Examination of Witnesses (Questions 80-99)
MR SEAN
SUTCLIFFE AND
MR GRAHAM
HILTON
8 MARCH 2006
Q80 Chairman: Would I be right in
saying that, as far as sourcing, in terms of the major oil companies
who will have the obligation to fulfil they can buy from wherever
they want?
Mr Hilton: They can today. That
choice will become limited. At the end of the day, the UK industry
does not have to compete with petrol—that will come in time
anyway—it has to compete with import. Our confidence as
a potential producer—I represent an ethanol producer in
the South West—is that the availability of imports from
Brazil will become constrained by a lack of overall supply, so
we are confident that overall demand will come. We need a very
clear signal from Government short-term that allows that UK industry
to develop. The investors in our industry do not see a risk of
not having a market for the product in 2011.
Q81 Chairman: You have used the term
`signal in the short term'; Mr Sutcliffe used the term `long-term
incentive'. Short and long seem to be incompatible in this context.
I am struggling to understand. We have looked at this before and
when we started out on our voyage of inquiry we were told by the
industry that they must have 27 pence a litre duty derogation.
Now I have Mr Sutcliffe, whose company has made a major investment,
saying if we have 20 pence for long enough . . . . Tell me where
I am wrong.
Mr Sutcliffe: It is predicated
on a long-term, Renewable Transport Fuels Obligation at 30 pence,
which is what the consultants to the Government have suggested.
Q82 Chairman: That is the buy-out
price.
Mr Sutcliffe: That is a buy-out
price, and in the short term and medium term a certainty in terms
of price or better clarity in terms of price, until we see the
RTFO mechanism—how it works in practice and bedded in—to
give us that price certainty to make the investment in the short.
So, just to clarify, I am not suggesting that a long-term transport
obligation with a buy-out price of 20 pence will stimulate investment
in the UK. It will not.
Q83 Chairman: How do we get to the
figure of 20 pence for the derogation and 30? Have you ever seen
a piece of paper which explains why 20 and 30 are deemed in these
respective activities to be the right numbers?
Mr Hilton: I think 20 already
exists. There is no great debate on that. That is what we have
started with and persuading Treasury to extend that has been one
of the challenges, which they appear to recognise. The 30 pence
is quite simply, today, double the cost of buying, whether it
is ethanol or biodiesel. The cost differential between ethanol
and petrol is approximately 15 pence; the cost differential between
biodiesel and fossil diesel is approximately 15 pence. Our understanding
of the market dynamics—and I am a semi-reformed oil trader—is
that, if somebody faces a 30 pence penalty for not buying something
at 15 pence, they will comply. So with the first mechanism, the
obligation is there to encourage engagement by the oil industry.
The reason we want an overlap on duty is so that, over the intervening
period, until April 2008 when the obligation comes in—and
remember that in the first year it could be very heavily traded
around, its impact could be very uncertain for the first year
or 18 months—there would be the continuing incentive of
duty. The difference between the industry position and the apparent
position of Government—and I know Treasury do not like to
have words put in their mouths—is this cap at 30 pence.
We are asking that the 30 pence is the buy-out, the duty continues
on a cap basis. If that were to happen to 2010, the total difference
in cost between the two approaches is less than £1 billion—and
that would get me a long way. I am sure it does not get Government
that far! And to have the difference between market sense and
total market failure for biofuels abandoned for £1 billion,
I think, in retrospect will prove very poor value.
Q84 Chairman: At the moment we are
talking, relatively speaking, to the major oil giants, of very
small-scale UK production of liquid biofuels. Why is it that the
market's advance into this area has been left to entrepreneurs
and risk takers like you? Why has not Mr Shell or Mr BP (who seems
to be spending an inordinate amount of advertising money on telling
us he wants to go beyond petroleum) got into it? Or are you hoping
that they will buy you?
Mr Sutcliffe: I can probably answer
that question. It is not BP but BG (being responsible for corporate
development there previously), and for me it would not have passed
muster in terms of a strategic investment. In their context it
is too small and the returns are better in exploration production
than refining and market. So it simply would be too small and
in the wrong sector for my capital allocation process. That is
the decision I would have made, coming from an oil major. From
our point of view, it is an opportunity, because, if we can give
them the quality which they need, the volumes that they need and
the sustainability that they need, and they do not have to put
their own hand into their pocket to make the investment, that
is great from their point of view.
