UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 965-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE

 

 

CLIMATE CHANGE: ROLE OF BIOENERGY

 

 

Wednesday 1 March 2006

MR PETER KENDALL, MR MATT WARE and MR DAVID PROUDLEY

MR GRAHAM MEEKS, MR IAN CALVERT and MR STEWART BOYCE

Evidence heard in Public Questions 1 - 73

 

 

USE OF THE TRANSCRIPT

1.	This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.
3.	Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.
4.	Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

 

Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 1 March 2006

Members present

Mr Michael Jack, in the Chair

Mr David Drew

Patrick Hall

Lynne Jones

Daniel Kawczynski

David Lepper

Mrs Madeleine Moon

Mr Jamie Reed

Sir Peter Soulsby

David Taylor

Mr Shailesh Vara

________________

Memorandum submitted by the National Farmers' Union

 

Examination of Witnesses

 

Witnesses: Mr Peter Kendall, President, Mr Matt Ware, NFU London Adviser, and Mr David Proudley, Non-Food Uses Adviser, National Farmers' Union, gave evidence.

Q1 Chairman: Good afternoon ladies and gentlemen. In three minutes' time the division bell is highly likely to go, so what I am going to do is to formally welcome our first set of witnesses from the National Farmers' Union and then adjourn the meeting. We have before us a member of the National Farmers' Union delegation who must be the fastest rising star in terms of witnesses, because when Peter Kendall was first billed he was on my list as the NFU's "Non-food Spokesman", but since that time he has successfully won an election to be the new President of the National Farmers' Union. Can I on behalf of the Committee pass on our congratulations to you. We have always had the most harmonious of relationships with the NFU, and particularly their President. We were reflecting before you came in how many presidents we have dealt with over the years. We are delighted that your first public outing is before the Committee, and I personally congratulate you. It is always good to see the exercise of democracy. We got on extremely well with Tim Bennett. I did pen a note to him yesterday thanking him very much for his co-operation and kindness in appearing as many times as he did during his presidency before the Committee, and, Peter, we hope that we will have the opportunity of welcoming you on many occasions and we wish you well in terms of your office. You are supported by Matt Ware, who is put down as the "NFU London Adviser". Mr Ware, what does that mean you do?

Mr Ware: Since the NFU relocated to Warwickshire we have had policy issues in London basically.

Chairman: So you are marooned here while all the work is done in Warwickshire. Finally, Mr David Proudley, who is the Non-food Uses Adviser. Gentlemen, you are all very welcome indeed. The hour of four is upon us and, so that we do not start and stop, we are going to adjourn the Committee. I will ask colleagues to try and get back within ten minutes of the start of the division bell. Can I apologise for keeping you waiting, we had a little bit of extra committee business to sort out, but we look forward to talking to you in detail when we come back from the division.

The Committee adjourned from 4.00 pm to 4.10 pm for a division in the House

Q2 Chairman: We can now formally start to take your evidence. Can I thank you for your written submission, which was very helpful and there will be some questions arising out of that, but I would like to start with a very straightforward question. What do you think is good about the Government's bioenergy policy and what do you think is bad about it?

Mr Kendall: Thank you very much for inviting us to come and give evidence today. As you say, it is the first day after my election and it is intriguing to be involved in the world of politics where you can be sent home very rapidly. Obviously I have sympathy. You referred to Tim Bennett. He has obviously worked with you in the past. It has been a difficult time for us all and I thank you for inviting us down as my first outing. On the Government's policy at the moment on bioenergy, I think we have some good aspects that will take priority which are being talked about. Around the whole of Europe now, the whole nation of renewables is very much in the headlines. We will be looking at Sweden making announcements trying to be oil-free by 2015. When you look at the gas crisis that has been going on in Europe in recent months, even George Bush is talking about trying to reduce dependence on imported oil. The fact that the Government has now raised renewables up the agenda is good news. I think our weakness on government policy at the moment is the lack of firm commitment to meet the goals in a certain time span. We welcome the Ben Gill Biomass Report, we welcome the RTFO announcement but there are still elements of detail that need to be sorted out to make sure that these actually come to fruition.

Q3 Chairman: Would you like to spell out the crucial points of data that you would like to see answers to?

Mr Kendall: On the RTFO agreement, Matt, do you want to cover the areas that we are waiting for detail on?

Mr Ware: Basically, as far as the Renewable Transport Fuel Obligation goes this budget is crucial. We are looking for some clear signals from the Treasury as to buy-out price, the continuation of the 20 pence per litre duty derogation and a long-term commitment, because without that level of certainty investors will not be involved and the current three-year rolling 20 pence duty rebate alone is not enough. We are looking at large scale investments. We need to know what is going to happen beyond 2010, so we are looking for some indication going to 2015, of the five per cent target increasing maybe to ten per cent and an idea of buy-out price and how long the duty will be in place for?

Q4 Chairman: One of the things that is intriguing in the evidence is the range of greenhouse gas reductions which are said to be obtainable from different bio-crops. Bioethanol for sugar seems to suggest that, compared with fossil fuel emissions, you can go from minus 11 per cent to a gain of 75 per cent, bioethanol from grain 21 per cent to 75 per cent and biodiesel from rapeseed oil seven percent to 80 per cent. Those seem to me extremely wide ranges of figures in terms of greenhouse gas emission savings. If you were looking to say, "Am I confident with a range that big", if it was money that you were putting into a financial venture that said that the rate of return could be minus eleven to plus 75, I think you would be wondering whether that was a safe place for your money. Why the range?

Mr Kendall: There are different technologies being applied and different techniques in producing the inputs to the feed stock. What is interesting is that, as we have seen other countries developing their ethanol largely from sugar or from maize or whether it is a biodiesel production, as long as they have been developing the process the better the CO₂ savings become. It also depends very much on what you do with the by-products. For example, and I think this is one of the examples quoted, if you took a ton of maize you would expect it to break down into three parts. A third of it would be ethanol, a third of it would be distilled dry grains, which is a high quality animal protein feed, and a third of it would be CO₂. If you took the by-product, the distilled dry grains, the animal feed, and use that as the feed stock you would magnify a lot, over 100 per cent in some cases, of the CO₂ savings, if you utilised the whole amount. The other way is that we are looking at how we produce the raw material, the feed stock in the UK, whether it is wheat or sugar, depending on the yield, depending on the amount of fertiliser and how the cultivations are going, it varies on the savings, and it is why we feel, as an organisation working with other people, we do need to demonstrate with a product - with the ethanol, with the diesel - that we are giving genuine CO₂ savings. We do not want to have the accusations made, when we are supporting a new form of fuel or a new fuel for the UK, that it is not delivering the CO₂ benefits that we feel actually give it value.

Q5 Chairman: You are saying it is the method of production. I presume that that is the way that it is, and there is nothing you can do to say that over time techniques would be able to move from minus numbers to everything being positive and that we could come towards the upper end of this range guaranteed from these different sources of raw material?

Mr Kendall: I think there is best practice involved. If I could give you one example at my farm, and I am actually a farmer in Bedfordshire. We have tried a technique where, as we harvest a field of wheat, we drip oilseed rape out behind the cutter bar, so it actually needs no cultivation at all. As you then chop the straw and grass it over the top, you have had no cultivation - you have not used ploughing and cultivation techniques - so that means that you are not disturbing the soil and that is a much more beneficial way of reducing CO₂ emissions. The Central Science Laboratory in York has done quite a lot of work on this and their figures are suggesting that we get at least 60 per cent savings. We are just acknowledging that there is other work out there that will demonstrate wider swings. We would not want to come and say to you that is the definitive saving (60 per cent) when we know there is other work out there that demonstrates a wider saving, but we certainly expect to see a CO₂ saving on most UK production.

Q6 David Taylor: The NFU submission, particularly at paragraph five, makes a pretty good pitch for the suitability of UK agriculture for energy crops. You talk about the experience in having annual crops like wheat, sugar and oilseed rape, and so on, and no need for specialist machinery, skills and knowledge. If that is so why are we lagging as far behind Germany and France whose aggregate economies are probably two and a half times the size of our own? In 2003 they were producing about a million tonnes of biofuels, or a bit over - that is the latest figure we have got, which is two and a bit years old - whilst the UK produced less than 10,000. That is a tremendous lag. I heard what Mr Ware said about the need for a long-term commitment on the 20 pence derogation, and he implied that the derogation should be higher, but surely it must be even more than that?

Mr Kendall: I think it is lack of certainty and also it is volatility in the oil prices. One of the things that has made people much more interested in the whole of the renewables debate and the cost of energy at the moment is what has happened to oil prices over the past year, 18 months. People are looking at it now, but even then, if you are going to go and invest maybe in a bioethanol plant where you may have £60-80 million in cost, you need to have some sort of certainty. The Germans have had a long-term commitment to a zero-rated duty on their biodiesel industry for a long time. The French have a different more imaginative scheme where they give you tax breaks if you reach certain targets of inclusion. There are various organisations, along with other people, who have been working with environmental groups and who have put so much store in the Renewable Transport Obligation, because if we do get set targets, we know we are going to be setting a five per cent inclusion by 2010, that is a sufficiently large target and that will give people the confidence to go out and invest in the production capacity.

Q7 David Taylor: There is no EU fiscal cap on the amount a national chancellor can derogate, is there?

Mr Kendall: No, there is not. As I just said, the Germans are down to zero duty on biodiesel.

Q8 David Taylor: You will be submitting very strongly to the Chancellor that we should emulate Germany in that respect, will you?

Mr Kendall: No, we have actually moved away from it. We know there are pressures on the Government finances and what have you, and we think that it is more prudent to go and say that we should have an inclusion through the Renewable Transport Obligation and then you have a buy-out, and so if they all happen to chose not to be blending or using five per cent of its total use of biofuels, you can pay a bio-price very similar to the rock scheme that operates in the energy market.

