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Europe warily prepares to enter a newly globalized age of biofuels

10.01.2011  |  Wright, Tim L.,  HP, Sweden

Keywords: [biofuels] [ethanol] [bioethanol] [renewables] [biodiesel] [environment] [tariffs] [legislation] [greenhouse gases]

Biofuels are growing up in Europe. From an exotic outlet for European Union (EU) agricultural product in the 1990s, to a boutique fuel for the green consumer in the 2000s, now today’s industry has filled out and bulked up. In 2011, biofuels are a globally traded business; this industry has transformed some of its pioneering suppliers into household names. But many more European startups lie bloodied by the wayside or limping along the sidewalk.

Manufacturers, suppliers, consumers, some non-governmental organizations (NGOs) and even pure-play fossil fuels suppliers have had their share of growing pains during the rapid rise of the market. Many biodiesel and bioethanol manufacturers in Europe have exited the industry or have gone bankrupt.

Growing pains.

Now, the European industry stands at a milestone, warily eyeing billion-dollar investments in equatorial regions, while nursing the bruises of a less competitive domestic industry. “The industry suffers from over-investment,” says Andrew Owens, chairman and co-founder of the UK’s Greenergy, a prime example of a biofuels distributor that has succeeded in the “green” industry. “During the mid-2000s, credit was easy and too much was built,” he says. “The industry still has a hangover from that time.”

Dieter Bockey, spokesperson for the Union for the Promotion of Oilseeds and Protein Plants in Germany, identifies credit conditions as part of the cause of the rapid growth of the industry. “In 2006, everyone could finance a plant,” he says. “But now in Germany, several hundred thousand tons of production have been idle for several years now.”

Legislation.

Another pillar of the industry’s growth is that phenomenon without which Greenergy might never have made its astonishing journey from being the “new kid” in the 1990s, to its position today as the UK’s third largest private company, the tax incentive. When the consulting group Arthur D. Little reported, in the early stages of the development of the 1997 Fuel Quality Directive, that when Sweden had used taxation policy to steer its refiners into profitable, clean fuels production, the detaxation of greener products was taken up with relish across large parts of Europe. Article 16 of the European Energy Taxation Directive allowed governments to exempt fuels, and the stimulus this provided led many to conclude that there were sound reasons to turn more of Europe’s agricultural product into biofuels. That phase, which effectively afforded manufacturers a 10-year trade wind, is now drawing to a close. “The rules are clear, and the general policy is to move from promoting biofuels with detaxation to mandating their use with quotas,” says Bockey.

Two pieces of European rule-making are responsible for this. The Renewable Energy Directive is a major policy initiative currently being transposed into national laws in the member states. In the UK, where it should enter fully into law by year end, it calls for 15% of UK energy all energy, but specifically 10% of transport fuels, to be supplied from renewable sources by 2020. Compared to initial ambitions for 20% biofuels in 2020, this goal has effectively been halved, and some of the more ambitious biofuels champions have seen slower growth as they realign their trajectory to a 10% share of the renewable energy in the transport sector. The target includes second-generation biofuels that can be double counted in the quota system because they are derived from used oils, waste or residues. Conventional biofuel producers perceive this next generation of sources as further reducing the demand for rapeseed and soy oils and sugar-derived ethanol.

Alongside the renewables directive are the greenhouse gas (GHG) provisions of the Fuel Quality Directive. These require fuel suppliers to reduce the lifecycle GHG lifecycle emissions of products that they supply by 6% by 2020. In July 2011, the European biofuels information initiative, EurObserv’ER, reported that biofuels sales grew by 1.7 million tons/yr (1.7 MMtpy) to 13.9 MMtpy between 2009 and 2010. Of this total, 10.7 MMtpy is biodiesel and 2.9 MMtpy is bioethanol.

Biodiesel.

The European standard for biodiesel, EN590, limits the blending of biodiesel to 7 vol%. Against a total market for 209 MMtpy within the EU, that suggests a potential market of 14 MMtpy. The Union zur Förderung von Oel- und Proteinpflanzen e.V. (UFOP) reports the stark fact that European production capacity, at 22.4 MMtpy, exceeds that by almost 10 MMtpy. The association is calling for B100 or B30 blends to be made available for sale as a way to boost the European industry, something that would also help fuel suppliers to hit their own quotas.

Ethanol.

In the ethanol market, a failure to meet even the existing quotas, means that, this year, oil companies in Europe will likely pay hundreds of millions of Euros in fines for failing to blend sufficient biofuels into their products.

