depend mostly on renewable energy (from hydro) for their electricity needs, coal accounts for over 80% of the primary source of energy for steam and thermal power generation in southern Africa. The large-scale use of coal impacts negatively on the environment through CO2 emissions that contribute to the greenhouse effect, sulphur oxides (SOx) and

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nitrogen oxides (NOx) that cause acid rain, and particulates that lead to health problems. In addition, fly ash generated as a result of coal combustion poses additional disposal hazards. All these negative environmental impacts of coal use call for the use of efficient steam and thermal power generation technologies which lead to minimum pollution of air, water, and land. In the transport sector, the 45 million litres of fuel consumed in southern Africa is mostly fossil based, and most countries import petroleum fuels. The use of petroleum fuels also results in GHG emissions that cause potentially devastating global climate change. The full or partial switch to bio-ethanol offers an opportunity to avoid these GHG emissions. Presented below is the role that the sugar industry can play in GHG emission reduction through bio-ethanol production and co-generation of steam and electricity. Relatively small projects would however need bundling to bring down the transaction cost of such projects. 7.2.1

Co-generation using Bagasse

Cogeneration offers an attractive solution to meet the industrial energy requirements in an efficient manner, while conserving regional resources. It offers numerous direct benefits to industrial and institutional applications but also positive carry-over benefits to utilities and society at large. Given the suitability of cogeneration to industry in southern Africa, the candidates for cogeneration include industries with substantial combined heat and power requirements, such as sugar, textile, paper, fertilizer, food processing, chemicals, and petrochemicals. Cogeneration is already being practiced widely in various industries such as pulp and paper, sugar, chemicals, and fertilizers.

IRR Vs Tariff (BAU) 50

IR R (% )

40 30 20

100t 150t

10

250t 300t 350t 400t

0 -10

0.20

0.04

0.06

0.08

500t

Tariff (US$/kWh) Figure 25: Cogeneration electricity financials – BAU

The consolidated baseline methodology for grid connected electricity generation from

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biomass residues is ACM0006, which can be applied to grid-connected bagasse cogeneration projects, as is the case with the sugar industry in southern Africa. CEEEZ (2003) analyzed the impacts of CERs on project viability for different factory sizes, and at various tariffs. Three scenarios were considered and analyzed, and results are shown in Figure 25, Figure 26 and Figure 27. The overall observation is that with CDM, the project economics improve, thus a marginal project can turn to be more attractive when CDM is considered.

IRR Vs Tariffs (CDM-Sale of CERs Spread) 50

IR R (% )

40 30 100t

20

150t 250t

10

300t 350t 400t

0 -10

0.20

0.04

0.06

0.08

500t

Tariff (US$/kWh) Figure 26: Cogeneration electricity financials – evenly spread CDM payments

IRR Vs Tariff (CDM-33% Down Payment) 60.00 IR R (% )

50.00 40.00 30.00 20.00 10.00 0.00 0.20

0.04

0.06

0.08

100t 150t 250t 300t 350t 400t 500t

Tariff (US$/kWh)

Figure 27: Cogeneration electricity financials for CDM with 33% down payments

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7.2.2

Bio-ethanol under CDM

The phasing out of lead as an octane enhancer in gasoline makes ethanol production and blending more attractive in the region. From Table 6, it can be seen that just in five countries, a 10% bio-ethanol blend policy will accrue environmental benefits through saving over 2.5 million tCO2 per annum in the region from the transport sector. If bio-ethanol projects are implemented under CDM, the viability of such projects will be greatly improved especially at higher carbon credit prices of US$10 per tonne Yamba and Matsika (2004) considered and analyzed three scenarios to determine the impact of sale of CERs under CDM: • Business as usual (BAU) without CDM consideration • CDM scenario spread over 21 years, at US$5 per tCO2 • CDM scenario with 33% down payment from sale of carbon credits, and the rest being sold over the remaining crediting period at US$5 per tCO2 Figure 28, Figure 29 and Figure 30 shows the results of financial performance for the three scenarios.

IRR Vs Ethanol Price (BAU)

IR R (% )

80.00 60.00 40.00

100t 150t

20.00

250t 300t 350t

0.00 0.1

0.2

0.3

Ethanol Price (US$/Litre)

Figure 28: Ethanol financials for BAU Scenario

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IRR Vs Ethanol Price (CDM - Spread) 100.00 IR R (% )

80.00 60.00 100t 150t 250t 300t 350t 400t 500t

40.00 20.00 0.00 0.1

0.2

0.3

0.4

Ethanol Price (US$/Litre)

Figure 29: Ethanol financials for evenly spread CDM payments IRR Vs Ethanol Price (CDM - 33% dp)

IR R ( % )

80.00 60.00 100t 150t 250t

40.00 20.00

300t 350t

0.00 0.1

0.2 Ethanol Price (US$/Litre)

0.3

400t 500t

Figure 30: Ethanol financials for CDM with 33% down payment

For each scenario, it is clear that larger plant sizes have a better financial performance due to economies of scale. Assuming an IRR of 20%, which is quite reasonable return on investment, the ethanol production prices are given in Table 32 below: Table 32: Ethanol Production Prices for Different Scenarios at 20% IRR Factory Size (tc/hr) 100 150 250 300 350 400 500 21 21 17 16 13 10 12 BAU (UScents) 19 19 16 14 11 8 10 CDM Spread Scenario (UScents) 18 18 15 13 10 5 9 CDM Advanced Payment (UScents)

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Table 32 shows that ethanol prices range between 10 and 21 US cents per litre for BAU. It ranges from 8 to 19 US cents for CDM spread, while it ranges from 5 to 18 US cents per litre for CDM advanced payment. In case of Zambia, for example, the current gasoline price (ex-factory) is over 40 US cents per litre, which gives an economic advantage to ethanol use as an octane enhancer. It is interesting to note from the above that CDM at US$5 per tonne CO2e is not attractive to business. Unless the value of carbon credits is increased, it is unlikely that the business sector will be attracted by CDM.