David Taylor: You have moved on to RTFO, and that is someone else's area of questioning.

Q9 Chairman: One of the things that struck me about this evidence was really the evidence of enthusiasts. You say in here, "There is plenty of land. We can do all of these things", and you rush, like people who have just discovered biofuels, to say, "We have really got to have all this. It is absolutely fantastic", but underneath it there is a lot of very important detail about farming economics. I was struck that there was not any economic analysis, for example, comparisons of return per hectare, which is the bottom line comparison point for different cropping patterns. It is quite difficult to understand, because we started with Mr Ware talking about the 20 pence duty derogation, but he did not mention the fact that for biodiesel that might simply be a crushed oilseed rape but not going through a process that currently attracts full duty. You did not mention the question of the Chancellor's pre-Budget announcement of capital allowances for production. We did not get any information here, for example, about the economics to the farmer of growing on set-aside land verses transferring his current food production arable cropping regime to an energy cropping regime. I do not know from your evidence whether it is good for farmers. All I know is the NFU tells me that it can be done and that there is enough land to do it, but do farmers actually want to do it? Can you help us, if not in a detailed exposé now, with some additional evidence to help us truly get behind the economics of these liquid biofuels and, for the same question, biomass as well?

Mr Kendall: Yes, we will make sure we get you some detailed figures on that.

Q10 Chairman: If there is anything you want to say by commentary, I would personally be very interested to hear it because I have not heard it from the farmer's end of the telescope. You have got a farm, Mr Kendall. Are you growing any energy crops?

Mr Kendall: Bizarrely, I actually grow energy crops, but they are swapped for bits of paper and my product ends up in a Spanish ethanol plant or a German biodiesel plant. The whole of the UK is excited enormously by the whole notion of being involved in energy production. I am an all-arable farmer. Whether I grow wheat, oilseed rape, beans or maize, those commodities are cited on the MATIF, or, particularly with oilseed rape, there is no oilseed rape futures market in the UK, or in the London Exchanges, so I know exactly what my commodities are worth, they are traded. Whether they go for food or whether they go for fuel, they are completely interchangeable. The economics mean I make a decision whether I plant my wheat whatever the market availability is. The reason why we are so excited about this opportunity is not just the economics of it, because the more we can displace the less I have to sell into foreign markets. The more we consume here, the more we get the benefit of the shipping costs. If we have an exportable surplus from the UK, at the moment this year we will export about 2.5 million tonnes of wheat - we have some years exported as much as 4.2 million tonnes of wheat - that has to then be competitive into our export market, whether it is North Africa, whether it is Southern Europe, particularly in the dry years it often goes to Southern Europe. If that commodity stays within these boundaries, that would be at a price we call an import parity rather than an export parity. That difference could be as much as 12 or £15.00 a tonne according to the Home Grown Sales Association figures. There are big advantages if we can find markets internally, and also I think it will drive a new market in the UK where people engage in longer term professional contracts. The biomass question you asked about as well, the economics for that, it is more uncertain, but where I am very concerned about agriculture and farmers is where people have taken a leap of faith and they have planted long-term coppice schemes and have found there is no market. The biggest submission I tried to put across from Ben Gill's Biomass Report was the need for demand pull rather than getting over concerned about supply chain inadequacies. Ben's comments were that we needed almost a Yellow Pages where you could go and buy your biomass. What we need is to know that there will be some guaranteed markets there. I look around at the 470,000, 480,000 new homes looking to be built in the south-east, if that was in Denmark or Sweden they would have a compulsory district heating scheme, a combined head and power scheme, which seems to me a brilliant use of renewable by-product from farming if we could do that. The value at the moment is not high enough to drive people to do it economically and give them the certainty that the market will be there. The figures do stack up and, as I say, we will make sure that you have them in detailed form as soon as we can.

Q11 Mr Drew: Can we look at the other side of the coin. You are talking about exporting to elsewhere in Europe. Let us keep the barriers to bioethanol production in this country. In your submission you say you believe you can meet the RTFO target for 2010, and the estimate is somewhere between 1.5 and 1.35 billion litres. What is going to make that happen and what is going to stop it from happening?

Mr Kendall: I will come to Matt in a minute. I think there are some real concerns about what level we start on the RTFO announcement, whether we start at a low level in 2008 or whether we start at a high level. If we started at two per cent we could probably meet a big percentage of the demand for two per cent inclusion from a matter of internal production of biodiesel and imported palm oil biodiesel production, and that would prevent bioethanol taking off. If we are starting at, say, two, three per cent in 2008, four per cent in 2009, five per cent in 2010, the oil companies will know that they cannot meet that just in diesel alone, they will need to be bringing in petrol as well. We think by setting a high enough inclusion rate in 2008 we will find investor confidence kicking in. We had an announcement at our AGM yesterday from David Reid of Tesco saying they have signed a deal with Cargill's Green Energy Fuels to start investing in biodiesel production.

Q12 Chairman: From UK-sourced feed stocks?

Mr Kendall: That is their intention, and they have also done a deal with British Sugar for ethanol - their Wissington plant in East Anglia - so there are encouraging signs but we need to have bold enough targets to drive it forward. Again, as Matt said earlier on, we need to make sure that the buy-out costs are right so that people do not decide just to say, "I will pay the forfeit", rather than making the inclusion.

Q13 Mr Drew: What additional incentives do you need through the industry? We have already touched on this, but I want to know in more detail what signals the farmers actually want. Some have taken a leap of faith, but they have taken a leap of faith in the past and some have got their fingers quite badly burned. What are the numbers and who will provide the gap finance? Presumably it will be the Government. What more do you want the Government to? I have been at presentations where they virtually solve the whole of the world's problems through bioenergy, but then they mention afterwards maybe there will be a bit of something for the UK. There seems to be a view that the Third World will automatically go to bioenergy and that will solve all our domestic problems. That is the threat at the least?

Mr Ware: We are very excited about bioethanol in particular because the UK has got this huge exporting surplus; so the feed stocks are there and we can provide five per cent by the 2010 target, no problem at all. The problem with bioethanol is that it is a more involved production process than biodiesel and therefore there is a higher infrastructure cost involved, which is why we need the certainty of the RTFO put in place, a long-term RTFO, and the buy-out price and figures set to give investors confidence.

Q14 Chairman: Could you explain? When you talk about the "buy-out price", what does that mean?

Mr Ware: Under the Renewable Transport Fuel Obligation oil companies have a choice either to provide biofuels or to pay a penalty or a buy-out, and that is an obligation not a mandate. If this price is set too low there is a real risk that oil companies will pay out the penalty and not invest.

Q15 Chairman: Who is going to the set price? I would have thought the market price of carbon is going to set the price.

Mr Ware: The price will be set by the Chancellor and we will be seeking a figure in the Budget this year to give some certainty to the market. If the price is not announced until next year, it delays the build of many new plants by an additional year and reduces the opportunity of achieving our target by 2010. Investor confidence is needed to put in these plants because they are so expensive. Obviously for bioethanol the enhanced capital allowances that were announced in the pre-Budget statement were extremely welcome and helpful, but what we would like to see is more of a lead from local government and regional government in things like public procurement. We have got a very good demonstration project in Somerset, where they are using E85 (which is 85 per cent bioethanol) powered cars by the local police constabulary, the county council and the water authority and various other organisations, and that shows a real lead. The problem is that we need that sort of government lead giving the infrastructure at the fuel pumps. Another barrier to bioethanol production in the UK at the moment is engaging the oil companies, the oil majors. At the moment they are coming up with various reasons why it is going to be difficult, which we find quite confusing because they seem to be able to do it elsewhere in the world, the same oil companies - Shell, Exon, BP, and so on. The sort of arguments they come up with are things like they cannot share oil pipe lines with aviation fuel and bioethanol and there are problems with tanks at fuel filling stations, and so on, and they are basically asking for more time. Interestingly Tesco last year introduced five per cent bioethanol in 185 stores in the south-east and the north-west, and when we met with them last year they said there was absolutely no problem. They just serviced the tanks - it takes a couple of hours - and they can put a five per cent blend in. We feel that maybe the oil companies need to engage slightly more enthusiastically. Finally, there is a problem with European quality standard. European fuel quality standards at the moment say that a five per cent blend is all that is allowed on current EN European quality fuel standards. Unfortunately the committee that changes those fuel quality standards is dominated by the oil companies and there seems to be some resistance to changing those fuel pumps.

Q16 Chairman: I thought that was to do with motor vehicle manufacturers who would not warrant cars above five per cent inclusion rates.

Mr Ware: Yes, it is all in the same pot. Again, these vehicles are warranted up to ten per cent as standard in North America, which we find quite confusing. We think there may be a vested interest involved there.

Mr Kendall: We think the E85 is a great example of something we could really get some marketing presence out of for green motoring. Stockholm, where you have no congestion charge, no parking charges as well if you arrive in an E85 car, is a good example of green motoring.

Q17 Chairman: An E85 is?

Mr Kendall: Eighty-five per cent ethanol. Saab, Volvo and Ford are working on these cars. You can put petrol into the tank if you find a pump that has only got petrol and you can put E85 in it down the road. Matt and I went to the United States to see ethanol production and there are a number of these pumps springing up everywhere. It is reported in Brazil at the moment that 80 per cent of new cars are being sold as flexi-fuel E85 cars. The growth of ethanol consumption is rocketing.

