assessing the viability of cogeneration in the south...

ASSESSING THE VIABILITY OF COGENERATION IN THE SOUTH AFRICAN

SUGAR INDUSTRY: AN ANALYSIS OF THE OPPORTUNITY COSTS OF BAGASSE

A Research Report

presented to

The Graduate School of Business

University of Cape Town

In partial fulfilment

of the requirements for the

Masters of Business Administration Degree

by

Rolf Lütge

December 2008

Supervisor: Barry Standish

An analysis of the Opportunity Costs of Bagasse Research Report

TABLE OF CONTENTS

1. PREFACE ............................................................................................................................... 5

2. ABSTRACT ............................................................................................................................ 6

3. GLOSSARY OF TERMS ....................................................................................................... 7

4. INTRODUCTION .................................................................................................................. 8

4.1 Background ...................................................................................................................... 8

4.2 Overview of Cogeneration ............................................................................................... 9

4.3 Overview of Bagasse ...................................................................................................... 11

4.3.1 Alternative Uses of Bagasse ................................................................................... 12

4.4 Problem Statement and Purpose of Study ...................................................................... 13

4.5 Research Questions ........................................................................................................ 14

4.6 Research Objectives and Motivation .............................................................................. 14

4.7 Research Hypotheses and Findings ................................................................................ 15

4.8 Constraints ...................................................................................................................... 16

4.9 Major Assumptions ........................................................................................................ 17

4.10 Layout ............................................................................................................................. 17

5. LITERATURE REVIEW ..................................................................................................... 18

5.1 Calculating the Opportunity Cost of Alternative Bagasse Based Processes .................. 18

5.1.1 Bagasse as Boiler Fuel ............................................................................................ 18

5.1.2 Bagasse in Animal Feed Manufacturing ................................................................. 19

5.1.3 Bagasse in Furfural Manufacturing ........................................................................ 20

5.1.4 Bagasse in Cogeneration ......................................................................................... 21

5.2 Overview of Studies of the Alternative Uses of Bagasse ............................................... 23

6. METHODOLOGY ............................................................................................................... 25

6.1 Estimating the Rate of Return of Alternative Value Adding Processes ......................... 25

6.2 Estimating the Price per Ton of Bagasse as a Fuel Substitute ....................................... 28

6.3 Estimating the Rate of Return for Investments in Cogeneration ................................... 29


7. DATA ANALYSIS, FINDINGS, AND DISCUSSION ....................................................... 33

7.1 Identifying the Main Consumers of Bagasse ................................................................. 33

7.2 Identifying the Quantities of Bagasse Consumed by Competing Applications ............. 34

7.3 Estimating the Coal Equivalent Price of Bagasse .......................................................... 34

7.4 Potential for Direct Sales of Bagasse ............................................................................. 37

7.5 Economic Feasibility Analysis of Animal Feed Processing .......................................... 38

7.5.1 Calculating the Estimated Cost of Animal Feed Production .................................. 38

7.5.2 Calculating the Estimated Returns of Animal Feed Production ............................. 40

7.5.3 Sensitivity Analysis of the Animal Feed Projections ............................................. 41

7.5.4 Potential Barriers to Animal Feed Production ........................................................ 42

7.5.5 Potential Enhancers of Animal Feed Production .................................................... 43

7.6 Economic Feasibility Analysis of Furfural Production .................................................. 43

7.6.1 Calculating the Estimated Cost of Furfural Production .......................................... 43

7.6.2 Calculating the Estimated Returns of Furfural Production ..................................... 45

7.6.3 Sensitivity Analysis of Furfural Projections ........................................................... 46

7.6.4 Potential Barriers to Furfural Production ................................................................ 47

7.6.5 Potential Enhancers of Furfural Production ............................................................ 47

7.7 Economic Feasibility Analysis of Cogeneration ............................................................ 48

7.7.1 Calculating the Estimated Cost of Cogeneration .................................................... 48

7.7.2 Calculating the Estimated Returns of Cogeneration ............................................... 55

7.7.3 Sensitivity Analysis of Cogeneration Projections................................................... 58

7.7.4 Potential Barriers to Cogeneration .......................................................................... 60

7.7.5 Potential Enhancers of Cogeneration ...................................................................... 61

8. SUMMARY OF THE FEASABILITY FINDINGS............................................................. 62

9. OTHER VALUE ADDING PROCESSES FOR FUTURE CONSIDERATION ................ 63

10. CONCLUSION ..................................................................................................................... 64

11. RECOMMENDATIONS ...................................................................................................... 66

12. BIBLIOGRAPHY ................................................................................................................. 67


LIST OF TABLES

Table 1 : Potential calorific value of popular crops for animal feeding ....................................... 20

Table 2: Market participants and role-players in bagasse processing ........................................... 27

Table 3 : Availability and processing of bagasse in South Africa ................................................ 33

Table 4 : Quantities of bagasse utilised by the various processes ................................................ 34

Table 5 : Input parameters for animal feed plant financial analysis ............................................. 39

Table 6 : Projected returns of animal feed plant ........................................................................... 40

Table 7 : Sensitivity analysis of projected animal feed financial indicators ................................. 41

Table 8 : Input parameters for furfural plant financial analysis .................................................... 44

Table 9 : Projected returns of furfural manufacturing .................................................................. 45

Table 10 : Sensitivity analysis of projected furfural financial indicators ..................................... 46

Table 11: New boiler and steam specifications for the average South African mill .................... 50

Table 12: Power capacity calculations .......................................................................................... 50

Table 13: Capital costs of standard sized cogeneration equipment .............................................. 51

Table 14 : Cost of energy from cogeneration ............................................................................... 53

Table 15: Cost of energy from cogeneration (continued) ............................................................. 54

Table 16: The MTPPP range of energy prices .............................................................................. 56

Table 17 : Input parameters for cogeneration plant financial analysis ......................................... 57

Table 18 : Sensitivity analysis of projected cogeneration financial indicators ............................. 58

Table 19 : Summary of financial indicators .................................................................................. 62

LIST OF FIGURES

Figure 1: Basic cogeneration process ........................................................................................... 10

Figure 2: Products and by-products of the sugar manufacturing process ..................................... 11

Figure 3: Alternative uses for bagasse .......................................................................................... 12

Figure 4: Methodology for bagasse input price analysis .............................................................. 26


1. PREFACE

I wish to thank Barry Standish from the Graduate School of Business, University of Cape Town

for his candid and valuable guidance during the writing of this research report. Furthermore, I

thank Bruce Moore and Christiaan von Coller from Bosch Projects (PTY) Ltd for their expert

advice regarding the subject of cogeneration.

I certify that this report is my own and that all references used have been accurately identified.

Signed:

Rolf Lütge


2. ABSTRACT

ASSESSING THE VIABILITY OF COGENERATION IN THE SOUTH AFRICAN SUGAR

INDUSTRY: AN ANALYSIS OF THE OPPORTUNITY COSTS OF BAGASSE

Cogeneration is seen by many in the global sugar industry as a promising diversification strategy

aimed at reducing the industry’s vulnerability to fluctuating world sugar prices. This report

however shows that cogeneration in the South African sugar industry remains unviable. The

investigation compares the potential returns of cogeneration at the majority of South African

sugar mills to the probable returns of alternative bagasse end-use processes, namely animal feed

and furfural. A financial feasibility analysis is carried out for each enterprise using commonly

accepted indicators including the internal rate of return, net present value and the payback

period. The results show that under current conditions, cogeneration is the least attractive value

adding option available to South African sugar millers. Animal feed and furfural manufacturing

are found to have superior potential returns. However, these industries are currently beleaguered

by their own unique set of difficulties.

KEYWORDS: cogeneration, opportunity cost, sugar industry, bagasse, furfural, animal

feed


3. GLOSSARY OF TERMS

Most of the descriptions of the technical terms in this report are taken from the book ‘Cane Sugar

Engineering’ written by Peter Rein (2007).

Bagasse: Cane fibre leaving mills after the extraction of cane juice.

Cane residue/trash: Cane tops, leaves and dead stalks of cane and any other vegetable matter

remaining in-field after the sugar cane has been harvested.

Cogeneration: The production of electricity for commercial sale by means of burning bagasse.

Technically speaking it refers to the simultaneous production of power and thermal energy in the

form of steam.

Fibre: The dry fibrous insoluble structure of the cane plant. Generally taken to mean all

insoluble material in the cane delivered to a mill and therefore includes soil or other extraneous

matter.

Furfural: Furfural, also known as furfuraldehyde, is a viscous and colourless liquid industrial

chemical derived from a variety of agricultural by-products, including sugar cane bagasse.

Imbibition: The process of adding imbibition water to the extraction plant to increase the

extraction of soluble sugar.

Molasses: The liquor separated from the sugar crystals during the centrifugal process.

Pyrolysis: Chemical decomposition induced in organic materials by heat in the absence of

oxygen.

Maximum Continuous Rating: This figure provides the maximum continuous per hour steam

throughput capacity of a boiler


4. INTRODUCTION

4.1 Background

The global sugar industry is currently experiencing difficult times characterized by rapidly

increasing input costs compounded by low world sugar prices. A long term outlook reveals a

very likely continuation of price increases for fossil fuels and at best a stagnation of the sugar

price (Paturau, 1988). With this backdrop the South African sugar industry has been seeking

profitable alternatives to sugar and its by-products in an attempt to add value to a struggling industry.

Sugar millers in South Africa have for years been investigating alternative uses for sugar cane

and the by-products associated with sugar manufacturing. Such diversification would minimize

their vulnerability towards the volatile world sugar price. Traditionally however, by-products

have had limited marketability due to restricted demand (Wienese & Purchase, 2004). Bagasse

fibre and molasses are the major by-products of the sugar manufacturing process. Bagasse

constitutes all of the fibrous matter expelled during the shredding, diffusion and milling of sugar

cane. For an average yield of 80tons of sugarcane per hectare, approximately 18tons of bagasse

is produced at the factory. When combined with the fibre left in-field during the harvesting

process, a total of 35 to 40 tons of biomass per hectare of cane land could potentially become

available for further processing (Eggers, 2008, pers.com).

Co-generation has been the vehicle chosen by many of the international sugar producers to

deliver value from the processing of excess bagasse. In the sugar industry, the term co-generation

is generally used when describing the production of electricity for the purpose of export

(Wienese, 1999). In simple terms the process involves the sequential generation of electrical

power and thermal energy in the form of steam by burning bagasse (Purohit & Michaelowa,

2007). This technology has been around for many years but has as yet not found a commercial

foothold in the South African sugar industry.

Co-generation in South Africa has historically not been considered viable due to the associated

high costs of capital and unattractive rate of return (Wienese & Purchase, 2004). It has however

received renewed interest of late in response to several external changes. The problems


experienced by South Africa’s power utility company Eskom in terms of reliable power supply

and the associated quest for renewable energy have prompted stakeholders to seek alternative

sources of electricity supply. Furthermore, the South African Government has set a renewable

energy target of 10 000GW by 2013 (Anon, 2004, p4). Adding momentum to these

developments is the recent increases in the coal price as well as the resulting increases in

electricity prices. In culmination of these events, Eskom has recently called for tenders for the

supply of electricity from alternate suppliers.

South African sugar millers have subsequently begun commissioning feasibility studies to assess

the viability of cogeneration plants in their factories. In a recent interview, Dave Meadows –

executive director for technology management at Tongaat Hulett – stated that a R10 billion

investment was required to kick-start a cogeneration programme in the South African sugar

industry (Anon, 2008, p24). This would potentially lead to a renewable power production

capacity of 400 megawatts of electricity. However, as this report will show, under current

circumstances cogeneration does not offer attractive financial returns to sugar millers.

4.2 Overview of Cogeneration

Energy recovery from sugarcane waste provides a large potential source of heat and electricity

while reducing the dependence on fossil fuels and the environmental impacts associated with

generating energy (Braunbeck, Bauen, Rosillo-Calle & Cortez, 1999, p 500). Sugar cane has

energy delivering capacity equivalent to five times that used by the crop. When burned, sugar

cane dry matter produces 4000 Kcal per kg. One hectare of sugarcane can produce about 100 to

200 million Kcal per year equivalent to about 10 to 20 ton of oil (Almazan, Gonzalez & Galvez,

1998, p14). According to (Almazan et al, 1998) sugar millers should give special attention to the

efficient use of this energy potential of sugar cane in their diversification strategy. Cogeneration

provides the means to unlock this energy potential.

While all sugar mills produce their own electricity, they have traditionally been characterized by

the inefficient use of the available energy in bagasse. This occurs because the inherent energy

content of bagasse exceeds the energy needs of the factory. Thus boilers and steam generators

are run at low efficiencies in order to burn as much of the bagasse as possible. The factory

thereby avoids incurring the costs associated with other forms of bagasse disposal (Gwang’ombe


and Mwihava, 2005). The sugar industry thus cogenerates only enough steam and power to meet

its on-site needs (Gwang’ombe and Mwihava, 2005). Potentially however, the industry could

deliver a surplus of 60 to 120 kWh of electric power per ton of cane, which can be delivered to

the national electricity grid (Almazan et al, 1998, p 9). Wienese and Purchase (2004) concur that

surplus energy is easily achievable under the correct circumstances but suggest that this surplus

energy could be as high as 250 kWh per ton of cane.

New cogeneration technologies have allowed modern factories to harness the full energy

potential of bagasse. The process allows millers to optimise their energy usage, to go beyond

meeting their own energy needs by producing electricity for sale to other electricity users

(Gwang’ombe and Mwihava, 2005). Cogeneration thus adds value by creating excess power.

Other advantages of cogeneration include reduced fuel consumption, reduced environmental

pollution and higher efficiencies (Purohit & Michaelowa, 2007). Figure 1 illustrates the basic

modern cogeneration process.

Figure 1: Basic cogeneration process

Source: Gwang’ombe & Mwihava, 2005, p9


Bagasse, or coal, is fed into the boilers which creates steam. The majority of steam passes

through the back pressure turbo-alternators where it creates electricity. Back pressure turbo-

alternators take in high pressure steam to create electricity. The steam is then channeled further

into the factory where it supplies the necessary process heat (Rein, 2007, p711). Steam in excess of

the processing requirements is channeled into a condensing turbo-alternator. Condensing turbo-

alternators use exhaust steam that is sub-atmospheric and are thus equipped with a condenser (Rein,

2007, p711). Additional electricity can thus be generated from excess steam. Currently most factories

do not have condensing turbines and thus operate below optimal efficiencies (Moor, 2008, pers.com).

