Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


Examination of Witnesses (Questions 420-439)

MR ANDREW PERRINS AND MR MARTIN JOHNSON

10 MAY 2006

  Q420  Mr Drew: But if you were to grow that, which we have got to if you are serious about it—

  Mr Johnson: Biofuels have a lower energy content than fossil-based fuels, so if you get up to high blends, like E85, you can have a significant reduction and essentially you need more litres to go the same distance, but at the kinds of blends we would expect in the next five, ten, 15 years, that is not going to be a significant issue and ethanol has an oxygenating benefit which compensates for some of the calorific loss, so I think at low blends it is not an issue; at higher blends it is more of an issue.

  Q421  Daniel Kawczynski: What has been fascinating listening to you is that you mentioned how far ahead Sweden is and you have acknowledged that we are significantly behind as a country.

  Mr Johnson: Behind Sweden.

  Q422  Daniel Kawczynski: And Brazil?

  Mr Johnson: Yes.

  Q423  Daniel Kawczynski: What was the strategy then, your strategy or your department's strategy? Did you genuinely want to encourage more ethanol production, because if that is the case you have obviously failed? In my county [Shropshire], which is the largest landlocked county in Britain, we have one petrol station where you can buy this fuel, and that to me is abject failure, so I just do not understand what the scenario is.

  Mr Johnson: The Chairman asked at the beginning about the strategic context for the development of biofuels. I made the point that it is part of the climate change programme, it is part of the Government's response to climate change. It is a long term commitment that we are looking at. I think it is fair to say that the amount of biofuels you have now as a share of road fuels is 0.3 of 1%, that that is a very low level but we have said we will get up to 5% by 2010 and we would like to go beyond that subject to the European Commission changing the fuel quality standards after that. Where we are now is at mid-table in Europe but we would expect with this mechanism, which I think is a world-leading mechanism; the Commission have shown great interest in it, it is a long term mechanism, we would expect to move forward quickly. In terms of the Government's commitment, it is there. If you look at the response to the Budget announcements from people like Sean Sutcliffe, some of the bioethanol companies, Bioethanol Ltd, Losanoco, generally these are the real people on the ground. These are the people who are going to go and do this. They were positive about the announcements. It was not everything they wanted but they felt it was a step forward and that this is a viable business, and I think that is an important test.

  Q424  Daniel Kawczynski: Consumers definitely want it and certainly a lot of people who speak to me in my constituency feel pretty strongly about wanting to use this new type of technology, and also farmers want to be able to grow the crops, and yet they tell me that there is very little incentive, as the Chairman indicated earlier, from a fiscal perspective, but also very little information going out to farmers as to what prices will be like. Will the 20p duty be maintained over a longer period of time? It is very difficult to enter a market if you do not have some form of information or stability. I am very concerned that the Government is giving very little incentive to farmers to go into this and to consumers to have the opportunity of buying it.

  Mr Johnson: One of the objectives of the announcement at Budget time was to set this mechanism in a long term framework and to be clear what the targets would be, what the financial rewards would be. I said that the combination of duty and buy-out will be 35p in 2009-10, 30p in 2010-11, and on that basis we would now hope to see contracts being signed between biofuel producers and oil majors and between farmers and producers. It will take time to develop but the RTFO starts in two years' time and there is a lot of detail there now. We are trying to respond to what people have said to us during the stakeholder discussions about certainty, about clear signals. I fully take your point about a lack of activity up to now and where the market share is, but the announcements that are there and the policy which has been developed are designed to move us forward.

  Q425  Chairman: Can we ask you about the second generation biofuels? The document The Partial Regulatory Impact Assessment on an Enhanced Capital Allowance for Biofuels Production Plant is a fascinating document and perhaps you could interpret this for us. First of all, is it the objective to stimulate second generation biofuels?

  Mr Johnson: That is part of the objective. I would describe the primary objective of this scheme as stimulating investment in the cleanest biofuel production plant, which includes second generation plant.

  Q426  Chairman: So all the ones that have been started will not qualify for this. What modelling have you done, because on table 3 of the document you have got a series of expenditure items? Perhaps you could make certain that the Committee understands what table 3 tells us.[4]

  Mr Johnson: This is on page 16.

  Q427  Chairman: Correct.

  Mr Johnson: Does everyone have a copy of table 3?

  Q428  Chairman: They probably do not because it is one of those things that I discovered on my voyage of exploration, having read the Red Book. I am most intrigued, by the way, that in "Measures to protect the environment" in the Red Book this thing does not appear although it does in the text, but that is only a minor point.

