Memorandum submitted by the East of England
Development Agency
1. BACKGROUND
1.1 The Kyoto Treaty required signatories
to reduce their Greenhouse Gas Emissions to below 1990 levels
by 2010. The UK Government has committed to reducing these gases
by 10% by 2010 and Carbon Dioxide emissions by 20% by 2010. The
recent Energy White Paper has further committed the government
to a target of 20% from renewables by 2020.
1.2 If the Government's targets for CO2,
greenhouse gasses and the contribution of renewables are to be
realised EEDA believes it is critical that road fuels are part
of the solution, as they represent 25% of current emissions, (and
whilst emissions in other sectors have stabilised or fallen since
1990, those from transport have continued to increase).
1.3 Working on behalf of all RDAs, EEDA
has therefore commissioned a major study on the impact of creating
a domestic Bio-ethanol production sector. The brief for the report
was drawn up by EEDA with terms of reference agreed with DEFRA
and DTI nationally. The conclusions of the report will be presented
by EEDA to the Treasury and other Departments on completion.
1.4 This study is being undertaken to identify
both the potential for Bio-ethanol production in the UK and what
support mechanisms are required to make such an industry economically
viable. EEDA believes that a bio-ethanol industry has the potential
to develop new markets for agricultural crops, thus helping to
address the current problems in the agricultural and rural economies
alongside representing a major opportunity for economic growth
and CO2 mitigation.
1.5 In the future, developments in technology
(eg for ligno-cellulosic fermentation) will allow household, domestic
and green wastes to produce fuel thereby contributing to a reduction
of material going to landfill. As such, the report will examine
multiple resource streams and their potential for short and long
term implementation.
1.6 The report is due to be completed by
the end of April 2003 and will contain three main sections:
— Firstly it will address the economics
of bio-ethanol production, both now and in the future in terms
of its impact on the whole economy and from the perspective of
industry.
— Secondly it will address the changes
in policy, fiscal arrangements or infrastructure necessary to
make a domestic bio-ethanol sector viable in the UK.
— Lastly it will identify the practical
factors, which will determine the viability of individual bio-ethanol
production plants by undertaking a number of case studies. These
are designed to examine the supply base, infrastructure and distribution
networks required to support individual plants.
1.7 In more detailed terms, the report looks
at:
— The macro-economic basis for the
creation of a national industry including the impact of imported
material on a developing and developed industry.
— The report will consider four methodologies
of processing raw material (including lingo-cellulosic) and evolve
them into detailed scenarios using a range of raw material resource
(wheat , sugar beet, other crops, woody substrates and waste).
— It will look at relative competition
between and for feedstocks.
— It will consider the different funding
mechanisms/policy support needed for an industry to achieve the
overall necessary level of support.
— The report considers the economic,
social and environmental impacts of a potential industry (eg relationship
to the emergent biodiesel industry and its supply chains; predicted
impacts in terms of biodiversity). It also utilises GIS technology
to identify and map optimal locations for plants in England and
Wales based upon clusters of potential raw material supplies and
the infrastructure for distribution.
1.8 Following a seminar with industry and
other stakeholders on 26 February to discuss the initial findings,
we have had a variety of comments which we have drawn together
to discuss the development of the final report and any additional
work which needs to be carried out on the macro-economic and GIS
analyses.
2. Initial Findings
2.1 As stated above the report will not
be finalised until the end of April but for the information of
the Select Committee, I have given a brief overview of some of
the initial findings of the report. Please note that, at this
stage, these should be taken IN CONFIDENCE, and may be subject
to some alteration.
2.2 Multi-criteria presentation
2.2.1 The national impacts of a UK bioethanol
industry can be summarised in a multi-criteria presentation. There
are several competing policy issues involved in developing such
an industry, each of which has economic, environmental and social
features. The main policy issues are:
— the overall cost of bioethanol;
— the extent to which rural economic
development can be enhanced by a bioethanol industry;
— the additional employment in the
main sectors of agriculture, feedstock conversion, fuel supply
and distribution and in the manufacturing sector;
— the levels of greenhouse gas avoidance
available by substituting bioethanol for gasoline, and the cost-effectiveness
of public support within the Climate Change programme objectives;
— the level of added value for the
national economy; and
— the extent of the net financial costs
to the Treasury.
