Building the Perfect Beast: Designing Advanced Alternative Fuel Policy to Work

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Cerulogy attended Biomass Conference and Exhibition in Copenhagen this year (2018) to present a paper on building more effective policy for advanced alternative fuel commercialisation. The paper is now available in the conference proceedings, or you can download it below.

Abstract

Since the year 2000, grand aspirations have been set for the development of a new advanced alternative fuel industry, but targets have repeatedly been missed and deployment of new facilities has delivered only a tiny fraction of the fuel production forecast by the most ambitious policies. This paper argues that one of the main reasons for this shortfall between goals and achievement is the use of policy frameworks that have not been designed to provide long-term value certainty. The setting of energetic targets for the supply of advanced alternative fuels was intended to give the market the flexibility to choose the lowest cost solutions. Instead, the value-uncertainty built into such policies as a feature has contributed to an investment environment in which high capital expenditure projects using new technologies are profoundly disadvantaged compared to high operational expenditure fuel production at first generation plants. The market has thus failed to deliver the best value long-term solutions. An alternative policy framework is proposed in which credits would be awarded for advanced alternative fuel production, and fuel suppliers would be required to support that production by buying all available credits at the end of the year at a prescribed price. That price would be fixed up to an annual supply target; beyond that annual supply target, the per-credit price would be scaled down in proportion to the degree of over-achievement in supply, allowing a firm cap to be set on the cost of support to fuel consumers. While the market would be able to expand supply until the adjusted credit price reflected marginal production costs, the high levels of price variability in existing biofuel credit markets would be avoided. It is argued that such a framework could be much more effective at driving investment than a simple mandate, while avoiding excessive costs for fuel suppliers or consumers.

Download paper

 

Devilish details…

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…you’ll never believe the regulatory mistakes the EU is at risk of making in the RED II*

In a blog post just under a year ago I heralded the generally positive qualities of the European Commission’s proposal for a revised Renewable Energy Directive for the period 2021-2030 (RED II). Since then, both the European Parliament and the European Council have started to develop their positions on the legislation. Plenty of organisations have proffered opinions on some of the big picture questions posed by the Directive (what should be the level of ambition for advanced biofuels, what cap would be appropriate for food-based fuels and such), and I don’t intend to revisit any of those questions today. Instead, I’d like to talk about a few details in the draft regulatory language that might represent a real problem down the line if the Directive is implemented. Without further ado therefore, and embracing the clickbait conventions of the zeitgeist, here’s a Cerulogy listicle:

Three crazy details in the 13th November European Council draft of RED II that could have regulators (and environmentalists and investors) tearing their hair out in the years to come

1.    An inadequate definition of ‘low iLUC risk’ biofuels

The proposed RED II caps the extent to which food-based biofuels can be used to meet renewable energy targets at 7%, but it creates a get-out for food-based fuels that meet the definition of being, ‘low indirect land-use change-risk biofuels and bioliquids’. The idea of low ILUC-risk biofuels has been around for years, and it’s fundamentally a sensible idea. If displacing existing uses of food-commodities causes ILUC, why don’t we just avoid displacing existing uses? It’s an idea that was supported in the Gallagher Review, and that I myself have spoken in favour of on several occasions. The problem (as I pointed out in a blog for the ICCT a few years ago) is that it’s not enough to just say that a biofuel has low ILUC risk – this has to be robustly demonstrated, and demonstrating it is complex. If the oversight systems don’t work, you will very quickly end up certifying biofuels as ‘low ILUC risk’ even though they are nothing of the kind. Unfortunately, the current language of RED II is incredibly vague on the subject. The definition given for a low ILUC risk biofuel is that the feedstock must be ‘produced within schemes which reduce the displacement of production for purposes other than for making biofuels and bioliquids’. The definition doesn’t say how much displacement should be reduced. To avoid ILUC completely it would have to be reduced by 100%, but what about a scheme that reduces displacement by only 10%, or only 1%? Given the proposed language, Member States may find it difficult to put robust requirements in their national implementations. Before you know it, the EU will be up to its neck in palm oil from replanting programmes getting certified as low ILUC risk – even if the programmes deliver only modest yield improvements and the true ILUC impact of the palm oil is still very high indeed. The solution? The language of the Directive should be revised from ‘reducing’ displacement to ‘avoiding’ displacement, and a delegated act should be added for the European Commission to define robust protocols to evaluate schemes. Further discussion of the challenges of ILUC mitigation is available in this ICCT paper.

