Memorandum submitted by British Sugar
plc (Bio 12)
INTRODUCTION
1. This submission will concentrate on British
Sugar's particular interest in producing bioethanol as a road
transport fuel. The company announced in December 2005 that it
would be going ahead with the construction of a £20 million
bioethanol plant at its sugar factory site in Wissington, Norfolk.
The plant will be completed and operational by early 2007 and
will manufacture 55,000 tonnes (70 million litres) of bioethanol
each year from sugar beet. The decision to go ahead with this
project is testimony to British Sugar's confidence that the policy
environment has improved sufficiently to justify some investment
in UK domestic bioethanol production. However, as will be shown
in this paper, there are still a number of steps that must be
completed before there can be confidence in the development of
a domestic biofuel industry that will be capable of meeting 5%
and more of the UK's transport fuel needs.
THE COMMITTEE'S
QUESTIONS
Q1. What is the real scope for biomass and
biofuels to contribute to tackling climate change? What proportion
of the UK's energy and transport fuel needs could they provide?
2. It has been recognised by the Government
and others that biofuels can make an immediate contribution to
reducing carbon emission in the transport sector. Road transport
accounts for about a quarter of the UK's carbon emissions and
with increasing car ownership and usage there is every expectation
that this figure will rise in the future. The technology to produce
biofuels from conventional crops such as wheat, sugar beet and
oilseed rape is available today and the Government have confirmed
that a 5% biofuels usage would reduce carbon emissions by at least
one million tonnes. However, it must be noted that biofuels will
make a contribution to tackling climate change—they cannot
provide the whole solution. They should be seen as part of the
mix of energy sources that will be needed to reduce carbon emissions
and help to tackle climate change.
3. Today the UK has sufficient crop surplus
production of cereals and sugar that could be converted to bioethanol
to replace at least 5% of all the petrol used. Beyond this, crop
yields are improving giving a larger raw material volume year
on year. Technologies are also being developed that will convert
lignocellulosic feedstock (woody biomass) into bioethanol to widen
the production scope even more. Raw materials include those parts
of conventional crops that are not currently used for bioethanol
production, wood wastes and energy crops.
4. It should also be noted that there is
also considerable potential for increased biofuel feedstock production
on currently available UK arable land. The DEFRA 2005 census states
that the UK has a total of 5.8 million hectares of land under
arable production, with an additional 0.6 million hectares under
set-aside. If just 10% of this combined total were reserved for
energy crops, (a reasonable long-term target) then an additional
640,000 hectares could be made available, generating another two
million tonnes of bioethanol. This would be equivalent to an additional
10% of UK petrol substitution, over and above the figures quoted
in paragraph 3. Imports of either feedstocks or end product would
further add to this contribution. There is consequently potential
for biofuels to substitute a highly significant proportion of
UK transport fuel in both short and medium term with equivalent
climate change benefits.
5. A combination of the measures explained
in paragraph 3 and 4 demonstrates that a biofuels target of 20%
would be achievable by 2020.
Q2. How cost-effective are biomass and biofuels
in comparison with other sources of renewable energy?
6. Currently bioethanol costs between 1.5
and 2 times more than petrol to produce. As technology improves
and the price of fossil fuels increases this difference will get
smaller. The European Commission has estimated that with technologies
currently available, EU produced bioethanol would become competitive
with oil prices at about €90 per barrel. It should also be
remembered that a new biofuels industry will be competing with
the established oil industry with decades of sunk costs.
7. Biofuels are currently the only viable
replacements for petrol and diesel in the transport sector. If
used in conjunction with vehicle technologies like hybrid engines,
the carbon savings are multiplied. If there is significant progress
towards the use of hydrogen in vehicles in future decades, biofuels,
in particular bioethanol, can also provide a source of renewable
hydrogen for these new technologies.
Q3. How do biofuels compare to other renewables,
and with conventional fossil fuels, in terms of carbon savings
over their full life-cycle?
8. Bioethanol can be produced in the UK
from UK crops with a carbon lifecycle saving in excess of 50%
when compared to today's conventional fossil fuels (ref LowCVP
work on bioethanol life-cycle). If technologies such as high efficiency
Combined Heat and Power, or biomass feedstocks are used, the carbon
saving can reach over 80%.