2.2.2 The Table below provides a summary
of these impacts in a qualified manner for selected bioethanol
production routes in comparison with gasoline.
MULTI-CRITERIA PRESENTATION OF IMPACTS
| Bioethanol
| | | |
| | | |
| |
| | | |
| | |
| Set aside crops
| Existing crops | Gasoline
| | | |
| | |
|
|
| | | |
| | |
| Wheat/sugar beet | SRC/forestry
| | | |
| | | |
|
| Resource cost | Expensive |
Expensive | Expensive | Cheap
| | | |
| | |
| Rural development benefits | Good
| Moderate | Moderate | None
| | | |
| | |
| Value added to UK economy | High
| High | Moderate | Low
| | | |
| | |
| Additional employment | Good
| Good | Moderate | Low
| | | |
| | |
| Impact on the Treasury | Moderate
| Poor | Moderate | Good
| | | |
| | |
| Greenhouse gas avoidance | Good
| Very good | Good | N/a
| | | |
| | |
| Cost of greenhouse gas avoidance | Moderate
| Moderate | Moderate | N/a
| | | |
| | |
| |
| | | |
| | | |
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2.3 INSTITUTIONAL AND
TECHNICAL BARRIERS
2.3.1 The main institutional and technical barriers to
the market development and up-take of bioethanol as a transport
fuel are:
— the overall production costs for all feedstocks
are higher than the production costs of gasoline. The least expensive
conversion process, namely for sugar beet and starch crops, are
commercially available now, but investors and project developers
need to be assured that the retail prices for the consumer will
be competitive with gasoline. This will require Government action,
either in the form of fuel duty reductions in favour of bioethanol
or in the form of other capital support;
— ligno-cellulosic feedstocks are still at an early
stage of development, and capital and operating costs need to
be reduced through R&D and technology development before they
can compete with sugar and starch crops. This might also require
Government support, perhaps through funding specific R&D and
demonstration projects;
— production of most feedstocks heavily influenced
by area aid and other EU mechanisms. The Mid-term Review of the
Common Agriculture Policy, the GATT and WTO trade agreements and
national mechanisms such as landfill tax will all exert a significant
effect on feedstock production costs;
— the agricultural sector and project developers
are keen to see the potential for bioethanol taken up, but the
major UK oil companies will also need to be convinced that the
product is worth developing for the road fuels market;
— the Government also needs to be convinced that
encouragement of a bioethanol industry is a viable and long term
option for the UK transport fuels market, and that bioethanol
has a role to play in the Climate Change Programme.
2.4 METHODS OF
SUPPORT
2.4.1 Support for bioethanol production could come in
the following forms:
— Purely from excise duty cut for the duration of
the processing plant's life (set in this study at 15 years).
— Excise duty cut capped at 20 pence per litre with
additional support in the form of capital grants in order to offset
(some of) the initial expenditure on bioethanol processing infrastructure.
The level of capital grant would be varied in order to accommodate
different technologies.
— Excise duty capped at 20 pence/litre with a Transport
Fuels Obligation applied to all UK fuel suppliers under which
they are required to bridge the funding gap (in effect most of
the gap would be met by the consumer).
— A combination of capital grant and staged excise
duty cuts which decline through time, to zero after 15 years,
thus minimising the overall cost to the exchequer.
2.4.2 Looking at the above, the initial findings of some
of the macro-economic analyses are as follows:
The main results of the Input-Output analysis are best presented
in graphical form, in terms of pence/litre of bioethanol (or gasoline).
The results shown below are aimed at illustrating the key findings
of the macro-economic analysis.
2.4.3 Figure 1 shows the input data (as set out above)
for the allocation of costs for each stage of the production,
conversion, distribution process for bioethanol and gasoline.
The feedstocks shown in the figure are wheat, sugar beet, imported
wheat, wheat straw, short rotation coppice and forestry residues.