  Mr Johnson: What the table does, just for the benefit of others, is that within an RIA you have to set out policy options, you have to have the objective up front and then say what the options are, and then you finish up by saying which policy lever you have chosen. Table 3 sets out the Exchequer costs of the different options around promoting the development of the cleanest biofuel plant. In the final option in the table, Chairman, 3(c), "ECA[5] based on eligibility criteria", you can see the numbers running across the right. These are the Exchequer costs which have been put into the public finance assumptions for this scheme, so the first year, as you can see, is 2007-08. That means that we expect the scheme to start in early 2007, so the first year in which we would incur costs would be that first year.

  Q429 Chairman: Let us make certain that we understand what we are talking about in terms of the capital allowances. It is a scheme which gives you a 100% write-off potential in year one; is that right?

  Mr Johnson: That is right, as opposed to 25% on a writing down basis.

  Q430  Chairman: So if I come along and build a plant and I spend £25 million on the plant in year one, assuming by some piece of magic of engineering I can have it up and running, and I generate £25 million worth of profit, then I can offset £25 million worth of my capital expenditure against my £25 million of profit; is that right?

  Mr Johnson: That is right.

  Q431  Chairman: So in one hit we could wipe out, if we had a big enough plant, the entire capital allowance scheme that you are proposing. Is that correct?

  Mr Johnson: You would use up your capital allowances in that first year.

  Q432  Chairman: No, you would use them up because you have cash constrained this, have you not?

  Mr Johnson: Sorry; I do not think I fully understand your question.

  Q433  Chairman: You put down the Exchequer cost in year one as £25 million, and if it is 100% write-off of an expenditure of capital against profit, am I right in saying that effectively you believe that you will relieve £75 million worth of potential investment? Is that what you are looking at?

  Mr Johnson: I think it is a little bit more complex than that because what these numbers do is represent the additional cost to the Exchequer, so in order to work that out you have to calculate what you would have incurred anyway under the current allowances scheme of 25% and the 25 that you see in 2007-08 represents the additional cost.

  Q434  Chairman: So in other words it is not 100%; it is a 75% add-on?

  Mr Johnson: Exactly; that is right.

  Q435  Chairman: But it amounts to 100% write-off for the taxpayer?

  Mr Johnson: Yes, which means that the Exchequer takes a hit, as it were, which is represented here in this year.

  Q436  Chairman: You can see what I am driving at; I do not want to detain the Committee any longer on this, but it would actually be quite helpful to know what are the capital investment criteria that lie behind the numbers in this table because, clearly, if what you are saying is that you have got some good feedback from the Budget and that there are projects coming along, then rather rapidly they should have some visibility. If you believe that this table is a fair representation of what you think you are going to be in for, I am intrigued to know how you calculated these numbers. Where did they come from?

  Mr Johnson: They came from a series of discussions and submissions that we had from prospective investors, companies, over a period of nine months or a year, so they are material from companies based on companies' plans. I should stress that they represent cautious assumptions on our part. What that means is that they are at the upper end of the scale. This represents the expenditure that would be there if all the planned plant went ahead. To answer your question, they are based on the material that we have had from the kinds of companies that you have heard about over the sessions.

  Q437  Chairman: I think we would find it very interesting because I am quite certain the Committee in future will want to track the progress to understand what the capital investment sums are which are in there. I presume that the normal rollover relief applies in terms of these allowances, does it?

  Mr Johnson: I have to say I do not know. They work in the usual way. There is nothing particularly special about this other than that it is 100% allowance rather than 25%.

  Q438  Chairman: But that is only relevant if you are making any profit.

  Mr Johnson: That is correct, but there are various ways that companies can—

  Q439  Chairman: At least that is where the rollover relief part comes in, so that is why I was asking that question. You are hoping that it is best practice. Have any of the people who have indicated that they would wish to invest in this area indicated that the Fischer-Tropsch method is one that they wish to invest in?

  Mr Johnson: No, they have not on that specific route, but on the other advanced process which we refer to in the qualifying criteria, Losonoco, whom you may be aware of, do plan plant which will use cellulose to ethanol acid hydrolysis, I think, so that is one advanced process which one company has firm plans to use.

  Chairman: Lynne, did you want to follow up on that?


4   http://www.hmrc.gov.uk/ria/eca.pdf (Page 16) Back

5   Enhanced Capital Allowance Back


 
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