Is There a Sustainable Biofuel Momentum for Europe?

Earlier this year the European Commission unveiled a target of increasing the share of biofuels used in transport to 10 percent by 2020. To support this target the Commission also recently launched a public consultation on “biofuel issues in the new legislation on the promotion of renewable energy.” There is certainly much to be discussed. What action is needed to meet the 10 percent target? How might biofuel development effect land use and food production, as well as food prices? And how can biofuels be developed and utilized more effectively?

The goal, as Andris Piebalgs the European Union's (EU) Energy Commissioner stated at the launch of the consultation, is to “design a simple and practical sustainability scheme” for biofuels. He underlined the advantages biofuels can play in improving security of supply and reducing greenhouse gas emissions, while offering new sources of income to people dependent on agriculture. Yet he also stated that these advantages should not be offset by environmental damage through inappropriate land use or outdated production processes.

This represents a fine line to tread, which is emphasized in two recently published reports. Both reports, the first titled Sustainable Bioenergy: A Framework for Decision Makers, from a United Nations (UN) cross-body agency, UN Energy, and the second from the UK's Co-op Insurance Society, state that biofuels can bring real benefits, but that a hasty switch to biofuels could have major impacts on societies and the environment.

The UN Report states food prices as well as land and agricultural commodities could be driven up, with major impacts seen in poorer countries where people spend a much greater share of their incomes on food than those in developed nations. It also highlights that the destruction of ecosystems which remove carbon from the atmosphere, such as primary forests, can lead to a net increase in emissions. Additionally, it is important to factor in the transport of these foods and the energy required to process them into biofuels.

Further concerns have been expressed over the possible impacts on nature as the “use of large-scale mono-cropping could lead to significant biodiversity loss, soil erosion and nutrient leaching,” and the possible consequences for the water supply. For example, the expanding world population and the on-going switch towards consumption of meat and dairy produce as incomes rise are already putting pressure on freshwater supplies, which increased agriculture of biofuel crops could exacerbate.

What all this underscores is the importance of taking an holistic approach for biofuel development that takes into account the convergence and knock-on effects for the biodiversity of land, greenhouse gas emissions, water use and the benefits associated with security of supply. The Commission's public consultation will make for interesting reading, but for EU nations and the Commission the consultation period cannot be viewed as one of “wait and see.”

The Commission is already making its case. Speaking at the recent World Agriculture Forum in St Louis, U.S., EU Agriculture Commissioner Mariann Fischer Boel stated that the Commission can hit the 10 percent target without undesirable environmental consequences and without putting excessive strain on food markets. She said that with this target, prices for agricultural raw materials in the EU would increase by between three and six percent for cereals, and between five and 18 percent for the major oilseeds. Since prices for those raw products only influenced food prices to a limited extent, bread prices might increase by less than one percent because the cost of cereals comprised less than 5 percent the consumer price of bread, she added.

EU member states have also been pushing ahead in 2007. For example, Svenska Statoil, the Swedish division of Norwegian energy group Statoil announced in February that its sales of biofuel have been growing at a rapid rate. It stated that it now had about 200 biofuel service stations in Sweden, an increase of around 240 percent on the year previous. Earlier this year, France also approved the sale of biofuel at an increasing number of service stations over the next three years. The French government hopes to see biofuel's share of total motor fuel consumption rise to seven percent by 2010.

Sweden and France are not alone in biofuel development, with Germany the EU's largest biofuel producer and consumer. Amongst others, Austria, Spain, the Czech Republic, the UK and Italy have also established significant biofuel programmes. In fact, the growth of the market warranted Euronext, a pan-European stock exchange, to launch futures and options contracts for rapeseed oil in January this year.

However, recent signs appear to suggest that a number of biofuel companies across Europe are suffering from some overcapacity. The issue is becoming particularly acute in Germany, where a new biofuels tax has had the undesirable effect of causing demand to fall rapidly. It is believed that the German biodiesel industry is currently running at just half capacity. It is not the only country with capacity issues. The UK's biodiesel industry is also running at approximately half capacity and companies have recently cut back on production. Biofuels Corporation, a leading UK biodiesel company, reduced its production by 25 percent at the beginning of 2007, and has stated that it expects production to remain low for the immediate future.

The problems encountered by Germany highlights the price-sensitive nature of biofuels, and the fact that tax increases on biofuels can leave them uncompetitive. It is something the rest of the EU must take on board, particularly if the 10 percent target is to be reached in the desired timeframe

Going forward there is much to ponder. It appears that first generation biofuels, made from food crops, can offer some CO2 benefits and aid in improving domestic energy security. However, concerns remain regarding the sourcing of feedstocks, including the impact it may have on biodiversity, land use and competition with food crops. For many it will be interesting to see how second generation biofuels, such as ligno-cellulosic processing, fare. This technology will allow biofuel to be produced from any plant material, meaning there would be no conflict between the need for food and the need for fuel. Pilot projects for these technologies are already established in the EU, but the technology is in its infancy and costs still need to come down.

Another interesting pointer was something brought out in the UN report. This stated that biofuels are more effective when used for heat and power rather than in transport. “Current research concludes that using biomass for combined heat and power (CHP), rather than for transport fuels or other uses, is the best option for reducing greenhouse gas emissions in the next decade—and also one of the cheapest,” it said. Transport is currently the main focus, but could this change?

Depending on who you ask, it often appears that biofuels are either the future of energy and one of the key solutions to the issue of greenhouse gas emissions or a false promise that diverts attention from finding real solutions to the world's energy and environmental problems. Looking at it all holistically, the position of biofuels likely lies somewhere in between. There is little doubt that fossil fuels will remain dominant in both the power generation and transportation sectors for the foreseeable future. Where biofuels fit in is as a supporting energy source.

Whether the EU meets its 10 percent target remains to be seen, but there is little doubt that biofuels will continue on an upward development curve. The key for their progress will be ensuring that they support sustainable development across the board, not just on the doorsteps of EU citizens, but on the doorsteps of all. If this can be achieved, then biofuels in the EU are capable of moving beyond the 10 percent figure.

UtiliPoint's IssueAlert^® articles are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's^® IssueAlert^® articles are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. © 2007, UtiliPoint^® International, Inc. All rights reserved. This article is protected by United States copyright and other intellectual property laws and may not be reproduced, rewritten, distributed, redisseminated, transmitted, displayed, published or broadcast, directly or indirectly, in any medium without the prior written permission of UtiliPoint^® International, Inc

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