Environmental Audit CommitteeWritten evidence submitted by Agri Energy

1. Summary

1.1 This paper sets out Agri’s submission to the Environmental Audit Committee’s inquiry into Budget 2013 and outlines the fiscal and economic measures the Government should be taking to support the transition to a green economy and create the conditions necessary for investment in low carbon skills and the creation of green jobs. The submission makes recommendations on how the tax and regulatory regimes in a number of renewable policy areas, including biodiesel and Anaerobic Digestion, could be reformed to encourage greater take up and investment of renewable energy:

1.2 Our submission to the inquiry makes the following policy recommendations:

A separation of the current joint obligation between biodiesel and bioethanol under the Renewable Transport Fuel Obligation (RTFO) in order to prevent market distortion, as well as greater direction from the Department for Transport to encourage the fuel industry to delay the introduction of E10.

The 2,500 litre fuel duty derogation for biodiesel producers should be abolished or an Environmental Agency processing permit required for all commercial production of biodiesel, including below 5,000 litre per year, in order to tackle the large black market biodiesel industry and the increased theft of biodiesel feedstock materials.

Greater certainty for investors in AD through the new Contract for Difference Feed-in-Tariffs (CfD) which will replace the Renewables Obligation as proposed in the Energy Bill, including a pre accreditation process for CfDs to provide investors with the certainty need to take significant up front financial risks.

A ban on the co-mingling of food waste in commercial catering establishment in the medium term, moving towards an outright ban on food waste to landfill to encourage more waste to be used for bioenergy generation, such as AD.

2. The RTFO and E10

2.1 Biodiesel made from UCO is acknowledged to be one of the most sustainable transport fuels. As a waste product, UCO avoids the negative indirect land use impacts traditionally associated with biofuels and is one of the only truly sustainable feedstocks that can help meet the Government’s objective to increase the proportion of transport fuel made from renewable sources.

2.2 Figures from the Renewable Fuels Agency based on a life-cycle analysis suggest UCO can deliver emission reductions savings of 84%. Our own measurements using ISO 14064 show savings of at least 90% for biofuel production when the required heat and power is provided by CHP run on a bioliquid. This is higher than any other biofuel feedstock. Agri is proud of this achievement and acknowledges that it has only been made possible by the variety of support mechanisms offered by government.

2.3 However, Agri is concerned that the current joint obligation for biodiesel and bioethanol under the RTFO is acting as a barrier to the future growth of this vital part of the UK renewable energy, as it favours the import of subsidised biofuels from outside the UK. Agri would like to see a separation of the obligation between biodiesel and bioethanol under the RTFO to protect against the volatile fluctuation of certificate prices and resultant market distortion, as well as encourage the domestic production of sustainable biodiesel.

2.4 The Renewable Transport Fuel Obligation currently treats biodiesel in the same way as bioethanol, as part of the same obligation and certificate scheme despite the fact that the international supply chain, markets and economics of these two industries are completely different. As a result of the joint obligation, suppliers can choose whether to meet the obligation with either biodiesel or bioethanol which can result in significant price fluctuations depending on a variety of global market factors. For example, in past experience, when the market is flooded with US subsidised bioethanol, this is immediately bought up by obligated suppliers causing certificate prices for biodiesel to plummet. The UK obligation for biodiesel can therefore be manipulated through imports of subsidised ethanol which do not necessarily reflect the most carbon effective way of meeting the renewable fuel targets and do not support the growth of the UK production sector.

2.5 In addition, certificate prices are prone to significant fluctuations, making long-term planning and revenue forecasting extremely difficult, and this unpredictability is likely to be further exacerbated if fuel suppliers begin to introduce E10 (a blend of petrol and 10% ethanol), as set out in the EU Fuel Quality Directive. Whilst we understand that the introduction of E10 may help the Government to meet its renewable fuel transport targets in the short term, because of the joint RTFO obligation for biodiesel and bioethanol, such a move would have a significantly detrimental impact on biodiesel certificate values as obligated suppliers are likely to choose to meet their renewable fuel targets through new E10 rather than biodiesel. In fact, it is likely that such a move will result in the UK becoming entirely dependent on imported ethanol from unsustainable crops grown in South America for its transport biofuels. Whilst this may help the UK meet its GHG targets in the short term, it will do nothing to create green jobs or provide security of fuel production in the UK.

