In the UK diesel and petrol currently supply around 50% each of our road transport fuel, it would therefore make sense to introduce a system whereby the UK would develop both biodiesel and bioethanol (this is not the case in Europe as diesel is presently the main fuel source for most EU countries). Our quantitative studies have yielded that from current UK set aside land we could grow enough rapeseed, sugarbeet and wheat to cover a 2% diesel blend and a 5% petrol blend. Therefore the basic aim of this section is to try and successfully implement the recommendations from our quantitative analysis and analyse the effects of such a scheme.
If the UK government was to commit to a policy that would initiate the development of biofuels (in an attempt to reach the goals set by the EU) a major problem would be posed in achieving this target – How can we create a new market for biofuels? As we have discussed earlier Austria and France ran into strong opposition when they tabled their original idea of mandatory blending regulations, we cannot expect that things would be any different for the UK (indeed they may be worse) so what can we do?
The first step would be to hold talks with the UK’s suppliers of petroleum, in much the same way as most of the EU countries have done, and come to an arrangement which allows the blending of biofuels in their products (as some countries such as France and Austria seem to have come to agreements with their oil suppliers we are assuming that the UK could hit upon a similar arrangement with its suppliers). It is expected that the biofuels would be passed on to the oil supplier at no cost, there would however be a provision in the final price of the fuel which would allow for the production facilities to recoup their costs. The graph below illustrates how this process would operate.
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We are now going to look at certain stages in depth and determine the costing of introducing biofuels into the UK.
To then provide a route for biofuels into the current road transport fuels market, we must be able to guarantee conversion form traditional fuels to these new blended fuels.
We can solve this problem by referring back to previous experience; a few years ago the British Government had exactly the same problem when trying to introduce ULSD (Ultra Low Sulphur Diesel) and ULSP (Ultra Low Sulphur Petrol). To create a market for these new fuels the Government introduced a duty incentive which made them available at a lower price than ordinary road fuels, thereby making them a far more attractive proposition (a case study of this process is given below).
From 15 August 1997 the government introduced a separate duty rate for the cleaner ULSD set at 1 penny per litre below the rate for ordinary diesel. By March 1998 the difference was increased slightly to 2 pence per litre less than normal diesel. It was not until the March 1999 Budget when the differential was raised to 3 pence per litre to equal the duty that was placed on premium unleaded petrol, that ULSD became the main UK road diesel. The larger duty differential created a sufficient manufacturing incentive for refiners to substitute production of ULSD for ordinary diesel and by August 1999 ULSD had been introduced to the entire UK retail network.
The UK was the first country outside Scandinavia to use a duty incentive to encourage the change to a cleaner form of diesel (sulphur levels less than 50 ppm).
The government used the same fiscal instruments to accelerate the uptake of another cleaner fuel, ultra-low sulphur petrol (ULSP). ULSP started off at 1 pence per litre lower than premium unleaded petrol and will meet the agreed 2005 fuel specifications of 50 ppm sulphur and 35% aromatics (EU Fuels Directive 98/70).
Therefore using the above as a guideline we decided to phase in blended fuels over a period of three years starting from 2005. For our policy we are assuming that duty levels will be the same as those expected in October of this year which is 47.1p/litre (REF31), therefore our plan is to:
Conversion to this new fuel is based on the trends witnessed for the sales of ULSP and ULSD, therefore conversion to the blended fuels are expected to be:
At present rates of consumption the above conversion to a fuel with a lower duty rate would lead to a loss of duty of £875million, to account for this from 2003 onwards we propose to take 0.5p from present ULSD and ULSP duty rates. We believe that this is a responsible way of utilising a small fraction of the current tax primarily because the tax on conventional fuels is meant to dissuade you from using fossil fuels and seek cleaner alternatives, as such we are of the opinion that tax from current road fuels should be used to better promote the use of cleaner fuels. This would result in the generation of £851 million over a period of five years therefore compensating for the short-term loss caused by introducing the blended fuels (the figure below explains how).
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After a considerable amount of debate the first stage of the proposed UK Policy was agreed upon.
The next phase of this section is to determine how to develop a suitable biofuel-processing infrastructure. First of all we need to quantify how much biodiesel and bioethanol we shall require.
In terms of current fuel consumption the UK uses:
Therefore in terms of replacing a percentage of regular fuels, by volume, with blended fuels we would require:
If we take the values of density for biodiesel and bioethanol to be 870kg/m3 (REF22) and 790kg/m3(REF32) it is possible to the above figures in terms of tonnage rather than litres, therefore we require:
In order to meet this demand we require the development of a series of biofuel production plants; this however is both a time consuming and costly exercise. As we have previously discussed the set-aside land is scattered across the UK, which has a direct result on both the size and number of production plants required. We must also take transport into account; there is no point in growing wheat in Scotland that has to be transported all the way down to the South-East of England. As the figures suggest we will have to build far more bioethanol plants than biodiesel and this has large financial implications, as we shall discuss later.