Chairman: Okay.
Q85 Mr Williams: The inclusion rate
for biofuels is sometimes expressed as a percentage by volume
and sometimes a percentage by energy. As I understand it, the
RTFO target for 2010 is a given per cent by volume inclusion.
The NFU have told us that they believe that is possible through
home production, even though the inclusion rate at the moment
is 0.3%. How realistic is the RTFO target for 2010?
Mr Hilton: I think the reason
it has been capped at 5% at the moment is a very simple one: the
Department for Transport do not wish to set a target that does
not meet the current fuel spec. The European fuel spec is at the
moment with EN228 for gasoline or EN590 for diesel, you can include
5% by volume, so it is merely setting a target that did not presume
actions on behalf of Europe to change the fuel specs. I agree
that it is possible, certainly in the ethanol context, that there
is an export surplus of 3.5 million tonnes of wheat. This is feed
grade wheat, if we convert to types of wheat specifically suited
for making ethanol, we could produce 5.75% by volume of ethanol
with the existing export surplus of wheat.
Mr Sutcliffe: Graham is right,
5%, just by volume, set at what you can put in every litre of
diesel and petrol today. It is a start. It is not terrifically
ambitious. The standard-setting bodies for Europe are already
being mandated to move from 5% to 10% and there is really very
little in terms of engine requirements to make that move. One
thing we will be looking for is for the Government here to signal
that they will be pushing the standard-setting body to move from
five to 10%, and then we will set targets for biofuels to 10%
when that move has been made. The only other thing I would like
to say in terms of agricultural sourcing is, yes, there clearly
is land across Europe that can be used for biofuels and we should
make the most of it. I think we should also look at how, the biomass
potential worldwide, which is quite considerable, can make that
contribution, not just in this sector, but I am sure you will
be looking at other sectors where there is that potential. So
we should not be constrained by the set-aside production or the
tenth of the land mass required from 5%. Clearly, we have plenty
of potential land that we can use, but we should not set that
as a short-term limit to making a more meaningful contribution
to carbon reduction.
Q86 Mr Williams: I think the point
that the NFU were making is that the 5% target is possible through
domestic supply of material, even though we are only 0.3% in 2006.
Mr Sutcliffe: That is absolutely
right, that agricultural potential is not a limit here, no.
Mr Hilton: I think it is one of
the often neglected facts—and I am sure the NFU made great
play of it—that the UK has historically had the most efficient
arable sector in the world. That is without growing products specifically
for biofuels. I think there is a huge ability to unlock additional
benefits. I mentioned in my submission the National Non-Food Crop
Centre, which could achieve an awful lot of things if it had a
base processing industry to release agricultural co-products.
There are an awful lot of efficiencies that will be unlocked from
this industry, even if we go to two or 3% in the short term, because
we will really be producing stuff. I think the industry will be
inordinately more efficient by 2010, and part of the problem in
predicating the efficiency of the industry at the moment is that
it always suffers badly, when ten-year old information is used
about biofuels and theoretical information is used about things
like hydrogen, to kick-start the industry to whatever percentage
will allow us to sit here in two years' time and have the discussion
on real facts.
Q87 Mr Williams: The European Biofuels
Directive is almost twice as high in terms of inclusion as the
RTFO. If Britain were to achieve that, would that be done with
more than just domestic production of material?
Mr Sutcliffe: I think across the
piece we will see UK domestic production and feedstocks from around
the world produced sustainably being part of the mix. The key
to this is growing the overall cake for everybody, being competitive,
as Graham says we are, and ensuring that, for example, our purchase
of UK-produced rapeseed oil, which is, as I say, the biggest in
the last 12 months, grows, so we have an interest in industry
that can be supplied. Rather than focusing on a domestic versus
imported, let us make sure we get an industry first, I suppose,
that is competitive.
Q88 Mr Williams: You say that your
purchase of domestic rapeseed oil is the highest in this country.
What percentage of your total material is supplied by rapeseed
oil?
Mr Sutcliffe: It is significant,
and it moves between winter and summer so we have not given specific
percentages—and I have to say it is not a great claim because
there is not much of a biofuel industry here in the UK yet. That
is really my point, getting the industry, getting the growth will
mean there are more opportunities for UK agriculture to compete.