Q18 Mr Drew: Could I make one final point. As someone who has had an LPG car for some time, it is a nice notion that everybody co-operates with the customer, but you really are a hostage to fortune with the petrol companies. They have never played fair with LPG. They have always been a minority provider, let alone the interesting way in which you have to try putting it in the vehicle. It is just not there, and it is very interesting that, as a result, it has virtually stayed at the same level now for the last three or four years. This was the great answer, and it is just not happening?

Mr Kendall: We have an LPG car on the farm at home and it is a pain in the neck to find a petrol station to fill it up. It is not been made easy, and that is why, I suspect, it has not happened, but E85 has exactly the same delivery system. It is like petrol.

Q19 Lynne Jones: You were referring earlier to the need for investment and yet, Mr Kendall, you said that as far as you were concerned your crops were interchangeable - whether you sent them for food or bioethanol it did not matter - so the issue is not investment for farmers, it is for the producers of the fuel. Am I right in that?

Mr Kendall: Yes.

Q20 Lynne Jones: You are talking about 85 per cent bioethanol powered vehicles. That might be feasible, but it is impossible for this country to produce. We are only able to produce about five per cent from indigenous resources without handing over a vast hectarage of the land. What is the point of going to 85 per cent? Surely, rather than having a small proportion of vehicles having 85 per cent bioethanol, is it not better to make sure we achieve the five per cent target throughout the country?

Mr Kendall: The point of E85 is that with an obligation it is not mandatory that every litre sold has five per cent biofuel in it. There might be certain markets that are still left with 100 per cent conventional fuel. You could have areas like London and Somerset where there is a concentration of E85 cars where you have a lot more being delivered through E85 engines. What we have not picked up enough on here is that this is the start, this is what we call first generation bioethanol and biofuel production, and there is a lot of work going on using enzymes in Denmark and iodine in Canada where they are looking at cellulosic ethanol production. If I can take my wheat, use my wheat in a first generation production facility producing ethanol from my wheat, I would also use the straw and extract the ethanol from the cellulose, and then you make it much more efficient and you increase your output significantly. There is work going on in relation to cellulosic ethanol production from woodchips as well, so this would increase our whole capacity to produce from other resources.

Q21 Lynne Jones: Can you have an engine that can work on five per cent bioethanol or zero per cent and 85 per cent? I travel between London and Birmingham, and so I want to be able to fill up at different petrol stations. Is it feasible to have a fuel that has that vast range of the proportion of contents, bioethanol as opposed to the conventional mineral oil?

Mr Ware: There are two distinct types of fuel here. There is the five per cent blended bioethanol or biodiesel and conventional petrol. It is only limited to five per cent because that is the European quality level. For the RTFO it would have to go up to ten per cent, but at the moment it is five per cent, and that can go in all conventional cars, but you have to remember that there is a huge conventional car fleet out there of 32 million vehicles in the UK. It can go into all those vehicles. In addition, the new generation of flexible vehicles can use 85 per cent ethanol or normal petrol. If you were in London and you filled up with 85 per cent bioethanol and then you went on holiday to Scotland, you could put normal petrol in the car in Scotland and then when you come back you can put in E85.

Q22 Lynne Jones: You would have to have newish car for that?

Mr Ware: You would have to have a new car, but the great news on that front is that Saab, Ford and Volvo are all producing cars at exactly the same forecourt price, a completely flexi-fuel vehicle, and that is why we are seeing massive increases in sales in Brazil and Sweden. We have got two distinct areas. We have got blending at five per cent of all cars and then these new flexi-fuel vehicles, which we would like to promote through Government procurement.

Q23 David Lepper: You talked about the role of local authorities and the things that are happening in Sweden, and so on. Are there any signs so far as you are aware of local authorities in this country taking that seriously?

Mr Ware: There is a pioneering project, as we have already mentioned, in Somerset which is great, and that is rolling out. They have got 55 Ford flex vehicles actually ordered, which is great because it is not hypothetical, it is actually happening, and they have got five pumps strategically located around the county. On the back of that we have got interest from Gloucestershire, Hampshire, Oxfordshire and Kent, and so we would be very keen to spread the good example around the country, but the great thing about getting local government involved is that they do have depots where they have fuel tanks and they have large fleets of vehicles which can make it more economical rather than individual farmers or forecourts trying to do it on their own.

Q24 David Lepper: What I was actually scheduled to ask you about was the energy crop scheme, but thank you for that information. You have talked about and you have shown enthusiasm for production, you have also talked about the lack of certainty. On the figures that I have got for 2004 - there may be more recent figures - the take-up in terms of the energy crop scheme (and I understand that is 45 euros per hectare of non set-aside land for energy crops) does not seem to be very high. It was 300,000 hectares in 2004. I do not know whether there are more recent figures that show an increase or whether it is about the same. Why do you think that is? Is there anything that can be done by the Government to improve?

Mr Ware: It has been a very disappointing uptake, but when you do the figures in old money it works out at £12 an acre, which basically is not a lot of money. There has also been a risk that the European ceiling of 1.5 million hectares is exceeded pro rata, so there is a level of uncertainty in there, and probably, most fundamentally, we have found that there have been administration costs put in by a lot of merchants that serve the contract for the energy crop aid which has further eaten into the £12 an acre. Because of the very disappointing figures, the European Biofuels Strategy announced last week in London is going to review the Energy Aid Scheme levels, and they were hinting that there may be an opportunity to increase the value in the future. Any indication or suggestion you can make to the EU Biofuels Strategy encouraging them to do that would be very welcome.

Mr Kendall: If I could come in on that. You are all aware, obviously, of some of the problems we had in getting the single payment scheme payments out this year.

Q25 Lynne Jones: Have you got yours yet?

Mr Kendall: I have not had anything yet. When my colleagues in Wales will receive their money, it is a bit of a moot point at the moment.

Chairman: You can have a pint on them then.

Q26 Mrs Moon: We do things more efficiently in Wales.

Mr Kendall: Particularly after the rugby, I will not comment on the Welsh!

Q27 David Lepper: Do you know anyone who has got one yet?

Mr Kendall: I have seen one cheque in a photocopy form. Someone received one down in Devon.

Q28 David Lepper: It is being passed around?

Mr Kendall: It is, yes, it is being looked act with amazement. This energy scheme payment complicates your application for an ECS under the old scheme; and certainly this year I took the decision on my farm not to apply for any energy supplement payment because it complicated things - I thought it might have held it up, but I did not realise it might hold it up to the end of June - so I stayed with a simple system on my farm and lots of farmers did in the year we have just experienced. Before that there was also a lot of oilseed rape, which is a main crop. In 2004/05 a lot of the winter oilseed rape failed because of the incredibly dry autumn. That was why the year you refer to was very low. This year we have got the Single Payment Scheme sorted out. I think this year the uptake will be much higher. I have certainly registered all the oilseed rape on my farm, which is not on set-aside land, for energy crop supplement.

Q29 Chairman: Hang on a minute. You said to us earlier on that you were quite happy, whatever the use for the arable crops - they could go to energy or they could go to food - and you did that because the economics for your farm were right and you did not want to mess the system up. Now you are telling us you definitely want £12 an acre. Why should anybody give you £12 an acre for doing this? If you are telling us that the Chancellor, who might be stuck for a bob or two, ought to be sustaining the 20 pence a litre duty derogation and ought to be handing out the nation's millions in capital allowances and you need all that to give certainty and encouragement, why are you then going to pinch money to go into this pot?

Mr Kendall: First, half of it disappears to the merchant who has to put up a complicated bond to the EU to make sure it can get the money back. Second, I am then tied to the merchant I can sell it to and when I can sell it, so putting my oilseed rape in an energy crop scheme reduces my business flexibility a lot. Bearing in mind, on an oilseed rape crop, I might in a good year average 1.4 tonnes to the acre, with a little but of fluctuation on when I can sell it or I can move it. If I am not careful, I get the sums wrong and am not able to market it for the best opportunities. This year I have taken a view that I want my money in that certain period. The rape price I thought was reasonable, and so I have locked into it, but there are reasons why you would not as a businessman, as a farmer, automatically lock into that price at that time. The incentive, once you have lost half of £12 in bureaucracy and handling, is not that much of an inducement.

Q30 Chairman: So why do we need it?

Mr Kendall: The idea is to encourage and stimulate energy production. The sad situation in the UK is that it is just a paper exercise. All we are doing is buying the rape. It actually depresses my market: because I grow rape in the UK that is meant to be for energy production, it stays internally and overhangs the market, whereas in Germany, where by counterfeit the opposite bit of paper turns up, they draw that rape off the market. The rape price in Germany, because of the demand for energy and fuel, is usually about £10 or £12 a tonne and getting higher than mine would be here. There are some real anomalies that go on because we have not got domestic production. I am very keen for the whole RTFO initiative, but we really need someone to sit behind the investors who are prepared to build the plants and have the demand in turn.

Q31 David Lepper: You mentioned the discussions last week, I think you said?

Mr Kendall: Yes.

Q32 David Lepper: Was that solely about the figure or was it about the mechanics of the operation of the scheme you are talking about?

Mr Ware: The European Biofuels Directive in 2003 set the target for last year and the 5.75 per cent target for 2010 and it always decided to have a review in 2006 to see how they were getting on, and, as part of that review, they announced seven areas of discussion under the EU Biofuel Strategy last week. The energy crop aid is just one of those seven areas.

Q33 Lynne Jones: I am intrigued on this point. Would it not be better to make sure that if there is support needed for the investment in the plant that needs to produce the bioethanol or the biodiesel, where perhaps the support needs to go, why do you need to declare in advance that such and such a proportion of your crop is going to go for biodiesel? Would it not be better to make sure that you create the demand and then you could decide where you actually market your crop?