4.3 Overview of Bagasse

Bagasse is produced as a by-product of sugar cane processing. It is composed of fibre, pith, non-

soluble solids and water (Almazan et al, 1998). The fibre in turn consists of approximately 50%

cellulose and 25% each of hemicellulose and lignin (Pandey, Soccol, Nigam and Soccol, 2000).

While its morphological structure in relatively weak its advantages lie in the fact that it need not

be subjected to severe processes during chemical and mechanical value adding treatments.

Furthermore, it is obtained from and concentrated in sugar factories thus simplifying handling

and transportation (Almazan et al, 1998).

Figure 2: Products and by-products of the sugar manufacturing process

Source: Almazan et al, 1998.

As can be seen in Figure 2 bagasse comprises 28% of the raw material entering a sugar factory. It

is used mainly as a fuel in the boilers of sugar factories as a replacement for fossil fuels. The


percentage bagasse exiting the sugar manufacturing process depends to a large extent on the varieties

of the cane harvested as well as the production efficiencies intrinsic to individual factories.

4.3.1 Alternative Uses of Bagasse

Bagasse can be put to multiple end uses but under modern technological and marketing

conditions most of them can be ignored due to their limited economic pay-off (Paturau, 1988).

Value adding processes are mostly characterised by complex production techniques.

Maximization of profits however, is not automatically linked with process complexity. Instead,

profitability is largely dependent on local conditions or the proximity of a remunerative export

market. A variety of new uses and technologies have been developed in recent times that lack

commercial application. These typically require high development costs and are likely to satisfy

niche markets only (Paturau, 1988).

Figure 3 illustrates the variety of end-products currently commercially manufactured throughout

the global sugar industry.

Figure 3: Alternative uses for bagasse

Source: Paturau (1988)


Bagasse boasts various useful properties. Alternative uses can be divided into three main groups

based on these characteristics. Fuels such as electricity, charcoal and gas take advantage of the

energy content of bagasse. Other products such as pulp, boards and paper make use of the fibre

content of bagasse. Furthermore, a variety of alternative uses are derived from the chemical and

organic nature of bagasse. These include, amongst others, furfural and animal feeds.

Furfural, also known as furfuraldehyde, is an industrial chemical derived from a variety of

agricultural by-products, including sugar cane bagasse. Furfural is a viscous, colourless liquid

that has a pleasant aromatic odour; upon exposure to air it turns dark in colour. It is a strong

solvent with a risk profile similar to that of dieseline. It is not dangerous to handle. The chemical

is a natural element in food where it is formed by the breakdown of Vitamin C. It is also a major

component of coffee (Anon, 2008, p3). The most important intermediate derived from furfural is

furfural alcohol, used to make furan resins. Other applications include the use in lube oil refining,

as a bonding agent in grinding wheels and abrasives, in pharmaceuticals, as a decolorizing agent,

fungicide, herbicide and in the manufacture of phenolic resins (Anon, 2008, p1).

Bagasse has over the years become a common feature in animal feeds. It does not ferment easily

and for this reason animal feed manufacturers utilise bagasse mainly as a carrier or filler. The

fibre contributes little in terms of nutritional value (Reineke, 2008, pers.com). Bagasse is often

used as a replacement for hay and can be used in the production of feed for all livestock species.

4.4 Problem Statement and Purpose of Study

Recent institutional and economic changes have redefined the dynamics of many agricultural

based markets. Previous studies and their reliance on ever changing data have subsequently been

rendered out of date. There is a need to reassess the impact these changes have had on the

viability of cogeneration and other end use processes. Furthermore, the likely future rates of

return of these processes needed to be re-examined. According to Paturau (1988) the market

price of the by-products of the sugarcane industry varies from country to country. Prices are also

subject to cyclical fluctuations. Realistic ranges for the domestic price movements based on

current supply and demand had to be determined in order to assess the related rates of return. As

a precursor to this analysis, the production throughput parameters of South African millers as

well as the resulting available quantities of bagasse were determined.


The problem statement thus centres on the issue of which value adding process offers the best

probable returns for the utilisation of bagasse. Challenging the feasibility of electricity

generation are the multitude of alternative uses of sugar cane bagasse and the associated

opportunity costs. An accurate assessment of these costs is required to bolster the legitimacy of a

feasibility study. An appraisal of the opportunity costs of bagasse will form the basis of this

report. A wide array of alternative uses exists. The scope of this study will be limited to those

widely recognized as the most viable and thus the most likely alternatives in the South African

sugar industry. These are boiler fuel, animal feed, and furfural.

The study served to assess not only the likely returns of the various end uses of bagasse but also

to identify the associated risks. By comparing the results of the various feasibility studies it was

possible to recommend a course of action regarding the continued pursuit of cogeneration in the

sugar industry.

4.5 Research Questions

The following fundamental questions have been addressed during the research process.

What are the likely capital costs, operating costs and the expected rate of return from

potential future cogeneration investments for South African sugar millers?

What are the capital costs, operating costs and the expected rates of return of the main

end use alternatives of sugar cane bagasse in the South African sugar industry?

What is the inherent value of bagasse and what price can be demanded by South African

sugar millers when selling bagasse directly?

4.6 Research Objectives and Motivation

Relating to the research questions are the objectives of the investigation coupled with the

relevant motivations.

This report focused on two primary objectives. First, the market related opportunity costs of the

selected bagasse based processing alternatives were determined in view of changing


externalities. Second, the costs and potential rate of return of future cogeneration investments by

sugar millers were calculated.

In satisfying these objectives millers have a better understanding of what their options are

regarding diversification in the sugar industry. Specifically, this report addresses the suitability

of cogeneration with regards to Government’s renewable energy objectives.

4.7 Research Hypotheses and Findings

The investigation has the following primary hypotheses:

Hypothesis 1:

Currently, cogeneration does not offer South African sugar millers the most promising rate

of return out of the range of possible alternative end uses for the by-product bagasse.

Hypothesis 2:

Under Eskom’s proposed power purchasing programme, cogeneration is not a suitable

vehicle for meeting the South African Government’s renewable energy targets.

The underlying premise is that the alternative applications of bagasse could not be possible

without the bagasse as raw material input.

The findings of this study confirm that cogeneration does not offer attractive financial returns. In

its current state, Eskom’s energy purchasing programme does not incentivise South African

sugar millers to participate in Government’s renewable energy initiative. The most noteworthy

inhibiting factor is the cost of the capital investments required to upgrade the power supply

capacity of individual millers. In short, the cost of producing electricity through cogeneration is

too high compared to conventional coal fired power plants. Instead, the manufacture of furfural

and animal feed are identified as the most promising value adding processes for sugar millers.

This implies that cogeneration, under the current circumstances, will not support Government’s

renewable energy initiative.


4.8 Constraints

Related theory provided the necessary tools and methods for conducting research into the

selected problem. In practice however, it was often difficult to gather all of the required or

recommended data. This section highlights some of the constraints encountered during the

course of this study.

Developing a full business plan is a lengthy, complicated process and falls outside the scope of

this study. The individual industry analyses in this investigation are done using common

methodologies that focus on basic capital and operating costing as well as probable returns. The

intention is to provide insights into the potential returns that exist for cogeneration compared to

the returns of established bagasse processing industries. All cost and price information is current.

Data was collected from sources directly involved with the manufacturing and operating of

plants as well as the purchasing of the relevant end products.

Most of the businesses that operate in the industries under investigation are very competitive in

nature. This makes it difficult to extract all of the relevant information ideally required to

conduct an accurate assessment of the current operating environment. However, in each case

original data was supplied by co-operators and supplemented with recognised theory where

necessary. The South African sugar industry has relatively few stakeholder groups when

compared to the large sugar growing industries such as Brazil and India. Thus, in some cases the

input data originated from a limited number of sources rather than all possible stakeholders

within the respective industries.

Many of the conclusions in this report are based on long term forecasts. Forecasting is not an

exact science, particularly in the modern environment where technologies and consumer

preferences are fast changing and diverse. Financial forecasts in particular are dependent on, for

example, the annualisation of capital costs. The selection of the relevant time periods involved is

subjective and this paper does not presume to have selected time periods suitable to all decision

makers. Similarly, the internal rate of return and net present value, while offering valuable

insight, are susceptible to unpredictable changes in cash flow in response to changing market

conditions.


4.9 Major Assumptions

The following major assumptions have been made for the purpose of this report:

The availability of coal to replace the bagasse should it be diverted to new processes is

assumed to be adequate.

The technologies required for the various processes involving bagasse are freely available or

can be purchased.

4.10 Layout

The report begins with a brief overview of the literature that introduces and analyses the relevant

subjects. This section includes a synopsis of the potential costs and returns of new cogeneration

projects. An assessment of both South African and international examples is included.

Furthermore, the feasibility of the selected alternative uses of bagasse, as determined by other

authors, is reviewed. Finally, a look at similar studies evaluating the various uses of bagasse

concludes the literature review.

Following the literature study is a description of the required methodologies used to carry out the

analysis. These methodologies are extracted from assorted literature related to the objectives of

this study. Three different methods are described in this section. The first deals with estimating

the rate of return of the alternative bagasse based processes. The second depicts the steps

required to calculate the value of bagasse as a fuel substitute. The final methodology illustrates

the appropriate technique for assessing the potential costs and returns of cogeneration.

The findings of this study are subsequently presented in a sequential order beginning with a

detailed calculation of the market price of bagasse as a coal replacement. This is followed by a

feasibility analysis of both animal feed and furfural manufacturing. A viability study of potential

cogeneration plants in the South African sugar industry closes the feasibility assessments. A

summary of all findings and the associated implications is also provided. Recommendations

regarding future areas of study to complement this investigation conclude the report.


5. LITERATURE REVIEW

The purpose of the literature review was to determine a theoretical basis from which this study

could be directed. Existing conclusions and assessments on the topics under review have

provided direction in terms of answering the questions posed by this study.

Investigations into the value adding processes for sugar by-products have largely focused on

international cases in individual industries. Of interest to this study is the potential profitability

of the major bagasse based processing options. As such, the literature review focuses on the

operational and economic suitability of bagasse derived products in an open market situation

with a focus on boiler fuel, animal feed, furfural and cogeneration.

5.1 Calculating the Opportunity Cost of Alternative Bagasse Based Processes

Almazan et al, (1998, p 10) states that as a first rule, alternatives products in the sugar industry

must be selected with high ratios of selling price to cost of raw materials. Various investigations

have addressed this statement in view of the specified bagasse based processes.

5.1.1 Bagasse as Boiler Fuel

All substances are comprised of organic matter, moisture and inorganic matter, also referred to as

ash. Only organic matter, however, takes part in the combustion process (Anon, 2004, p15). The

measure of energy in any given substance is quoted as either a gross calorific value (GCV) or a

net calorific value (NCV). The GCV is the total energy released during the combustion process

and is determined by test. The NCV is the GCV less the latent heat of the water formed by the

combustion process and is obtainable via calculation. Both are quoted on a dry matter basis free

of ash (Anon, 2004, p15). Moisture and ash are both present in bagasse and although they are

inert, their presence affects the associated NCV values. The NCV of bagasse serves to quantify

the monetary value per ton of bagasse by a set formula.

In South Africa most of the work on the calorific value of bagasse was done by Don, Mellet,

Ravno and Bodger in 1977. They measured the GCV of the bagasse from various cane varieties

using a bomb calorimeter (Wienese, 2001, p278). From this formula a measure of NCV was

deduced. This familiar equation, commonly used in the sugar industry reads as follows:


NCV = 18309 - 207,63 * M - 31,14 * B - 196,05 * A (M-% moisture, B – % brix, A – % ash)

Using bagasse as a replacement for fossil fuels in firing boilers in sugar cane factories has also

been researched extensively internationally. Ramakrishna and Babu (2001), Bain, Overend and

Craig (1998), Barosso, Barreras, Amaveda and Lozano (2003) and Easterly and Burnham (1996)

offer detailed insights into the operational and theoretical aspects of using bagasse as a fuel

replacement. There is unilateral agreement that bagasse offers a range of benefits including

environmental friendliness, cost savings and satisfactory calorific characteristics.

There is however also consensus regarding the poor efficiencies obtained by sugar factories not

originally designed for maximising the use of energy inherent in bagasse. These inefficiencies

are due to boiler design and present operational dynamics.

5.1.2 Bagasse in Animal Feed Manufacturing

The recent emphasis on renewable resources, such as bagasse, for value adding processes has led

to the development of several practices for the production of protein-enriched animal feeds

(Pandey, Soccol, Nigam, Soccol, 2000, p69). Sugar cane contains a high percentage fibre with a

low digestibility, which becomes a limitation for its use in monogastric animals (Almazan et al,

1998, p7). The extremely low fermentability of sugarcane fibre and the negative effect this has

on voluntary intake has prompted research into more suitable uses of bagasse in animal feed

(Preston, 1988). According to Baconawa (1985) using treated cane bagasse for animal feeding in

a fermentation process has been proven technically feasible. In terms of metabolic energy, each

cultivated hectare of sugar cane can deliver as much as 75 000 million calories a year (Almazan

et al, 1998, p2). However, the cost of chemicals for treating bagasse in order to capture this

potential is largely inhibiting.

Most manufacturers of animal feed thus use bagasse as a carrier rather than as a source of

nutrients. Bagasse and molasses combined provide between 15 and 20% of the nutritional value

of the feed depending on price (Reineke, 2008, pers.com). The energy potential of sugar cane

compared to that of other popular renewable crops is illustrated in Table 1.


Table 1 : Potential calorific value of popular crops for animal feeding

Source: (Almazan et al, 1998, p 3)

Almazan (1998), Baconawa (1985), Preston (1988) as well as Usmani, Khatib and Husain (1990)

have covered the technical and operational aspects of incorporating bagasse into animal feeds.

Their conclusions in terms of the biological and potential nutritional benefits are favourable.

Transportation of the lightweight yet bulky bagasse is however a limiting factor. Furthermore,

while the fermentation of bagasse is technically viable, the associated costs are excessive and

bagasse is thus recommended only as a carrier or filler.

