Caution the keyword as govt takes on biofuels

The government is set to introduce a raft of regulations expected to trigger a gradual reduction in the prices of petroleum products.

The Energy ministry spokesperson, Mr Solomon Muyita, told Saturday Monitor that plans to release the guidelines—which will operationalise the Biofuel Act of 2018—are in the latter stages.

“The regulations should have been published in the national gazette by the end of this month. That is a prerequisite,” Mr Muyita said.

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The Biofuels Act requires the Energy minister to issue a statutory instrument declaring a commissioner in the ministry to be the licensing authority under the Act, which Mr Muyita said has been achieved.

He added that the minister has already named “the commissioner for renewable energy, Mr Brian Isabirye, as the licensing officer.”

The Biofuels Act, which also requires the ministry to, among other things,  “determine the appropriate amounts of biofuels to be blended in a petroleum product”, was passed by Parliament in May 2018 and assented to by the President on June 4, 2018.

It was meant to come into force on the day of assent by the President, but the ministry had never issued guidance on the ratio of biofuels to be added to fuel products to be sold on the market.

Biofuels are fuels derived from living matter such as sugarcane, corn, cassava and palm oils.

Mr Muyita did not say what blending ratio the ministry has recommended.

Ms Irene Muloni, who was the line minister when the Biofuels Bill was first presented before Parliament in December 2016, said the law would allow for blending of between five and 15 percent of ethanol to fuel.

Benefits

Economists generally agree that the operationalisation of the Biofuel’s Act would have a ripple effect on the economy as it would lead to an incremental reduction in the amounts of fuel imported into the country and ease the pressure on the foreign exchange reserves.

The executive director of the Civil Society Budget Advocacy Group (CSBAG), Mr Julius Mukunda, said blending of biofuels with petroleum products would help set Uganda off towards decreased dependence on imported fuel.

“The introduction of a blend of ethanol and fossil fuel expands domestic fuel supplies. It reduces the amount of imported fuels and lowers the fuel prices. There would also be a reduction in over reliance on fuel imports, which would translate into less demand for the dollar,” Mr Mukunda said.

The director of research at the Bank of Uganda, Mr Adam Mugume, said the operationalisation of the Act is likely to result in a decrease in Uganda’s trade deficit.

“Our trade deficit in [Financial Year] 2021/2022 is estimated at $3.2 billion (Shs12 trillion). Oil imports are estimated at $125.7m (Shs472b) compared to $830m (Shs3.2b) in [Financial Year] 2021/2022, an increase of about 51 percent. This is contributing to the trade deficit. Non-oil imports are estimated to rise by 13 percent between last financial year and the current financial year,” Mr Mugume said.

He, however, pointed out that the projected reduction in amounts spent on fuel and volumes of oil imports can only be realised if the biofuels are not imported.

“Whether the blending of fuel with ethanol will save foreign currency demand; if ethanol is going to be imported, then it would not substantially reduce the demand for dollars to import,” Mr Mugume said.

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The Act also makes it incumbent upon the Energy ministry to “promote the production of biofuels and plan for the implementation, expansion and sustainability of the production of biofuels.”

Ethanol production

The biggest challenge is that Uganda does not have the capacity to produce big volumes of biofuels.

Two out of the country’s three biggest producers—Kinyara Sugar and the Sugar Corporation of Uganda Lugazi (Scoul)—who generate molasses, a byproduct from the sugar-making process that is required in the production of ethanol, do not have the capacity to produce ethanol.

The Kinyara Sugar corporate affairs manager, Ms Caroline Amongin, said the firm limits itself to the production of raw industrial alcohol.

The Scoul marketing manager, Mr Senthil Kumar, told Saturday Monitor that the firm takes the process a notch higher by subjecting the industrial alcohol to a rectification process, which leads to the production of extra neutral alcohol (ENA) or potable alcohol for use in the beverages industry, and as a sanitiser in hospitals.

“We produce at least 35,000 litres of ENA per day, but do not produce any ethanol,” Mr Kumar confessed.

Lone producer

Kakira Sugar Limited, a subsidiary of the Madhvani Group of Companies, installed a $36.6m (Shs138 billion) ethanol distillery that commenced operations at the end of November 2016. It was commissioned by President Museveni on January 23, 2017.

It is the only facility that is ready to produce ethanol, but its capacity is only 20 million litres per year. That is a drop in the ocean given that Uganda, which consumes an average of 6.5 million litres of petroleum products per day, and imports in excess of 2 billion litres of petroleum products a year, would require at least 300 million litres of fuel if the mandate stipulates a 15 percent blending ratio.

Even then, whereas the Kakira facility has the capacity to produce both ethanol and extra neutral alcohol (ENA), it has not been concentrating on the production of ENA.

The Madhvani Group’s director for corporate affairs, Mr P.K Eswar, attributed the firms’ position to delays in operationalisation of the law.

“We are ready as and when the government wants to implement the law or whenever it is ready with the guidelines. We can switch from the production of ENA to production of ethanol within a period of only eight hours,” Mr Eswar said.

Mr Eswar also expressed optimism that the other sugar millers in the country will be enticed into diversifying their operations to include production of ethanol if government comes up with an incentives regime, including tax waivers and access to low interest credit.

“Other actors are likely to come on board if the price that government is paying for ethanol is good and if there can be tax waivers on, say, importation of equipment,” Mr Eswar said, adding: “We also need to see waivers on excise duty and VAT. We are paying about 60 percent as excise duty and 20 percent VAT on ENA.”

Section 12 of the investment Code Act says an investor who engages in a priority area specified in the Act qualifies for incentives such as Mr Eswar is calling for.

Bottlenecks

The other challenge revolves around the readiness of the petroleum dealers to embrace blending of their products with ethanol.

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By press time, it was not possible to engage Vivo Energies and Total Energies, the two biggest actors in the industry, but sources close to Kakira Sugar indicated that the two had been keen on having discussions with a view of having purchase agreements.

Both France and the Netherlands where Total Energies and Vivo Energies are headquartered have been introducing regulations aimed at reducing greenhouse emissions from transportation through increased use of biofuels.

In December 2018, France where Total Energies is headquartered, increased the minimum amount of biofuels blending from 7.5 percent to 7.9 percent. It reached the 8.2 percent mark in 2020.

In December 2020, the Netherlands, where Vivo Energy is headquartered, introduced a draft law with plans to increase the minimum share use of renewable energies in transport from 16.4 per cent this year to 27.1 percent in 2030.

It is, therefore, unlikely that Vivo and Total Energies will be opposed to blending, but some of the smaller players are wary of the cost implications.

The chief executive officer of the Jinja-based Hared Petroleum, Mr Bashir Musa Yusuf, told Saturday Monitor that his firm might not be in position to immediately embrace blending.

“Blending is a great idea, but it requires some investment, which we might not be in position to put forward at this point in time,” Mr Yusuf said.

The solution to that challenge, the Madhvani Group’s director for corporate affairs, Mr P.K Eswar, says, is for the Ministry of Finance to extend incentives to the petroleum dealers to embrace blending. He proposes tax waivers and rebates if the renewable energy sector is to grow and reduction of greenhouse emissions is to be achieved.