Publications / EU Biofuels Investment Development - Impact of an Uncertain Policy Environment

EU Biofuels Investment Development - Impact of an Uncertain Policy Environment
09/12/2013

Although in 2009 the Renewable Energy Directive set mandatory targets for all Member States to achieve a minimum 10% share of renewable energy in transport fuel by 2020, in September 2012 the European Commission proposed to amend these, proposing to cap at 5% the contribution of first generation biofuels (based on sugar, cereals and vegetable oils).  Since then there has been extensive discussion within the European institutions about the future direction this policy framework should take.  The discussion within both the European Council and within the European Parliament has been highly polarised and hitherto inconclusive.  Much of the emphasis of the discussion has been focused on the understandable concern relating to the potentially adverse impacts of feedstock production for biofuels on both the environment and food security. This has led to a preoccupation with issues related to indirect land use change (ILUC) and more generally on the proposals to cut back on what are generally termed first generation or conventional biofuels using readily available agricultural feedstocks.

While these issues clearly merit attention, little discussion has focused on the question of the investment needed to supply 5% of EU transport sector energy from renewable sources other than conventional biofuels or indeed what the drivers for such investment are.  This is in part based on the assumption that the investment will follow from whatever policy targets are set and indeed by the belief that the supposed current biofuels investments boom needs to be altered to funnel money towards advanced biofuels.

The findings of our latest report on 'EU Biofuels Investment Development - Impact of an Uncertain Policy Environment' demonstrates that there has been a dramatic slowdown in the rate of investment in traditional (first generation) biofuels and the investment in advanced (second generation) biofuels do not appear to be compensating for this decline.  Given the current investment climate, and as history has shown, it is highly unlikely that these could all be expected to come on stream by 2020.  Moreover, even if they were all to come on stream within the timeframe, these new projects are in the main relatively small-scale advanced biofuels plants which would thus add little additional capacity to that required to meet mandated levels.  The reason that biofuels capacity is no longer being built in line with projected 2020 mandated demand is primarily linked to the continued investment uncertainty within the sector resulting from regular changes in policy direction and a lack of clarity as to what policies are going to be in place going forward.  Discussions with the sector have revealed a consensus that investment cannot proceed without a clear policy framework going forward. While one of the objectives of the renewable Energy Directive and the setting of the mandatory targets to 2020 was to:

“provide certainty
for investors and to encourage continuous development of technologies which
generate energy from all types of renewable sources”.

…clearly the proposed revisions of this Directive announced in 2012 and the continued indecision within the European institutions on how to conclude this debate means that the uncertainty and potential risks of further future policy reversals are too great to encourage investment to take place.  This uncertainty and risk is further exacerbated by both the weaknesses of the EU’s system of tariff protection, as exposed in the case of both biodiesel and fuel ethanol in recent years, but perhaps even more significantly by the fact that the time horizon being addressed by the Renewable Energy Directive only runs to 2020.  Given the inherent risks to margins which arise from operating in a market characterised by increasing, and likely continuing, volatility in feedstock costs investors need a longer secure planning horizon of at least 10 years to ensure adequate returns.  There is an urgent need for the biofuels policy framework to be set up to take this
into account.

Currently, although the European Commission has indicated that it is due to present its thinking on energy policy generally to 2030 early in 2014, there is no suggestion that the framework for biofuels will be addressed by this and legislation would in any case take considerably longer to be put in place.  Given the timescales required for investment and the continued uncertainty, this suggests it would seem highly unlikely that even modified EU targets for biofuels use are likely to be met unless a longer and more secure planning horizon based on technologies and feedstocks which can be accepted is adopted.