EU Biofuels Annual 2019

Policy and Programs for Transport Biofuels

 

The current EU policy for renewable energy is set in the EU Energy and Climate Change Package (CCP) and the Fuel Quality Directive (FQD). The CCP includes the “20/20/20” mandatory goals for 2020, one of which is a 20 percent binding target for renewable energy in the overall energy mix of the EU, and a ten percent renewable energy blending target (energy basis) for the transport sector. According to the EU’s most recent biannual progress report (April 2019), the EU is on track to meet its 20 percent target and will likely meet the binding ten percent renewable energy target for the transport sector understanding that double-counting is used to achieve this target.

 

In the Renewable Energy Directive (RED), which is part of the CCP, specific sustainability requirements are defined for conventional liquid biofuels. The European Commission (EC) amended these sustainability requirements in the Indirect Land Use Change (ILUC) Directive, most notably by capping the use of food based biofuels at seven percent and setting non-binding national targets for non-food based biofuels such as cellulosic ethanol at 0.5 percent of overall energy use.

 

In 2016, the EC proposed a successor to the RED for the period of 2021-2030: the RED II. Following almost two years of debates, the RED II was published in the EU’s Official Journal as Directive (EU) 2018/2001. The RED II sets a new overall renewable energy target of 32 percent by 2030 and a 14 percent target for the transport sector. The RED II caps the share of food based biofuels for each Member State (MS) to one percent above each MS’s consumption level in the year 2020, limited to an overall cap of seven percent of final consumption of road and rail transport for each MS. The RED II also sets ambitious binding targets for the use of advanced, non-food based biofuels (not derived from fats and oils) to 3.5 percent by 2030, and a blending cap of 1.7 percent for advanced biofuels produced with waste fats and oils. Advanced biofuels will be double-counted towards both the 3.5 percent target and towards the 14 percent target.

 

With the RED II, the EU also introduced sustainability criteria for biomass and expanded sustainability criteria for liquid biofuels. The RED II will enter into force on January 1, 2021. The EC is now preparing implementing and delegated acts, most of which will need to be adopted before the enforcement of the Directive.

 

The EC, European Council and European Parliament are also currently negotiating the next Common Agricultural Policy (CAP), which programs all the EU-wide funding for agricultural and rural development. The EC released its legislative proposal for CAP post-2020 on June 1, 2018. The co-legislators in the European Parliament and Council are currently considering the proposal. The EC’s legislative proposals suggested voluntary coupled support for sectors that would decrease dependence on fossil fuels.

 

Finally, there have been several recent developments related to the EU’s Anti-Dumping (AD) duties on biofuels. In May 2019, the EU repealed the AD duties that were imposed on U.S. bioethanol exports since 2013. Earlier, in October 2018, the EU had repealed AD duties imposed on Argentinean and Indonesia’s biodiesel. However, in December 2018, the EU launched an antisubsidy proceeding on imports of biodiesel from Indonesia. The result of the investigation is still pending but provisional measures could be put in place in September 2019. With regards to Argentina, in February 2019, the EU imposed a countervailing (CV) duty on Argentinean biofuels.

 

Conventional and Advanced Transport Biofuels

 

Based on the increasing MS mandates, consumption of both bioethanol and biodiesel is forecast to continue to increase in 2019. But due to the abolishment of AD duties on U.S. ethanol and especially Argentinean and Indonesian biodiesel a major share of this increase is forecast to be fulfilled with imports. Nonetheless, the rise in bioethanol imports is expected to be limited due to imposed sustainability requirements, and domestic bioethanol production is still forecast to increase in 2019. Also domestic production of hydrotreated vegetable oil (HVO) is expected to benefit from rising consumption. In contrast, EU biodiesel production is hampered by strong competition and is expected to decline by four percent. As a result, the production of rapeseed oil based biodiesel is forecast to be cut and the use of rapeseed oil is expected to decline from 6.3 mmt in 2017 and 5.2 mmt in 2018 to 5.0 mmt in 2019.

