Coordinating author. Contributing authors. Luc Pelkmans VITO. Chun Sheng Goh, Martin Junginger, Ravindresingh Parhar

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2 Coordinating author Luc Pelkmans VITO Contributing authors Chun Sheng Goh, Martin Junginger, Ravindresingh Parhar Copernicus Institute, Utrecht University Emanuele Bianco Alessandro Pellini Luca Benedetti GSE Marek Gawor Stefan Majer DBFZ Daniela Thrän UFZ & DBFZ Leire Iriarte Uwe R. Fritsche IINAS Study accomplished under the authority of IEA Bioenergy Task 40 Published in August

3 Conditions of Use and Citation All materials and content contained in this publication are the intellectual property of IEA Bioenergy Task 40 and may not be copied, reproduced, distributed or displayed beyond personal, educational, and research purposes without IEA Bioenergy Task 40's express written permission. Citation of this publication must appear in all copies or derivative works. In no event shall anyone commercialize contents or information from this publication without prior written consent from IEA Bioenergy Task 40. Please cite as: Pelkmans et al Impact of promotion mechanisms for advanced and low-iluc biofuels on biomass markets: Summary report. IEA Bioenergy Task 40. August Disclaimer This report was written for IEA Bioenergy Task 40 Sustainable Bioenergy Trade. While the utmost care has been taken when compiling the report, the authors disclaim any legal liability or responsibility for the accuracy, completeness, or usefulness of any information contained herein, or any consequences resulting from actions taken based on information contained in this report. 3

4 Impact of promotion mechanisms for advanced and low-iluc biofuels on markets Summary report August 2014 Coordinating author: Luc Pelkmans (VITO) Co-authors: Chun Sheng Goh (UU) Martin Junginger (UU) Ravindresingh Parhar (UU) Emanuele Bianco (GSE) Alessandro Pellini (GSE) Luca Benedetti (GSE) Marek Gawor (DBFZ) Stefan Majer (DBFZ) Daniela Thrän (UFZ) Leire Iriarte (IINAS) Uwe R. Fritsche (IINAS) 4

5 Table of Contents Table of Contents 5 1. Introduction Background Scope of the study 6 2. Used cooking oils and animal fats for biodiesel Double counting advanced biofuels in the EU Renewable Energy Directive Implementation of double counting biofuels in the EU Used cooking oils and animal fats for biodiesel in the Netherlands, Italy and the UK Trade of UCO, AF and double counted biofuels Impacts on traditional end-uses Critical issues and risks Conclusions Sugarcane ethanol from Brazil to the US Renewable Fuel Standard in the US Biofuel mandates Adjustments to the biofuel mandates Brazilian Biofuel Policy Ethanol trade between Brazil and the US Critical issues and risks Conclusions Straw for bioenergy Straw potential and use for energy Straw prices Critical issues and risks Conclusions Wood pellets from the US to the EU Introduction Impact in the past years Anticipated trends in the future Conclusions and recommendations Conclusions from the case studies 29 5

6 1. Introduction 1.1. Background With current discussions on indirect effects of biofuels (the indirect land use change or iluc debate ), and the aim to broaden feedstocks to non-food biomass, policies are trying to put focus on biofuels from waste, residues and lignocellulose materials, so called advanced biofuels with low iluc impact. Next to the general biofuel incentives, these biofuels are getting extra support through specific promotion mechanisms. Examples are the doublecounting mechanism for advanced biofuels in the EU, and the specific targets for advanced biofuels in the USA. While technologically challenging lignocellulosic ( 2 nd generation ) biofuels are developing slower than expected, markets so far seem to have focused on cheaper options, using waste and residues or cheap feedstocks in more conventional biofuel technologies to take advantage of these extra incentives. Typical examples are used cooking oil or animal fats which are used for biodiesel production in the EU, or sugarcane ethanol to fulfil advanced biofuels targets in the US. However well these policy measures intended to be, some of these may create unintended effects. These promotion mechanisms induce market movements and also trading of specific biomass and biofuel types. Other applications relying on these (residue) materials - traditionally very cheap feedstocks - may be impacted by this, both in terms of available volumes, and in terms of feedstock prices Scope of the study In this study, some typical cases are presented where promotion mechanisms for advanced biofuels have had an impact on markets and trade, or may be anticipated to impact markets and trade in the future. The study focuses on some concrete cases. The selected cases are: 1. Used cooking oils and animal fats for biodiesel: impact of the double-counting mechanism for advanced biofuels in the European Renewable Energy Directive on market prices and trade flows, analysed for the Netherlands and Italy (see chapter 2). 2. Sugarcane ethanol: impact of the subtargets for specific advanced biofuels in the US Renewable Fuels Standard (RFS2), where sugar cane ethanol is classified as advanced biofuel. This has had a clear impact on prices and trade patterns between Brazil and the US. (see chapter 3) The other two are more prospective cases, where we can learn from a stimulated demand for straw or woody biomass in the past (for stationary bioenergy). With the introduction of advanced biofuel technologies (based on lignocellulosic feedstocks), these feedstocks may experience an additional demand for biofuels production (also stimulated by specific promotion mechanisms such as double counting): 3. Crop residues (straw) for bioenergy: straw may play an important role for advanced biofuels in the future. In countries such as Germany, Denmark or Poland, this is an emerging feedstock for energy and biofuels. There are already some experiences we 6

7 can take into account from the promotion of straw for stationary energy, e.g. in Denmark. (see chapter 4) 4. International trade of US wood pellets for bioenergy in the EU: Renewable Energy promotion in certain EU Member States is causing considerable trade flows from the US to the EU. There is clear that there are interactions with existing wood markets and forestry practises. In the future there may be additional effects when demand for cellulose-based biofuels enters these markets. (see chapter 5) This report contains the summary of the case studies. The case studies themselves are available as separate reports. All reports are available at: For each case, the specific relevant promotion mechanisms in place, volume and price evolutions of the specific feedstocks, emerging trade patterns and impact on other applications/markets are discussed. Impacts can be increased competition or additional pressure to ecosystems; however, it may also induce new possibilities and synergies for certain markets. Potential future impacts are also anticipated, e.g. on straw or woody biomass when advanced biofuel technologies get more mature. 7

8 2. Used cooking oils and animal fats for biodiesel 2.1 Double counting advanced biofuels in the EU Renewable Energy Directive According to the Renewable Energy Directive 1 (RED) the share of renewable energy in the transport sector must rise to a minimum of 10% in every European Member State in While electric vehicles can contribute to this target, the main share is expected to be covered by biofuels. The Directive aims to promote only biofuels which fulfil certain sustainability criteria, i.e. they need to generate substantial greenhouse gas (GHG) savings if compared to fossil fuels emissions, and they should not cause negative impacts on land use in terms of biodiversity and carbon stock. The use of waste, residues, non-food cellulosic material and lignocellulosic material for the production of biofuels is supported as a favourable alternative to traditional agricultural commodities-based feedstocks. In order to stimulate the use of such feedstocks, the RED foresees that biofuels from these feedstock types can be counted double towards the renewable energy in transport target (RED, Art.21). In practice countries can fulfil their target with half the amount of biofuels, and when applied to fuel distributors, they can be allowed to blend only half of the biofuel into fossil fuel in order to reach their blending obligations if the respective biofuel was produced from waste, residues or lignocellulose. This incentive is widely known as double counting Implementation of double counting biofuels in the EU The Renewable Energy Directive allows double counting in biofuels support mechanisms, but there is no uniform measure provided by the European Commission to implement the double counting mechanism on Member State level. Member States have implemented different measures in the market and applied different definitions to determine which feedstocks are eligible for double counting. The main support policies implemented in EU Member States are: - Substitution obligations, requiring fuel distributors to put a certain amount of biofuels (% share of transport fuel) to the market. o Art.21 biofuels can be counted double towards this target (not always implemented by Member States) o Different Member States have coupled this with certificates to demonstrate compliance. These certificates can be tradable, i.e. the obligated party pays another party for certificates showing he has put a certain volume of biofuels on the market. o In practice there should be a penalty for non-compliance. - Tax reduction for biofuels compared to fossil fuels o Some countries still apply tax reduction for biofuels. In some cases there is a differentiated tax for Art.21 biofuels. The main biofuels applied under the double-counting mechanism are: - biodiesel (methyl ester) from used cooking oils (UCO) and animal fats (AF), 1 Directive 2009/28/EC of 23 April 2009 on the promotion of the use of energy from renewable sources 8

9 - HVO (hydrotreated vegetable oil) from used cooking oils and animal fats, - biomethane from digestion of organic waste, manure or sludge Some advanced technologies are emerging; most of them are still in demonstration or precommercial production; so far their contribution to the transport biofuel targets is marginal: - bio-ethanol from lignocellulose material, such as straw or woody biomass (in demo, IT) - bio-methanol from crude glycerine (NL) - bio-dme from black liquor (SE) - Fischer-Tropsch diesel (BTL) from gasified woody biomass When looking at the reported volumes of double counting biofuels in the EU Member States, the Member States can be divided in three groups: 9 countries with substantial markets, also relying on trade, 6 countries with a (small) domestic market, 13 countries where no double counting biofuels have been reported. Overall more than 90% of double counting biofuels in the EU are based on used cooking oils and animal fats. This market is dominated by a few countries, namely the UK, Germany (from 2012), Italy and the Netherlands. This case study has focused on the markets in the Netherlands and Italy, and included results of a study done by Ecofys in 2013 for the UK market 2. Figure 1. Overview of double counting biofuels in the EU Member States 3 2 Ecofys (2013) G. Toop et al. Trends in the UCO market. Study commissioned by the UK Department for Transport. November Based on 2013 Renewable Energy Progress Reports of the EU Member States 9

10 2.2 Used cooking oils and animal fats for biodiesel in the Netherlands, Italy and the UK Table 1 shows the overview of the implementation of double counting mechanism in the Netherlands, Italy and the UK. The Netherlands and the UK have been heavily relying on double counted biofuels in meeting the blending obligation in the past few years. The demand for double counted biofuels in Italy also shows an increasing trend. However, domestic availability of UCO and AF in these countries is insufficient to reach this demand, so they have been importing from other Member States or even oversea. While Italy and UK are net importer of double counted biofuels, the Netherlands has actually been producing excessive stock of UCO biodiesel for export, largely based on imported UCO and AF. Table 1. Overview of the implementation of double counting mechanism in the Netherlands, Italy and UK 4 Netherlands Italy UK Feedstock Used Cooking Oil x x x Animal fat cat. I x x x Animal fat cat. II x -? Animal fat cat. IIII Biofuel blend (ktoe) Total biofuel blended Of which double counted Principle biofuels for double counting Situation in relation to trade Form of non-physical trade Mostly UCO & AF biodiesel and HVO; fractions of biomethanol (from glycerine) and biomethane Large importer of UCO & AF; exporter of biodiesel of these feedstocks Bio-tickets Mostly UCO & AF biodiesel Large import dependency Biofuel Immission Certificates (CICs) Mostly UCO & AF biodiesel Large dependency import Renewable Transport Fuel Certificates (RTFCs) Trade of UCO, AF and double counted biofuels The Netherlands: Germany has been the largest trade partner of the Netherlands in terms of UCO volumes. The Dutch UCO & AF market is closely linked to the German market. The prices in both markets determine the supply and flow of UCO & AF. However, in terms of net import, Belgium, UK and US are among the biggest suppliers. Interestingly, the import of oils and fats mixture from North America as well as Asia has grown remarkably from In 2009, the volume of these trade flows was negligible. Compared to 2010, a 4 Based on 2013 Renewable Energy Progress Reports & epure (2003). Double counting, half measures: Study on the effectiveness of double counting as a support for advanced biofuels. March MVO (2013) Statistics Year Book

11 relatively large amount of UCO & AF have been processed to biofuels in 2012, however only a small percentage was being consumed domestically and the rest were exported to other Member States. Italy: Different from the Netherlands, Italy mainly imported double counted biofuels instead of the feedstock. In 2012, about 98 % of UCO biofuels consumed in Italy were imported. The largest trade partners are Spain and the Netherlands, together supplying more than 70% of the total consumption. Double counting was restricted to EU sourced feedstocks. Interestingly, Italy has also imported biofuels made from UCO collected in Italy but processed outside Italy (about 3%). However, local production of UCO biofuels has increased substantially from 2 ktons in 2012 to 14 ktons in 2013 using domestic source of UCO, while total consumption of double counting biofuels has plummeted from 380 ktons in 2012 to 129 ktons in This was related to the special limitations to double counting biofuels from 2013 in Italy and more accurate controls on the correctness of the information gathered. Similarly for AF biofuels, Italy has also turned to a producer in 2013 rather than relying heavily on import. AF was collected from domestic source, and also imported from neighbouring countries like Austria, Germany and other Member States. These AF mainly come from category I fats. UK: The consumption of domestic produced UCO biofuels in UK has remained stable in the range of million litres. However, the import has been fluctuating in the past 5 years. The total consumption peaked at about 760 million litres in 2011/12, but fell sharply in 2012/13, when the import from the Netherlands, Germany and US has plummeted 7. The decrease may simply be because the volume of UCO from that source has decreased or it may be indicative of biodiesel being traded through the Netherlands and therefore potentially misreported as being of Dutch origin (i.e. mistakenly reporting the origin of the biodiesel or the place of purchase of the biodiesel, rather than the origin of the UCO feedstock itself). In 2013, the share of non-european sources is clearly growing, but also shifting from US to over 50 other countries worldwide Impacts on traditional end-uses There are multiple end-uses of UCO and AF: - Oleo-chemistry: According to APAG, the European association of the oleochemical industry, the relation between UCO and animal fat used in the industry is 1:9. The relatively low UCO share is explained by its variable quality, due to the variety of sources from different entities using different vegetable oils. About 10% of collected UCO is used by the oleochemical industry. - Animal feed ingredients: Before the year 2003 UCO was mainly used as an animal feed ingredient. However in 2003 the EU Animal Byproduct Regulation banned the use of UCO in animal feed due to health reasons. Animal fats are also broadly used as ingredients in feed for livestock animal and pets, in the petrochemical industry (as lubricants, insulators, emulsifiers, etc ) and also in the manufacturing of health care products like soap, perfumes and cosmetics. - Power generation: UCO can be burned in bioliquids power plants. - Food: Edible animal fats (as category 3) are largely used in the food industry, such as in the meat manufacturing and for frying or directly in cooking. Various acids and triglycerides of refined and fractionated fats are used as emulsifiers in the food 6 GSE database, UK Department for Transport RTFO Biofuel Statistics 11

12 production. AF from category 3 are however not considered for double counting in all three countries. The Netherlands: The consumption volume of UCO and AF for animal consumption has decreased significantly in 2011 and UCO and AF were also used for other purposes, but not burnt in power plants. Since 2011 the volume of UCO and AF consumed for biofuel production has become larger than the total volume of UCO and AF consumed for other uses. Italy: Around 5.8 ktons of UCO and 17 ktons of AF were burned in power plants in Italy in The amount of UCO used for other purposes is unclear. For AF, less than 10% of AF were used for biofuel production. There is no clear picture from the statistics how the use of UCO and AF for biofuels has impacted the other uses. UK: Before the use of UCO for biofuel production, UCO was most commonly put into the local drainage system or sent to landfill, despite these disposal options being prohibited under UK law. The price which is now received from UCO collectors is a clear incentive for customers (e.g. restaurants, pubs) to have its UCO collected. 2.3 Critical issues and risks Biofuels from UCO or AF can be counted double towards companies obligations, so there is a clear incentive to use these instead of virgin oils in countries where the double counting principle is clearly implemented in national legislation (targets can be reached with only half the amount of biofuel). Nevertheless available amounts of UCO and AF are limited, so there may be different issues arising: Lower efforts towards advanced 2 nd generation biofuels: While the double counting mechanism was intended to support technology innovation (towards more technologically advanced 2 nd generation biofuels), it has actually pushed UCO and AF biodiesel, which were relatively mature and inexpensive in relation to other advanced biofuels. So it has only little contributed to technology innovation, while the potential of UCO and AF remains limited (in the order of 1% of transport fuel consumption). Reduced physical volumes of biofuels on the markets: For some countries relying heavily on UCO and AF biofuels, we notice a decrease of the physical amount of biofuels on their markets - although administratively the obligated target is still achieved - because of their shift to double counting biofuels. This also implies that less fossil fuel is displaced when using the double counted UCO biofuel, contributing less to energy security. Inefficient trade and market distortion due to differences in policies between Member States: Promotion mechanisms in countries like the UK, the Netherlands, Italy, Finland and Ireland have attracted UCO and AF from other countries (which have less favourable policies). Uncertainties and differences in policies such as the definition of waste, the eligibility of feedstock for double counting and mechanisms to verify the sources have caused confusion in the market. Impacts on traditional markets relying on these feedstocks: Prices for UCO & AF have increased steadily in the past years, from near zero in the 1990s to a little below virgin oil prices. These price increases may impact other applications of UCO and AF, 12

13 mainly in the oleochemical industry, which uses around 10% of UCO resources. Nevertheless it does provide an interesting alternative for unsustainable disposal (drainage, landfill) and unhealthy practices (extended use in cooking). Risk for unlawfully claiming double counting for certain batches of vegetable oil biofuels: It is important to distinguish, trace and verify UCO and AF to reduce the risk of fraud. There have been various inconsistencies in the markets in previous years. Tracing of UCO and AF is more difficult than virgin oils and there is lack of uniform mechanisms across Member States. Verification of UCO from outside the EU is very challenging. Long-distance trade of UCO? Export regions in America and Asia also implement their own support policies for biodiesel (from UCO), so we should watch out that European incentives are not competing against domestic policies in these regions. This may induce displacement effects and create trade inefficiencies. Moreover, shipping this material to the other side of the world also brings along additional greenhouse gas emissions it is probably more beneficial to improve domestic waste management and processing of UCO in these regions. 2.4 Conclusions Producing biofuels from used cooking oil or animal fats provides an interesting outlet for these products, with high greenhouse gas advantage, on condition that these feedstocks are really waste. Nevertheless we should take into account that potentials of UCO and AF are limited and to achieve higher fossil fuel replacement, other biofuel types will still be needed. The double counting mechanism, which was intended to promote advanced biofuels, has merely incentivised the use of UCO and AF biodiesel, a relatively mature and inexpensive biofuel in relation to other biofuels. For market parties this was a very cost-effective way to reach their obligations, but it hardly contributed to technological advances. More specific promotion mechanisms will be needed to achieve that. The current promotion mechanism has boosted demand for UCO and AF in certain countries, which are now importing UCO from all over the world. It should be analysed if this has led to displacement effects in the sourcing regions and trade inefficiencies. Moreover, prices of UCO and AF have increased to a little below the level of virgin oils. This clearly has an impact on other markets using UCO and AF, such as the oleochemical industry. Finally, double counting biofuels from these materials gives an extra economic incentive over other (more expensive) biofuels. This induces risks of fraud (unlawful claiming of double counting). A good tracing and verification system becomes very important, but is not evident, specifically for materials imported from all over the world. More detailed analysis can be found in the case study report. 13

