Thursday, November 26, 2009

By Paul M. Icamina

By then, the country will need 460 million liters of ethanol when the current 5 percent blend will be increased to 10 percent.

"We lack the supply to comply with the law," said Assistant Secretary Mario C. Marasigan, concurrent director of the Renewable Energy Management Bureau of the Department of Energy (DOE).

Still, he said, the National Biofuels Board has not considered reducing the mandate because it is confident supply needs will be met.

About 208 million liters of bioethanol are needed this year to meet the 5-percent bioethanol annual total volume sales, according to the Philippine Energy Plan, increasing to 219 million liters next year and 461 million liters by 2011.

The lack of local supply is a temporary problem, lasting perhaps two years at most, said Tetchi Capellan, executive director of the Ethanol Producers Association of the Philippines (EPAP).

"If the government vigorously supports bioethanol production in the country, then a 10-percent blend will be attained because about 19 ethanol projects are in the pipeline. Our only stumbling block is financing ... But we can build the plants, we can operate the plants and we have feedstock supply," she said.

"A USAID (US Agency for International Development) Eco-Asia study reported that the Philippines has a feedstock capacity equivalent to over 1 billion liters of ethanol. The mandate is only 220 million liters, or only 20 percent of our potential. There is a lot of room," she said.

Today, two distilleries produce about 39 million liters. The supply gap is filled by imports, mostly from Brazil, The Netherlands and Southeast Asia.

By 2011, however, bioethanol must be sourced locally. About 45,000 hectares of sugarcane would be required to produce 208 million liters currently needed for bioethanol.

About 398,872 hectares are currently planted to sugarcane and most of the harvest go to sugar production. An average sugar mill needs around 13,000 has. of sugarcane to produce 100,000 liters of bioethanol a day.

"We are encouraging expansion and the development of idle areas to be planted with sugarcane to meet the mandated bioethanol requirement and at the same time prevent conflict with the domestic supply of sugar ," said Rosemarie S. Gumera, head of the Planning and Policy Department of the Sugar Regulatory Administration (SRA).

"We have more than enough sugarcane now and we encourage the production of other value-added products from sugarcane such as bioethanol, and more when sugarcane hectarage is expanded," Gumera said.

"Although we have a long list of prospective investors, the problem is investors are hesitant to proceed with their investment without a firmer policy support from government; each takes 18 to 24 months to construct," she said.

"Investors feel incentives aren’t attractive enough, considering the difficulties in putting up a bioethanol plant that costs around P2 billion to build," said Marasigan. "There are substantial concerns, like the issue of duty for imported bioethanol."

"We are confident incentives now in place are attractive enough and we continuously promote bioethanol to investors," he said.

Incentives to bioethanol plants, which must be 100-percent Filipino-owned, include zero specific tax; VAT exemption; exemption from charges on wastewater effluents; financial assistance from government institutions; and pioneering status under the Investment Priorities Plan.

Other enticements are duty-free important of machinery, equipment and materials during the first 10 years; seven-year tax holiday; corporate tax rates of 10 percent on net taxable income after the seven-year tax holiday; cash incentive of 50 percent of the universal charge for power needed to service missionary areas; net operating loss carry-over during the first three years of commercial operation deductible from gross income for the next seven years of operation; and special realty tax rates of not more than 1.5 percent on equipment and machinery, civil works and other improvements.

"We recognize that government has no capital to help private sector build the plants," said Capellan. "But the DOE can use its ‘executive power’ in order to stimulate the market and attract foreign investors."

One major constraint is the threat of outside competition, Gumera explains, and investors want a clear policy to protect their investments, such as a 20 percent tariff on imported bioethanol from the current 1 percent tariff.

"This is really what prevents investors, and a lot are on the line-up just waiting for a policy signal from government," she said.

Bioethanol producers say a 20 percent tariff is reasonable as it is the same as that of Brazil and Thailand and less than the 30 percent tariff in Indonesia.

"EPAP wants a level playing field," said Capellan. "If Brazil is imposing a 20 percent tariff on ethanol imports, then why should the Philippines allow imports at 1 percent? We understand the DOE concern about lack of supply. But if we allow this 1 percent tariff to continue, then investors would rather go to Brazil and invest there."

To a lesser extent, another restraint is that bioethanol producers are not assured of a guaranteed market because buyers are unwilling to sign long-term supply contracts. Long-term contracts reduce risks and improves access to financing.

"Investing in a P4 billion plant, without any assurance of a market, is considered by investors as plain suicide," Capellan observed. "An offtake (supply) agreement reduces risks and brings stability into the market. Now, no one is entering into any agreements.

"We believe that government has to facilitate the signing of offtake agreements to accelerate the construction of plants. I believe oil companies are willing to sign, just like Petron when it signed an agreement with San Carlos Bioenergy. But the government has to lead."

Gumera said there is no problem in filling up the country’s bioethanol needs: the country is self-sufficient and a net sugar exporter; and sugarcane productivity of big farms is at par, if not better, than other countries.

"Our programs are focused in helping the small sugarcane farmers, comprising around 89 percent of the total, improve their farm productivity," she added.

"The technology is the same, but sugar production will be a major factor," Marasigan said.

According to the SRA, the cost of producing sugar has steadily increased over the last five years due to the rising cost of farm inputs, particularly fertilizers and fuel. Data from 2000 to 2008 indicates that while nominal sugar prices increased (from P21.95 to P30 per bag), retail prices actually stagnated (from P21.95 to P19 per bag), so that producers have been spending more to produce cane but getting less for their sugar.

Partly because of stable sugar prices, bioethanol remains competitive. Compared with biodiesel from coconut which is more expensive than conventional diesel, bioethanol is cheaper compared with gasoline.

At the peak of gasoline prices last year, bioethanol was cheaper by P1.50 to P2 per liter.

"Bioethanol is a renewable energy. With strategic planning, we will be able to forecast our supply, manage our demand given the available inventory, and conserve our foreign exchange," said Capellan.

"And we need not be fearful of limited oil supply from the Middle East," she said, adding oil is a finite resource. "We do not know how much is still underground. We do not know if the producing country will be friendly enough to supply us. Our country is so vulnerable."

"If the financing issue is resolved, the 10 percent blend mandate is doable. Financing means being able to source private capital by demonstrating the project viability, meaning, capital recovery, decent returns, and quick turn-around," Capellan said.

As quickly as she said that, Capellan also has misgivings. "The law is clear but it is not insulated from politics; it may change," she said. "Therefore, investors are reluctant to put in their money too early. Without government support, the biofuels program will not move the way that the Thai or Brazilian ethanol industry moved. We will not be able to achieve the target of the program."

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