5.1.3 Bagasse in Furfural Manufacturing

Furfural can be produced from any plant material containing carbohydrates called pentosans

(Chen, Chou & Peterkin Meade, 1993, p394). World production of furfural is wholly based on

agro-industrial residues or wastes that are abundantly available in many developing countries and

are often under-utilized (Anon, 2008, p5). In the sugar industry the product is made from the

pentoses, or five carbon sugars, which are obtained from hydrolyzing the hemicellulose fraction

of bagasse (Rein, 2007, p721). The reason why furfural is a popular alternative product in the

sugar industry is because the content of pentosan in bagasse is higher than in both softwood and

hardwood (Chen et al, 1993, p394).

Furfural is extracted by treating the bagasse with a mild solution of sulfuric acid, which leaves

most of the lignin and cellulose untouched. The pentoses react to form furfural by losing three


molecules of water through steam stripping and distillation (Rein, 2007, p721). A maximum

yield of furfural per ton of bagasse of 21% is possible. In reality it is closer to 10%, due to

secondary reactions caused by prolonged exposure in the reactor. Several new processes have

recently been developed that claim higher yields but these have not been replicated on a large

commercial scale (Rein, 2007, p721). A major advantage of the furfural process is that as much

as 95% of the original fibre can be recycled back to the boilers for use as fuel (Chen et al, 1993,

p394).

According to Rein (2007, p721) the world market is quite small, about 250 000t per annum. Half

of this market is served by furfural alcohol. New market developments in agrochemicals,

biofuels and performance plastics are expected to double, or even triple, the current world market

by 2012 (Anon, 2008).

Chen et al (1993) as well as Rein (2007) have provided insight into the furfural production

process in their works on sugar cane technology. Most of the literature delves into the chemistry

of the process as well as the technical content of the procedure. The process is without flaw and

few changes have been made over the years. New technologies have been mentioned in terms of

their basic nature but no details are provided as they are recent and well protected. Their

assessments also include an overview of market conditions.

5.1.4 Bagasse in Cogeneration

Traditionally cogeneration in the South African Sugar Industry, although technically feasible,

has not been recognized as economically viable (Wienese & Purchase, 2004, p 1). According to

Wienese & Purchase (2004, p 2) there are two main drivers of the current interest in renewable

energy from sugar cane. First, the use of fossil fuels is generally seen by most stakeholders as

both environmentally undesirable and unsustainable in the long run. Second, the low world sugar

price is forcing manufacturers to supplement their revenues with alternatives. Cogeneration is

seen by many as the vehicle for reducing the risk inherent in the global sugar market.

Previous studies in this field, both locally and abroad, offer insights as to how a feasibility

investigation can be conducted in terms of technique, content and conclusions. Developing


comprehensive cost models as well as scenarios for probable returns forms the basis of these

investigations.

Few literary studies have focused on the South African sugar industry. Wienese and Purchase

(2004) focus on cogeneration in their analysis of the renewable energy opportunities that exist

for the South African Sugar Industry. Their work centres on measuring the costs associated with

cogeneration investments. Their conclusion at the time was that the likely cost of power under a

cogeneration scheme for existing mills does not compare well with a coal fired power station.

They based their assessments on the various means by which sugar mills are able to increase

their power generation capacities in order to maximise returns. These improvements are both

mechanical and logistical in nature. Mechanical improvements include reducing the plant’s

process steam demand and installing upgraded boilers and turbo-alternators. Logistical

improvements relate to the availability of fibre in the form of cane residues.

According to Braunbeck et al, (1999) the use of cane residues to complement bagasse during and

outside the milling season is a viable consideration. The quality of the fuel has been found to be

acceptable. De Beer et al, (1989) and Hugot, (1986) determined that trash and tops from sugar

cane are very similar to bagasse in both quality and quantity. According to Purchase, Wynne,

Meyer and van Antwerpen (2008, p88) a mill in South African experimented with 100% cleaned

trash as boiler fuel for more than a month and found harmful effects in terms of molten ash

deposits. It can bring about economies of scale due to larger generating equipment and/or higher

returns on investment resulting from higher load factors. Burning cane residues could in theory

more than double the amount of excess energy (Braunbeck et al, 1999, p 503; De Beer, Boast &

Warlock, 1989).

The potential profit margins of cogeneration in the South African sugar industry are solely reliant

upon Eskom’s proposed power purchasing scheme. Due to high demand growth and limited

investment in infrastructure, Eskom’s power generation reserve margin has fallen below 10%.

Eskom plans to restore generation reserve margins to 15% in the medium term and to 19% on a

long term basis (Anon, 2008, p1). However, long lead times are required to build the necessary

infrastructure. This has resulted in a variety of approaches undertaken together with the private

sector to ultimately meet South Africa’s foreseeable energy needs. In the short term, demand side


initiatives have been promoted. In the medium term, alternative supply is being considered

(Anon, 2008). It is the pricing structure of these medium term initiatives that are relevant to this

analysis

Several international case studies offer insights into the feasibility of cogeneration. Mbohwa

(2003), Osawa and Yuko (2004) as well as Purohit and Michaelowa (2007) provide an in-depth

look at the technical feasibility of cogeneration in Zimbabwe, Kenya and India respectively.

Restuti and Michaelowa (2007), Bhurtun and Coonjul (2005), Walter and Overend (1999) and

Lobo, Jaguaribe, Rodrigues & da Rocha (2006) have in turn conducted studies into the economic

feasibility of cogeneration in Indonesia, Mauritius and Brazil respectively. These studies have all

lauded the benefits of cogeneration in terms of the associated advantages of renewable energy.

However, their findings point to the high cost of capital required in cogeneration as the biggest

inhibiting factor.

Furthermore, these papers outline the considerations required in calculating the viability of

cogeneration projects. Most of the studies have made use of either a specific country or a specific

mill to illustrate their arguments. This suggests that circumstances and local conditions,

machinery and markets, amongst others, have a distinct impact on the conclusions and outcomes

of research in this field. Nevertheless, these papers provided additional elements for that

comprehensive framework that has guided this study in determining the economics of co-

generation in South Africa’s sugar industry.

5.2 Overview of Studies of the Alternative Uses of Bagasse

Several papers have been written on the alternative uses of bagasse. Detailed financial

comparisons between the different industries are however lacking. Summaries of the relevant

papers are presented in this section.

Lobo et al (2007), have studied the economics of alternative sugar milling options. They weigh

up the benefits of selling bagasse in its basic form compared to the revenues of cogeneration.

They conclude that more efficient cogeneration systems allow mills to sell more unprocessed

bagasse or to generate surplus electricity. However, the high investment requirement of

cogeneration means that the sale of electricity does not always match the returns of simply


selling bagasse free of additional investment. They conclude that for older plants the return on

investment on improved sugar extraction is more attractive as a first step towards energy

rationalization. In this case, cogeneration was not recognized as the best value adding investment

(Lobo et al, 2007, p1412).

Paturau (1988) offers a global overview of existing alternative uses for sugarcane bagasse and

other sugarcane by-products at the time of writing in 1988. He describes most of the products in

terms of their basic production parameters, potential cost and price structures. Advantages and

disadvantages are also discussed but comparisons of profitability are absent. While

acknowledging the fragmented nature of his survey, Paturau concluded that priority choices exist

that are particularly applicable to typical third world countries. Those relevant to this study

include his assertion that surplus bagasse should be used to produce electricity for national grids.

If electricity supply is already adequate, then surplus bagasse ought to be used for the production

of cement particle board for local markets. Prices and some of the technologies have since

become outdated.

Almazan et al (1998) expand on the work of Paturau (1988) and provide updated insights into

alternative uses of sugar and the associated by-products within a Cuban context. Their focus is

on detailed descriptions of the actual final product of the various bagasse processing options on

offer. They do however stop short of describing the technical and financial dynamics. They

prescribe a generic set of prerequisites that should define a selection process for alternative uses.

These include attractive economical results, a layout of the involved technologies, efficient use

of energy, flexible economies of scale, and non pollution of the environment. In contrast to

Paturau (1998), Almazan et al (1998) conclude by recommending animal feeds as the preferred

end use of bagasse.

Olguin, Doelle & Mercado (1995) assess the resource optimization options available to sugar

mills in Mexico through the utilization and processing of sugarcane by-products. The focus of

their research is not solely on bagasse. As a result limited details are provided in terms of

technical and economic information. The authors do however conclude that within the Mexican

state under review sugar factories should focus on recycling bagasse as a fuel in their boilers.


Various conclusions are thus derived from previously conducted research of a similar nature.

Similarly, South Africa’s institutional, economic, market, technological and circumstantial

externalities have had a major bearing on the outcome of this study.

6. METHODOLOGY

This section describes the basic research procedures followed during the course of this study.

Recommended data gathering techniques as well as suggested analytical processes are described

based on the literature review. Desk research, interviews with industry stakeholders as well as

field research was necessary in order to gather and analyse the relevant data. The chosen

methodologies focus on recognised procedures aimed at offering practical insights into the

problem at hand.

Brorsen and Irwin (1996), in their paper on the state of research in agricultural economics and

inherent price models, claim that modern research reflects several flaws. These include too much

supposedly applied work that is never used; too many applications of existing methods with little

connection to the real world and not enough fact finding research. They go on to state that most

of the research in this field is based on public data that, while useful, cannot answer many of the

posed questions. Instead, the emphasis should be on recognizing our changing realities,

collecting new data and thereby avoiding irrelevance (Brorsen and Irwin, 1996). It was the

intention to conduct this research in a similar spirit. This meant collecting primary and updated

information and effectively communicating relevant conclusions.

In line with the objectives of this study, the research methodology will focus on calculating the

potential financial returns of alternative bagasse end use processes as well as the potential

financial returns of cogeneration. In each case the process will be conducted in the context of the

South African sugar industry.

6.1 Estimating the Rate of Return of Alternative Value Adding Processes

Junginger, Faaij, van den Broek, Koopmans and Hulscher (2001) propose a sequential process

for collecting data on prices for raw materials within competing industries. The general principle


is to explicitly reveal uncertainties at each step and to determine ranges within which parameters

may vary (Junginger et al, 2001).

First, the main consumers of the residue are identified. In South Africa, a variety of industries

involved in the processing of bagasse have been developed over the years. Many more exist

internationally and even more still are in developmental stages. The industries established

domestically have presumably advanced to their mature state due to favourable local conditions.

Furthermore, those that have not been commercially established locally are presumed to have

been found unviable. The focus of this study will thus be those businesses that are already well

established in South Africa and have a good chance of successful implementation. New

technologies are not considered due to the risk associated with such ventures as well as a lack of

data.

Second, the different quantities of bagasse utilized by the various competing applications are

determined. According to Junginger et al (2001) all applications can be summarized into Fuel,

Fodder, Fertilizer, Fibre, Feedstock and Further uses. The categories relevant to this study are

limited to Fuel (in boilers), Fodder (in animal feed) and Feedstock (in furfural manufacturing).

Figure 4: Methodology for bagasse input price analysis

Source: Junginger et al, 2001


Third, the extent to which the material in question is utilized must be determined in order to

establish price. This step is characterized by three potential scenarios (Junginger et al, 2001).

Scenario one: the material is highly utilized and the price variations can be readily determined.

Scenario two: the material may be utilized to a varying degree but monetary values may not be

available. Scenario 3: the material is not utilized at all. In the latter two scenarios a price can be

determined based on the heating value of the material and the costs of the most commonly used

replacement fuel. The relevant steps of the methodology for this part of the investigation are

illustrated in Figure 4. Relevant market participants and other relevant role players are listed in

Table 2.

Table 2: Market participants and role-players in bagasse processing

Company Industry

Price Setters

TSB Company Limited Animal Feed / Sugar

UCL Company Limited Sugar

Illovo Sugar Limited Ethanol / Cogeneration / Sugar/furfural

Tongaat Hulett Sugar Ltd Ethanol / Cogeneration / Sugar/ Animal

Feed

Price takers

Dries Reinecker Animal Feed

Triple A Animal Feed

Crafcor Animal Feed

Research Organisations

South African Sugar Research Institute Research

Sugar Milling Research Institute Research

Dalin Yebo Furfural

Industry Bodies

South African Sugar Millers Association Ltd Representation

South African Growers Association Representation

Source: Results of this study, 2001

As can be seen from Table 2 there are two major manufacturers of animal feed in the South

African sugar industry. TSB Sugar produces a range of animal feed products under the trade


name Molatek. Their animal feed comprises molasses and sugarcane bagasse (Anon, 2008).

Tongaat Hulett manufactures a very similar product under the trade names Voermol and

Moreland. Other operators of note include Crafcor, Triple A and Molasses Trading Company.

Illovo Sugar is the only manufacturer of furfural. As is the case with most furfural plants it is

located adjacent to its available supply of raw material, i.e. the Sezela sugar factory on the

KwaZulu Natal south coast. Dalin Yebo holds the intellectual property rights to the most recently

developed technology processes for furfural manufacturing. These institutions have provided the

necessary data relevant to the industries in question. The data was then incorporated into the

prescribed models used to assess pricing dynamics.

Once demand side prices were determined it was necessary to establish as near as possible what

the costs of production and end product market prices were likely to be. These were required to

assess the likely rates of return of the various end use processes of bagasse. The financial ratios

used to determine profitability include the internal rate of return (IRR), the net present value

(NPV) and the payback period. Much of the information relating to costs is of a sensitive nature

and was difficult to obtain. In such cases, a best estimate was utilized to determine likely

profitability. To validate the analysis, several industry participants provided data in the form of

percentages and ratios. Costs and prices were then inferred based on the input parameters

determined in accordance with established production designs.

6.2 Estimating the Price per Ton of Bagasse as a Fuel Substitute

According to Paturau (1988) the price of bagasse is generally related to its fuel value. Kumar,

Purohit, Rana & Kandpal (2002) offer two approaches to estimating the value of agricultural

residues used as biofuels. First, the production cost method recognizes the contribution of each

step in crop production and harvesting and accumulates the related costs into a representative

cost figure. Second, an opportunity cost estimation is made based on the amount and cost of fuels

likely to be substituted by the biomass.

The first method covers the supply side of the agricultural residue production and utilization

while the second considers the demand side (Kumar et al, 2002). In keeping with the intention of

supplying relevant research data, the supply method for calculating costs is judged to be less

suited to the purpose of this study. Reasons for this include the hugely varying modes of


transport, labour productivity and harvesting styles within the sugar industry together with the

relative costs. Furthermore, the preparation and transportation of crop residues to sugar mills has

rarely occurred in South African mills and data would be speculative and potentially unreliable.

