Examination of Witnesses (Questions 74-79)
MR SEAN
SUTCLIFFE AND
MR GRAHAM
HILTON
8 MARCH 2006
Q74 Chairman: Ladies and gentlemen, may
I welcome you to the second evidence session of biofuels. For
the record, welcome Mr Sean Sutcliffe, the Chief Executive of
Biofuels Corporation plc, and, from the Energy Crops Company,
Mr Graham Hilton. I do appreciate that you come at this problem
from slightly different backgrounds, but, if there is a question
that I or a member directs to one and the other feels compelled
to want to make a contribution, if you would just catch my eye,
we would be delighted to have your respective views on the subject.
I would like to start off by asking each one of you the same question
that I asked to our witnesses last week. What do you think is
good about Government biofuels policy and what do you think is
essentially bad?
Mr Hilton: I would like to start,
if I may, by explaining where I fit into the equation. I am more
than happy to answer questions on biofuels because for my sins
I am the Chairman of the Environmental Industries Commission Road
Transport Fuels Group, which looked at biofuels and was heavily
involved with Lord Carter in drafting one of the first mechanisms
for the Renewable Transport Fuels Obligation. My submissions to
this Committee, however, were on a slightly different level, in
that, as the Managing Director of the Energy Crops Company, my
objective is to commercialise wood heating. If my views seem a
little disparate, then that is the reason why. In terms of an
approach to biofuels and bioenergy in general, I think the most
encouraging thing is that it exists and that it has the attention
of Government across such a wide span. That does, however, carry
with it the single biggest disadvantage to which I alluded in
my written submission, that I do not think we are alone, as a
relatively small company, the Energy Crops Company—I know
it is a problem with some of the bigger companies—in understanding
what is the most effective way to feed our views into Government.
As far as biofuels are concerned, we were told some time ago that
there were five Government departments involved in looking at
this, and that it was so important that there would not be a lead
department, all five would lead. I am not sure if it occurred
to anybody at that time how unhelpful it was if those five led
in different directions, and that certainly seems regularly to
have been the case. You are also probably conscious, as we are,
that there is the Energy Review being undertaken by the DTI, the
Stern Review on the Economics of Climate Change, and the number
of investigations is not only almost endless but also regularly
very contradictory. That is our biggest single problem as an industry,
in making our views not just heard but coherent.
Q75 Chairman: Just before I bring
Mr Sutcliffe in, I wonder if you could tease out some of the differences
in approach that you have come across. The Committee would be
interested to hear about those.
Mr Hilton: It is very difficult
at times to understand what some of the individual departments
are trying to achieve. At the early stages of legislation, one
has often encountered that Defra will have an attitude on transport,
DfT will have an attitude on agriculture, and Treasury may have
an attitude on carbon assurance. It seems to be the rule rather
than the exception for Government departments to seem to have
views on things which are not within the apparent orbit of their
departmental responsibilities. However, as much as anything, it
is literally a question that we have some very coherent views
on biofuels—I think it is fair to say that the two major
trade associations have virtually identical views—but we
are asked on a very regular basis exactly the same questions by
several different departments and the responses that then come
back as a result of that input often seem to bear no relation
to the input that we have given.
Q76 Chairman: Right, Mr Sutcliffe.
Mr Sutcliffe: Thank you. From
a slightly different perspective, Biofuels is building in the
UK one of Europe's largest biodiesel plants up in Teeside. We
have produced our first biodiesel, and it will be equivalent to
about 1% of UK biodiesel requirements. In a sense, it is a measure
of where the UK has not so far got—in that the level of
biofuels production in the UK is so far behind our European competitors—so
there has been a lot of, if you like, policy direction and yet,
funnily enough, not much investment in the UK against that policy
objective. In terms of what is good about the change in policy
that we have seen over the last year or so, I think a policy that
is clearly grounded in the prime objective, which is carbon—which
is carbon in the transport sector, where we have such a poor track
record alongside other countries, I need to say—is important,
because that sets for our business a very long, clear objective
against which we can invest. The second thing that is good about
the policy direction we are seeing at the moment, is that it is
a switch from duty differentials, which have the benefit at least
of certainty and clarity but they do not have the longevity that
long-term investments that we are looking to put in place need.
The third thing that is good about the policy direction is that
it sets a clear direction for sustainability and for carbon measurement.
I am sure we are going to have some questions about that. It is
important to recognise that we are very much an embryonic industry
and there is no point inventing a gold-plated industry without
having an industry in place. I am sure we are going to come back
to how we move to put in place the clear policy goals that we
want. What is bad? if I may turn to the other side of your question.