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| REF33 |
As our quantitative analysis showed we require:
To reach these targets we devised the following possible scenario.
Biodiesel: - The set-aside areas of Scotland, the North-East, East and West-Midlands shall be given over to the cultivation of rapeseed. One 80,000 tonne biodiesel production plant shall be built in Scotland whilst three other similar sized plants will be erected in the Midlands.
Bioethanol: - The remaining land shall be given over to the production of wheat and sugar with a total of 5 bioethanol processing plants. A 70,000 tonne plant shall be located in Yorkshire (this allows for sugar or wheat to be transported from the North-West), one 80,000 and 50,000 tonne plant shall be located in the East, and the South-West and East shall each have an 80,000 tonne plant.
This results in the development of 9 biofuel processing plants.
The above analysis however does not detail the costs of constructing these production plants. For the purposes of our
calculations we have taken values from two external sources that have performed extensive analysis in this particular
field, their analysis estimated costs of:
These costs included all labour, capital and transport costs and the revenue recovered from the sale of the by products resulting from the primary production process for a more detailed analysis of this please go to Biodiesel Plant or Bioethanol Plant.
If we relate these figures back to our values for the amounts required for blending we find that the total eventual cost for development of processing plants is in the region of £536 million. It is our belief that the Government could not build and operate these plants instead we envisage a system whereby the Government will put out to tender contracts for each production plant therefore allowing companies which have a greater expertise in this particular area (British Sugar for example) to develop these plants. Indeed many companies have expressed an interest in this field but at the moment the economic conditions in the UK does not support the development of biofuels. The main problem is that companies will not spend large sums of money on the development of processing plants in the knowledge that they will find it almost impossible to recoup their initial outlay (this is a result of there being no market for biofuels).
As stated earlier we shall enhance the current UK market by guaranteeing that a fraction of the final pump price will go back to the production plants thus ensuring that they shall recoup their costs.
At present the production costs for diesel are 23.2p/litre and 21.03p/litre for petrol however the new production costs will be:
Based on this and earlier analysis we can now calculate the total price of our blended fuels across a year period and compare to the expected prices for “normal” diesel and petrol.
N.B. For this we have assumed that the profit margins currently employed by oil companies we not change significantly over the course of the next few years.
| Comparison between 2005 diesel prices |
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| Comparison between 2008 diesel prices |
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As we can see the initial price of the new blended diesel will be 1.1p/litre lower than the old diesel by 2008 this price differential will rise to 2.273p/litre.
| Comparison between 2005 petrol prices |
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| Comparison between 2008 petrol prices |
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For petrol the initial price difference will only be around 0.6265p/litre but this will rise to about 1.8015p/litre. The petrol prices have a smaller differential than the diesel ones because the production prices are greater for bioethanol.
Based on our analysis of the production side of things we devised the second stage of our policy.
In terms of subsidy and lost revenue the UK Government must account for a total of £1411 million, as a result of the development of new policies we can generate £1386 million.
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This means we have a total shortfall of £25 million as a result of creating a market for biofuels. However in our calculations we have not factored in the potential costs that come from marketing etc. and have not made any estimates for such a scheme.
We are also of the opinion that the Government should set-aside funds for the further development of ethanol from woody (lingo-cellulosic) biomass. It is well documented that woody biomass can produce far greater yields than crops, as we have discussed earlier the technology for such a process is relatively immature and its advancement would be of significant importance in achieving our required ethanol targets. This is an area that has plenty of scope for innovation and one where the UK has the potential to be the frontrunner in the world market. Therefore the Government should provide at least £10 million each year for the next 5 years this results in a total loss of £75 million to the Government over the next five years. However one must consider the amount of jobs that would be generated as a result of a biofuels industry, exact figures are very difficult to give but is assumed that for every 20 hectares of land brought under cultivation 1 job will be created (REF36) (this includes the development of the production plants).
If this figure is correct then as a result of developing 630,000 hectares we can expect the creation of 31,500 jobs which is quite a significant figure, even more so when one considers the current ravaged state of the agriculture industry. If the current UK average wage is just under £19,000 and the tax rate is at 21% the Government can expect a boost of £125 million a year which is far in advance of the expected loss of £75 million over a period of five years. This quite clearly is a major reason why we should seriously consider introducing biofuels to the UK.