Memorandum submitted by Greenergy
EXECUTIVE SUMMARY
1. Biofuels and biodiesel technology provides
an opportunity to bring immediate environmental benefits, as well
as improved performance to vehicles already in use today. They
offer a practical and effective way of achieving carbon reductions
in transport. Biofuels and biodiesel have, in our experience,
already attracted great public and commercial interest and popularity.
They have great potential to motivate the public to begin to consider
a low carbon lifestyle beyond their driving fuel consumption.
2. Greenergy favours the use of processed
rapeseed oil (Rapeseed Methyl Ester, or RME) in producing biodiesel,
because of the quality of the fuel produced, namely its high conversion
efficiency to biodiesel and optimal fuel characteristics. The
use of RME has the potential to create a major new market for
farmers—the cultivation of oilseed rape for biodiesel.
3. As present there is virtually no facility
for the esterification, or processing, of rapeseed oil in the
UK. For there to be a substantial domestic biofuel market—and
therefore substantial opportunities for the production of alternative
crops for biofuels—in the UK, a reliable domestic supply
of virgin oil feedstock is needed, as well as the facilities to
process the feedstock to the fuel.
4. To achieve this Greenergy believes that
changes in duty incentives are required in order to allow the
full potential of the biofuels market in the UK, creating the
market penetration of biofuels, and encouraging investment in
the biofuels industry to be developed. Specifically:
— the biodiesel duty incentive should
be increased to 25 pence per litre to support biodiesel produced
from agricultural products;
— such incentives should be restricted
to blends;
— the Government should fully engage
with the concerns of the oil industry since, in reality, the existing
(highly efficient) distribution network is the only volume route
to market for biofuels.
5. With regard to bioethanol, a duty incentive
should be introduced at 20 pence per litre, pending further review.
Within that review, consideration should be given to restricting
the incentive to bioethanol produced from waste or lignocellulosic
processes, and an additionality study on bioethanol should be
undertaken.
6. Greenergy would also highlight the need
for more UK-specific studies of sustainable development—and
particularly quantitative assessments of benefits and costs.
THE EXTENT
TO WHICH
ALTERNATIVE CROPS
ARE ALREADY
GROWN IN
THE UNITED
KINGDOM
7. "Fuelling Road Transport: Implications
for Energy Policy", a report published in November 2002 the
Energy Saving Trust, the Institute for European Environmental
Policy (IEEP) and the National Society for Clean Air and Environmental
Protection (NSCA), concludes that there is little prospect in
the short- and mid-term of renewable electricity supplying low-carbon
electricity in the volumes needed for mass market transport demand,
but that biomass fuels can be used for heat, power or transport
fuels. Biomass includes certain annual food crops that can be
used to make liquid fuels (for example oil seed rape), as well
as lignocellulosic crops, and waste.
8. Alternative crops are grown in the UK
as a component for biofuels on a very limited basis. Greenergy
is working closely with a farmer-controlled organisation called
Renewable Energy from Agriculture (REFA) and United Oilseeds,
to promote the growth of alternative crops in the UK for this
purpose, and to illustrate the potential for farmers, who could
grow such crops in set-aside land.
9. As a thumbnail sketch of the potential
market for alternative crops grown for biofuel, 19,764 million
litres of diesel were sold in 2002. If everybody who used ultra
low sulphur diesel (ULSD) switched to a product such as Greenergy
GlobalDiesel with its 5% biodiesel blend, this would create a
market demand for around 988 million litres of rapeseed oil. In
turn this would mean that Greenergy would need in the region of
2.5 million tonne of rape per year. This would be a welcome economic
opportunity for farmers as it should increase the demand for oilseed
rape which, at around £150 per tonne at the time of writing,
is the most profitable break crop on the farm. Furthermore the
development of the biofuels market should also create other opportunities
such as the production of bioethanol.
10. To date there is only one full-scale
biodiesel plant planned for construction in the UK. Few such plants
are likely to be built as, despite previous incentives, production
economics still remain marginally below the point at which domestic
biodiesel manufacture from virgin plant oils would become feasible
and a significant market size could be achieved.
11. At present most RME is imported, largely
as surplus from Germany, where biodiesel must be sold at 100%
concentration in order to benefit from a lower duty rate. Importing
it is economically viable only because of its availability at
a discounted price. However, this is set to change later in 2003,
when German regulations will permit blending and the surplus is
expected to dry up. The benefits resulting from expanding the
production of alternative crops, and the contribution biofuels
might make to sustainable development.
BIODIESEL
12. The main three "national benefits"
from expanding the production of alternative crops for biofuel,
and thereby also further building the biofuels market, would be:
— Providing economic opportunities
for farmers. With the poor economic environment that UK farmers
exist in today, stimulated rapeseed cultivation would enable them
to diversify their product base. As previously submitted, break
crops such as oilseed rape could be lucrative for farmers with
the existence of a strong and stable UK biofuels market.
