My Lords, the order follows a good deal of consultation and makes some relatively small but important changes to the renewable transport fuel obligation scheme—the RTFO. The changes would improve consistency in the way the RTFO treats two different types of biodiesel, and would encourage investment in renewable gaseous fuels. The RTFO is a certificate trading scheme that places an obligation on suppliers of fossil fuels in the UK to ensure that certain amounts of sustainable biofuel are supplied. The obligation can be met by redeeming renewable transport fuel certificates known as RTFCs. Their value is determined by the market, and trading them provides a financial reward for those supplying renewable transport fuel.
The RTFO order was amended in 2011 to ensure that only biofuels meeting mandatory sustainability criteria were rewarded with RTFCs. The 2011 amendment also introduced new requirements on suppliers to report on the sustainability of the biofuel being supplied and for this to be assured through independent verification. In April last year we published our response to a call for evidence on additional support mechanisms for advanced and more sustainable fuels. At the same time, we concluded a post-implementation review of the RTFO scheme. The review considered the extent to which the RTFO had achieved its objectives to support the supply of sustainable biofuels in the UK. The review also noted the significant achievements made by the UK biofuel industry to date.
Since the RTFO was introduced in 2008, savings in greenhouse gas emissions, excluding impacts from indirect land use change, have increased from 46% to reach 69% in 2013-14. The most recent statistics also showed that 46% of biofuels supplied in the UK were made from a waste or residue such as used cooking oil, which does not compete for land with food crops. A further public consultation on the proposed changes to the RTFO order we are considering today ran in the summer of 2014.
This small group of amendments aims to build on the RTFO scheme’s success and deliver two important commitments. The amendments will, first, provide consistency in respect of how we treat renewable fuels under the RTFO by aligning the treatment of two particular types of biodiesel; and, secondly, encourage investment in the development of emerging renewable transport technologies such as sustainable renewable gaseous fuels, by adjusting the reward provided to reflect their higher energy content relative to liquid biofuels.
Hydotreated vegetable oil, or HVO, and fatty acid methyl ester, or FAME, are both renewable fuels that can be blended with diesel. The biological feedstocks used in the HVO process are similar to those used for FAME: for example, vegetable or plant oils and waste animal fats. In both the FAME and HVO processes, a secondary, non-biological feedstock is used and incorporated into the final fuel. For FAME, this is methanol derived from natural gas, while for HVO it is hydrogen produced from natural gas. However, although FAME is deemed to be 100% renewable in calculating the reward of RTFCs, HVO is currently not. The
effect of the order would be to provide for HVO to be treated in the same way as FAME. This is in line with our emerging understanding of how HVO should be treated under the renewable energy directive and is consistent with the approach in other EU member states to these two types of biodiesel.
Our policy aim for gaseous fuels is to level the playing field for renewable gaseous and liquid fuels. Doing so provides a clear signal that the UK Government will provide a positive investment climate for those looking to supply renewable gaseous fuels in the HGV and other sectors. Renewable gaseous fuels are currently rewarded at one RTFC per kilogram of fuel supplied, and liquid renewable fuels at one RTFC per litre. However, the energy contained in a kilogram of gaseous fuel is generally higher than the energy found in a litre of liquid fuel. The draft order would provide that 1.9 RTFCs per kilogram would be rewarded for biomethane and 1.75 RTFCs per kilogram for both biopropane and biobutane. As is the case now, double the amount of RTFCs would be awarded where the fuel is produced from wastes or residues.
I am aware that the Secondary Legislation Scrutiny Committee has reasonably advised the House that the order may imperfectly deliver the policy, due to uncertainties highlighted by the department in our cost-benefit analysis. I will address the concern that has been raised. The range of costs and benefits is essentially determined by which sort of biodiesel will be displaced by extra RTFCs going to renewable gaseous fuel. We are estimating discounted carbon-reduction benefits of £2.65 million, assuming a 50:50 spilt in the displacement of biodiesel from waste versus biodiesel from crop.
Waste-derived biodiesel is incentivised by being awarded twice the number of certificates per litre compared to crop-based biodiesel. As a consequence, it is a more cost-effective option in meeting the obligation. There would only be a carbon cost should a significant volume of waste-derived biodiesel be displaced—and then only if approaching 60% of the displacement was of waste-derived biodiesel.
As biodiesel from waste is the cheaper option to meet the obligation, and is in limited supply, we fully expect that biodiesel from crop would be displaced by increased rewards for renewable gaseous fuels. This means that the carbon savings for 2015 to 2020 are likely to be towards the higher end of those estimated in our cost-benefit analysis central scenario—nearer the £16 million benefit end of the scale. Further, I stress that we have limited options to decarbonise the heavy goods sector, and I believe that, in the long term, renewable gaseous fuels will be an important element in meeting our carbon-reduction targets.
The draft order will also introduce two measures to support effective administration. The first would update and streamline the powers of the RTFO administrator to require information. The second measure would put it beyond doubt that the administrator can apply mathematical rounding as part of calculating the number of RTFCs it issues.
Biofuels have proved a complex and controversial topic over the years. However, we know that vehicles are going to continue to require liquid and gaseous
fuels for decades to come. We therefore need to develop technologies and capacity to produce low-carbon fuels in the UK, to reduce emissions from road transport and to encourage sustainable growth and jobs.
The proposed changes in the draft order are supported by stakeholders and make a number of worthwhile improvements in that direction. I know that the industry and investors would like to see greater certainty on the pathway to meeting the 2020 transport renewable energy target. The Committee will be pleased to hear that, in anticipation of measures to address indirect land use change—ILUC—being agreed in Europe later this year, we have been working with a very broad group of interested parties through our Transport Energy Task Force on precisely how to improve the investment climate. The group will report to Ministers in the coming months. I commend the draft order to the Committee.