Memorandum submitted by HM Treasury (Bio
33)
Enclosed are four papers:
A. Note on how the 20ppl biofuels duty incentive
was arrived at.
B. More information on the proposed biofuels
ECA scheme.
C. Govt assessments of carbon savings from different
policy routes.
D. A specific type of biofuels production process—Losonoco's
acid dilute hydrolysis—and how it works. This note is from
Alan Banks, CEO of Losonoco.
A. NOTE ON
THE 20PPL
DUTY DIFFERENTIAL
FOR BIOFUELS
A duty differential of 20 pence per litre was
introduced for biodiesel from July, 2002, and for bioethanol from
January, 2005.
In deciding that the duty incentive for biofuels
should be set at 20 pence per litre (ppl), Ministers took a number
of factors into account. The starting point—and the primary
consideration—was the environmental benefits that biofuels
offered, in the form of reductions in CO2 emissions
of the order of 55%. It was possible to quantify the monetary
value of these savings at about 3ppl, drawing on analysis within
Government on the marginal social cost of carbon, which established
a figure of £70 per tonne in 2000 prices, rising at the rate
of £1 per year in real terms.
Ministers also considered other benefits that
could be gained from increased use of biofuels, including security
of fuel supplies, development of new technologies and recycling
of waste products. Although it was difficult to quantify these
benefits in monetary terms, Ministers concluded that they justified
increasing the duty incentive above 3ppl. In setting the final
figure, Ministers took into account also that biofuels production
costs were greater than those of conventional fuels, and they
concluded that it would be appropriate for the duty incentive
to reflect some contribution to those additional costs. Ministers
also took the view that it was desirable for all sectors to make
a contribution towards carbon-saving, and 20ppl was broadly comparable
to the costs of other carbon-saving measures in the transport
sector.
The decision taken by Government to introduce
a Renewable Transport Fuel Obligation, announced in November 2005
and built on in the Budget 2006 announcements, builds on the Government's
policy commitment to biofuels. It sets out a long-term framework,
giving the industry the additional certainty they have requested,
while seeking to ensure biofuels can be delivered at the lowest
economic cost over time through seeking to exploit economies of
scale and by developing innovative production techniques such
as second generation biofuels. Extending the 20 pence per litre
duty incentive to 2008-09—the first year of the RTFO—also
responds to the desire of the industry to maintain certainty.
B. EXCHEQUER
COST CALCULATIONS
FOR THE
PROPOSED ECA FOR
CLEANEST BIOFUELS
PLANT
Background
1. Capital allowances allow the costs of
capital assets to be written off against a business's taxable
profits. They take the place of depreciation charged in commercial
accounts. The main rate of allowances for plant and machinery
is 25% per year, on a declining balance basis.
2. Enhanced Capital Allowances (ECAs) allow
a greater proportion of the cost of an investment to qualify for
tax relief against a business's profits of the period during which
the investment is made. They bring forward the time tax relief
is available for capital spending.
3. The proposed ECA will allow businesses
investing in the "cleanest" (most carbon-efficient)
biofuels production installations to claim 100% relief on eligible
plant and machinery (though it should be noted that implementation
of the ECA is subject to State Aid approval).
Cost calculation process
4. The net Exchequer effect of a Budget
measure is generally calculated as the difference between applying
the pre-Budget and post-Budget tax and benefit regimes to the
levels of total income and spending at factor cost expected after
the Budget.
5. Investment data underlying the ECA cost
calculations is based on stakeholders' own investment projections,
shared with Treasury/HMRC on a confidential basis during stakeholder
discussions. For each year's projected investment in the cost
calculation, we calculate the current capital allowances available
(without the ECA) and those after the scheme's introduction. In
the "current" (without ECA) scenario we assume that
5% of investment would have qualified for the existing ECA for
energy saving technologies (eg investment in good quality Combined
Heat and Power, CHP)[12]
6. We make the following assumptions about
the businesses involved:
(i) They are all incorporated and pay corporation
tax at the main rate of 30%. This represents a cautious assumption
for smaller companies, which may pay corporation tax at a lower
rate
[13].
(ii) They have sufficient taxable profits
to claim their capital allowances against, and they claim the
available capital allowances in full at the earliest opportunity
[14].
7. Costs are calculated as the difference
between the estimated relief claimed with and without the ECA.
After making adjustments to allow for the delay between when investment
is made and the effect on tax receipts is felt, we estimate costs
as follows:
| |
2007-08 |
2008-09 |
2009-10 |
| Exchequer effects[15] (£m) |
-30 |
-20 |
-35 |
8. Because of our cautious approach to both the projected
investment figures used and the necessary assumptions, these represent
the upper bound of expected costs of the ECA.