I suppose it is not bad, it is just deferred goodness, because
we are waiting for the Chancellor to put in place what I think
is necessary, which is long-term targets. We will be looking for
a volume target beyond 2010, which is in our books very medium
term; we will be looking for a target of 10% by 2015, which will
require some changes in standards and other people to improve
or at least verify their car performance to get there; and we
are looking for an ambitious set of short-term incentives, which
means the target out until 2010, both in terms of the volume targets
and to ensure the duty differential remains, to allow a time for
bedding in of this new and what I think is a better long-term
incentive mechanism.
Q77 Chairman: What intrigues me about
the words you just uttered is that, as you rightly said in your
evidence—you are an £80 million cap company on AIM—you
have already taken the decisions to make some pretty formidable
investments in this field against a background of the elements
of uncertainty about longevity and objective which you have outlined
to us. Why have you decided, notwithstanding all these uncertainties,
to have invested? How much have you invested?
Mr Sutcliffe: I should say, for
the followers of AIM stocks, that Biofuels has had an interesting
genesis and quite a difficult one in terms of a rather bold investment
decision by the entrepreneurs who set this up—who, by the
way, are Australian—plus investors. I came in to ensure
that their vision is turned into something a little bit more grounded
in reality and delivery, so it has been an ambition and, I have
to say, for our investors, a bold investment decision that they
have made, alongside Barclays Bank, who have also put substantial
capital behind the business. It has been against the background
of the European incentives that the market case has been made.
Q78 Chairman: You would not have
made the investment and your investors would not have put the
money in unless you thought you were going to get a positive return
on your money. You have gone down the palm oil route basically
for feedstock, am I right?
Mr Sutcliffe: No, you are not.
We are using a basket of vegetable oils, including rapeseed oil,
soya and palm—and, indeed, I think we have been the largest
buyer of UK rape oil in the last 12 months for biodiesel in the
UK. I think it is based in the UK because—if I can sing
the praises of north-eastern MPs—the way it has been approached
in the UK in terms of flexible investment and infrastructure makes
this a good place to invest, but the markets will be the UK and
European markets, and, indeed, in the short term clearly the European
market is actually a more attractive one than the UK one. In the
longer term, we think that the policy measures that the UK is
putting in place should make the UK a good market too, and that
will be the basis for further investment that we would make.
Q79 Chairman: To be entirely clear,
you are saying to the Committee that the current duty derogation
of 20 pence per litre, the promise of uncertain but nonetheless
specified capital allowances—which would not affect what
you have already done because you have already made your investment—and
the Road Transport Fuels Obligation are sufficient points of certainty
for you to say it is worth investing in this industry because
you opened up by pointing out that we are an awful long way behind
and we are trying to establish why. I would like to know from
our two witnesses whether you think the Government is truly committed
and enthusiastic about this, or whether, in the nicest sense,
it is just going through the motions.
Mr Sutcliffe: I do not want to
monopolise this, because Graham you have been involved in this
field for much longer than I have, but I suppose I would say that
our analysis is that the Government has no choice. We are going
to hit only half of the 20% targets; the carbon emissions in transport
have gone up by 10% over 15 years, and therefore are rising as
a percentage from 20 to 25%; and in terms of measures which can
make a demonstrable difference in the transport sector (short
of forcing everybody to cycle to work) this is one of the demonstrable
measures which can make a difference, and therefore our judgment
is that this policy has to happen. Whether it happens aggressively,
to allow the UK to grow from virtually nothing to being one of
the European leaders in biofuels, or whether it will continue
to be a laggard is a matter of debate. From our perspective, we
believe that Europe as a whole will move ahead and if the UK is
not the right market for biofuels we will have the ability to
sell to Europe.
Mr Hilton: My feeling is that
the policy battle is effectively won. If there is a failure—and
I think there is a very real and imminent danger of market failure
in biofuels—it will be almost accidental. The difference
in position, as I understand it, from what is circulating in Whitehall
and the position which the industry wishes to have, revolves around
what is perceived as a package of measures. It is clear that obligation
is a different and complementary measure to duty derogation. The
industry is asking that the obligation has from the outset an
effective buyout price (that is, 30 pence per litre) which will
incentivise the oil industry to engage with biofuel producers
because it will be a lot cheaper to include biofuels than to buy
out. The risk comes because, while Treasury appear willing to
continue duty derogation for some time. We envisage that continuing
at 20 pence in the 2008-09 period but then tailing off, so it
would be a capped cost over two or three years. Within certain
Government departments there appears to be a desire to have a
capped package, which would be an addition of buy-out and duty,
coming to a total of a combined 30 pence. The reason that is a
fallacy is that the cost of complying is no different whether
the buy-out is 30 pence a litre or £3.30 a litre. The real
cost of compliance is what it costs to buy the product, so to
say you are supporting a market by having a 30 pence buy-out to
a degree of 30 pence support is false: you are supporting it to
the amount it has to pay to comply.
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