14 3. Sugarcane ethanol from Brazil to the US Brazil and the USA are the most important producers, consumers and traders of ethanol. Brazilian ethanol is produced primarily from sugarcane, while the US produces ethanol primarily from maize. Until 2010, ethanol trade between the two countries was one direction only (from Brazil to the US). In recent years, there have been significant volumes of bilateral trade of (physically identical) ethanol between the US and Brazil driven by their different biofuel policies 8. Part of it is related to the way advanced biofuels are promoted in the US Renewable Fuel Standard in the US The main promotion system for biofuels in the US is the Renewable Fuel Standard (RFS).The RFS is a requirement that a certain percentage of petroleum transportation fuels needs to be displaced by renewable fuels. RFS1 started with the Energy Policy Act of This was amended by the Energy Independence and Security Act (EISA) of 2007, the new renewable fuel standard being known as RFS2. The RFS2 further segmented biofuels in four classes (renewable fuels, advanced fuels, biobased diesel, cellulosic biofuel), each with their own mandated volume Biofuel mandates The cellulosic biofuel (S) and bio-based diesel (B) mandates set minimum quantities of these two types of fuels to be consumed. The overarching advanced fuel (A) mandate is greater than the sum of the cellulosic and bio-based diesel mandates, which creates an undefined advanced gap for other advanced fuels used to meet the larger advanced fuel mandate. The other advanced fuels explicitly include ethanol made from sugarcane and explicitly exclude maize starch ethanol. This advanced mandate is nested in a larger over-arching renewable fuels mandate (T). This mechanism creates a hierarchy among the fuels. In the actual RFS targets two aspects catch the eye: - Cap on non-advanced biofuels (i.e. corn ethanol). There is an implicit cap on nonadvanced biofuels of 15 billion gallons from Mind that ethanol consumption in 2010 almost reached 13 billion gallons, so the growth margin for corn-based ethanol is very limited. On the other hand US gasoline consumption is around billion gallons per year, so about 9-10% of fuel sold as motor gasoline is ethanol, which is close to the E10 blend wall. This implies that growth margin for ethanol overall (including advanced ethanol) is limited, unless E15 or E85 are introduced on large scale. - High expectation for cellulosic biofuels. The mandate foresees a spectacular growth of cellulosic biofuels from virtually nothing in 2009 up to 16 billion gallons in Renewable Volume Obligations (RVO) and Renewable Identification Numbers (RIN) are the mechanisms the Environmental Protection Agency (EPA) uses to implement the RFS program. RVOs are the targets for each refiner or importer of petroleum-based gasoline or diesel fuel, while RINs are a type of tradable certificates which allow for flexibility in how obligated parties may choose to comply. RINs have a market price. 8 Also discussed in: S. Meyer, J. Schmidhuber, J. Barreiro-Hurlé (2013). Global Biofuel Trade: How uncoordinated biofuel policy fuels resource use and GHG emissions. FAO ICTSD, Issue Paper48. May US EPA. Renewable Fuel Standard (RFS) website 14

15 Adjustments to the biofuel mandates There is an annual RFS review process where the EPA may propose waivers compared to the initial targets. Faced with inadequate production capacity to meet the cellulosic biofuel mandate as legislated for , the EPA was forced to reduce the cellulosic biofuel mandate significantly while choosing to leave the total and advanced mandate in place. The short fall in cellulosic ethanol biofuels coupled with the EPA decision to maintain the other mandates means that the size of the implied undefined advanced gap has grown and even created an extra need for undefined advanced fuels. This prompted an increase of biobased diesel as well as US sugarcane ethanol imports from Brazil, and plentiful supplies of maize starch ethanol in the US prompted increased ethanol exports Brazilian Biofuel Policy Brazil is the world's second largest producer of ethanol fuel (after the US) and the world's largest exporter. It uses sugarcane as feedstock; the residual cane-waste (bagasse) is used to produce heat and power, which results in a very competitive price and also a low fossil energy input and high greenhouse gas savings. It is therefore qualified as advanced biofuel in the United States, also because it is recognized that emissions due to land use change (LUC and iluc) for sugarcane ethanol are low. In Brazil, ethanol is used in two ways: (1) as octane enhancer in gasoline, in the form of 18 to 25% anhydrous ethanol (minimum mandated by law), (2) as pure ethanol in neat-ethanol engines or flexible fuel vehicles (FFV), in the form of hydrated ethanol. In the past decades ethanol prices have been liberalized along with gasoline and sugar markets, although ethanol still maintained a (state dependent) tax advantage relative to gasoline. It is still required by law that all gasoline should be blended at 18 to 25 percent ethanol inclusion rates. The governments sets the minimum percentage of ethanol blend according to the results of the sugarcane harvest and the amounts of ethanol produced from sugarcane, resulting in blend variations, even within the same year. The shift in supplies available for domestic consumption can occur either through production shortfalls or from increased trade demand Ethanol trade between Brazil and the US Until 2009, the US was a net importer of ethanol to fulfill the demand of its domestic ethanol market, most of it coming from Brazil and the Caribbean area (most of which was also Brazilian ethanol). However, since 2010, the US is a net exporter of ethanol, mainly to Canada, the EU, and in 2011 also a considerable amount to Brazil. Since 2011 we see the phenomenon that large volumes of sugarcane based ethanol are imported from Brazil, while also considerable amounts of corn based US ethanol are exported to Brazil. 15

16 Figure 2. Ethanol imports and exports from the US, and trade with Brazil 10. There are various factors impacting this trade between the US and Brazil: Seasonal fluctuations. Brazilian sugarcane harvest season is between March and November. Unlike corn, sugarcane cannot be stored because it goes bad after a couple of days, forcing mills to process the entire crop while harvesting. Varying crop yields. Typical examples are the low sugarcane yields in Brazil in 2011, and the draught in the US in 2012, leading to low corn yields was a particular case with a low production in Brazil and a surplus in the US. Crop prices (maize, sugarcane) are related to world markets and may favorize one or the other ethanol type. Ethanol market in Brazil: next to pure ethanol distribution, there is a mandated minimum ethanol blending in gasoline, 18-25%, so there is continuous demand for ethanol on the domestic market. The level may be adjusted according to harvest yields and actual ethanol production. In Brazil, the part of the domestic market that is almost inflexible is the market for anhydrous ethanol (used for blending). In theory, because of FFVs, the market for hydrated ethanol is much more flexible. RFS2 targets in the US: the biofuel targets in the US make distinction between advanced and non-advanced biofuels, with separate targets (cap on corn based ethanol, minimum target for advanced biofuels). The different biofuel types have different RIN prices. Changes in US policy, e.g. the ethanol blending credit (0.45$/gallon), and the import tariff of 0.54$/gallon (0.14$/litre) for imported ethanol (waived for Caribbean) both expired end EU market: Historically, trade flows (mostly exports from Brazil) were impacted by the European market. The amount currently exported from Brazil to Europe is relatively small, and the US took over this market in the past years. 10 Source of the data: US EIA (2014), Annual Energy Outlook US Energy Information Administration, April

17 3.4. Critical issues and risks Incentives for technologically advanced biofuels in the RFS2 were insufficient for deploying these types of biofuels Cellulosic biofuel targets in the RFS2 were very optimistic at least in the short to medium term. From the start in 2010, cellulosic biofuel targets have been waived, down to less than 1% of original targets, and even those targets were not met on the market. In , the original advanced biofuel target (of which cellulosic biofuels were part) remained as in the original RFS2, meaning that the gap needed to be filled by other advanced biofuels, i.e. biobased diesel and sugarcane ethanol. So the incentives for cellulosic biofuels do not seem to be sufficient, and have merely promoted more imports of Brazilian ethanol and higher production of biobased diesel. E10 blend wall creating uncertainty in the fuel markets. Ethanol blending in gasoline in the US on average reaches between 9 to 10%, so in practice, the blend wall of 10% (E10) is reached. There are some efforts to further promote E85 (in flex-fuel vehicles) and also to extend the blend wall to E15 for released gasoline models. However, there are lots of concerns from vehicle manufacturers and fuel distributors, which also feed into the public. So the blend wall seems to be a practical barrier, which may impede further expansion of ethanol in the US fleet (corn based, sugarcane based, and in particular cellulose based ethanol due to higher production costs and market uncertainties). This creates uncertainty on how to fulfil the RFS mandates, with higher expected costs, and creates fluctuations in the price of RINs. This in its turn creates instability on biofuel markets. Volatility of RIN markets RIN prices have proven to be very volatile which makes it difficult to reach a solid business case for new advanced biofuels (other than commercial ones like sugarcane ethanol or biobased diesel). The uncertainty of the blend wall is an extra barrier for cellulosic ethanol. Cap on corn ethanol creates exports The RFS2 caps the amount of non-advanced biofuels (i.e. corn ethanol). With production capacity higher than this cap, the US has now become a net exporter of ethanol, with the main partners being Canada, the EU, some Asian countries, but also Brazil in the past 3 years. So in practice, the US is importing sugarcane ethanol to fulfil its advanced biofuel targets, while it exports an excess of corn ethanol. Intra-trade between Brazil and the US At a certain stage (in 2011), there was a high intra-trade between the US and Brazil: the US was importing sugarcane ethanol from Brazil to fulfil its advanced biofuel targets; meanwhile Brazil was falling short of ethanol because of lower sugarcane harvests. Two consequences resulted from this: (1) Brazilian authorities reduced the general blending mandate from 25% to 18% in April 2011, and (2) Brazil started to import corn ethanol from the US. So this created an intra-industry trade of physically identical but policy differentiated biofuels. This intra-trade of physically identical ethanol incurs additional transportation, adding costs and releasing additional GHG emissions, and therefore moderating some of the anticipated advantages of (advanced) biofuel use. Moreover, substituting Brazilian ethanol (in Brazil) with corn ethanol (having lower greenhouse gas performance) creates a carbon leakage in Brazil. When quantifying the combined effects, through the intra-trade of 2011 around 80-17

18 90% of the GHG advantage for sugarcane ethanol was lost, in this effect amounted to around 20% of the GHG advantage. Impact on Brazilian ethanol prices The intra-trade drives up ethanol prices in Brazil, the extent of which depends critically on the size of domestic supplies relative to Brazil s own blending mandate and where domestic demand sits relative to that mandate. Exports typically represent 10% of Brazilian ethanol production. In 2011 and 2012, Brazilian ethanol (FOB) was more expensive than US corn ethanol 11 still imports were attractive because import tariffs have been removed and there were quite high RINs for advanced biofuels to compensate for higher costs. Meanwhile the situation has more or less stabilized and US ethanol exports to Brazil have been largely reduced (while imports of Brazilian ethanol to the US are still important). Prices of Brazilian ethanol have stayed in the higher end and are now in the same range as US ethanol. The main reason is that US markets are now fully open for Brazilian imports since import tariffs has been removed, but also the advantage of higher RINs for advanced biofuels has more or less gone away since Conclusions The main promotion mechanism for advanced biofuels in the US are the RFS mandates, implemented through Volume Obligations for fuel suppliers and tradable certificates (RINs), which have a certain market value. There are specific separate targets for advanced biofuels, and subtargets for biobased diesel and cellulosic biofuels. The growth of cellulosic biofuels has clearly stayed below expectations, and in the past 4 years, the subtarget for cellulosic biofuels was consistently reduced by EPA. The question is whether current promotion mechanisms are the right ones to stimulate further growth of technologically challenging cellulosic biofuels. Meanwhile, imports of Brazilian sugarcane ethanol (recognised as advanced biofuel by US authorities) have partly compensated for the underperformance of cellulosic biofuels. There is a consistent import of Brazilian sugarcane ethanol to the US, being one of the cheaper ways to fulfil the advanced biofuels mandate, and with the current RFS system (and the abolishment of import tariffs on Brazilian ethanol) this seems to remain. In normal seasons, Brazil is able to export about 2 to 3 Billion litres per year to the US. For these volumes, the domestic prices will not increase a lot. But Brazil will not be able to export much more than that, in short-term, at low prices. In periods when Brazil is struggling with sugarcane yields (as was the case in 2011), when in fact they only have sufficient volume to cover the domestic ethanol market, this import demand from the US market may lead to intra-trade (also shipping ethanol back from the US to Brazil) and lower blending mandates in Brazil. At the end, this has a large impact on greenhouse gas emissions (carbon leakage), and on prices. 11 TradingCharts.com (June 2014) & UNICA (June 2014) 18

19 4. Straw for bioenergy Straw is often cited as one of the most promising feedstocks for advanced biofuels. While market uptake so far is limited, we will focus on the impact of using straw for stationary bioenergy, looking at the situation in Germany, Denmark and Poland. This will provide issues and learnings which will also be relevant when future markets for advanced biofuels from straw may arise. Agricultural residues like straw seem to have the advantage of low competition with other land uses and thus comparably low corresponding land use change effects. Currently, legislations on European and national level are developed towards an improved framework for the energy-related utilization of these raw materials. At European level, the double counting mechanism in the Renewable Energy Directive promotes their application for biofuel production. On national level, support schemes for renewable energy production are increasingly promoting the use of agricultural residues (e.g. the Renewable Energy Sources Act in Germany). Nevertheless, there are a number of uncertainties with regard to the actual potential of agricultural residues like straw that could be used for the production of bioenergy in a sustainable manner Straw potential and use for energy The technical straw potential in the EU-27 varies between 820 and 1800 PJ annually, depending on the source 12, 13, 14, 15. Within the EU-27, France, Germany and Poland show the highest technical straw potentials. Altogether more than half of the overall European straw potential is located in these countries. However, the exploitable part of this technical potential is influenced by a number of regional factors, such as competing uses, carbon and nutrient balances, the technical restrictions and the spatial distribution of the technical potentials. Germany: Approximately 30 million tonnes of straw (fresh matter) are produced annually in Germany 16. Between 8 and 13 million tonnes of this theoretical potential could be used sustainably for energy or fuel production. Highest straw potential (4 tonnes per ha) can be found in parts of Schleswig-Holstein, Mecklenburg West Pomerania, North Rhine- Westphalia and Lower Saxony. But there are also regions that show a net deficit. Even though straw is one of the most important agricultural residues in Germany, it is not yet used for energy purposes extensively. Current practices in agricultural management suggest that cereal straw is either chopped after threshing the grain and spread onto the field with a combined harvester, or it is harvested, baled and utilized for animal husbandry. Nevertheless, the transition from straw based livestock housing to housing types with slotted floors decreased the demand for cereal straw as litter significantly. 12 JRC (2006): Cereal Straw Resources for bioenergy in the European Union. Proceedings of an Expert Consultation; Pamplona, October Zeller et al. (2011): Basisinformationen für eine nachhaltige Nutzung landwirtschaftlicher Reststoffe zur Bioenergiebereitstellung. 14 Thrän et al. (2009): Regionale und globale räumliche Verteilung von Biomassepotenzialen. Status Quo und Möglichkeit der Präzisierung 15 Panoutsou et al. (2012): The role of straw for heat & electricity in EU27 member states in 2020 and in 2030 with respect to costs and sustainability criteria. 16 Weiser et al. (2013) Integrated assessment of sustainable cereal straw potential and different straw-based energy applications in Germany 19

20 One of the main differences with regards to the ratio of straw utilised for energy production between Germany and countries like Denmark are the strong thresholds for direct emissions from straw combustion in Germany. These thresholds lead to a significantly higher technical effort and thus investment costs for straw combustion plants compared to Denmark. Due to these technical and economic restrictions the current number of installed straw combustion units in Germany is estimated at approximately 130 plants 17. Beside these small scale combustion units a number of activities regarding the use of straw in large scale CHP units and the production of advanced biofuels have started recently. Denmark: The straw potential in Denmark originates mainly from wheat and barley cultivation. The total amount of straw produced annually is between 5 and 6 million tonnes per year, of which 1 to 1.5 million tonnes is used for energy, approximately 2 million tonnes are used for bedding and forage, and 2 million tonnes are not collected 18. The introduction of support mechanisms for bioenergy in Denmark can be traced back to the year As a result of consequent and long-lasting political actions the straw market in Denmark belongs to most developed and stable in Europe. It is strongly dominated by farm scale boilers (7000 units), which represent approximately 30% of the total straw consumption in the home market. Another important sector is the district heating sector: approximately 50 district heating boilers and 7 CHP plants are running on straw, representing around 20% of straw resources used 19. Next to that there is also one power plant co-firing straw pellets, and one dedicated power plant running on straw. From the mid-1980s up to the year 2000 straw generated a rather constant amount of renewable energy between 10 and 13 PJ, slightly increasing to PJ in the past 10 years 20. Poland: Straw production Poland varies between 18 and 25 million tonnes per year, of which a surplus of 7 to 12 million tonnes could be available 21. While all polish regions have substantial straw production, some of them have important surpluses, while others have deficits. This also indicates the heterogeneous availability of straw. The preferred application of biomass in Poland is co-firing of woody biomass. Technical problems with straw combustion (e.g. slag formation) are slowing down the development of the market. However, several local companies which provide e.g. heat and warm water use already straw-fired boilers Straw prices To define prices for straw is a rather difficult task. Because of its low energy density straw is currently not comparable to other biomass commodities like wood chip or pellets. Prices for straw differ significantly between countries and regions and are influenced by a number of local, technical and economic parameters. A number of parameters influencing final straw prices: Types of logistical processes including loading/unloading, round trips, operation speed/time; 17 Hering, Thomas (2012): Energetische Halmgutnutzung in Deutschland 18 Bang, C. et al (2013): Analysis of biomass prices. Future Danish prices for straw, wood chips, and wood pellets. 19 FNR Tagungsband 2012: Gülzower Fachgespräche. 20 Danish Energy Agency: Annual Energy Statistics. Accessed May Wiktor Kozłowski, Krzysztof Cygan (2011): Współspalanie słomy z węglem w dużym kotle energetycznym (in Polish) 20