2.6 Eight EU countries including Germany and the Netherlands operate separate obligations and certificate schemes for biodiesel and bioethanol in order to avoid such difficulties and ensure the biofuel meeting the obligation is sustainably sourced. We believe that this approach should be introduced in the UK in order to better align incentives for renewable fuel across Europe, to provide greater security of demand, and encourage UK dedicated production and the creation of green jobs. This would not seek to distort the market to favour one particular type of biofuel over another, but would rather work to ensure stability of demand for both UK biodiesel and bioethanol producers. In turn this will help support the progressively higher blending of biodiesel with conventional fossil fuels, such as by providing incentives to support the uptake of higher blends of UCO biodiesel in captive fleets, and help the UK meet its long term target to decarbonise the transport sector and reduce its dependency on oil imports.

2.7 In addition, we would like to see the Department for Transport take a stronger stance in recommending the fuel industry delay the introduction of E10 until the department undertakes further reform of the RTFO mechanism in 2014, particularly as forthcoming legislation from the EU on biofuels and Indirect Land Use Change is likely to have further implications for the RTFO. This will provide time for the biodiesel industry to adapt to the changes without deterring investors, whilst also enabling the motoring industry to prepare for the new fuel and ensure that motorists are not forced to buy more expensive fuels.

2.8 A DfT commissioned independent report in 2010 raised concerns that over 700,000 vehicles on UK roads may be incompatible with E10, and that the fuel could cause fuel filter blockages, the corrosion of engines, as well as driveability problems in hot and cold weather. Many in the automobile industry, including the Federation of British Historic Vehicle Clubs (FBHVC), have also been campaigning against the move, claiming that owners of older vehicles which cannot use E10 would be restricted to buying the more expensive super unleaded grades which will be the only E5 fuels available on many forecourts, which will have a detrimental impact on those on lower incomes. We understand the DfT has expressed a preference that now is not the right time to introduce E10, but we would like to see the department take greater action to encourage fuel suppliers and retailers to delay any plans for the early introduction of this new product.

3. The 2,500 Litre Fuel Duty Derogation For Biodiesel Producers

3.1 In 2007 the Chancellor announced that motorists who refine or use less than 2,500 litres of biodiesel per year to run their cars would be exempt from paying fuel duty. This was in response to unflattering news stories of police officers and tax inspectors staking out supermarkets and sniffing exhaust fumes to identify drivers that were buying cheap cooking oil and pouring it straight into their tanks without paying any duty.

3.2 However, this duty derogation has created a lucrative underground industry with black market producers selling their product illegally and ignoring the 2,500 litre limit. Moreover, the proliferation of unregulated biodiesel, which contains dangerous combustible elements and by-products, can pose a serious health and safety threat to those involved as well as to the environment unless it is produced as part of a strictly controlled and monitored process. The fuel duty exemption for those who produce less than 2,500 litres of biodiesel per year has also led to a spate of thefts of UCO from catering establishments. Agri estimates that 25% of all UCO is stolen, equalling 30 million litres of biodiesel with no duty paid. Indeed, Agri’s own reporting mechanisms indicate an average of 135 UCO thefts a month in 2011 from its customers and partners. However, these figures are only the tip of a large iceberg as UCO theft rarely goes reported.

3.3 Black market biodiesel is a profitable business. A small processor can be bought for as little as £995, or leased for £7 a week. It costs about 20 pence a litre to turn vegetable oil into biodiesel if you cut corners, use inferior elements and do not follow stringent regulations and processing methods. If a producer steals the UCO, it costs nothing to get the raw material, nor is VAT paid at 20%. Diesel currently costs about £1.32 per litre at the pump. The cost to produce sustainable and professional biodiesel from UCO is around £1.24 per litre, but producing black market biodiesel with stolen materials can cost just 20 pence a litre. It also creates unfair competition for legitimate biodiesel manufacturers, who adhere to strict standards for health and safety and fuel quality.

3.4 As a solution, Agri would recommend the abolition of the fuel duty derogation for those who refine less than 2,500 litres of biodiesel per year. Legitimate producers who meet environmental standards would still benefit from the 20 pence per litre fuel duty differential, should the Government decide to retain it, while black market producers would no longer fly under HMRC’s radar and be able to undermine the sustainable biodiesel industry with poor quality fuel sold via the black market. Alternatively, the Government could require an Environmental Agency processing permit for all commercial production of biodiesel, including below 5,000 litre per year, as this would require waste transfer notes to be properly logged and recorded, and will prevent illicit producers from gaming the system by refining much more than 5,000 litre limit.