9. Currently carbon emissions from UK refineries
stand at 19.8 million tonnes of CO2 and from offshore
activities 19.1 million tonnes of CO2 per year, with
these numbers increasing. As current conventional oil reserves
are exploited oil companies will move to the more difficult extraction
technologies such as using tar sands and ultra heavy crudes which
will increase costs, energy consumption and carbon emissions further.
As these negative impacts get ever greater then the most sensible
course will be to switch to greater production of carbon saving
fuels such as biofuels. We believe that the marginal road transport
fuel used in the EU will increasingly be from these non-conventional
sources from 2010 onwards.
Q4. Not all biomass is equal; potential carbon
savings depend on, for instance, farming practice. What can be
done to ensure energy crops are sustainably produced?
10. With progressive CAP reform now well
underway, there is an increasing economic imperative for farmers
to reduce the use of agricultural chemicals and thereby to improve
the sustainability of production. There is a considerable body
of legislation in place to ensure sustainable agricultural production,
such the Nitrates Directive, the Water Framework Directive and
the more recent rules on cross-compliance following CAP reform.
There are also voluntary schemes which address sustainability
issues such as the Assured Combinable Crops Scheme and the Little
Red Tractor scheme.
11. It is the Government's intention within
the operation of the Renewable Transport Fuels Obligation to introduce
mandatory reporting of both carbon saving and sustainability compliance.
This monitoring process, which is likely to be based on existing
legislation and schemes will ensure that biofuels production is
carried out according to sound environmental principles. If, as
seems to be the case from the European Commission's Biomass Action
Plan and Biofuels Strategy, there is an intention to introduce
similar schemes in other EU Member States, UK production should
not be put at a competitive disadvantage through the operation
of the RTFO.
Q5. What impact will UK Government and EU
actions have in increasing demand for, and production of, biomass
and biofuels?
12. The cost of biofuel production and market
inertia have combined to frustrate the development of a viable
biofuels industry in the UK. Government action has been essential
to kickstart production albeit in a tiny market segment (mainly
biodiesel from waste oil). It is clear that the introduction of
the EU Biofuels Directive in May 2003 provided a significant incentive
for Member States, including the UK, to look seriously at their
domestic policies for the promotion of biofuels and to re-appraise
their actions to reduce carbon emissions in the transport sector.
The introduction of a fuel duty rebate of 20p per litre for both
biodiesel and bioethanol (this latter only came into effect in
January 2005) has been successful in stimulating the development
of a small market, supplied in bioethanol's case by imports.
13. However, for production to grow to levels
that will make a significant reduction in carbon emissions, it
has become increasingly clear that Government action is needed
to stimulate demand and to create a real market. The Government's
announcement in November 2005 that it would introduce a Renewable
Transport Fuels Obligation from April 2008 has provided a much-needed
impetus to the development of a market. Work is going forward
on the precise details of the operation of the RTFO. The success
of the market will depend on the success of the RTFO in setting
targets and financial mechanisms that will give customers (the
oil companies) a real incentive to buy and producers a real incentive
to supply biofuels. If the RTFO mechanisms work as intended then
the potential for increasing demand and production will reach
the projected 5% usage level by 2010 and could reach 15% by 2015
and 20% by 2020.
14. Within the financial mechanisms of the
RTFO must come consideration of the future of the current 20p
per litre fuel duty rebate. What is important to British Sugar
as a potential large scale investor in the UK biofuels sector
is that the RTFO is a mechanism that will drive the creation of
a UK market of a size set by the Government targets and with the
price set by the balance of supply and demand. If the RTFO design
is successful in driving market behaviour such that the market
"clears" at the specified level; then the 20p rebate
is unnecessary. A good RTFO design, with little "leakage"
to incumbent fossil fuel suppliers will deliver the targeted biofuels
penetration at a lower cost than with a duty rebate and with no
direct cost to the Treasury. At this stage it is important not
to confuse any "cash out" penalty that the RTFO may
incorporate with the "cost" to consumers or indeed the
"support" to producers. With an effective mechanism
the cost to consumers will just be set by the open market price
of ethanol and not by an artificial "certificate" price.
In this regard it is important that the flaws from the power market
Renewable Obligation are not repeated in this area.
