Examination of Witnesses (Questions 20-39)
MR CHRIS
CARTER, MR
GARY PUNTER,
MS RUTH
RAWLING AND
MR PETER
SMITH
2 JULY 2003
Q20 Mrs Shephard: I know Mr Carter
is, this is an unfair question, I will ask Cargill if they are.
Ms Rawling: No.
Mrs Shephard: It was made public about
two weeks ago. The Committee ought to be given a copy as well.
As far as I know, it is the only cross-departmental look at the
policy on biofuels. Last night I questioned a number of Treasury
ministers none of whom was aware of its existence although all
of their officers had received this document. The proposition
in the document is that the Government has a number of options,
one of which would be further reductions in duty, another of which
is a combination of capital grants to get the policy going and
some duty reduction, and then another option is variations in
the length of time for which the capital grant would be available.
I cannot ask Cargill what they think of this but I would like
to ask Mr Carter what he thinks of the options. I am going to
put the same question to the NFU representatives when it is their
turn.
Chairman: It is 260 pages there, Sir
Ben, so you had better get speed reading.
Q21 Mrs Shephard: There really are
not and there is a good executive summary.
Mr Carter: We need to make a reply
each on this, if that is alright.
Ms Rawling: Although we are not
aware of the exact report, we are aware of the issues. What we
need to say here is that in terms of capital grant that is not
so important for biodiesel because what we are talking about is
building an esterification plant on top of an existing oil refinery,
so it is a rather small add-on to an existing plant. A typical
plant of this kind would cost between £10 and £15 million,
so we are not talking enormous amounts of capital here. The capital
issue for biodiesel is not so important as the duty derogation.
Mr Carter: We are in exactly the
opposite position. Our overall requirement for support coincidentally
is almost exactly the same as for Cargill for a similar-sized
plant, for about a 100,000 tonnes a year plant, but our capital
cost is relatively high and our operating costs are relatively
low. So in our case we are in position where, yes, it would be
helpful to have a combination of either capital grants or, if
it were possible, a project life of longer than five years. We
have had to submit in our business case to government a project
life of only five years because that is what we were advised to
do, which clearly under normal circumstances would be absurd for
a large plant of this kind which would normally be written off
over 15 or 20. So both extended project life and capital grants
could be very helpful to us, in addition to the duty reduction,
yes.
Q22 Mrs Shephard: This is my last
question. I think we all accept there is a different case for
what should be done to help biodiesel and what should be done
to help bioethanol. However, if I were one of the ministers in
one of the departments that is apparently responsible for this
policy I would rejoice in the fact that the different protagonists
pushing for help for biofuels take different views on what should
be done because what I would say is, "If they cannot agree
amongst themselves"—and I am accepting the difference
between biodiesel and bioethanol—"what is required,
we will not do anything." What can be done to make sure that
the industry—making distinctions between biodiesel and bioethanol
of course—does come down with a unified voice on a set of
options that the government should consider?
Ms Rawling: The point is we are
unified on the need for a duty reduction between 26 and 30 pence
per litre.
Q23 Mrs Shephard: That is quite some
variation and then you need to feed in the option of grant-cum-duty
reductions, which I believe the NFU "and I shall ask them"
would rather favour. The fact is there is not a unified voice.
Ms Rawling: It is true that a
capital grant would be of more use for the bioethanol industry
than for us—
Q24 Mrs Shephard: I am leaving aside
the distinction between the two products, I am saying let's look
at bioethanol, is there a unified approval of any given option
or set of options, has any work been done between the protagonists
to identify such a thing?
Mr Carter: In the bioethanol sector
I think what I have explained holds good, that capital grants,
or if it were possible an extension of the period of life of the
project, would be of considerable value in addition to a duty
reduction. It just so happens between bioethanol and biodiesel
they are two slightly different industries, and there is no reason
at all why the government should deal in exactly the same way
between them.
Q25 Mrs Shephard: Indeed. I keep
making this point, but I am asking if what is being done by the
protagonists, let us say in favour of help for bioethanol, is
going to be speaking with a common voice. And I shall ask the
same question of Sir Ben. You are saying "Yes-ish"?
Mr Carter: I think for bioethanol
it is clear we are speaking with a common voice. Just to repeat
for clarification, that is slightly different than the case for
biodiesel simply because the industries are slightly different
and there is nothing sinister about it.
Q26 Alan Simpson: One technical question
about whether you are speaking with a common voice. You will be
aware that in May the European Commission came up with a timetable
for the ending of the use of used cooking oil in animal feed and
the UK has a derogation that exempts us from that until November
2004. That means effectively that the biofuels industry is in
competition with the animal feed industry for the purchasing of
used cooking oil. Have you made any particular representations
to government about whether that helps or hinders the development
of a biofuels industry in the UK?
