|
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 965-v House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE
CLIMATE CHANGE: ROLE OF BIOENERGY
Wednesday 3 May 2006 MR DARRAN MESSEM and MS TANYA MORRISON Evidence heard in Public Questions 295 - 396
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environment, Food and Rural Affairs Committee on Wednesday 3 May 2006 Members present Mr Michael Jack, in the Chair Mr David Drew James Duddridge Patrick Hall Lynne Jones David Lepper Mrs Madeleine Moon Mr Dan Rogerson Sir Peter Soulsby David Taylor Mr Shailesh Vara Mr Roger Williams ________________ Memorandum submitted by Shell International UK
Examination of Witnesses
Witnesses: Mr Darran Messem, Vice-President of Fuel Development, and Ms Tanya Morrison, UK External Affairs Manager, Shell International UK, gave evidence Q295 Chairman: It is four o'clock so we will start our evidence session on biofuels and welcome the representatives for our first session from Shell. For the record, we welcome Darran Messem, the Vice-President of Fuel Development for Shell International Petroleum. Are you the man who makes Michael Schumacher go faster? Mr Messem: My colleagues do that. Q296 Chairman: And Tanya Morrison, the United Kingdom External Affairs Manager for Shell International. In your helpful evidence, you told us that Shell is amongst the world's largest blenders of transport biofuels and a world leader in biofuel distribution and that you sell around two and a half billion litres of biofuel a year, mainly in the United States and Brazil. To put that into context, what does that represent of the total road fuels market that you service? Mr Messem: That is just under one per cent of our total road and transportation volume. Q297 Chairman: So 99 per cent is still conventional? Mr Messem: That is right. Q298 Chairman: Would you count Shell as a company that was really enthusiastic, with only one per cent of sales in the "new" column for this new technology, or perhaps not so new technology because, going back to motor sport, I seem to recall that cars at the Brickyard, Indianapolis, used to run on bioethanol many years ago, now replaced by more conventional fuels, so it is not that new, but are you really enthusiastic about these fuels today? Mr Messem: I can speak from my personal experience that Shell is very enthusiastic about alternative fuels. I report to a biofuel supervisory board that consists of four of our most senior international executives and I get an immense amount of encouragement and support for what we do in this area. You are right to say that the technology is not all entirely new. The ethanol fuel, that the US market is very enthusiastic about at present, has been around, obviously, for many years and, of course, the original diesel vehicles were developed with vegetable oil, including peanut oil, right from the very early days; so some of the technology is not new. The biofuels that are better for the societal objectives that we are seeking to meet are very much based on new technology. These are what we call second generation biofuels that offer lower carbon footprints and do not tend to rely on the food chain for their feedstock and resource, and to develop those technologies there is an awful lot of brand new technology and technology under development. Q299 Chairman: Given the 99:1 ratio, we are currently discussing issues both of climate change, fuel security and the diminishing source of conventional hydrocarbon-based fuels. What is the Shell roll-out programme? You have got your Board, you report to them, you are enthusiastic, you are committed, but do you have a little graph on the wall that has the "time" and "percentage" for biofuels, or second generation biofuels or other types of fuel? Do you have a future trend line that you can share with us? Mr Messem: We have a demand projection, which we use for making assumptions around the amount of biofuel supply that we are going to require, and we look at that on a market by a market basis. I think, looking at the one per cent, it is important to recognise that that one per cent is one per cent of quite a big operation. In 2005 our total biofuel volume was very nearly three billion litres. It is growing at about 15 per cent compound at the moment, so it is quite a substantial growth curve that we are climbing up and it is quite a substantial volume that we have to distribute and blend. When you mention the projection going forward, Shell is not a biofuel manufacturer. Shell is primarily a hydrocarbon energy company with interest in renewable energy, and much of the renewable energy work that we are undertaking is at the more technologically advanced end of the energy cone, because we are seeking lower carbon footprints and we are seeking economical compartments to production. Currently all of the biofuel that Shell distributes and sells is made by third-parties and Shell buys that fuel in according to where that fuel is required in the Shell distribution system. We do not project a Shell manufactured volume, we project our estimated requirement for biofuel, and our estimated requirement is, of course, partly a function of the financial incentives that are in place for it, partly dependent upon the mandates that are put in place and that we are required to meet and partly due to where we see for ourselves a business strategy benefit or an economic benefit from becoming involved in the biofuel supply chain. Q300 Chairman: That suggests that you are doing it because (in the case of the United Kingdom) we have got a Road Transport Fuels Obligation, but you are not doing it because you think it is a good strategic move to say that Shell, as you say, is a major player in the conventional fuels market and will now invest in manufacturing capacity to move it into biofuels or other fuels. How are we to understand that? Are there other routes that Shell is going down that you think will bypass the biofuels route, because we as a Committee are aware that in the transport sector emissions continue to rise and there are only so many known solutions to that particular problem? Mr Messem: As I said, there are really three conditions that we are responding to with biofuels. In some markets there are mandates. For example, in Brazil, which is our second largest biofuel market, we have been required to distribute and blend biofuel for the last 25 years. In some US states there are mandates and there we have implemented ethanol where we have been required to do so. In mandated markets the challenge for us is that biofuels are typically more expensive than conventional fuels, typically have a lower energy content and typically are not demanded by consumers, and so there is always a degree of resistance to overcome in the implementation of biofuel, often from our customers rather than specifically from Shell, and so, in response to mandates, we implement biofuel where we are required to do so for legal reasons. Secondly, in response to financial incentives, where we are placed at a commercial or a competitive disadvantage by competitors taking up financial incentives, in some areas we will be required to respond in order to maintain our competitiveness. Thirdly, there are areas where we proactively choose to introduce biofuel where we see an opportunity to serve our customers better and where we see an opportunity to differentiate ourselves in the minds of the consumer. Those instances are relatively few presently, simply because the consumer demand for biofuel is limited and the economic penalty is substantial because of the cost base. Q301 Chairman: There used to be a man who walked round with a placard saying, "The end of the world is nigh." For some the final run-down of hydrocarbon fuels represents the end of the world. What is the Shell working timetable for the run-down of hydrocarbons? The sense I get is that you are doing it because in some markets you have got to do it and in some places you think it is not a bad idea, but I do not sense a great enthusiasm for biofuels. If we are seeing a run-down of conventional hydrocarbon fuels over whatever timetable it is, what are you doing that you are enthusiastic about to replace them? Mr Messem: We have two principal technology ventures that I am extremely enthusiastic about, and so are my colleagues. I am on the Board of Iogen Corporation in Canada, which is the world's leading producer of cellulose ethanol. The second venture, that my colleague Ken Fisher is on the Board of, is CHOREN Industries GmbH in Germany, which is a producer of BTL liquid, which is a zero-sulphur diesel fuel that is made principally from timber but can actually be made pretty much from any form of biomass. These two technologies are substantially superior to most conventional biofuel technologies. Their well-to-wheel CO2 (i.e. the amount of CO2 that they produce compared to conventional gasoline or diesel) is around about 90 per cent less than conventional gasoline or diesel, whereas conventional ethanol or conventional biodiesel, like fatty acid methyl ester, range anywhere between a 20 per cent reduction and a 60 per cent reduction depending on the manufacturing process. The fuels that we are really enthusiastic about are those that offer the potential for a very low carbon footprint combined with the potential for the economics which can be competitive in the longer term. Both the Iogen process and the CHOREN process use feedstock that will not find its way into food. The Iogen process uses straw and the straw, if it was not being used for the Iogen process, would typically be burnt, thereby producing an awful lot of carbon, or ploughed back into the field to be used as a fairly low-grade fertiliser. The CHOREN process uses timber, and that timber would be either harvested from surplus, i.e. dead trees naturally, or it would be harvested from trees grown for the purpose. The non competition with the food chain is a really important element, because we are already starting to see inflationary pressures in the world commodity markets being brought to bear by biofuel production competing for corn, for vegetable oil, on the world markets, and so we get really enthusiastic about those fuels that have the potential to be very low carbon and not compete with food chain. Q302 Lynne Jones: Which of those two technologies do you see having the greatest potential and what proportion of biofuels is produced by these advanced technologies? Mr Messem: Currently zero, precisely because we are in the process of developing the technologies. One of the reasons why we cannot give you a full production and sales forecast for these technologies is, firstly, because we are developing the technologies as we speak and, secondly, because the market conditions into which those technologies will be brought are not entirely clear to us. Crucially the success of such second generation technologies depends upon the ability to monetise the CO2 advantage, and currently, with a few exceptions around the world, policy does not enable the monetisation of the CO2 advantage. What I mean by that is if you take, for example, the UK financial incentive of 20 pence per litre, it is indiscriminate as to whether it is paid for a biofuel that has a zero CO2 benefit or has a 90 or 95 per cent CO2 benefit, and so what policy can do is encourage biofuels into the supply chain that are based upon production processes that are not very well understood in terms of their CO2 impact and draw upon agricultural supply chains that also are not very well understood in terms of their CO2 environmental impact, whereas what we would like to see is a policy that is based on the certification of biofuel for its CO2 impact and for the sustainable development processes that go into its production, particularly in agriculture and manufacturing. To answer your question more specifically, I think both of those technologies have potential. I would say, if anything at the moment, cellulose ethanol is a little bit more advanced in terms of potential, simply because the US Energy Act, which was passed in August last year, puts in place a requirement for cellulose ethanol to encourage its development and the White House has identified cellulose ethanol as one of the technologies that they are keen to see flourish in the US because of the vast amounts of straw production there; so there is a degree of backing for cellulose ethanol that is probably due to the fact that its development is more advanced and there has been work-in-progress for the last 20 or 30 years more than to do with the inherent nature of the chemistry and the technology. Q303 Lynne Jones: How do the methods compare in terms of their CO2 emissions? Are they equal in cleanliness, so to speak, and how do they compare with the use of biomass for alternative energy saving methods, for instance for heat or for electricity? Mr Messem: Both BTL and cellulose ethanol have the potential to be around about a 95 per cent saving on conventional gasoline and diesel. To compare and contrast the two, cellulose ethanol can be blended into gasoline, provided that the vapour pressure of the gasoline is low to accommodate the higher vapour pressure of the ethanol, and that can be used in a blend up to five per cent, maybe up to ten per cent, in existing Iogen technologies for gasoline powered vehicles. BTL is a diesel product which can be blended to higher concentrations because it is of a similar volatility and a similar density, and the advantage of BTL diesel compared to conventional diesel is that it is sulphur-free, so it helps with the catalyst treatment of diesels, gasses and it also, because of its purity, results in lower particulate and hydrocarbon emissions. Q304 Lynne Jones: Your concern about CO2 emissions is very commendable, but you have already told us in relation to conventional biofuels that they are too expensive. Fuels from these new technological processes are going to be even more expensive; so what are the price differences and what is it going to take to actually get these technologies off the ground? Last week we were told by the Biosciences Federation, for example, that the cost of the enzymes in the cellulosic process was very expensive and they thought that the Fisher-Tropsch