OUTLOOK '11: New guidelines bring uncertainty for Europe biofuels

28 December 2010 11:30  [Source: ICIS news]

By Ross Yeo

An ethanol production plantLONDON (ICIS)--The year ahead is set to be a confusing and chaotic one for European biofuels markets as a result of the European Commission's new renewable energy directive (RED).

The RED contains strict guidelines regarding the sustainability criteria necessary to certify a product as a biofuel. Any uncertified material will not be eligible to contribute to a country’s mandated biofuel targets and will therefore lose its premium value over regular fuels.

The confusion stems from the variability with which EU countries are transposing the directive into their internal legislation. Only Germany and Austria are doing so in January, while other states have been less clear but are generally thought to be delaying the implementation until later in the year.

Even Germany, which is widely expected to be the most thorough initial adherent to the RED, did not have the legislation in place by 5 December 2010, as the Commission originally requested as preparation for validity on 1 January.

“I think 2011 will be a transitional period – the RED implementation will not be as stringent as originally intended,” said a biofuels producer.

This also means that producers of ethanol, ethyl tertiary butyl ether (ETBE) and biodiesel have no clear idea of exactly what they will be able to sell, and to whom, for the first half of the year at least.

An even more pressing concern was the possibility of losing the bio-value of their products for uncertified material. If a product no longer qualifies as able to contribute to a country’s total biofuels usage – mandated to be 20% of total energy use and 10% of fuel/transportation by 2010 – then its value is the same as its non-bio equivalent. For example, ETBE would sell at around the same price as methyl tertiary butyl ether (MTBE) and lose its premium, generally around $150-250/tonne.

“I’m very concerned about it [the RED] – we stand to lose all the bio-value [of ETBE]”, said one producer.

Given that some countries, such as Italy, are expected to be initially relatively relaxed about implementing the RED whereas others, such as Germany, will be strictly adhering to it, two-tier markets are expected to emerge for certified and non-certified material.

“There’s already a two-tier market for ethanol, with a premium for certified material,” said another producer of ETBE, for which ethanol is a feedstock.

Conversely, the price of certified material was expected to increase, with some sources anticipating a brief hike in January while others thought the higher prices would last the first six months of the year.

One reason for higher prices would be the cost of certification, which must cover the entire supply chain from farmer to production plant. One producer estimated the cost of auditing a plant to be $30,000-40,000 (€23,000-30,0000).

A second reason is the lack of certified product. With the uncertainty which has shrouded the issue of certification, not all producers and farmers in Europe, let alone other global regions which supply Europe, have been audited. Furthermore, with the time it takes to grow and harvest a crop, this lack of certified feedstock material may take some time to increase, thus keeping the “certified market” tight.

Yet another source of uncertainty for gasoline-related products such as ethanol and ETBE is the emergence of E10 gasoline (10% ethanol) and, more specifically, the introduction of E10 in Germany from January next year.

E10 will be sold alongside standard E5 gasoline, and there were varied opinions over the extent of the former’s impact in the gasoline market. Some sources felt consumers would continue to buy the cheaper E5 in the absence of any pricing incentives, therefore minimising the initial impact of E10 on ethanol consumption.

Yet many others disagreed, with one ethanol producer estimating that Germany would need to import an additional 800,000 cbm (cubic metres) of T2 ethanol as a result of the larger amounts blended into gasoline. This additional volume would lead to inevitable price hikes, according to the producer.

The success of E10 would also partly depend on the price of ethanol in relation to that of gasoline. There was speculation that, if ethanol prices increased too much, oil companies would opt to pay government penalties as a cheaper option instead of using ethanol, and increasing gasoline prices to pay for this.

Additional reporting by Sarah Trinder

($1 = €0.76)

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By: Ross Yeo
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