21 Personnel costs, Machinery costs (fixed and running costs), Diesel fuel (including refunds for agricultural machines), Storage capacities and costs, Storage losses, Fertilizer costs. Hence, unlike other biogenic fuels such as wood chips, local straw prices are strongly cost driven. Furthermore, they correlate strongly with the type of planned installation, chosen location, estimated availability or the local straw demand. This is indicated in the figure below. Figure 3. Preference regions and straw supply costs for bioethanol plant 22 The price level of straw paid by district heating facilities in Denmark is quite constant up to 2007 at about 54 per tonne for straw, recently increasing to around 70 /tonne 23. In contrast to the rather stable situation in Denmark, the Polish markets have been much more instable. A drastic fall of green certificate prices in Poland at the beginning of 2013, and the subsequent decrease of demand for agricultural substrates from the large players 22 Brosowski, A. (2013): Biomass supply costs for cereal straw and preference regions for an ethanol plant in Germany 23 Danish District Heating Association (2012). Straw to Energy. Status, Technologies and Innovation in Denmark

22 resulted in a price drop from 125 to 25 Euro per tonne straw 24. In many cases, the electricity producing companies have stopped buying the contracted amounts of biomass. Although meanwhile the prices for green certificates have partially recovered, the uncertainty of the investors remains Critical issues and risks High potential, but heterogeneous: There is a high potential of energy from straw in the EU that could contribute to the future targets for renewable energy in Europe. However, the spatial distribution of this potential is very heterogeneous and can therefore, amongst others, lead to big differences in regional prices for straw. Large vs small scale? It is not clear whether the EU 2030 targets for the transportation sector will be continued in the form known currently in the objectives. However, the facilities for the production of the advanced biofuels have to be realised on relatively large scale, and the possible locations for those plants are limited. To explore the unused potential of straw for energy, it may be more efficient to focus on smaller straw conversion units for heat, combined heat and power and for material use - than for advanced biofuels. Today there is a clear preference of using residues and wastes for the provision of biofuels, established in the so called double counting of biofuels from residues. An increased bioenergy provision from straw under the current support scheme can lead to the following discussions: Maintaining the humus balance: o The availability of straw in many European regions has been investigated in different studies. Nevertheless the collection and use of straw may influence the soil organic carbon, the humus balance of the soil and can cause environmental problems like erosion, effects of the water household etc. Regional information is necessary to avoid those complications. First investigation for Germany showed that there are preferable regions for straw utilisation. A comparable information base for Europe is still missing but necessary especially if larger conversion facilities are planned. o One of the risks related to the sustainable use for straw may be related to the market structure of renewable energy. Renewable energy in Poland is produced by the biggest players (power plants and energy companies), which invest in large installations. Thus, it could happen that the question of e.g. maintaining the minimum levels of soil fertility in the vicinity of the installations will have a lower priority for the farmers and companies. Currently, the main responsibility on maintenance of the soil fertility is put on the farmers and mandatory legal requirements are defined on European and national levels. o Straw availability in developing and especially tropical countries is much more limited than in temperate zones as straw is very important for the humus and nutrient balance in these regions. Import of products provided from straw need a clear framing by dedicated sustainability criteria. Indirect effects of increased straw utilisation: Is the residue an unused residue or does the increased use of straw lead to a shift of material flows, for example in animal feeding. This discussion might even be more difficult if straw based biofuels are 24 Jadwiga Jarzębowicz, TVP (2013): Słoma tania jak barszcz (in Polish). 22

23 imported from outside Europe and especially if they are produced in developing countries. Straw has a market price which may vary depending on the supply and demand situation. Current prices are in the range of per tonne, but higher and lower spikes are possible. The example in Poland shows that instability of the market and price levels may have a long-term negative influence on the entire market, since the potential investors may delay or abandon their projects. Also for advanced biofuels instability in feedstock costs creates a risk for business development Conclusions The use of residues from agriculture for the production of energy can play a role in the transition towards a more renewable energy supply, both for stationary bioenergy, and in time, also for advanced biofuels. However, sustainability issues have to be considered along the entire provision chain as they affect the resource and energy potential, as well as the achievable contribution to climate mitigation. It must be taken into consideration that cereal straw plays an important role in the humus balance of soils. For this reason not the complete technical straw potential is available. Some of the straw must be left scattered on the agricultural land to prevent nutrients from being permanently extracted from the soil. Proposals like a quadruple counting of fuels from straw might create strong incentives to overuse the sustainable share of available straw. The development of advanced bioenergy technologies (incl. straw) has to be based on stable political frame conditions. Especially for the European biofuel sector specific targets for the time frame beyond 2020 have to be defined by EU policy makers. The stabilization of the market will be one of the most important tasks for future years in order to create a basis of trust for the development of straw-using technologies. 23

24 5. Wood pellets from the US to the EU Woody biomass is also seen as promising feedstocks for advanced biofuels. While market uptake so far is limited, we will focus on the impact of using wood pellets for stationary bioenergy, and specifically the impact European wood pellets demand has had on the US Southeast region. This will provide issues and learnings which will also be relevant when future markets for advanced biofuels from woody biomass may arise in international markets Introduction European demand for wood pellets is shaping international pellet trade. Belgium, Denmark, the Netherlands and UK are increasingly importing pellets from overseas to meet their renewable energy targets through co-firing of pellets in coal-fired power plants or dedicated biomass plants. Given the lack of coherent EU-wide sustainability requirements for woody bioenergy, these countries create their domestic sustainability systems. The US Southeast became a key exporter to EU markets in the last years. There are several reasons why this region is a promising export region: feedstock availability, technoeconomical capabilities, stable context and relatively close distance to major EU harbours. The US Southeast is well known as a key fibre basket for sawn timber and pulp and paper products. Pine plantations delineate the US Southeast forest landscape, representing 20 % of the area 25 and providing 60 % of national timber 26. The economic recession during the 2000s reduced industrial roundwood demand for housing 27, but pulpwood production was maintained almost constant during the last decade 28. In 2013, the pulp and paper sector dominated demand for wood with a consumption of 68 Mt od /a, while the panel industry uses 9 Mt od /a, and the pellet industry 4 Mt od /a 29. There is still about 32 Mt od /a unmobilized wood, though much of that might not be available to enter into the markets. At present, 86 % of forestland is owned by private landowners and 67 % of private forestland is owned by non-industrial private forest owners (families or individuals) 30. Forest management responded to population pressures with parcelling timber tracts and reducing harvest tract sizes 31. More intensive silviculture has significantly increased plantation productivity from less than 100 m 3 /ha in 1950s to about 450 m 3 /ha in and the productivity is expected to continue increasing USDA FS 2009: U.S. Forest Resource Facts and Historical Trends. 26 Conrad J.L., et al. (2011): Wood-energy market impact on competition, procurement practices, and profitability of landowners and forest products industry in the U.S. south. 27 Forisk Consulting (2013): Update and Context for U.S. Wood Bioenergy Markets. 28 USDA FS (2013): Southern Pulpwood Production, Pöyry (2014): The Global Pellet Market Growth prospects and market dynamics. 30 Butler B.J., Wear D.N. (2013): Chapter 6. Forest Ownership Dynamics of Southern Forests; in: Southern Forest Futures Project 31 Conrad J.L. (2011): Anticipated Impact of a Vibrant Wood-to-Energy Market on the U.S. South s Wood Supply Chain. 32 Munsell J, Fox T (2010): An analysis of the feasibility for increasing woody biomass production from pine plantations in the southern United States. 33 Wear D.N. et al. (2013): Chapter 9. Markets; in: Southern Forest Futures Project. 24

25 Best management practices (BMP) are one of the key programs related to forest management activities; most of US South states have adopted them on a voluntary basis. Moreover, several states have developed BMPs focusing on biomass harvesting. Only 17 % of US South forest area is certified by forest certification schemes 34. Figure 4. Wood flow in the US SE There are several mechanisms such as the Renewable Fuel Standard (Federal level) and the Renewable Portfolio Standards (State level) to incentivize or support domestic consumption of woody biomass in the US South, but these policies are very diverse among states 36. The rulemaking on limits for CO 2 emissions from coal power plants announced by US EPA 37 could also increase domestic demand for woody biomass. An additional federal program is the Biomass Crop Assistance Program which promotes the mobilization of specified woody biomass for eligible landowners with 25 million US$ for 2014 distributed between matching payments and technical assistance. It is expected that these promoting mechanisms result in increasing domestic demand for several final uses. The pellet production capacity has increased sharply during last years within the US from 0.36 Mt in to almost 6 Mt in In addition to domestic demand (about 3 Mt of pellets consumed in 2009), total exports to the EU increased from 0.8 Mt of pellet in 2011 to 2.9 Mt in The capacity of operational pellet plants was 6.6 Mt and total capacity of operational, under construction and announced plants is 15.3 Mt pellets in July Kittler B., et al (2012): Pathways to sustainability. 35 Pöyry (2014): The Global Pellet Market Growth prospects and market dynamics 36 Guo Z. (2011): Forest Biomass Utilization in the Southern United States: Resource Sustainability and Policy Impacts. 37 US EPA (2014): Carbon Pollution Standards. 38 Cocchi M. et al. (2011): Global Wood Pellet Industry Market and Trade Study. 39 Bioenergy International (2013): Pellets in the World Market Watch (2014): Wood Resources International LLC: Wood pellet exports from North America to Europe have doubled in two years with the US South accounting for 63% of the volume. 41 Own calculations as of July 2014 based on Biomass Magazine (2014): Pellet Plants 25

26 In terms of costs the US South is competitive (well positioned in both the stumpage costs and overseas transport) with a delivered CIF ARA costs of about 180 US$/t, equivalent to 143 /t 42. The international pellet trade is based on long-term supply contracts so it guarantees some stability on prices but as the growth in volume increase more price volatility is expected 43. The interaction of the wood pellet sector with other wood-based bioenergy sectors as well as with traditional forest industries or new ones (e.g. biomaterials) will mainly depend on geographical and temporal scales. The demand of pellets could have impact on land related issues, biodiversity and climate change (GHG emissions) in different ways. Depending on a long list of issues the relation between the traditional markets and the new pellet industry could be complementary, substitutive or competitor Impact in the past years A first consequence of the introduction of the pellet mills is the increase in biomass consumption. The amount of biomass used in the US South pellet mills increased from 2 Mt in 2012 to 4 Mt in , 30, 60 % of the feedstock being pulpwood (45 % softwood and 15 % hardwood) and the remaining 40 % mill residues and it is expected that the share of pulpwood feedstock will continue to increase 45. The geographical distribution of the pulp and paper industries (and panel industries) and the pellet mills is key on the potential impacts that might occur given the feedstocks transport constraints. At present it is observed that wood sourcing areas of pellet mills and paper mills could overlap to some extent at the regional level despite the fact that this has to be assessed at the local level. There might be other reasons than pellet production why the rebound of pulpwood stumpage prices has been observed in last years. The wood paying capacity of the pellet industry is typically lower than that of pulp and paper or panel mills, but it might become higher due to climate change policies which could allow higher fuel prices in the bioenergy industry (e.g. due to increased CO 2 certificate prices in the EU) Anticipated trends in the future Many of potential impacts and their extent depend on the magnitude of the demand and respective supply responses, taking into account the specific location of industries. It has to be kept in mind that timber supply is quite inelastic so sourcing woody feedstocks in a sustainable way takes time. Both domestic demand from various industries, including the overall bioeconomy, and demand for pellet exports are expected to significantly increase. Regarding prices, the international pellet trade is based on long-term supply contracts so it guarantees some stability on prices. 42 Fritsche U., Iriarte L. (2014): Biomass Policies Task 2.4: Sustainable Imports; Cost supply curves for medium- to longer-term potentials for sustainable biomass and bioenergy (pellets, biomethane, liquid biofuels) imports to the EU-27; forthcoming. 43 WPAC (2012): Market data and trends from Argus conferences. Wood Pellet Association of Canada 44 Pöyry (2013): Biomass Sourcing Strategies. Non-Technical Challenges of a Company Intending to Build a Demonstration/Flagship plant. 45 Abt K.L. et al. (2014) Forthcoming: Draft. Effect of policies on pellet production and forests in the US South. 26

27 5.4. Conclusions and recommendations European demand of wood pellets from the US South deems unquestionable in the coming years but the amount and pace of growth will be determined by policy decisions in the EU. If ambitious estimates up to 21 Mt pellets by 2020 (Pöyry 2014) were materialized, this would imply a total relevant demand in comparison with the feedstock consumption of the traditional forest industry in the US Southeast (77 Mt od /a by the pulp, paper and panel mills and 9 Mt od /a by the energy industry). The trend of traditional forest industry and the readiness of other industries within the bioeconomy framework will dictate to a great extent the availability of feedstocks for the wood-pellet sector. Federal and State US policies will determine the domestic demand and hence the availability of resources for pellets to export (to EU), given that domestic consumption would be preferred to international trade. Relevant displacement and competition between the pellet industry and the pulp and paper sector for feedstocks has not been observed yet. In the longer term if the medium to higher levels of projected pellet production capacity expansion (8 to 20 Mt) are realized by 2020 there will be increased competition among sectors and displacement might occur. The pace of growth and supply responses will be key factors for this. The feedstocks prices are expected to continue increasing, although there are several variables playing a role, such as the demand, including the associated sustainability criteria, and the competition, generated by the inelastic response of the demand and supply sides 45. Synergies between the traditional forestry operations and new forestry techniques as well as between the traditional wood markets and bioenergy markets are deemed achievable in the long term. Nevertheless, the short term perspective should not be forgotten and measures to avoid negative and unintended effects on ecosystems and markets should be put in place. Given the long-term effects of forest policies, careful planning is needed. It is necessary to acknowledge forest ownership to better understand real biomass availability and mobilization as well as potential impacts on forest management. Policy makers should take precautionary approaches when uncertainties about impacts, e.g. on biodiversity and climate, exist and encourage research to provide sound answers to open questions. Forest regulations towards Sustainable Forest Management in the US might seem weak from the EU perspective. This reinforces the necessity to promote mechanisms to assure that woody biomass procurement is in accordance with the principles of SFM and that (EU MS) sustainability criteria are fully met. Additional mechanisms to BMPs are needed to protect biodiversity 46 although it is unlikely to happen since the US South culture is decidedly pro landowner rights 47. There are several uncertainties 45, including: 46 Evans J.M. et al. (2013): Forestry Bioenergy in the Southeast United States: Implications for Wildlife Habitat and Biodiversity 47 Fledderman R. (2014): personal communication with Robert Fledderman; MWV; May-June

28 How increased feedstocks prices might affect land use changes (natural forests to pine plantations or agricultural lands to pine plantations). How the sustainability criteria might affect the inventory available (and costs). The effects of prices on biomass mobilization (e.g. forest residues) and the viability of traditional timber users. All in all, and aiming to make the most of this incipient market, decision-makers should consider short and long-term cross-cutting policies aiming to capture the complexity of the inter-linked systems and promoting the most efficient development. 28

29 6. Conclusions from the case studies With current discussions on indirect effects of biofuels, and the aim to broaden feedstocks to non-food biomass, policies are trying to put focus on biofuels from waste, residues and lignocellulose materials, so called advanced biofuels. Next to the general biofuel incentives, these biofuels are getting extra support through specific promotion mechanisms. Examples are the double-counting mechanism for advanced biofuels in the EU, and the specific targets for advanced biofuels in the US. The double counting mechanism in the Renewable Energy Directive, which was intended to promote advanced biofuels in the EU, has merely incentivised the use of used cooking oils and animal fats for biodiesel, a relatively mature and inexpensive biofuel in relation to other biofuels. For market parties this was a very cost-effective way to reach their obligations, but it hardly contributed to technological advances. More specific promotion mechanisms will be needed to achieve that. Similar story in the US, where targets are set in the Renewable Fuels Standard (RFS2), with specific mandated volumes for renewable fuels, advanced fuels, biobased diesel and cellulosic biofuel. The growth of cellulosic biofuels has clearly stayed below expectations, and in the past 4 years, the ambitious subtarget for cellulosic biofuels was consistently reduced by EPA. Imports of Brazilian sugarcane ethanol (recognised as advanced biofuel by US authorities) have partly compensated for the underperformance of cellulosic biofuels. The question is whether current promotion mechanisms are the right ones to stimulate further growth of technologically challenging cellulosic biofuels. A clear lesson from the two first case studies is that markets look for the most costeffective options to fulfil mandates. They will preferably focus on proven technologies and cheap feedstocks. To stimulate the development and deployment of real technology challenging biofuels, a different policy approach is needed. Another lesson is that these promotion mechanisms (mandates, double counting) create economic incentives for market players (often valued in tradable certificates, or the alternative cost of reaching mandates without double counting). When the economic value of the extra incentives is higher than the additional cost of certain technologies, this can give an upward push on prices of the concerned feedstocks, and this also increases risks of fraud. One lesson is that overincentivising / overcompensation of additional costs through certain promotion mechanisms should be avoided. On the other hand a good tracing and verification system becomes very important, but is not evident, specifically for materials imported from all over the world. Differences in policy implementation between countries/regions (i.e. double counting mechanism between EU Member States, and different policies towards advanced biofuels between the US and Brazil) makes certain markets more attractive, which leads to trade to these markets. This can induce trade inefficiencies, create displacement effects (displace existing applications in sourcing regions), drive up prices of existing applications, and the carbon impact of trade and displacement (leakage) can also be substantial. Policies should keep a close eye on these effects and in principle a better aligning of policies between countries would be preferred. 29