process was actually going to be more of goer in the short-term. What do you say to that? Mr Messem: The enzymes for the cellulosic process are expensive. The competitiveness of the fuel will depend upon our ability to scale the processes in order to spread the capital cost and get efficiencies in production, and presently that scale-up process is an unknown quantity. We are working on the specifications for the first full-scale production now, and we hope to have that production plant commissioned in 2007 or 2008, and so it is not entirely clear to us yet exactly how the economics of that process will work. It is not necessarily the case, though, that cellulose ethanol will be more expensive. It depends very much on what happens to the world commodity markets and the price for vegetable oil versus the price for the feedstock such as straw, but there is every reason to believe that, as biofuel use increases, there will be considerable pressure on the world agricultural market, and that will result in price inflation for the feedstock which will also push up the price of the food and, in that process, the underlying economics of conventional ethanol will deteriorate. When you compare that against cellulose ethanol that is using straw as a feedstock, there is every possibility that you will not see the same price inflation in straw precisely because there is a much higher quantity of surplus product. We cannot be specific about the precise economics of cellulose ethanol verses conventional ethanol, but there is a scenario in which the world markets push up the price of the agricultural feedstock in the food chain and make conventional ethanol less economical, whereas cellulose ethanol potentially could have a cost advantage because of its straw feedstock. Similarly in BTL, in biodiesel. BTL would not be relying on food as a feedstock. The conventional biodiesels, like fatty acid methyl ester, will draw particularly upon soy or rape-seed oil or palm oil, and we expect there to be price inflation in relation to the supply of those products such that there could be a scenario where BTL is economically competitive because its supply chain does not compete with the food chain. There are many unknowns in this area at present. Shell's position has been that we do not have what we would call core competence or competitive advantage in first generation biofuels. The US ethanol business has been producing biofuels for many years. We do not regard ourselves as having a great deal of core competence or spare capital to allocate to the manufacture of first generation technologies. We do believe that the second generation technologies offer us a potential application for our technology and a potentially better fit for our business model and our sustainable development policy to offer us a business that we can develop in the future, but much of that is dependent upon the world economic markets and also upon the public policy that is put in place to require or incentivise biofuel. Q305 Lynne Jones: What public policies would help to drive that market forward more rapidly, and what sort of timescale do you think we could optimistically look at having a high proportion, particularly of diesel, from biomass sources? Mr Messem: Shell, as you know, is working towards the implementation of ethanol in the UK in 2010. In order to do that we need to reconfigure the Stanlow refinery during its planned shut-down period in 2010, and that work is planned to be got underway. To answer your question about the policy, the important issue is how policy recognises the performance of biofuel in reducing CO2 production. Presently the policy does not discriminate in terms of CO2 production from biofuel, so it is entirely feasible that you could have biofuel coming into the UK market that uses agricultural practices that are energy intensive, that uses manufacturing process that are energy intensive and results in a well-to-wheel CO2 profile that could be, say, 20 per cent better or even zero per cent better than conventional gasoline, and, whilst we are supportive of implementing the Renewable Fuels Transport Obligation in the UK and configuring the Stanlow refinery to enable fuels to make that happen, we think the policy objective for reducing greenhouse gas emissions would be better served by having a certification scheme for biofuels that enables us to really understand what is the CO2 impact and to enable technologies like cellulose ethanol and biomass to compete on their CO2 performance. Q306 Chairman: We are ducking and weaving between our of our line of questioning, but to follow on from that, the Chancellor announced some measures in terms of enhanced capital allowances for companies who were investing in the way you have described. Are these part of Shell's thinking and do they really make a difference? Mr Messem: The capital allowances, as I understand it, apply directly to the biofuel producing company. The capital allowance or the capital challenge that Shell has is the substantial capital investment required to reconfigure the Stanlow refinery to enable our fuels to be blended with biofuel. As far as I know, and I would need to double check with the people back at Shell UK, the investment is not directly dependent upon other capital allowances. Q307 Chairman: Is that because the Iogen link and the Fischer-Tropsch link are not UK based? Mr Messem: No. The issue for us in terms of implementing biofuel is that we have to reduce the vapour pressure of the gasoline that is produced by the refinery to enable the blending of a higher vapour pressure biofuel with the gasoline so that we still keep the vapour pressure specifications practised in the UK. Q308 Chairman: I am trying to find out in terms of where you put your investment capital, because you referred to it earlier. At the moment you have got Canada and Germany as sources of second generation fuels. The message I am getting at the moment is that the UK is not going to be a site for such developments in the foreseeable future. The challenge is to deal with the distribution of new fuels as opposed to establishing a manufacturing point for them in the UK. Have I understood it correctly? Mr Messem: No, I have misled you slightly. I am sorry. Let me try and clarify it for you. Iogen is based in Canada and CHOREN is based in Germany. That is not our preference in terms of manufacturing location strategy; it is simply that is where those companies are based. The technologies could be rolled out to various manufacturing points around the world. We have just completed a feasibility study for an Iogen cellulose ethanol plant in Germany, for example. The factors that are relevant to the industrial location of these technologies are primarily to do with the availability of agricultural feedstock - so straw and timber in the case of these two - the availability of land and transportation at competitive rates and then the availability, if there are any, of capital allowances and helpful economic circumstances for the construction of the project. Q309 Chairman: Just to be clear, am I right in assuming from that that the United Kingdom does not tick the first two boxes but ticks the third? Mr Messem: Currently the United Kingdom would be relatively down the list on agricultural supply, simply due to the volume of its agricultural market. It would be less attractive as a location for its financial treatment, it would be relatively attractive in terms of transportation, principally because the population, the demand, is so concentrated and the issue of capital is not so much the capital allowances, although, when you compare the German capital allowances and the US capital allowances, those are substantially more generous for these kinds of technologies. Q310 Chairman: Than the United Kingdom? Mr Messem: Than the United Kingdom, yes. The US Energy Act provisions for bio-technology are substantial, because of the size of the economy; so the US is probably the most attractive market in the world at the moment for biofuel technology development. Germany is also an attractive market, for similar reasons, but it also comes to the duty relaxation per litre of biofuel that is put in place. For example, in Germany there has been - and this is not directly relevant to CHOREN - a 100 per cent duty reduction for 100 per cent biodiesel over the last few years, and that has encouraged considerable investment in the biodiesel production sector in Germany. Q311 Chairman: Finally, does the Fischer-Tropsch process lend itself to producing aviation quality fuel? Mr Messem: Theoretically, yes. Theoretically the Fischer-Tropsch process could produce a BTL kerosene. That is not necessarily compatible directly with conventional kerosene. It would depend on the specification of the product that is produced. Of course, jet fuel (Jet A1) is one of the most tightly specified fuels in the world and is also subject to a host of bilateral agreements, which means, in practice, that whilst BTL kerosene could theoretically be produced, the practical issues of implementing a BTL kerosene in aviation would be immense. Q312 Mr Williams: You have given us written evidence and also you have told us today of the changes that are going to take place at the refinery in Stanlow, Cheshire, so that you can introduce biofuels into the fuel production there. Can you tell us where you are going to source these biofuels from? Mr Messem: It is a very good question and one that is vexing the minds of a number of people in Shell at the moment. The installed capacity for ethanol in the UK is, I understand, zero. The installed capacity for biodiesel in the UK is a little bit higher than that at a couple of hundred thousand tonnes. The Road Transport Fuel Obligation for biofuel is substantially in excess of the UK's installed capacity to produce the product; so it is almost inevitable that there will be imports into the UK market to meet the requirement that has been set out. Clearly, you would expect, if there is a mandated requirement, that would encourage investment into biofuel production, and we are starting to see interest in manufacturing capacity, but my experience so far is that the major part of the interest is in basing manufacturing capacity in lower-cost economies and importing the product into the UK. It is still unclear to us where all of this biofuel will come from, and we are working with the industry to figure out the most advantageous supply points. The issue that concerns me most with regard to supply is that, again, the policy does not discriminate in terms of the sustainability for the CO2 footprint of the biofuel that is implemented and typically it is the simpler, lower-cost production technologies that will be encouraged to the market fastest, and typically it is those that will have the worst performance in terms of CO2, and so part of our challenge is to make sure that we choose a supply infrastructure that not only can provide a fuel which is what the RTFO calls for but can also provide that fuel in a sustainable environmentally friendly way. Our strong preference is, of course, we are implementing biofuel, to implement biofuel that is good for the environment not biofuel that is not so good for the environment, and that remains a significant challenge for us going forward. Q313 Mr Williams: We have been told by other people that there is enough surplus feed production in this country to produce all the bioethanol that is required and enough set aside land so that rape could be grown to produce the biodiesel, but from the comments that you are making it does not seem likely that the production of biofuels is going to take place in this country, it is going to take place in lower-cost economies? Mr Messem: I have read the reports also that say that there is sufficient surplus biomass production and sufficient agricultural potential for the biomass production. I am not an expert in that area, but I have every reason to believe the reports that have been put in front of you, though the projected outcomes of those reports vary dramatically; but even if you assume that the UK can produce sufficient biomass, the challenge remains to install the productive capacity to convert that biomass to the fuel that we need in an economic and in an environmentally sustainable way, and it is that productive capacity that has yet to be built. Theoretically, the productive capacity could be built in the UK, but I think manufacturers will look at the cost of production verses the cost of transportation and, as we are seeing in many products around the world, often the cost of production is better served by being located outside of the UK and the products transported to the UK for consumption. Biofuel will be a relatively high value but also heavy product, and so there are transportation penalties, but we already are seeing Brazilian ethanol being transported to Europe as a refined product and so there is evidence in the market that transportation economics for biofuel do work in favour of importation. Q314 Mr Williams: But I gather from what you are saying that Shell is not interested in producing these for the third generation type fuels? Mr Messem: No, I would not say that Shell is not interested. We continue to monitor the situation and review our strategic options, and to date it has been possible to meet our requirement from available production in established markets by established producers such that we have not been required to divert capital from our core business to the development of a first generation biofuel business. That said, I would ask you to keep in mind that in 2005 we spent in excess of $1 billion on biofuel procurement and development, and that is a substantial investment for any company of any size, and the availability of capital, even within a company the size of Shell, is finite and so we have to choose where best to deploy our resources. We continue to keep open the option of investing in first generation biofuel manufacture because clearly we need supply security, just as the country needs supply security, but we continue to focus heavily on the advantages of second generation technologies and we hope that the market conditions will enable the introduction of those technologies