9. These costs differ slightly to those included in the
Partial Regulatory Impact Assessment (RIA) published in December
2005 and in the 2005 Pre-Budget Report. This is because our cost
estimates were revised at Budget 2006 as a result of updated stakeholder
information on proposed investment.
C. GOVERNMENT RANKING
OF CLIMATE
CHANGE POLICIES
The Climate Change Programme Review, published on 28 March,
2006, and documents published alongside it provide the most up
to date and comprehensive comparison of the cost of carbon abatement.
This can be found at:
http://www.defra.gov.uk/environment/climatechange/uk/ukccp/index.htm
Greenhouse Gas Policy Evaluation and Appraisal in Government
Departments (Chapter 3, from page 21-23), published by Defra,
explains how the Government can go about ranking different policy
interventions and the pros and cons of each measure. This can
be found at:
http://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/greengas-policyevaluation.pdf
Synthesis of Climate Change Policy Evaluations, also
published by Defra, looks at the past and projected emissions
savings of current policy measures, and ranks them by cost effectiveness
(see page 21-33). This can be found at:
http://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/synthesisccpolicy-evaluations.pdf
The Partial Regulatory Impact Assessment (RIA) on the
Renewable Transport Fuel Obligation (RTFO), published on 10
November, 2005, alongside the Feasibility Study on the RTFO, set
out figures for the estimated resource costs of biofuels (see
section 5, pages 14-15). This can be found at:
http://www.dft.gov.uk/stellent/groups/dft—roads/documents/pdf/dft—roads—pdf—610330.pdf
D. LOSONOCO: TOMORROW'S
FUEL TODAY
Process Description May 2006
Losonoco has developed a process to convert lignocellulosic
biomass (woody biomass) into fuel ethanol. The principal by-products
of the process are liquified, purified carbon dioxide which is
sold as an industrial gas, and clean biofibre which is used for
power generation.
Losonoco's process is based on two-stage dilute acid hydrolysis.
It produces very little waste and features negligible emissions.
The whole process has been designed as an environmental solution
for the re-use of forestry, construction, municipal and agricultural
waste streams. By extracting the sugars from woody biomass before
using it for power generation we are effectively creating two
energy products in place of one: low-emission transport fuel and
electricity instead of just electricity. The diagram below summarises
the process:
The process for converting lignolellulosic biomass into ethanol
has five main steps:
— Feedstock preparation: Chopping, shredding and
steam treating the feedstock to soften it and start the process
of breaking down the lignin.
— Acid hydrolysis: Using dilute acids, temperature
and pressure to break open the lignin and release the natural
sugars.
— Sugar separation: Removing the acid/sugar solution
from the hydrolysate; separating the sugar from the acid and neutralising
it.
— Ethanol manufacture: Fermenting the sugars into
a "beer"; removal of the wet ethanol from the beer by
distillation and removing the water from the ethanol.
— Carbon dioxide manufacturing: Capture, purification
and liquification of the carbon dioxide.
As previously explained there is a strong industrial symbiosis
with power generation, and Losonoco's engineering designs include
a bio-power co-generation facility. The ethanol plant provides
the power plant with high energy content bio-feedstock which is
combusted to produce steam which is passed through a turbine to
produce renewable electricity. The ethanol plant uses the power
plant's waste steam as its main energy source, and returns the
water from the steam so it can be re-cycled back into power production.
FEEDSTOCK PREPARATION
Woody biomass is essentially comprised of cellulose and hemicellulose-based
sugars wrapped in lignin. The cellulose provides C6 sugar molecules
(similar to glucose) and the hemicellulose provides C5 sugar molecules
(similar to zylose). Losonoco's acid hydrolysis process un-wraps
the lignin and releases the sugars. The output from this process
is a soggy fibrous material comprising lignin, acid and dissolved
sugars.
Lignin is a very tough substance consisting of plant fibre
and various resin and glue-like compounds. Losonoco uses a two
step process to break down the lignin and release the sugars:
Step 1: Preparation: The feedstock is chopped and shredded
down to pieces of no more than 2 cm length. This is to increase
the surface area to ensure consistent wetting by the acid solution
and steam and to make the feedstock easier to handle in a continous
flow system.
Step 2: Steam Explosion: The chopped wood is passed into
a pressure`vessel where it is rapidly heated to around 220C
for five minutes by the action of steam. At the end of the heating
period the vessel is vented to air which rapidly drops the pressure
and "explodes" the lignin. It is not in fact an explosion
but the rapid decompression softens and opens up the lignin fibres
to make them easier to break down with acid.
