Memorandum submitted by the Renewable
Energy Association
1. The Renewable Energy Association (REA)
welcomes the opportunity to submit this evidence. The REA has
over 400 members, active across the entire range of renewable
energy resources and technologies. The REA specifically represents
the interests of some 40 members involved in the development of
a market for renewable road transport fuels (biofuels), particularly
biodiesel, bioethanol and biogas.
2. With its specific interest in biofuels,
the REA's response to the Committee's inquiry will therefore be
limited to this somewhat narrow scope when considering how the
Government is working to reduce carbon emissions from transport.
3. In summary the REA has been disappointed
that the Government has taken so long to recognise the carbon
saving benefits of renewable road transport fuels. It would appear
that significant policy developments have only emerged in response
to initiatives from the European Commission and the UK Government
has been slow to embrace changes away from fossil fuel use.
4. Looking forward, the Government has committed
to introduce a Renewable Transport Fuels Obligation (RTFO), that
has the potential to deliver a strong market for biofuels. At
the proposed target for 5% of road transport fuels to come from
renewable sources by 2010, this measure could deliver annual carbon
savings of one million tonnes per annum.
5. However, the Government has yet to determine
whether the RTFO, which mirrors many of the features of the Renewables
Obligation in the UK power sector, will impose strong penalties
upon those obligated oil companies that choose not to supply biofuels.
Weak penalties may simply result in these parties opting to "buy-out"
of their Obligation, imposing costs on the consumer but failing
to secure either the supply of biofuels or carbon savings.
6. Similarly, weak targets set by Government
for the early stages of the Obligation, will fail to provide meaningful
market growth and will fail to incentivise the development of
the supply chain. Consequently, Government's target for 5% of
road transport fuels from renewable sources by 2010 may not be
met.
RESPONSE TO
QUESTIONS RAISED
1. What progress the DfT is making against
key carbon reduction targets or forecasts included in the Ten
Year Plan (2000), the Climate Change Strategy (2000), the 2004
Transport White Paper, the 2004 PSA, Powering Future Vehicles
(2004), and other documents.
7. Neither the Government's Transport Ten
Year Plan (2000) nor the Climate Change Programme (2000) made
any mention of biofuels. While the Government was clear in the
Climate Change Programme that greenhouse gas emissions from the
transport sector would rise from 39.7 MtC in 1990 to 47.8 MtC
in 2010, none of the targets and policies referred to covered
biofuels. In effect biofuels appear to have been largely ignored
at this time.
8. Instead there was a heavy focus upon
vehicle efficiencies, including the Voluntary Agreements on the
reduction of CO2 emissions from new cars, changes to
Vehicle Excise Duty and company car taxation as well as improvements
in distribution, public transport and modal shift. It is somewhat
ironic, in this respect, that the EU Biomass Action Plan identifies
biofuels as a potential means by which the Voluntary Agreements
on CO2 reductions from new cars will be met.
9. Some biofuels (but not biodiesel) were
included in the scope of the Government Green Fuel Challenges
in 2001 and 2002. This inclusion was the only reference to biofuels
in the Powering Future Vehicles Strategy of 2002.
10. Biofuels only begin to feature seriously
in UK Government policy after the appearance of the European Commission's
proposals for and the subsequent adoption of the Biofuels Directive
in May 2003. The fuel duty rebate of 20 pence per litre for biodiesel
was extended to bioethanol from January 2005. In practice, however,
this level of support has proved insufficient to make any material
difference to carbon saving. This fact is reflected in the unambitious
target for sales of biofuels in the UK by 2005 of 0.3% (c.120,000
tonnes) against an indicative target in the Directive of 2% (c
800,000 tonnes).
11. Since 2003 the DfT has put biofuels
closer to the heart of policy culminating in the publication of
their Renewable Transport Fuels Obligation Feasibility Study[59]
and the announcement in November 2005 of the introduction of an
RTFO from April 2008[60].
This is considered in more detail in question 5.
12. It is difficult to see, when the DfT
say that a 5% use of biofuels will result in an annual carbon
saving of one million tonnes, why it took such a long time for
Government to acknowledge the key role that biofuels could play
in reducing carbon emissions. It is all the more puzzling and
disappointing when many other countries in Europe and beyond had
recognised the value of biofuels considerably earlier.
2. Whether the DfT's carbon reduction target
is underpinned by a coherent strategy stretching across the department's
entire range of activities.
13. Biofuels are handled by a relatively
small group of officials in the DfT and as far as we are aware
there is a coherent, if somewhat measured, strategy across the
department.
3. Whether the current balance of expenditure
between the DfT's objectives (as revealed in its 2005 departmental
report, Annex A) adequately reflects the environmental challenges
it faces.