in due course. My biggest fear in that regard is that the policies that do not discriminate between CO2 performance of biofuel will encourage first generation technologies to such an extent that they lock the market out for second generation technologies because the first generation technologies are in there first, and that would result in a less than optimal CO2 benefit for the supply of biofuel. Q315 Mr Williams: One of the other things that we have been told is that the key to reducing the carbon output, as far as biofuels is concerned, is that you have short supply chains, but you are telling us that the cost pressure will be such that it will be more economic to import biofuels from lower-cost economies than to produce it closer to where it is needed? Mr Messem: One of the difficulties of the biofuel market is that biofuels are encouraged because the perception is that they will reduce CO2 emissions. In reality, the consumption of biofuel in your vehicle produces as much CO2 from the tail-pipe as conventional hydrocarbon fuels. You are combusting the hydrocarbon. The benefit from biofuels comes purely from the plants sucking the CO2 from the air, as you clearly know, but then some of those benefits are lost through the agriculture process that employs conventional energy and pesticides and manufacturing processes that employ conventional energy. A further component is lost in the manufacturing process for biofuel and the final component is lost in the transportation and distribution. Hence some biofuel components have a marginal benefit in terms of CO2. In order to maximise the CO2 benefit, ideally what you would want to see is domestic agricultural production, domestic manufacture of biofuel and minimal transportation distances, but, of course, that would need to be factored against the cost of production and the cost of transportation. Q316 Mrs Moon: That was extremely interesting. It brings me on nicely to the issue of the Carbon Assurance Scheme. You have talked about issues of sustainability and English Nature, in its presentation to us, has talked about sustainability and safeguarding biodiversity in the wider environment. You have talked about not tackling and getting into competition with the food chain in this country, but then you are talking about the new biofuels actually losing some of their carbon saving in the processes, because you are talking about the transport costs of bringing production in from abroad, you are talking about the manufacturing implications as well as what happens when the fuel actually gets into the tank. English Nature has suggested to us that the allocation of Renewable Transport Fuel Certificates should be linked with greenhouse gas savings. You said that there are actually marginal benefits in terms of CO2 reduction. Those are the words you have just uttered. Do you agree with English Nature and what do you think would be the advantages and disadvantages of linking that certification scheme to actual reduction in CO2? Mr Messem: I am sorry if I am confusing you slightly. The circumstances under which biofuel is marginal to CO2 is where the process from agricultural feedstock through to the end user uses industrial methodology and conventional fuels heavily in the production process. For example, if you look in the Concawe analysis of the well-to-wheel performance of biofuels, some ethanol from wheat is a 70 odd per cent reduction in CO2, some ethanol from wheat is a ten per cent reduction in terms of CO2, and that is dependent upon the region and the process that is producing them. It is not that you can say that any one biofuel has a particular carbon footprint; it very much depends on the process that is used to produce. To me English Nature have a very strong point, which is that the certification needs to be linked, not just to the fuel but also to the production process and to the production process for the agricultural feedstock that goes into that supply chain. Only by validating the CO2 performance of the agriculture, the manufacturing and the distribution could CO2 certification be substantially achieved. Clearly there would be a cost to that in terms of manpower and bureaucracy to manage that scheme, but I think there is enough evidence in the CO2 analyses for biofuel to indicate that biofuels are not all the same in terms of their CO2 performance and some way of identifying the good from the less good is very important. I have some sympathy with the position that English Nature have represented to you. Q317 Mrs Moon: You think it would have advantages. What would be the disadvantages? Mr Messem: Of such a certification scheme? Q318 Mrs Moon: Yes. Mr Messem: Principally that it would take a substantial amount of resource to manage and to police that scheme, given that the well-to-wheel analysis is a complex science and that the biofuel industry is very fragmented. Therefore, there would be a considerable number of agricultural production points and biofuel production points that would need to be assessed in that process, and so that would inevitably create a cost, the cost would have to be borne somehow, either by the private sector producers or by the public sector administrators or supervisors of that process, and, therefore, I would imagine that it would bring a cost and complexity to the industry for which ultimately the consumer or the industry would end up having to pay. Q319 Mrs Moon: So we could find ourselves pursuing a process that, at the end of the day, unless we monitor very intensely, brings very few CO2 reductions? Mr Messem: Yes, and I think that is the major reason why you probably perceive that the energy industry has been relatively slow in the take-up of these technologies. If I can go back to the question Mr Jack asked at the start in terms of what is holding us up, I mentioned there is not a consumer demand for biofuel. Our market research suggests that consumers certainly do not expect to pay a premium for this product even though it costs substantially more to produce than conventional gasoline or diesel. Secondly, the energy content of biofuel is lower, the combustible energy content in joules of ethanol is about 60 or 70 per cent that of conventional gasoline, which means less miles per gallon and less performance from your car, and, as we know, consumers tend to like miles per gallon and performance. The processes are not particularly scaleable, such that it is difficult to achieve the kind of through-puts that you achieve in the conventional refinery in order to bring the unit costs down, so it is difficult to see how, on a unit cost basis, biofuels will ever be completely competitive with conventional hydrocarbon fuels, and, in addition to that, the policy environment typically is only secure for about three or four years. The UK RTFO talks about a quality framework in place for 2009, but when you build a capital intensive plant like an ethanol plant, you have to take a 25-year view on its economics and its lifetime, and if the financial incentives for the product disappear after three years and you are left with a product that costs more to produce than conventional gasoline, then the business case for that investment is hard to substantiate, and so there are these three or four major impediments to investment in biofuel technology that really are difficult for the industry to overcome and, therefore, to put forward a strong production investment schedule. Q320 Mr Rogerson: Very briefly, talking about the certification process, following the brief discussion that we have had on transport and the distance that fuels would have to travel before they reach the consumer, do you think that should be factored into that certification process? Mr Messem: The transportation of the fuel? Q321 Mr Rogerson: As in where it is produced. Mr Messem: Yes. It should be factored in, simply because the transportation of the fuel consumes energy, therefore incurs cost and, therefore, produces additional CO2. As I said, the issues with biofuel are that the energy content is lower; the CO2 performance is variable, so that those transportation issues affect the performance of the biofuel on that basis. The other concern to watch out for is that the actual energy creation process for biofuel is very variable as well. If you produce a litre of ethanol, its energy content is already 70 per cent of availability on your gasoline but you have also got a relatively energy intensive process to produce it. Hence the Concawe Report believes that some biofuels do not even result in net energy creation; so it is really important that we have a process that discriminates between biofuels that are working towards your policy objectives and biofuels that are not. Q322 Mr Rogerson: I understand that. What I am saying is if we are going to take into account the energy use of getting the fuel to where it is going, then it is not just that Shell has a product that you can buy from a pump and it should be certificated at this level, it is also the fact that this bit was produced in Africa, this bit was produced in Asia, and it is how you account for that as well? Mr Messem: I do not think the issue is so much where exactly it is produced. Shell has learned over the last 100 years that an open and free market in energy is the best way to drive down the production costs and get efficiency in the energy system, and I think that would be true for biofuel production as well. I think the important thing is to make sure that it is clear what is the CO2 footprint and what is the energy creation in the biofuel process in order to be sure that when you mandate biofuel in order to reduce greenhouse gases that is what is actually being delivered. Q323 Lynne Jones: I was very struck by what you said earlier that without a Carbon Assurance Scheme there was a danger that you would lock second generation technologies out of the market. The Government has said in its evidence to us that they are going to produce a Carbon Sustainability Assurance Scheme, but how urgent is that? If it takes several years to get to that stage, will we, before we have developed that assurance scheme, have locked the second generation technologies out of the market and is it sufficient for it to be just done with a British scheme or do we need international agreement on this? Mr Messem: I think it is very important that the scheme is as consistent as possible internationally, for two reasons: (1) there will be immense complexity in the supply chain if we have different international standards, (2) I think the efficiency of the energy system would be encouraged by having open international markets; so the more consistent the policy the better. In terms of its urgency, I think there is an urgent requirement for it, because at the moment there is biofuel production capacity being planned and biomass production being planned without, I think, the necessary regard for the CO2 impact of that production. If the ultimate aim of the policy is to reduce greenhouse gas emissions, I think it is important that the variability inherent in the process is somehow measured and managed such that we are clear that we are getting carbon reduction. Q324 Lynne Jones: Would it not be counter-productive to be requiring a Renewable Fuel Obligation without a Carbon Assurance Scheme? Would it not be better to wait until you have got a Carbon Assurance Scheme to really go, hell for leather, for biofuels? Mr Messem: It could be counter-productive. It will certainly be less optimal than it could be, even if it is not counter-productive, precisely because, if there is a mandate for biofuel and if demand exceeds supply such that there is a big incentive to get involved in biofuel production, the easiest way to meet that demand is to go for the simplest, most readily available technologies, which also are likely to be the most energy intensive and most carbon producing technologies. The Iogen process, by way of example, is an advanced process that uses enzymes that have been specially bred in the process of extracting cellulose from straw, and that uses advanced bio-technology to do a job which otherwise you would have some form of heat treatment process to do. There is a substantial difference in the technologies and there is potential to use this kind of technology to develop very low-carbon fuels, potentially even carbon neutral fuels, but at the moment, if there really needs to be a rush to implement biofuel, that kind of technology does not stand much of a chance because you can produce ethanol the Iogen way or you can produce it the conventional way, and the conventional way is more energy intensive and you will have more CO2 production in that process than the Iogen way. I think there is very much a risk in what you are describing. Q325 Chairman: Can I ask Ms Morrison a question. Annually Shell sends in a report on its CSR responsibilities on a world basis. We have just been talking about sourcing biofuels from external sources outside the United Kingdom. What is Shell's policy with reference to (I think a point that Mr Rogerson touched on) the impact on biodiversity, for example, of sourcing from parts of the world where sustainability may not necessarily be at the top of the agenda? Ms Morrison: As Darran said earlier, we do support having an international market. We have a biodiversity policy, and I can send it to you. It is one of the issues we are looking very carefully at and we are looking to work with others to maintain eco-systems, working with NGOs and other stakeholders to discuss how that can be done. There is a lot of work going on. Q326 Chairman: By all means write to me, but to follow on Lynne Jones' line of questioning, just as you were talking about having a tough certification scheme from well-to-wheel, should such a certification scheme also incorporate some requirements from the supply side over questions of sustainability and biodiversity? Ms Morrison: Yes. I think some of the work that we have seen that is starting to be developed by the Low Carbon Vehicle Partnership is looking at that as well as the carbon footprint; so that is something that is being brought to bear. Chairman: I think it would be helpful if you could expand your thought pattern on that, because it