Mr Smith: No, we have not. Cargill's
principal industry is to manufacture biodiesel from domestically
grown rape seed. We recognise that used cooking oil has a role
to play in this. Today the industry, so far as it exists at all,
exists almost exclusively on used cooking oils. There are some
difficulties with this, one being the fact that by their very
nature used cooking oils vary in quality and a variable quality
input inevitably leads to a variable quality of the biodiesel
produced. We have concerns about that and its potential effect
on consumer confidence in biodiesel. Nevertheless, used cooking
oils, as you quite rightly mention, by the end of 2004 will not
be able to find any other use. The other alternative will probably
be landfill and in small inclusion quantities they have a valuable
role to play within the biodiesel industry. We see the industry
developing along the lines of significant tonnages of rape seed
oils from domestically grown crops being blended either at vegetable
oil plants or more likely at the diesel blending plants with biodiesels
produced from used cooking oils.
Ms Rawling: If there is no reasonable
scale of biodiesel development from rape seed oil there will be
no way of blending in used cooking oil biodiesel to be used as
biodiesel proper because, quite frankly, I do not believe the
car manufacturers or distributers will be interested in any large-scale
product based exclusively on used cooking oil. You need the rape
seed oil biodiesel to make that work.
Q27 Mr Mitchell: I just wanted to
move away from partisan attacks on the Government in earlier questions
into some more practical issues. You emphasised a need for both
investment support, capital grants, and a reduction in duty. Are
they both essential? Will the industry not go ahead unless it
gets both?
Mr Carter: I need to be quite
clear on this; on the currently offered duty reduction rate of
20 pence per litre it will not go ahead. So the alternatives are
to increase the duty rate to 28 pence per litre or in our case,
but not Cargill's, leave it at 20 and offer a reasonable capital
grant with it, or if it were possible, you could also extend the
life of the project. So that is the position at the moment. 20
pence will not make it work.
Q28 Mr Mitchell: And Cargill's position
is 28 pence would do the job?
Ms Rawling: 28 pence would do
the job.
Q29 Mr Mitchell: Without a capital
grant?
Ms Rawling: Yes.
Mr Carter: We are in exactly the
same position, 28 pence would do the job for us. It is just that
instead of increasing the current duty reduction of 20 pence per
litre by that eight pence, you could put in a capital grant instead
and it would still work because our capital investment costs are
higher than for biodiesel.
Mr Mitchell: You talk about investment
in plants; there has to be investment in distributions systems
as well unless you are going to have a little boutique organic
fuel station somewhere in Norfolk that people have to drive hundreds
of miles to find. Is there not a big investment necessary in distribution.
Q30 Mrs Shephard: A partisan attack
on Norfolk!
Mr Smith: Certainly in terms of
the biodiesel industry our view is that this market will develop
in blends with conventional diesel. Indeed, we have had discussions
with various of the major petroleum companies who all are in favour
of this route. It means that you can distribute biodiesel on a
country-wide basis through the existing diesel infrastructure
with no additional costs involved
Q31 Mr Mitchell: It is not sold on
its own to organic drivers?
Mr Smith: It can be and indeed
it is today in very tiny quantities. There is a niche market of
individuals or organisations who value or need the environmental
benefit that 100% biodiesel brings but that market is so small
and so niche that it is willing to pay the premium required. To
bring biodiesel to the general public we see the blended option
as being the route to go.
Mr Carter: For bioethanol it is
exactly the same. All our work has been done on blends of up to
5% which are allowable now. You can use them in your car and they
can be sold at the gas station down the road there without labelling
if that is the way the retailer wished to do it. There are some
costs associated with blending, although they are relatively low,
but of course they would have to allowed for in the overall equation.
Q32 Mr Mitchell: Another simple-minded
question; how does it work? Do you establish a plant and then
have contracts with farmers to grow the stuff, and they deliver
it to you for a price? Is that how the system would work?
Mr Carter: It would, broadly,
yes.
Q33 Mr Mitchell: So the growing does
not need any subsidy or support?
Mr Carter: Providing—
Q34 Mr Mitchell: —Providing
your price is right?
Mr Carter: A providing the industry
had the level of support equivalent to 28 pence per litre for
the duty reduction, then we would be able to contract with farmers
at a price which we feel would be reasonably acceptable to them.
In our case the price we picked for wheat, which is the main feedstock
we have looked at, was £75 a tonne which is slightly higher
than the current UK market price and the world market price.
Ms Rawling: On rape seed what
is happening at the moment is that some of the rape seed UK farmers
are growing under the existing Common Agricultural Policy is effectively
being used for helping the biodiesel industry in other European
countries. In fact, some of that rape seed is being exported from
the UK. Because of the high duty derogations in those countries
there is a pull on UK rape seed, particularly as they have not
had terribly good crops this year, into other countries. On the
farm level what we would be doing is keeping that rape seed in
the UK instead of sending it away.