By-product credits are included for the cases of wheat and sugar
beet, where the costs are calculated for a conversion plant capacity
of 100,000 t/year. For the ligno-cellulosic feedstocks, the conversion
plant capacity is 156,000 t/year, using the design throughput
of the process. Gasoline is shown as using both imported and UK
sourced petroleum, with the refinery operations being carried
out in the UK.
2.4.4 The gasoline and wheat import cases are assigned
the same respective costs structure as the UK sourced cases of
these feedstocks. This is because, from a macro-economic point
of view, there is no differential in costs between these cases
since the international commodity trade in petroleum or wheat
would ensure that the price of imported feedstock was equalled
to the price of the UK sourced feedstock.
Figure 1: Distribution of Costs for Bioethanol
and Gasoline
2.4.5 Figure 2 shows the direct and indirect value added
to the UK economy and the expenditure on direct and indirect imports
for bioethanol from these feedstocks and plant capacities, together
with the imported and UK sourced gasoline cases. It can be seen
that the value added for all the bioethanol cases exceeds the
value added for both gasoline cases, but there are also indirect
imports for bioethanol due to the use of imported goods and services.
Hence a UK bioethanol industry would still require imports, whilst
also contributing to the national economy through the direct and
indirect value added. The figure also shows the difference between
imported and UK sourced feedstocks, in that the direct import
component of the total cost is much higher and the value added
in the UK is much lower for the import cases.
Figure 1.3: Direct and Indirect Value Added and
Direct and Indirect Imports for Bioethanol and Gasoline
2.4.6 Bioethanol production costs are more expensive
than gasoline, but the retail price for the consumer is also determined
by the amount of fuel duty imposed by the Treasury[9].
Figure 3 shows the amount of fuel duty required to equalize the
bioethanol retail price with the gasoline retail price (using
the current fuel duty of 45.82 p/litre for gasoline). To achieve
this equalization, fuel duty for bioethanol from wheat and sugar
beet feedstocks needs to be reduced to around 21 p/litre (ie a
reduction of about 25 p/litre from the current gasoline fuel duty).
2.4.7 For short rotation coppice and forestry, the pre-tax
costs of bioethanol are greater than the retail price of gasoline
including fuel duty. Hence in order to equalize retail prices,
an additional subsidy would need to be paid to the bioethanol
producers, amounting to around 11 to 14 p/litre.
2.4.8 Figure 4 shows the total impacts on the Treasury.
The Treasury would receive fuel duty, together with an amount
of indirect taxes (less subsidies on production) that are imposed
on the sectors of the economy involved in bioethanol production.
In addition, the Treasury would save payments of job seekers allowances.
This is because a UK bioethanol industry would create direct employment
within the agricultural sector and in the bioethanol conversion,
distribution and supply chains, together with indirect employment
in other sectors of the economy. It is clear that the net receipts
to the Treasury would be reduced, if the fuel duty were to be
reduced as suggested above, since the savings in job seekers allowances
would not compensate for the loss of some fuel duty. Furthermore,
for the cases of short rotation coppice and forestry, if subsidies
were paid, then there would be a net outflow of funds from the
Treasury. However, much of the duty foregone will generate revenue,
and thus taxes, in other sectors of the economy. The overall loss
of revenue to the Treasury is about 18p/litre in the case of wheat
and sugar beet feedstocks.
Figure 4: Treasury Impacts
2.4.9 Figure 5 shows the value added in the main economic
sectors involved in the supply of bioethanol from wheat feedstock.
Not surprisingly, agriculture receives the most value added, accounting
for about 40% of the total value added. The manufacturing sector,
along with the wholesale and retail trade and transport (in the
form of road haulage), also has significant value added.
Figure 5: Value Added in Main Economic Sectors
for Bioethanol from Wheat Feedstock
2.5 IMMEDIATE PROSPECTS
2.5.1 Sugar beet and starch crops are available as feedstocks
for use in proven mature technology routes to bioethanol production,
and facilities using these routes could be built within a one
to two year time frame. The retail costs of bioethanol from these
feedstocks are in the range between 38-42 p/litre. In order to
make bioethanol competitive with gasoline, a fuel duty reduction
of around 24-28 p/litre would be needed.
