Sugar industry could have a sweet deal to help Eskom generate more power

While a moratorium has been placed on the sugar tax for the next two years, the South African Sugar Association (SASA) says it remains concerned about the devastating impact of the Health Promotion Levy (HPL), also known as the sugar tax.

A creative plan to use the byproducts of the sugar generation process could, however, be the industry’s saving grace, while also alleviating some of the strain on South Africa’s struggling electricity grid.

Two out of the association’s fourteen mills have already closed shop for reasons partially linked to the HPL, resulting in the loss of 300 000 tonnes of local sugar sales.

According to CEO of the South African Cane Growers’ Association (SACGA) Thomas Funke, the HPL also caused severe job losses in the sector and placed thousands of livelihoods at risk, which was exacerbated by the July unrest of 2021.

ALSO READ: Sugar industry jobs buckling under weight of government’s health tax

“The moratorium on the HPL comes at a time when our industry is in a crisis and needs some leeway to get back on track.

“As an industry, all focus is now on the future and diversification, in addition it is our plan to use this time wisely to reimagine our sector,” said Funke.

ALSO READ: SA unrest: Aftermath threatens thousands of sugar industry jobs

Sweet, sweet co-generated electricity

Just like every other industry, the sugar industry has also been experiencing the effects of the country’s load shedding crisis.

This current energy crises could, however, provide an opportunity for the sugar industry to export co-generated power to the grid, in line with the industry’s diversification goals.

“Co-generated power, however, is more competitive when compared to emergency generation units running on high priced diesel than when compared to solar and wind technologies… the price of diesel could, therefore, be used as a debating point for the industry to get into the power generation market,” according to SASA.

The industry says newly appointed Electricity Minister, Dr Kgosientso Ramokgopa, has indicated his willingness to engage with the sugar sector on co-generation given the sugar industry’s potential to generate up to 800MW of co-generated electricity on to the grid.

What is co-generated power?

Co-generation is the production of multiple forms of energy, such as heat and electricity from a single fuel source.

For the sugar industry, fibrous sugarcane waste known as bagasse is used as this single fuel source.  During the sugar extraction process, sugarcane is crushed and the sugar juice extracted and the remaining bagasse is recycled and burnt at high temperatures to produce steam. 

The steam is then used to generate usable heat for the sugar milling process or can be used to drive turbines for electricity generation. 

Most of the heat and electricity produced by the South African sugar mills through co-generation is for own use but through improved sugar mill energy efficiencies, technology and agricultural yield improvements, the sugar mills could be modified to produce between two to seven times more power for export to the national grid. 

Previous studies conducted by the industry showed that approximately 700MW – 800MW of sugarcane fibre-based electricity could be exported to the national grid if all 14 sugar mills (including the 2 closed mills) implemented the required improvements to export this capacity.

Freeze widely welcomed

Prior to this year’s budget speech, the industry had pleaded with government not to increase the sugar levy or lower the current threshold as this would decimate the sector.

The sugar tax has almost brought the industry to its knees and since its introduction in April 2018, the sector has suffered a multi-billion rand loss in revenue (sales) as many beverage manufacturers have reformulated away from sugar.

The South African Farmers Development Association (SAFDA) expressed joy at the development.

“SAFDA welcomes the announcement by the Minister of Finance, Enoch Godongwana, to keep the HPL (sugar tax) unchanged for the next two years,” SAFDA chairperson Siyabonga Madlala said.

“This is a relief for the sugar industry and most importantly, to our farmers who have been anxiously waiting on the minister to announce these good news, and keeping the HPL unchanged would give the industry an opportunity to pursue various diversification opportunities, which would allow the industry to export less sugar and ensure the sustainability of the industry.”

Executive director of the South African Sugar Association (SASA) Trix Trikam agrees that the moratorium gives them time to pursue a just transition of the sugar sector into new activities and industries.

What are the consequences of lowering the sugar threshold?

It is anticipated that there will be a decrease in the threshold of sugar by 125 000 tonnes in 2023/2024, followed by a reduction of 160 000 tonnes (11%) of the local refined, and an additional 35 000 tonne reduction in 2024/2025.

The industry says it remains concerned that National Treasury is to commence consultation on the lowering of the 4 grams tax-free threshold.

The concern is based on an independent study commissioned by SASA.

The Bureau for Food and Agriculture Policy (BFAP) undertook the study which looked at the impact of reduced local sugar demand, should the 4 grams threshold be lowered or removed completely.

Outcomes of the study

BFAP states that the South African sugar industry has been in a steady decline over the last 20 years with substantially higher production costs, increased uncertainty and competition.

As a result of the continued decline in an area under cane (including HPL and other challenges), two mills have been forced to close due to insufficient supply. 

The baseline outlook for the sugarcane sector, should the HPL remain at its current threshold and rate, is expected to decline by 26 400 hectares over the next 10 years. 

The decline will largely be driven by tariff-free imports from Eswatini, reduced local consumption partly due to the current HPL implemented in 2018, stagnant and decreasing yields, and increasing production costs (specifically labour, fertiliser, transport and electricity).

Effects of decreasing the HPL threshold

Decreasing the threshold is estimated to cost 1 975 permanent jobs, 2 076 seasonal jobs and will see 1 630 small scale growers at risk of going out of business.

According to the BFAP study, the loss in income will significantly affect food affordability, food security and poverty incidence within the KwaZulu-Natal (KZN) and Mpumalanga regions. 

For example, should a full-time farmworker, who supports a household with two children, lose his or her job, the reduction under household will fall short of R3 060 to afford a basic healthy diet.

Impact at mill level

According to the study, the loss of area under cane will also have a significant impact on the livelihoods of thousands of individuals that are reliant on the agricultural value chain that underpins the sugar industry. 

A reduced demand of 160 000 tonnes of sugar will place significant risk on the on-going operation of multiple mills and refineries and increasing the risk of more mill closures.

“The impact of a reduction in the local demand for refined white sugar goes beyond just farm level as the decline in sugar cane volumes, as areas go out of cane production, impacts the entire value chain and those that depend on it for livelihoods,” the study further revealed.

“The milling operations have significant economic and social contributions within the regions in which they operate and at an aggregated level, sugar milling and refining annually contributes around R1.6 billion to employment through salaries and wages, and a further R1 billion in the form of maintenance and other services which benefit the local communities.”