30 The last two case studies (straw and wood pellets) are more prospective when it comes to their use for advanced biofuels. As mentioned, the real challenging advanced biofuel technologies are not really stimulated through the current promotion mechanisms. We tried to describe what has already happened with these feedstocks on energy markets, and what lessons we can learn when demand for these feedstocks increases in future. The use of residues from agriculture (e.g. straw) for the production of energy can play a role in the transition towards a more renewable energy supply, both for stationary bioenergy, and in time, also for advanced biofuels. However, sustainability issues have to be considered along the entire provision chain as they affect the resource and energy potential, as well as the achievable contribution to climate mitigation. Straw plays an important role in the humus balance of soils. For this reason not the complete technical straw potential is available. Some of the straw must be left scattered on the agricultural land to prevent nutrients from being permanently extracted from the soil. This share strongly depends on the local condition. Sustainability criteria need to safeguard that agricultural soils are not overexploited. The trend of traditional forest industry and the readiness of other industries within the bioeconomy framework will dictate to a great extent the availability of woody biomass for energy both for stationary energy and for advanced biofuels. Synergies between the traditional forestry operations and new forestry techniques as well as between the traditional wood markets and bioenergy markets are deemed achievable in the long term. Nevertheless, the short term perspective should not be forgotten and measures to avoid negative and unintended effects on ecosystems and markets should be put in place. Given the long-term effects of forest policies, careful planning is needed. It is necessary to acknowledge forest ownership to better understand real biomass availability and mobilization as well as potential impacts on forest management. Sustainable forest management will be key for further mobilization of woody resources, while also safeguarding forest ecosystems and avoiding negative carbon impacts. All in all, and aiming to make the most of this incipient market, decision-makers should consider short and longterm cross-cutting policies aiming to capture the complexity of the inter-linked systems and promoting the most efficient development. The development of advanced bioenergy technologies (incl. straw) has to be based on stable political frame conditions. Especially for the European biofuel sector specific targets for the time frame beyond 2020 should be defined by EU policy makers. The stabilization of the market will be one of the most important tasks for future years in order to create a basis of trust for the development of biomass-using technologies. 30

31 1

32 Coordinating author Luc Pelkmans VITO Contributing authors Chun Sheng Goh, Martin Junginger, Ravindresingh Parhar Copernicus Institute, Utrecht University Emanuele Bianco Alessandro Pellini Luca Benedetti GSE Study accomplished under the authority of IEA Bioenergy Task 40 Published in August 2014 Conditions of Use and Citation All materials and content contained in this publication are the intellectual property of IEA Bioenergy Task 40 and may not be copied, reproduced, distributed or displayed beyond personal, educational, and research purposes without IEA Bioenergy Task 40's express written permission. Citation of this publication must appear in all copies or derivative works. In no event shall anyone commercialize contents or information from this publication without prior written consent from IEA Bioenergy Task 40. Please cite as: Pelkmans et al Impact of promotion mechanisms for advanced and low-iluc biofuels on biomass markets: Used cooking oil and animal fats for biodiesel (case study). IEA Bioenergy Task 40. August Disclaimer This report was written for IEA Bioenergy Task 40 Sustainable Bioenergy Trade. While the utmost care has been taken when compiling the report, the authors disclaim any legal liability or responsibility for the accuracy, completeness, or usefulness of any information contained herein, or any consequences resulting from actions taken based on information contained in this report. 2

33 Impact of promotion mechanisms for advanced and low-iluc biofuels on markets: Used cooking oil and animal fats for biodiesel August 2014 Coordinating author: Luc Pelkmans (VITO) Co-authors: Chun Sheng Goh (UU) Martin Junginger (UU) Ravindresingh Parhar (UU) Emanuele Bianco (GSE) Alessandro Pellini (GSE) Luca Benedetti (GSE) 3

34 Table of contents Table of contents IV List of Figures and tables V List of Acronyms VI 1. Introduction Background Scope of the study Scope of this report 8 2. Double counting advanced biofuels in the EU Renewable Energy Directive Implementation of double counting biofuels in the EU Definitions Promotion mechanisms for advanced biofuels in the Netherlands, UK and Italy Double counting mechanism in the Netherlands Promotion mechanisms for advanced biofuels in Italy Promotion mechanisms for advanced biofuels in the UK Volumes of used cooking oils and fats for biodiesel Volumes of used cooking oils and animal fats for biodiesel in the Netherlands Volumes of used cooking oils and animal fats for biodiesel in Italy Biofuel quantities Role of used cooking oils and animal fats in biodiesel Emerging trade patterns and sourcing regions Biodiesel from UCO Biodiesel from Animal fats Volumes of used cooking oils and animal fats for biodiesel in the UK Prices evolutions Prices in the Netherlands Price evolutions in Italy Used cooking oils Animal fats Prices in the UK Traditional applications and impact on these markets Impact on other markets in the Netherlands Impact on other markets in Italy Used cooking oils Animal fats Alternative uses for UCO in the UK Outside the EU Critical issues and risks Lower efforts towards advanced biofuel technologies Reduced physical volumes of biofuels on the markets Risk of fraud and challenges in verification Conclusions and lessons 45 Annex A: 47 Summary of interviews on UCO & AF in the Netherlands 47 Annex B: 50 Tables of biofuels and biodiesel in Italy 50 Overall biofuels 50 Biodiesel from UCO 50 Biodiesel from animal fats 51 4

35 References 53 List of Figures and tables Figure 1. Price development of bio-tickets of liquid biofuels (in euros per bio-ticket) 15 Figure 2. Trade balance of oils and fats mixtures* and other animal fats for the Netherlands 18 Figure 3. Biodiesel consumed in the Netherlands in by feedstock and country 4 19 Figure 4. Mass balance for oils and fats flows in the Netherlands in 2010 (dry content) 20 Figure 5. Mass balance for oils and fats flows in the Netherlands in 2012 (dry content) 21 Figure 6. Distribution of biofuels in Italy in Figure 7. Distribution of biofuels in Italy in Figure 8. Origin of the raw materials and of the production of biodiesel for Italy in Figure 9: Origin of the raw materials and of the production of biodiesel for Italy in Figure 10. Raw materials of Italian (feedstock and production) biodiesel in Figure 11. Origin of the raw materials and of the production of biodiesel from UCO for Italy in Figure 12. Origin of the raw materials and of the production of biodiesel from UCO for Italy in Figure 13. Origin of the raw materials and of the production of biodiesel from AF for Italy in Figure 14. Origin of the raw materials and of the production of biodiesel from AF in Italy in Figure 15. Main countries of origin for UCO reported under the RTFO in million litres. 29 Figure 16. Evolution of UCO, tallow, UCOME and TME prices in April June Figure 17. Evolution of vegetable oil prices, delivered in the Netherlands 31 Figure 18. Price of sustainable used cooking oils in Italy 32 Figure 19. Prices of food commodities and UCO [ /ton] 33 Figure 20. Price of animal fats for livestock use 33 Figure 21. Price of beef tallow for industrial use 34 Figure 22: Consumption of oils and fats for different purposes in the Netherlands 36 Figure 23. Uses of category 3 fats 38 Figure 24. Uses of category 1 & 2 fats 39 Figure 25. Category 3 animal fats - typologies 39 Figure 26. Evolution of biofuel consumption in Germany 42 Figure 27. Evolution of biofuel consumption in the UK 42 Table 1. Implementation of double counting waste derived biofuels 10 Table 2. Overview of double counting biofuels in EU Member States, 11 Table 3. Feedstocks for biodiesel in Italy in Table 4. Feedstocks for biodiesel in Italy in Table 5 ktons of biofuels in Italy in Table 6 ktons of biofuels in Italy in Table 7. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2012 (tons) 50 Table 8. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2013 (tons) 51 Table 9. Origin of the raw materials and of the production of biodiesel from animal fats for Italy in Table 10. Origin of the raw materials and of the production of biodiesel from animal fats for Italy in

36 List of Acronyms ABP AF BTL CIC DfT DME EC EU FAME FOB Gcal GHG GJ HVO IEA iluc ISCC ktoe kton OS PVO RED RFS RTFC RTFO TME TSE UCO UCOME US Animal by-products Animal fat Biomass-to-liquid Biofuel immission certificate, certificati di immissione in consumo (italy) Department for transport (uk) Di-methyl ether European commission European union Fatty acid methyl ester Freight on board Giga-calories Greenhouse gas Giga joule Hydrotreated vegetable oil International energy agency Indirect land use change International sustainability and carbon certification Kilo tonne oil equivalent 1000 metric tonnes Obligated subject (for biofuel obligation system in italy) Pure vegetable oil Renewable energy directive (2009/ec/28) Renewable fuels standard (us) Renewable transport fuel certificate (uk) Renewable transport fuel obligation (uk) Tallow methyl ester Transmissible spongiform encephalopathy Used cooking oil Used cooking oil methyl ester United states 6

37 1. Introduction 1.1. Background With current discussions on indirect effects of biofuels (the indirect land use change or iluc debate ), and the aim to broaden feedstocks to non-food biomass, policies are trying to put focus on biofuels from waste, residues and lignocellulose materials, so called advanced biofuels with low iluc impact. Next to the general biofuel incentives, these biofuels are getting extra support through specific promotion mechanisms. Examples are the doublecounting mechanism for advanced biofuels in the EU, and the specific targets for advanced biofuels in the US. While technologically challenging lignocellulosic ( 2 nd generation ) biofuels are developing slower than expected, markets so far seem to have focused on cheaper options, using waste and residues or cheap feedstocks in more conventional biofuel technologies to take advantage of these extra incentives. Typical examples are used cooking oil or animal fats which are used for biodiesel production in the EU, or sugarcane ethanol to fulfil advanced biofuels targets in the US. However well these policy measures intended to be, some of these may create unintended effects. These promotion mechanisms induce market movements and also trading of specific biomass and biofuel types. Other applications relying on these (residue) materials - traditionally very cheap feedstocks - may be impacted by this, both in terms of available volumes, and in terms of feedstock prices Scope of the study In this study, some typical cases are presented where promotion mechanisms for advanced biofuels have had an impact on markets and trade, or may be anticipated to impact markets and trade in the future. The study focuses on some concrete cases. The selected cases are: 1. Used cooking oils and animal fats for biodiesel: impact of the double-counting mechanism for advanced biofuels in the European Renewable Energy Directive on market prices and trade flows, analysed for the Netherlands and Italy. 2. Sugarcane ethanol: impact of the sub-targets for specific advanced biofuels in the US Renewable Fuels Standard (RFS2), where sugarcane ethanol is classified as advanced biofuel. This has had a clear impact on prices and trade patterns between Brazil and the US. The other two are more prospective cases, where we can learn from a stimulated demand for straw or woody biomass in the past (for stationary bioenergy). With the introduction of advanced biofuel technologies (based on lignocellulosic feedstocks), these feedstocks may experience an additional demand for biofuels production (also stimulated by specific promotion mechanisms such as double counting): 3. Crop residues (straw) for bioenergy: straw may play an important role for advanced biofuels in the future. In countries such as Germany, Denmark or Poland, this is an emerging feedstock for energy and biofuels. There are already some experiences we 7

38 can take into account from the promotion of straw for stationary energy, e.g. in Denmark. 4. International trade of US wood pellets for bioenergy in the EU: Renewable Energy promotion in certain EU Member States is causing considerable trade flows from the US to the EU. There is clear that there are interactions with existing wood markets and forestry practises. In the future there may be additional effects when demand for cellulose-based biofuels enters these markets. For each case, the specific relevant promotion mechanisms in place, volume and price evolutions of the specific feedstocks, emerging trade patterns and impact on other applications/markets are discussed. Impacts can be increased competition or additional pressure to ecosystems; however, it may also induce new possibilities and synergies for certain markets. Potential future impacts are also anticipated, e.g. on straw or woody biomass when advanced biofuel technologies get more mature. The case studies themselves are available as separate reports. All reports are available at: Scope of this report This report contains the first case study on used cooking oils and animal fats which are qualified as advanced biofuels in European countries. The study focuses on the cases of the Netherlands and Italy, with minor coverage on the UK. 8

39 2. Double counting advanced biofuels in the EU 2.1 Renewable Energy Directive According to the Renewable Energy Directive 1 (RED) the share of renewable energy in the transport sector must rise to a minimum of 10% in every European Member State in While electric vehicles can contribute to this target, the main share is expected to be covered by biofuels. The Directive aims to promote only biofuels which fulfil certain sustainability criteria, i.e. they need to generate substantial greenhouse gas (GHG) savings if compared to fossil fuels emissions, and they should not cause negative impacts on land use in terms of biodiversity and carbon stock. The use of waste, residues, non-food cellulosic material and lignocellulosic material for the production of biofuels is supported as a favourable alternative to traditional agricultural commodities-based feedstocks. In order to stimulate the use of such feedstocks, the RED foresees that biofuels from these feedstock types can be counted double towards the renewable energy in transport target (RED, Art.21). In practice countries can fulfil their target with half the amount of biofuels, and when applied to fuel distributors, they can be allowed to blend only half of the biofuel into fossil fuel in order to reach their blending obligations if the respective biofuel was produced from waste, residues or lignocellulose. This incentive is widely known as double counting. On 17 October 2012, the EC published a proposal to adapt the Renewable Energy Directive and the Fuel Quality Directive to limit global land conversion for biofuel production, and raise the climate benefits of biofuels used in the EU (the iluc proposal) 2. The proposal would cap the contribution of food crop based biofuels towards the 10% renewable energy in transport target to 5%, increase the greenhouse gas performance thresholds for new installations, and include additional benefits for advanced (low-iluc) biofuels. Biofuels from specific feedstocks could even be quadruple counted. The proposal is still highly debated, several amendments can be expected. The exact cap on food-crop based biofuels is a point of debate, as well as the potential application of iluc factors, and which feedstocks could be entitled to have multiple counting. The quadruple counting mechanism will probably be abolished; double counting will stay, but following a positive list of feedstocks. 2.2 Implementation of double counting biofuels in the EU The Renewable Energy Directive allows double counting in biofuels support mechanisms, but there is no uniform measure provided by the European Commission to implement the double counting mechanism on Member State level. Member States have implemented different measures in the market and applied different definitions to determine which feedstocks are eligible for double counting. Table 1 is a small selection of non-uniform implementation taken from (epure, 2013) (however the measures may have changed after the time of writing). 1 Directive 2009/28/EC of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC 2 Proposal for a Directive amending Directive 98/70/EC relating to the quality of petrol and diesel fuels and amending Council Directive 93/12/EC and amending Directive 2009/28/EC on the promotion of the use of energy from renewable sources [COM(2012) 595] 9

40 Table 1. Implementation of double counting waste derived biofuels 3 DK FR DE HU IT NL ES UK UCO x x x x x x x Animal fat cat. I x x x x x? x Animal fat cat. II x x x? Animal fat cat. IIII x Molasses residues? x??? x means eligible for double counting,? means unclear, blank means not eligible The main support policies implemented in EU Member States are 4 : - Substitution obligations, requiring fuel distributors to put a certain amount of biofuels (% share of transport fuel) to the market. o Art.21 biofuels can be counted double towards this target (not always implemented by Member States) o Different Member States have coupled this with certificates to demonstrate compliance. These certificates can be tradable, i.e. the obligated party pays another party for certificates showing he has put a certain volume of biofuels on the market. o In practice there should be a penalty for non-compliance. - Tax reduction for biofuels compared to fossil fuels o Some countries still apply tax reduction for biofuels. In some cases there is a differentiated tax for Art.21 biofuels. The main biofuels applied under the double-counting mechanism are: - biodiesel (methyl ester) from used cooking oils and animal fats, - HVO (hydrotreated vegetable oil) from used cooking oils and animal fats, - biomethane from digestion of organic waste, manure or sludge Some advanced technologies are emerging; most of them are still in demonstration or precommercial production; so far their contribution to the transport biofuel targets is marginal: - bio-ethanol from lignocellulose material, such as straw or woody biomass (in demo, IT) - bio-methanol from crude glycerine (NL) - bio-dme from black liquor (SE) - Fischer-Tropsch diesel (BTL) from gasified woody biomass Table 2 shows an overview of European countries which have significant volumes of double counting biofuels in their transport fuel consumption. The other EU member states have no or very limited amounts of double counting biofuels. 3 epure (2013). Double counting, half measures: Study on the effectiveness of double counting as a support for advanced biofuels. Commissioned by epure and carried out by Meo Carbon Solutions, March B. Kampman et al. (2013). Bringing biofuels on the market - Options to increase EU biofuels volumes beyond the current blending limits. Study commissioned by the European Commission, DG Energy. CE Delft, July

41 Table 2. Overview of double counting biofuels in EU Member States 5,6 ktoe total biofuels * (in 2012) United Kingdom Principle biofuels for double counting Mostly UCO & animal fat (AF) biodiesel Germany Mostly UCO & AF biodiesel, some biomethane Italy Mostly UCO & AF biodiesel Netherlands** (102 ) 194 (131 ) 319 (384) Mostly UCO & AF biodiesel and HVO; fractions of bio-methanol (from glycerine) and biomethane Sweden Important share of bio-methane (78 ktoe); HVO (from UCO & AF) share is growing; some DME and cellulosic ethanol France Mostly UCO & AF biodiesel Situation in relation to trade Large import dependency Moved from exporter of UCO & AF, to importer of biofuels of these feedstocks Large import dependency Large importer of UCO & AF; exporter of biodiesel of these feedstocks Bio-methane is domestic; HVO mostly imported Since 2013 the double counting share is limited to 125 ktoe, leading to UCO exports Importer of UCO & AF, exporter of HVO From 2011 Spain limited the amount of UCO/AF biofuel for double counting. Reduced domestic market led to exports. Finland Mostly HVO from UCO & AF Spain n.a Mostly UCO & AF biodiesel; marginal fraction of cellulosic ethanol Ireland Mostly UCO & Increasing imports AF biodiesel Greece Mostly UCO & Domestic market AF biodiesel Hungary Mostly UCO & Domestic market AF biodiesel Austria No domestic Important production of UCO consumption of & AF biodiesel (80 ktoe/yr); double counting all exported to neighbour biofuels countries TOTAL EU * physical volumes, without double counting applied ** Numbers in bracket represents numbers taken from Dutch Emission Authority (NEa) 7. NEa does not report real physical volumes, but the volumes that are claimed in a certain year to fulfil the obligation. 5 MS (2013). Second progress report on the development of renewable energy, pursuant to Article 22 of Directive 2009/28/EC. Separate report of the 27 EU Member States on the years Available on 6 Eur ObservER (2013). Biofuels Barometer July

