Memorandum submitted by D1 Oils plc
SUMMARY
1. The Stern Review urges the UK to take
strong action now to avoid the worst impacts of climate change.
The Government has taken steps to encourage both consumers and
industry to help in this task, but it is clear that policy and
fiscal incentives will be necessary to accelerate development.
Within the transport sector, the Renewable Transport Fuels Obligation
(RTFO) is the key mechanism by which the UK Government intends
to deliver its greenhouse gas emissions (GHG) targets.
2. D1 Oils plc (D1) is building a business
in the agronomy, refining and trading of inedible vegetable oils
to produce biodiesel. D1's primary feedstock is Jatropha curcas,
an oilseed-bearing tree that grows in tropical and semi-tropical
climates. D1 is the first and largest global operation involved
in the research, cultivation and production of jatropha for sustainable
biodiesel. D1 also designs, builds, owns, operates and markets
its own proprietary biodiesel refinery technology. D1 currently
operates 32,000 tonnes of biodiesel refining capacity in Middlesbrough
3. D1 supports the Government's announcement
of the RTFO. We recognise that this innovative policy method,
which builds on the government's earlier reduction of the duty
paid on biofuels, will be fundamental to supporting the development
of an efficient UK biofuels market. However, we would recommend
a number of adjustments to the implementation of the RTFO to improve
the potential for growth, competitiveness and sustainability of
the UK biofuels industry:
— To revise its biofuel blend
targets upwards from 5% in 2010 to 10% in 2015 and 20% in 2020.
— To amend the current plan to
reduce the levels of tax derogation that are the lever to encourage
adoption of the RTFO targets.
— To ensure that the design of
the scheme does not discourage the use of higher biofuel blends
by large users such as road hauliers, bus companies and local
authorities.
— To ensure that the carbon saving
features of each biofuel are recognised commercially within the
design detail of the RTFO.
We would also recommend that the Government
take the following actions:
— To support moves at EU level
to ensure that sustainable biofuel feedstocks imported to member
states, including jatropha, are exempt from import duty.
— To engage with the auto industry
to ensure progress is made to allow vehicle engine warranties
to cover use of biofuels blends higher than 5%.
INTRODUCTION TO
D1 OILS
1. D1 is a UK-based global producer of biodiesel
from renewable crops. We are building a global supply chain that
is sustainable and delivers value from "earth to engine"
via agronomy, refining and trading of biodiesel and biodiesel
feedstocks. Our core belief is that to develop an efficient long-term
biodiesel business, we should not rely solely on traditional edible
vegetable oils as raw materials for making biodiesel. Edible oils
are an important food source and require good quality arable land,
which is increasingly short supply particularly in developing
countries. Rather we should develop new crops that can supply
biodiesel feedstocks from plants, shrubs and trees producing inedible
vegetable oils that will not compete with food crops for available
arable land. These oil crops typically grow on a wider range of
soil types and therefore need not displace food crops. Our long-term
strategy is to import sustainable inedible oil feedstocks into
Europe to use for biodiesel production. We are planting our preferred
energy crop, Jatropha curcas, in a range of countries in
the developing world.
2. In addition, we have developed our own
biodiesel refinery technology in the UK. We commissioned four
refineries in Middlesbrough in 2006. We plan to install further
biodiesel capacity during 2007 at Middlesbrough and at our new
site at Bromborough on Merseyside. All development and commissioning
work was, and continues to be, UK-based.
3. Production of biodiesel commenced last
year and this has all been sold into the UK transport market.
WHY JATROPHA
CURCAS?
4. Traditional feedstocks for European production
of biodiesel are rape seed and soya oil, which are also used extensively
in the food industries. Prices of these two core feedstocks have
increased substantially over the last two years and are driven
by events far removed from biodiesel or energy use. D1 embarked
on a search for alternative feedstocks so as to reduce the risk
of food market demand adversely affecting biofuels' prices in
this way.
5. D1 identified Jatropha curcas
because it produces seeds with a high oil content. Under optimum
conditions jatropha seeds can yield up to 40% oil content. Crude
jatropha oil (CJO) is inedible and its price is not distorted
by competing food uses. Jatropha also has the ability to tolerate
a wide range of climates and soil conditions, and has a productive
lifespan of over 30 years. The extracted CJO can be refined into
high quality biodiesel. D1 Oils is committed to enabling developing
countries to benefit from growing energy crops such as jatropha
for the production of biodiesel. Developing countries have millions
of hectares of land, currently unused, marginal, waste or degraded,
that could be suitable for growing jatropha. We believe that
Jatropha curcas has the potential to become one of the world's
key energy crops.
RTFO TARGETS
6. The RTFO obligates fuel sellers to include
a percentage of renewable fuels within their total fuel sales
by volume. Fuel sellers will buy renewables (biodiesel for blending
into diesel and bioethanol into petrol) from producers like D1.
The percentage of renewable fuels required under the RTFO increases
over time to reach 5% by 2010.