7.3

Closing Remarks

As discussed in section 0, there are technical, financial, and policy barriers that inhibit wide-scale development of bioenergy projects. CDM can help in the redressing especially the financial and technical barriers. Although estimates vary, many studies indicate a huge potential for CDM projects in southern Africa. To realize this CDM potential, however, there is a need to create an environment that promotes low-risk carbon emissions reduction opportunities, while optimizing transaction costs. The creation of such an environment requires an understanding of the concerns of various stakeholders. CDM can be an effective tool through which the sugar sector in southern Africa can receive technological and financial transfer from developed countries. It can help promote the transition towards environmentally, economically and socially sustainable energy systems. The carbon credits generated in the process would also create an additional revenue stream. The sugar industry, therefore, is well poised to benefit from carbon finance under the CDM. Cane resource-based projects can benefit from an additional revenue stream by monetizing the carbon emission reductions (or carbon credits) that these projects generate. The markets for emission reductions is rapidly evolving and expanding and this additional revenue stream could help sugar millers diversify their revenue base. Even so, much still depends on the presence of favourable underlying fundamentals for cogeneration and for independent private power initiatives. Bagasse cogeneration CDM projects would appear to hold higher potential in the region due to rapidly growing electricity demand and a carbon intensive baseline. To exploit carbon credit potential, the sugar industry must understand the regulatory environment for the carbon market, key concepts underlying the CDM and its associated institutions and procedures, and the carbon credit buyers. A regional bio-ethanol and cogeneration programme would greatly contribute to improvement of the environmental integrity through reduction of local and global emissions, while at the same time contributing to sustainable development in southern Africa.

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3) 4)

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9) 10) 11)

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17)

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ABARE. 2001. Factors Impacting the Commercial Viability of Ethanol Production, Report to Client, Canberra Alvarez, Jose, and Polopolus, Leo C. 2008. Domestic and International Competition in Sugar Markets. EDIS document SC 021, publication of Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. First published November 1990; revised June 2002. Reviewed October 2008. Also part of the Florida Sugarcane Handbook, University of Florida. http://edis.ifas.ufl.edu/SC021 Batidzirai, B. 2002. Cogeneration in Zimbabwe - A Utility Perspective. AFREPREN Occasional Paper No. 19. AFREPREN/FWD, Nairobi, 2002. Beehary, R, and Baguant, J. 1996. Electricity from Sugarcane Biomass for Decarbonisation of Energy Supply in Mauritius. The Environmental Professional. Volume 18, pp 61 – 68, 1996. Berg, C. 2004. World Ethanol – An Analysis of Global Competitiveness, in F.O. Lichts World Ethanol and Biofuels Report. Vol 3, No 5. CARENSA. 2004. Working Paper on Modelling of Scenarios for the Optimisation of Cane Production in the Sugar Industry. CDM For Sustainable Africa. 2004. Report on Barriers to CDM Implementation in Africa CEEEZ. 2005. “Financing Acquisition Support Brochure for the Policy, Action and Programme Partnerships” PARTNERS FOR AFRICA PROJECT, CONTRACT NO. INCO-CT-2003-502257 CFC. 2001. Technical Paper No. 12. Correa Carvalho, L. C. 2003. The Brazilian Ethanol Experience. Paper presented to Seminario Internacional de Alcohol Carburante, 17-18 June, Cali, Colombia. Cornland, D.W., Johnson, F.X., Yamba, F., Chidumayo, E.N. Morales, M.M., Kalumiana, O. and Mtonga-Chidumayo, S.B. 2001. Sugar cane resources for sustainable development: a case study in Luena, Zambia. SEI. Dajue, L. 2005. Sweet Sorghum – the Old and the New (with special reference to China). Beijing Green Energy Institute, China. Deepchand, K. 2001. Bagasse Based Cogeneration in Mauritius – A Model for Eastern and Southern Africa. AFREPREN Occasional Paper No. 2. AFREPREN/FWD, Nairobi. EIA. 2006. Southern Africa (SADC) Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal. www.eia.doe.gov EDIS. 2006. http://edis.ifas.ufl.edu/SC021 ERS (Economic Research Service, USDA). 2003. World Sugar Policy Review. Sugar and Sweeteners Outlook/SSS-236/January 31, 2003. http://www.ers.usda.gov/briefing/Sugar/sugarpdf/SugarPolicy.pdf Faaij, A.P.C. and Domac, J. 2006. Emerging International bio-energy markets and opportunities for Socio-economic Development. Energy for Sustainable Development. Vol X, No. 1. FAOSTAT. 2005. Food and Agriculture Organisation Statistical Database. http://faostat.fao.org. FAOSTAT. 2004. www.faostat.fao.org Groenewald, J. 2002. Bio-energy from Sugarcane Bagasse. PGBI International, South Africa. Paper presented at LAMNET, CARENSA and SPARKNET Workshop, August 2002, Durban South Africa. Haley, S. and Suarez, N. 2002. U.S. Sugar Policy Under the 2002 Farm Act. USDA U.S. Department of Agriculture August 23, 2002. http://news.tradingcharts.com/futures/8/8/usda1030106688.html Henniges, O. and Zeddies, J. 2003. Fuel Ethanol Production in the USA and Germany – A cost comparison. F.O. Lichts World Ethanol and Biofuels Report. Vol.1, No.11. Henniges, O. and Zeddies, J. 2004. Competitiveness of Brazilian Bioethanol in the EU. F.O. Lichts World Ethanol and Biofuels Report, Vol.2, No.20.