42 There are several reasons for a difference between real physical volumes and volumes that are claimed; the most important ones are these two: (1) For the national renewable energy obligation for transport it is allowed to have more physical deliveries in one year and to compensate less deliveries in a later year. This freedom reduces the costs. NEa includes these administrative transfers in the data for chapter 3 in their report. However, for international energy statistics and the related RED reporting such administrative transfers do not exist; (2) Biogas that is claimed for fulfilling the renewable energy obligation for transport (about 3% of total physical biofuel delivery in 2012) is usually not based on a physical delivery of biogas to transport but to a combination of a physical delivery of natural gas to transport and a certificate that proves that somewhere in the national natural gas grid a company injected upgraded biogas into the grid. This is a legal procedure to fulfil the obligation for renewable energy for transport. However, for international energy statistics and the related RED reporting such administrative transfers do not exist. Overall more than 90% of double counting biofuels in the EU are based on used cooking oils and animal fats. When looking at the reported volumes of double counting biofuels in the EU Member States, the Member States can be divided in three groups: 9 countries with substantial markets, also relying on trade (in terms of feedstock and/or biofuel), 6 countries with a (small) domestic market, 13 countries where no double counting biofuels have been reported. Countries like the UK, the Netherlands, Finland and Ireland put a clear focus on double counting biofuels, filling more than half of their biofuels target with these types of biofuels, thereby clearly relying on EU and international markets for acquiring the necessary feedstock. It would be out of scope of this study to make a complete analysis of feedstocks used for double counting in the whole EU. In this study we have analysed the markets for used cooking oils and animal fats in the Netherlands and in Italy, and we will refer to a study done by Ecofys in 2013 for the UK Market Definitions Used Cooking Oils (UCO) are oils and fats that have been used for cooking or frying in the food processing industry, restaurants, snack shops and households. UCO can be collected and recycled to be used for other purposes. UCO can originate from both vegetable and animal fats and oils. Animal Fats are fats from slaughtered animals that are rendered into a variety of products. Animal fats can be general fats and tissues, or be rendered from internal organs, bones, heads, and to a small extent from hides or skins. Animal fats are part of the wider group of animal by-products (ABPs). 7 NEa Report: Naleving jaarverplichting 2012 hernieuwbare energie vervoer en verplichting brandstoffen luchtverontreiniging. Available at: 8 Ecofys (2013) G. Toop et al. Trends in the UCO market. Study commissioned by the UK Department for Transport. November

43 Animal by-products are products of animal origin mostly not intended for human consumption, such as heads, skins, horns, blood and bones. However, a small percentage of the highest quality animal fats and some bones if processed into gelatine are used for human consumption. Animal by-products can be classified by degree of quality, from high to low: Animal fats intended for human consumption. Category 3 materials are low risk materials. It includes parts of animals that have been passed fit for human consumption in a slaughterhouse but are not intended for consumption, either because they are not parts of animals that we normally eat (hides, hair, feathers, bones etc.) or for commercial reasons. Category 3 material also includes former foodstuffs (waste from food factories and retail premises such as butchers and supermarkets). Catering waste, including domestic kitchen waste is category 3 material. Category 2: animal fats that can be used for soil enhancement and for technical purposes, such as oleochemical products and special chemicals, as well as cosmetics. Examples of this category fats include manure and digestive tract content, (parts of) animals that have died from other causes than by being slaughtered for human consumption, including animals killed to eradicate an epizootic disease; Category 1 material is the highest risk, and consists principally of material that is considered a TSE risk, such as Specified Risk Material (those parts of an animal considered most likely to harbour a disease such as BSE, e.g. bovine brain & spinal cord). These materials must be disposed of by incineration or processing (pressure rendering) followed by incineration. They are not allowed to enter the human or animal food chains. The three categories of ABPs were introduced by EU Regulation 1774/2002 (EC, 2002) that lays down health rules on animal by-products not intended for human consumption and were confirmed by the EU Regulation 1069/2009. If products of different categories are mixed, the entire mix is classified according to the lowest category in the mix. Before animal slaughtering, a veterinary inspection takes place. If no signs of diseases are found, the animal fats will be further processed with a large portion of animal fats being classified as category 3 fats. After the veterinary inspection, some animal body parts (head, skin, hair, blood, placenta and manure) are removed from the carcass, leaving only: meat, fats, tissues, internal organs, horns/feet and bones. Except for the meat, the remaining parts are then rendered into various products including tallow and protein meal. 13

44 3. Promotion mechanisms for advanced biofuels in the Netherlands, UK and Italy 3.1 Double counting mechanism in the Netherlands The double counting mechanism was implemented in the Netherlands already in It is described in paragraph 6 of the Ministerial Order for Renewable Energy in Transport (the new order of 2011 replaced the order of 2009). Only raw materials that cannot be used for products of a higher value than for generating electricity or heat, composting or using the lignocellulosic part as animal fodder, are eligible for double counting. Should a particular raw material have an alternative application, then a market analysis must be used to prove that there is an excess of this material available, before it may become eligible for double counting. 9 These biofuels are counted double for the annual obligation of renewable transport fuels. For example, a company only needs to sell 2.5% double-counted biofuels to fulfil the standard its target commitment of 5%. To prove that the biofuels are eligible for double counting, companies must include the information accompanied by a verification statement issued by inspection bodies in the annual reports to the Dutch Emission Authority (NEa). The verification protocol for the double counting of biofuels should be used by the inspection bodies. This protocol includes basic rules, procedures and guidelines for the verification of biofuels counted double. The process consists of two phases: (i) gather information from the producer/suppliers, visit the production site, and draw up a verification plan (ii) actual audit and random checks with reports. More information is available on the RVO website. 10 Bio-tickets If the obliged parties have a surplus in blending (exceeds mandatory level), they can 'administratively allocate this surplus to the coming year or trade this surplus with other obliged parties so that they can use for meeting their blending requirement. This surplus is traded in the form of bio-tickets. In fact, bio-tickets need to be submitted to the authorities by fuel distributors to demonstrate compliance to the renewable transport fuel obligation. However, the amount of transactions is not publicly available. The trade of bio-tickets can be done with (i) direct contact with owners of bio-tickets, (ii) through industry associations such as VNPI or NOVE, (iii) through a broker like STX Services. For double counted biofuels, the factor for double counting has to be indicated on the bio-ticket. It is not allowed to split it into two single tickets. 11 The NEa may impose a penalty order if a registered party fails to comply with these regulations, as well as administrative fine in the event of contravention. Also, the NEa may increase a registered party s annual obligation for a given calendar year by the amount by which that party fell short of its obligation to place biofuel on the Dutch market in the preceding year. 10 However it is not publicly known about the value of fine. Note that the values in Figure 1 do not correspond to the price paid to the biofuel producer, but the value after delivery, including margins of trader / shipper, (possibly) intermediate and filling station. The sharp fall in 2010 is due to the retrospective effect in late 2009 on double counted biofuel (i.e. when the regulations on double counting came into force). As a 9 Ministerial Order for Renewable Energy in Transport (2011) Section 6 and Annex IV. Available at: %20Regulations%20on%20Renewable%20Energy%20in%20Transport%20-%20stcrt _EN.pdf 10 RVO (2014) Double counting biofuels. Available at: 11 NEa (2014) Dutch Emission Authority. Available at: 14

45 result, prices fell sharply in In 2011, 2012 and 2013, the mandatory blending percentage went up. As a result, the parties had less surplus and therefore less tickets to sell. Figure 1. Price development of bio-tickets of liquid biofuels (in euros per bio-ticket) Source: Groengas.nl 12 * STX Services publishes a weekly overview of the used biodiesel and ethanol ticket prices. 3.2 Promotion mechanisms for advanced biofuels in Italy Since 2007 Italy promotes biofuels by means of a quota obligaton system 13. According to this system, the obligated subjects (OSs), namely the parties who release for consumption gasoline and diesel to be used for motor transport, have to mix them with a well-established amount of sustainable biofuels. The obligation, until 2013, was calculated on the basis of the calorific value of the fossil fuels released in the previous year, while from 2014 is based on the fossil fuels released in the current year. The biofuel s quota to be mixed increased over time; for 2014 the level is 4.5%. All kinds of biofuels can be applied to the mechanism. OSs can also fulfil the obligation buying the so-called biofuel immission certificates ( Certificati di Immissione in Consumo - CICs), issued by GSE 14 to the operators that actually release biofuels on the market. A CIC proves the release of 10 Gcal (~1toe) of biofuels. The price of a CIC in 2013 was about 400/450. Failure to fulfil the obligation by the OSs implies the payment of a penalty of a value between 600 and 900 /CIC depending on the extent of the failure. CICs banding As mentioned above, a CIC generally proves the release of 10 Gcal of biofuels; anyway, there are two exceptions to this rule: - 8 Gcal Bonus: Biofuels produced in the European Union from European food crops are awarded with one CIC every 8 Gcal. The same incentive is recognized if the OS releases any biofuel in mixtures in which the share of biofuels is equal or higher than 25% by volume. From July 2014, the 8 Gcal bonus is no longer valid. 12 Groengas.nl (2013). Biotickets voor groen gas en bio-lng. 13 Relevant Italian Laws: Law 21 February 2014, n.9; Decree 11 December 2013; Law 7 Agoust 2012, n. 134; Legislative Decree 3 March 2011, n. 28; Decree 29 April 2008, n. 110; Decree 23 April 2008, n. 100; Law of 24 December 2007, n GSE: Gestore dei Servizi Energetici S.p.A. is the state-owned company that promotes and supports renewable energy sources in Italy. 15

46 - Double counting Bonus: In Italy the law establishes that the calorific value of the biofuels produced from wastes, residues, non-food cellulosic material, and lignocellulosic material 15 is worth double for the purposes of the calculation of the obligation. In this case, 10 Gcal of biofuels guarantees two CICs (double counting). The law n. 134/2012 states some limitations to the double counting biofuels. In particular, from November 2012: all wastes and residues must come from EU countries as well as the production of biofuels (constraint on the European origin ); biofuel from waste and residues could cover only 20% of the obligation residues allowed for the double counting are: o glycerol waters; o fatty acids from the oil refining; o saponified fatty acids from neutralization of the acid part residual oil; o residues from the distillation of crude fatty acids and glycerol waters; o lubricating oils, vegetable oil derived from fatty acids; o marc and wine lees; o animal fats of category 1 16 The constraint on the European origin and the 20% limit are no longer applied from the beginning of These limitations do not apply to biofuels produced from raw materials not suitable for food production, lignocellulosic material and algae. In the case of double counting, the Italian legislation prescribes that, even using voluntary schemes, certificates of sustainability must contain the same information provided by the Italian National Certification System (including the country of origin of the raw material and the country of biodiesel production), in order to monitor the whole biofuel production chain. Therefore, if a voluntary system does not provide enough information, in order to access to double counting, the certification shall integrate information on the raw material producers, through the national system or other voluntary systems. 3.3 Promotion mechanisms for advanced biofuels in the UK The Renewable Transport Fuel Obligation (RTFO) in the UK supports the government s policy on reducing greenhouse gas emissions from vehicles by encouraging sustainable biofuels. Under the RTFO suppliers of transport and non-road mobile machinery fuel in the UK must be able to show that a percentage of the fuel they supply comes from renewable and sustainable sources. Fuel suppliers who supply at least 450,000 litres of fuel a year are affected. This includes suppliers of biofuels as well as suppliers of fossil fuel. Next to the obligation system, there were also duty differentials. In April 2010 the 20 pence per litre fuel duty differential for biofuels in the UK was stopped. However the duty differential remained in place for a further two years for biodiesel derived from Used Cooking Oil (UCO). Since April 2012 (start of Year 5 of the RTFO), the duty differential has been removed. Since December 2011 UCO-derived biodiesel has been eligible to receive two Renewable Transport Fuel Certificates (RTFCs) for each litre supplied (between December 2011 and March 2012, both support mechanisms for UCO biodiesel were in place) (Ecofys 2013). 15 Biofuel from wastes, residues, non-food cellulosic material, and ligno-cellulosic material according to Article 21(2) of RED 16 From 2014, also animal fats of category 2 can obtain the double counting bonus. 16

47 4. Volumes of used cooking oils and fats for biodiesel 4.1 Volumes of used cooking oils and animal fats for biodiesel in the Netherlands The total volume of biodiesels consumed in the Netherlands in amounted 0.10 million tonnes, 0.29 million tonnes and 0.26 million tonnes respectively in the three consecutive years. 17,18 The nominal share of biodiesel in total Dutch diesel consumption was 4.86% in 2012 a considerable part through double counting. The Dutch biodiesel market is still heavily relying on double counting, as double-counted biodiesel contribute more than 40% of the compliance with the annual requirement of renewable energy in transportation in In other words, the physical amount of biodiesel blended is less than 3.9% in 2012 (if 40% comes from double-counted biofuel, only 20% are physically blended). In addition to UCO and AF, other advanced biofuel pathways have not entered the transport fuel stream in the Netherlands in considerable quantities, except methanol produced from crude glycerine (about 4% of the total compliance) (NEa, 2014). Figure 2 shows the trade balance of oils and fats mixtures, which is assumed to represent the trade flows of UCO. The trade flows of other animal fats are also included as a comparison. Germany has been the largest trade partner of the Netherlands in terms of UCO volume. However, in terms of net import, Belgium, UK and the US are among the biggest suppliers. Interestingly, the import of oils and fats mixture from North America as well as Asia has grown remarkably from In 2009, the volume of these trade flows was negligible. In the biofuel sector, a large share of biodiesel consumption comes from double counting, particularly domestic UCO and tallow from Germany. As shown in Figure 3, in 2012, a significant amount of biodiesel made of UCO was also imported from Spain and the US. Note that for the year 2011, it is unclear whether the Unknown category includes UCO or not, but more than 80% of this category was counted double. This double counted Unknown diminished in The Dutch UCO & AF market is closely linked to the German market. The prices in both markets determine the supply and flow of UCO & AF. The demand in Germany has grown substantially in the past few years. 19 Figure 4 and Figure 5 show the flows of UCO & AF among other oils and fats streams in the Netherlands in 2010 and Compared to 2010, a relatively large amount of UCO & AF has been processed to biofuels, however only a small percentage was being consumed domestically. This shows that the Netherlands has become a net exporter for both single- and double-counted biodiesel. 17 Goh CS, Junginger M, Faaij APC (2014) Monitoring sustainable biomass flows in a bio-based economy: General methodology development. Biofuels, Bioproducts, and Biorefining. 8(1): p Goh CS, Junginger M (2013) Sustainable biomass and bioenergy in the Netherlands: Report Netherlands%20-%20Report% pdf 19 Biofuelsdigest (2013) German biodiesel producer benefiting from RED s double-counting. August 14, Available at: 17

48 ktonnes Import Export Import Export Import Export Others (other animal fats) Germany (other animal fats) Others Asia Canada US Other European countries France UK Belgium Germany Figure 2. Trade balance of oils and fats mixtures* and other animal fats for the Netherlands 20 * category vetmengsels, dierlijk, dierlijk / plantaardig Interview with a Dutch oils and fats expert (hereafter Expert II ): (see Attachment 3 for the interview script). The amount of UCO/AF collected in the Netherlands is estimated to be 60 ktons per year. This amount fluctuates and is not stable the whole year. There are approximately 50 to 75 companies that collect UCO. Only a few of these companies also process the UCO and make it ready for further use. Only two recycling companies in The Netherlands produce biodiesel (Note: there is also companies that only collect and trade UCO/AF). Interview with a Dutch UCO & AF collector (hereafter Expert I ): Upon request, the name of the collector remains anonymous (see Attachment 1 for the interview script). The company collects UCO and AF mainly from the Netherlands and its neighbouring countries like Belgium, Germany and Luxembourg. They also import from other European countries, e.g. Finland and Spain. The collected volume is approximately 3 ktons per month (about 36 ktons annually), remaining stable in the past few years. The peak is usually in January, when a huge amount of UCO & AF are collected from Oliebol sellers. Oliebol is a type of Dutch snack that is mainly consumed during the time of Christmas and New Year. During the winter when the average temperature is around 10 C the collected fats are solid and thus not that easy to collect. The collected UCO & AF are sold directly to Dutch and foreign based technical companies. There is no mediator in between. These companies process the materials to bio-fuels and also animal feed. 20 MVO (2013) Statistics Year Book 2012 (only in Dutch). Available at: US/Default.aspx 18

49 Figure 3. Biodiesel consumed in the Netherlands in by feedstock and country 4 Note: Tiny streams are omitted. Others implies the feedstock is known to NEa but reported at aggregated level. 19

50 Figure 4. Mass balance for oils and fats flows in the Netherlands in 2010 (dry content) Source: Goh et al,

51 Figure 5. Mass balance for oils and fats flows in the Netherlands in 2012 (dry content) Source: Goh et al,

52 4.2 Volumes of used cooking oils and animal fats for biodiesel in Italy From 2012, GSE is entitled to issue the CICs and to collect information from the obligated subjects, through self-declarations, about biofuels released in Italy. Data included into the self-declarations derive from the sustainability certificates. GSE stores the collected data in a database that was used to carry out the following analyses (GSE, 2014). The year 2012 was the first with the new system of self-declarations and sustainability certification into force. Since it was a start-up period, the certification schemes provided less detailed information about the chain of custody of the biofuels than in the following year (i.e.: European Union or Not European Union as country of origin, or Unknown for feedstock if no banding was required). Until November 2012, raw materials used to produce double counting biofuels could be defined in the sustainability certificates generally as wastes or by-products. Therefore, in for 2012 definition in Table 3, the self-declaration contained the following feedstock definitions are used: unknown undefined wastes, undefined unknown by-products and undefined food crops. Starting from 2013, after the end of the start-up phase, operators have only the possibility to define the origin of the raw materials from EU Countries as from European Union in general Biofuel quantities The total quantity of biofuels released in Italy passed from 1583 ktonnes in 2012 to 1433 ktonnes in Meanwhile, the double counting biodiesel quantity dropped from 380 ktonnes to 129 ktonnes in one year. This is attributable to the special limitations to double counting biofuels into force throughout 2013 in Italy and to the accurate controls on the correctness of the information gathered. The following figures show the quantities of biofuel released in Italy, considering biofuel typology and CIC banding. Tables are available in Annex B. HVO Bio-ETBE Bio-ethanol Biodiesel Figure 6. Distribution of biofuels in Italy in 2012 Source: GSE (2014) ktons Non-sustainable biofuels Double counting biofuels Biofuels of European origin Biofuels in 25% mixture Other sustainable biofuels 22

53 PVO HVO Bio-ETBE Bio-ethanol Biodiesel Figure 7. Distribution of biofuels in Italy in 2013 Source: GSE (2014) ktons Non-sustainable biofuels Double counting biofuels Biofuels of European origin Biofuels in 25% mixture Generic biofuels Role of used cooking oils and animal fats in biodiesel The following tables shows the feedstocks for biodiesel consumed in Italy in 2012 and Table 3. Feedstocks for biodiesel in Italy in 2012 Source: GSE (2014) Feedstock kton ktoe Rapeseed Palm Soy UCO Animal fat Other by-products and waste Undefined food crops Undefined byproducts Undefined waste Unknown Total Und. waste 4% Unknown 25% Und. byproducts 10% Rapeseed 6% Palm 8% Und. food crops 32% Soy 3% UCO 6% Animal fat 2% Other byproducts and waste 4% Due to the large amount of raw materials defined as unknown in 2012, it is not possible to know exactly the trend of UCO and animal fat biodiesel in that year. Data show that the use of UCO biodiesel decreased in 2013, following the trend of the double counting biodiesel in general. Possibly this was a consequence of the introduction of the constraint on the 23