The opportunity cost estimation related to the substituted fuels will thus be used to approximate

the price of bagasse. This methodology is based on the assumption that the use of bagasse leads

to the substitution of fossil fuels (Kumar et al, 2002). According to Kumar et al (2002) the

maximum acceptable unit price (MAP) of bagasse can therefore be estimated as the monetary

value of the equivalent amount of fossil fuel that can be substituted. The formula offered for this

estimate is presented in Equation 1 where CVar represents the calorific value of the agricultural

residue; CVff the calorific value of the fossil fuel being substituted; nd,ar the efficiency of the

agricultural residue utilization; nd,ff the efficiency of fossil fuel utilization in its end use and

finally Pff,local the unit price of the fossil fuel at its end use location.

Equation 1 : Formula for Estimating the Price of Bagasse

The methodology for calculating the price of bagasse as a substitute for fossil fuels will thus

focus on collecting the data comprising the components of the formula illustrated in Equation 1.

The transport costs of coal as well as boiler efficiencies can vary between locations. An average

figure was thus utilised.

6.3 Estimating the Rate of Return for Investments in Cogeneration

Subject to improvements in the efficient use and generation of electricity, the local sugar

industry could produce 3000GWh of power with an in-house requirement of only 700 GWh

(Anon, 2004, p7). It was necessary to calculate the profitability of this cogeneration potential in

South African sugar mills in order to provide a point of reference against which alternative

operations could be compared.

In general, cogeneration projects are evaluated using such indicators as IRR, NPV and the

payback period (Bhattacharyya & Quoc Thang, 2004, p 72). These indicators require valuations


of both costs and benefits. An accurate assessment of these costs and returns is in turn dependent

on the technical requirements of the relevant project. This type of analysis requires data on

specific operational parameters including the size, type and pressure of the boilers as well as the

size and type of the turbines that ultimately generate the electricity.

In the average raw sugar factory the process steam as a percentage on cane crushed is between

55 and 60%. This is high for cogeneration purposes and is typical of current factories with poor

efficiencies. Cogeneration requires a figure of between 40 and 45% (Wienese & Purchase, 2004,

p 6). Several measures can be undertaken in order to achieve these efficiencies. Wienese and

Purchase (2004) as well as Braunbeck, Bauen, Rosillo-Calle & Cortez, (1999) propose a

sequential model for assessing the costs of various power output improvement steps required for

cogeneration in the sugar industry. These steps include reducing the process steam requirements,

increasing boiler and turbine efficiencies, increasing fuel supply with tops and trash as well as

employing combined cycle technology. The model forms the basis for estimating the costs of

establishing a cogeneration plant in the sugar industry.

Several measures exist whereby the process steam requirements can be reduced. These include

reduced imbibition, increased evaporator efficiency, use of continuous pans, efficient boiling

schemes and optimized condensate flashing (Wienese & Purchase, 2004, p 7). Other energy

efficient solutions include the use of multiple bleeding in evaporation stations for heating and

boiling, a high number of evaporation stages and the substitution of throttling valves by other

systems (Almazan et al, 1998). According to Paturau (1988) efficient factories could save up to

50% of their bagasse for use in cogeneration. These efficiency improvement steps will thus form

the first step in quantifying the capital cost of cogeneration.

The second step involves assessing the cost of replacing the existing boilers and turbo-alternators

in order to achieve the desired efficiencies. South African mills in general are characterised by

boiler operating levels that are far below the ideal operating pressure required for cogeneration.

Rein (2007, p634) states that where power is exported to the grid a 6000kPa 480°C boiler cycle

is normally required. The ideal operating pressure will however vary from mill to mill. For the

purposes of this study it is recommended that an average cycle of 6500kPa at 485°C is used (van

Coller, 2008, pers.com). Furthermore, existing turbo-alternators will need to be replaced with


highly efficient back pressure and condensing turbo-alternators (Moor, 2008, pers.com). The size

of these is determined by the bagasse throughput rate.

For each step the resulting power output increase was estimated and converted into an annual

energy output. The capital costs of the project as well as operating and maintenance costs are

then calculated, annualised and converted into a cost figure per kWh. Industry professionals

comprising of consulting engineers at Bosch Projects (PTY) Ltd as well as other industry

stakeholders were consulted. Costs are thus current and as accurate as can be ascertained without

doing a comprehensive feasibility study at each mill. A similar approach was also followed by

Walter and Llagostera (2007) in their feasibility analysis of co-fired combined cycles in

electricity production. The only difference being the selection of different discount rates and the

inclusion of a fixed carbon credit value.

Combined cycle technology is in an advanced development stage and has not been applied

commercially to any large degree. It is thus not considered applicable in this analysis.

Furthermore, in many of the South African milling area most of the tops and trash are burnt prior

to harvesting leaving 3 to 4 tons of trash per hectare (Eggers, 2008, pers.com). This is a

relatively small quantity and the availability of this fuel is not guaranteed. In addition, cane

residue left in the field has multiple agronomic benefits including reduced weed growth,

favourable moisture retention and enhanced soil nutrition (Braunbeck et al, 1999, p497). For

these reasons increased renewable fuel supply, by means of cane residues, are not considered in

the calculations for determining the appropriate scale of potential cogeneration plants.

The technical information relevant to the proposed costing model has been obtained from

interviews with consulting company Bosch Projects (2008). The data relates to current project

costs, updated technologies, equipment requirements, operating costs and likely plant

performance statistics. These costs are then compared to the likely returns on offer based on

Eskom’s power purchasing program.

The feasibility assessment of a cogeneration plant could include the profitability of operating

outside of the normal sugar milling season. It can do this by running on coal. This is however not

recommended for the following reasons.


Unlike bagasse, coal comes at a cost. Furthermore, the storage of bagasse is not advisable as

it slowly deteriorates in storage. It also poses a major fire risk (Waldron, 2008, pers.com).

With no process steam requirements during the off-crop, all power is generated on the

condensing turbo-alternators, in a low efficiency energy cycle. Only 26% of the heat energy

created by the boilers is used in these turbo-alternators. The remaining 74% is dissipated.

Thus, most of the energy value of coal would be lost (Moor, 2008, pers.com).

The sugar milling off-crop occurs from December to March. This is a low demand period for

Eskom.

Burning coal has an environmental cost attached to it.

Any benefits accruing to renewable energy such as carbon credits and preferential financing

will be lost when reverting to fossil fuels.

Bhattacharyya & Quoc Thang (2004) in their analysis of the Vietnamese cogeneration industry

offer a solid methodology for assessing the potential returns of cogeneration based on various

buy-back rates. They offer guidance in terms of which assumptions ought to be made as well as

identifying all the variables necessary for an accurate financial assessment. For the purpose of

this investigation, the price ranges of electricity as stated in Eskom’s Medium Term Power

Purchasing Programme (MTPPP) was used to estimate the profitability of cogeneration projects

for the various mills. The MTPPP covers power supply solutions ranging from 5MW to

1000MW and are commercially operational by at the latest 2012 (Anon, 2008, p9). The pricing

structure of the MTPPP recognises the value to Eskom of being able to secure power in a timely

manner (Anon, 2008, p9). Consequently, a variable price is on offer that recognises the

additional value of energy in the first years of the programme, and tapers off in later years

(Anon, 2008, p10). This projected return, in combination with an overview of local institutional,

technological, environmental and market factors, was used in the overall feasibility assessment.


7. DATA ANALYSIS, FINDINGS, AND DISCUSSION

7.1 Identifying the Main Consumers of Bagasse

The first step in establishing the pricing levels of bagasse is to identify its principle consumers.

Bagasse is produced by 15 mills located throughout the eastern half of South Africa and mainly

in KwaZulu Natal. Operating companies include Illovo Sugar Limited, Tongaat Hulett Sugar

Limited, TSB Sugar Limited, UCL Company Limited and Ushukela Milling Limited. The TSB

mills are located in Mpumalanga. Several of these mills have established value adding processes

that have been operational for a number of years. These businesses include paper manufacturing,

animal feed manufacturing and furfural production.

The manufacturers and the associated bagasse consumer industries are listed in Table 3. The

alternative value adding processes that form part of this analysis are animal feed and furfural.

Tongaat Hulett Sugar Limited and TSB Sugar Limited are the proprietors of the respective

animal feed manufacturing plants. Illovo Sugar Limited owns and operates the sole furfural

manufacturing plant in South Africa. Paper manufacturing in South Africa is highly competitive

and the data relating to costs and margins is closely guarded and thus unavailable. Mondi South

Africa Limited possesses the paper plant in Felixton while Sappi Limited runs the plant in Gledhow.

Table 3 : Availability and processing of bagasse in South Africa

Milling Company and location Tons Bagasse Internal value adding External value adding

produced processes processes

Tongaat Hulett ‐ Amatikulu 380000 boiler fuel ‐

Tongaat Hulett ‐ Darnall 350000 boiler fuel ‐

Tongaat Hulett ‐ Felixton 680000 boiler fuel Paper manufacturingTongaat Hulett ‐ Maidstone 460000 boiler fuel Animal Feed manufacturing

Illovo ‐ Eston 400000 boiler fuel ‐Illovo ‐ Noodsberg 470000 boiler fuel ‐

Illovo ‐ Pongola 400000 boiler fuel ‐

Illovo ‐ Sezela 620000 boiler fuel FurfuralIllovo ‐ Umfolozi 300000 boiler fuel ‐

Illovo ‐ Umzimkulu 350000 boiler fuel ‐uShukela ‐ Gledhow 360000 boiler fuel Paper manufacturing

UCL Company Ltd 230000 boiler fuel

TSB Sugar ‐ Komati 400000 boiler fuel Animal Feed manufacturing

TSB Sugar ‐ Malelane 400000 boiler fuel Animal Feed manufacturing

Total 5800000 Source: Anon, Department of Minerals and Energy, 2008


7.2 Identifying the Quantities of Bagasse Consumed by Competing Applications

The quantities of bagasse consumed by the various processes are largely determined by market

demand. Market demand is in turn limited by location. All value adding facilities in South Africa

are placed directly adjacent to the sugar mill in question due to the high transport costs

associated with such a low density product. The approximate quantities of bagasse utilised by the

various processes are illustrated in Table 4.

Table 4 : Quantities of bagasse utilised by the various processes

Bagasse consuming value Quantity bagasse

adding process consumed (t)

Boiler Fuel Application 4,071,000.00Paper Manufacturing 1,040,000.00

Furfural Processing 590,000.00Animal Feed Manufacturing 100,000.00

Source: Estimated quantities based on the results of this study

Currently, the highest use for bagasse is its application as a boiler fuel. Paper manufacturing is

second followed by furfural manufacturing and finally animal feed manufacturing.

The third step in assessing the potential returns of bagasse based enterprises is the establishment

of price (Junginger ,2001). The best method for doing so depends on the level of utilization. The

furfural and animal feed industries, while well established, do not freely divulge the price that

they pay for bagasse. According to Junginger (2001), should this be the case then the researcher

can determine the price by establishing the heating value of the material and the costs of the most

commonly used replacement fuel. During the interviews held with the various sellers of bagasse

(2008) all indicated that the basis of their selling price is determined by calculating the coal

equivalent value per ton of bagasse.

7.3 Estimating the Coal Equivalent Price of Bagasse

Bagasse is the predominant boiler fuel in the South African sugar industry. Coal is the main

auxiliary fuel when there is a shortfall of bagasse (Wienese, 2001, p277). This section serves to


determine an appropriate monetary value for raw bagasse. This is done by comparing the NCV

of bagasse to that of coal. Once this has been established a Rand value per ton of bagasse is

calculated based on the price per ton of coal delivered.

The formula for NCV of bagasse, also referred to as net specific energy, was developed by the

South Milling Research Institute of South Africa (SMRI) (Don, Mellet, Ravno and Bodger,

1977). The Formula, comprising of constants and variables reads as follows:

NCV = 18 309 - 207,63(M) - 31,14(Bx) - 196,05(A)

where Bx = Brix in Bagasse (wet Basis) (%)M = Moisture Content of Bagasse (%)A = Ash Content of Bagasse (wet Basis) (%)

Most of the sugar mills in South Africa have very similar values for the variables listed above.

Using average values the recoverable value of bagasse is calculated as follows:

Assuming Bx = 1.5M = 49.5A = 2.7

Then NCV = 7436.96 kJ/kg bagasse

The next step is to calculate the NCV of coal. The formula, again comprising of constants and

variable reads as follows:

NCV = GSE - M (GSE + 2 454 - W2 454) - W 2 454 100

where M = Moisture Content of Fuel (%)W = Mass of water in products of combustion

(kg water/kg oven dried fuel)2,454 = Heat measured due to condensation and cooling

of water during specific energy tests (kJ/kg) GSE = Gross calorific value of Coal

The quality of coal can vary per shipment due to shifts in both grade and moisture content.

Average figures have thus been used to calculate NCV for coal as follows:


Assuming M = 6 %W = 0.3584 kJ/kgGSE = 27486

then NCV = 24,864 kJ/kg

The maximum acceptable unit price (MAP) of bagasse can now be estimated as the monetary

value of the equivalent amount of fossil fuel that can be substituted by the bagasse. Kumar et al

(2002) propose the following formula:

where CVar = the calorific value of the agricultural residueCVff = the calorific value of the fossil fuel being substitutednd,ar = the efficiency of the agricultural residue utilization (79.68%)nd,ff = the efficiency of fossil fuel utilization in its end use (84.10%)Pff,local = the unit price of the fossil fuel at its end use location.

The boiler efficiencies are fixed depending on the fuel type (von Fintel, 2008, pers.com). The

average price per ton of coal provided by millers is R875. Having already established the NCV

values of both bagasse and coal, the MAP is calculated as follows:

7437 x 0.7924864 x 0.85[ ] x 875R 243.24R =

An additional handling fee of R20 per ton is applicable as the bagasse has to be moved to and

from a storage zone to the boilers. The estimated coal equivalent price for one ton of bagasse is

thus approximately R263 per ton.

The price paid to suppliers per ton of sugar cane is based on the sucrose content of the cane and

excludes any value placed on the insoluble dry matter. The implication is thus that each ton of

bagasse saves the miller approximately R263. In other words the use of bagasse, at 52%

moisture, as a boiler fuel realises a return of R263 per ton. This figure represents the hurdle for

all potential value adding process using bagasse as an input. Returns in excess of this number


will have to be realised in order to justify the diversion of bagasse away from its use a boiler

fuel.