Mr Kendall: I think I tried to make the point earlier on, I have always been much keener on demand pull than trying to stimulate supply. This is a European scheme. The Europeans are much keener on saying that farming needs extra support to grow these crops and therefore put it in place. That is why as an organisation we have moved to supporting the Renewable Transport Obligation as a key point. Twelve pounds is not a big sum of money. The amount of money that ends up with me is quite small. The most important thing for me as a farmer is to see the internal demand and internal capacity built within the UK, and that is what I am keen to start with.

Q34 Mr Vara: I would like to turn your attention to the carbon assurance schemes and the importance of a carbon certification scheme to ensure that energy crops are grown sustainably, safeguarding biodiversity and the wider environment. In order for such an assurance scheme to be successful, the NFU believes that it must include a "banding system to reward the most efficiently produced biofuels". How do you envisage that this might work and how do you think it might be regulated?

Mr Ware: Under the Renewable Transport Fuel Obligation there is an opportunity for recycling of funds and those funds are the buy-out price, or the penalty price that we talked about earlier, and it will go into a central pot or pool. Under the Energy Bill amendments it states that that money should be recycled back into the industry, but it does not go into any detail. There is an opportunity there for those monies to be put into supporting or encouraging the most efficient forms of bioenergy production in the UK, so there could be grant availability for cleanest fuel production standards, and so on, but it is an area that under the Renewable Fuel Transport Obligation has not been investigated or discussed in any great detail and we think it is a great opportunity to encourage the greenest fuel production possible.

Q35 Mr Vara: Of course there is the difficulty that farmers are always complaining that there is a lot of bureaucracy in the entire system. To what extent is this going to create more bureaucracy and what sort of response and support have you had from the farming community generally?

Mr Kendall: Speaking as a farmer, we have Farm Assurance now on farms where we are inspected on a yearly basis, which looks at how I produce my crops, makes sure I look after my water courses, how I treat my fertiliser storage and my crop management records. We think that is one visit already we would not want to duplicate. That would demonstrate that I am growing in an environmentally responsible way. Where we then would want to move is attaching it to, for example, something where I record my total amount of fertiliser used in relation to the anticipated yield. We would then like to relate to something along the generic line, and this is something that is being talked about at the moment in the industry as a whole, that rather than have a detailed analysis for my individual farm, if, for example, you are growing wheat in the United Kingdom, three and a half tonnes of wheat would give you, say, 65, 70 per cent CO₂ savings, and have a generic system that did not add to detail in depth around the quality of individual farms. We would have the farm assurance with some sort of record of the amount of fertiliser used as a key input and then we would use a generic acceptance of it.

Q36 Mr Vara: Turning to the international scheme, the NFU has argued that a scheme "must be applicable throughout Europe and compare with world imports". English Nature, on the other hand, although supporting the scheme, has raised concerns that it might conflict with the World Trade Organisation rules. How does the NFU feel the international scheme can be dealt with, bearing in mind you have got this conflict? Do you want to expand on the one hand and tell us if you have any reservations as well?

Mr Ware: The Department of Transport and the Government at the moment have been looking into this in great depth, and their legal advisers say that on carbon saving grounds there is not a problem in looking at environmental accreditation. However, there is more of a problem under the WTO when we start to invest in sustainability production. That is why we are very interested in the work done by Imperial College and others looking at carbon saving or a biocycle analysis of the whole crop. In the UK, through assurance and the work of the Central Science Laboratory, we know what our carbon savings are - at least 60 per cent in our conventional crops - and the challenge we would like to put out to importers is, "Tell us what your carbon saving is." What we are very concerned about is that there would be over complication and over accreditation of UK produced crops, just simply because it is easy to do, and almost a disregard or lack of interest in the imported products because it is too complicated. For example, one scenario I would like to give, bioethanol coming from Brazil on a ship, there is a relatively low carbon amount used in the freight, a tanker it is quite efficient. There is a huge difference between the bioethanol from Brazil whether it is produced on the coast or whether it is produced a thousand kilometres inland, because it has to get to the coast first.

Q37 Mr Vara: Is this message getting through? Are you actively making sure that people are discussing this and getting involved, getting the message across. Are they being responsive your thoughts?

Mr Ware: We are battling away. As I am sure you will appreciate, there are an awful lot of environmental groups out there, and there is only one NFU. We feel that we are sometimes a lone voice on this. We would hate to see our proven carbon saving crop production perhaps being exported to third countries where we do not know about their assurance and accreditation. One criticism of biofuel production that used to be given was that we would create monocultures of oilseed rape, or whatever, across the UK. The fact that all the feed stocks used in the UK - oilseed rape, wheat and sugar beet - are rotational and therefore move around the farm and therefore are not monocultures, could be lost to third countries where we have monocultures of sugar cane, palm oil or jatropha, and I think that is a very important point to remember.

Q38 Mrs Moon: I would like to talk, if I can, about the conflict between achieving food security and energy security, because we are getting quite conflicting statements made. We have, for example, a statement from yourselves saying that food crops will not be adversely affected. You have said already that the crops are dual-purpose, so you can go where the market demand is, and at the moment, Mr Kendall, you have said that a lot of the crop that you produce is exported and, in fact, the market, if it was here, could at least remain in this country which would also perhaps increase profit to you because you would not be paying for the transport costs for export. Equally, we have got the Food and Drink Federation expressing concern that the financial incentives to go into biofuel production would impact on costs for them of producing enough. The Margarine and Spread Association have also expressed concern. There is concern that there is insufficient set-aside land to meet the increased capacity that would be needed to provide the energy crops for biofuels. Equally, we have got the RSPB expressing concern that the pressure to provide additional land would result in set-aside land - that is land of nature conservation value - being pulled into production. How do we meet all these conflicting demands and create a balance so that, if there are increased subsidies going into energy crop production, we do not end up in a situation where we do not have enough food stock production?

Mr Ware: First of all, the Food and Drink Federation report comes from their European umbrella body IMACE, which is the European margarine organisation, and primarily their concerns arise from central Europe, primarily Germany, where there is an awful lot of oilseed rape being used for biodiesel because of the very preferential or no duty rate. It is a different scenario in the UK. We have not got such an imbalance. We see a mixture of bio-ethanol and biodiesel and we have not got the same pressures. They have actually been to visit us in the NFU and said that the prices are rising, what do we think, and we actually said, "That is great." We want our oilseed rape prices to increase. The point we would like to make is that oilseed rape prices are actually recovering. They were a lot higher back in the 1980s and early 1990s, they had fallen and now they are recovering. The Food and Drink Federation has been saying that their costs of production are going up, which is true, but they are only recovering from what they were, they are not historic highs. As far as the RSPB and set-aside land goes, it is a slight misnomer because set side was never intended to be for the environmental good, it was meant to be a way of reducing our food mountains, and we should always remember that. Now we have got the opportunity to change from food to fuel production, and we are quite concerned about the whole set-aside scenario because under the Single Farm Payment and Cap Reform it is likely that set-aside will be removed by 2013 anyway, so we think it is far better to base our bird and environmental policies on whole farm approaches rather than just set-aside and put all our weight behind the new entry level schemes and higher tier schemes to get bird and environmental life enhanced across the whole farm rather than just nine per cent of the farm, which you develop a great bird habitat on and then in 2013 somebody comes along and ploughs it up.

Mr Kendall: I am also unable to grow energy crops on my set-aside already. For example, I would have to have on my farm a couple of hundred acres of set-aside, and I would grow that in winter oilseed rape and it goes for energy crops on the back of that, and it is allowed to happen. It is already happening on a percentage of the set-aside, but we feel very strongly that set-aside was a market management tool and should not be confused with an environmental tool.

Q39 Mrs Moon: To be fair to the RSPB, they did talk about areas specific to nature conservation, such as peat bogs, and they were talking about wetland sites. Their concern was that you would go back into, for example, drainage of land so that you would create new land for development, and Defra, in fact, does say most energy crops are grown on set-aside land in fact. I think again, Mr Kendall, you have talked about dual-functionality and the fact that the way that a single crop is manufactured and produced can actually save energy costs and biomass. Can you go into that a little bit more?

Mr Kendall: Yes, I will talk about dual-functionality in the crops I currently grow. We see a strong bioethanol industry growing within the United Kingdom. I think we see that very much as leading to more research and development in a modern variety which will be higher in starch content, might mean lower levels of fertiliser going on, might need different pesticide regimes. We are optimistic that with a strong demand structure for bioethanol we will see new varieties coming through that are specifically developed for that. That would reduce their dual-functionality, but I am sure they would still meet an animal feed demand if required. The one thing I find comforting about the whole generation of renewables, and I am nervous of the people behind me who want to build these plants, but if we had a situation where we had a number of years of very low production because of some of the vagaries of climate change, I would rather have the infrastructure in place and crops being grown. If we had to draw on more fossil fuels for a period of time, we would still have the crops being grown and they would still be there. To me it is a better strategic reserve than the food mountains in Brussels and intervention in other reserves. Every year we do it we are reducing CO₂ emissions, and let us encourage that.

Q40 Mrs Moon: Are you talking about genetically modified crops?

Mr Kendall: No, I am talking about plant renewables.

Q41 Mrs Moon: Would you comment on plans that we see for the Government to close some of their research establishments. Would you have a concern that that seems to be on the cards?

Mr Kendall: I would have a great concern. One of the enthusiasms I have for the whole development of non food crops, and we have done a big climate change report from the NFU, I think when you look at the vagaries of what is going on around the world at the moment, we should be investing more in research and development. One of the reasons I got involved in my new job is that farming can be the provider of smart solutions, and when you look at what is happening with biogas production and the suggestion that there will be 10,000 biogas plants up and running in Germany by the end 2009, there are really exciting things which farming can do with its by-products, with the use of land, and we should be investing in this and it is something I feel very strongly about.