15. The Government has also announced that
it will introduce Enhanced Capital Allowances in 2007 for those
biofuel plants which can demonstrate the greatest carbon saving.
While this is a welcome development its ability to instigate significant
change should not be over-estimated.
16. As the UK looks to policies to implement
the provisions of the EU Biofuels Directive, the EU Commission's
thinking has moved on to giving a greater weighting to biofuels
within the EU's overall climate change and energy security policies.
It issued a Biomass Action Plan in December 2005 and will publish
its Biofuels Strategy in February 2006. These initiatives will
help to create markets and to raise public awareness of the cost-effective
contribution that biofuels can make to tackling climate change.
Q6. What level of financial and policy support
do bioenergy technologies require in order to achieve the Government's
targets for renewable energy?
See Q5 above.
17. The current fuel duty rebate and the
proposed RTFO have the potential to ensure that industry meets
any targets that are set for the transport sector providing the
RTFO is strong enough to have an impact on the existing transport
fuel supply chain. Up till now this industry has been reluctant
to include biofuels in their market mix. It would be too costly
for the biofuel industry to set up an independent supply chain
to supply biofuels to the end consumer.
Q7. What impact might an increase in energy
crops in the UK and the rest of the EU have on biodiversity, production
of food crops and land use and the environment more generally?
18. As already stated (see Q1) above), there
is already sufficient surplus wheat and sugar beet feedstock available
to reach a 5% biofuels usage level as set out in the Government's
RTFO announcement of 10 November 2005. Reaching this level of
usage would therefore have no adverse biodiversity or other environmental
impacts. Beyond a 5% usage level, if current legislation and voluntary
arrangements, as evidenced in the mandatory reporting proposed
under the RTFO, proved insufficient to protect the UK and EU environment
then the UK Government and the EU Member States and Commission
would be able to introduce further measures as required. British
Sugar can see no logic for sustainability constraints being applied
solely to materials for liquid biofuels as opposed to material
for all biomass.
19. Of more concern, however, are the potential
adverse environmental impacts of the production of biofuels, especially
bioethanol, in exporting countries. It is difficult to see how
a mandatory reporting scheme under the RTFO can apply with equal
effect to imports as well as UK biofuel production. The legislation
and monitoring and surveillance schemes may not be available in
all supplying countries to give the degree of confidence that
UK production will be competing fairly in environmental terms
with imports. This is an area of great concern in the detailed
development of the RTFO and could seriously undermine the good
intentions of the policy.
Q8. Does bioenergy production constitute
the best use of UK land for non-food crops? Should UK and EU policy
focus on increasing domestic production of energy crops and biomass,
or are there merits in importing biomass for energy production,
or raw feedstock or refined biofuel, from outside the EU?
20. If substantial inroads are to be made
in replacing fossil fuels then the EU will have to rely on a combination
of domestically produced and home produced raw materials and finished
products. If the demand is created by a combination of Government
policy and the peaking of oil supply, then there will be a global
market for biofuel products that will be filled by a combination
of home production and imports. EU and UK policies on fuel security
will encourage us to have diverse energy supply chains and this
includes those for biomass and biofuels.
Q9. What more can be done to make more efficient
use, as an energy source, of the by-products of agriculture and
forestry (eg wood waste and other organic waste)?
21. The biggest driver to develop the technologies
to use by-products and wastes will be by introducing policy that
creates demand in the market place, by pushing, for instance,
RTFO targets beyond the easily obtainable through conventional
crops. This demand will encourage industry to make the necessary
investments in R&D to develop and commercialise the technologies
that are already in the pipeline such as lignocellulosic bioethanol.
Q10. What lessons can be learned from other
countries' experience in the production and use of bioenergy?
22. The best example for bioethanol introduction
in Europe is Sweden. With a combination of tax breaks for biofuel
and legislation applied to retailers to set up E85 (85% bioethanol
15% petrol) filling station points, virtually all of Sweden's
petrol now contains a minimum 5% bioethanol. Additionally, with
other measures such as free parking, exemption from congestion
charging and tax breaks for drivers and companies, a market has
developed for flexfuel cars (cars that can run on both petrol
and E85) with Ford, Saab and Volvo producing cars for the Swedish
market. These cars are now selling much better than their petrol-only
counterparts. This in turn creates further demand for bioethanol.
British Sugar plc
February 2006
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