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Henniges, O. and Zeddies, J. 2005. Economics of Bioethanol Production in the AsiaPacific: Australia, Thailand, China. F.O. Lichts World Ethanol and Biofuels Report, Vol.3, No.11. 2004. Hodes, G., Thomas, V. and Williams, A. 2003. A strategy to Phase out Lead in African Gasoline. Renewable Energy for Development, SEI. Vol 10, No. 3. Issue 1101 – 8267 Hunt, S.C. and Förster, E. 2006. Biofuels for transportation: Global potential and implications for sustainable agriculture and energy in the 21st century. Renewable Energy World. Vol 9, Issue 4. IEA. 2002. World Energy Outlook 2002. IEA. 2004. Biofuels for Transport: An International Perspective. OECD. Paris. ISO – MECAS (02)17. November 2002. Ethanol from sugar crops: prospects and implications for the world sugar trade. ISO. 2006. International Sugar Organisation Database. ISO. April 2007. Southern Africa: Key Drivers Impacting Sugar Export Potential, MECAS (07)07. ISO. November 2007. Government Biofuels Policy and Sugar Crops: Outlook to 2015, MECAS(07)17 Johnson X. F. and Matsika E. 2006. “Bio-energy Trade and Regional Development: the Case Study of Bio-ethanol in Southern Africa”. Energy for Sustainable Development – The Journal of the International Energy Initiative, Volume X No. 1 March 2006. Jolly, L. 2001. The Commercial Viability of Fuel Ethanol from Sugarcane, presentation to F.O.Licht’s World Sugar By-Products Conference, Miami, FL, Feb. 20-21, 2001. Larson, E.D., Williams, R.H., Regis, M. and Leal, L.V. 2001. A review of biomass integrated-gasifier/gas turbine combined cycle technology and its application in sugarcane industries, with an analysis for Cuba. Energy for Sustainable Development, V(1):54-76, March 2001. Marketing Matters. 2008. SADC sugar consumers. Facts and opportunities. Presentation to Omega's 10th Annual European Conference Series On Africa. http://www.omegainvest.co.za/Conferences/presentation/SADC_Sugar/ABSIP_Jennifer _Smith.pdf Matsika, E. 2006. Barrier Removal Desk Study on Employing Renewable Energy in ICT Applications in Rural Communities. The UNEP/UNIDO/MOE Renewable Energy Rural ICT Teleconnectivity Project. Project No. GP/RAF/04/001. Metz, B., Davidson, O., Swart, R. & Pan, J. (Eds) 2001. Climate Change 2001. Mitigation Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Cambridge University Press, Cambridge, U.K. Ministry For Agriculture And Land Affairs South Africa. 2006. ‘Land and Agrarian Reform in South Africa: 1994-2006’ presentation by The Minister for Agriculture and Land Affairs, Republic of South Africa, Ms at Didiza. For The International Conference on Agrarian Reform and Rural Development, Brazil, March 2006. Morales, M. and Johnson, F. 2002. Cane Co-products as a Sustainable Bio-energy Source Portfolio, Stockholm Environment Institute. Paper presented at the LAMNET, CARENSA, SPARKNET Workshop on Bio-energy, 19th – 21st August 2002, Durban, South Africa. Musaba, L. 2006. Review of the Regional Power Supply Situation & Planned Investments. Southern African Power Pool RERA Annual General Meeting Lesotho, 2022 November 2006. Pabot, J.L. 2002. Southern African Power Pool (SAPP), 2001. Pool Plan – Drought Scenario – Paper presented at the SAPP Drought Cycles Scenario, August 2002, Johannesburg, South Africa. Pembina Institute. 2003. A User’s Guide to the CDM (Clean Development Mechanism) Praj Industries. 2003. Ethanol Production from Alternative Feedstocks: Sweet Sorghum Extractive Hydrolysis Technology. www.praj.net Rowland, I. H 1998. Climate Change Co-operation in Southern Africa. Rosillo-calle, F. 2003. Thematic Network: Cane Resources Network for Southern Africa (CARENSA) working paper CARENSA Meeting, December 2003.