— Helping the UK in meeting EU legislative
targets. For example, the European Commission proposed setting
mandatory targets for biodiesel—2% of total automotive consumption
by 2005 and 5.75% by 2010 through the biofuels Directive. Early
market penetration of biodiesel blends in the UK will enable full
compliance with these targets should they become law. It would
also help meet the targets set out in the Government's Energy
White Paper published in February 2003.
— Offering improved fuel security—the
demand for diesel fuel is set to rise in the coming years both
in absolute terms and as a proportion of the "barrel"
relative to petrol. This will create significant supply imbalances
within the refining industry and will increase dependency on imported
diesel products from potentially volatile parts of the world.
13. There would also be a number of important
environmental benefits. The production of biodiesel is categorically
additional in terms of greenhouse gas emission benefits. This
is because of two factors:
— The biodiesel "carbon tariff",
net of production energy used in its production, is simple to
determine and its CO2 emissions are demonstrably lower than mineral
ULSD.
— The UK is a net importer of ULSD,
due to insufficient ULSD production in UK refineries to meet domestic
demand.
Thus, any biodiesel produced in the UK results
in an equivalent amount of ULSD not being produced somewhere else
in the world.
14. There are also further performance advantages
from biodiesel in terms of its effect on reducing both PM10 and
ultrafine particulate emissions. Greenergy can provide evidence
as to the cost effectiveness of biodiesel compared to ULSD, based
on a 25 pence per litre duty incentive (the level requested by
Greenergy in this memorandum and in our Budget submission).
BIOETHANOL
15. Bioethanol also has significant potential
to reduce CO2 emissions, but our concerns focus on the method
of its production. Greenergy is of the view that bioethanol produced
using conventional fermentation methods and new feedstock (such
as wheat and sugar beet) is not the most cost-effective or "additional"
route to CO2 reductions. Unlike fermentation, lignocellulosic
processes result in the net consumption of waste, achieving significant
"additional" CO2 and waste management benefits. A duty
incentive of 20 pence per litre may be sufficient to support the
development of lignocellulosic hydrolysis plants, producing bioethanol
and other beneficial co-products. Overall bioethanol production
based on lignocellulosic hydrolysis technology offers greater
environmental benefits and fewer additionality concerns.
16. With regard to conventional bioethanol
from UK wheat and sugar beet crops Greenergy is open minded to
this approach but has several concerns which should be properly
addressed before deciding for or against the process of production.
The UK is a net exporter of low quality petrol, predominantly
to the US and Africa. This is because UK refineries have to produce
surplus petrol when producing sufficient diesel to meet domestic
demand. Clearly, any bioethanol production will exacerbate this
imbalance and create a larger surplus of petrol—which in
turn can be considered to keep US petrol prices low and encourage
Americans to continue to buy fuel-thirsty vehicles.
17. In the context of the above the use
of UK agricultural land (of which there is a limited amount) to
grow crops for the production of bioethanol probably results in
little or no CO2 additionality. But the use of this land could
also restrict the production of certifiably additional energy
crops such as biodiesel, straw for electricity or wood for heating.
Therefore unless there are confidential additionality reports
on bioethanol that Greenergy has not seen, it appears that the
bioethanol proponents have not yet addressed this additionality
issue on a UK basis. It is simply not credible to quote American,
German, Australian, French or any other studies where the local
market and supply demand drivers are completely different to the
UK.
18. We believe that the Treasury is currently
seeking views on which level of duty incentive would be appropriate
for bioethanol and that various stakeholders have indicated support
for an incentive at various levels, from 20 pence to 35 pence
per litre. It has been indicated that a decision on the most appropriate
level of support would depend, to a large extent, on the cost
of achieving CO2 reductions through a duty incentive for bioethanol.
STEPS TO
ENCOURAGE PRODUCTION
19. Greenergy has consistently argued for
alterations in the duty regime in order to encourage the growth
of alternative crops for biofuels. This is a position we maintain.
In the UK, current regulations and incentives only encourage biodiesel
from waste products, such as used cooking oil, to be produced
for sale at prices below that of ULSD. Previous operations have
been small-scale, producing heterogeneous products and acting
as both fuel manufacturers and distributors. Such a situation
is complex to regulate, both in terms of collecting fuel excise
duty and in imposing quality standards to maintain consumer confidence
in the product.
20. The future of biofuels and biodiesel
in the UK appears to be at a crossroads. If the production of
large volumes of high quality fuel from full-scale commercial
plant is encouraged, it can be integrated with the present supply
infrastructure for liquid fuels. If it is not, one risks biodiesel
becoming an uncertain market with no guarantee of product quality
or compatibility with current engines.
21. One major step towards a strong and
stable market would be to place a further duty incentive on the
use of biodiesel blends with conventional fuel, rather than on
the pure biodiesel itself. This would have several potential benefits:
— Collecting excise duty and imposing
fit for purpose quality standards would be simpler and more effective,
as the point of control could remain with petroleum fuel suppliers,
with biodiesel itself being treated as a fuel additive.