14. In the field of renewable road transport
fuels the DfT have assumed their responsibility as delivering
policies which are either paid for directly in revenue foregone
by the Treasury (Fuel Duty rebate, Enhanced Capital Allowances),
or by the consumer (RTFO). As yet the DfT have proposed no policies
to promote biofuels that would impact directly upon their own
budget. If the RTFO fails to deliver on biofuel use and consequent
carbon reduction, this position may have to change with the introduction
of more direct policies such as biofuel grants.
15. This may prove to be pressing problem
if the major road transport fuel suppliers resist a move to supply
5% ethanol blends in standard gasoline (petroleum) products—known
as E5 Blend under the Renewable Transport Fuels Obligation. A
combination of technical and commercial factors suggests that
the major suppliers will seek to switch from conventional gasoline
to E5 in a single coordinated action. This will imply an increase
from current levels of supply of 70,000 tonnes to one million
tonnes per annum, over a timetable of months. This provides little
opportunity for an orderly increase in production capacity. Furthermore,
the timing of this switch is likely to be determined by the commercial
perspective of the major transport fuel suppliers, and could therefore
be subject to delay against the Government's target for 5% of
fuels from renewable sources by 2010.
16. In these circumstances, Government may
need to pursue direct incentives for the development of markets
for ethanol, either to provide for a staged introduction of ethanol
into the road transport fuel market, or to compensate for a resistance
to move to E5 blends on the part of the major fuel suppliers.
4. What realistically the DfT could achieve
by 2010 and 2020 in terms of reducing transport-related carbon
emissions, and the role that demand management should play in
doing so.
17. The DfT have announced that they will
introduce an RTFO at a 5% level by volume by 2010. This falls
well short of the indicative target set out in the EU Biofuels
Directive 2003/30/EC, which stands at 5.75% by energy, equating
to a target by volume of over 8%. The ostensible reason for this
conservative target is that fuel standards and engine specifications
will not allow a mix of more than 5% as a blended fuel. In reality
there are many other ways of introducing biofuels into the fuel
pool, for example dedicated fleets for both biodiesel and bioethanol,
greater use of E85 flex fuel vehicles and greater use of biofuels
in the UK's bus fleets.
18. If the Government will not move beyond
5% before fuel and engine specifications are adjusted upwards,
then it must expedite the procedures to permit these adjustments
to the Fuel Quality Directive 2003/17/EC and the related fuel
specifications to 10% and, if appropriate, beyond. This has been
advocated in the European Commission's Biomass Action Plan[61]
(December 2005) and their Strategy for Biofuels[62]
(February 2006). The government should then ensure that the RTFO
targets are set to at least 10% by 2015, in line with these adjustments.
With sufficient lead time this will allow adequate time for a
turn over of the UK vehicle pool without exposing policy to undue
complexity.
19. As has been recognised in the acceptance
of the principle of the RTFO, demand management must play a central
role in UK biofuels policy for the short to medium term. The Government
should commit to retaining the RTFO for a minimum of 15 years
from its date of introduction. In the short term, until the market
and the investing community have adjusted to the incentivising
nature of the RTFO, the Government should retain the fuel duty
rebate.
5. What specific steps the department should
now take to reduce road transport carbon emissions and congestion
over the next decade.
20. The Government has committed to introduce
a Renewable Transport Fuels Obligation (RTFO) in April 2008, as
the principal means by which it will bring forward the supply
of biofuels to the UK road transport fuel market. Government have
announced a target for renewable fuels to meet 5% of the demand
for road transport fuels by 2010, and estimate that this measure
will deliver carbon savings of 1.1 to 1.4 Mtonnes per annum at
this target level[63].
The obligation to supply fuels is expected to rest with suppliers
of road transport fuels that currently pay Fuel Duty on these
fuels, including both the major oil companies and independent
suppliers.
21. The RTFO bears a number of similarities
to the Renewables Obligation already operating in the UK electricity
sector. A central element of both Obligations is the option for
the obligated parties to "buy-out" of their obligation
through the payment of a penalty charge. The level of the "Buy-Out
Price" remains to be set by Government, and will determine
whether the oil companies have a commercial incentive to supply
biofuels, or whether it is preferable to buy-out of their obligation.
22. Decisions reached by Government over
the key elements of the RTFO will be critical in determining whether
the RTFO becomes an effective means of transforming the UK road
transport fuels market to physically deliver 5% biofuels and thus
secure Government's carbon savings target. The Government has
already announced that a number of key decisions will be taken
in the context of the Budget 2006. These are:
— The level of the Fuel Duty rebate
for 2008-09. The Fuel Duty rebate is the principal policy measure
in place today for promoting the development of biofuels supply.