 

In 2019, total biofuels blending with fossil fuels (on energy basis and with double-counting of advanced biofuels) is forecast to reach 7.3 percent. This is a minor increase compared to the blending of 7.1 percent achieved in 2018. Excluding double-counting, total biofuel blending in 2019 is forecast to reach only 5.7 percent (see graph above), with 4.0 percent for bioethanol and 6.4 percent for biodiesel and HVO. Blending of food-based biofuels is estimated at 4.6 percent, still well below the seven percent cap set by the ILUC Directive, and for 2021-2030 by the RED II.

 

Blending of advanced, non-food and waste-based biofuels is estimated at 1.2 percent in 2019. The majority of these advanced biofuels, about one percent, is produced from waste fats and oils (listed in Part B of Annex IX of the RED II), and only a small percentage, 0.2 percent, is produced from agricultural and forestry by-products such pine oil and cellulosic feedstocks (listed in Part A). 

 

Historical Eurostat transport fuel statistics and EC projections for transport fuel use (EU Energy, Transport and GHG Emission Trends to 2050) combined with the seven percent cap for conventional biofuels in the RED II translate to a consumption maximum of conventional and advanced biofuels combined of about 23,000 ttoe (thousand metric tons of oil equivalent) in 2022 and 21,000 ttoe in 2030 (see graph below). It should be noted that this volume can be cut by the proposed multipliers for reaching the overall mandate of 14 percent renewable energy in transport: electric transport (4x for road and 1.5x for rail transport), the use of biofuels by the aviation and maritime sector (1.2x), and advanced biofuels produced from agricultural and forestry by-products (Part A) and waste fats and oils (Part B) which both count double to the mandate. It should be noted that MSs may also decide to set limits below seven percent for the contribution from food-based biofuels.

 

Given the double-counting and the readiness of the technology, renewable diesel (HVO produced with Part B inputs) is likely to be a preferred transport biofuel, but RED II sets a limit of 1.7 percent. However, MSs can modify this limit if justified by taking into account the availability of the feedstock. Sourcing feedstocks from third countries could support a production expansion in order to keep these renewable transport fuels competitive. The EU already imports these feedstock and this trade opportunity is set to grow. The EC is able to add feedstocks listed in Part A and B of Annex IX, but cannot remove them.

 

Based on the proposed minimum blending rates for advanced biofuels produced with feedstocks listed in Part A of the RED II, the consumption of these second generation biofuels must increase significantly from 2020 (see graph above). The RED II target for advanced biofuels (Part A) of 0.2 percent in 2022 equals the current consumption level, but the target is set to increase to 3.5 percent in 2030, which requires a quantity of about 10,000 ttoe. This would almost equal the current production of conventional biofuels, and require about a hundred advanced biofuel plants with an annual capacity of 200 million liters each. This requires investments in domestic biorefineries and possible external sourcing of eligible feedstocks or as an alternative sourcing of such advanced biofuels outside the EU. The current available biofuels produced from feedstocks listed in Part A are produced from tall oil (renewable diesel), glycerol (biomethanol) and saw dust (bioethanol). The most significant production expansion of such advanced biofuels is forecast to take place in Finland and Sweden. This expansion will likely be based on the refining of tall oil and wood derived feedstocks.

 

Biomass for Heat and Power

 

With a consumption of about 27.4 mmt of pellets in 2018, the EU is the world’s largest wood pellet market. Based on EC mandates and MS incentives, the demand is expected to expand further to 30 mmt in 2019. Residential use for heating, about forty percent of the total pellet market, is a relatively stable market compared to industrial heat and power generation. In some EU MSs, households receive subsidies or tax deductions for heating with biomass. In most countries, however, government funding is limited. Italy and Germany are the main growth markets for residential pellets.

 

Demand for industrial pellets, mostly for power generation, depends primarily on MS mandates and incentives. The main market for industrial pellets is the United Kingdom, which is anticipated to further grow in 2019. Another important industrial market for pellets is Denmark. The Dutch power sector is preparing to scale up its co-firing but it is uncertain what the size of this market will be. If EU demand and trade flows remain consistent with current patterns, the United States has the potential to supply 65 percent of the EU import demand, which would represent a trade value of potentially US$1.6 billion in 2020. Third country imports could, however, be affected by the implementation of sustainability requirements by individual MS governments.