Having established the price per ton of bagasse, the next step is to determine the costs of

production and end product market prices. This allows us to establish the rate of return as well as

other commonly used financial indicators.

7.4 Potential for Direct Sales of Bagasse

Interviews (2008) with millers confirm that in all cases the price for direct sales of bagasse is

based on the calorific value of bagasse. This ensures that the miller does not incur losses, as the

price of the coal used to replace the bagasse is equal to the revenue of the bagasse sold. Millers

with excess bagasse have trouble selling the fibre as a fuel due to the transport costs associated

with moving products with such a low bulk density. The following case example illustrates this

point.

In 2008, UCL Company Ltd, a sugar miller, was approached by a neighbouring sugar mill,

located six kilometres away, with the intention of buying UCL’s excess bagasse. The mill in

question had insufficient bagasse supplies of their own, while the coal price had escalated

sharply in recent times (Waldron, 2008, pers.com). In order to calculate a contract price a test run

was conducted between the two mills whereby a sample load was sent to the buyer in order to

quantify the appropriate transport costs. The tare mass of the load was 6.7tons with a turnaround

time of 1.5 hours equalling 4.3tons of bagasse an hour. The vehicle running costs were

approximately R225 per hour resulting in a transport cost of R53 per ton of bagasse. Assuming

75% transport efficiency, the actual transport cost per ton of bagasse between the two mills was

R70 per ton of bagasse (Waldron, 2008, pers.com).

At the time the mill’s own coal equivalent price of bagasse was given as R215 per ton (Waldron,

2008, pers.com). This led to the potential buyer offering R125 per ton of UCL’s bagasse. This

price took into account a saving on the coal price in order to justify the transaction. Considering

that a) UCL could store the bagasse for later use and b) the UCL coal equivalent price at the time

was estimated at R230 per ton, UCL would have lost R105 per ton of bagasse had they sold at

this price.


The sale of bagasse as a boiler fuel is thus not a viable alternative unless the seller has no need

for it. This would however be an exception as current boiler designs are inefficient and not

intended to save on bagasse.

Bagasse is also currently being sold to paper manufacturers by two South African millers. The

paper mills are located directly adjacent to the sugar factories. Bagasse is moved via a conveyer

system and transport costs are thus avoided (Ngcamu, 2008, pers.com). In both cases the bagasse

is sold at its coal equivalent value and additional coal is purchased to feed the boilers. The

environmental cost of burning the additional coal is however not taken into account.

In summary, there is little potential for selling bagasse directly to outside parties. The high

transport costs as well as the low quantities of available bagasse are the main inhibitors. Thus,

while millers are able to replace their bagasse with coal, they have little incentive to do so.

7.5 Economic Feasibility Analysis of Animal Feed Processing

The potential financial gains of animal feed production are assessed in this section. As with all

investment projects, profitability is measured by determining both the likely costs as well as the

potential returns of the business.

7.5.1 Calculating the Estimated Cost of Animal Feed Production

Animal feed manufacturing essentially involves the purchasing and mixing of raw materials into

specially designed feed mixes. The quantities and selection of the input materials determine the

type of feed. There is no chemical or heat processing required during production. Mechanical

processing is limited to the chopping of certain fibrous material and mixing the contents of the

feed. Consequently, animal feed manufacturing requires a minimal capital infrastructure. The

majority of costs are related to the purchase of input material and the transportation of both the

inputs and final product (Reineke, 2008, pers.com).

Based on current market constraints the optimal size of the animal feed plant should be restricted

to a maximum production capacity of 120 000 tons of feed (Reineke, 2008, pers.com). The input

data is thus based on this throughput figure. A bagasse to animal feed ratio of 0.25 is used. The

capital cost is annualised over a twenty year period at 10%.


The relevant production costs are also taken into account. The cost of raw material includes

bagasse at its average coal replacement value of R263. Salaries are estimated to total R1 500

000. The operating and maintenance costs are assumed to be 12% of total capital costs

(Govender, 2008, pers.com). This is a relatively high figure but not unexpected due to the

comparatively low capital cost requirements.

The inputs for estimating the cost of animal feed production are listed in Table 5. As indicated,

the capital costs of approximately R15 per ton of feed constitute a fraction of the overall cost per

ton of bagasse. In contrast, the cost of input materials of R 1600 comprises nearly all of the

overall cost per ton of animal feed. The total cost per ton is estimated to average R1629.

Table 5 : Input parameters for animal feed plant financial analysis

Description Unit Value

Average annual output of animal feed plant tons 120,000

Ratio of bagasse to animal feed ratio 0.25

Annual consumption of bagasse 30,000

Cost of bagasse per ton R 263

Capital cost R 14,000,000

Annual maintenance cost R 700,000

Construction period years 1

Plant life years 20

Annualisation factor 0.127

Annualised capital cost R 1,778,000

Average sales price per ton of animal feed R 1,680

Capital cost per ton animal feed R 14.82

Avg operational & maintenance costs per ton animal feed R 1.78

Avg cost of raw material per ton animal feed incl. transport R 1,600

Salaries per ton animal feed R 12.50

Total cost per ton animal feed R 1,629

Source: vand der Merwe, Reineke, van der Walt (2008, pers.com)

Any bagasse diverted towards animal feed production must be replaced with coal. The

environmental cost of burning more coal should thus ideally also be taken into account. The ratio

of bagasse to coal, based on calorific value, was determined to be 3.3. Thus 1 kg of bagasse is

the equivalent of 0.166 kg of coal. 0.55 kg of coal creates one kWh of electricity (Bhattacharyya


& Quoc Thang, 2004, p 1046). From this we can determine that 1kg of bagasse creates 0.3 kWh

of electricity. According to Wienese and Purchse (2004, p9) 1 kWh carries an environmental cost

of 5c. Thus each kg of bagasse that must be replaced by coal carries an estimated environmental

cost of 1.5c. From Table 5 we see that 30 000tons of bagasse will be diverted into the animal

feed plant which will result in an additional environmental cost of R450 000 or R3.75 per ton of

animal feed. In practice however, these considerations are not quantified as a requirement and

are thus excluded from the commercial feasibility analysis.

7.5.2 Calculating the Estimated Returns of Animal Feed Production

The price paid for animal feed products is strictly market based. Any contract price is secured for

no more than a year due to changing variable costs (Reineke, 2008, pers.com). The one

advantage that manufacturers have is that they can adapt the product mix depending on the

market price. Thus they try to maintain their profit margins as the price moves. They do this by

using cheaper inputs or alternatively changing the ratios of the product mix.

Prices vary depending on the relevant feed being sold. All manufacturers have a range of feeds

on offer. An average selling price of R1680 is thus used.

The financial returns are assessed by calculating the IRR, NPV and payback period of the

proposed project. The financial ratios listed in Table 6 indicate that an animal feed plant based

on using bagasse as a carrier should provide a healthy return. The IRR of 30% and the NPV of

R67 million are provided in real terms.

Table 6 : Projected returns of animal feed plant

Description Value

Total costs per ton of animal feed 1,629R

Average selling price per ton of animal feed 1,680R

Return after tax per ton of animal feed 36R

IRR 30%

NPV R 67,244,912

Payback period 3.25 years

Source: Results of this study


If the environmental costs were taken into account it would reduce the IRR by 3%, to 25%, and

the NPV by R6 million, to R54.5 million.

7.5.3 Sensitivity Analysis of the Animal Feed Projections

The financial attractiveness of any large investment project is expected to change in the face of

varying investment costs, price ranges and throughput rates. The effect on IRR and NPV is

analysed under the following scenarios:

a) A change in investment cost by increasing the total capital cost by 10%, 20% and 30%

b) A decrease in the sales price of animal feed by 1%, 2% and 3%

c) A decrease in throughput by 10%, 20% and 30%

Table 7 : Sensitivity analysis of projected animal feed financial indicators

Sensitivity change IRR NPV

Original value of investment 30% 86,000,000R

Investment cost increase by 10% 27% 82,000,000R Investment cost increase by 20% 23% 78,000,000R

Investment cost increase by 30% 20% 75,000,000R

Original market price 30% 86,000,000R

Price decrease of 1% 20% 66,000,000R Price decrease of 2% 8% 45,000,000R

Price decrease of 3% negative 26,000,000R

Original throughput 30% 86,000,000R

Throughput decrease of 10% 25% 71,000,000R Throughput decrease of 20% 20% 57,000,000R

Throughput decrease of 30% 15% 43,000,000R


From Table 7 we observe the following:

Changes in capital cost do not pose a major threat to the viability of an animal feed plant,

even with a 30% increase. The reason for this is that by far the majority of costs per ton of

animal feed (98%) are comprised of the cost of raw material.


An animal feed business is highly sensitive to price. Even a 1% change in price has a major

impact on returns. Margins are equally sensitive to increases in the cost of sales. An increase

in the price of raw material inputs would thus result in similar consequences. This is typical

of a low margin enterprise. According to Reineke (2008, pers.com) there are two ways in

which to overcome this difficulty, First, manufacturers tend to change the nutritional mix of

the product i.e. they use cheaper input materials. Second, contract prices are changed

annually. Such changes in price are immediately characterised by new product mixes. It is

thus difficult to gauge at which price animal feed manufacturing would become unviable. A

drop in price can be countered by cheaper inputs.

Considering that fluctuating demand is an issue in the animal feed industry, throughput

becomes an important indicator. A reduction in throughput of 10% reduces the IRR by

approximately 5% and the NPV by R15 million. A fall in throughput should generally not

threaten the business. However, due to the low margins, profits in such a year would be

significantly affected. The increase in fixed costs is ignored due to their small contribution

towards total costs.

7.5.4 Potential Barriers to Animal Feed Production

The following environmental factors also impact on the profitability of an animal feed business

and must be taken into account.

Molasses would form an integral part of the animal feed produced at a sugar mill. The current

market price of molasses sold in an unprocessed state is high, approximately R750 per ton, and is

expected to continue rising (van der Merwe, 2008, pers.com). It has already been established that

margins in the animal feed industry are low. If the molasses price were to increase much higher,

then the viability of the business becomes questionable. Under these circumstances it would be

more profitable to sell unprocessed molasses directly to the market as no processing is required.

In fact, in 2007, UCL Company Limited, impaired its animal feed plant in favour of direct

molasses sales (van der Merwe, 2008, pers.com).

Market demand for animal feed is cyclical. In dry years more feed is required and in wet years

most agricultural land is self sustaining (Reineke, 2008, pers.com). This makes planning difficult


while profitability becomes subject to factors outside of the control of good management

practice. Furthermore, if all mills were to produce animal feed then the market would eventually

become saturated and prices would fall. Taking into account the sensitivity of the margins in this

business, this situation would invariably lead to losses.

Even though the use of enzymes or yeast in bagasse fermentation has great promise, the

necessary chemicals used in the treating programme are expensive (Baconawa, 1985, p4). For

the foreseeable future, bagasse is likely to be used only as a filler in animal feed manufacturing.

7.5.5 Potential Enhancers of Animal Feed Production

The capital costs of setting up an animal feed plant are a fraction of the costs related to other

bagasse based value adding options. The risk element is thus much lower. Furthermore, the

repayment period is relatively short.

The price of hay, an important filler and nutritional additive in the South African animal feed

industry, has increased sharply in recent times. This has led to a search for alternatives, implying

that producers with access to a relatively cheap alternative, such as bagasse, hold a competitive

edge (Reineke, 2008, personal interview).

7.6 Economic Feasibility Analysis of Furfural Production

Furfural production is based on chemical extraction procedures. Specialised equipment and

hazardous substances characterise the manufacturing process. Furthermore, the intellectual

property relating to furfural manufacturing processes is well protected. Recent technological

developments by Dalin Yebo Investments have resulted in the opportunity to buy furfural

manufacturing technology specifically aligned with sugar milling. Dalin Yebo Investments have

provided the data necessary to estimate the likely costs as well as the expected returns of furfural

manufacturing.

7.6.1 Calculating the Estimated Cost of Furfural Production

Furfural manufacturing relies on complex equipment that facilitate the chemical processes

required to extract the furfural. Such a project thus requires significant capital investments as


well as costly operating inputs. The plant relies wholly on the supply of bagasse. It would thus be

in operation from March until December each year i.e. the length of the sugar milling season.

An average sized furfural plant would produce in the region of 7500 tons of furfural while

consuming 150 000tons of bagasse. The bagasse (wet basis) to furfural ratio is thus

approximately 20 to one (Arnold, 2008, pers.com). Realistically, 80% of the original bagasse can

be reused as boiler fuel (Napier, 2008, pers.com). This implies that 80% of the cost of raw

material can be recouped by selling it back to the sugar mill at coal equivalent prices. The

effective price per ton of bagasse is thus only R53, which reduces the cost of production

significantly.

The capital cost of the plant is estimated to be R120 000 000 (Arnold, 2008, pers.com) and

would require 2 years to be built and commissioned. A plant life of 20 years is assumed in

conjunction with a weighted average cost of capital of 10%.

The operational and maintenance costs are estimated to be 3% of total capital costs (Arnold,

2008, pers.com). The costs of raw material as well as the cost of salaries are also incorporated.

Annual salaries are estimated to be in the region of R5 000 000.

Table 8 : Input parameters for furfural plant financial analysis

Description Unit Value

Average annual output of furfural tons 7,500

Ratio of bagasse to furfural ratio 20

Annual consumption of bagasse tons 150,000

Cost of bagasse per ton (80% recoupment) R 53

Capital cost R 120,000,000Construction period years 2

Plant life years 20

Annualisation factor 0.127

Annualised capital cost R 15,240,000

Capital cost per ton furfural R 2,032

Avg operating and maintenance costs per ton furfural R 61

Avg cost of raw material per ton furfural R 600

Salaries per ton furfural R 667

Total costs per ton of furfural R 3,360

Source: Arnold (2008, pers.com), results of this study


The relevant cost components as well as other input parameters are presented in Table 8. The

total cost per ton of furfural is thus estimated to be in the region of R3 360. Unlike animal feed

manufacturing, the capital cost of R2030 per ton of product is significant and represents 60% of

the total cost. Salaries and raw materials represent approximately 20% and 18% of the total costs

per ton of product respectively. Operating and maintenance activities pose the smallest cost

contribution of R61 per ton, or 2%.

7.6.2 Calculating the Estimated Returns of Furfural Production

Furfural prices are determined by a broad set of markets both locally and internationally. The

current average market price is estimated to be in the region of R10 000 per ton. This price is

expected to increase sharply from 2009 onwards (Arnold, 2008, pers.com). Because local

demand is limited, the product is very likely to be exported. This implies that the exchange rate

will play a significant part in determining the final price.