— The interim targets for the RTFO
for 2008-09 and 2009-10, prior to the introduction of the 5% target
for 2010-11.
23. An early decision from Government on
the Buy-Out Price will also be necessary in order to provide the
maximum possible information to the market and so assist in driving
the investment necessary to meet the Government's 2010 target
in a timely and efficient manner.
24. To deliver an effective RTFO the Government
must be bold in its use of Buy-Out Price penalties, targets, and
rebate. The industry has sought the following framework of measures
from Government:
— A Buy-Out Price of 30 pence per litre
of biofuels, in order to deliver a powerful incentive for obligated
parties to supply biofuels.
— Interim targets of 3% for 2008-09
and 4% for 2009-10, to achieve an orderly and efficient programme
of investment that reflects the growing maturity of the market.
— Retention of the Fuel Duty rebate
for a sufficient period to retain current investor confidence
and effect an orderly transition from the current support framework
to the incentive mechanism of the RTFO. The Budget 2006 should
retain the rebate at 20 pence per litre for biofuels supplied
in 2008-09.
25. In addition, the Government should set
targets for post-2010 that move rapidly into line with the reference
value of 5.75% recommended in the Biofuels Directive, and thereafter
rise to a level of 10% of road transport fuels from renewable
sources by 2015, in line with expected revisions to the Fuel Quality
Directive and corresponding fuel standards. This approach will
present a growing market, that will present an opportunity to
bring forward the second generation of biofuel technologies that
can deliver greater resource efficiency once a functioning biofuels
market has been established.
26. There is a concern that Government will
regard the RTFO as a single, simple means of delivering its policy
objectives, and so overlook other complementary measures that
could assist in developing a functioning biofuels market.
27. These measures include the early introduction
of Enhanced Capital Allowances for biofuels plant, that would
provide early incentives for the development of the most efficient
and lowest-carbon biofuels facilities. The Government has indicated
that in the long-term it wishes to encourage lower-carbon biofuels
feedstock supply and production chains.
28. Changes in the fuel specification to
increase the biofuel content in mass-market fuels provide the
opportunity for wholesale increases in biofuels utilisation. However,
vehicle manufacturers' warranties typically limit the biofuel
content in the fuels that that their engines may use. Since vehicle
manufacturers will seek to limit their potential liabilities under
these warranties, transition to a higher proportion of biofuels
in mass market fuels will tend to occur as a series of step changes,
the timing of which will be dictated by the rate of turnover of
the existing stock of cars (the "car pool").
29. The development of a market for higher
biofuels blends, such as 85% ethanol blend (E85) and 100% biodiesel
(B100), provide an opportunity for a steady and progressive evolution
of biofuel demand, outside of these constraints. This steady evolution
is more consistent with a normal pattern of market maturing, and
will tend to encourage orderly investment. Demand for higher biofuel
blends could be driven by:
— Incentives for flex-fuel vehicles,
that can automatically switch between various blends of ethanol
and gasoline.
— Further incentives for investment
in new or adapted refuelling infrastructure.
— Incentives for the conversion and
specification of captive fleets (logistics, municipal contractors,
bus fleets, etc) to utilise higher blends.
30. A range of fiscal and financial incentives
could be employed to deliver this demand growth, including Enhanced
Capital Allowances, Vehicle Excise Duty concessions, congestion
charge concessions and capital grants. Similar measures could
also be employed to stimulate demand for, and production of biogas,
that can be used in place of fossil methane in natural gas vehicles.
March 2006
59 RTFO Feasibility Report, Department for Transport,
November 2005.
http://www.dft.gov.uk/stellent/groups/dft_roads/documents/pdf/dft_roads_pdf_610329.pdf Back
60
Darling Takes Action To Make Transport Fuels Greener, 10 November
2005
http://www.gnn.gov.uk/environment/mediaDetail.asp?MediaDetailsID=135355&NewsAreaID=2&ClientID=202 Back
61
Biomass Action Plan, COM(2005)628 final, European Commission,
Brussels, December 2005
http://europa.eu.int/comm/energy/res/biomass_action_plan/doc/2005_12_07_comm_biomass_action_plan_en.pdf Back
62
An EU Biofuels Strategy, COM(2006)34 final, European Commission,
Brussels, February 2006
http://europa.eu.int/comm/agriculture/biomass/biofuel/com2006_34_en.pdf Back
63
Partial RIA Biofuels, Department for Transport, November 2005
http://www.dft.gov.uk/stellent/groups/dft_roads/documents/pdf/dft_roads_pdf_610330.pdf Back
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