INSIGHT: Standoff between oil and UK government main obstacle to E10

Source: ICIS News

2018/05/21

LONDON (ICIS)--The UK government and the country's transport fuel suppliers have been entrenched in a disagreement over whether biofuel E10 will be mandated by the government or introduced by suppliers at petrol stations, delaying its introduction for years, according to the biofuel’s supporters.

“The government has been off-pace on introducing the most recent RTFO [renewable transport fuel obligation]”, opposition Labour Member of Parliament (MP) for Scunthorpe and chair of the All Party Parliamentary Group for British Bioethanol Nic Dakin told ICIS.

The overall renewable target has hovered at 4.75% since 2013 until this year.

“But when it comes to E10, the government is reluctant to legislate. Suppliers are saying they would value the government taking the first step… There isn’t the commercial or political will to do it [first] and the danger is that nothing is happening,” added the MP.

In April, the government upped biofuel and waste-based fuel requirements for road transport fuels to 7.2% from May 2018, progressively incrementing the ratio from over 10% in 2021 up to 12.4% in 2032.

But fuel suppliers can meet the updated RTFO through any mix of biodiesel, ethanol, or other specified lower-emission fuels. Some materials such as biodiesel produced from used cooking oil are double counted, while buybacks are also an option.

Viewed by the 820m litre-strong UK bioethanol industry as key to securing economic viability, E10 is a label for petrol with anything up to 10% ethanol content to gasoline.

The current E5 label visible at pumps across the breadth of the country allow for blends of up to 5% ethanol, so in theory refiners would still not have to blend more ethanol into fuel.

But they would be able to, raising what is referred to in the industry as the “blending wall” from 5 to 10%.

“Given the investment encouraged by the government from 2010, if we want this industry to continue in the UK, the signal of E10 would be very helpful,” Dakin said.

Vivergo, the UK's largest bioethanol producer, started in 2012 and situated just north of the Humber, is a short journey from Dakin’s Scunthorpe. It is also an important employer for some of his constituents.

Another feature of the RTFO, the crop cap, beginning at 4% and contracting to 2% by 2032, has been regarded by ethanol producers as a signal that support for the biofuel industry in the UK will wane.

However, Dakin and other bioethanol supporters believe that while renewable fuel and agriculture do pose some environmental issues, not using biofuels now would be worse.

Both he and Conservative members of the cross-party bioethanol group signed a letter at the beginning of May which said:

"We need to take a candid look at what measures might be taken in the time period between now and full electrification to ensure that road transport can make an immediate contribution to improving air quality as well as reducing CO2 [carbon dioxide] emissions," it said.

“We understand that fuel suppliers my now be considering using imported crop-based biodiesel which the government has gone to great lengths to discourage, or even buying out of their obligation rather than supplying E10.”

MP Dakin added: “The problem with the changing crop cap means that the commercial horizons are relatively short,” adding that he was not commenting on whether there should be a crop cap or not.

“Within that horizon there needs to be a decision on E10,” he said. “Business needs a confident future and at the moment there is a lot of uncertainty.”

Some crude majors, as well as their trade group in the UK, have declined to comment on the matter.

However, a spokesperson for Anglo-Dutch major Shell said to ICIS: “In order to ensure that the introduction of E10 is successful, both in terms of for the consumer and for businesses commercially, strong government leadership is needed.”

Industry body UK Petroleum Industry Association (UK PIA) declined to comment on the issue of who should introduce E10, as did several other blenders like US-headquartered Phillips 66 and ExxonMobil.

Fuel ethanol industry participants are quick to explain what they see being the issue.

The “standoff between oil and government,” as Dakin puts it, comes from issues of cost and reputational risk.

“UK infrastructure is made for two grades of gasoline; high octane fuel and E5,” explained Grant Pearson, who is both commercial director at the UK’s second-largest fuel ethanol plant, Ensus, and chairman of the UK’s Renewable Energy Association.

When E10 was unveiled in 2011 in Germany, an “E10 boykott” began among drivers who thought their cars’ warranties might be affected by using the fuel, or who did not know if they could use it, he said.

Suppliers worry that they are the company to start using E10 instead of E5, they will bear the burden of informing the public on how to use E10, and the costs.

With only two, and sometimes one, gasoline pump available at most UK petrol stations, the shift will be a replacement and could confuse consumers.

The lack of response from UK suppliers’ trade body could be a strong indication no plans to unveil E10 as a group are not favoured.

By Pearson's calculations, about 5% of UK sales are of high octane premium product, but the fuel sells for £0.08-0.10/litre more than E5.

Swapping to E10 fuel supply at once would see suppliers retain customers that otherwise might be spooked.

And, if they are spooked, they could choose to spend more on a more expensive fuel grade they recognise, even providing a nice boost to profits.

COMPETITION WITH BIODIESEL
Over the last eight years, the actual volume of renewable fuel consumed by motorists in the UK has hovered between 3-3.6%.

It is a factor largely explained by double counting for waste-derived biodiesel blends, according to James Cogan from Ethanol Europe Renewables.

Parent company of Hungary-based production plant Pannonia, Cogan is also interested in consumption in his native Ireland, and hopes that introducing E10 labelling in the UK will be a quick encouragement for Ireland to take up a higher blending wall.

He also argues that double counting is hurting not only the ethanol industry but the environment, calling the legislation a “get out of jail” free card.

“Double counting is allowed under the EU programme for Renewable Energy and Transport. If a company is using used cooking oil or animal fat to make diesel, every litre is counted like two litres,” said Cogan.

“EU legislation accepts that. Double counting doesn’t stop [the UK] reaching targets from a legislative point of view, but does stop it from a carbon production point of view.”

By the 2017/2018 financial year, which is how the government measures its targets, UK bioethanol was making up about 4.7% in petrol.

Calculated from UK government data, this number could include portions of other renewable blending materials like ethyl tertiary butyl ether (ETBE), but mostly represents ethanol consumption.

Therefore, if the overall volume proportion of renewable energy consumed in the UK is to increase, Cogan argues, that means introducing E10.

He added that used cooking oil is a finite source, whereas locally produced bioethanol that also produces local animal feed is less harmful to the environment. (It is worth noting here that the UK imports and exports fuel ethanol from and to other EU countries).

The debate is a complex one, involving the pollutant damage done from seed to pump when importing vegetable oils from tropical locations, and crops grown for humans or animals closer to home.

Agricultural production is polluting, with the specifics dependant on the soil type and farming techniques, etcetera.

However, it is also clear that from a consumer point of view, diesel’s image in the context of the environment has been done great damage in recent years.

Car purchases for gasoline and alternative powered engines, like hybrids, are growing in Europe whereas new diesel car purchases are down.

A glycerine market (downstream from biodiesel) source recently said: “Diesel is now the devil incarnate. Government opinion has changed quite considerably. It doesn't look good for diesel in general, and in a couple of years’ time, with all the negative press from diesel, if everyone switches out then there probably won’t be much demand for biodiesel.”

MP Nic Dakin will be joining the cross-party group on 22 May in Parliament to make the case for E10 again.

Whether he will convince the government, whose Baroness Sugg (Parliamentary Under Secretary of State for transport) implied this year that introducing E10 was a matter for suppliers “should suppliers choose to deploy it,” remains to be seen.

However, with Brexit looming on the horizon, the following months will be key to shape the future of the UK bioethanol industry.

If it is finally introduced, it could even increase demands for European markets too.

Pictured source: Siegfried Kramer/imageBROKER/REX/Shutterstock

Additional reporting by Samantha Wright