Table 9 : Projected returns of furfural manufacturing

Description Value

Total costs per ton furfural 3,360R Average selling price per ton furfural 10,000R

Return after tax per ton of furfural 4,648R

IRR 16%

NPV R 319,260,696Payback period 5 years


Returns are entirely dependent on the ruling market price as the production process is fixed and

only one version of the final product is manufactured.

The estimated returns are presented in Table 9. The high margins realised in the manufacture of

furfural makes this business proposal attractive. The after tax returns of approximately R4 600

represent 46% of sales price. The real internal rate of return is adequate at 16%. Both the net

present value of R70 million and the payback period of five years are also satisfactory.


7.6.3 Sensitivity Analysis of Furfural Projections

Due, in particular to the potential effects of a fluctuating exchange rate, a sensitivity analysis is

conducted on the furfural profitability projections. The effect on IRR and NPV under the

following scenarios is analysed:

A change in investment cost by increasing the total capital cost by 10%, 20% and 30%

A decrease in the sales price of furfural by 10%, 20% and 30%

A decrease in throughput by 10%, 20% and 30%

Table 10 : Sensitivity analysis of projected furfural financial indicators

Sensitivity change IRR NPV

Original value of investment 16% 320,000,000R

Investment cost increase by 10% 14% 290,000,000R Investment cost increase by 20% 12% 265,000,000R

Investment cost increase by 30% 11% 240,000,000R

Original market price 16% 320,000,000R

Price decrease of 10% 14% 250,000,000R Price decrease of 20% 11% 185,000,000R

Price decrease of 30% 8% 120,000,000R

Original throughput 16% 320,000,000R Throughput decrease of 10% 14% 250,000,000R

Throughput decrease of 20% 11% 195,000,000R Throughput decrease of 30% 8% 130,000,000R


The following observations are inferred from Table 10:

Overall the financial analysis is quite resilient to changes in input variables. The real IRR

and NPV remain positive under all of the examined scenarios.

Assuming a 10% threshold for investment projects in real terms, a furfural plant would

become infeasible above a 30% increase in capital costs. This risk can however be

adequately assessed ahead of time through adequate project planning.


Similarly a decrease in price of more than 20% below current levels is likely to make the

project infeasible. This scenario is however in contradiction to the projected price

increase expected in the near future.

Assuming other factors remain constant, a drop in throughput of greater than 20% is

likely to lead to an excessive erosion of value. This scenario would require a 20% drop in

the crop estimate.

7.6.4 Potential Barriers to Furfural Production

A major concern regarding furfural production is its potential impact on the environment. While

newer, cleaner technologies exist (Arnold, 2008, pers.com) public resistance may scupper any

planned development. A plant currently being built in Australia is being hampered by an

incomplete environmental impact assessment that may yet prevent production from taking place

(Arnold, 2008, pers.com). It is unlikely that Illovo’s manufacturing plant in Sezela would have

received approval under today’s environmental legislation.

The influence of the exchange rate on price could erode profits without failings in management.

While these risks can be mitigated by hedging, it does not offer guaranteed protection.

7.6.5 Potential Enhancers of Furfural Production

Market demand is predicted to surpass supply in 2012 (Anon, 2008). Currently, the market price

for furfural is unusually high and realising exceptional returns for companies with established

plants (Arnold, 2008, pers.com). Present market conditions are thus ideal for entry into this

industry.

Furfural manufacturing does not necessarily displace alternative value adding processes utilising

bagasse. The majority of the fibre is available for reuse after the furfural has been extracted.

Other processes requiring this fibre as an input can thus still be considered.


7.7 Economic Feasibility Analysis of Cogeneration

In South Africa, nearly all available bagasse is used to satisfy in-house steam and electro-

mechanical needs. Currently, there is thus little potential for exporting power on a large scale

commercial basis. The exceptions are the Felixton, Maidstone and Komati mills who export

small amounts of power due to their installed power capacity and better efficiencies (Moor,

2008, pers.com). The resulting underlying assumption is that most, if not all mills would have to

invest significant amounts of capital towards replacing existing inefficient boilers and under

capacity turbo-alternator sets. The analysis addresses the multiple scenarios represented by the

various mills operating in the local sugar industry. The mills with existing bagasse based value-

add processes are excluded from the analysis.

This chapter investigates the returns of cogeneration by first quantifying the required capital cost

of establishing a cogeneration plant. This is followed by an assessment of the potential income

for cogeneration based on Eskom’s proposed power purchasing initiative. The chapter concludes

with a description of the external enhancers and inhibitors of cogeneration implementation.

7.7.1 Calculating the Estimated Cost of Cogeneration

The costs associated with the mechanical upgrades and adjustments leading to greater power

export capacity for sugar mills are quantified in this section. These costs are categorised into

those relating to improved efficiencies, capital replacements and operations.

Quantifying the costs associated with increased processing efficiencies differs significantly

between mills depending on the process design and other factors such as age and throughput. An

average set of recommended changes are thus used and quantified for each mill. These include

amongst others reduced imbibition, increased evaporator efficiency, use of continuous pans,

efficient boiling schemes, optimized condensate flashing and a high number of evaporation

stages.

A standardised 6500 kPa 485°C boiler cycle is used to calculate the cost of new boilers at the

various mills. Ideally, cost considerations must include other external equipment that may be

required in association with the boiler. For example an off-gas system could cost as much as R60


million if low SO2 levels are required (van Coller, 2008, pers.com). It is however assumed that

no abnormal needs are required for the purpose of these calculations. A standard 150t steam per

hour, 6500 kPa, 485°C, chain grate boiler will cost in the region of R180 million, excluding

instrumentation and controls. The 150t of steam per hour stipulates the boilers maximum

continuous rating (MCR), which is the highest steam output deliverable on a continuous basis. The

instrumentation and controls will cost an additional R20 million (van Coller, 2008, pers.com). A

simplified pro-rata cost is used to price boilers with different steam throughput requirements based

on its relevant MCR. It is standard practice to install a boiler with a design throughput to the nearest

25t per hour above the estimated MCR (Moor, 2008, pers.com). Thus a mill with an estimated MCR

of 130 tons per hour will install a 150t per hour boiler. This principle is used when determining the

size of the required boiler at the various mills in order to establish an approximated cost.

The size of the turbo-alternators also varies between mills. The total power output will depend on

two considerations. First, the mill process power requirements are taken into account. The power

requirements of refining are excluded for comparative purposes as only three mills operate

refineries. The processing power need sets the minimum required power output level. Second,

the bagasse throughput per hour determines the maximum power output. With modern boilers

and turbo-alternator sets a bagasse consumption rate of 3kg per hour can be expected

(Bhattacharyya & Quoc Thang, 2004, p 1046). It is this maximum power output capacity that

determines the recommended turbo-alternator size. In order to accurately calculate the maximum

power output capacity several other considerations were taken into account. The length of the

milling season and thus the total operational hours depend on the size of the crop available for

processing each year. Many of the mills are undersupplied and not operating at design

throughput. This situation is not expected to change over the medium term as property

development and the high cost of production are taking their toll. The actual current throughput

rates are thus used to calculate the potential maximum power output capacity per mill.

In order to calculate the power output potential of bagasse it is necessary to determine the steam

generation capacity of bagasse and then the power output potential of the steam. From this the

available power per kg of bagasse can be determined. Table 11 illustrates the input parameters

and assumptions used to calculate the available steam per kg of bagasse. Figures are based on the

recommended boiler specifications. 1 kg of bagasse can thus create 2.16kg of steam.


Table 11: New boiler and steam specifications for the average South African mill

Description Value Unit

HP Steam pressure 6500 kPa abs (= 64 Bar)

HP Steam temperature 485oC

HP steam enthalpy 3387.5 kJ/kgBoiler NCV efficiency 85 %

Process steam pressure 200 kPaa

Condensing steam pressure 15 kPaa

Boiler feed water temperature 110 oCBoiler feed water enthalpy 460.6 kJ/kg

Enthalpy added per kg steam 2926.9 kJ/kg

Enthalpy required from fuel 3443.4 kJ/kg

NCV 7437 kJ/kg fuel

kg Steam per kg Bagasse 2.16 kg Steam/kg Bagasse

Source: Moor (2008, pers.com)

Having determined the steam potential per kg of bagasse, it is possible to calculate the power

generation capacity of the fuel based on the steam specifications of the two relevant types of

turbo-alternators. The input parameters are provided in Table 12.

Table 12: Power capacity calculations

Description Back pressure turbo-alternators Condensing turbo-alternators

H.P. Pressure 6500.00 kPaabs 6500.00 kPaabs

H.P. Temperature 485.00 °C 485.00 °C

L.P. Pressure 200.00 kPaabs 15.00 kPaabs

Energy Generated 20.00 MW 10.00 MW

Isentropic Efficiency 80.00 % 66.00 %

H.P. Enthalpy; H1 3387.49 kJ/kg 3387.49 kJ/kg

H.P. Entropy; S1 = S2 6.7902 kJ/kg.K 6.7902 kJ/kg.K

L.P. Enthalpy; H2 (theoretica l @ 100% Eff) 2570.83 kJ/kg 2215.83 kJ/kg

L.P. Enthalpy; H2' (actual) 2734.16 kJ/kg.K 2614.20 kJ/kg.K

L.P. Saturated Temperature 120.31 °C 53.89 °C

L.P. Actual Temperature 133.09 °C 64.26 °C

H.P. Steam Consumption 110.21 tph 46.55 tph

Specific Steam Consumption 5.51 kg steam/kWh 4.66 kg steam/kWh

Power generated per kg fuel 0.392 kWh/kg bagasse 0.464 kWh/kg bagasse

Source: Moor (2008, pers.com)


Standard sized back pressure and condensing turbo-alternators are used for these calculations i.e.

20MW and 10MW respectively. Standard operating specifications are also provided. For back

pressure turbo-alternators, each kg of bagasse is thus capable of generating 0.39 kWh of

electricity. Condensing turbo-alternators can extract 0.46 kWh of electricity per kg of bagasse.

The cost of a lower efficiency 20MW back pressure turbo-alternator is approximately R45

million. A lower efficiency 10MW condensing turbo-alternator will cost approximately R45

million. Delivery, installation, training, spare parts, insurance and VAT will add another R 16

Million and R20 million respectively (van Coller, 2008, pers.com). A 10MW unit is typically

65% of a 20 MW unit as many costs are the same regardless of size (van Coller, 2008, pers.com).

These and other costs are summarised in Table 13.

Table 13: Capital costs of standard sized cogeneration equipment

Description Cost

boiler150t, 6500kPa chain grate boiler all inclusive 180,000,000R

Instrumentation & control 20,000,000R

Total 200,000,000R

Turbo‐Alternators

20 MW back pressure T/A 50,000,000R

Installation 16,000,000R

Instrumentation & controls 5,000,000R

10 MW condensing T/A 45,000,000R

Installation 20,000,000R Instrumentation & controls 5,000,000R

30MW cooling tower 10,000,000R

pumps and piping 6,000,000R

steam piping, valves & de‐superheating station 30,000,000R

Condensate polishing plant 20,000,000R

Civil and structural 35,000,000R

Transformers 18,000,000R Electrical drives and cables 17,000,000R

Service crane 5,000,000R Balance of plant 25,000,000R

Contingencies 50,000,000R

Total 357,000,000R

Source: van Coller, 2008, pers.com


A further cost consideration is the annual running cost of a cogeneration plant. Bhattacharyya &

Quoc Thang (2004, p 1048) recommend using a figure of 4% of the total capital cost as a

measure of annual operating and maintenance costs. This is in contrast to Wienese and Purchase

(2004, p9) who recommend a rate of 3%. Considering that the latter analysis was done in the

context of the South African sugar industry, the 3% value is used in this case.

There is no cost of raw material as the bagasse is not being diverted away from the sugar mil.

The power being generated is merely being geared upwards by the cogeneration plant and the

mill still consumes its share. The excess power is transferred onto the national grid.

A plant life of 34 years is used with an interest rate of 10% as recommended by Wienese and

Purchase (2004, p9). This results in a discount factor of 0.104. It is furthermore assumed that the

construction period is two years. The input parameters discussed above are provided in Table 14

and used to calculate the cost of energy per kWh at the various South African mills.