Mr Carter: Perhaps I should also
add that currently the exports of wheat from the UK are about
three million tonnes onto the world market. That three million
tonnes would be sufficient to drive a 5% or one million tonne
bioethanol industry.
Q35 Mr Mitchell: Cargill has been
producing bioethanol diesel in Germany since 1999. Presumably
you have learnt economic lessons on the kind of duty reduction
that was necessary. Are there other lessons which come from the
German experience that we need to learn in this country?
Mr Smith: Yes, I think there are.
First of all, the German biodiesel industry, although much, much
greater than ours "450,000 tonnes last year" is essentially
a 100% biodiesel market with all the problems that you have already
mentioned regarding a new infrastructure required. The Germans
themselves are learning that the blended route is the way forward
and we have certainly taken that lesson on board and brought it
over here.
Ms Rawling: They have in fact
just changed their legislation to go down the blending route in
Germany away from the 100% biodiesel route.
Q36 Mr Mitchell: Is it premature
to talk about a balance between food and non-food crops? Are we
very far away, given it is an infant industry, from needing to
talk about such a balance?
Mr Carter: Not in the case of
bioethanol. Use of surplus exports of wheat and sugar would take
you five or 10 years down the road because, as I say, we export
five million tonnes of wheat and we also, for the record, export
an average of a couple of hundred thousand tonnes of sugar onto
the world market as well in an average year. Those exports could
initially be used and that would take us towards a 5% target,
ie to 2010. Beyond that, yes, there would have to be land allocation
in some way but that is not in any way an obstacle. There is ample
arable land available to do that.
Q37 Mr Drew: I want to come on to
looking at the relationship with the EU in a moment but may I
raise a point with you all on the blending of diesel. I think
I have managed to open the first garage that sold it; it would
be in Stroud! Is there not a problem with education in terms of
the customers because I would have thought that one of the issues
you would be faced with is this is going to be fairly marginal
for some time and to get the customer to use it they need to recognise
that this is not going to affect their car, it is going to potentially
give them a slightly lower price "although given the amount
of blend that goes into it, it will be very small" I would
be interested in what you see in terms of consumer demand because
we have talked a lot about supply factors and we have not talked
about what the customer might be persuaded to buy.
Mr Smith: We think there is significant
consumer demand out there already. It is shown by the take-up
of some biodiesel which is currently trading at a premium market,
as we have already mentioned. Beyond that, at Cargill we receive
two or three enquiries every week for rape seed oil for the manufacture
of biodiesel. So far all these enquiries have come to nothing
because the economics do not stack up but there is interest from
several people, including the major petroleum companies who are
also talking about it, one of whom has recently been tendering
on the Continent for 25,000 tonnes of biodiesel to bring into
the UK for what they term a trial, to blend and put into the pumps.
Again, they have not purchased it because the economics do not
stack up.
Ms Rawling: I think the important
point to recognise is that whether you use it as 100% or as a
blend the carbon dioxide benefits are there and that is effectively
what you are doing by using this in your fuel. From our experience
we do not see more than a very small niche market prepared to
pay a premium so it would have to be priced with normal diesel.
We would not have had all these enquiries from distributers and
others if they did not think there was demand out there which
could be developed once we had a product.
Mr Carter: What I think is key
to the successful introduction, taking your point, is that there
need to be clear quality standards and high quality standards
accepted and agreed with all the people from the demand end of
the business to make sure that it gets off to a flying start and
to make sure there are no issues that could give it a bad name
at the beginning. That has been the case in one or two countries
and it would be important that we did not do that in the UK.
Q38 Mr Drew: Just on that there is
nothing to stop all the petrol retailers from rebadging their
diesel as "biodiesel" in the sense they could say we
will all put a blend in. How you persuade them is another matter
but notionally there is nothing to prevent that happening.
Mr Smith: No.
Q39 Mr Drew: Can I quickly turn to
the issue of the relationship with the EU. Are the Directives
now coming out of the EU helpful to your cause, given that there
are obviously other EU states are ahead of us, and what has the
Government got to do to meet these Directives?
Mr Carter: They should be extremely
helpful to us. I think they should provide a much needed dynamic
into the market. Because they require each Member State to come
up with indicative targets and then to report very rigorously
in an auditable way against the achievement of those targets as
the years go by, then I think they should be extremely helpful.
It is obviously important that to do that the UK Government takes
the matter seriously and sets targets in the future—the
medium term and longer term—which are achievable and to
which there is a route, because providing there is a route to
them then we are going to be in business. That is the way we see
it.
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