Q42 Patrick Hall: Picking up on that enthusiasm, what has the NFU done and what is it planning to do to try and spread that enthusiasm within the automotive industry and, indeed, the energy industry, the oil industry, much of which says it is into energy?

Mr Kendall: I could facetiously say, I am the new President of the NFU, and it would be rather rude to say that, I know. A big part of the message that has been sent to me in my role is that they want a more proactive message of what farming can do in solution providing. I have made many speeches where I have talked about the fact that for 20 years farmers have been seen as real problem because of our environmental track record - over supply, the diseases we have had, which are all scars on our backs from foot and mouth and BSE. I believe we have got real opportunities, and we want to work with other organisations that see farming as being beneficial. A lot of the environmental groups also see us as delivering a lower carbon economy. One of the reasons I am so keen on the accreditation scheme is if we get this wrong, if we demonstrate that you are doing damage to try and develop renewable solutions, it will set us back a long way, and we are very keen to make sure that is this done in a responsible way.

Chairman: Thank you very much indeed, it has been a very useful opening to this inquiry. I think you have given us not only a lot of very valuable information but perhaps have raised issues and questions which we had not thought of which we will want to investigate further. Thank you in advance for the further information on the economics of biofuel production that you are going to send us. If there is anything else that you feel would assist our inquiry in the light of the questions we have asked, please do not inhibit yourselves to sending that as well. I hope you enjoyed your first presidential outing giving evidence to us, and we look forward to seeing you again in the future.

 

 

 

Memorandum submitted by Renewable Energy Association

Examination of Witnesses

Witnesses: Mr Graham Meeks, Head of Fuels and Heat, Renewable Energy Association, Mr Ian Calvert, British Sugar, Mr Stewart Boyle, Wood Energy Ltd, and Mr Graham Stowell, Bronze Oak, gave evidence.

Q43 Chairman: First of all, may I thank you for your written evidence. May I welcome the representatives of the Renewable Energy Association and apologise for the slight delay in your coming on to be our witnesses. For the record, can I welcome Graham Meeks, the Head of Fuels and Heat of the Association, Ian Calvert who comes from British Sugar, Stuart Boyle from Wood Energy Ltd and Graham Stowell from Bronze Oak. Can I start our questioning with you in the same way as I did with the NFU, which is to ask you very straightforwardly what is good about Government bioenergy policy and what is bad?

Mr Meeks: First of all, thank you very much for the invitation to come and give evidence. The colleagues I have with me today have been selected to represent some discreet areas of the industry, from heat, power and fuels. What I intend to do is to direct questions to the expertise that is there. Returning to your question, the principal problem we have today is that the significance of biomass in contributing to our carbon abatement targets, our climate change targets and also, increasingly, to the question of fuel security has simply failed to be recognised and given the significance that it probably deserves. If one looks at the current concerns that we have, for example, on the security of gas supplies, if we are to believe the line the Government has taken, the Energy Review has been predicated on the assumption that our electricity supply mix by 2020 will become something like 60 per cent gas powered and something like 60 to 70 per cent, maybe even higher than that, of our gas supplies will be imported from unstable sources overseas. If we take a step back and look at our heat supply in the UK at the moment, 90 per cent of our heat in our homes today comes from natural gas. If we look at the industrial and commercial sector, 55 per cent of the heat supply comes from natural gas. If we have got a looming problem with natural gas in 2020 in the power sector, we have got a real problem today. A lot of the institutional structures that we have today simply fail to take into account what the heat market is, what the transport fuels market really is and how biomass can necessarily be used to address the concerns of climate change and fuel security right across our energy economy.

Q44 Chairman: Can you define in simple terms how you would like to see the Government's review of their climate change programme and the Energy Review that is going on address the deficit as far as the use of biomass is concerned? If you had a free hand in designing what the words would be, what would you write down?

Mr Meeks: First of all, we need to move away from a narrow attachment to looking at energy supply simply as how we deliver network utilities, electricity and gas, and begin to approach it in a far more holistic way in which we look far more at the energy services and how those can be delivered by taking advantage not only of indigenous sources but a far greater variety of energy sources. Biomass clearly has a major contribution to make in terms of an energy source if we look at it as another competing energy source alongside gas in the heat market and alongside other renewable sources, fossil sources and nuclear in the power sector and also, of course, in fuels. If we were to look at the enormous opportunity and resource that is available not only with the current first generation biofuels which tend to use higher value starches and oil seeds to provide the source but then we go to second generation where there is a whole host of technologies which could be used in parallel and in a coordinated manner with other energy systems to provide a far more efficient overall energy system, I think the root of this is really taking an holistic approach.

Mr Boyle: We have a policy at the moment to go for 60 per cent carbon reductions; that is official Government policy. There is a longer aspiration to go beyond that. No one who has seriously looked at this believes that we can get there without a substantial role for biomass because what biomass addresses is the fuel aspect, the heat aspect and quite clearly the base load issue on the power side. It is recognised beyond a certain level with the intermittent renewables that you need some base load and biomass provides that possibility. At the moment that is not fully recognised in the policy-making systems that are there. There are additional qualities that you can give that. In my own area, in heat, it is as though it does not exist. There are major support mechanisms for power belatedly coming along on the liquid fuels side and really nothing on the heat side. So a whole third of the energy equation, which provides big opportunities for reductions, at the moment is largely ignored. So there is a lot of work to be done.

Q45 Chairman: Why is it ignored? The Government would argue that they appointed Sir Ben Gill to produce his report. I am sure they would say if they were here - I am not a spokesman for the Government - they did recognise it and they have produced a report.

Mr Boyle: That is absolutely right. In that report you will find a great deal which echoes the criticisms that we have just talked about and they have given a recipe of policies to move out of that. There are four or five working groups at the moment due to report in April. The proof of the pudding will be in those recommendations and what the Government does. So far there has been one single recommendation addressed which is to reduce VAT on biomass boilers from 17.5 to 5 per cent.

Q46 Chairman: Who are these working groups?

Mr Boyle: They are inter-governmental working groups, Defra and the DTI mainly, with some other experts brought in. They are looking at fuel infrastructure and policy mechanisms right across the range.

Q47 Chairman: Is that the sum total of their output to date?

Mr Boyle: Well, to be fair, they are on a fast track to report within six months. Ben Gill reported in late October and they will have until April.

Q48 Chairman: So we have a dual line of inquiry by the Government. Are they following on or paralleling Sir Ben's report?

Mr Boyle: The interesting thing about this is it has become a little bit Kafkaesque here because the climate change strategy is 20 months late and counting. The problem with that strategy is that there is always another report from a different sector coming along which then leads to a delay in the climate change strategy, which then leads to the excuse that because we are behind in our targets and we are missing all sorts of things we had better wait for the biomass task force or we had better wait for that review on wave and tidal, it just gets being put back. In a way you are putting off the inevitable, which is to face up to the fact we are not hitting our carbon targets, we need more intervention and we have got to do more. We need to bring that to a head and realise there is an end point here, acknowledge what has not worked and bring in what needs to happen and then we can move forward.

Q49 Patrick Hall: I am not sure about the distinction between power and heat because electricity is used to generate heat and gas is used to generate electricity.

Mr Boyle: Obviously to provide low grade heat, such as heating this room, or process heat for industry et cetera you can use a variety of sources. At the moment that is dominated a lot by gas in the domestic sector and 55 per cent in the industrial sector. You can use electricity for heat. It is a very, very small part of the market because it is a very inefficient and expensive way of providing heat. Electricity is mainly for the high quality end, lighting et cetera. You have got a few buildings where there are storage heaters and so on, but anybody who has paid the bills for those knows it is pretty expensive.

Q50 Mrs Moon: You talked about the Government always being on the back foot and it never actually getting there. Where do you see the hold up as being? Is there a particular department that is slowing the process down? Sometimes I feel that Defra has all the targets, but the actual changes that we are looking for are often with other departments like the DTI and the ODPM. Where do you think, if you pulled that plug, we would see some movement?

Mr Meeks: I think you have hit on the problem in that it seems to be the case that responsibilities are spread too thinly across too many departments and it therefore bears too small a significance within each of their respective portfolios and so it simply does not receive the attention it is due. I think if you put it in a single department you may begin to see that it enjoys a greater significance with respect to the ministerial brief, but unfortunately with the responsibility spread fairly thin we do not reach that. We see that DTI has responsibility for power and so they will begin to look at biomass applications in the power sector. Defra appear to have inherited it because of the upstream issues of fuel supply and also the legacy of combined heat and power which for some reason has always fallen outside of DTI's gift and within Defra's, so they then have part of the picture to deal with and, of course, the Treasury will always have an interest in economic efficiency. In some respects, even though they may be willing to pursue this, again it is not a significant part of the respective departments' brief to then go in to bat with the Treasury. I would also add that ODPM has an incredibly important role to play in this and they are consistently found to be a very difficult department to deal with, particularly with some of the more local solutions which tends to be the optimum certainly for biomass power and also biomass heat. It really requires the coordination of activity at a local level to create the market. The ODPM is a very jealous defender of the interests of local authority budgets and it will resist fiercely anything which they see as in any way imposing additional costs. As a result of that, in particular I would say biomass, which requires a local intervention as well as a national government one, falls foul of the ODPM's very strong defensive tactics.

Q51 Mrs Moon: So the big barrier is the ODPM, is it?