2.    Double counting renewability of electrofuels

The proposed Directive allows electrofuels (fuels that are produced by electrolysing water to produce hydrogen and reacting the hydrogen with carbon monoxide or dioxide to produce hydrocarbons, referred to as ‘renewable fuels of non-biological origin’ in the proposed Directive), to be counted towards the transport sector obligation for renewable energy use. This is reasonable enough – liquid fuels produced from renewable electricity present much lower sustainability risks than most biofuels, and electrofuel technologies would provide a valuable additional option for producing low-carbon drop-in liquid fuels. The problem is that way that electrofuels are counted towards overall Member State renewable energy targets. Whereas advanced biofuels are counted based on the energy content of the fuel, it is proposed that electrofuels would be counted based on the amount of electricity required to produce them. Because the efficiency of conversion of electricity to drop-in fuels will be only about 40% with currently available technologies, that means that electrofuels would count two and a half times more to overall targets than advanced biofuels would. Why is this a problem? Because that means that if a Member State uses electrofuels instead of biofuels for the transport target, there is a reduced requirement for renewables in heat and power, reducing the true ambition of the renewables target. Indeed, the less efficient electrofuel production is the less renewable energy in heat and power will be needed to meet targets. The solution? Count electrofuels in the overall Member State target by the energy delivered to transport, not the energy used to produce them. Watch this space for a forthcoming Cerulogy report on electrofuels.

3.    No mechanism to deal with developing ILUC science

If there’s one thing that everyone seems to agree on about the ILUC discussion since 2009, it’s that it created uncertainty for investors considering entering the biofuel market. The draft Directive seems to be trying to create certainty by writing in ILUC values and sticking to them – the Annexes include estimated average values, and ranges, for three groups of biofuels (starchy, sugary and oily). Anything without a value is assigned an ILUC estimate of zero, and there appears to be no accommodation for the values to be revised to reflect new evidence. Also, while the initial proposal provided a general power for Member States to “distinguish between different types of biofuels and bioliquids produced from food and feed crops”, the latest Council edit restricts that power to “categories set out in Annex VIII”. That appears to mean no distinction between different feedstocks in a category. Given that more recent ILUC analysis for the Commission suggests, for instance, that palm oil biodiesel could have four times the ILUC of some other vegetable oils, it seems both shirt-sighted and ill-judged to preclude Member States from taking evidence on differences in ILUC impact into consideration. More generally, while there are certainly those in industry who believe that locking in ILUC estimates in this way reduces future uncertainty, I disagree. Rather than preventing ILUC from becoming an issue again in the 20s, I think this rigidity almost guarantees it. By preventing the Commission from adjusting to new science through delegated acts, the proposed Directive guarantees that every time new evidence on ILUC comes to like, there will be calls to reopen the Directive entirely with new legislation. For the advanced alternative fuels industry, that increased risk that the Directive could be subjected to wholesale revision before 2030 can only be a barrier to fundraising. The solution? Provide greater leeway for Member States and/or the Commission to react appropriately to existing and new evidence on ILUC and other sustainability problems.

Fingers crossed for good outcomes as the process moves forward!

* Clickbait titles are just the worst aren’t they?

A leap forward for European advanced biofuel policy

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Yesterday, the European Commission released its proposal for the renewable energy regime for Europe through to 2030. The proposal includes a framework for supporting and regulating the supply of alternative fuels, including biofuels, fuels produced from power-to-liquids technologies, and fuels produced from non-renewable waste streams, notably technologies such as Lanzatech’s carbon monoxide fermentation. As is the way with these things, much of the initial reception to the package has been hostile – the European Biodiesel Board accused the package of being “a worrying weakening of ambitions”, the ethanol association ePURE said that the package “ignores science”, Birdlife International said that the Commission was “ignoring science” (after all, there’s a lot of science to take into consideration…), Transport and Environment asserted that the Commission had “today proposed to keep supporting planet-wrecking biofuels,” and CNBC reported* that the, “death of Castro could free Cuba to produce biofuels.”