is an issue that has been raised and which one would like to explore further. Q327 David Taylor: It is a pretty profitable process at the moment, is it not, turning to biofuel production? Mr Messem: Some aspects are, some aspects are not. There is a lot of variability in the markets, both on the oil industry side and on the biofuel industry side, that makes the returns volatile and unpredictable. Q328 David Taylor: It is pretty good at the moment? Mr Messem: It is currently good for ethanol production. Q329 David Taylor: What about in the wider sense? Mr Messem: There are areas where there are pressures in terms of post refinery production. The downstream businesses worldwide have come under pressure in a number of areas, but, broadly speaking, the last two years have been reasonably good in terms of the oil industry, the energy industry. If you look at the comparative analyses on economic returns that have been done by magazines like Fortune and The Economist, for example, Shell's return on capital is still around 15 per cent and our return on sales is around seven per cent, which, relative to other industries, is not a particularly sterling performance. Q330 David Taylor: You made a particular point earlier on that you had spent a billion dollars on biofuel components. What is your aggregate global revenue approximately? Mr Messem: Our aggregate global revenue. I would need to check it. I cannot give you an exact figure. It is right to say that biofuel---- Q331 David Taylor: No, in aggregate terms for all fuels? Mr Messem: Biofuel is less than one per cent of the fuel that we sell. I cannot tell you what it is as a percentage of revenue. Q332 David Taylor: I was trying illustrate that one billion pounds might be such a tiny proportion of the revenue costs that the company has? Mr Messem: It is a small proportion. Our total capital budget was in the order of about £15 billion last year, but the one billion is a combination of product spend and capital investment. Q333 David Taylor: A cynical environmental observer might think that some of what you are doing is just window-dressing and you are not serious about it. You have described the constraints - the financial ones, the economic ones, the energy constraints - and I understand all of that, but it is an extraordinarily slow process, is not it? The global environment cannot wait for companies like your own to start to deliver a much higher proportion of fuel in alternative, more satisfactory forms. One per cent. You have, therefore, a global market of about 250 billion litres of various fuels primarily. Is that right? You have said that one per cent is two and a half; that is 250, is it not? Mr Messem: Yes. It is potentially greater than that now. Q334 David Taylor: I am going to come to the point about how we encourage the demand that you have identified as one of the things which was in short supply. Here in the UK, I think we have a road fuel usage of about billion litres per year, 150 million of which are biofuels, less than one quarter of one per cent. We have to accelerate the process more substantially than that. Shell made the point in its submission that you would want to see a substantial increase in the present duty derogation incentive, which is 20 pence an hour. You suggest 40 pence, but you do acknowledge that that would have a fiscal burden and you observe that some other mechanism for enabling biofuels to be economically competitive may need to be found. What mechanism do you have in mind, bearing in mind all the questions and constraints and burdens that you have painted in your submission and in your evidence so far? Mr Messem: Let me try and respond to your questions with specific numbers that I can share with you, because I have them here. The UK market volume of transportation fuel is 120 million litres and of that currently 0.3 per cent is biofuel. Currently the UK spot-price for gasoline, before you do the distribution and the marketing of it through retail outlets, is about 30 pence per litre. The European spot-price for ethanol is anywhere between 35 and 38 pence per litre; so you have got a five to eight pence per litre difference just in terms of the unit cost of the fuel. Bear in mind that the unit energy content of that fuel is 60 per cent of the gasoline. Q335 David Taylor: I hear what you say. Mr Messem: From a consumer point of view you would be paying more for less, and that indicates a significant barrier to implementation. From our point of view, in order for there to be a sustainable growth in the use of biofuel, that cost and energy barrier somehow needs to be overcome in the minds of consumers and producers, and that is why we said we feel that there needs to be a substantially greater duty reduction on biofuels to encourage their use. For Shell to be able to implement more biofuel, we have to reconfigure the Stanlow refinery, reconfigure the Stanlow distribution terminal and reconfigure the Jarrow distribution terminal. Q336 David Taylor: I understand all of that - I am sorry to interrupt - and I understand these are serious and significant technical hurdles, but you say elsewhere in your submission, almost with relish I am tempted to observe, that it would be decades before it will be possible to have an economically efficient internal combustion engine using biofuels on any great scale, but we cannot wait that long, can we? Mr Messem: The issue with the internal combustion engine - I am sure my colleagues from Ford can represent this much better than I can - is that currently all of the engines driving around the UK are ill-equipped to accommodate any fuel that contains much more than five per cent biofuel. The ethanol is more corrosive and tends to have an impact upon the elasto-sealant and biodiesel tends to result in formation build-up deposits which can be damaging to engines, and so, if we want to just implement biofuel in current engines, we are really looking at a five per cent blend as a maximum. In order to move to a higher concentration of biofuel, we either need to have engines that are built for that purpose, and they are typically called flexi-fuel engines (and this is what we have had in Brazil and we are starting to in see more of in the US for ethanol) or we have to have advanced technology fuels, such as BTL, that can be used in conventional engines at higher concentration. Typically a car in the UK will have a lifespan of around about 12-15 years, and so, if we want to have all vehicles running on more than five per cent and to do that with conventional biofuels, we have to enable the car fleet to turn over, and that is going to take something in the order of 15 to 20 years to do. It is not Shell or the energy industry that is presenting that constraint; it is simply the practical reality of nearly 25 million vehicles on the road at the moment and they are not going to run on biofuel concentrations greater than five per cent very easily. David Taylor: But they are producing about a quarter of our carbon emissions and they are currently failing to deliver significant reductions terms of carbon emissions. I am going to pass over to you, Chairman. Q337 Mr Drew: Can we look at the issue of the hydrocarbon economy and, moving towards that, perhaps I can use the analogy of the vaccination for bovine TB: it seems to be ten years away! Can we, firstly, deal with what I know you are going to tell me is a great myth: the patent for electric or hydrogen fuel cell cars are held by the oil companies. That is a great myth, is it? Mr Messem: To be honest, I cannot answer that question. I do not know. I will check it as soon as I get back. Q338 Mr Drew: You are worrying me now! Mr Messem: Shell has been working on hydrogen fuel cell vehicles for the last 40 years - I know that that for a fact - and the technical and practical challenges to introducing a cost-effective and economically viable hydrogen fuel cell vehicle are enormous. Q339 Mr Drew: Is that simply the reason why we are not there? According to the figures from the World Business Council of Sustainable Development, by 2025 fossil fuels will still be 60 per cent of the transport fuel total, which is a bit depressing. This is not really a paradigm shift in proportions, is it? Mr Messem: Again, the people from Ford are probably better placed to answer this, but I can try and answer the question to the best of my knowledge. The hydrogen fuel cell vehicle depends on two key things happening. One is the development of a drive train technology that can deliver the kind of range and performance that customers expect when they are paying $20,000 for a vehicle. The second is that there needs to be a fuel supply chain that can deliver the fuel energy competitively and practically, and the fuel side of it really comes down to two issues. One is the only practical way currently of producing hydrogen for transportation is from natural gas, and that is a process of conversion which inevitably is more expensive than producing hydrocarbon liquid fuel from crude oil. Secondly, if you want to do it any differently and get to a renewable hydrogen we need to find a process that is both technically and economically feasible, and currently there is not a clearly identified process able to produce renewable hydrogen in sufficient scale at a low enough cost to be practical. Q340 Mr Drew: Is that because the scientific knowledge about how you would break down the molecules of water are really deficient, or is the nuclear route something again that you are interested in? We have to take one of these routes, surely. Mr Messem: It is a good point. Nuclear hydrogen would be a third potential pathway. Shell is not a nuclear energy company; we do keep a close watch to nuclear industry and our strategic options in that area, but to date it has been an area of energy that we have determined not to invest ourselves in. It poses a number of issues, obviously, in terms of the perception and the perceived safety of the process, together with the capital cost and the economics of the nuclear industry. Coming back to your question, though, about why is this, in many ways it comes down to thermodynamics and chemistry. It is a simple scientific fact that separating the hydrogen from the oxygen in water requires an immense amount of energy to do it, and separating the hydrogen from a hydrocarbon chain or any other molecule that it is attached to requires an awful lot of energy, and processes requiring immense amounts of energy and conversion tend to be expensive. Q341 Mr Drew: So coming to this idea of 2025, we are still very heavily dependent on fossil fuels, is that your prediction, then? Or could we go more quickly towards biofuels and hydrogen fuel cell delivery? Mr Messem: I am in the privileged position of being able to talk to many car companies around the world, if not all, and my understanding, having spoken to many car companies, is that the commercial scale roll‑out of hydrogen fuel cell vehicles is in the order of 15‑20 years away, and the reason for that is that the technology development process in order to produce a viable hydrogen power drive train requires that kind of development lead time. The only other constraint on that as an economic constraint is inevitably that the automotive industry has billions of dollars in stored capacity producing internal combustion engines, and internal combustion engines therefore are being produced very economically, very cost competitively, and new technology will somehow have to compete when the motor vehicle is a consumer purchase and a consumer investment, and I think that the car industry struggles with the fact that if you want to produce a vehicle that can propel 4‑6 people from 0‑60 in ten seconds and have a range of 300 miles and do all of that carrying a CD player and all of the mod cons that cars now have, and to produce that at a list price including tax and duty of around £10‑£15,000, that is an immense technical and manufacturing challenge, and to do that then with a whole new drive train technology and to do it competitively is a huge challenge. So practically it seems that the hydrogen fuel cell vehicle as a large scale mass production transportation system is a number of years away. Therefore, practically, the most practical route to renewable fuels in transportation is to look at biofuel and, as I have said, because vehicles on the road can run at blends of 5 per cent biofuel the most practical thing to do is to blend biofuel in low concentration blends with conventional hydrocarbon. That is the most practical way of addressing the challenge today, given that there are 25 million vehicles on the road that require a hydrocarbon fuel and cannot accommodate a biofuel blend much above 5 per cent. Q342 Mr Vara: Very briefly, is it not in your company's interests not to have hydrogen fuel, and you give the argument that if you had actually put the investment in there then you might be able to get that car for about £10‑£15,000 rather than the million pounds it costs at a moment, which we found when our Committee went to Sacramento. Mr Messem: In the long term, no. Shell is an energy company and has been for the last 100 years, and in that time we have been the leader in fuel development over the course of 100 years and we intend to be around for the next 100 years, and therefore it is in our interests to develop energy technologies that are cost effective and commercially viable, and that is why we focus on the advance technologies that we do. Chairman: Thank you very much indeed. That was fascinating and interesting and I look forward to your further observations about CSR sustainability and biodiversity. Thank you very much not only for your evidence this afternoon but also your written submissions. Thank you. Memoranda submitted by Ford Motor Company and Rolls-Royce plc Examination of Witnesses
Witnesses: Mr Joe Greenwell, Vice-President of Government Affairs, Ford of Europe and Premier Automotive Group; Dr John Bennett, Fuels Technical Specialist, Ford of Europe, and Mr Andy Taylor, Director of Corporate Citizenship; Mr David Clarke, Head of Technology Strategy, Mr Colin Beesley, Head of Environmental Strategy and Mr John Moran, Chief of Combustion Research, Rolls-Royce plc, gave evidence.