7. D1 believes that the UK's target of a
5% blend by volume from 2010 is not sufficiently ambitious. The
UK target is less than the target of 5.75% by energy content by
2010 set by the European Commission. When calculated on the basis
of energy content, the present UK target percentage amounts to
only 3.5%.
8. The Government has not yet published
its long-term targets for beyond 2010. We believe that higher
long-term targets for biofuel blends are essential for market
development and we would urge Government to set more challenging
goals for the uptake of biofuels. The European Commission announced
on 10 January 2007 its recommendation that biofuels constitute
a minimum of 10% by energy content of all transport fuels consumed
in Europe by 2020. D1 would suggest that the Government consider
altering its biofuels targets from a requirement of percentage
by volume to a percentage by energy requirement and revising its
targets upwards into line with Commission targets. Short of this,
we would recommend that the Government raise its biofuels targets
more aggressively to at least 10% by volume by 2015 and set a
more ambitious long-term target of 20% by 2020.
RTFO SCHEME DESIGN
9. The principal mechanism to ensure fuel
sellers comply with their obligation is a combination of excise
duty relief and penalty payments, designed to reward biodiesel
sellers with up to 35 pence per litre (ppl) of biodiesel or ethanol
sold to fuel suppliers. This incentive is the encouragement to
the renewable fuels industry to produce an alternative to mineral
fuels and sits at the heart of the RTFO. It is the key element
that will encourage or discourage investment in renewable fuels.
However, it is already been announced that the level of the incentive
will reduce to 30ppl within two years.
10. The fundamental economic issue influencing
the development of the UK biofuels market is the differential
between feedstock prices and biofuel sale prices. In the case
of biodiesel, at current price levels for mineral diesel and edible
vegetable oils biodiesel production and sales margins are under
pressure. To encourage and sustain long-term investment in the
UK biodiesel industry and minimise market risk, D1 believes that
it is essential that the incentives incorporated into the RTFO
are maintained at the highest possible level for a longer period
than is currently envisaged.
11. D1 believes that it is essential that
the biofuels industry receives further clarification on duty incentives.
HM Treasury has announced that the excise duty incentive for biodiesel
will be maintained at 20 ppl in 2008-09, the first year of the
RTFO, with a penalty/buy-out price of 15p in 2008-09, providing
a combined incentive of 35ppl. It has been announced that this
will fall to 30ppl in 2010-11. A firm commitment from the Government
guaranteeing the 35p price for a longer period would better enable
the industry to continue to plan, develop and expand and would
encourage market stability. D1 would therefore encourage HM Treasury
to clarify further how the excise duty incentive and buy-out price
package will be split for the year 2010-11. We believe that the
UK is in danger of not meeting its GHG emission reduction targets
for transport because the incentive may not be sufficient to incentivise
biodiesel producers.
12. D1 is also concerned that the design
of the RTFO may stifle development of the market for biodiesel
blends above 5%. D1 is one of the few companies currently making
biodiesel and selling into the UK road transport market and we
believe there is a significant appetite for high blend ratios,
possibly up to 100%, from UK companies and public bodies running
large fleets of lorries, buses and other vehicles. D1 is keen
to develop this market and is actively working with road haulage
companies in particular to identify the most efficient biodiesel
blends. If encouraged, this sector could expand the total UK biofuels
market substantially. However, as the RTFO is currently configured,
biofuels producers who directly supply fuel to this market rather
than working through oil companies and fuel distributors will
be forced to bear a greater risk over the future price of buy
back certificates. As a result there is concern that the RTFO
actually could discourage the direct supply of higher biofuels
blends.
13. We find it odd that a scheme aimed at
reducing GHG should have this negative impact. A dual policy of
promoting both low- and high-blend biofuels has been pursued successfully
in other parts of Europe, specifically in Germany and France,
and we would welcome similar high blend initiatives in the UK.
We believe that this design flaw should be remedied during the
system design stage, as it has the potential to expand the total
UK market for biodiesel beyond the 5% level if encouraged.
RTFO AND IMPORTED
FEEDSTOCKS
14. Imported feedstocks will play a key
role in the UK meeting its targets under RTFO. Currently UK agriculture
can produce a significant proportion of the UK's demand for biodiesel
and bioethanol, however it will be impossible to meet all demand
from domestic agriculture. A mix of home production and imports
will be needed.
15. The blends of renewable fuels required
by the RTFO should create a demand for biodiesel of around for
one million tonnes per annum. Currently the UK has the capacity
to produce around 720,000 tonnes of rape seed biodiesel from the
570,000 hectares currently growing rapeseed in the UK. However,
this does not take into account the food industry's demand for
rape seed oil as a food product. Some 40% of rape seed oil currently
goes to food uses. There is potential to increase production using
set-aside land to grow rape seed oil. However, it is widely recognized
that even with the use of set-aside land, UK agriculture will
not be capable of meeting fully the 5% biodiesel target from domestic
feedstock production. Furthermore, there are concerns around the
expansion of rape seed cultivation, particularly its sustainability
as a monocrop, its need for frequent rotation and intensive use
of fossil fuel fertilizers. Yields for set-aside lands are also
questionable.