Now, there is context for all of these statements, and a little hyperbole is all part of the fun of the democratic process, but here at Cerulogy we’re a good natured bunch and we see a great deal in the new proposal that can be welcomed. Most importantly, the proposal sets a clear and ring-fenced target for a defined set of advanced biofuels, primarily those produced from cellulosic material (also stuff such as algae and municipal waste). This target increases to 3.6% (of European road and rail transport energy demand) by 2030. There are various ways that one could incentivise the commercialisation of advanced biofuels, but a nice clear production mandate, while lacking the sophistication of measures such as low carbon fuel standards, has the potential to do the job pretty effectively. The level that this part of the target has been set at is undoubtedly ambitious – 3.6% of 2030 road and rail fuel demand is around nine million tonnes of oil equivalent, which is a lot of fuel. Meeting this ambition from European production could require as many as a couple of hundred commercial fuel production facilities, so we’re talking about building up to 20 new, high capital expenditure, advanced biofuel plants in every year of the 20s. On the other hand, the ambition is not out of control – compare it to the American cellulosic fuel mandate, which in 2009 set a target to deliver an extravagant 30 million tonnes of oil equivalent a year by 2022. To my mind, the European Commission has found a pretty appropriate balance between recognising the urgency of the challenge of dealing with climate change, recognising the limits on the capacity to deploy capital for technologies that have had only limited testing at commercial scale., and recognising that unachievably ambitious targets can be a barrier rather than a spur to investment and innovation. The ‘Leaders of Sustainable Biofuels’ (see artist’s impression below) duly bucked the trend of Brussels-lobby negativity by calling the proposal a “significant step to enhance the EU innovation capacity and stimulate green growth.”

Beyond the core incentive for “advanced” biofuels (defined by the Commission through a list of relevant feedstocks), there is an overall target that by 2030 6.8% of transport energy** should be supplied from a defined set of alternative fuels. The additional 3.2% is to be split between biodiesel from used cooking oil and animal fats, ethanol from molasses, waste-based fossil fuels, electricity in road transport, and ‘renewable fuels of non-biological origin’ (presumably fuel produced using renewable electricity).. The incentive for the supply of biodiesel from used cooking oil is maintained, but new biofuel technologies are not being asked to compete directly with the supply chain for an already commercialised product, which is eminently sensible in driving new innovations to market. The Lanzatech technology for ethanol from waste carbon monoxide in flue gas, previously overlooked by legislation, is now able to receive support. Technologies to use renewable electricity in transport are included. As with the 3.6% target, 3.2% for these other fuels combines a degree of realism with a commitment to achievability. In short, it’s a B+ to the Commission for supporting the deployment of a more sustainable next generation of alternative fuels.

At risk of interrupting the flow of positivity, a notable fly in the ointment is the failure to properly address issues around the sustainability of these fuels. The criteria in the new Directive should generally ensure that production processes are fairly efficient, and provide a degree of protection to the most valuable ecosystems, but they fail to directly address any of the issues related to sustainable extraction rates for agricultural residues, fail to directly address the local sustainability of energy cropping systems (e.g. impact on air, soil, water or biodiversity), fail to ensure that waste-based fossil fuels are actually low carbon (although power is delegated to the Commission to revise this), and will fail to give European civil society confidence that the Commission is taking seriously the many sustainability concerns that have been raised since the adoption of the original Renewable Energy Directive in 2009.