Q89 Lynne Jones: Both the Petroleum
Industry Association and the World Wildlife Trust have told us
that the CO2 saved would be greater per hectare if,
instead of emphasising biofuel production, biomass production
were used for electricity and heat. What do you say to that? Why
is there so much emphasis on biofuels and not that much on biomass?
Mr Hilton: As somebody with a
significant interest in the biomass sector, there are a number
of points I would like to make. The first is that it is not either
or; there is actually a very heavy interplay between the two.
For instance, there is a significant amount of straw generated
by growing wheat for bio-ethanol, and the varieties of wheat that
produce the highest starch and therefore the highest alcohol yield
also have the longest straw, also have the lowest nitrogen fertiliser
input, so there is a real win-win available in this. I am slightly
cynical about the input of UKPIA—and I think it is applied
also to the subject of carbon accreditation, where the biofuels
and biomass industry were both adamant that their contribution
to carbon savings should be independently audited. The reason
that they have taken a slight step back from that, much to the
puzzlement of an awful lot of Government officials and MPs, is
that the oil industry saw that as a marvellous opportunity to
delay institution of the whole industry, so that there has been
a real battle going on, where I think a simple accreditation system
could have been offered up by the industry but it has been abandoned
because we saw it was being used as an obstacle for starting production.
Q90 Lynne Jones: We will move on
to accreditation schemes later, but are you saying that, per hectare,
if you are using a crop that you can use partially for biofuels
and partially for biomass for heat and power, that you will save
more CO2 than using that exclusively for biomass?
Mr Hilton: I would refer to my
earlier answer which is that my personal belief is that it is
not either/or. I think if we made a decision now we would be guessing,
and there has been far too much of that in promoting the bioenergy
industry altogether. There is certainly a wood resource in the
UK which is more than capable of providing all the biomass heating,
which is my company's specific interest, and we know that we can
reduce carbon emissions by 40% of that achieved by even the wildest
ambitions of the nuclear industry.
Q91 Lynne Jones: But it is a combination
of heat and electricity that we are talking about.
Mr Hilton: Indeed. We think that
heat is the most efficient use of wood, for instance, and that
is what we are championing. I think the immediate availability
of the technology to convert arable land into producing liquid
biofuels rather than electricity or food, suggests that we should
go down that road and then review things when we have real evidence.
The majority of the environmental NGOs are now interested in having
real industry in all sectors—then we can compare the figures.
Until we do so, we are guessing, and taking a view on the environmental
impact of biomass from the Petroleum Industry Association would
not be the first place I would start. But you will have a chance
to ask them.
Mr Sutcliffe: If I may add to
that, I think it is not, as Graham said, a question of either/or,
it is a question of and. We need to make progress in the transport
sector in the same way we need to in the generation sector and
the domestic sector. We need to make progress across all three
sectors, so I do not think events say that we have to choose today
between using land for heat generation, for example, in small-scale
CHP or for crops or for transport use. We do know that the transport
sector today—this is a measure that we can take—can
make a significant difference to the sector but has made no progress
to date.
Q92 Lynne Jones: Could we make a
more significant difference by having greater fuel efficiency
and also less unnecessary transport?
Mr Sutcliffe: Absolutely right.
We need to do that as well. It is not a question of either/or,
it is a question of and. We need to bear down on carbon emissions
from cars, improve the energy efficiency in the domestic homes,
ensure that the ROC mechanism in power generation is ever more
efficient in producing renewables, but we cannot afford to say
that just because energy saving light bulbs is the most efficient
measure of carbon reduction—which I think it probably is,
along with loft insulation—that we should somehow ignore
the transport sector where we have made no impact at all. It is
a question of: Get an industry up and running; make the savings.
We may have a choice later on, whether if we start to look at
land use we are having to make choices, but we are nowhere near
that situation today.
Chairman: Mr Hilton, you may not
have a couple of hours to spare, but, if you did happen to have
a couple of hours to spare and were able to look through the evidence
we took last week on the use of biomass for heating, the impression
I gained was that people were almost thinking as they were giving
evidence of little ideas to make it easier to use biomass in the
context of heat. I walked away with the impression that it was
getting into what I call "the all-too-difficult column".
You give a much more positive impression that it can be done and
there are not too many barriers to progress. Perhaps you might
have a look at last week's evidence and tell us if there are some
ways of removing the barriers which our witnesses last week erected
in terms of biomass for heating. That would be very helpful to
us.