2.5.2 A UK bioethanol industry using currently available
conversion technology and sugar and starch crops as feedstocks
can offer economic development benefits for the agricultural sector
and rural communities. However, the industry will require active
stimulation and encouragement by agencies such as EEDA, working
in partnership with other public and private sector interests.
There should also be sufficient government incentives, perhaps
in the form of fuel duty reductions and/or capital grants, for
commercial investments to go ahead.
2.5.3 The development of a UK bioethanol industry would
also require process plant suppliers to gear up to design and
build the required conversion facilities, and hence there might
need to be some involvement by Government, RDAs and others in
helping to stimulate the supply chain for this process industry.
2.5.4 The immediate support of full scale beet and starch
processing facilities is required if the UK is to meet the EU's
Transport Fuel Directive.
2.6 LONGER-TERM
PROSPECTS
2.6.1 A variety of ligno-cellulosic feedstocks require
demonstration of conversion technologies at the pilot and commercial
scales, and it is unlikely that a facility could be built to compete
on a economic basis with sugar beet or starch crops commercially
for several years to come. In addition to full excise duty cuts,
ligno-cellulose processing would require additional capital grants
to enable it to compete with fossil derived gasoline. Nevertheless
in the medium term—perhaps within four to five years—the
first generation of ligno-cellulosic conversion facilities using
wheat straw feedstocks could be in operation on a demonstration
scale in the UK, and the technology routes involved offer the
prospect of economic competitiveness with conventional sugar and
starch conversion. In the longer term, of 10-12 years, other ligno-cellulosic
feedstocks could be introduced into second generation conversion
facilities, assuming that capital and operating costs can be reduced
through R&D and technology development. Demonstration projects
and R&D should be fully supported.
2.7 CLIMATE CHANGE
MITIGATION
2.7.1 The public costs of climate change mitigation are
around £140-160/t CO2-equivalent for sugar beet and wheat,
and between £190-360/t CO2-equivalent for wheat straw and
short rotation coppice/forestry. Relatively modest greenhouse
gas reductions have been indicated for the sugar and starch crop
feedstocks, there are much more significant reductions available
for ligno-cellulosic feedstocks. Hence a UK bioethanol industry
that makes use of ligno-cellulosic feedstocks could represent
a viable low carbon option that provides a renewable transport
fuel. However, the cost-effectiveness of this option is crucial
in determining whether it is in the national interest to develop
and deploy the relevant technologies.
2.8 FEEDSTOCK SUPPLY
2.8.1 England and Wales has sufficient sugar starch and
ligno-cellulose resources in which to meet the EUs Transport Fuel
Directive (5.75% renewable transport fuels by 2010). Under the
current cropping regime this would most likely come from a mixture
of industrial cropping on set-aside and diversion of grain from
export markets to indigenous bio-ethanol production. In the most
favourable location in the East of England a 100,000 t ethanol
processing plant would require 35,000 hectares of land. An equivalent
scale ligno-cellulose processing facility would require 92,000
hectares of land.
2.8.2 Ligno-cellulose waste streams offer longer term
low cost feedstocks, but their cost must not be underestimated.
Currently, collection, separation, screening and shredding render
waste paper feedstocks relatively expensive. UK waste directives
will be essential to promoting such waste materials as a viable
alternative once conversion technologies for ligno-cellulose are
mature.
2.9 NORTH SEA
OIL DEPLETION
2.9.1 The effects on North Sea oil depletion and gasoline
prices are likely to be relatively minor, since and reduction
in UK demand will mean that crude oil or refined petroleum products
will be diverted from UK markets to international trade. Moreover,
oil prices are determined largely by international markets so
that any bioethanol production in the UK would not markedly affect
these prices.
March 2003
9
VAT is added in addition to the fuel duty, but its effect is
not included in this analysis.
Figure 3: Fuel Duty Required to Equalize
Bioethanol and Gasoline Prices Back
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