Q343 Chairman: I would like to start off with a question for our automotive colleagues. In your evidence you said on page 2 which caught my eye: "The fuel industry and the automotive sector must further increase the market penetration of alternative fuels through a substantially increased offer in accordance with the EU Biofuels Directive, easier availability and enabling vehicle technology". Is there any sign that that aspiration is being turned into reality? Mr Greenwell: Perhaps I can comment on that first. I think as you have heard from other evidence there are issues around awareness and around fuel distribution and around incentivisation, and we see some contrasts around those matters even within Europe. The price at the pump, the difference between petrol and biofuel, bioethanol, is quite modest. Bioethanol is about 2 per cent lower at the moment. Elsewhere in Europe where a more comprehensive incentive package has been put together you see differences of 30 per cent and more, supported by a number of other incentives to the consumer like reduced purchase tax, reduced annual circulation tax, car park waivers, congestion charge waivers, plus some allied encouragement to petrol retailers, garages, to have a pump addressing the distribution issue. The result of that is that in Sweden you are making a market, and of our 21,000 Focuses that we have sold recently 17,000 are Focus FFVs. So to your general point there are signs within Europe ‑ and not just in Sweden but Germany, and others have referred to the removal of the fuel GT ‑ where a market is being made. You will know from our written submission, we think increased consumer awareness, encouragement to the consumer to consider biofuels, and frankly some straightforward incentives to the process, can yield some results. Q344 Patrick Hall: On page 1 of Ford Motor Company's evidence, sixth paragraph, and I want to clear this up first because this is a rather important first principle, there is a reference to: "At Ford Motor Company we have long acknowledged the importance of climate change." Does that mean climate change triggered by human activity, because in the US there has been and still is considerable questioning as to whether or not it is triggered by human activity. What is the company's position? Mr Greenwell: I think our position with the publication of our climate change document last year is clear ‑ that we think that the science is compelling. We appreciate that there is an active debate going on but we think for our part we need to gear our activities towards product development and offerings around biofuel that can offer some improvement to cover current levels of CO2 emissions. So we are clear in that. We believe that the science is persuasive and that our product plans, which we suggest in the written submission, are a response to that information. Q345 Patrick Hall: So science and the majority of scientific opinion throughout the world is the opinion that Ford goes along with, even though that has been challenged? Mr Greenwell: We know that the debate is live, and continues, but for us we are totally ‑‑ Q346 Patrick Hall: I do not think the debate continues in many places except in the United States, and it may be reducing there. Can I look at the reference in the evidence ‑ I think it is page 3, and you just mentioned it yourself, Mr Greenwell ‑ to Sweden and the Focus Flexi‑Fuel Vehicle. It says there that the E85 fuel is less efficient therefore there is a higher fuel consumption, so why go for it? What is the effect on CO2 savings if you have to consume or burn more of the fuel to do the same journey? Mr Greenwell: To answer your question specifically let me hand over to Andy Taylor, who has been closely involved in that initiative in Somerset and also in Sweden. Mr Taylor: You may be misinterpreting that slightly. When people in Shell talk about as we were previously discussing CO2 reductions as being 50 per cent, maybe 85 per cent, the additional use of ethanol is already factored into those calculations, so 30 per cent more fuel is required but you still recognise and still end up with the 50 per cent, maybe 85 per cent reduction in CO2, even with the higher ethanol usage. Q347 Patrick Hall: So on those grounds there is no doubt at all that in terms of reducing CO2 emissions it is worth going for, and you are going for it in Sweden. The next question is, in terms of cost to the customer, is the regime in Sweden more favourable than in this country? Mr Taylor: Yes, very substantially. In Sweden typically a customer would see a 30‑35 per cent reduction in fuel price for an E85 per litre relative to the unleaded gasoline. Q348 Patrick Hall: But they would need to use more? Mr Taylor: Yes, but it is pretty much cost neutral, from a customer's perspective. You would have to use 30 per cent more but it is 30 per cent less per litre, in orders of magnitude. As my colleague was explaining there are other incentives in Sweden to encourage the usage of environmentally friendly products, of which the Flexi‑Fuel Focus is one. So the company car tax is lower, there is free parking, the congestion charge ‑ which is only a new thing in Stockholm, flexible fuel vehicles like hybrids and gas vehicles are exempt from the congestion charge, so there are other mechanisms in place to encourage the purchase of flexible fuel vehicles and to encourage the purchase of bioethanol. In contrast, in the United Kingdom we do not have those incentives at all to encourage such usage. The price in Somerset is roughly 2 per cent lower, and the price in Norfolk, which is where higher burn bioethanol is sold, is 2p per litre cheaper on the forecourt, and there are ten filling stations operating. Q349 Patrick Hall: However, in terms of fuel consumption, et cetera, it costs you more? Mr Taylor: Absolutely. Q350 Patrick Hall: So why is the Somerset initiative off the ground and why are you supporting it? Mr Taylor: When we started the Swedish project the situation was very similar. You had a situation where people wanted to demonstrate a clear commitment to the environment, so we were nurturing the Somerset project in much the same way as we were nurturing the Swedish project. Now, reality will bite at some point when some people say: "Can we make this beyond a pilot?" It was very much a pilot, proving it could be done, proving there is an awareness of an interest, so it is a pioneering effort, and that is what we are trying to support. Q351 Patrick Hall: Are you subsidising the Somerset initiative? Mr Taylor: Are we subsidising it? Q352 Patrick Hall: Yes. You may be investing in it but you may also be subsidising in order hopefully to get past this threshold that has happened in Sweden. Mr Taylor: We are nurturing it, so if you class that as subsidisation we are putting a lot of effort in and our time, yes. In terms of throwing cash at it then, no, we are not throwing cash at it. Mr Greenwell: We are supplying. Mr Taylor: Vehicles will be supplied at a very competitive price to encourage development. Q353 Patrick Hall: Based on your experience in Scandinavia and in Somerset, or that part of England, are you making the case perhaps behind the scenes with the British Government to bring about the integrated approach that you say works well in Sweden? Mr Greenwell: We are certainly fans of the integrated approach, as must be very clear, but as you will have seen from the written submission we think that biofuels can make a tremendous contribution to climate change work but there are also some significant developments on the product front, so we wanted to present in our written submission an array, a portfolio, of product actions devoted to CO2 reduction over time within which we see biofuels as playing a significant role in generation 1, and we would support the view expressed earlier that, depending on the original manufacturing conditions, generation 1 can yield very substantial reductions in well‑to‑wheel CO2, well in excess of a typical 50 per cent ‑ up to 70 per cent I think we have said in the past. But the further attraction involves the Generation 2 biofuel developments which provide typically 80/85 per cent reduction well‑to‑wheel. Andy made clear that to some degree our technologies, our product development engineers, are pathfinding here along a number of fronts, and those fronts are with conventional petrol power train, diesel power train, where direct injection and clean diesel can give tremendous yield in terms of CO2 reductions. In fact, we would argue ‑ and have ‑ that it is quite wrong to favour a particular technology because depending on use a clean diesel in a Fiesta or a Fusion gives 112/114 grams per km which is a very creditable level, but we are looking at hybrids as well. So we look at conventional, hybrids, weight‑saving, and hydrogen internal combustion further down the track and fuel cells as well. With our own biofuels we have presented a significant element and one which our engineers feel holds good promise for the next generation of technology, but with any new technology you have to do some groundwork and you have to try and encourage the making of a market. Our experience to date is that it is important to raise awareness amongst consumers and give them a reason to pursue. Q354 Patrick Hall: The Focus vehicle is trying to change the market, change public perception. Mr Greenwell: I think it has already, as you can see, in a market in Sweden selling in numbers, in certain market conditions. Those market conditions do not apply at the current incentive levels in the United Kingdom, but we are keen to promote those vehicles in the Somerset project, and to other local authorities, in terms of the well‑to‑wheel CO2 emissions reductions, as part of this portfolio. Q355 Patrick Hall: So is the Ford Motor Company no longer going to promote big tank four wheeler gas guzzlers with bull bars and that sort of image? Mr Greenwell: Well, we do have a variety of brands! Jaguar, for example ‑ and you will not find bull bars on Jaguars but Jaguar has significantly decreased its CO2 emissions with the advent of the X‑type diesels. The new XJ diesel is a tremendous product, and a tremendous advance. Land Rover, too, has reduced its CO2 emissions and we are mindful of the need to carry on doing more. It is difficult for us here to lay out our product plans but over time I think that the public will see the seriousness of our intent across the brands. Q356 Mr Drew: The Select Committee, I think you will all be aware, did make a visit to Brazil and we saw the bioethanol vehicles there. I think what struck us was the willingness of the Brazilian government just to impose its solution on the car companies. Would you welcome imposition? Mr Greenwell: No. I think what we favour is technology neutrality. There are developments all the time: witness the prospect of second generation biofuels. We think that a balance needs to be struck between incentivising the here‑and‑now technology to deliver real benefits, in terms of reduced well‑to‑wheel CO2 levels, but not to have it at a level that will discourage further developments in potentially more productive iterations of that technology. So we do not think there is a silver bullet ‑‑ Q357 Mr Drew: But the Brazilians, as a result of quite a brave decision where everyone said they would end up with no car manufacturers, are now a leading manufacturer in the world, a leading exponent of biofuels, and we have got nothing. Mr Greenwell: We think that our proper course is not to favour a particular technology or have the regulators favour a particular technology. What we favour is a technological neutrality, operating on a number of fronts so that we can ensure there are developments which ultimately may prove more beneficial than the chosen singular route, and I have described the product approach we are taking, and that includes hybrids and, of course, it includes hydrogen‑powered vehicles as well. Q358 David Lepper: Can I just come back for a moment to the Somerset project? You have some local partners involved, and you are nurturing that project there. What level of interest has there been from other local authorities or institutional bodies with fleets of vehicles? Mr Taylor: I personally have been involved in presentations to Cornwall, South Wales, we are due to go to Norfolk and we are aware of a number of others. I was in Fylde a week or so ago, so we are aware of a substantial interest. Now, can we turn interest into practical implementation? We are not so sure but we bring a portfolio of partners; we bring people who will provide the fuel, who will provide the distribution, so we are not just doing this as a car project. We are working with partners to make this work at a local level as a practical solution. Q359 David Lepper: And they are mainly local authorities? Mr Taylor: It is certainly true that for the most part it is local authorities who represent the driving force. However, there are some commercial fleet companies who wish for reasons, reputational aspects to be involved with