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
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