The justification for largely failing to expand the scope of sustainability governance is a little perplexing. For instance, the impact assessment notes that, “Stakeholders were also of the view that sustainability criteria haven’t adequately addressed the protection of soil and water.” This, however, is followed almost immediately by the assertion that, “The content of the criteria as such was not put into question,” a pair of statements that I personally am having trouble stitching together. It is not only environmental groups that see a case for expanded sustainability oversight – work for the Commission itself on the need for criteria on air, soil and water impacts concluded that, “risks to sustainability from biofuel cultivation exist, particularly risks to soils and to water quality and water availability. Given these risks…, introducing some form of environmental safeguards is necessary to avoid further aggravation of existing adverse impacts.” The Commission have pointed to the REFIT on the Renewable Directive to justify the failure to expand criteria, saying that it concludes that the “criteria have effectively reduced direct environmental impacts of the biofuels used in most of the EU.” However, this requires one to take the REFIT report wilfully out of context. While the authors CE Delft do indeed state that the existing criteria “have been effective in the prevention of the direct environmental impacts of biofuel production”, the very same paragraph continues by noting that “the criteria do not regulate direct impacts as water pollution by waste water, social impacts, etc. Therefore not all direct impacts are covered. In the EU, other legislation covers the prevention of such local impacts (see also Art. 17(6)), but whether effective safeguards are in place for feedstock from countries outside the EU is currently unknown.” The REFIT also notes that, “Because the indirect impact of biofuel feedstock is not included in the criteria there is still a risk biofuel feedstock production might result in an increase in GHG emissions rather than reduction of emissions, and a net loss of biodiversity and loss of land with high carbon stock.”

In short, the new directive represents a missed opportunity to deal upfront with legitimate sustainability concerns, and therefore we can look forward to the next two years being punctuated by a return to the sort of rear-guard campaign action to expand sustainability coverage that resulted in an ILUC review clause being inserted in the original RED, and much subsequent uncertainty for both the environment and industry. Slightly ironically, while the new text falls short on the points I noted above, it does make important progress on sustainability in forestry specifically. New clauses require that forest biomass should only be harvested in areas where legal requirements or active project oversight guarantee that removals will be followed by forest regrowth, that “impacts of forest harvesting on soil quality and biodiversity are minimised” and that “harvesting does not exceed the long-term production capacity of the forest”. There will no doubt be important questions about how this will be implemented in practice, but the focus in this new text on making appropriate sustainability assessment at the local level echoes work by the Institute for European Environmental Policy for the Biofrontiers project, which proposed that regionally adapted environmental impact assessment should be a precondition for developing new biomass supply chains for an expanding advanced biofuels industry. I am convinced that it’s in everyone’s interest to make sure that a more comprehensive set of criteria is included in the Directive by the time it’s been through the Parliament and Council, as inadequate sustainability governance is a guarantee of policy uncertainty for years to come.

Before I close, it would be remiss to comment on the new proposal without noting that the Commission has laid out a firm pathway for a gradual phase down of first generation biofuel use in Europe, capping the maximum utilisation of food based fuels in any given Member State at 3.8% by 2030. The use of food and feed commodities for fuel remains contentious, and it was almost inevitable that whatever the Commission proposed would be seen as unsatisfactory by all the most interested parties. With the Commission having indicated that food-based biofuels would have ‘no place’ in the post-2020 framework, we can expect that development campaigners will call for a more rapid reduction, while on the other side the first generation biofuels industry is bound to oppose reduction in its support, pointing to the ‘direct’ carbon savings that they are able to claim under the existing carbon accounting system. While the precise level of the 2030 limit will undoubtedly be debated incessantly until the new package is finalised, I’m pleased to see a proposal that sets an extremely clear direction of travel for Europe towards a new advanced industry, while providing an opportunity for a (relatively) graceful exit by businesses that made investments in good faith in response to the original legislation. The new text is also quite explicit that Member States can consider providing greater support to lower-ILUC ethanol than higher-ILUC biodiesel production, and I hope to see government embrace this option and provide differentiated support that recognises that food-based ethanol has better performance than food-based biodiesel, and that there are options to transform first generation ethanol facilities over time into advanced biofuel plants – options that are not really available for biodiesel plants. At the same time, the gradual reduction in food-commodity demand for European renewable energy targets will avoid pressure on food prices and stocks, and sets an example that the rest of the world is bound to look to.

In conclusion, the new proposal doesn’t dot every ‘I’ or cross every ‘t’ required to be anybody’s ideal instrument, but it has a lot to offer, and I think that it should be welcomed as a constructive response to the challenges of the current policy. I shall be hoping that yesterday fired the starting pistol on an aggressive program of industrial development in European advanced alternative fuels for the coming decades.

 

*Admittedly, this article may have been only incidentally inspired by the release of the Commission’s proposal.

**Strictly, an amount of transport energy equivalent to 6.8% of transport energy consumption for road and rail.