54 Production European origin, into force throughout 2013 and partly also in It is expected that volumes of UCO biodiesel will increase again in Table 4. Feedstocks for biodiesel in Italy in 2013 Source: GSE (2014) Feedstock kton ktoe Rapeseed Palm Soy UCO Animal fat Other Unknown 3 3 Total UCO 5% Animal fat 4% Soy 7% Palm 36% Other 6% Unknown 0.25% Rapeseed 42% Emerging trade patterns and sourcing regions The GSE database on biofuels released in Italy allows to know the origin of the raw materials and the countries where the biodiesel production facilities are located. In this overview we will focus on biodiesel. In 2012, 1417 ktons of biodiesel were released in Italy; in 2013, this amounted 1310 ktons. Figure 8 and Figure 9 show the countries of origin of the feedstock and of the biodiesel s production sites in 2012 and Other non EU Other EU Extra EU IN ES IT EU Unknown ktons Raw materials origin Unknown EU Extra EU Indonesia Netherlands Argentina France Italy Germany Spain Other EU Other Non EU Figure 8. Origin of the raw materials and of the production of biodiesel for Italy in 2012 Source: GSE (2014) 24

55 Production As mentioned above, in 2012, due to the start-up period of the sustainability certification scheme there was a lack of information (possibility to report unknown ), which did not allow to monitor the market of biodiesel properly data are clearer than the 2012 data, with less volumes of biofuels classified as unknown. In 2013, Indonesian palm oil represented a significant share of the raw materials used to produce biodiesel sold in the Italian market, followed by German rapeseed oil. Other (Non EU) Other (EU) FR AT BE NL ID ES DE IT ktons Raw material origin Indonesia Germany France UE Italy Argentina United K. Malesia Australia Ukraine Spain Paraguay Figure 9: Origin of the raw materials and of the production of biodiesel for Italy in 2013 Source: GSE (2014) Soy 14% Other waste 7% Fatty acids 19% Other by-product 6% Rapeseed 3% UCO 22% Animal fat 29% Figure 10. Raw materials of Italian (feedstock and production) biodiesel in 2013 Source: GSE (2014) 25

56 Production Production Italian biodiesel (considering both feedstocks and production) represented in 2013 only 4.8% of the total biodiesel released, with a production of 63 ktons. Figure 10 shows how these are distributed: animal fats and UCOs were the most used raw materials in the national biodiesel production, reaching more than half of the total production. In general, only 17% of the biodiesel produced in Italy came from dedicate crops Biodiesel from UCO IT EU DE NL ES ktons Raw materials origin European Union Netherlands Spain Italy Austria Figure 11. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2012 Source: GSE (2014) HU BE CZ AT NL DE IT ES ktons Raw material origin Austria Italy France Netherlands Spain European Union Other EU Figure 12. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2013 Source: GSE (2014) 26

57 Production UCO biodiesel produced in Spain was the most sold in Italy in Unfortunately, the country of origin of a large part of the feedstock used in Spain is uncertain because it was defined generally as European Union (see in Table 8. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2013 (tons)annex B). This generic origin concerns over 41% of the total UCO biodiesel. Biodiesel from Italian UCOs grew from about 2 ktons to almost 14 ktons in one year, becoming the second most common feedstock (as seen on Figure 12) used in Italy to produce biodiesel. An effect of the constraint on the European origin for the double counting is that no UCO biodiesel is declared as coming from outside the EU. in Annex B shows that the UCO biodiesel market involves a large part of European countries (at least 13 countries) Biodiesel from Animal fats The verified Italian production of AF biodiesel has grown from 3 to 26 ktons in a year: the national and EU policies created a new interesting market for animal fats of category 1: in fact, about 18 ktons of biodiesel has been produced from this kind of waste in Italy. Figure 14 shows a very bustling market, involving over 15 countries in the EU: for example, Italian animal fats are sold in Austria for the production of biodiesel that is imported in Italy and vice versa. The generic origin European Union is less relevant than in the UCO sector, covering only 7% of total AF biodiesel. AT NL Unknown IT EU ktons Raw material origin European Union Italy Unknown Germany United Kingdom Hungary Figure 13. Origin of the raw materials and of the production of biodiesel from AF for Italy in 2012 Source: GSE (2014) 27

58 Production NL CZ ES AT IT ktons Raw material origin Italy Austria Germany Spain Unknown (UE) Belgium Ireland Other EU Figure 14. Origin of the raw materials and of the production of biodiesel from AF in Italy in 2013 Source: GSE (2014) (German production excluded because negligible) 4.3 Volumes of used cooking oils and animal fats for biodiesel in the UK Figure 15 shows total UCO biodiesel volumes reported since the start of the RTFO in April The reported years run from 15 April until 14 April the next year. UCO biodiesel volumes have increased significantly since Years 1 and 2, with particularly high volumes reported in Year 4 ( ). In year 5 and 6, volumes have been reduced to levels somewhat below year 3. For comparison, biodiesel from tallow (animal fat) is reported around million litres in total, around half from the UK, the rest from other European countries. As shown in the Figure, around 30% of the UCO originated from the UK, 30% from other European sources and 40% from outside Europe (most from the USA). The share of non- European sources is clearly growing. In year 6 the UCO originates from over 50 countries worldwide (RTFO, 2014). The very large volume of UCO reported to be of Dutch origin in Years 3 and 4 has decreased markedly in Year 5 after the volume was questioned by the UK Department for Transport (DfT). The decrease may simply be because the volume of UCO from that source has decreased or it may be indicative of biodiesel being traded through the Netherlands and therefore potentially misreported as being of Dutch origin (i.e. mistakenly reporting the origin of the biodiesel or the place of purchase of the biodiesel, rather than the origin of the UCO feedstock itself). The DfT has worked with other Member States and with ECrecognised voluntary schemes to highlight the need to ensure full traceability and chain of custody checks throughout the UCO supply chain back to the origin of the used oil. (Ecofys, 2013) 28

59 Million litres Unknown Rest of World United States Rest of Europe Spain Germany Netherlands United Kingdom 0 year 1 ( ) year 2 ( ) year 3 ( ) year 4 ( ) year 5 ( ) year 6* ( ) Figure 15. Main countries of origin for UCO reported under the RTFO in million litres. Source of the data: Ecofys (2013) & DfT RTFO Biofuel Statistics (2014) (years run from 15 April until 14 April, the next year) * year 6 data are preliminary 29

60 Title 5. Prices evolutions 5.1 Prices in the Netherlands According to a Dutch UCO & AF collector, the prices of the UCO & AF differ markedly, based upon certification, quality, and volume. Different certifications are applied: ISCC-EU certificates for AF like fish oil & ISCC-DE for UCO. The current prices (in Feb 2014) are: 300 /ton for non-certificated UCO & AF, 400 /ton for AF certificated with ISCC-EU, 500 /ton for UCO certificated with ISCC-DE. The historical prices of are not published by the company, however, it is said that the trend is quite stable and does not have significant fluctuations for each categories. On the other hand, Greenea, a broker in Europe specialized in waste-based feedstock and biodiesel, also reported the evolution of UCO, tallow, UCOME and TME prices in the ARA region in April June 2014 as shown in Figure 16. The prices are relatively higher compared to the aforementioned source. The price of tallow cat 1 is much lower compared to UCO; however, the price gap is small when they are converted to methyl esters UCOME ISCC DE UCOME ISCC EU TME cat 1 UCO ISCC DE UCO ISCC EU Tallow cat 1 Palm oil /4/ /4/2014 2/5/ /5/ /5/ /6/ /6/2014 Figure 16. Evolution of UCO, tallow, UCOME and TME prices in April June 2014 Source: Greenea; Indexmundi (palm oil) As UCOME prices are declining at the time of writing, the UCO price level has also dropped significantly. Compared to virgin oil prices in Figure 17, the prices of UCO and AF still remain lower. 30

61 Figure 17. Evolution of vegetable oil prices, delivered in the Netherlands Source of the data: FAOSTAT (2014) Prices are CIF NW Europe for palm and sunflower oil; FOB ex-mill in NL for rapeseed and soy oil 5.2 Price evolutions in Italy Used cooking oils The price of UCO is influenced by several factors, such as 21 : percentage of acidity; percentage of MIU (moisture, insoluble impurities and unsaponifiable matters); quantity delivered and means of transport of the batches. Therefore, the prices presented are for UCO with the following properties: acidity under 5%; MIU under 3%; batches of 25/30 tons delivered with dedicated trucks; no extraneous elements. The price of UCO has risen strongly in the last years. In the nineties, when UCOs was considered as a common waste without an economic value, its price was around ITL/ton ( /ton). Currently, the price of UCO in Italy is around /ton. Sustainable certified UCO, used for the production of biodiesel or to produce electricity in power plants, has a higher price: it reaches /ton considering the UCO certified through the Italian National Certification scheme, which can be used only in Italy, and /ton for UCO certified through ISCC EU, which can be used in all Europe. According to a stakeholder, a large part of Italian certified UCO is sold in the European market (in Austria, Netherlands, Hungary, Bulgaria and Czech Republic) Interview with UCO biodiesel producer (Rome, 2014). Upon request, the name remains anonymous. 22 Interview with UCO collector (Rome, 2014). Upon request, the name remains anonymous. 31

62 /ton Stakeholder (buyer) Collectors average price Figure 18. Price of sustainable used cooking oils in Italy 23 In Figure 18, two different trends of UCOs prices are shown. The blue line indicates the average annual price according to an important biodiesel producer, while the orange line indicates the estimated selling price of regenerated oils according to the collectors. Even if the two lines are a bit different, it is clear that from 2004 to 2011 the price of UCO has doubled. The increase in the UCO price has two main causes: UCOs, during the last twenty years, have been used in various sectors (chemical, energy, building, etc.); it has caused an increase in the demand, which widening the UCO market; The UCO price is strongly influenced by virgin oil such as rapeseed oil or palm oil 24. Figure 19 confirms that the prices of used cooking oil have a trend very similar to that of common oils. The difference remains in the order of /tonne. In relative terms UCO prices are getting closer (40% of virgin oil price in 2004; 70% of virgin oil price in 2013). There is no clear sign that the double counting premium which became operational in has noticeably impacted the market prices. 23 Interview with UCO biodiesel producer (2014) & CONOE (2013): Presentation on Used Cooking Oil market in Italy 24 OILECO (2014): Overview of the UCO market, emerged issues, and possible market outlets to promote. 32

63 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 /ton /ton UCO Rapeseed oil Palm oil Figure 19. Prices of food commodities and UCO [ /ton] Animal fats The below graphs show the evolution of animal fats prices from 2008 until Tallow fat (water max 4%) fat (water max 7%) fat (water max 10%) Figure 20. Price of animal fats for livestock use 25 Source: Interview with UCO biodiesel producer (2014); data on food commodities are from Milan s Chamber of Commerce price database 26 Assograssi (2014): Animal fat price database 33

64 /ton Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 /ton acidity max 2% FAC 3/5 acidity max 3% FAC 5/7 acidity max 3% FAC 7/9 acidity max 4% FAC 9/11 Figure 21. Price of beef tallow for industrial use * FAC is a colour scale used to determine the purity of the tallow. Lower values indicate purer tallow. As figure 20 shows, the price trend of animal fats follows that of virgin oils. There is no clear sign that the double counting premium which became operational in has noticeably impacted the market prices UCO Rapeseed oil Palm oil AF (water max 4%) Beef tallow (acidity max 2%) Figure 22. Prices of food commodities, UCO and animal fats [ /ton] In figure 22, however, it is possible to see an increase in the spread between the prices of the best beef tallow (acidity under 2%) for industrial use and those of the other beef tallows. According to the biodiesel producers, the double counting bonus, started in 2012, fostered the increase of the prices of the best beef tallows. 34

65 5.3 Prices in the UK The UCO market has changed dramatically over the past years, although it is still relatively immature and can be intransparent. The price of UCO naturally increases along the supply chain from the generating source to final UCOME (biodiesel), as the UCO is continuously processed to improve its quality. Some estimations from Ecofys in 2013 on the basis of stakeholder interviews: whereas restaurants sell UCO for a maximum of 300 /ton, small UCO collectors could charge up to 550 /ton for filtered UCO. Larger UCO collectors and melting plants sell purified UCO ready for biodiesel production for /ton (Ecofys, 2013). 35

66 6. Traditional applications and impact on these markets 6.1 Impact on other markets in the Netherlands Before the year 2003, UCO was mainly used as an animal feed ingredient or in oleochemistry. However, in 2003, the EU Animal Byproduct Regulation banned the use of UCO in animal feed due to health reasons. The first alternative use of UCO after 2003 was electricity production in Scandinavia. The Netherlands was one in the first batch of countries to promote the use of UCO for biodiesel, and was the first to implement the double counting measure in It is not known if the use of AF for biofuels production has caused any direct impact on traditional applications, i.e. as animal feed ingredient and other technical use. In terms of volume changes, Figure 22 shows the consumption trend of UCO and AF for different purposes in the Netherlands. The consumption volume of UCO and AF has decreased significantly for animal consumption in 2011 and 2012, however it seems that fatty acid (by-product from oils and fats processing) has filled in the demand gap. On the other hand, since 2011, the volume of UCO and AF consumed for bioenergy production (in the Netherlands only biofuels) has become larger than the total volume of UCO and AF consumed for other uses. Figure 22: Consumption of oils and fats for different purposes in the Netherlands Source: MVO (2014) 36

67 6.2 Impact on other markets in Italy Used cooking oils The consumption of edible oils in Italy is approximately 1,400,000 tonnes per year 27, of which about 20% (280,000 tonnes) becomes used cooking oils: about half of the total quantity is consumed in the household sector and it is difficult to collect after the use; the remaining amount is used in the food industry or in restaurants and it is easier to collect. About 100,000 tons of UCOs are successfully collected in Italy and therefore recycled for other uses. Traditional uses of UCO in Italy are: Production of vegetable lubricants; Production of soaps; Production of fats for industry; Release agents for construction sector; Energy production in bioliquids plants; Biodiesel production. The most recent estimates 28 indicate that around 5800 tons of UCO are burned in two different bioliquids power plants. All UCO used in power plants came from Italy. By comparison, around 400 ktons of palm oil is burned in Italy in similar power plants. The European origin limit imposed on biodiesel from wastes is responsible for the significant import of UCO biodiesel from EU countries (around 45 ktons), but the permission to not explicitly declare the country of origin lead to a loss of information (42% of UCO are generically from European Union ) Animal fats Animal fats have several uses: edible animal fats (as category 3) are largely used in the food industry, such as in the meat manufacturing and for frying, or directly in cooking. Various acids and triglycerides of refined and fractionated fats are used as emulsifiers in the food production. Animal fats are also broadly used as ingredients in feed for livestock animal and pets, in the petrochemical industry (as lubricants, insulators, emulsifiers, etc ) and also in the manufacturing of health care products like soap, perfumes and cosmetics. In 2013 around 17,000 tons of animal fats were used in Italy as bioliquids to produce electricity. The blending obligation (both in Italy and abroad) is the cause of the increase, during the last years, of the demand of all categories of animal fats to produce biofuels. The below graphs show the total production (in tons) of animal fats (referred to the 85% of the Italian producers) from 2008 till 2013, split between the quantity used for biodiesel production and the volumes used for other purposes (food industry, animal feed, petfood, fertilizers, petrochemicals etc.). 27 CONOE (2013): Presentation on Used Cooking Oil market in Italy & OILECO (2013): Daniele Guidi presentation on OILECO final conference 28 GSE (2014). Bioliquids database. 37

68 tons Concerning category 3 fats the quantity used to produce biodiesel doubled in 2010 compared to It continued to grow in 2011, reaching almost 80,000 tons. In 2012, it decreased to about half its value in the previous year. In 2013 the quantity fell to 28,000 tons. 500, , , , , , , , ,000 50, , , ,500 35,500 Figure 23. Uses of category 3 fats Source: Assograssi (2014) 353, , ,000 70,500 78, , , , ,300 35,000 28, Animal fats for biodiesel Other uses Concerning category 1 and 2 animal fats, their use has increased significantly during the recent years, both for biodiesel production and for other uses. As depicted in Figure 24 the quantity of category 1 & 2 fats used in the biodiesel production has grown from negligible quantities in 2008, 2009 and 2010 to tons in 2011 and tons in In 2013, the quantity decreased slightly to tons, following the decreasing trend of raw material. The use, from 2011, of animal fats of category 1 & 2 to produce biodiesel could be due, in part, to the introduction of the double counting for these kinds of animal fats. 38

69 tons tons 80,000 70,000 75,000 67,500 60,000 50,000 40,000 41,200 45,000 45,000 42,000 68,000 61,000 30,000 20,000 41,200 45,000 45,000 36,000 10, ,000 7,000 6, Figure 24. Uses of category 1 & 2 fats Source: Assograssi (2014) Animal fats for biodiesel Other uses The graph below depicts the origin and the quantities of animal fats of category 3 used for biodiesel production from 2008 until The graph shows a growth in the use of lard and multi species animal fats (like beef tallow) to produce biodiesel from 2008 until From 2012, data are available only on multispecies animal fats. Anyway, according to the trading associations in 2012 and 2013 there was a fall in the use of poultry, pig fats and lard to produce biodiesel. 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Multi species animal fats Poultry fats Pig fats Lard Figure 25. Category 3 animal fats - typologies Source: Assograssi (2014) 39