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SADC Technical Committee on Sugar. 2004. Personal Communication. Seebaluck, V. 2003. Optimisation of Bagasse Properties and Processing Operations for Cogeneration. Cane Resources Network for Southern Africa (CARENSA) Workshop. 813 December 2003. Durban, South Africa. Shapouri, H., Gallagher, P. and Graboski, M.S. 2002. USDA’s 1998 Ethanol Cost-ofProduction Survey. US Department of Agriculture, Office of the Chief Economist, Office of Energy Policy & New Uses. Agricultural Economic Report Number 808. Washington DC. Short, C. and Dickson, A. (2003) Revised assessment of biofuels industry viability. ABARE report for the Department of Industry, Tourism and Resources, Canberra, April 2004, pp. 21. SMRI. 2003. Sugar Milling Research Institute database, Durban, South Africa. Southern Centre. 1999. Report on Sugar Factories Surplus Bagasse Utilisation for Cogeneration for Sugar Industries in Eastern Africa. Project No. CFC/ISO/21FT – Harare, 1999. Todd, M. 2001. The Sugar Industries of Southern Africa: Challenges and Opportunities. Briefing Paper New Series No. 27 November 2001. The Royal Institute of International Affairs. Southern Africa Study Group. UNFCCC. 2006. www.unfccc.int (visited on December 2, 2006) UNFCCC. 1997. The Kyoto Protocol. http://unfccc.int/kyoto_protocol/items/2830.php Williams, R. H. and Larson, E. P. 1993. Advanced Gasification-based Biomass Power Generation: Renewable Energy Sources for Fuels and Electricity (Island Press, Washington D. C., 1993) Whitehouse & Associates, 2002. Overview of the Food and Pre-mix Industries in southern and eastern Africa: Tanzania. The Micronutrient Initiative. Whitehouse & Associates. 2003a. Overview of the Food and Pre-mix Industries in Southern and Eastern Africa: Swaziland. The Micronutrient Initiative. Whitehouse & Associates. 2003b. Overview of the Food and Pre-mix Industries in Southern and Eastern Africa: Zimbabwe. The Micronutrient Initiative. Whitehouse & Associates. 2003c. Overview of the Food and Pre-mix Industries in Southern and Eastern Africa: Mozambique. The Micronutrient Initiative. Woods, J and Bauen A., 2003. Technology status review and carbon abatement potential of renewable transport fuels in the U.K., DTI, London. World Bank. 2006. World Development Indicators database, April 2006. http://devdata.worldbank.org/external/CPProfile.asp?PTYPE=CP&CCODE=AGO WWF. 2005. EU sugar deal ‘scandalous betrayal’ of poor countries. Nov 2005. http://www.panda.org/about_wwf/where_we_work/europe/what_we_do/epo/initiatives/ag riculture/common_ag_policy/cap/news/index.cfm?uNewsID=51760 Yamba, F. D. 2003. CARENSA Working Paper : Benefits From Sugarcane Co-Products And Policy Issues, Durban. Yamba, F. D. and Matsika, E. 2004. Factors and Barriers Influencing the Transfer and Diffusion of Biofuels Producing Based Technologies With Particular Reference to Southern Africa. Paper presented at the IPCC Expert Meeting On Industrial Technology Development, Transfer And Diffusion, Tokyo, Japan, 21-23 September 2004 Yamba, F. D. and Matsika, E. 2003. Assessment of the Potential of State-of-the-art Biomass Technologies in Contributing to a Sustainable SADC Regional Mitigation Energy Scenario. Paper presented at the Risø Energy Conference held in Copenhagen, Denmark, May 2003. Yamba, F. D. and Munyinda, M. 2005. Poverty Reduction Potential of Sweet Sorghum as a Supplementary Feedstock to Ethanol Production. Paper presented at the Policy Dialogue Conference on The Role of Renewable Energy Policy in Africa for Poverty Alleviation and Sustainable Development, Dar- es-Salaam, 22 - 24 June 2005

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Appendix A: Case Study: South African Sugar Institutional Arrangements (i) The Sugar Act and Sugar Industry Agreement The South African Sugar Association is constituted in terms of the Sugar Act of 1978. The Act provides for an Agreement to regulate the affairs of the sugar industry, binding upon all those who grow sugarcane and produce sugar and associated sugar products. The Sugar Act has been amended from time to time in response to changing circumstances in the industry and the environment in which it operates.

The Sugar Industry Agreement covers the following: Administration of cane production; Co-ordination of the supply of sugarcane to the mills; Dispute resolution structures; Disposal of the raw sugar available for export by SASA on behalf of the industry; Pooling of proceeds from the sale of sugar and molasses and the division of the net proceeds between the growing and milling sections; • Calculation of the price payable for cane deliveries; • Imposition of levies to cover the cost of the administration of the industry by SASA; • Control of pests and diseases in sugarcane. • • • • •

(ii) The Division of Proceeds The Division of Proceeds is the formula through which revenue that accrues to the sugar industry, is allocated to the millers and growers as part of the partnership arrangement. The Division of Proceeds calculation is a notional calculation, and whilst representing industry income does not reflect actual revenues (see Figure A 1). The Division of Proceeds formula is dynamic and changes from time to time in accordance with the environment in which the industry operates taking into account the needs of the industry. Prior to 1998, a pool system based on quotas was operational whereby proceeds were accounted for in two pools, the A and B pool, in which Millers and Growers participated, The Division of Proceeds now comprises a single pool.