4. Anaerobic Digestion

4.1 Agri supports the Government’s pledge to seek a large increase in renewable energy generated from AD, and welcomes the broad range of incentives available to generators. Whilst Agri understand the need to ensure value for money under any support scheme for renewables, if the Government is to achieve its aspiration of a rapid expansion of AD, it must provide continued certainty to investors through the new Contract for Difference Feed-in-Tariff (CfD FiT) mechanism which will replace the Renewables Obligation as set out in the draft Energy Bill, particularly for smaller AD plants which are vital to the growth of the sector as a whole.

4.2 Given the long time frames involved in the development of AD installations (often nine–18 months in construction), we would like to highlight the vital importance of preliminary accreditation to provide investors with the certainty required to enable them to take on significant up front financial risks. We therefore would like to see the introduction of a preliminary accreditation process for AD installations under the new CfD FiT scheme based along the process currently pre accreditation process used under the Renewables Obligation, with the installation eligible for the tariff level payable at the time of accreditation rather than completion.

4.3 We would also like to note the need to make the pre accreditation process less burdensome and time consuming for business. The existing accreditation process via Ofgem is often long and laborious, with audit costs to measure the sustainability of projects often extremely high, meaning that they can counter balance any payback from the tariff process for small projects. Therefore any accreditation process under the CfD FiTs needs to be streamlined to ensure it does not impose unnecessary burdens and costs on those seeking to invest in renewable projects, and that applications can be processed as quickly as possible to provide greater certainty to investors. In the longer term, it may also be worth considering a combination of RO and Feed-in-Tariff support. This would have the advantage of keeping a market based support system that responds to the supply and demand of renewable energy as well as giving fixed payments to support technologies that require a greater level of support. In other words all technologies would receive 1 ROC per MW and some technologies would receive a FiT per MW in addition, as per the CfD mechanism described in the draft legislation.

4.4 We would also highlight the need to take into account the cost of collection when examining the cost of converting waste to energy. The current low level of AD power production is largely due to the fact that the total cost of starting up segregated food waste collections and processing this is too high when compared to the cost of dumping food waste in landfill and general waste collections. The growth of the AD sector also depends on the reliability of the food waste supply chain, but this is not recognised when determining project costs.The current system to promote the collection of food waste and convert it into renewable energy is not working for the catering sector, which is estimated to produce 5 million metric tonnes, or 25% of the UK’s food waste. This is because the cost of smaller multi-site collections is more expensive than bulk collection from manufacturing sites, and because there are not sufficient disincentives to using landfill.

4.5 Agri is supportive of the Government’s ambition to ban waste to landfill in the long term and would like to see further measures to encourage the commercial catering sector to segregate its food waste, such as a ban on the co-mingling of food waste as an interim solution to help ensure adequate access to food waste feedstocks for the growth of the AD sector. In May 2012, Scotland also approved new regulations around the source segregation of waste, including a requirement for businesses that produce more than 50kg of food waste per week to separate this for collection. Agri would like to see similar measures taken in England to prevent commercial catering establishments from co-mingling food waste with general waste, to ensure as little as possible is sent to landfill while also providing access to viable feedstock of food waste for AD generation.

5. Conclusion

5.1 Agri has used this submission to highlight the need for the Government to provide greater certainty to investors to ensure that bioenergy produced from waste has the potential to contribute significantly to achieving the UK’s 2020 renewables target and contribute to the growth of the low carbon economy.

5.2 For biodiesel, to address ongoing concerns about the instability of the RTFO certificate mechanism, which is likely to be further exacerbated by the introduction of E10, we believe the most appropriate solution would be to make the current RTFO obligation shared equally between biodiesel and bioethanol, rather than obligated jointly. This would mean that obligated suppliers will have to provide a certain amount both of biodiesel and bioethanol, rather than choosing to meet their renewable fuel targets through either technology. This will provide stability to demand as well as protect the value of RTFO certificate prices, while also encouraging UK dedicated production of renewable fuels and the creation of green jobs. In addition, in order to ensure legitimate businesses are not undermined by black market biodiesel producers that evade tax and do not meet environmental standards in the quality of the fuel they produce, we would like to see the Government take greater measures to ensure that all biodiesel production is properly taxed and has VAT paid.

5.3 For Anaerobic Digestion, whilst Agri welcomes many of the proposals in the draft Energy bill, we would like to see greater clarity about what measures will be in place to support renewable technologies during the transition period from the RO to CfD FiTs, including through a pre accreditation process to give reassurance to investors. Finally, it is important that any financial support offered through the new CfD FiTs is supported by a positive regulatory environment to ensure adequate access to feedstocks for the growth of the bioenergy industry, specifically through a ban on the co-mingling of food waste to support the further development of the AD sector.

17 October 2012

Prepared 19th November 2012