Q93 David Lepper: Before I come back
for a moment to this question of 5% by volume target, could I
take you back to the beginning of your evidence. You talked about
the pluses and the minuses of current policy and mentioned the
five departments involved in policy making, with no leader among
them. If you had to nominate one of those departments to be the
lead department, which would it be?
Mr Hilton: I think for road transport
fuels it would be the Department for Transport; for biomass from
heat I think it would be Defra. It is partly the number of departments
but it is also the approach that I think is one of the obstacles.
If I had to say the two things which are most difficult, it is
knowing who to talk to but also knowing what the alternative will
be tomorrow. I think the biggest single difficulty here—and
it goes back to the previous question in terms of land use—is
a tendency by Government to try to micro-manage. I think, as a
result of that, there are very strict definitions of things like
biomass, and what is and is not specifically grown biomass. An
example of that which we saw a couple of years ago was the ARBRE
project which, let us not forget, had absolutely zero impact—certainly
zero positive impact on carbon—because somebody had prejudged
that some things should be appropriate biomass and some things
should not be. There is a terrible tendency to say to industries—who
are prepared to risk their money, and you can call it losses or
investments but they are actually the same thing. They will invest
in what they believe are technologies that have a long-term possibility;
they will make those choices to hit the targets that they are
given. The danger with an awful lot of what goes on at the moment
is that we are told we are going to go from London to Manchester
but we should first go via Brighton, Oakhampton and a thousand
and one other places along the way. I think that in itself is
a major mistake, and when you have three or five different people
supplying the road maps it becomes singularly unhelpful.
Q94 David Lepper: Mr Sutcliffe, do
you share those views?
Mr Sutcliffe: To be honest, you
are the experts in government machinery.
Q95 David Lepper: Oh, yes!
Mr Sutcliffe: All I am looking
for is outcome which is clear and ambitious.
Q96 David Lepper: Okay. So it is
knowing who to talk to at the right moment, the paths of connection,
that are important.
Mr Hilton: I think history suggests—and
I have been involved directly in trying to address Government
objectives on biofuels for three years now—that just when
you think you have delivered what you are being asked for, the
goalposts move.
Q97 David Lepper: Could I come back
to this question of the 5% inclusion level. I am just wondering
what your view is of the role of the vehicle manufacturers here
in the UK and the length of engine warranties that they offer
on driving up standards here. You talked about the move to push
up from 5% to go beyond that, but are we stuck with a situation
where there is a kind of timidity on the part of manufacturers?
Mr Sutcliffe: I think moving up
from five to 10% is not a big technical issue. Clearly, if you
were an engine manufacturer, why would you do it, if it might
increase your costs or if you would need to change you warranty
claims? I think they are looking for a strong steer from Government,
be it at the EU level, and then they will make the change necessary.
They are happy to do that, I am sure.
Mr Hilton: In terms of fuel distribution
and motor car, it is very similar to unleaded. I think everybody
has to go at the same time. An awful lot of the motor manufacturers
say their cars will run on 10% now, but I think inconsistency
again is the nightmare here, that if you turn up in a ten-year-old
car to a filling station, not knowing if the fuel in that filling
station is appropriate for your car, everybody has a headache
about it. But I think those things are well in hand and our understanding
is that the European standards bodies are already looking hard
at a move to 10%—and I think that is everybody's assumption;
we just have not embodied that in policy at the moment.
Q98 Chairman: Is that 10% by volume?
Mr Hilton: Yes.
Q99 Chairman: I just want to go back
to a little point you made earlier: I wonder if you have any impression
that part of the business of the project or the Government's position
reflected the fact that departments had been told by the Treasury
that there was only so much money to go round and this had been
spread out over the various bio options.
Mr Hilton: No, I think the 30
pence cap on a combination of buy-out and duty . . . . The 30
pence cap started when we had 20 pence duty derogation. At that
time, with much cheaper oil, industry said to the Treasury they
needed 27/28 pence. That figure has got locked in somewhere, so
that there is now a view that 30 pence is generous and I think
the 30 pence cap is a complete accident. If the 30 pence cap is
announced in the Budget, it would be disastrous. My personal view
on the reason it is there is that the messenger does not want
to get shot—and that messenger, for the record is DfT. They
believe you can add the two things together. I believe that is
a fallacy. So they have taken the 30 pence which would have been
a comfortable support level—with which I think we all agree—and
said, "You can get to a 30 pence total by adding buy-out
and duty together," and you cannot.
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