The notional proceeds from refined and brown sugar in the national market, raw export sugar and molasses comprise total industrial proceeds. Total notional industrial proceeds are determined by the size of the crop and the prices achieved on the local and export markets for sugar and molasses sales. The size of the annual sugarcane crop is determined by the area under sugarcane, the nature of the agricultural season, the quality of the sugarcane crop and the efficiencies achieved in processing the crop through the sugar mills. Notional prices for sugar and molasses are dependent on market conditions both locally and abroad, as well as on the Rand/USD exchange rate. Industrial costs are the costs of administrating the Sugar Association that include all the specialist services provided by SASA, including agricultural research and sugar exports. Industrial costs are a first charge against the total notional industrial proceeds to determine the net divisible proceeds which are then split based on a fixed percentage between millers and growers. Total deliveries to mills during a season are

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then divided into the growers share which then establishes the price per ton for the growers’ deliveries. The Division of Proceeds calculation is performed on a monthly basis during the season based on estimates with a final calculation at the end of the season. Other than proceeds from the export of raw sugar, revenues flow directly to the milling companies. Export proceeds from the sale of raw export sugar sold through the Sugar Association, is paid to the milling companies shortly after receipt. The milling companies then pay the growers based on cane delivered to their mills.

NATIONAL MARKET SUGAR SALES

EXPORT MARKET SUGAR SALES

MOLASSES SALES

TOTAL INDUSTRIAL PROCEEDS

DEDUCT INDUSTRIAL COSTS

EQUALS NET DIVISIBLE PROCEEDS

FIXED DIVISION

GROWERS’ SHARE

MILLERS’ SHARE

PRICE/TON

DISTRIBUTED BY INDIVIDUAL MILLERS

Figure A 1: The Division of Proceeds Formula

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Appendix B: The Success of Cogeneration Policies in Mauritius

The government of Mauritius has through legislation created an environment conducive to the success of bagasse energy cogeneration. The Sugar Industry Efficiency Act of 1998 (SIE) was promulgated to promote bagasse energy generation and export of electricity to the public grid in an efficient manner. It also encouraged investment in appropriate equipment and encouraged other stakeholders to save on bagasse and sell it to firm power producers. Cogeneration is a win-win commercial undertaking for all stakeholders in Mauritius. The cogenerators get revenue, 60% of which is exempt from income tax payments and initial allowances thereto. In addition they are entitled to a share from 50% of the Bagasse Transfer Price Fund (BTPF) prorata to electricity they export (Deepchand, 2001). Millers get fiscal incentives for energy saving and if operating next to a power plant, they are no longer required to operate and maintain boilers and turbo-alternators. Furthermore, the cogenerator and the miller enter into agreements on amount of exhaust steam per tonne of cane. Any improvement in amount of steam per tonne of cane results in additional revenue to the miller. The non-miller shares 37% of the BTPF on the basis of their individual sugar production. In addition, as a stakeholder of Sugar Investment Trust (SIT), they benefit from the declared dividend, of which bagasse energy revenue is a major contributor. Miller planters are entitled to 12% of the BTPF which is shared on a prorata of their individual sugar production. Workers in the sugar industry are all beneficiaries of a dividend as shareholders of the SIT (Deepchand, 2001).

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Appendix C: Drivers of Sugar Consumption Growth Population Growth Globally, 85% of the growth in sugar consumption is attributed to population growth. At a country level, population size and its growth rate are key factors. If there is no change in sugar per capita consumption, then growth in population translates directly into increased sugar consumption for that country. However, changes in population and demographics can sometimes affect per capita sugar demand. For instance, changes in the age, gender balance, location (urban/rural) and affordability could impact the average amount or form of sugar consumed.

Population (millions)

60 50 40 30 20 10

D .R .C So on go ut h Af r Ta ica n z M oz an am ia bi qu e An g ol Zi a m ba bw e M al aw Za i m b Le ia so th o N am i Bo bia ts w an M au a r Sw itius az ila nd

0

Figure A 2: SADC-12 Population (2002) Source: World Bank (2006); EIA (2006)

Population growth and sugar consumption within SADC Domestic sugar consumption in the 14 countries of SADC amounted to an average of close to 3 million tonnes per annum from 2003 to 2005. See Table A 1. At the aggregate level, population growth for the SADC-12 has been growing around 2.5% yearly (1984-2002), much faster than average annual growth in sugar consumption (at 1.36%). This suggests that in some countries, population growth is not the only important factor in determining both the level and growth of sugar consumption. The significance of population growth in driving sugar consumption generally holds true in the SADC-12. In Table A 2, the correlation between population growth and sugar consumption growth during the period 1984-2002 is presented. The overall SADC-12 shows a very strong correlation between sugar consumption and population of 0.9. Out of the 11 countries (insufficient data for Namibia), 6 show a strong correlation. There is no strong link for Botswana and Zambia, whilst Mozambique and South Africa show a moderate correlation between population growth and sugar consumption. The strong negative correlation for the Democratic Republic of Congo indicates that consumption has been falling in spite of population growth.