DILUTE ACID
HYDROLYSIS
Dilute acid hydrolysis is a continuous flow process. The
chopped and steam softened feedstock is passed by conveyor into
a funnel leading to a bank of six vertical digestion vessels of
5 tonnes capacity each. These are standard digesters as used in
the paper industry with the difference that they are lined with
titanium or an equivalent material such as monium. This is done
to prevent decay of the vessels from the hot acid process. On
entering the digesters the feedstock is sprayed with dilute sulphuric
acid at a concentration of 0.8% to 1.4%.
The digesters have artesian screws inside them to pass the
acid-wetted feedstock through and out into the liquid/solid separators.
The digesters are maintained at a temperature of around 180C
by use of a steam jacket, the steam being waste steam provided
by the power generation facility, and at a pressure of around
2 bar. Residency time in the digesters is around 10-12 minutes
during which time the sugars are hydrolysed from the lignin. The
hydrolysis process is a catalysed chemical reaction and occurs
instantanously once the feedstock reaches the correct operating
parameters.
Losonoco will be using a two-stage hydrolysis for the eucalyptus
wood. This wood contains around 40% by wood cellulose, which produces
C6, or glucose-like, sugars and 20% by weight hemicellulose which
produces C5, or xylose-type sugars. The first hydrolysis stage
releases the C5 sugars from the feedstock, and the second stage
releases the C6 sugars.
SUGAR SEPARATION
The output from the digesters is a soggy fibrous mass containing
the solid lignin and the liquid acid and sugars. A polymer, for
flocculation, is added and the acid and dissolved sugars are separated
from the lignin in one of four vertically stacked filter presses.
The lignin is dried and mixed with the waste biosolids from
the fermentation process. It will be sold to the proposed co-located
power generation facility for use as a solid fuel. The energy
value of this solid fuel is around 29 GJ/dry tonne which is 45%
higher than the energy value of the eucalyptus wood itself which
is around 20 GJ/dry tonne.
The acid/sugar filtrate from all four presses is pumped through
a primary mechanical filter and a final resin guard filter to
the acid/sugar separation units where the acid is removed by anionic
exchange. The sugars are neutralised by the addition of lime and
this produces the only significant waste product of the process,
gypsum, the amount of which depends on the amount of lime used
and the acidity of the mix. Another benefit of liming is that
any impurities in the acid-sugar mix caused by impurities in the
feedstock are captured by forming compounds with the lime.
ETHANOL MANUFACTURE
The sugars are concentrated in an evaporator before being
passed into a bank of six fermentation tanks. Losonoco uses a
proprietory "thermophyllic" fermentation process in
closed fermentation tanks. Thermophyllic fermentation improves
on standard yeast fermentation in three important ways:
— Yeast fermentation will only convert the C6 sugars
to ethanol, whereas thermophyllic fermentation will convert both
the C6 and C5 sugars, providing a 20% increase in the ethanol
yield.
— Thermophyllic fermentation occurs around three
times faster than yeast fermentation which provides significant
gains in process efficiency.
— Thermophyllic fermentation takes place at 65C
compared to 32C and is exothermic—that is it gives
off heat. The hotter fermentation broth means that much of the
ethanol evaporates off during fermentation to be captured in the
distillation train. This continuously reduces the ethanol concentration
in the broth which benefits the fermentation process.
The ethanol is removed from the "beer" using standard
distillation equipment and steam from the gasifier. At first hydrous
ethanol is produced and this is de-watered to 99.5% anhydrous
ethanol in a two step process: steam is used to get the ethanol
to around 77%, followed by membrane filtration. The ethanol is
stored in standard cylindrical, cone-bottomed gasoline storage
tanks.
CARBON DIOXIDE
MANUFACTURE
A great deal of carbon dioxide is given off during fermentation.
It is captured and passed to a standard purification plant where
it is purified to industrial or potable standards. This carbon
dioxide is sold into the food, beverage and industrial process
industries.
HM Treasury
June 2006
12
This is a conservative estimate of the level of investment that
would qualify for the existing ECA; the majority of cases involve
CHP, which typically represents more than 5% of total investment
costs for the plants involved. In addition, some other qualifying
technologies may have a more modest application in the manufacture
of biofuel. Back
13
This will also differ from the tax rates paid by any unincorporated
businesses, but we expect the majority of claimants to be companies. Back
14
In reality allowances are not always claimed at the first opportunity,
and where there are no taxable profits even those that are claimed
may be used to create losses that aren't utilised until later
years. This assumption is therefore a cautious one. Back
15
I.e. negative figures represent an Exchequer cost. Back
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