Mr Boyle: I think it is a bit more complicated than that. You have put your finger on one of the key problem issues for our sector, which is that it is disparate, disjointed and incoherent. For a long time the DTI has simply not understood heat. For the DTI energy means power. Unless it is ten megawatts you do not go into a meeting. So it is small scale stuff, particularly with heating. Why is that? If you look at where the allocations and the sources are, traditionally that has been the case. That is a reality. On the heat side and on some of the smaller scale biomass side it has been difficult to find a champion. At the end of the day you are trying to change infrastructure which has been geared up for the lowest possible price, conventional fuels et cetera. You are trying to redirect that with carbon reduction and other objectives are coming into play. There is a lot of resistance to that. There are a lot of pressure groups writing to you saying not to change anything. In my sector we have the Chipboard Association that will write in to you and say we cannot have too much wood fuel as it will put the price up for them. With every change there is someone who does not like it. Within that you need champions. At the moment if you asked where is the champion for biomass, there is no one department that you could point to and say that is the place it should be because the responsibilities are split right across three or four departments. We must not forget the Treasury, of course.

Q52 Mr Drew: I want to look at one of the key levers which is the Renewables Obligation. I would welcome your views on the efficiency of this particular means to impose changes on the energy suppliers. More particularly, I have been interested in the dysfunctionality of the Renewables Obligation Certificates which were a fine idea and may be working a bit better, but, of course, the whole market almost fell with the collapse of TXU. What are your views on that workability if you like?

Mr Stowell: The Renewables Obligation has had a certain amount of success. It has encouraged us to develop a full capacity for landfill gas capacity. It has certainly encouraged onshore wind to come onstream and it has been successful with cofiring. What it has not been successful in dealing with is other technologies, such as biomass and then the other offshore and more expensive ones, ie wind, wave, tidal and solar. To my mind there is an inflexibility when it comes to biomass in that it does not recognise some of the other benefits of biomass not only just in the rural community but in being able to present base load capacity at the end of transmission lines. It helps reinforce the system and so on. Those benefits are not valued in it. This difficulty of getting biomass, which is just behind the crest of a wave really in terms of the economics and so on and its applicability under this system, is not really encouraging that to come through. You have hit on one or two of the issues which cause a problem. In order to have the development of small to medium-size projects, which are the ones that are replicable throughout the country, with definable catchment areas of feedstock and to be able to finance these projects and so on, one does need to have a certainty on the value of the output, electricity and ROC and it has been very difficult for developers of such projects to get good long-term contracts for the sale of electricity without leaving a lot of value on the table with the purchasers. So it has been quite difficult to get a financing scheme together with the uncertainty of what is going to happen longer term. You are talking about long-term investments here, you are looking for debt terms of ten years or more and it is very difficult to establish those long-term values in order to be able to finance projects. So there are constraints on the system.

Q53 Chairman: Can I just stop you, Mr Stowell, because you have painted a little word picture which I have been following with enthusiasm. You have been talking about medium-size projects doing a certain something or other. Can you turn that into something tangible that I can understand?

Mr Stowell: With biomass power you could be looking at anything from a few kilowatts up to 50 megawatts or maybe a little larger in terms of the output of projects. Now, one or two of the larger projects have gone through with capital grants and so on. By going through I mean they have reached financial closure and they are in build and so on. We are talking about 25 or 40 megawatt projects. The problem with those projects in terms of replicability across the country is that they put a stress on the feedstock supply, on the catchment areas of biomass. My personal belief and my company's belief is that the replicable nature of things in terms of feedstock supply is to concentrate on catchment areas of 20 or 30 miles radius, which means that you are more in the five to ten megawatt range and those are quite difficult to finance. They are also quite difficult economically because biomass is rather like fossil fuel plants, ie the larger the more economic you get and you get a benefit of scale. You are getting into an area where you have to get all the benefits of the economics you can, on costs of feedstock and so on to make those work. They are not quite there with the ROC values as they are at the moment.

Q54 Chairman: Put simply, unless these plants are subsidised by the payment of the ROC they do not produce power at an affordable price at the end of the day.

Mr Stowell: Not at the price of feedstock which is there in the market at the present time.

Q55 Chairman: And to make the economics work you have got to have a step change up in the size of plant if you are using it as a source for power generation.

Mr Stowell: Yes. You are right, there are step changes in the sizes of technology that you use. The bigger projects do not necessarily suddenly become viable because the distance you have to bring fuel to the plant increases and therefore the costs of fuel increases the larger you get. So there are lots of dynamics in the economics of these projects.

Q56 Chairman: Do you think that influences the answer you gave to our earlier question on why this is sounding like it is in the all too difficult column?

Mr Stowell: It is difficult. I would say, however, that some of the earlier and more successful projects under NOFFO were biomass projects and indeed at the moment more ROC are produced from biomass, if I include landfill gas and cofiring, than there are from wind or any of the other renewables. So it is a major renewable energy technology that does need to continue to be encouraged, but I do have a problem. You asked about departments. The DTI has put biomass into their 2020 targets as a technology which I think is very false and very discouraging for the industry.

Q57 Mr Drew: This is quite complicated, but in a sense when we many years ago went to Denmark to look at the upsurge in interest in wind there, one of the things that really stuck in my mind was the fact that they ran it through community engagement. Surely, if it were sold in the right way in rural communities, people would buy into this? This is something that could really regenerate those rural areas that need help and with public subscription, which is seen to be old-fashioned in this country, it could make a reoccurrence if somebody was to drive this forward.

Mr Boyce: I have a lot of sympathy with that view. We are involved with a number of communities on LPG oil which have made the commitment to move forward. In saying that, the decision-making process takes a lot longer because if you engage with the community you are immediately putting six to nine months on the decision-making, in contrast with a single industrial client who, if they had the finance and the economics stack up, could make a decision quite quickly. I think there is a balance there certainly in terms of buying the local community, where local benefits help the management of local woodlands, help generate a few jobs, et cetera, et cetera. The pluses are all there, but I do not think we should be under any illusions that that automatically overnight will change the economics of the framework in which you are operating. At the end of the day you have still got to access capital.

Mr Meeks: If I can just come in on that point. The economic opportunity from the community point of view is likely to come from the feedstock supply, the management of the land, and the logistics that bring the fuel to the project. In terms of financing these projects, particularly if as many of these projects are stand-alone projects using a project finance model, one has to have contracts at both ends of the project, if you like; one for the supply of the electricity from the project, and also to make that mean anything from the bankers' perspective, you also need to have the up-stream contracts in place for the supply of the feedstock into the project, and both of those need to be with creditworthy, solid counterparties, and at the state of maturity that we are with the supply chain at the moment there is a concern that that upstream supply chain is not able to provide the guarantees that one looking for to effectively balance the financing of the project.

Q58 Mr Drew: Can I be very clear what do you mean by the upstream supply chain?

Mr Meeks: I mean the contracts to supply the fuel. It is as simple as that. That has to be with a strong, creditworthy counterparty if the project is to attract finance. We are at a stage today where we are transiting, if you like, from where we are today, which is at a very immature stage of the market, to one we would like to be in ten years' time where these supply infrastructures are mature, they are businesses with a commercial track record, which one could raise money against or for, but we have to get there and we have to find a way of reaching that point. Perhaps one way one could look at that is to look at the way in which the Government might underwrite or guarantee the fuel supplies, to supply the financial underpinning that would allow a bank to lend money to makes these projects happen. That could be a very straightforward way of, if you like, unlocking the credit risk that sits in a lot of these projects.

Q59 Chairman: I would like to take forward this theme because you raised in your evidence in paragraph 17 some issues connected with co-firing. I do not want to go into it now but I would be most grateful for a layman's explanation of what paragraph 17 means because I could not work out what the numbers meant. I have received a number of letters sent to me in connection with this inquiry, one from Renewable Fuel Supply Limited and an interesting letter from Drax, who have written saying that "the decision to reduce the co-firing cap from 25 per cent to ten per cent of obligation levels was taken as a result of a major review of co-firing." That is a quote from a letter sent to Melanie Wedgbury, who is the Head of External Affairs at Drax, and I am not clear whether this was a letter from the Minister for Energy on this particular subject. First of all, it seems to me that co-firing is one sure-fire success because it is straightforward to do, you have got a plant there, you are going to make an instant impact on greenhouse gas emissions, and yet, according to this letter and the statement from the Minister, the Government have decided to make it less worthwhile or less easy, I am not quite certain, and I hope you will explain to me why they have decided in one area where you have got a winner in 2004 they make it more difficult. I am not clear from the letter and what the Minister says whether this is because it was costing too much money or whether they just decided they wanted to cut back. I do not understand.

Mr Meeks: The decision to set this lower cap on co-firing was taken, I believe, in 2003. It was a year into the introduction of the Renewables Obligation.

Q60 Chairman: Can I just be clear because this is a new territory for me, when we talk about caps, are we talking about the percentage of the burden which can be either in this case by coal and 25 per cent in biomass?

Mr Meeks: The Renewables Obligation requires the electricity suppliers who are obligated to supply a certain proportion of their electricity from renewable sources. The cap that is referring to effectively separates out that obligation and says it can only meet, say, 25 per cent of its obligation through the use of the Renewables Obligation certificate from co-firing, so if, for example, its obligation in year X was 4,000, let us say, then it would only be allowed to submit 1,000 co-fired ROCs.

Q61 Chairman: Why?

Mr Meeks: I believe the concern at the time - and this is an understanding of the situation - was a concern within government that co-firing would be too successful and would take up too large a proportion of the Renewables Obligation and therefore squeeze out the opportunity for other renewables technologies, and it was almost, if you like, ring-fencing a particular proportion of the obligation to prevent that from happening. At the same time, they wished to balance that against what they saw as the opportunity with co-firing, which was to bring forward domestic energy crop production. They took the opportunity in 2003 to change the RO because the immediate response they got from stakeholders across the industry was that the initial proposals - and even now I cannot remember the detail - would not have facilitated that, so they made a number of changes looking forward - and as I say these changes were introduced to do that in 2003 - that would effectively change the role of co-firing as the obligation moved forward. There is the co-firing cap which goes from 25 per cent to ten per cent this year and in 2009 it would be necessary for co-firers to use a minimum proportion of energy crops within the mix of fuel that they put into the station.