70 6.3 Alternative uses for UCO in the UK UCO can be used for energy production (incineration or biodiesel), for oleochemical products or for the production of animal feed. The latter is mostly prohibited in the EU following the implementation of the Animal By-Products Regulation EC 1774/2002 in October 2004, as a reaction to the BSE scare from 1993 to the early 2000s. Certain high quality sources of UCO are still permitted to be used for animal feed (e.g. from food manufacturers where the oil has been in a controlled environment throughout), although the main alternative use in the EU for UCO now is the oleochemical industry. The oleochemical industry relies on animal fats and UCO for the production of a variety of products ranging from consumer products like shampoo and candles, to plastics and building materials. According to APAG, the European association of the oleochemical industry, the relation between UCO and animal fat used in the industry is 1:9 (i.e. for every 10 tonnes of raw material, 1 tonne is UCO and 9 tonnes is animal fat). The relatively low UCO share is explained by its variable quality, due to the variety of sources from different entities using different vegetable oils. (Ecofys 2013) estimates that 90% of the UCO in the EU-27 is currently used for biodiesel production and 10% is used by the oleochemical industry. If UCO is not otherwise collected, the most common outcome is that it is simply put into the local drainage system or sent to landfill, despite these disposal options being prohibited under UK law. Several stakeholders indicated that most of the additional UCO recovery witnessed over the last few years is from customers (e.g. restaurants, pubs) who used to pour their waste oils into the drains, but are instead choosing to have it collected, in part due to the price they now receive for it from UCO collectors. (Ecofys, 2013) 6.4 Outside the EU The situation with regard to UCO uses outside the EU is completely different, as animal feed production from UCO is allowed in for instance the US and China. In Indonesia, UCO can even be reused as cooking oil for human consumption. The latter is explicitly forbidden in China, but it is reported to happen to a large extent. A black market has emerged and sells simply processed UCO blended with fresh oil back to the restaurants. This so-called gutter oil is a big threat to the health of Chinese consumers and the Chinese government is establishing official UCO collectors who sell their UCO for biodiesel production (Ecofys, 2013). 40

71 7. Critical issues and risks Biofuels from UCO or animal fats can be double counted towards companies obligations, so there is a clear incentive to use these instead of virgin oils (targets can be reached with only half the amount of biofuel). Nevertheless, available amounts are limited, so there may be different issues arising: Lower efforts towards advanced biofuel technologies Reduced physical volumes of biofuels on the markets Inefficient trade and market distortions due to differences in policies between countries Impacts on traditional markets relying on these feedstocks, Risk for unlawfully claiming double counting certain batches of vegetable oil biofuels. 7.1 Lower efforts towards advanced biofuel technologies While the double counting mechanism was intended to support technology innovation (towards more technologically advanced 2 nd generation biofuels), markets have so far focused on mature technologies like biodiesel from UCO & AF, much less on advanced technologies from lignocellulose. UCO and AF biofuels were already part of the biofuel pool before the double counting mechanisms were introduced although to a lesser extent. Although greenhouse gas savings of UCO biodiesel are higher than virgin oil biodiesel, applying promoting mechanisms on UCO and AF does only little to contribute to technology innovation and potential remains limited (in the order of 1% of transport fuel consumption). 7.2 Reduced physical volumes of biofuels on the markets For some countries relying heavily on UCO and AF biofuels, we notice a decrease of the physical amount of biofuels on their markets - although administratively the obligated target is still achieved - because of their shift to double counting biofuels. This also implies that less fossil fuel is displaced when using the double counted UCO biofuel, contributing less to energy security. The following figures show the biofuel volumes in Germany and the UK. The decreasing trend of biofuel consumption is clear, while targets have been constant in the period (6.5% in Germany, 4.5% in UK). Two effects have played: (1) a decreasing trend in transport energy consumption, and (2) a shift to double counting biofuels. 41

72 ktoe ktoe Biofuel consumption in Germany gasoline replaced diesel replaced Figure 26. Evolution of biofuel consumption in Germany Data source: BMF, Biofuel consumption in the UK gasoline replaced diesel replaced Figure 27. Evolution of biofuel consumption in the UK Data source: Biofuels Barometer (2013), RTFO 7.3 Inefficient trade and market distortions due to differences in policies between countries Member States have implemented different promotion mechanisms and incentives. Promotion mechanisms in countries like the UK, the Netherlands, Italy, Finland and Ireland have attracted UCO and AF from other countries (which have less favourable policies). Some are even fulfilling more than half of their renewable fuels target with these types of biofuels. Nevertheless UCO and AF potential is limited (in the range of 1% of transport fuel consumption if based on domestic resources). So these countries clearly rely on EU and international markets for acquiring their feedstock, while other countries (which have less 42

73 favourable policies) may be deprived from an interesting feedstock option for their own market. In addition, uncertainties in policies such as the definition of waste, the eligibility of a feedstock type for double counting and mechanisms to verify the sources have caused confusion in the market. Export regions in America and Asia also implement their own support policies for biodiesel (from UCO), so we should watch out that European incentives are not competing against domestic policies in these regions. This may induce displacement effects and create trade inefficiencies. Moreover, shipping this material to the other side of the world also brings along additional greenhouse gas emissions it is probably more beneficial to improve domestic waste management and processing of UCO in these regions. 7.4 Impacts on traditional markets? Before the year 2003, UCO and AF were mainly used as an animal feed ingredient or in oleochemistry. However, in 2003 the EU banned the use of (most) UCO and AF in animal feed due to health reasons. In terms of volumes large amounts of UCO and AF have become available since The application of UCO and AF for biofuels indeed provides an interesting outlet for these waste products, of which previously much was disappearing into the local drainage system or sent to landfill. It can stimulate efficient collection practices as waste oils have interesting market values. It could also provide an alternative for unhealthy practices (extended use in cooking), e.g. the so-called gutter oil practice in China (to feed processed UCO blended with fresh oil back to restaurants), which is a big threat to the health of Chinese consumers. In the past 10 years, prices for UCO and AF have clearly increased, up to a level slightly below virgin oils. Other applications of UCO and AF mainly in the oleochemical industry, which uses around 10% of UCO resources were also impacted by these price increases. 7.5 Risk of fraud and challenges in verification Double counting has provided incentives for using biofuels derived from certain feedstock (related to the value of tradable certificates). There is a risk for unlawfully claiming double counting for certain batches of vegetable oil derived biofuels (which are supposingly not eligible for double counting). In the past years, we have seen high increases of these types of double counting biofuels, but with difficulty to trace origins of the UCO (especially sourced from outside the country). There were also no uniform mechanisms to distinguish and trace waste-derived biodiesel. When taking away some of the unclarities and implementing stronger tracing and verification procedures, markets seem to decrease (see decrease of double counting biofuels from 2012 to 2013 in Italy, or the sudden decrease of Dutch UCO from 2011 to 2012 in the UK market). Another issue being debated in the past years is the risk of deliberate production of UCO. There is a risk of fraud when the economic value of UCO is higher than virgin oils due to double counting measure that provide extra incentives to use UCO for biofuel production. Since it could be very difficult to trace the origins of the UCO (especially sourced from outside the country), there is a risk of deliberate production of waste and imports of poorly 43

74 checked waste. 29. Both in the Netherlands and Germany, UCO and AF used as biofuel feedstock must be traceable, starting from the origin up to and including the production of the biofuel, and requires ISCC DE certification. Interview with UCO verifier in the Netherlands: Albert Diedering, a UCO verifier from DEKRA (a certification body for a.o. ISCC and RedCert) (see Attachment 2 for the interview script). He mentioned that the price differences only became relevant after Germany implemented the double-counting policy in 2012 (which has led to a much larger demand compared to the Dutch market). He pointed out that the risk of fraud is rather small if the UCO and AF are collected from the food retail industry as they are unable to exploit the price difference - the price difference only exists when a large quantity of virgin oils are purchased at a reduced price. In the Netherlands most of the UCO is gathered at rather small (fast food) restaurants, so the risk is low. The risk of fraud mainly takes place at large scale operations. It is therefore important that verifications carried out at such operations will be thorough and strict. He also mentioned that prices of UCO are mainly determined by the market. The risk of fraud could be higher if the price difference becomes larger between virgin oil and verified UCO. The price of verified UCO will increase when supply is lower than demand. For large scale gathering operations, verification cost has relatively smaller impact. The main problem that DEKRA is facing is the reliability of the certified companies, because some parties may be certified but it is questionable if they have followed the rules, and tracing that is difficult. However, until now (the time of interview conducted) DEKRA did not encounter any fraud with regard to this aspect. Verification bodies in the Netherlands DEKRA Certification BV, Ernst & Young CertifyPoint BV, Control Union, Quality Inspection Services BV Another possible side-effect suggested by an interviewee is the artificial increase of the UCO volume by shortening the lifespan of frying oil in the kitchen. If this is true, the demand of virgin oil for human consumption would increase. However, this is not the case for the Netherlands. As shown in Figure 22, the consumption of vegetable oils has been rather stable in the past 4 years for human, animal and technical consumption, except a substantial increase for biofuel (mainly HVO) production. 29 Tsay M (2012) The Impact of Double Counting Legislation on UCOME & TME. 1st Annual Biofuels Conference Tackling Fragmentation in the International Biofuels Sector. June 28 29, 2012, Amsterdam, The Netherlands. Available at: ntations/maria_tsay.pdf 44

75 8. Conclusions and lessons Producing biofuels from used cooking oil or animal fats provides an interesting outlet for these products, with high greenhouse gas advantage (in comparison to virgin oil biodiesel), on condition that these feedstocks are really waste. Nevertheless, we should take into account that potentials of UCO and AF are limited, and to achieve higher fossil fuel replacement, other biofuel types will still be needed. The double counting mechanism, which was intended to promote advanced biofuels, has so far merely incentivised the use of UCO and AF biodiesel, a relatively mature and inexpensive biofuel in relation to other biofuels. UCO can be fed into normal biodiesel facilities with existing pre-treatment technology which does not incur significant cost compared to virgin oil. For market parties, this was a very cost-effective way to reach their obligations, but it hardly contributed to technological advances. More specific promotion mechanisms will be needed to achieve that. European Member States have implemented different promotion mechanisms and incentives for biofuels. There are large differences in uptake of double counting biofuels (mainly from UCO and AF) between countries. Countries such as the UK, the Netherlands, Finland and Ireland put a clear focus on double counting biofuels, fulfilling more than half of their renewable fuels target with these types of biofuels. Nevertheless, UCO and AF potential is limited (in the range of 1% of transport fuel consumption if based on domestic resources). These countries clearly rely on EU and international markets for acquiring their feedstock, while other countries (which have less favourable policies) may be deprived from an interesting feedstock option for their own market. Harmonized measures in biofuel policies and consistent definitions across Member States are needed to avoid market distortions and trade inefficiencies. Countries which are focusing on double counting biofuels tend to have lower physical amount of biofuels on their markets compared to administrative reporting. This also implies that less fossil fuels will be displaced for using more UCO to fulfil the emission target (the physical blending of UCO biodiesel is only half of the volume of typical biodiesel for the assumed same amount of emission saving), and such strategy contributes less to energy security. Prices for UCO & AF have steadily increased in the past years, from near zero in the 1990s to somewhat below virgin oil prices since , when biodiesel reached significant volumes in the markets. The trend seems to be that they stay somewhat below virgin oil prices, even after introduction of double counting. Before double counting was introduced, UCO & AF were already one of the cheaper solutions to produce biodiesel, and demand from the biodiesel side has increased their prices. However, there is no clear indication that the double counting mechanism has created an extra increase of UCO & AF prices, as the prices are still lower than the prices of virgin oils. It is important to distinguish, trace and verify UCO and AF to reduce the risk of fraud. There have been some inconsistencies in the markets in previous years. A uniform mechanism at EU level is needed for tracing and verification to reduce unclarities. ISCC is frontrunner for double counting verification (mainly focused on the German market). However, the administrative burden for market parties should remain reasonable. 45

76 Demand for second generation biofuels made from waste streams may continue to grow in the EU; however, the expansion of the UCO and AF market is questionable. The limitation mainly comes from the supply side. Some growth may be possible in terms of efficient collection of UCO from the household side. Experts believe that the market for UCO will become more stable in the near future, balancing prices and logistics costs of the collection. Import of UCO from North America and Asia is growing but the potential is unclear, and it seems that the verification of these UCO will be challenging. These regions also implement their own support policies for biodiesel from UCO, so we should watch out that EU incentives are not competing domestic policies in these regions. This may induce displacement effects and create trade inefficiencies. As mentioned, producing biodiesel from waste oils and fats does provide an interesting alternative for unsustainable disposal (drainage, landfill) and unhealthy practices (extended use in cooking). However, the double counting mechanism led to over-incentivising / overcompensation of the additional costs of UCO and AF biodiesel on the market, which can lead to inefficient trade and market distortions, and can create significant risks for fraud. 46

77 Annex A: Summary of interviews on UCO & AF in the Netherlands 1. UCO/AF Collector Date: 7 January 2014 Name: Anonymous Company: Dutch based UCO/AF collector Interviewer: Ravindresingh Parhar Collecting This Dutch based Used Cooking Oil (UCO) and Animal Fat (AF) collector is collecting UCO and AF from the Netherlands and its neighbouring countries like Belgium, Germany and Luxembourg. However they have also imports from other parts of Europe for instance Finland and Spain. The amount of collected UCO/AF is approximately 3 ktons/month and approximately 36 ktons annually. The amount of collected UCO/AF per year is stable. The small differences are in January, when a huge amount of UCO/AF is collected from Oliebol sellers. Oliebol is a Dutch snack that is mainly consumed during the time of Christmas and New Year. During the winter when the average temperature is around 10 0 C the collected fats are solid and thus not that easy to collect. Trade The collected UCO/AF is traded to Dutch and foreign based technical companies. These technical companies process this UCO/AF to bio-fuels and also animal feed. It is assumed that blending of biofuels will reduce GHG emissions by 35%. There is no mediator in between; the fats are sold directly to these processing companies. The price of the UCO/AF fluctuates a lot based upon the quality and amount. The company does have an EU certificate and thus it buys/trades only sustainable products that have a certificate. If the fat is an AF, for example fish oil after verification the AF will get an ISCC-EU certificate. For UCO after verification the license will be ISCC-DE. The price can fluctuate due to these verifications and licenses that are provided to the oils/fats. The current prices are: 0.30/kg for non-certificated UCO/AF 0.40/kg for AF certificated with ISCC-EU 0.50/kg for UCO certificated with ISCC-DE The historical prices of are not published by the company, however it is said that it is quite stable and does not have significant fluctuations. The expectations for the coming years are unpredictable. Verification Dekra, a verification agent is having each three months an extensive investigation. The possibility of fraud is thus very low. The challenge for the coming years is to increase profit and extending the company further during the crisis. The intervieweeis glad that the UCO/AF market is awarded a ISCC-system certificate. 2. UCO/AF Verifier 47

78 Date: 9 January 2014 Name: Albert Diedering Company name: Dekra Netherlands Interviewer: Ravindresingh Parhar Verification Dekra Netherlands is an ISCC- and RedCert certificated UCO/AF Verification Company based in Arnhem, the Netherlands. Their main job is to avoid fraud in the UCO/AF trade. According to the expert there are changes that fraud is being perpetrated in this business as long as the UCO/AF prices are higher than the virgin oils. However, the price difference only exists when a huge amount of virgin oils are purchased for a reduced price. The UCO/AF that Dekra verified are coming from local fast food restaurants and thus the risk of fraud is minimal, since these parties will not be able to exploit the price differences. Dekra does visit these fast food restaurants or even UCO/AF collectors to verify the UCO and AF. Since the UCO/AF collectors collect mainly from these fast food restaurants again the risk of fraud is rather small with the argument that buying cheap virgin oil is only feasible if a huge amount is being purchased. Furthermore Dekra did not experience any fraud on the UCO/AF market regarding the trade. Market In the Netherlands the double-counting policy has existed before the EU agreement. Price differences became relevant since Germany implemented the double-counting policy. The verification process may have an impact on the UCO/AF prices: the costs of verification will grow and thus UCO/AF will become more expensive, and this will result in a higher risk of fraud. Legal cross border trading within the EU is only possible if the products are certified with an ISCC or RedCert certificate. The main problem that Dekra is facing is the reliability of the certified companies because some parties may be certified, but it is questionable if they have followed the rules and tracing that is difficult. 3. Oils and fats sector organization (Advisor) Date: 10 April 2014 Name: Anonymous Company name: Expert working for the oils and fats sector. Interviewer: Ravindresingh Parhar Collecting In The Netherlands 50 to 75 companies collect UCO. The amount of UCO collected per year is estimated to be 60 ktons per year approximately in the Netherlands. This amount does fluctuate during the year. In January due to the Oliebollen a peak is noticed. There are a few recycling companies in the Netherlands that collect the UCO and make biofuels from it (Rotie vetveredeling makes their own biofuels with Biodiesel Amsterdam and UCO Kampen does this as well).fuel suppliers like Shell and Texaco only buy the biofuel and don t produce themselves. Fuel suppliers buy the biofuel from biodiesel companies and blend this with their fossil fuels. 5.25% of biofuels should be present in the fuels for 2014 (blending). A few 48

79 years ago the market price of cleaned UCO on average was between per tonne ( /kg). Verification The government (Ministry of Infrastructure and Environment) cannot prove frauds in the sector thus the claims are just rumours. It is not cost beneficial for the UCO collectors/producers to use virgin oils as used oils since this will cost the company themselves more money. The national implementation of the legislation on biofuels (RED) requires full tracking and tracing making the possibility for fraud really low. Germany is a frontrunner with legislation requiring full tracking and tracing of biofuels from by-products by (national legislation based on the Renewable energy Directive requiring ISCC DE certification). Challenges Challenges on the market are to extend the business. To increase the supply, UCO from households needs to be collected. Currently collection of household UCO is being developed in The Netherlands. This could also be extended to other Member States. The production of animal fats is a completely different sector with its own properties. Double counting is implemented only in a few EU states. In Germany for example double counting is only on biofuels from UCO and not on biofuels from AF. The German authorities don t allow AF biofuel to be used to fulfil the obligations under the RED. This decision may be influenced by parties that are also involved in using AF as a feedstock. Market Before the year 2003 UCO was mainly used as an animal feed ingredient. However in 2003 the EU Animal By-product Regulation banned the use of UCO in animal feed due to health safety reasons. The first alternative use of UCO after 2003 was electricity production in Scandinavia. The European commission is not clear about UCO if it is a waste product or an animal by-product. If it is classified an animal by-product than complex import procedures apply. If classified as waste import procedures are easier. Future Neste Oil is a Finnish company that produces NExBTL, a biofuel that is fully compatible with mineral diesel. Neste Oil owns plants in Finland, Singapore and Rotterdam. Their process is based on hydrotreatment of vegetable oils or animal fats in order to produce alkanes. See NExBTL can be mixed with mineral diesel in any blend, or can be used as a pure biofuel. Policy makers should avoid market distortion when developing new policies. Policies should also be based on sound science. If science didn t reach a mature stage more research is needed before drafting new legislative proposals. From a resource efficiency perspective waste products like UCO should be collected separately to recycle it and use it as a feedstock. Furthermore using biomass will support the transition to a biobased economy. 49