— Products could be tailored to encourage
the use of the environmentally efficient 5% blend, as mentioned
above.
— The variation in properties of different
types of biodiesels would be minimised by dilution in ULSD, producing
a more dependable, homogeneous product.
22. It is worth noting that the cost effectiveness
of biodiesel in blends can be more than twice as high for CO2
and an order of magnitude higher for particulates than is the
case for pure grades of biodiesel. This is because the biodiesel
acts as a performance enhancing additive which reduces the consumption
and emissions of ULSD beyond its own direct benefits. Greenergy
has evidence which shows that blends of biodiesel have a multiplicative
effect on emissions reduction, compared with that of pure biodiesel,
and which can be supplied to the Committee on request.
23. As the Government already accepts the
case for a 20 pence per litre incentive for pure grades of biodiesel
it should therefore accept that there is an even stronger case
for an increased duty incentive for biodiesel blends, and in fact
that if best value is maintained for the Treasury and the environment
any incentives should be restricted to blends. This new level
would stimulate the market for biofuels, creating benefits in
terms of sustainability and the economic opportunities for UK
farmers.
24. Greenergy believes that only way to
protect the market place from inferior product, or product that
evades duty, is to restrict the biodiesel duty incentive to blends.
The major oil companies are, of course, the natural guardians
of quality product and correct payment of excise duty. A further
advantage of restricting the incentivisation of biodiesel to blends
is the cost-efficiency with which they deliver environmental benefits.
25. These effects could be obtained if the
duty incentive for biodiesel blends against ULSD were to be revised.
A shift from the current 20p to 25p per litre of biomass component
(equivalent to an extra incentive of 0.25p-0.5p on a litre of
5% RME blend) would both allow this and would enable the production
of around 400-800 kilotonnes of RME in the UK per year. This would
be enough to ensure the future of a biodiesel market and create
new economic opportunities for agriculture, but would not encourage
the mass conversion of farms to rapeseed monocultures, as has
been feared by some environmental groups.
26. With regard to the creation of a viable
biodiesel market capable of having a material effect on greenhouse
gas emissions, the existing 20 pence per litre duty incentive
is insufficient to support the production of biodiesel derived
from primary agricultural crops—yet this is the only route
to creating a market of a sufficient scale to affect greenhouse
gas emissions significantly. Therefore, an incentive beyond 20
pence per litre is required for the introduction of biodiesel
from primary oil crops.
27. The current 20 pence per litre incentive
is sufficient to support the cheap and cheerful "back-street"
production of biodiesel produced from recovered vegetable oil.
It is unlikely that such material will meet the stringent quality
requirements of modern vehicles and fuels markets and, as such,
it represents a significant risk to market confidence in biodiesel.
The risk to corporate reputation through association with such
products is also likely to deter the major oil companies from
participating in the biodiesel market. There is significant duty
evasion in the current diesel markets, and "back-street"
production is likely to exacerbate this problem, to the detriment
of both UK tax revenue and a fair and fully competitive UK fuels
market.
28. It does not seem reasonable to treat
as yet unproven agricultural bioethanol in the same way as biodiesel,
which is proven from an excise duty and additionality perspective.
It may be prudent to treat bioethanol produced from waste (whether
this be domestic, industrial or agricultural, and where waste
management is a more important driver than CO2 abatement) differently,
and it may deserve a higher duty incentive. In fact when combined
with the gate fees for waste, the 20 pence per litre incentive
already announced may just be enough to make limited production
viable, although this is subject to further feasibility analysis
and 25 pence per litre would be required for market surety.
29. In all situations relating to bioethanol,
Greenergy is of the view that some form of provenance control,
traceability or carbon certification should be a prerequisite,
as it would otherwise be impossible to establish the source of
the ethanol (chemical, agro-bio or waste-bio) and its eligibility
for duty incentives. It is worth remembering that the quantities
of bioethanol produced would be significantly lower if the Government
restricted its incentive to bioethanol produced from waste, and
not bioethanol produced from crops.
30. We believe that in order to fully reap
the environmental, sustainability and economic benefits from the
potential biofuels market in the UK, the Department of the Environment,
Food and Rural Affairs should apply pressure to the Treasury in
order to secure the duty incentive regime changes requested above.
ABOUT GREENERGY
31. Greenergy was founded in 1992 by Andrew
Owens, who was awarded an MBE in 2000 for services to the environment.
In 1995 Greenergy CityDiesel became the first ultra low sulphur
diesel (ULSD) available in the UK, initially through Sainsbury's
supermarket forecourts. Greenergy has worked closely with UK Governments
throughout the 1990s and up to the present day on maximising the
environmental and commercial benefits of ultra low sulphur fuels.
In 2002 Greenergy launched GlobalDiesel, a low carbon biodiesel
fuel containing processed rapeseed oil, which is now sold through
forecourts, including Tesco and Sainsbury's, and used by public
and private sector organisations. Greenergy is now Europe's largest
independent low emission fuel company.
27 March 2003
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