Table 14 : Cost of energy from cogeneration

Description Unit UCL Dalton THS Darnall THS Amatikulu ISL Eston

Determining power export capacity

Average crush rate (2005/06) TCH 141 289 337 232

Tons fibre per hour (2005/06) t/hour 19.6 41.1 50.6 33.7

Fibre % bagasse (2006/07) % 45.7 46.4 49.3 49.6

Current bagasse throughput t/hour 42.9 88.6 102.6 67.9

Available bagasse tons p.a. 235,000 350,000 385,000 400,000

Effective hours of bagasse production p.a. hours 5,479 3,951 3,751 5,887

Available 6500kPa steam p.a. t. p.a. 507,541 755,913 831,504 863,900

1 Steam required for process at 51% / 56% cane t. p.a. 394,019 582,388 644,699 696,578

Hence kWh of power on back pressure T‐As kWh p.a. 71,506,325 105,691,339 116,999,602 126,414,562

Steam available for condensing T‐As t. p.a. 113,522 173,525 186,805 167,322

Hence kWh of power on condensing T‐As kWh p.a. 24,385,022 37,273,830 40,126,359 35,941,395

2 Assumed internal power needed, excl Refining kW/TCH 33 45 33 33

3 Power required for internal factory purposes kWh p.a. 27,534,982 55,498,126 45,053,105 48,678,529

Total power with efficient boilers & T‐As kWh p.a. 95,891,347 142,965,169 157,125,961 162,355,957

Power available for export kWh p.a. 68,356,365 87,467,043 112,072,856 113,677,428

Average export rate during season MW 12 22 30 19

4 Approximate 6500 kPa boiler MCR capacity t/hour 83 169 198 136

5 Approximate back pressure T‐A capacity required MW 15 31 36 25

6 Approximate condensing T‐A capacity required MW 5 11 13 7

Determining annualised captial & operating costs

Capital cost ‐ reduced process steam demand R 54,050,000R 110,783,333R 129,183,333R 88,933,333R

Capital cost ‐ back pressure T/A R 60,377,355R 116,299,686R 134,436,658R 94,762,032R

Capital cost ‐ condensing T/A R 51,383,026R 93,239,022R 103,856,998R 65,281,704R

7 Captial cost ‐ T/A systems equipment R 200,000,000R 200,000,000R 200,000,000R 200,000,000R

Capital cost ‐ 6500kPa boiler R 130,000,000R 260,000,000R 292,500,000R 227,500,000R

Total capital cost R 495,810,381R 780,322,041R 859,976,989R 676,477,069R

Annual maintenance cost as % of capital cost % 3% 3% 3% 3%

Construction period years 2 2 2 2

Plant life years 34 34 34 34

Annualisation factor 0.104 0.104 0.104 0.104

Annual capital cost R 51,564,280R 81,153,492R 89,437,607R 70,353,615R

Annual operating and maintenance cost R 3,900,000R 7,800,000R 8,775,000R 6,825,000R

Cost of prodcution (bagasse fired)

Total annual capital cost R/kWh 0.75 0.93 0.80 0.62

Operating and maintenance cost R/kWh 0.06 0.09 0.08 0.06

Total Energy cost R/kWh 0.81 1.02 0.88 0.68

Notes

1 South African factories set high store on extraction and therefore use ? 350% imbibition on fibre if possible. With this requirement,

efficient process factories will use ± 51% process steam on cane for making VHP sugar. With back‐end refineries for 100% of sugar

produced (NB & PG), total 56% process steam on cane assumed. Note that these figures are for reasonably optimised factories

(low end of present RSA factories)

2 This includes direct turbine drives for cane preparation, mills, etc. if applicable. For milling tandems, 33 kW/TCH; for diffusers,

45 kW/TCH. Upgraded regarding improved efficiencies are assumed to have been implemented

3 Allows for running time power + 8% for mill down time power.

4 Boiler MCR capacity of 115% average load

5 Pass out T‐A capacity of 115% average load allowed

6 Condensing T‐A capacity of 120% average load allowed

7 While the fixed costs will vary depending on layout etc. they are assumed to be equal for the purpose of this study

Source: Results of this study; Moore(2008, pers.com); van Coller (2008, pers.com)


Table 15: Cost of energy from cogeneration (continued)

Description Unit ISL Noodsberg ISL Pongola ISL Umfolozi ISL Umzimkulu TSB Komati

Determining power export capacity

Average crush rate (2005/06) TCH 288 250 253 243 439

Tons fibre per hour (2005/06) t/hour 38.5 33.8 35.3 37 59.7

Fibre % bagasse (2006/07) % 48.7 48.2 48.5 49.6 50.7

Current bagasse throughput t/hour 79.1 70.1 72.8 74.6 117.8

Available bagasse tons p.a. 460,000 400,000 300,000 350,000 630,000

Effective hours of bagasse production p.a. hours 5,819 5,704 4,122 4,692 5,350

Available 64 Bar steam p.a. t. p.a. 993,485 863,900 647,925 755,913 1,360,643

1 Steam required for process at 51% / 56% cane t. p.a. 938,440 798,580 531,838 581,466 1,197,868

Hence kWh of power on back pressure T‐As kWh p.a. 170,307,492 144,925,745 96,517,522 105,524,092 217,388,242

Steam available for condensing T‐As t. p.a. 55,045 65,320 116,088 174,446 162,775

Hence kWh of power on condensing T‐As kWh p.a. 11,823,881 14,031,045 24,936,067 37,471,788 34,964,701

2 Assumed internal power needed, excl Refining kW/TCH 45 33 33 33 31

3 Power required for internal factory purposes kWh p.a. 81,443,198 50,823,905 37,166,058 40,634,224 78,636,495

Total power with efficient boilers & T‐As kWh p.a. 182,131,374 158,956,790 121,453,589 142,995,880 252,352,943

Power available for export kWh p.a. 100,688,176 108,132,885 84,287,530 102,361,656 173,716,448

Average export rate during season MW 17 19 20 22 32

4 Approximate 6500 kPa boiler MCR capacity t/hour 185 161 148 143 257

5 Approximate back pressure T‐A capacity required MW 34 29 27 26 47

6 Approximate condensing T‐A capacity required MW 2 3 7 10 8

Determining annualised captial & operating costs

Capital cost ‐ reduced process steam demand R 110,400,000R 95,833,333R 96,983,333R 93,150,000R 168,283,333R

Capital cost ‐ back pressure T/A R 126,590,639R 110,824,513R 102,696,957R 98,918,421R 172,977,723R

Capital cost ‐ condensing T/A R 31,069,205R 34,662,315R 64,818,162R 81,086,588R 68,895,270R

Captial cost ‐ T/A system equipment R 200,000,000R 200,000,000R 200,000,000R 200,000,000R 200,000,000R

Capital cost ‐ 65 bar boiler R 292,500,000R 260,000,000R 227,500,000R 227,500,000R 390,000,000R

R 760,559,844R 701,320,162R 691,998,452R 700,655,009R 1,000,156,327R

Annual maintenance cost as % of capital cost % 3% 3% 3% 3% 3%

Construction period years 2 2 2 2 2

Plant life years 34 34 34 34 34

Annualisation factor 0.104 0.104 0.104 0.104 0.104

Annual capital cost R 79,098,224R 72,937,297R 71,967,839R 72,868,121R 104,016,258R

Annual operating and maintenance cost R 8,775,000R 7,800,000R 6,825,000R 6,825,000R 11,700,000R

Cost of prodcution (bagasse fired)

Total annual capital cost R/kWh 0.79 0.67 0.85 0.71 0.60

Operating and maintenance cost R/kWh 0.09 0.07 0.08 0.07 0.07

Total Energy cost R/kWh 0.87 0.75 0.93 0.78 0.67

Notes

1 South African factories set high store on extraction and therefore use ? 350% imbibition on fibre if possible. With this requirement,

efficient process factories will use ± 51% process steam on cane for making VHP sugar. With back‐end refineries for 100% of sugar

produced (NB & PG), total 56% process steam on cane assumed. Note that these figures are for reasonably optimised factories

(low end of present RSA factories)

2 This includes direct turbine drives for cane preparation, mills, etc. if applicable. For milling tandems, 33 kW/TCH; for diffusers,

45 kW/TCH. Upgraded regarding improved efficiencies are assumed to have been implemented

3 Allows for running time power + 8% for mill down time power.

4 Boiler MCR capacity of 115% average load

5 Pass out T‐A capacity of 115% average load allowed

6 Condensing T‐A capacity of 120% average load allowed

7 While the fixed costs will vary depending on layout etc. they are assumed to be equal for the purpose of this study

Source: Results of this study; Moore(2008, pers.com); van Coller (2008, pers.com)

The cost of cogeneration thus differs significantly across various mills in the South African sugar

industry. Costs vary from 67c per kWh at Komati mill to 102c per kWh at Darnall mill.


Generally speaking the more power there is available for export the cheaper it becomes. The

amount of power available for export is in turn reliant on the amount of bagasse available i.e. the

size of the annual cane crop. The only mills with any scope of reducing their cost of production

per kWh are those currently not operating at maximum capacity. Thus, by the same token, the

smaller the size of the crop, the higher the cost of electricity becomes. However, mill throughput

and thus the size of the required equipment also plays a role in determining cost. A higher

throughput demands larger equipment, and therefore costs increase.

Overall the cost per kWh is high. As expected, the capital cost of the required new equipment is

the dominant cost contributor and greatly inhibiting. Interviewed industry participants have

confirmed that the cost estimates are a realistic approximation of likely costs based on the

assumptions and input parameters detailed in this analysis. Von Coller (2008, pers.com)

indicated that costs could be cut by combining the separate back pressure and condensing turbo-

alternators into one condensing extraction machine. However, this is not advisable for two

reasons. First, the condensing section cannot be closed off completely while the turbo alternators

is operational. A minimum of 10% of the steam must be run through the condenser which means

that much of the available energy is lost. Second, having two units allows the miller to access

one while the other is off-line in order to conduct maintenance (Moor, 2008, pers.com).

7.7.2 Calculating the Estimated Returns of Cogeneration

This chapter describes the basis upon which the returns for cogeneration are calculated. In

general, contracted rates are used to estimate the revenue to be generated from cogeneration

projects. These rates are often variable and depend on project size and the negotiation between

the co-generator and the utility (Bhattacharyya & Quoc Thang, 2004, p 1042). This description

closely resembles the situation in South Africa where Eskom has called for tenders regarding the

supply of electricity to assist in overcoming the medium term electricity capacity shortage.

Bidders are required to tender a price for the electricity which they intend transferring onto the

national grid. The average price thresholds in real terms governing these tenders and stipulated in

the MTPPP are illustrated in Table 16. A bid below the ceiling price of 65c implies that Eskom

will automatically enter into an agreement with this bidder on a first received, first accepted

basis. A bid below the maximum programme price of 105c but above the ceiling price implies


that Eskom will review the bid upon receipt. However, no decision will be made regarding

preferred tender status until after the latest submission deadline (Anon, 2008, p2).

Table 16: The MTPPP range of energy prices

Real (2008) prices c/kWH

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ceiling Price 65 65 65 65 65 60 50 40 35 35

Maximum Programme Price 105 105 105 105 105 85 75 60 40 35

Source: Anon, 2008, p 91

A bidder’s tender price will depend on their estimated cost of production. For example, a

company producing power at 80c/kWh will not tender underneath the ceiling price of 65c/kWh.

Other key features of the payment mechanisms include (Anon, 2008):

Payment to sellers is on an ‘energy only’ basis.

There are no fixed capacity payments provided.

Sellers receive a commercial energy payment for metered Net Energy Output (kWh).

Energy payments are modified by time of use (TOU) rates. (peak is 1.309, off-peak is

0.485). The prices quoted in Table 16 are average weighted TOU prices

A Performance factor is applied in cases where production drops significantly from what

was provided for under the generation profile provided in a bid.

The actual calculation for energy payments also takes into account a performance factor, which

penalises suppliers if they underperform (Anon, 2008). A performance factor of 1 is assumed for

this analysis.

The project payback must to be achieved before the cost of production becomes higher than the

price received per kWh. Under normal circumstances production is likely to continue (so long as

returns exceed operating costs) as the capital costs are classified as sunk costs. For illustrative


purposes however the NPV, under the MTPPP pricing structure, is calculated only over the

period where returns are positive i.e. where capital costs are accounted for in real terms.

The parameters used for calculating the projected returns for the South African sugar industry

scenario are provided in Table 17. The financial indicators are also listed. The maximum

programme price of 105c per kWh is used to calculate the returns.

Table 17 : Input parameters for cogeneration plant financial analysis

Description Unit UCL Dalton THS Darnal THS Amatikulu ISL Eston ISL Noodsberg

Additional capacity ‐ improved equipment kWh p.a. 68,356,365 87,467,043 112,072,856 113,677,428 100,688,176

Cost of energy R/kWh 0.81 1.02 0.88 0.68 0.87

Electricity tariff years 1‐5 R/kWh 1.05 1.05 1.05 1.05 1.05

Electricity tariff year 6 R/kWh 0.85 0.85 0.85 0.85 0.85



Electricity tariff years 9 R/kWh 0.40 0.40 0.40 0.40 0.40

Electricity tariff years 9 ‐25 R/kWh 0.35 0.35 0.35 0.35 0.35

IRR negative negative negative negative negative

NPV R ‐230,269,700 R ‐580,494,031 R ‐579,766,175 R ‐247,009,152 R ‐485,958,408

Payback period ‐ ‐ ‐ ‐ ‐


Description Unit ISL Pongola ISL Umfolozi ISL Umzimkulu TSB Komati

Additional capacity ‐ improved equipment kWh p.a. 108,132,885 84,287,530 102,361,656 173,716,448

Cost of energy R/kWh 0.75 0.93 0.78 0.67

Electricity tariff years 1‐5 R/kWh 1.05 1.05 1.05 1.05

Electricity tariff year 6 R/kWh 0.85 0.85 0.85 0.85



Electricity tariff years 9 R/kWh 0.40 0.40 0.40 0.40

Electricity tariff years 9 ‐25 R/kWh 0.35 0.35 0.35 0.35

IRR negative negative negative negative

NPV R ‐325,770,978 R ‐466,178,743 R ‐357,329,510 R ‐431,698,854

Payback period ‐ ‐ ‐


The financial analysis over this time period portrays a dismal situation. The high capital cost of

the projects requires a much higher rate of return than that which is realised. All mills reflect a

negative IRR as well as a negative NPV. The payback period is thus not achievable. Komati mill,

with the cheapest cost of production, can only operate for seven years before the cost of


production exceeds the price received per kWh. Darnal mill, with the highest cost of production,

can only operate for five years before costs exceed returns. The time period over which mills can

operate profitably is too short, and the margins too small, for any mill to recover its investment

costs. The staggered pricing scheme proposed by Eskom is thus unable to promote cogeneration

in the South African sugar industry.

These results are in contrast to the findings of Bhattacharyya & Quoc Thang (2004, p 1048-

1049). Their projected IRR for cogeneration in Vietnam ranged from 10% to approximately 14%

under various throughput scenarios. The difference in results can mainly be attributed to the fact

that the capital costs in the Bhattacharyya & Quoc Thang (2004) case study were significantly

lower than those determined by this study. Furthermore, the Vietnamese case assumed out of

milling season cogeneration activity.

7.7.3 Sensitivity Analysis of Cogeneration Projections

A sensitivity analysis will assist in determining the price levels at which cogeneration might

become feasible. Cost and throughput are not analysed as the current minimum costs and

maximum throughputs already have a negative IRR and NPV. The following scenarios are

considered:

a) The purchase price of electricity remains at 105c for the duration of the plant’s lifespan

b) The purchase price of electricity remains at 85c for the duration of the plant’s lifespan

Due to the fact that the maximum attainable price is 105c per kWh, no scenarios beyond that

price are relevant.