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Table A 1: SADC Sugar Consumption 2001 to 2005 (tonnes) Country 2001-02 2002-03 2003-04 2004-05 2005-06 δ 155,000 185,000 195,000 205,000 225,000 Angola δ 46,000 47,000 48,000 48,000 50,000 Botswana Congo Dem Rep 75,000 85,000 85,000 90,000 95,000 97,500 104,444 117,150 129,038 131,548 Madagascar δ 121,600 136,761 130,000 135,864 135,554 Malawiδ Mauritius 40,663 40,738 40,778 39,598 39,635 Mozambique 82,000 117,000 132,000 137,000 137,000 47,000 48,000 50,000 55,000 55,000 Namibia δ South Africa 1,227,215 1,412,795 1,101,602 1,278,784 1,327,794 Swaziland* 296,397 280,620 331,920 311,310 314,537 δ 200,000 164,518 218,494 220,898 267,856 Tanzania Zambia 102,207 114,179 114,900 110,417 110,504 Zimbabwe 305,381 335,068 314,960 298,812 285,275 TOTAL 2,674,363 3,071,123 2,879,804 3,059,721 3,175,068 Source: SADC Technical Committee on Sugar- marketing year data (April-March). δ ISO data – calendar year * in SACU - Data for Lesotho not reported separately

Table A 2: Correlation between sugar consumption and population growth Country Correlation Country Correlation coefficient coefficient Angola 0.72 Namibia na Botswana 0.22 South Africa 0.31 Congo (D.R.) -0.52 Swaziland 0.93 Malawi 0.80 Tanzania 0.81 Mauritius 0.66 Zambia 0.04 Mozambique 0.38 Zimbabwe 0.78 SADC-12 0.90 Source: ISO (2006)

Per Capita Consumption There is a wide variation in per capita consumption of sugar among countries and regions of the world, and also in its growth rate. Generally, consumption levels are lowest in the low-income developing countries (frequently importers of sugar). In SubSaharan Africa and parts of Asia, annual per capita consumption levels in 2002 were less than half the world average of 20 kg, and less than one third of the developed countries average of 35 kg per person. Per capita sugar consumption for the SADC as a whole has been declining over time: from 15.6 kg head in 1986 to 13.6 kg/head in 2005 – an annual average decline of 0.4% (see Figure A3 and Table A 4). More important, there is a wide variation among SADC countries and also in the rate at which per capita consumption of sugar is growing. Per capita consumption ranges between 1.6kg/head and 33/kg head (Table A 3), whilst annual growth over the period 1986-2005 has ranged between – 3% to +

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13%. This highlights major differences in the way income and possibly other factors are driving sugar consumption. 18 16

tons raw value

14 12 10 8 6 4 2 0 1984

1986

1988

1990

1992

1994

1996

1998

2000 2002 2004 2006

Figure A3: Per capita sugar consumption in SADC-12 countries Source: ISO (2007a) Table A 3: Per Capita Sugar Consumption for SADC countries (kg/head) Average Annual average growth Countries‡ 2005 2003-2005 1986-2005 Angola 12.8 12.9 0.71 Botswana 28.1 27.4 -0.80 Congo (D.R.) 1.6 1.5 -3.35 Madagascar 7.6 7.4 -0.04 Malawi 13.4 13.1 1.65 Mauritius 31.6 33.3 -1.34 Mozambique 6.9 6.9 0.51 Namibia 30.2 29.3 12.95 South Africa 32.9 32.1 -1.04 Swaziland‡ 97.4 98.2 5.42 Tanzania 7.2 6.6 1.78 Zambia 9.0 9.1 -2.25 Zimbabwe 25.3 25.8 -0.58 Data not reported separately for Lesotho and Seychelles Figure inflated reflected undocumented trade with neighbouring countries.

‡

Source: MarketingMatters, 2008.

Income The level of income and its rate of growth are important to determinants of per capita sugar consumption. Generally, higher levels of per capita sugar consumption are associated with higher income levels (but other factors can weaken this axiom considerably). In other words as income rises, so too does sugar consumption (economists refer to this as the income elasticity of demand). In many developing countries, per capita consumption of sugar has been growing over recent years as the younger generation develops a taste for fast foods, soft drinks and confectionary (that is, changing dietary habit). However, in high-income countries, per capita sugar

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consumption has stagnated even though incomes may be rising – there is a physical limit to how much sugar can be consumed, irrespective of income. Concerns for health and diet and the availability of alternative sweeteners have even resulted in a negative relationship between income growth and sugar consumption in several developed economies, notably Japan. In China, reported increases in income have not led to any substantial rise in per capita consumption of sugar, with much less expensive saccharin being the preferred sweetener in the country’s soft drink sector. Analysis of sugar consumption and income levels around the world shows that the propensity to consume more sugar declines as income rises. Countries with low incomes (less than US$2,500 per head) see a very rapid rise in their per capita consumption as their income rises. For middle income countries (between US$2,500 and US$10,000 per head) the gains are more modest, while very little additional sugar is consumed as income rises in high-income countries (above US$10,000 head). This most likely holds true in SADC where there are both low and middle-income countries. Income and consumption in SADC Consumption for the region has grown on average by 1.3% annually over the 19952005 period. The overarching importance of population growth in driving sugar consumption in SADC is shown by a strong correlation coefficient of 0.9 at the aggregate level. The relationship between per capita sugar consumption and per capita income in 2005 is shown in Figure A 4 and Table A 4. As indicated by the fitted trend line, the rate of increase in per capita consumption is greatest as income rises in the low income countries, but that the propensity to consume more sugar is lower for the middle income countries. Whilst Figure A 4 and Table A 4 shows a strong and predictable relationship between per capita sugar consumption and per capita income levels across SADC, it also shows that there is a relatively low degree of scatter around the trend line, suggesting other factors that potentially exert an important influence over consumption, such as cultural factors and dietary preferences which may not be as strong as in other regions of the world.