Q62 Chairman: To me as a layman sitting here, it does not seem to make any sense because if you are trying to hit the various targets that you opened up your evidence with, and which we know the Government is trying to achieve, and we know the CO₂ outputs in sum total have risen, not gone down, in the last few years, would it not be the case that you take all opportunities? Is there any evidence you have come across to substantiate the position in 2004 which saw co-firing as a threat? Have you heard of projects where somebody was going to build a wind farm or wave development or something else and who said, "Gosh, we can't do that because of co-firing"?

Mr Meeks: I think there was a wave of optimism that existed in 2002 about the speed with which the market would be able to respond to the signals that were laid in front of it by the Renewables Obligation, and I think we are now reaching a point in 2006 where the reality is beginning to dawn, and exactly the point you make, Chairman, given where we are in terms of the climate change programme review and the evidence I am sure that will present about our rather paltry performance in relation to the targets, we need to be pursuing all the opportunities that we have in front of us.

Q63 Chairman: I do not want to lead you in this answer but are you sending a clear message to this inquiry that the Government should look again at these numbers in the light of the reality you have just described?

Mr Meeks: In terms of the way that the RO is likely to stimulate a number of technologies, including offshore wind in particular, which is now facing some increasingly recognised difficulties, the Government really does need to look at how effective the RO is in delivering what it set out to do.

Chairman: Sir Peter?

Q64 Sir Peter Soulsby: Can I take you back again to the question of renewables and heat because this is something you touched on earlier on that has not perhaps had the same degree of attention as the use of renewables for generating electricity. Back in 2004, the Royal Commission on Environmental Pollution was very supportive of a Renewable Heat Obligation similar to the Renewables Obligation for electricity, yet when the Biomass Task Force came to look at that they said it would be "unworkable". How do you respond to that?

Mr Boyce: I was very intimately involved in that and had about four or five meetings with Sir Ben and his fellow members. I think the issue for us is two-fold. One, as a company, a recommendation for a five-year 40 per cent capital grant would do wonders for our business, so on a purely selfish note that recommendation would do a great deal to lift the industry because the current Bio-energy Capital Grant of about 22 per cent is too low to make it a must-have investment kind of decision. So if that is a recommendation, no problem whatsoever. It would do a great deal to stimulate the market. If you look at countries like Austria and Sweden with ten years plus of capital grants of 35 per cent, it has really led to a massive increase in a sustained big growth industry, which is why they dominate the manufacturing side of biomass boilers. Most of the boilers sold in this country are from Sweden, Austria, Germany, etcetera, because they have got a huge domestic market. However, in the UK we have tended to take an approach on capital grants which is, "Give it two or three years and hope that miracles happen"; then the capital grant programme goes away and, what a surprise, it does not take off. We do not have a track record of the Treasury supporting long-term capital grant support. The worry is that you will not build a sustainable industry with a relatively short-term set of grants and big uncertainty whether after three or four years it all drops away. That is why the discussion on a longer term support mechanism grew because we were concerned that when grants end we will not have built a sustainable industry. Our concern on the conclusion of Sir Ben is that as an Association we are not saying that a Renewable Heat Obligation is the answer; however, we would certainly like the assessment and analysis to be done. Our big concern at the moment is that the Royal Commission certainly did not do any research, the Biomass Task Force did not do any research, the Defra/DTI joint report, which was supposed to look at this, did not do any research, so we are dismissing this without the intellectual capital or time to assess whether it could work or not. Our own view is that there are certainly the ingredients in there and we think it is workable, but the detail has not been done, and certainly a longer term support mechanism to take you beyond the vagaries of a Treasury on-and-off situation, which is no way to build a sustainable low carbon market, should be looked at.

Q65 Sir Peter Soulsby: Who should do the research and over what sort of timescale might that be possible?

Mr Boyce: It is a pity that the opportunity has really been missed with the research that came out of the Energy Bill because there was a commitment by DTI and Defra to do joint research. In the end we ended up with a not great report which looked at how big was the renewable heat market. We could have told them that a year and a half ago. It is pretty big. What we have not got is any mechanism. Clearly DTI and Defra have dropped the ball and I think the research should be commissioned by them because ultimately they have to carry it out. Six to eight months of focused research, with the right set of parameters, will answer, we believe, the bulk of the questions, and then we can have a discussion about it and decide whether it is appropriate to move forward or not.

Mr Meeks: The Department of Transport sponsored the introduction of a Renewable Transport Fuel Obligation and effectively did the evaluation of that in a period that went from, I believe, April 2005 to an announcement by ministers in November of last year. So the focused evaluation, given that all the studies that have been done to provide the basis have already taken place, could be done in a relatively short timescale.

Mr Boyce: I am afraid there is a little bit of a feeling at the moment by civil servants of "not another obligation". They are very over-worked and I have a great deal of sympathy. They are trying to do a lot more with less people. I have sympathy on a real world sort of level but there is definitely a "not another obligation" approach and that has affected the willingness of the DTI to take on and embrace the concept and approach of a Renewable Heat Obligation.

Q66 Mrs Moon: I am interested that you felt the research should come from Defra and the DTI because the previous evidence we had from the National Farmers' Union was that they wanted local government to take a lead in this area because they felt that the public sector (and local government was part of it) had the capacity to invest in combined heat and power units that could take the biomass. So why have you gone for that end and the National Farmers' Union would say, "No, it should be ODFM"? Since you are talking about being realistic and "not another obligation", part of the problem that ODPM are obviously faced with is that they do not want a rise in their council tax. How do we square that circle at the same time?

Mr Boyce: This is a little bit apples and oranges. On some sort of obligation which might be placed upon fuel supplies, it has to be national legislation, it has to come from the centre. There may be elements of that where obviously in terms of monitoring, et cetera, at the local level, regional heat targets and so on, you can move down and delegate, but, frankly, where local government is really knocking the spots off central government and showing what can be done in this area is in a very simple initiative that took place two and a half year ago in the London Borough of Merton which said that commercial developments above a certain size will have a minimum of ten per cent renewables. It got challenged but is now accepted and the GLA adopted it and 52 plus local authorities have now adopted it. It is sweeping the country. That includes any developer of offices, schools or PFIs, all sorts of things. It is not about a local authority saying, "We would quite like you to do a bit of renewables please", and getting into a planning gain discussion. On this occasion this is a box that they have to tick, a minimum level of renewables. That simple policy applied at a local level of planning has done more to increase dramatically the market in renewable heat across the board in solar, biomass, et cetera, because the developers accept, "We have got to do it. Let's get on with it." It is a small additional cost to them. If you have a 400-house development, if you have got to do ten per cent renewables, it is a tiny marginal cost but you get to the big development. That is where local authorities working at that sort of level are a fantastic lever. Let us move it out ten, 15, 20 per cent and start ramping it up. That is where you will get the real change.

Mr Meeks: From an economist's standpoint they are building developments which are going to be lasting for 20, 30, 40 or 50 years. The fact that these projects may have a very long pay-back if appraised in perhaps a more normal way becomes less relevant. They are creating value, they are allowing developments to proceed, and also they are being implemented in a way that is consistent with the economic lifetime of those developments. It seems a logical way to take it forward and one that should not cost the Exchequer much, if anything.

Q67 Lynne Jones: I find all this conversation very interesting because in the 1980s and 1990s local authorities were busy getting rid of their district heating schemes, for example, which at the time I remember being quite critical of. You have been critical of the Bio-energy Capital Grants scheme and you have expanded on that just now about the fact that it is just a short-term scheme and there has not been the uptake of the money that has been made available. Apart from having a scheme lasting a bit longer, what other changes would you like to see? We have, for example, vast amounts of our local authority housing which does not meet the Decent Housing standard and yet the Government does not seem to be making money available. There is £10 million here not taken up. So what changes would you like to see in the Capital Grants Scheme? There may well be projects that have been given the go-ahead that may not actually take place so what should happen to that funding? The other side of that is whether the stimulation of this investment is going to be sufficient to reduce the cost of capital investment in biomass or are there other areas of work that need to take place to reduce the costs?

Mr Meeks: There are a lot of questions there. The first question on Bio-energy Capital Grants, I would say it has been very much a mixed bag because, as you appreciate, it has covered quite a broad spectrum of technologies from pure power technologies through to heat only and also a range of scales, so I will ask Graham to perhaps start off with talking about the power side of things where it has perhaps been less successful, and I think on the heat side, Stewart, it probably has been perhaps a different story, and that is maybe where the lessons are to be learned. Graham?

Mr Stowell: On the power side, there has been some success with the larger projects which I mentioned before. The support mechanism that not been taken up yet - there are a number of reasons for that. Part of that is the economics of biomass and trying to get long-term contracts of fuel supply and so on, but if we look just at the Capital Grants Scheme, there are some constraints there. For a start, the Government has given itself the right to withdraw those before the completion so that does not give banks any confidence. It is a mechanism that means that it reimburses after the money has been spent so the balance of funding needs to fund the whole lot before it gets some money back. Some of those projects, because they were selected by tender and certain criteria, actually have pushed advanced technologies, which banks of themselves find difficult to support pushing through, so some of the reasons are not just the money availability but actually the other criteria that go around it. Mr Meeks made a point that one of the issues that we tried to present to help unlock some of these projects, a mechanism whereby we could release private sector not only capital but debt from banks, might be by coming up with a commercial guarantee scheme supported by Government. Nobody has really wanted to get involved with this, although it is a very simple mechanism - and I can say this from personal experience because we have developed biomass and biofuels projects abroad - and the Philippines, for example, has managed to do this to enable international debt to come in without any difficulty. I suppose it is not really understanding what it takes to close financing on projects of a reasonable size. We are talking about the £20 million-plus capital cost projects. Those are some of the reasons why it has not happened. I think there are mechanisms that can make it work. They need to be followed through a little, but they are not terribly difficult to do. It just needs to move the goalposts a little bit.