As I reported in May, a bungled introduction of E10 gasoline into the large German gasoline market means that the large players will be paying the German government some €620 for every 1,000 l when they are below their quota commitment. Likewise, there are growing pains for German consumers due to a lack of persuasive information on the suitability of high-ethanol blends. Result: Many German drivers have persistently avoided the blended fuels. But for German oil companies to meet their quotas, they really need to attain 80%–90% of the total marketshare as E10.

Other problems.

Aside from the bottom line hit that the German companies face this year, there have also been reputational issues to contend with. Consider Neste, the export-oriented Finnish refinery. This refiner focused on reacting nimbly to the need for on-spec bioblending components, as it once did to US West Coast reformulated gasoline demand. But its attempts to control its supply chain through involvement with Indonesian palm oil producers have left it exposed to constant criticism from environmentalists.

Despite its technical and commercial leadership in hydrogenated vegetable oil production, and its rapidly growing boilerplate capacity in Europe and Singapore, it is dogged by claims that its oils resources are destructive to rainforest.

Greenpeace members wearing orangutan suits who leafleted on the steps of the Rotterdam World Biofuels Markets conference this year may be tolerable for a fuels manufacturer at an industry conference. But how easy it is for some of Europe’s major consumer brands, including the airlines involved in the fledgling biojet fuel market, to deal with environmentalist criticism of what they see as their green initiatives remains to be seen.

Article 17 of the Renewable Energy Directive requires the whole supply chain of compliant fuels to be certified. Unsustainable biofuels will simply not generate the tradable certificates that must be surrendered to avoid fines under the scheme. Fuels that do not offer a 35% GHG gas saving compared to gasoline or diesel will not count in the early phase of the legislation. In 2017, this threshold will rise to 50% and, in 2018, to 60% for new plants that come onstream after Jan. 1, 2017.

Faced with the difficulty of sourcing biofuels that meet sustainability requirements, it’s understandable that large oil companies should seek relationships with Brazilian companies. Sugarcane ethanol from Brazil has lifecycle GHG emissions that are hard to beat in an energy-dense liquid.

This year Shell announced a joint venture with Cosan, the world’s largest manufacturer, which the companies value at some $12 billion. Cosan represents the best entry to sustainable biofuels in the market—the best entry of scale,” Mark Williams, Shell’s director of downstream operations, told the Financial Times, adding, “we will take the lowest-carbon, least-impact form of ethanol and leverage that into a worldwide opportunity.”

It’s understandably difficult for some European manufacturers to accept that their markets, stimulated by the European tax-payer, will be supplied from outside of the EU. Get over it, says Owens. “Trade bodies are looking to be protectionist and close the door and I think that’s absolutely the wrong way to. European producers need simply to ask, ‘who are my customers, what’s my customers, and how do I meet my customers’ needs,” he says.

Globalization.

But as Shell spends its billions in the tropics and Owens feeds UK cars on US cooking oil and Brazilian ethanol, the apparent winners in the European biofuels market will need to contend with a political risk that could yet upset their plans. Globalization is not a philosophy that has emerged completely unscathed from the restructuring of European economies post-2008 crash. “German and European politicians are no longer accessible like they once were to the biofuels industry. They don’t reply to letters,” says Bockey. “Their answer to requests to support the European biofuels market with tax exemptions is to ask why they should spend European money to line the pockets of manufacturers in the US or South America.”

European politicians don’t necessarily have to put up further tariffs to deter biofuel imports. There are less dense biofuels, uneconomic to transport across the planet, than that are produced on small farms and at local council facilities from Sweden in the North to Naples in the south.

Other options.

Biogas—methane derived from biomass, human, animal and household waste—has lifecycle GHG credentials that Brazilian biofuels can only dream of. Stimulating the market leads to investments in the local neighborhood, not the Atlantic Basin. Vehicles are becoming more efficient, and the product is interchangeable with natural gas. Already, European politicians have seen to it that there are some 7,000 sites in Germany manufacturing biomethane, and the Swedish market grew 40% last year. “It’s becoming more important for German agriculture than liquid biofuels,” says Bockey. That may overstate the importance of a market that is largely restricted to a strip of Europe from Sweden, through Germany and the Alps, to Italy in the south.

But manufacturers will be wise to remember that policy makers created the biofuels markets, and their influence, alongside the power of the free market, will continue to shape it. HP

The author 

Tim Lloyd Wright is HP’s European Editor and is also a specialist in European distillate markets. He has been active as a reporter and conference chair in the European downstream industry since 1997, before which he was a feature writer and reporter for the UK broadsheet press and BBC radio. Mr. Wright lives in Sweden and is the founder of a local climate and sustainability initiative.  




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