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Relationship between income and sugar consumption - SADC (2005) 35.0 Sout h Af rica

M auritius Namibia

per capita sugar consumption (KG)

30.0

Botswana

25.0

Zimbabwe

20.0 15.0

M alawi Angola

10.0

Zambia Tanzania M adagascar M ozambique

5.0 0.0 0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

GDP per capita, US$'000

Figure A 4: Relationship between income and sugar in SADC (2005) Source: ISO (2007a). Table A 4: Income and sugar consumption: estimated/projected relationship Per capita Per capita sugar Per capita income Per capita sugar income consumption consumption US$/person kg/person US$/person kg/person 100 0.62 5500 36.04 500 14.85 6000 36.81 1500 24.56 6500 37.52 2000 27.10 7000 38.18 2500 29.07 7500 38.75 3000 30.68 8000 39.36 3500 32.05 8500 39.89 4000 33.23 9000 40.39 4500 34.27 9500 40.87 5000 35.20 10000 41.33 Source: ISO (2006)

Whilst this “cross sectional” analysis suggests that as income rises, sugar consumption also rises, the evolution of income growth and sugar consumption over the past two decades in each SADC-12 country, shows that such a prognosis is less certain (see Table A 5). Historically other factors have counter-balanced the positive impact of income growth in several SADC countries.

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Table A 5: Relationship between sugar consumption and income growth Country Correlation coefficient Angola na Botswana -0.57 Congo (D.R.) 0.91 Malawi -0.15 Mauritius -0.74 Mozambique 0.13 Namibia na South Africa 0.51 Swaziland 0.84 Tanzania 0.24 Zambia -0.07 Zimbabwe 0.25 Source: ISO (2006)

In Table A5 the correlation coefficient between per capita income and sugar consumption over the period 1984-2002 is presented. The low and negative correlation in 4 instances suggest that other factors are critical to explaining the dynamics of per capita sugar consumption, such as evolution in diet and preferences, changes in domestic sugar prices, and changes in population demographics.

Consumption Prospects Looking ahead, consumption is likely to be determined primarily by income and population growth. Estimates made by the ISO (International Sugar Organisation) have assumed these factors grow by the following rates: 1. National Gross Domestic Product to grow by an average of 5% per annum. 2. For most countries it is assumed that for every 1% increase in income, sugar consumption increases by 0.58%16, whilst for several more mature markets, such as South Africa, the income elasticity coefficient was lowered to 0.35%. 3. Population growth rates are taken from UN projections (World Population Prospects: The 2006 Revision: Population Database).

16

This income elasticity is based on results from an ISO econometric model of sugar demand estimating regional-specific effects of population, income and domestic prices on sugar consumption. Reported in ISO, 2004, World Sugar Demand: outlook to 2010, MECAS(04)17. The model was updated and revised income elasticities estimated in 2006, see ISO, “Asia and Africa: sugar consumption and its impact on the world market”, paper presented to the 17th WABCG-ISO Consultation, London.

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Table A 6: Projections of Domestic Sugar Consumption (SADC-14) 2005 2006 2007 2008 2009 2010 2015 Angola 225.0 232.5 240.3 248.3 256.6 265.2 312.6 Botswana 50.0 51.3 52.7 54.0 55.5 56.9 64.7 Congo (D.R.) 95.0 100.3 105.9 111.9 118.1 124.8 163.8 Madagascar 131.5 136.5 141.7 147.0 152.6 158.4 190.7 Malawi 135.0 141.7 148.2 155.3 162.7 170.5 215.4 Mauritius 39.3 40.3 41.3 42.3 43.4 44.4 50.2 Mozambique 137.0 144.6.0 152.7 161.2 170.1 179.7 235.6 Namibia 55.0 56.5 57.9 59.5 61.1 62.7 71.5 South Africa 1,565.4 1,590.0 1,615.1 1,640.5 1,666.3 1,692.6 1830.2 Swaziland 114.0 116.7 119.5 122.3 125.2 128.2 144.2 Tanzania 267.0 278.3 289.3 300.7 312.5 324.8 393.8 Zambia 94.9 99.2 103.5 108.0 112.8 117.8 146.0 Zimbabwe 258.0 293.8 302.9 312.3 321.9 331.9 386.4 SADC 3,195.1 3,281.6 3,371.0 3,463.5 3,559.0 3,657.8 4,205.0 Data not reported separately for Lesotho.