this, so they may be willing to take an on‑cost. I cannot speak on whether they have a specific motivation but one anticipates they are prepared to take an on‑cost in order to build a reputation and be seen to make a contribution to the community. Q360 David Lepper: Do you have a time limit on Ford's involvement? Mr Taylor: We see biofuels as part of a solution to the tackling of climate change. Q361 David Lepper: I understand that. I meant specifically in Somerset. Mr Taylor: The commitment to Somerset is for three years. Chairman: I should just put on the record that I was very appreciative of Ford supporting the launch in my constituency of an initiative which has the long-term objective of turning the Borough of Fylde into the most energy efficient borough in the country. They very kindly came along and stimulated interest in it by bringing one of the flexi-fuel vehicles to be at the launch. I was very grateful and I would like to publicly acknowledge that kindness in supporting the start of what I hope will be an interesting experiment. Can I just say to Rolls-Royce that this is a bit like waiting for the plane, there is quite a long procedure before we get to the bit on aviation but we will get there. Q362 Mr Rogerson: Having talked about flexi-fuel vehicles, can we move on to hybrids. I understand that you have a vehicle which has been on sale for a couple of years in the United States. Mr Grenwell: Yes. Q363 Mr Rogerson: And you have committed to having "available for sale globally up to 250,000 hybrids a year by 2010". What proportion of your total annual sales do you anticipate making from hybrid vehicles up to and after 2010? How do they compare with conventionally fuelled vehicles in terms of price and also running costs? Mr Grenwell: I do not have the exact figure but it is going to be small, 250,000. We are still likely to be producing those conventional power trains in petrol and also diesel, but it is going to be a growing number. Because of the diesel characteristics of the European market we see particular potential for diesel hybrids as part of our overall efforts to reduce CO2 emissions. Part of the constraint has been touched upon already in that hybrid in current technology remains expensive, so we need to continue to work hard on that technology in order to try and develop the market with the consumer. We are going to be producing hybrids across our brands as we go forward. I do not know whether my colleagues would want to add to that? Mr Taylor: The marginal cost of CO2 reduction in hybrids is a tough sell for Europe and it remains to be seen whether hybrids will be a huge growth area in Europe. Certainly in terms of measuring biofuels the cost of the technology to car companies much, much favours biofuels versus hybrids. Q364 Mr Rogerson: Can you give us an indication of the cost to the consumer of a hybrid car? Mr Grenwell: It depends on whether it is a micro or a full hybrid. With a full hybrid you are into thousands of dollars. I think my colleague mentioned, or it is in the written submission, that the on-cost for a flexi-fuel vehicle is £200. It is hundreds of dollars at the smallest level of hybrid for a built ISG but for a full hybrid it is a significant on-cost. In order to make a market and business case for these developments you have to iterate the technology and continue to work on it consistent with the other objectives that we have described. I do think diesel hybrids offer that, and we are looking with particular interest at Europe because of the diesel market characteristics there. Q365 Mr Rogerson: We did see when we were in California, or we heard about the possibility of plug-in hybrids. Is that something you are considering? Mr Taylor: This is where you recharge your battery overnight effectively. Ford Motor Company has some experience of battery technology. We have a think division in solid electric vehicles which we have sold in the UK. There are lots of issues to be overcome with plug-in battery technology. It is something we are monitoring and looking at but there are huge barriers to be overcome in terms of durability of a motor vehicle. Shell mentioned twelve to 15 years but having a battery being recharged every 12-15 years represents some technical challenges; no battery I am aware of today can achieve that. Q366 Mr Rogerson: Would you care to hazard a guess as to how far away that technology is? Mr Taylor: No, I would not care to hazard a guess. It is something that we are monitoring very carefully. Q367 Mr Rogerson: Do you think that such technology would have a part to play in carbon saving? Mr Taylor: We are not in a position, as Ford Motor Company, to say what the solution here is to this very serious issue. We would not rule it out. Can I tell you it is going to be at the forefront? No, I cannot tell you that. What probably will happen is you will have a combination of plug-in hybrid and biofuels together in combination and the hybrid using a biofuel product could be a substantial way forward. That represents a new level of complexity - electric, biofuels and hybrid - which is a substantial challenge for us and substantial investment cost. Q368 Lynne Jones: You say in your submission that climate change is a critical business issue for your company. Why? Mr Taylor: There are a number of different levels for that. One is cost of ownership of vehicles will change materially as legislators look to tax fuels differently, tax vehicles differently so it will restructure our business and change our business. We have to anticipate this and respond appropriately to the marketplace, to anticipate the future marketplace. Q369 Lynne Jones: You are requiring mechanisms to make the market for your vehicles in order for you to invest. You are not investing out of the goodness of your heart because you are concerned about climate change, it is necessary for governments to impose upon you conditions that will require you to make those investments. Mr Grenwell: I do not think that is an entirely fair construction of Ford Motor Company's motivation. I think the German company has been pretty consistent in its expressions of ---- Q370 Lynne Jones: Are you involved with the motor companies that are prosecuting the Californian organisation that controls vehicle emissions? Mr Taylor: I understand all the car companies are trying to promote that. Q371 Lynne Jones: You are not really concerned. You are only really concerned about ensuring that you have a market for the future. Mr Grenwell: I think that is an issue of state management and policy versus federal management and policy and what is the right way to go forward. Q372 Lynne Jones: Okay. You heard the discussion with Darran Messem about second generation fuels, would you like to comment on that? Does it concern you whether or not the biofuels that are going in to fuel your vehicles are produced sustainably or with low CO2 emissions? Mr Grenwell: Absolutely, it does concern us, and we are very clear about that in our climate change reports and here and now. It is something that we are acutely conscious of. We are interested in sustainable sources and processes. Q373 Lynne Jones: So what do you think our Government, or governments in Europe and across the world, should be doing to ensure that we move forward in a way that maximises the CO2 benefits of new technologies? Mr Grenwell: I think we have laid out an array of technologies which we are engaged in, that we have been engaged in and we are engaged in. We are enthusiasts of biofuel, genuine enthusiasts of biofuel. I would like to think that what we have done since 2001 in Sweden, which was basically lead the industry in Europe, if we can be immodest for a second, followed up by the encouragement we are trying to offer in the UK markets through what my colleague has described, is evidence that we think biofuel, alongside some of those other product technologies, has a real yield. We think second generation, notwithstanding what you have just said about sources and sustainability, offers us some further significant gains. Q374 Lynne Jones: How do we ensure that we get those gains because in the UK there is no real pressure to ensure that the biofuels that are receiving the Obligation Certificates are going to be environmentally sustainable or particularly good on the CO2 emission front? Mr Grenwell: I think putting forward the facts about technologies and their CO2 performance well-to-wheel through the auspices of the Committee and projects such as our own is a way of raising awareness, not just amongst the consumer but other commentators about the relative benefits from various of these technologies. Acting in concert, we think carmakers can make a very significant impact and we think second generation biofuel has real potential. Q375 Lynne Jones: If they are buying one of your flexi-fuel vehicles or putting biofuels in their tank up to five per cent, are people not going to be thinking they are doing something good for the environment when, in fact, perhaps they are not, relatively speaking? The biodiesel is being sources from perhaps non-sustainable palm oil or the bioethanol from far away in sugar plantations that are knocking down the rain forests. What are you doing to actually get the message across and to promote the use of really sustainable biofuels and ensure the investment in the second generation technology? Mr Grenwell: I think the process needs to be exposed to scrutiny. That is the way that some of the challenges that were outlined earlier will come to the fore and they must be challenged, as you did us, on what their attitude towards sustainability is. All we can do is not just pay lip service to our interest but back it up producing demonstrators, products which we offer to consumers in the marketplace, suggest that further incentivisation may be a route, warn against a silver bullet approach and we should be technologically neutral. A balance needs to be struck between incentives with the technology that is here and now to get that well-to-wheel CO2 reduction in place but not to discourage further developments within the technology that offer protection. Q376 Lynne Jones: Would it bother you if the Government imposed a carbon assurance scheme which meant that a lot of the biofuel that is currently on the market would not qualify because it would not meet the high standards of an assurance scheme? Mr Grenwell: If you are talking about standardisation, we think it is very important that fuel quality standards are met in order that ---- Our cars can run at five per cent now for the RTFO, some can run at ten per cent, but we need to do some work to ensure that they can all run at the ten per cent blend level. Frankly, we need standardisation to establish those standards in order that we can meet that further enhanced objective. Q377 Sir Peter Soulsby: In Shell's evidence and in questioning Mr Messem we were discussing the role of hydrogen and he implied - I hope I am not putting words into his mouth - that attractive as it might be it was a somewhat distant prospect. I was aware, I think it was in the Observer, Keith Lewis of the SMMT said that cars powered by hydrogen cells were the "ultimate aim". From what Mr Messem was saying earlier on, ultimate may be quite a long way away. Is that your expectation of the prospects for hydrogen? Mr Grenwell: It is not an unusual observation. If you look at the chart of well-to-wheel it is probably the optimum power unit. That said, you did have a discussion about some of the technical and commercial feasibility issues associated with hydrogen, and they are real and typically people talk of 15-20 years away. We have demonstrators now. We have hydrogen powered vehicles now. The issue is well-to-wheel - I will not repeat the point the witness made about the influence of the production of the manufacturing source - but there is also storage and the infrastructure associated with it. We are talking about the availability of E85 pumps. Q378 Sir Peter Soulsby: Some Members of the Committee did have an opportunity to tour the Sacramento Fuel Cell Partnership where we saw some of the prototype vehicles. I note after he visited it, President Bush said: "Hydrogen is the fuel of the future, not a foolish dream". You might agree with that but it does sound, if not a foolish dream, a very long-term prospect rather than a medium one. Mr Grenwell: Some of the technical challenges are clearly very substantial and they are well-known. I can only speak for our company. We are engaged in HICE and we are engaged in fuel cell work too. Many other car companies are involved in seeing the potential prize but infrastructure challenges, technical challenges like storage, and those mentioned earlier about the nature of the manufacturing source and the implications of that for well-to-wheel, all of those are to be wrestled with. Frankly, there is no short-term prospect of that technology superseding any of the others that you have mentioned. Q379 Sir Peter Soulsby: When we were in California we did see what the state