Q68 Lynne Jones: What have other countries done that has been different apart from having a more sustainable length of time for the availability of the money?

Mr Stowell: In terms of other capital grants?

Mr Meeks: Would it be worth just talking on the other aspects of the Bio-energy Capital Grants Scheme because it has been quite different in the way it has been administered in different sectors?

Mr Boyce: I think in our sector we would probably say six and a half, maybe seven out of ten. The first reasons that it has been different from Graham's experience on the power side is that it has been ring-fenced for companies so you do not have to go bespoke for a single project. We have a certain amount agreed for us and the criteria that we can sort out pretty quickly with the grant administrators, the Lottery and DTI, means we can move pretty quickly and we can offer it to clients upfront. Instead of having to wait and claim back afterwards we will do that as part of the package. We can say, "This price includes a Bio-energy Capital Grant." They have good staff, they are very flexible, and they have recognised a big gap in the market for funding support for district heating. They have been flexible enough to accept district heating infrastructure to go in, which is beyond their original brief but they have been pragmatic enough to realise that the big potential growth in that area is district heating and if nobody is supporting the grant funding on the pipework it is not going to happen. Those are the pros. The cons are that there is 22 per cent of allowable costs. You cannot include the cost of the boiler house and a number of other costs are not included in here so you are probably ending up with 17 or 18 per cent of total project costs, which is too low to make a fundamental difference on certain projects, which means then in certain areas you have to go and get two or three other grants. In Yorkshire you go to Yorkshire Forward and say, "Can we have a grant from there?" That takes another six months. Then you maybe want a third one. So instead of it being a rapid turnover, you have to waste another nine months to assemble the grants to get to the 40 per cent figure. If you had a very simple 40 per cent quick rapid turnaround you could replicate and really move the market much more quickly. That is the real area of concern. It is just not big enough and the criteria of what is included in this is too restrictive at the moment. I think experience overseas where there have been grant schemes is if it is simple, quick, rapid, clear and at the right level then it works, and I think if we could get some changes those would be the areas.

Q69 Lynne Jones: The point about local authorities is important because in Birmingham where I come from they have got tower blocks and blocks of low-rise flats, in fact, some of them where they have taken out previous district heating schemes. Are they eligible for any of this money?

Mr Boyce: Firstly, retro-fitting district heating back into systems taken out is very, very expensive, which is why it is always a pity when it comes out. It is much easier with the pipework in there to upgrade it, to bring in a wood boiler; that is cost-effective. To retro-fit the infrastructure, to dig up the concrete and all the rest makes it extremely expensive. It is not impossible but you need very substantial support. You are making a long-term, 100-year social investment. In new build it is completely different. If you are digging the ground anyway to put the pipework in at the start, then the marginal costs are relatively low and it really makes sense. My sense at the moment is that again with the planning is to really influence all new build and larger, denser settlements should look at district heating with biomass. You should really turn it on its head and you should have a good reason for not doing it rather than having to buy into it. In that way you get many more schemes much more cost effectively. You can retro-fit but the numbers are a little bit frightening at times

Q70 Chairman: Mr Calvert, I would like to ask you a question because we have heard about the potential from our other three respondents for the use of biomass both as a heat source and a potential power source. You have taken an interesting punt. You have decided to go ahead with your bioethanol plant. You do not know what the Chancellor's capital allowances are going to be, you do not know if the 20 pence is definitely going to carry on, but you have decided to take a punt. As far as the heat source of your system is concerned, are you considering using biomass as a way of a) making your total project more CO₂ friendly and b) capturing some of the potential cash that we have just been hearing about?

Mr Calvert: Hello, Chairman, I am here representing the part of the REA that is interested in liquid biofuels and in particular investing in large-scale, future, domestic, liquid biofuels plants. You are obviously mentioning the British Sugar investment at Whittington which, for the record, is a 70-million litre (that is 35,000 tonne) per year ethanol plant using sugar syrups as a feedstock, so it is integrated with an existing sugar factory. We have started building it now and I would not like to say it is a punt, I am sure it is a considered investment, but it is the first so in that respect it is bold. It is the first investment in a bespoke bioethanol manufacturing facility in the UK. It is also quite small and it is for us a limited opportunity because it is so tightly integrated with an existing sugar facility. That integration would extend in all probability, and I believe it does in fact, to the way the plant is fuelled because there are some highly specific issues relating to that plant at that site in Whittington in Norfolk. It has already got a very modern combined heat and power plant. I am sure we will come on to life cycle analysis in a moment, but the clever thing to do is supply any heat that the bioethanol plant needs (which is low temperature heat) which could be effectively supplied from the waste heat from a power station, which is what CHP is. The clever thing to do with that plant is to connect it to the existing CHP plant. That is not to say that British Sugar has not looked at and continues to look at biomass opportunities. We are always alive to that and are active in that area in fact.

Mr Stowell: Could I just answer your question specifically does it help the CO₂ to use biomass as a fuel source; yes, very much so. It is not particularly relevant to this country but we are developing bioethanol distilleries in the Far East, using sugar cane as a feedstock and using the biomass from that to produce the heat and power and selling surplus electricity into the grid. That way our CO₂ balance is orders of magnitude better than grain distilleries that use fossil fuels.

Q71 Chairman: What I am getting from you, Mr Stowell, with your observations about overseas investment, is greater investor certainty as opposed to the domestic situation where there is vast uncertainty. I was intrigued from the British Sugar point of view that we have had you before us on a number of occasions where you have talked about what you would like to do, but you have said that there is so much uncertainty that you were not actually going to invest in this plant. Then all of a sudden you decided to put in for a planning application and now you have gone and done it, against a background of uncertainty because you still do not know what the capital allowance regime is going to be, unless you have got a special line to the Chancellor, and you do not know definitely if the 20 pence per litre duty derogation is going to be sustained for whatever the investment period is for which you want to recoup the cost and make an investment return. How come for a company like yours where investor certainty is rather important you have decided to make an investment? What is the value of the investment in the bioethanol plant?

Mr Calvert: We are talking of the order of about £20 million.

Q72 Chairman: So you are putting £20 million of your shareholders' capital at risk against a very uncertain investor background and you have bothered to do it. Why have you done it?

Mr Calvert: As I said, the Whittington investment is a special case. It has got some advantages because of its integration with the sugar factory. We have referred to it as a niche opportunity and it does not in any way point to there being loads and loads of other future investments. When we talk about uncertainties, as previous speakers did from the National Farmers' Union, in the regulatory regime surrounding biofuels investments, I can assure you that that uncertainty is still there and we are very involved with the development of the Renewable Transport Fuel Obligation because that is the key and the fact that the RTFO will work will deliver a future large-scale industry that we are really interested in and, in that respect, the Whittington investment is not a pointer of the way forward. All subsequent bioethanol plants in the UK will be contingent upon the RTFO actually working. By working it is a simple test; it has to generate a market, ie get the customers to interact with our sales force and say, "Yes, we recognise the Government's intent or the regulatory intent is that they want us to include five per cent in our products, we will buy it from you at the market rate," and we stand ready to make large quantities and large investments at the market rate but we are very worried.

Q73 Chairman: Just to clarify a point finally for me on this. Again, when you first started out, I was pretty clear that this was going to be a sugar beet-related enterprise. Then in an intermediate period you extolled the virtues of grain as a very efficient feedstock. Now, as I understand it, you have gone back to sugar beet. Why?

Mr Calvert: It gives me pleasure to set the record straight on this. Obviously there has been some confusion over the past few years. I have been involved with this for about the last six years and early on we did some work to share with Government as to what would be the preferable feedstocks for a large-scale bioethanol plant, and I do assure you that at the time we came to the conclusion that in the current environment wheat in the UK would be the preferred feedstock. It is not a huge difference and yields can change but, as I remember it, we felt that a wheat plant would deliver ethanol about ten per cent cheaper than a sugar beet plant at that time. Since then obviously we have identified the opportunity to build this small plant at Whittington and we have gone ahead with that, and that is a clear demonstration that we mean what we say and we are ready to commit to this industry. We feel, as I know Government does, that this is a tremendous opportunity, so we have made that small step and we will be first in the market for manufacturing that fuel in the UK. However, the point about a wheat-based plant still being the preferred feedstock for a large-scale investment is still true and that is what we and many other competitors and members of the REA are still considering. There is tremendous potential for wheat to ethanol plants in the UK and you should not have to swap your wheat with someone in Spain to make it, as I heard earlier. We have got an exportable surplus of about three million tonnes and that in itself could meet five per cent of UK petrol demand with no agricultural changes by 2010. We stand ready to make that investment but it is dependent on the RTFO.

Chairman: Gentlemen, it has been a fascinating hour or so. We could probably have another hour, but I fear that colleagues may have to depart to do other things and you have homes to go to. Can I thank you most sincerely for a very stimulating evidence session. You have given us a great deal of food to think about. We are hoping before much time has passed to go to the United States and another group to go to China, and I think they will have gained a great deal in terms of some very useful background information from you to guide them in the type of questions they will be asking, particularly in countries where some of the things you want to see developed here are more advanced. So thank you very much indeed for your contribution.