16. Imports of biodiesel and biodiesel feedstock
will be a major part of the UK biofuels market under the RTFO
regime. D1 believes that significant imports will be required
to fulfill the 5% target and that blends of up to 20% can only
be achieved under the RTFO using imports of sustainable fuels.
CARBON AND
SUSTAINABILITY
17. The initial design of the RTFO considers
all biodiesels to be equal. The reality is that producing biodiesel
from alternative feedstocks from different countries results in
different levels of carbon and GHG savings and different environmental
impacts. This issue is particularly important, given concerns
over the sustainability of producing biodiesel from palm oil,
particularly palm oil produced from South East Asian plantations
located on land cleared of rainforest. D1 does not support the
production of green fuels at the expense of rain forest that has
its own intrinsic value not only as a source of biodiversity but
also as an essential carbon sink and climate regulator. D1 is
a member of the Roundtable on Sustainable Palm Oil (RSPO).
18. We believe that it is important that
producers of biofuels which produce the greatest net environmental
benefits should be rewarded most. We believe that net environmental
benefits should be reflected in the commercial benefits under
the RTFO, for example in the value accorded to certificates for
fuel supplied. D1 is working closely with other companies and
industry bodies to develop relevant criteria to evaluate carbon
savings and sustainability of different feedstocks and is keen
to introduce new, sustainable feedstocks such as jatropha for
testing and evaluation.
IMPORT DUTIES
ON BIOFUEL
FEEDSTOCKS
19. D1 Oils believes that jatropha offers
a viable and sustainable raw material for biodiesel and we expect
imports of CJO for refining to begin in volume from 2008. Jatropha
is an inedible feedstock that can be produced from a sustainable
crop and as such matches the criteria for a number of the Government's
environmental policies. We believe that under current EU customs
codes, imports of crude jatropha oil are likely to be charged
a duty rate of 2.7%. However, palm oil imported into the EU for
refining into biodiesel is currently exempt from duty. D1 intends
to apply for a similar exemption for jatropha and other sustainable
inedible vegetable oils and would look for Government support
in applying for this exemption. By facilitating duty free status,
jatropha will be able to compete with other feedstocks and benefit
considerably the agricultural sectors of developing countries.
The import of high volumes of low-cost jatropha oil could contribute
significantly towards meeting the UK's RTFO targets.
20. Furthermore, D1 urges the Government
to consider the anomalous position whereby soya oil imported for
refining into biodiesel is subject to duty while palm oil is exempt.
At the current price levels for mineral diesel and vegetable oils,
every additional feedstock cost further weakens the likelihood
of the RTFO delivering the Governments targets. D1 believes the
EU should instate a level playing field for biodiesel feedstock
imports that accords soya and inedible oils, including jatropha,
the same exempt status as palm oil.
NEED FOR
IMPROVED VEHICLE
WARRANTIES FOR
BIOFUELS
21. In order for the RTFO targets to be
achieved, it follows that regular engines must be able to run
effectively on biofuels and that vehicle and engine manufacturers
cover such use in their warranties. Many diesel vehicle and engine
manufacturers and distributors continue to either completely discourage
the use of biodiesel in their engines or to limit the warranty
cover to only 5% blends. Vehicle manufacturers in the USA have
already raised the level of biodiesel covered by their warranties
to up to 20%. Many European manufacturers also warranty vehicles
up to this level in the US market, but identical models of vehicle
are only warrantied to 5% in the EU market.
22. D1 would therefore urge the Government
to encourage vehicle and engine manufacturers to be more proactive
in developing and modifying engines and parts to enable regular
engines to use greater proportions of renewable fuel.
CONCLUSION
23. Currently biodiesel and bioethanol production
is a fledging industry in the UK. The success of the RTFO and
the extent to which the UK government succeeds in delivering its
GHG reduction targets for transport depends to a very great extent
on whether the incentives contained within the RTFO are sufficient
to persuade companies to invest in new biodiesel and bioethanol
capacity.
24. The UK biofuels industry has made significant
strides in attracting development and building capacity. However,
we believe that more ambitious targets for biofuels blends beyond
2010, coupled with a commitment to retain tax derogation levels
at the higher level for longer, would be a significant additional
encouragement to the industry. We would also like to ensure that
important market sectors, particularly the higher blend market
among road haulage companies, are not discouraged by the mechanism,
and that sustainable feedstocks are given due commercial weight
by the scheme.
25. We would also like to see the Government
act at EU-level to ensure that sustainable feedstocks are exempt
from import duty. Furthermore, we would welcome greater encouragement
by the Government of vehicle and engine manufacturers to enable
the same blend levels under warranties in the EU that are now
common in markets such as the US.
January 2007
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