government was doing to support the prospect of the use of hydrogen. Is there anything that our Government could be doing to make it an earlier prospect in the UK? Mr Grenwell: I think it is difficult. The technical problems are the technical problems and the infrastructure challenges are there for all of us. I think continued liaison with trade groups like SMMT and individual companies around these challenges is very important but I do not think that should deflect us from taking advantage of technologies that are manageable, that we can get our arms around and offer benefits in terms of well-to-wheel CO2 reductions right now. Frankly, we are doing both in parallel and everyone is being candid about the timeline associated with hydrogen, and it is further out. Q380 David Lepper: Colleagues from Rolls-Royce, welcome. I hope you found the first part interesting. I think everybody is agreed about the importance of dealing with aviation fuel in terms of our CO2 emissions and the world's CO2 emissions. I think the Tyndall Centre for Climate Change Research recently said that if the climate change impact of aviation continues to grow at current rates, all householders, motorists and businesses would have to reduce their CO2 emissions to zero in order for the UK Government to meet its 2050 target. I would be interested in hearing what Rolls-Royce is doing within that context. Can I just put something to you that you said in your submission, and that was to express a concern about alternative fuels for aviation due to "safety, energy density, cost, global availability and environmental impact". You have got some concerns about alternative aviation fuels. Some of my colleagues who went to the US heard similar concerns being expressed by Boeing in Washington. What is Rolls-Royce up to and what is the issue about the problems with alternative fuels? Mr Clarke: I will comment to start with on what we are doing generally and then I will pass to Colin and John to comment on the details of the technical programmes and the issues around alternative fuels where there are some very big concerns both from our side and the operators' side. If you look generally at what we are doing in this arena, we invest about £600 million a year in product development, at any one time we are probably developing between two and five new gas turbine products for aviation and every single one of those represents an improvement on the one that went before. This year we are doing two major new engines which will be improvements over what we did just last year. To give an indication of what that means in practice, over the last 50 years, which realistically is the horizon of the gas turbine jet industry and aviation industry, we have improved fuel efficiency of our engines by about one per cent a year, which may not sound very much but the reality is when you are working with something where simply achieving that kind of change requires that kind of investment every year, that is a fair rate of progress given we are dealing with materials and structures operating quite literally at the limits of their capabilities. This is not something you can change trivially in terms of changing fuels. John, who is chief combustion engineer, will explain some of the realities of what is involved in changing the fuel of an engine. Given that kind of background, the fuel we are using has not changed particularly for many years in the industry. Where we are going right now is we are evaluating the possibilities of alternative fuels and we do that mostly at a research level where we are working with a number of UK universities and overseas in terms of what is possible given the types of engine and type of combustion systems that we have got today, and we are looking at where will be the bounds in terms of alternative fuels. One of the key things to bear in mind is this is an industry where we cannot change anything independently of the fuel manufacturers or independently of the operators, independently of other international agencies and international programmes, so we work very closely with all of those groups and are represented on groups like ICAO which is looking at emission standards from engines and fuel standards to go with aircraft. We are working with all of those groups in a genuinely co-ordinated fashion to take these kinds of issues forward. I must stress it is not something that is immediate, and the Ford guys said the same thing about their products, you are talking about a 12-15 year life cycle. Shell was saying ethanol is a 50 year programme. Our products are out there 25 years-plus, we design for a minimum 25 year operation. To change that product significantly, those gas turbines that fly overhead here and right now, you will have to engineer a new engine and in crude terms you cannot retrofit. You cannot go to a Boeing 747 and put a completely new engine on to it without huge investment. It does mean there is a very long-term life cycle. Realistically you cannot roll over product in a few years, it is going to be a 25 or 40 year programme to roll over gas turbine product into a new technological standard. You can do some of that but it is a hugely long-term business that we are in and a quite challenging one. Mr Beesley: If I can start with the Tyndall Centre report, which we read with great interest. We would not argue with the results of the sums that they came out with given the assumptions they used, which were rather pessimistic from an aviation point of view and very optimistic from all the other sectors' points of view which relatively made the aviation sector by 2050 very large compared to everybody else's emissions. Q381 David Lepper: The Government does seem to be looking towards a huge increase in air travel. Mr Beesley: Yes. In some ways the increased focus on the environmental challenges of the aviation industry mean it is a victim of its success in meeting the growing demand for air travel and air transport that more and more of us want to do as much as we can. Rolls-Royce is a founder signatory and very proactive in the formation of the Sustainable Aviation Strategy, which was launched last year, which is a collaboration between the manufacturers, the airlines, the airports and air traffic control in the UK, and has set out a path towards sustainability. The major contribution from our perspective is the technology. As David was referring to, specifically we are committed to a 50 per cent reduction in fuel burn and CO2 emissions over a 20 year timeframe of 2000-2020, on top of a 70 per cent reduction in fuel burn that we have done historically since the first jet aircraft. We are talking about huge improvements in efficiency on top of what has already been achieved. We have not planned any contribution from lower carbon fuels in those assumptions, we are assuming that the current global standard fuel, Jet A1 kerosene, will remain so. As David referred to, aviation is a truly global industry, aircraft have to be able to rely on the same standard quality fuel being available at all of their destinations and also some unintended destinations occasionally. Safety is the number one priority of the aviation industry and it has an excellent safety record. Q382 David Lepper: I think you were involved in, or contributed to, the study carried out by Imperial College two or three years ago on Potential for Renewable Energy Sources for Aviation. Mr Beesley: Yes. Q383 David Lepper: It sounds as though perhaps you do not agree with some of the findings of that study which suggested that synthetic kerosene and biodiesel offered, I think they said, the greatest potential benefits as alternative aviation fuel. Mr Beesley: It would be fair to say we nurtured that report, using the terminology of the day. Q384 David Lepper: There is lots of nurturing going on. Mr Beesley: The Department for Trade and Industry funded the work with very strong guidance from ourselves and British Airways, who ought to be credited also. We gave them the brief of going away and finding the best alternative aviation fuel, so the report is written in that context. They talked about three possibilities and dismissed lots of other alternatives. I think the most practical solution was the Fisher-Tropsch synthetic kerosene which is currently being used and approved for use at a 50 per cent blend. It is manufactured by SASOL in South Africa. Much of the fuel that is uplifted in Johannesburg is already synthetic kerosene. In this case it is manufactured by coal but there is no technical reason why the same process could not be used to manufacture it from biomass. In terms of the report it is a proven practical alternative. The other fuel that they said was possible was hydrogen, which is a very long-term potential for the future. Most people who have looked at hydrogen have said there are some huge, great technical challenges mainly to do with the storage of the fuel and the logistics of creating enough hydrogen at all the airports of the world. Many people say that you would expect aviation to move over to hydrogen ten to 15 years after all other transport has. I think in the context of the discussions you were having earlier you can see where we are coming from there. Within the PRESAV report we did suggest the possibility of blending biodiesel into traditional kerosene. With the benefit of hindsight I think they were a little optimistic. They say ten to 20 per cent would be possible but we would have concerns certainly at the higher end of that range. One of the fundamental properties that an aviation fuel has is that it has to remain liquid at minus 60 degrees centigrade, which is the temperature within the wings at altitude. Not only that, you have to have a fuel where the engines can be relit at 30,000 feet, which is a big challenge. The biodiesel fuels have technical constraints which do not make those two things easier. Also, any fuel containing oxygen, as all the biofuels do - biodiesel and ethanol contain oxygen - is not good news for an aviation fuel. If you are carrying around heavy oxygen molecules you have to burn more fuel just to carry it around. There are some real inefficiencies just from using a fuel that has got less energy density. Q385 David Lepper: Presumably you have given consideration to the implications of eventual agreement, if it happens, on aviation being included within the EU Emissions Trading Scheme. There are discussions going on towards that end, which may or may not be completed at some point. I imagine you and others have taken into account the likely implications of that. Is that likely to affect the speed of technological process or not? Mr Beesley: I have to admit to an interest. I have been a member of the Aviation Working Party ---- Q386 David Lepper: Good. Mr Beesley: ---- on the European Commission Climate Change Programme looking at incorporating aviation into phase two of the Emissions Trading Scheme. There are a huge number of options available. The working party submitted its final report literally a few days ago which will be presented to the European Parliament during this year. There are many problems in integrating what is a European scheme within a global aviation industry, some of them political, as you can imagine. If it is just a European scheme, which would be the least controversial, it would be unlikely to have any great impetus on a global aviation industry. Intra-EU aviation is only about 15 per cent of global aviation, so there would be little incentive for products being developed specifically for the European market. There is also the issue of the fact that aviation uniquely has impacts on the climate beyond just its CO2 emissions. It is unclear with the current level of scientific understanding what the best way is of addressing that. We know that reducing fuel burn is a good idea and reducing CO2 has got to be a good thing, so the whole aviation industry is geared towards reducing its fuel burn and increasing its efficiency. Emissions trading will hopefully further encourage that which is happening anyway. Q387 Patrick Hall: I would like to congratulate Rolls-Royce on the evidence. I thought it was very readable as well as being short, and that always helps. I thought paragraph six was particularly measured and balanced where you say: "While carbon dioxide emissions from aircraft are a significant and growing contributor to climate change..." et cetera, plus the effect Mr Beesley has just referred to of cruise, which I had not sufficiently understood. Can I say the message in paragraph six contrasts rather strongly in my view with the message in paragraph 11 where you said: "Aviation kerosene accounts for only three per cent of the global use of fossil fuels. It can be argued that the benefits to local and global economies and to personal and social mobility brought about by aviation justify the use of this resource for this purpose...." et cetera. That sounds like on the one hand you are upfront about the issues and on the other you are not yet serious about doing something about it. That