For SADC as a whole only around 35% of sugar is used for industrial production in the food and drinks industry. The development of regional markets for value added foods and drinks could add to the growth of the local sugar industry through increases in industrial demand (assuming there is a sufficiently high external tariff to deter sugar imports at world market prices). In this way the establishment of free trade between SADC countries would then be an incentive for regional sugar processing industries to acquire raw material exclusively from regional markets (rather than imports). Projected consumption levels are shown in Table A 6, and annual average growth rates in Table A 7. Consumption within SADC is projected to grow annually at an average rate of 2.8 %, rising to 3.6 million tonnes in 2010 and to as much as 4.2 million tonnes in 2015. Table A 7: Projected Domestic Sugar Consumption growth rates (SADC-14) Average Annual Growth: 2005-2015 (%) Angola 3.3 Botswana 2.6 Congo (D.R.) 5.6 Madagascar 3.8 Malawi 4.7 Mauritius 2.5 Mozambique 5.5 Namibia 2.6 South Africa 1.6 Swaziland 2.4 Tanzania 3.9 Zambia 4.3 Zimbabwe 3.0 SADC 2.8

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Appendix D: Ethanol production technologies Figure A 5 shows the various ethanol conversion routes which may be employed depending on the feedstock.

Figure A 5: Ethanol production routes (Source: IEA, 2004)

Costs of Producing Ethanol The absence of a global market for ethanol, together with the wide range of feedstock types and regional peculiarities results in ethanol production costs that vary considerably by region. The largest ethanol cost component is the plant feedstock. Operating costs represent about one-third of total cost per litre, of which the energy needed to run the conversion facility is an important (and in some cases quite variable) component. Capital cost recovery represents about one-sixth of total cost per litre (IEA, 2004). Scale of ethanol plants has a major effect on final fuel cost. The typical cost for ethanol produced in Europe is much higher than ethanol from large scale state-of-theart ethanol plants in Brazil and the US (be $0.29 per litre, or $0.43 per gasolineequivalent litre). Tripling of plant size results in a reduction in capital costs of about 40% per unit of capacity, saving about $0.03 per litre. In addition, operating costs are also reduced by 15% to 20%, saving another $0.02 to $0.03 per litre (IEA, 2004).

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Table A 8: Estimated Ethanol Production Costs by region and feedstock (US$2000) Cost Item US (Corn)† EU (sugar Brazil (Sugar beet)‡ cane) Net feedstock cost $0.13 $0.20 - $0.31 Operating cost $0.11 $0.22 - $0.28 $0.167 Capital recovery (per litre) $0.05 $0.062 Total production cost (gate $0.29 $0.42 - $0.60 $0.23 price) † ‡

Ethanol from corn in recent large plants Ethanol Cost Estimates for Europe

Source: IEA (2004)

Table A 9 shows estimates of capital and production costs of cellulosic ethanol from poplar trees from a 2001 assessment of biofuels in the US and Canada. Table A 9: Cellulosic Ethanol Plant Cost Estimates (US$2000/litre) Near-term Near-term “best base case Industry” case Plant capital recovery cost $0.177 $0.139 Raw material processing capacity 2 000 2 000 (tonnes per day) Ethanol yield (litres per tonne) 283 316 Ethanol production (million litres 198 221 per year) Total capital cost (million US$) $234 $205 Operating cost $0.182 $0.152 Feedstock cost $0.097 $0.087 Co-product credit ($0.019) $0.029 Chemicals $0.049 $0.049 Labour $0.013 $0.011 Maintenance $0.024 $0.019 Insurance & taxes $0.018 $0.015 Total cost per litre $0.36 $0.29 Source: IEA (2004)

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Post-2010

$0.073 2 000 466 326 $159 $0.112 $0.059 $0.0 $0.028 $0.008 $0.010 $0.007 $0.19

CARENSA

Partners The Cane Resources Network for Southern Africa (CARENSA) was a Thematic Research Network supported by the European Commission's Directorate General for Research (DG-RES). The primary objective of the CARENSA work programme was to evaluate the potential for renewable energy from sugar cane and similar crops to support sustainable development and improve global competitiveness within the southern African Development Community (SADC) region. The Stockholm Environment Institute (SEI) is an independent and non-profit international research institute specialising in sustainable development and environment issues. SEI was established by the Swedish government in 1989. Its research programme aims to clarify the requirements, strategies and policies for a transition to sustainability. SEI’s mission is to support decision-making and induce change towards sustainable development around the world by providing integrative knowledge that bridges science and policy in the field of environment and development. Winrock International India (WII) is a registered notfor-profit organization working in three principal program areas: Energy and Environment (ENE), Natural Resource Management (NRM), Climate Change (CLC). Supported by a strong Outreach unit, WII in all its areas of work emphasizes the development of local institutions, leadership and human resources, and actively works towards building cooperation at all levels. Headquartered in New Delhi, WII works through a series of fieldbased and policy related projects across the country.

Centre for Energy, Policy and Technology (ICCEPT) Imperial College, London

Centro nacional de referencia de biomasa, Brazil

University of Mauritius

Agricultural University of Athens, Greece

University of KwaZulu Natal

Food & Agriculture Organisation of the United Nations

Interuniversity Research Centre on Sustainable Development, Italy

International Sugar Organisation

southern African Development Community

Biomass Users Network, Zimbabwe

Centre for Energy, Environment and Engineering Zambia Limited, Zambia

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University of Campinas, Brazil

ISBN: 978-91-86125-02-8

This report along with related information is available on the CARENSA website: www.carensa.net