Table 18 : Sensitivity analysis of projected cogeneration financial indicators

Sensitivity change Unit UCL Dalton THS Darnal THS Amatikulu ISL Eston ISL Noodsberg

NPV, If 105c applied over 34 years R R 258,726,336 R ‐482,167,336 R 1,795,328 R 957,734,194 R 46,318,415

NPV, If 85c applied over 34 years R R ‐206,096,945 R ‐1,076,943,230 R ‐760,300,091 R 184,727,684 R ‐638,361,179

IRR, If 105c applied over 34 years % 4% negative 0% 8% 0%

IRR, If 85c applied over 34 years R negative negative negative 2% negative



Sensitivity change Unit ISL Pongola ISL Umfolozi ISL Umzimkulu TSB Komati

NPV, If 105c applied over 34 years R R 613,955,739 R ‐161,890,146 R 444,090,007 R 1,467,168,092

NPV, If 85c applied over 34 years R R ‐121,347,879 R ‐735,045,352 R ‐251,969,256 R 285,896,246

IRR, If 105c applied over 34 years % 5% negative 4% 8%

IRR, If 85c applied over 34 years R negative negative negative 2%


From Table 18 the following can be deduced:

Were Eskom to maintain its maximum programme price ceiling of 105c per kWh

indefinitely, then cogeneration has the potential to become profitable for certain mills. At

this rate all sugar mills, with the exception of Darnal and Umfolozi reflect a real IRR of zero

and above. The NPV follows the same pattern. However, most companies have a minimum

acceptable weighted average cost of capital. Even at a continuous price level of 105c per

kWh a real return of 3 to 4% is unlikely to be sufficient. Eston and Komati are the only mills

with the prospect of delivering an acceptable real return of 8%. Not surprisingly, these mills

are two of only a handful who regularly operate at full capacity due to sufficient cane

supply. Under these set of circumstances cogeneration in South Africa becomes comparable

to the projected returns of international case studies.

If a price of 85c per kWh were to be maintained indefinitely then cogeneration becomes

profitable for only 2 of the 9 mills under investigation. However, the maximum predicted

IRR rests at 2% in real terms. It is doubtful that any company would be satisfied with this

figure.

In order for cogeneration to become viable in the South African sugar industry under a realistic

and guaranteed electricity price scenario of 65c, three factors must be considered. First, the tiered

pricing system would have to be abandoned. A continuous price of 65c would be required into

the future. Second, the cost of capital must be come down by between fifty and sixty percent.

This can only occur through government intervention either through subsidizations or highly

favorable financing. Third, carbon credits as well as the environmental cost of coal fired

electricity must be quantified and the benefits accrued to the miller. According to interviewed

millers, none of these options are presently under consideration. It is thus highly improbable that

cogeneration will become a reality in the foreseeable future.


These problems are not unique to the South African sugar industry. Alonso Pippo, Garzone, &

Cornacchia (2007) in their analysis of the energy potential of bagasse in Cuba conclude that the

biggest barrier to cogeneration remains cost. Even if this problem could be overcome through

appropriate financing and joint ventures several other barriers challenge the viability of

cogeneration.

7.7.4 Potential Barriers to Cogeneration

Over and above the unfavourable financial analysis the promotion of cogeneration is further

hampered by external constraints. These include limitations both unique to South Africa and

those that are relevant the world over.

The best efficiency figures for both milling capacity and sugarcane biomass availability can

only be achieved on the basis of year round operation (Alonso Pippo, 2007, p874). There is

no certainty of this alternative biomass supply during the off-season. Furthermore, the

reliance on the transportation of large volumes of low density biomass fuels to the

cogeneration plant is difficult and costly (Sims (2001, p34).

There is high competition for land use from food and fibre production industries (Sims

(2001, p34). The availability of raw material could thus be curbed.

The use of cane residues promotes the removal of additional nutrients from the soil thereby

depleting reserves that take years to built up (Sims (2001, p34).

The following location related barriers are also relevant:

Many milling areas have a limited water supply. Large quantities of water are used in

cogeneration to make steam.

Most of the mills are located in rural agricultural regions. There is a good possibility that the

grid capacities in these regions could be limited in terms of the maximum size of the

proposed electrical power generation capacity (Waldron, 2008, pers.com)


The economic feasibility of most cogeneration projects is critically dependant on a reliable

supply of fuel. The cost thereof may prove inhibiting

According to Zweli Mkhise, KwaZulu Natal’s MEC for Finance and Economic

Development, (Anon, 2008, p25) emerging farmer participation in the province must

increase in order for cogeneration to work. However, present economic conditions and the

disadvantages of operating small holdings is making it very difficult for developing farmers

to prosper. If these issues have to be addressed as a prerequisite to cogeneration then the

chances of timely implementation are reduced significantly.

7.7.5 Potential Enhancers of Cogeneration

It has been shown that current conditions are not favourable for cogeneration in the South

African sugar industry. However, changes in the operating environment could provide a much

needed driving force for the enhancement of cogeneration and related surplus power exports. The

following drivers, should they materialise, might encourage decision makers to reassess the

viability of cogeneration in future.

The establishment and enforcement of legislation banning the pre-harvest burning of

sugarcane fields. This would greatly increase the availability of fibre as a source of fuel,

allowing mills to generate power not only for longer but also in greater quantities. This

would greatly improve the related economies of scale and thus profitability.

The introduction of policies aimed at compulsory renewable energy targets and the effective

utilisation of resources would compel Eskom to reconsider its MTPPP pricing structure.

Higher prices reflecting the cost of renewable energy could be secured.

The cogeneration potential of advanced biomass integrated gasifier/gas turbine combined

cycle technology is very high. Large efficiency gains are possible by using this process.

Even though this technology is very promising, it does not have sufficient maturity for large

scale implementation (Alonso Pippo et al, 2007, p875).

Carbon credits are broadly recognised as tangible currency. According to Wienese &

Purchase (2004) the value of carbon credits can be estimated at 3c per kWh. They also


estimate that the environmental costs of a conventional coal fired power station are

approximately 5c/kWh. While these prices are insufficient to make cogeneration viable at

present, it could make the difference in future. Carbon credits are only awarded in cases

where proposed projects will not go ahead without them (Moor, 2008, pers.com).

Furthermore, the South African Government has recently proposed a carbon tax and is

considering the use of incentives for renewable energy (Moor, 2008, pers.com)

8. SUMMARY OF THE FEASABILITY FINDINGS

The financial indicators of the various bagasse based processes are summarised in Table 19.

Table 19 : Summary of financial indicators

Description Cogeneration Animal Feed Furfural

Capital cost 530,000,000R 14,000,000R 120,000,000R Annualised capital cost 55,120,000.00R 1,778,000.00R 15,240,000.00R

Annual operating & maintenance cost 15,900,000.00R 213,360.00R 457,200.00R Annual salaries ‐R 1,500,000.00R 5,000,000.00R

IRR negative 30% 16%NPV negative R 67,244,912 R 319,260,696Payback period n/a 3.25 years 5 years


The results of this study reveal that an animal feed project is likely to offer the best returns of the

alternative bagasse processing options. However, this option is also characterised by high risk

due its sensitivity to changes in price. Furthermore, the high prices currently offered for

molasses, a primary animal feed ingredient, makes it easier to make money out of direct

molasses sales.

The other possible alternative is furfural with a satisfactory projected real return of 16%. Furfural

manufacturing, should it pass an environmental impact assessment, is in turn threatened by its

sensitivity to fluctuation exchange rates.

Cogeneration, under current circumstances, is not worth further analysis. This industry is

characterised by a poor marriage between cost of production and proposed pricing of electricity.


Until boilers and turbo-alternators become more affordable or the price of electricity is secured at

significantly higher levels then presently offered, cogeneration will remain elusive.

9. OTHER VALUE ADDING PROCESSES FOR FUTURE CONSIDERATION

Many of the bagasse based value adding processes not covered in this study are presently in

development stage or otherwise unfeasible due to current external conditions. Should

circumstances change, these technologies may yet prove a valuable addition to the diversification

strategy of sugar millers. This section takes a brief look at what lies on the horizon in terms of

new technology development as well as mature technology being implemented internationally.

Bagasse conversion into liquids via fast pyrolysis could be a solution to the problem of

extracting and utilizing the energy potential of bagasse. According to Alonso Pippo et al, (2007,

p875) several advantages to producing pyrolysis oil exist. These include the fact that a sugarcane

factory has an appropriate energy infrastructure to assimilate technologies like fast pyrolysis.

The pyrolysis oil may be considered innocuous in terms of CO2 emissions. Furthermore, bio-oil

can easily be transported. Storable bio-oil provides an alternative to the total conversion of

sugarcane biomass into electricity. Because Bio-oil can be stored, the pyrolysis process can be

decoupled from the power generation cycle, increasing the flexibility of its use so it can be used

when it is really necessary and in the precise quantity needed. Finally, bio-oil stores 11 times

more energy in the same unit of volume and has three times less moisture content. Disadvantages

include the fact that the conversion process is endothermic. Bio-oil is also not a stable fuel while

bio-oil upgrading is very expensive. There are no reported fast pyrolysis facilities with a capacity

beyond 3.5 ton/h. Finally, there is no well established bio-oil market (Alonso Pippo et al, 2007,

p875-876).

Bagasse can also be used for the production of bagasse boards (Almazan et al, 1009, p15).

Intense exploitation of wood has caused depletion of forest reserves. This has triggered a trend

whereby it has become necessary to rely on other fibre sources. It is accepted that bagasse is one

of the best alternatives due to its quality, cost and renewable nature.

Composting is considered to be one of the most suitable ways of converting organic wastes into

products that are beneficial for plant growth (Stantiford, 1987, quoted by Meunchang,


Panichsakpatana & Weaver, 2005, p1). Compost material from bagasse, which can include filter

cake, is suitable for agronomic use. It is characterized by favourable pH levels, low

phytotoxicity, and is likely free of pathogens because of the high temperatures. The compost is a

good source of plant nutrients such as N (1.6–1.8%), P (1.2%), K (0.5%), Ca (10%) and Mg

(0.5%). Mixing filter cake with the bagasse will reduce Nitrogen losses (Meunchang et al,

2005).

The production of bio-ethanol from bagasse is another possibility. Ethanol derived from biomass

has the potential to be a sustainable transportation fuel, as well as a fuel oxygenate that can

replace gasoline (Kim & Dale, p362). According to Kim & Dale (2004, p372) wasted sugar cane

could globally produce 51 GL of bio-ethanol annually, representing 3.4% of world gasoline

consumption. However according to Pandey et al (2000, p70) ethanol production from bagasse

requires hydrolysis, which requires large quantities of cellulose enzymes for saccharification.

Processes for the production of cellulases are presently quite expensive and unfeasible. Such

bioconversion thus appears to be unattractive at present.

Advances in industrial biotechnology offer potential opportunities for economic utilization of

bagasse. The various products, which have been obtained from bagasse processing, include

chemicals, metabolites such as alcohol and alkaloids, and enzymes. (Pandey et al, 2000, p69). An

advantage of this enzyme production from bagasse is that it would need a relatively small

fraction of total bagasse. This is unlikely to affect the supply of bagasse to the sugar mills in

terms of its boiler fuel requirements (Pandey et al, 2000, p70). Xylotol, which is an important

substitute for sucrose and finds many applications in the food industry, is another important

product derived from bagasse hydrolysate (Pandey et al, 2000, p73).

10. CONCLUSION

Bagasse offers a range of value adding processing options to South African sugar millers. It has

been established as an important boiler fuel with an average value of R263 per ton. Although

there is limited opportunity to sell bagasse directly to the open market, other processing

opportunities have been identified. These include cogeneration as well as animal feed and

furfural manufacturing.


Sugar cane bagasse was identified as the most promising source of biomass for use in meeting

government’s renewable energy targets (Anon, 2008, p7). However, cogeneration in the South

African sugar industry appears to be marked with the all too frequent label of being technically

feasibility but lacking economic viability. This study concludes that under the proposed

institutional framework, cogeneration is not a viable business proposition for South African

sugar millers. This is mainly due to the high capital cost of equipment and plant upgrades

necessary to attain satisfactory increases in power output. Furthermore, the sensitivity analysis

reveals that the rate of return of cogeneration does not improve sufficiently for most millers even

with prolonged premium prices. Eskom’s proposed pricing scheme does not sufficiently exceed

the cost of production for the required time period. This, together with other identified obstacles,

implies that cogeneration is unlikely to meet with favour inside the South African sugar industry

in the near future.

The alternative processes of animal feed production and furfural manufacturing seem to show

potential in terms of adding value to bagasse over and above its intrinsic worth as a coal fuel

substitute. The respective projected internal rate of return of 16% and 30% for the analysed

furfural and animal feed projects confirms their status as the preferred current diversification

options. However, these businesses are plagued by their own unique set of concerns. It is

unlikely that further investments in animal feed plants will occur due to the current high value of

molasses. Furfural manufacturing is likely to be challenged by environmental prohibitions.

The findings of this study do not disprove the stated hypotheses. The investigation thus supports

the notion that: 1) currently, cogeneration does not offer South African sugar millers the most

promising rate of return out of the range of possible alternative end uses for the by-product

bagasse; and 2) under Eskom’s proposed power purchasing programmes, cogeneration is not a

suitable vehicle for meeting the South African Government’s renewable energy targets.

In conclusion, under current conditions it seems pertinent to continue using bagasse in its

capacity as a boiler fuel. Furthermore, it is advisable that millers periodically re-evaluate

alternative industry dynamics in their pursuit of successful diversification strategies.


11. RECOMMENDATIONS

The following future areas of study are recommended in order to address the issues raised by this

investigation:

Government assistance towards subsidising the cost of cogeneration is necessary if

renewable energy targets are to be taken seriously. These could include state/private sector

partnerships, state funding and improved price incentives, amongst others. A study of the

various financial support options available should be undertaken in order to fast track the use

of renewable biomass as an energy source.

The environmental cost of coal generated energy should be adequately recognised,

quantified and incorporated into existing and proposed pricing structures. This will narrow

the gap between the cost of coal energy and the cost of renewable energy.

Feasible cogeneration scenarios are dependent on the reliable supply of additional biomass

in the form of cane residues left infield. Further studies into the cost of gathering, delivering

and storing this raw material are required. In addition, the opportunity cost of leaving the

residue in-field for agronomic purposes must be weighed up against its potential value as

boiler fuel.

The high capital cost of investing in new boilers, turbo alternators etc. is the single biggest

inhibitor of cogeneration. An investigation into ways of reducing this major cost would

prove useful.

A cost and benefit analysis between cogeneration and other forms of renewable energy

would provide insight into the practicality of governments renewable energy targets. Unless

other forms of renewable energy are found to be more cost effective, renewable energy in

South Africa could remain unattainable.

A comparative analysis of the differences in projected returns of cogeneration in South

Africa and successful international cases ought to be carried out. This may provide useful

information as to why cogeneration remains unfeasible in South Africa and what can be

done to change the situation.


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