message in paragraph 11 could sound complacent, and you are here to explain this. I would like to ask you exactly where is Rolls-Royce's policy on this issue. As a supplementary to that, could you indicate, if you are able to now, what proportion of your research budget is being directed to replacing safely and efficiently and economically the current aviation kerosene? Mr Beesley: Thank you for that question, which is very perceptive. We are often misunderstood, so thank you for giving us the chance to correct it. Yes, we are concerned about the environmental impact of all of our products. The point we were trying to make was that aviation is only three per cent of fossil fuel use. It is growing faster than some others but on an absolute level it is very small and will remain so for some time. Because of all the constraints within the aviation industry, and we have mentioned some of them to do with the technical specifications required that the fuel remains safe and reliable and efficient, you can argue that the best use for what kerosene there is is in aviation rather than for other uses, power generation and land transportation to name but a couple. We are putting all of our effort through research and technology to make sure that the kerosene that we are burning is being done as efficiently and as cleanly as possible. That is the point we are trying to make but it is a complex argument. Q388 Patrick Hall: I understand that, but it could look like, and it might actually be, because it is in everybody's interest to make fuel consumption more efficient whatever the fuel is, that you are relying on every other sector to directly tackle carbon change, CO2 emissions and arguing that for the foreseeable future, and I am not quite sure how long that is, you did not answer my point about scientific research, the aviation industry does not need to do that. I think that would be a mistake if that was the position. It may well be the perception that people will draw from that position which perhaps you will think about. If you can answer it now, please do, if not maybe write, about the scientific research budget and what you are putting into looking beyond existing kerosene. Not just the efficiency because you have been doing that for decades. Mr Clarke: That is right. It is a very interesting point. If we were purely an aviation company the answer to your question would be less than one per cent. In terms of what we are investing directly of our funding in alternative fuels to kerosene for aviation the answer would be less than one per cent. If you look at what we are investing in efficiency from our research programme the answer is more than 70 per cent. Efficiency of fuels is absolutely crucial. On the specific issue of alternative fuels the answer is a very, very small number for aviation but it is worth recognising we are not just an aviation business, we are also involved in ground based power in terms of power generation, we do power systems and propulsion systems for marine application, and in those areas we are looking for alternative fuels because those are areas where there is a clear opportunity and a clear demand from customers for alternative fuels, whether it is gas-based or liquid-based fuels. In those areas we work primarily on non-kerosene fuels, it is gaseous-based fuels that we are interested in, and diesels as well. What we are seeing is the investment we make in those areas and in the technology groups that work in those areas feed through into our aviation activities over the longer term. It is important to recognise that it is not just aviation activity gas turbines, in the gas turbines we use in the aerospace industry and our product range we use derivatives of the same products in those other sectors, so there is a high degree of commonality across those markets for us. We can take the technology that is developed in one area and use it, generally with some modification, in one of the other sectors. The answer on alternative fuels is clearly we are working on that at the moment in the other sectors where there is a clear market driven potential to go into those areas with alternative fuels, whether it is a conventional fossil fuel or whether it is a biofuel or hydrogen. Our latest business sector is around fuel cells, not for transport applications but for ground based power applications where we have a solid oxide fuel cell system in development at megawatt scales which are going into those. Q389 Sir Peter Soulsby: In your paragraph ten you referred to the SASOL plant and the production of synthetic kerosene. The impression given there is that this fuel does have a future, and I mean to aviation. That is how I am reading it. If that is so, and that is what you say there, why do you feel that is not being reflected more in your medium or long-term investment and research plans? Mr Moran: Synthetic kerosenes are different. One thing we can do with the SASOL process is it gives us the opportunity to tailor make a fuel that is tailor made to the kind of combustion process that we have. At the present time Jet A1 is a highly polished fuel but it comes along with some things that we do not like. It has got polycyclic aromatics in it, it has got benzene rings, things that we do not like in there. Those produce soot and smoke particles. You do not see very many soot and smoke particles from modern gas turbines but they are still there at the very small level. What the Fischer-Tropsch process allows you to do is tailor make a fuel that will not have those polycyclic aromatics in it. Therefore, the ability to make those precursors to smoke that come from benzene rings and polycyclic aromatics are not there any more. As far as PM2.5s and PM10s are concerned, the aim to use something like a Fischer-Tropsch kerosene would be a far nicer thing to do. We may also be able to increase the power density of the fuel as well using the Fischer-Tropsch methodology. One of the things that we find difficult with the biofuels is this oxygen molecule that comes along for free but does not produce anything with regard to heat output. What that means is when looking at a blend of 20 per cent of this biodiesel along with kerosene, for example, there is a 25 per cent reduction in overall heat output. That means we would have to burn 25 per cent more fuel. Going to Fischer-Tropsch fuel we may be able to increase the power density of the fuel, not by very much but we would be able to tailor the fuel to give us more energy, so one, two, three, four per cent maybe of energy increase, and obviously that is really worthwhile. Q390 Mr Drew: Can I go back to what Mr Beesley was talking about. I think it is fair to say the last time we were in Brussels the airline emissions issue was not seen as unalloyed success, let alone future joy ringing from the corridors of power there. Who are the good guys? Who are the bad guys? I do not mean just in terms of countries, but the carriers, the manufacturers like yourself. I know it is a complicated issue. It is symbolic in terms of the world becoming a bit more serious about emissions, is it not, and if we do not get this right then the rest is mere chattering in the background. Mr Beesley: You are asking me a question that could take me into dangerous territory with some of our customers, so I will have to be slightly diplomatic in my answer. Q391 Mr Drew: That is why I asked it! Mr Beesley: Obviously all of the aircraft operators have to fly to global standards with essentially the same equipment and really there is not a lot different in the way that they use our products so in one way the answer is there are no good guys or bad guys, they are all pretty much the same. The UK is blessed with some of the good guys in that some airlines do report their emissions from their airline operations and some do not. You can look at British Airways as an example of a good guy. Q392 Chairman: Is the United Kingdom Government through its fiscal and other financial policy doing enough to assist the more rapid development of the technologies you have described, both in terms of next generation of engines and next generation of aviation fuels? Mr Beesley: The motivation to develop new technology for aviation has been there all the time. Even if fuel was free we would be under pressure to improve fuel efficiency simply because if you can carry less fuel not only are you saving money but you can fly your aircraft further or replace some of the fuel with greater payload, more paying passengers. There is a built-in multiplier effect on the cost model of running an airline if you can use less fuel. The motivation is there and always has been and it has been increased recently through the very rapid increases in fuel price. Q393 Chairman: Part of the reason I ask you that is you have made very strong emphasis in your evidence about the longevity of the asset. Mr Beesley: Yes. Q394 Chairman: You also disappointingly - I do not say this critically - have told the Committee that retrofitting aircraft of an existing specification with more modern engines is not financially viable. The reason I asked about the fiscal aspect was whether you felt from the airline operator's point of view that a more generous regime of write-down could speed up the turnover in age terms of the fleet thus enabling the fruits of your labours to be incorporated in new aircraft quicker. Mr Beesley: Part of the reason it is difficult to change an aircraft is the number one priority, which is safety. Aircraft are certified at the time that they are first designed and first flown. To change that aircraft in any way, whether it is part of an engine or a type of fuel, takes an incredible amount of certification safety work in order to get that allowed. The costs of doing that are often prohibitive for all but essential changes. Q395 Chairman: One final question in terms of the engine design. You talked about your long-term objective of a 50 per cent reduction in fuel burn over quite a long time period. Does that mean that engine design is going to improve incrementally or does there come a point - a point you made earlier about the nature of materials operating at their limit - at which new types of engine, perhaps even non-metallic types, may offer a quantum leap breakthrough in terms of fuel consumption? Mr Beesley: Can I put that target in context? We are talking about 50 per cent for the aviation industry, the system, between 2000 and 2020. We have broken that 50 per cent target down into the different parts, although it has got to be the system working together that delivers it. Our part as the aero engine manufacturers is 20 per cent. There is another 20 per cent to come from the airframe and another ten per cent to come from better air traffic control allowing the aircraft to waste less fuel. Our part of that target is 20 per cent. The Trent 1000 engine for the Boeing 787, which enters service in 2008, so that is less than halfway through that time period, will be 12 per cent better than our baseline, so we will be more than half the way in less than half the time. Having said that, it does get increasingly hard because the better you get as you approach the laws of physics there are limits. We believe that 20 per cent is a challenging but realistic target for 2020. There is some small further improvement to come after that date. Q396 Chairman: After that are we looking at a complete quantum leap in what constitutes a modern gas turbine engine? Mr Clarke: The reality is in terms of what you see on the wing, or it might be above the wing in many cases, it probably will not look that different but in terms of what is inside it, will it be non-metallic, there will be non-metallics in there, I am sure, but there will still be some parts which will be metal for both safety reasons and life reasons because it is too difficult to do in ceramic. To give you an indication: we have been running ceramic systems in research and development and production for 35 years. Mr Beesley and myself have both been in it for 20 years and they are not in production yet, other than in one or two components. It is a very long, challenging job. That is the other thing about the kinds of things we are talking about, the research timescales are not a few years. Like the fuel cells, this is ten, 20, 30 years. You will see it but you will not see it physically on the outside of the engine. Chairman: Both from the automotive and aviation standpoints you have brought a well-informed dose of realism to our consideration of how we address the question of greenhouse gas emissions and the use of biofuels in both the worlds of road transport and aviation, for which we are grateful. May I thank you both for your written evidence, which was of a high quality and very helpful to the Committee. If there is anything that subsequently occurs to you that you would like to write to us about following questions, we are always open to further input. Thank you very much indeed for coming and for your patience in answering our questions this afternoon. |