80 Production sites Annex B: Tables of biofuels and biodiesel in Italy Overall biofuels Table 6 ktons of biofuels in Italy in 2013 Source: GSE (2014) Gcal Biodiesel /CIC Table 5 ktons of biofuels in Italy in 2012 Source: GSE (2014) Gcal/CIC Biodiesel Bioethanol Bio- ETBE Hydro-treated vegetable oil Non-sustainable biofuels - 1,36 0,02 3,06 - Double counting biofuels 5 379,74-2,94 - Biofuels of European origin 8 152,58-102,42 - Biofuels in 25% mixture 8 0, Other sustainable biofuels ,10 3,15 44,34 10,01 Total ,06 3,17 152,76 10,01 Bioethanol Bio- ETBE Hydrotreated vegetable oil Pure vegetable oil Non-sustainable biofuels - 0,02 0,01 3, Double counting biofuels 5 128,81 0,02 1, Biofuels of European 8 494,74 1,37 97, origin Biofuels in 25% mixture 8 0, Other sustainable biofuels ,91 0,89 6,57 10,97 1,81 Total ,80 2,27 107,85 10,97 1,81 Biodiesel from UCO Table 7. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2012 (tons) Source: GSE (2014) Origin raw material European Union Netherlands Spain Italy Austria Total ES NL DE EU IT Total

81 Production sites Production sites Table 8. Origin of the raw materials and of the production of biodiesel from UCO for Italy in 2013 (tons) Source: GSE (2014) Origin raw material EU IT ES AT DE CZ BE NL SK FR HU PL SI RO TOT Spain Italy Germany Netherlands Austria Czech Rep Belgium Hungary Total Biodiesel from animal fats Table 9. Origin of the raw materials and of the production of biodiesel from animal fats for Italy in 2012 Source: GSE (2014) Origin of the raw material EU Italy Un-known Germany United Kingdom Hungary Total European Union Italy Unknown Netherlands Austria Total

82 Production sites Table 10. Origin of the raw materials and of the production of biodiesel from animal fats for Italy in 2013 Source: GSE (2014) Origin raw material IT AT DE ES EU BE IE NL FR HU UK LT SK CZ SI PL TOT IT AT ES CZ NL DE Total

83 References Assograssi - Associazione nazionale dei produttori di grassi e proteine animali. Italian national association of producers of animal protein and fats. Biofuelsdigest (2013). German biodiesel producer benefiting from RED s double-counting. August 14, CONOE (2013). Consorzio Obbligatorio Nazionale di raccolta e trattamento Oli e grassi vegetali e animali Esausti. Mandatory National Consortium for collecting and processing used animal and vegetable fats and oils. - Presentation on Used Cooking Oil market in Rome, Italy. EC (2002). Animal By-Products Regulation. Regulation (EC) No 1774/2002 of 3 October 2002 laying down health rules concerning animal by-products not intended for human consumption. EC (2009). Directive 2009/28/EC of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC EC (2012). Proposal for a Directive amending Directive 98/70/EC relating to the quality of petrol and diesel fuels and amending Council Directive 93/12/EC and amending Directive 2009/28/EC on the promotion of the use of energy from renewable sources [COM(2012) 595] Ecofys (2013). Toop G. et al. Trends in the UCO market. Study commissioned by the UK Department for Transport. November epure (2013). Double counting, half measures: Study on the effectiveness of double counting as a support for advanced biofuels. Commissioned by epure and carried out by Meo Carbon Solutions, March Available at EU Member States (2013). Second progress report on the development of renewable energy, pursuant to Article 22 of Directive 2009/28/EC. Separate reports of the 27 EU Member States on the years Available on Eur ObservER (2013). Biofuels Barometer Systèmes solaires le journal des énergies renouvelables N 216. July FAOstat (2014). Food and agriculture organisation of the United Nations Statistics Division. Goh C.S,. Junginger M., Faaij A.P.C. (2014). Monitoring sustainable biomass flows in a biobased economy: General methodology development. Biofuels, Bioproducts, and Biorefining. 8(1): p

84 Goh C.S., Junginger M. (2013). Sustainable biomass and bioenergy in the Netherlands: Report Study carried out in the framework of the Netherlands Programme Sustainable Biomass. November Greenea. Broker specialized in waste-based feedstock and biodiesel. Groengas.nl (2013). Biotickets voor groen gas en bio-lng (in Dutch). Stichting Groen Gas Nederland. September GSE - Gestore dei Servizi Energetici S.p.A (2014). Biofuels database. IenM (2011). Regulations laid down by the State Secretary for Infrastructure and the Environment on 2 May 2011, regarding the use of energy from renewable sources in transport, Section 6 and Annex IV. Dutch State Secretary for Infrastructure and the Environment. May Indexmundi (2014). Commodity prices. Kampman B. et al. (2013). Bringing biofuels on the market - Options to increase EU biofuels volumes beyond the current blending limits. Study commissioned by the European Commission, DG Energy. CE Delft, July MVO (2013). Statistics Year Book 2012 (only in Dutch). Dutch Product Board for Margarine, Fats and Oils. NEa (2014). Biobrandstoffen - dubbeltelling (in Dutch). Dutch Emission Authority. OILECO (2013). Guidi D. OILECO Initiatives in Italy. Presented at the OILECO Final Conference, Madrid, 13 December OILECO (2014): Overview of the UCO market, emerged issues, and possible market outlets to promote. RTFO (2014). Biofuels Statistics. UK Department for Transport. RVO (2014). Dutch Biofuels Policy - Double counting biofuels. Netherlands Enterprise Agency (RVO). Tsay M. (2012). The Impact of Double Counting Legislation on UCOME & TME. 1st Annual Biofuels Conference Tackling Fragmentation in the International Biofuels Sector. June 28 29, 2012, Amsterdam, The Netherlands. 54

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86 Project coordinator & Chapter author Luc Pelkmans VITO Study accomplished under the authority of IEA Bioenergy Task 40 Published in August 2014 Conditions of Use and Citation All materials and content contained in this publication are the intellectual property of IEA Bioenergy Task 40 and may not be copied, reproduced, distributed or displayed beyond personal, educational, and research purposes without IEA Bioenergy Task 40's express written permission. Citation of this publication must appear in all copies or derivative works. In no event shall anyone commercialize contents or information from this publication without prior written consent from IEA Bioenergy Task 40. Please cite as: Pelkmans et al Impact of promotion mechanisms for advanced and low-iluc biofuels on biomass markets: Trade of ethanol between Brazil and the US. IEA Bioenergy Task 40. August Disclaimer This report was written for IEA Bioenergy Task 40 Sustainable Bioenergy Trade. While the utmost care has been taken when compiling the report, the authors disclaim any legal liability or responsibility for the accuracy, completeness, or usefulness of any information contained herein, or any consequences resulting from actions taken based on information contained in this report. 2

87 Impact of promotion mechanisms for advanced and low-iluc biofuels on markets Trade of ethanol between Brazil and the US August 2014 Project coordinator and chapter author: Luc Pelkmans (VITO) 3

88 Table of Contents Table of Contents 4 List of Figures and tables 5 List of Acronyms 5 1. Introduction Background Scope of the overall study Scope of this report 7 2. Promotion mechanisms for advanced biofuels in the US US Renewable Fuel Standard Four classes of biofuels RVO and RIN Adjustments to the biofuel mandates Low Carbon Fuel Standard (LCFS) in California VEETC and ethanol import tariff Brazilian biofuel policy Volumes and prices of ethanol traded between Brazil and the US Ethanol production volumes in the US and Brazil Trade between the US and Brazil Prices RIN (Renewable Identification Numbers) Main conclusions Critical issues and risks Impact of promotion mechanisms 20 References 22 4

89 List of Figures and tables Figure 1: US RFS2 biofuel targets. Source of the data: EPA 9 Figure 2: Fuel ethanol production volumes in Brazil and the US (data source: F.O.Licht s & EIA) 14 Figure 3: Ethanol imports and exports from the US, and trade with Brazil. 15 Figure 4: Total imports and exports of ethanol from Brazil. 16 Figure 5: Evolution of US ethanol commodity prices (CBOT) and traded ethanol price from Brazil (FOB) 17 Figure 6: Evolution of RIN prices for corn ethanol (D6), biodiesel (D4) and advanced biofuels (D5) 18 Figure 7: Quarterly bilateral ethanol trade between Brazil and the US in , with and without exports through the Caribbean countries 20 Table 1: Summary of EISA provisions for renewable fuel classification (source: US-EPA) 8 Table 2: Waivers for biofuel mandates in (in million gallons), and achieved biofuel volumes in the US market (total generated RINs). Source of the data: EPA 11 List of Acronyms CBOT CIF ARA E10 E15 E85 EC EISA EPA EU FFV FOB GHG GJ GTIS IEA iluc ktoe kton LCFS Mt MW MWh OPIS PJ RED RFS RIN RVO TWh US VEETC Chicago Board of Trade Cost, insurance and Freight, delivered to the Amsterdam, Rotterdam and Antwerp region Gasoline with 10% ethanol Gasoline with 15% ethanol 85% ethanol and 15% gasoline European Commission Energy Independence and Security Act (US) Environmental Protection Agency (US) European Union flexible fuel vehicles freight on board greenhouse gas Giga Joule Global Trade Information Services International Energy Agency indirect land use change kilo tonne oil equivalent 1000 metric tonnes Low Carbon Fuel Standard (California) million metric tonnes MegaWatt MegaWatt-hour Oil Price Information Service (US) Peta Joule Renewable Energy Directive (2009/EC/28) Renewable Fuels Standard (US) Renewable Identification Numbers (US) Renewable Volume Obligations (US) TeraWatt-hour United States Volumetric Ethanol Excise Tax Credit (US) 5

90 1. Introduction 1.1. Background With current discussions on indirect effects of biofuels (the indirect land use change or iluc debate ), and the aim to broaden feedstocks to non-food biomass, policies are trying to put focus on biofuels from waste, residues and lignocellulose materials, so called advanced biofuels with low iluc impact. Next to the general biofuel incentives, these biofuels are getting extra support through specific promotion mechanisms. Examples are the doublecounting mechanism for advanced biofuels in the EU, and the specific targets for advanced biofuels in the US. While technologically challenging lignocellulosic ( 2 nd generation ) biofuels are developing slower than expected, markets so far seem to have focused on cheaper options, using waste and residues or cheap feedstocks in more conventional biofuel technologies to take advantage of these extra incentives. Typical examples are used cooking oil or animal fats which are used for biodiesel production in the EU, or sugarcane ethanol to fulfil advanced biofuels targets in the US. However well these policy measures intended to be, some of these may create unintended effects. These promotion mechanisms induce market movements and also trading of specific biomass and biofuel types. Other applications relying on these (residue) materials - traditionally very cheap feedstocks - may be impacted by this, both in terms of available volumes, and in terms of feedstock prices Scope of the overall study In this study, some typical cases are presented where promotion mechanisms for advanced biofuels have had an impact on markets and trade, or may be anticipated to impact markets and trade in the future. The study focuses on some concrete cases. The selected cases are: 1. Used cooking oils and animal fats for biodiesel: impact of the double-counting mechanism for advanced biofuels in the European Renewable Energy Directive on market prices and trade flows, analysed for the Netherlands and Italy. 2. Sugarcane ethanol: impact of the subtargets for specific advanced biofuels in the US Renewable Fuels Standard (RFS2), where sugarcane ethanol is classified as advanced biofuel. This has had a clear impact on prices and trade patterns between Brazil and the US. The other two are more prospective cases, where we can learn from a stimulated demand for straw or woody biomass in the past (for stationary bioenergy). With the introduction of advanced biofuel technologies (based on lignocellulosic feedstocks), these feedstocks may experience an additional demand for biofuels production (also stimulated by specific promotion mechanisms such as double counting): 3. Crop residues (straw) for bioenergy: straw may play an important role for advanced biofuels in the future. In countries such as Germany, Denmark or Poland, this is an emerging feedstock for energy and biofuels. There are already some experiences we 6

91 can take into account from the promotion of straw for stationary energy, e.g. in Denmark. 4. International trade of US wood pellets for bioenergy in the EU: Renewable Energy promotion in certain EU Member States is causing considerable trade flows from the US to the EU. There is clear that there are interactions with existing wood markets and forestry practises. In the future there may be additional effects when demand for cellulose-based biofuels enters these markets. For each case, the specific relevant promotion mechanisms in place, volume and price evolutions of the specific feedstocks, emerging trade patterns and impact on other applications/markets are discussed. Impacts can be increased competition or additional pressure to ecosystems; however, it may also induce new possibilities and synergies for certain markets. Potential future impacts are also anticipated, e.g. on straw or woody biomass when advanced biofuel technologies get more mature. The case studies themselves are available as separate reports. All reports are available at: Scope of this report This report contains the second case study on the role of sugarcane ethanol in the US Renewable Fuel Standard and the impact on ethanol trade flows between US and Brazil. Brazil and the USA are the most important producers, consumers and traders of ethanol. Brazilian ethanol is produced primarily from sugarcane, while the US produces ethanol primarily from maize, but the resulting ethanol products are physically indistinguishable. Until 2010, ethanol trade between the two countries was one direction only (from Brazil to the US). In recent years, we have seen significant volumes of bilateral trade of (physically identical) ethanol between the US and Brazil driven by their different biofuel policies. The following section is mainly derived from existing studies, in particular the report of Meyer (2013) 1, which discussed the phenomenon. 1 S. Meyer, J. Schmidhuber, J. Barreiro-Hurlé (2013). Global Biofuel Trade: How uncoordinated biofuel policy fuels resource use and GHG emissions. FAO ICTSD, Issue Paper48. May

92 2. Promotion mechanisms for advanced biofuels in the US 2.1 US Renewable Fuel Standard The main promotion system for biofuels in the US is the Renewable Fuel Standard (RFS).The RFS 2 is a requirement that a certain percentage of petroleum transportation fuels needs to be displaced by renewable fuels. RFS1 started with the Energy Policy Act of This was amended by the Energy Independence and Security Act (EISA) of 2007, the new renewable fuel standard being known as RFS2. The RFS2 further segmented biofuels in four classes, as displayed in Table 1, and mandated volumes were greatly expanded in comparison to the previous RFS1. The volumes are shown in Figure Four classes of biofuels The four classes of mandates are delineated by fuel type, the reduction in life cycle GHG emissions relative to a base for gasoline or diesel transport fuels, feedstocks and manufacturing process. The mandates (renewable fuel (T), advanced biofuel (A), bio-based diesel (B) and cellulosic biofuel (S)) are not individual compartmentalized mandates, but quantitative minimums nested within the overall renewable fuel mandate. Table 1. Summary of EISA provisions for renewable fuel classification (source: US-EPA) Mandate Minimum Feedstocks, fuels and processes GHG reduction Cellulosic biofuel (S) 60% Derived from cellulose, hemi-cellulose or lignin from renewable biomass (from existing lands in production): dedicated crops, crop residues, planted trees and residues, Bio-based diesel (B) Advanced fuels (A) Renewable fuels (T) algae, yard waste and food waste 50% Distillate replacements produced from: vegetable oil, animal fats, waste grease, animal waste and by-products, excluding co-processing with petroleum 50% All of above and sugar, starch other than maize, bio-based diesel from co-processing with petroleum, butanol, biogas 20% All of above and ethanol from maize starch 2 The RFS1 and RFS2 are amendments to the Clean Air Act, which is the authority under which the RFS1 and RFS2 operate. 8

93 Figure 1. US RFS2 biofuel targets. Source of the data: EPA The cellulosic biofuel (S) and bio-based diesel (B) mandates set minimum quantities of these two types of fuels to be consumed. The overarching advanced fuel (A) mandate is greater than (or equal to) the sum of the cellulosic and bio-based diesel mandates creating an undefined advanced gap for other advanced fuels used to meet the larger advanced fuel mandate. They explicitly include ethanol made from sugarcane and explicitly exclude maize starch ethanol. This advanced mandate is nested in a larger over-arching renewable fuels mandate (T). The nesting creates a renewable fuel gap for which maize starch ethanol qualifies. As they are minimums, over production in each category can be used to meet the larger, less restrictive mandate. That is to say advanced fuels, for example sugarcane based ethanol, blended in excess of the advanced mandate, could be used to satisfy the total renewable fuels mandate, crowding out maize starch ethanol, but the reverse is not true. This creates a hierarchy among the fuels based on the mandate classification while the physical product, in this case ethanol, is indistinguishable. When looking at the actual targets two aspects catch the eye: - Cap on non-advanced biofuels (i.e. corn ethanol). There is an implicit cap on nonadvanced biofuels of 15 billion gallons from Mind that ethanol consumption in 2010 almost reached 13 billion gallons, so the growth margin for corn-based ethanol is very limited. Mind that US gasoline consumption is around billion gallons per year, so about 9-10% of fuel sold as motor gasoline is ethanol, which is close to the E10 blend wall. This implies that growth margin for ethanol overall (including advanced ethanol) is limited, unless E15 or E85 are introduced on large scale. - High expectation for cellulosic biofuels. The mandate foresees a spectacular growth of cellulosic biofuels from virtually nothing in 2009 up to 16 billion gallons in

94 2.1.2 RVO and RIN Renewable Volume Obligations (RVO) and Renewable Identification Numbers (RIN) are the mechanisms the Environmental Protection Agency (EPA) uses to implement the RFS program. RVOs are the targets for each refiner or importer of petroleum-based gasoline or diesel fuel, while RINs allow for flexibility in how each of them may choose to comply. The RVOs are applied to each obligated party's actual supply of gasoline and diesel fuel to determine its specific renewable fuel obligation for that calendar year. Obligated parties must cover their RVOs by surrendering RINs within 60 days after the end of each calendar year. RINs are used for both record keeping and flexibility in meeting the separate RFS targets. Each RIN is a 38- character alphanumeric code assigned to each gallon of renewable fuel that is produced in or imported into the United States. The RIN identifies the highest of the four classifications the renewable fuel can qualify for, the volume and the vintage of production. The wholesale price of the biofuel reflects the embedded value of the RIN. The value of RINs, which derives from the RFS program, provides an economic incentive to use renewable fuels. Once the renewable fuel is blended, RINs can be separated and used for compliance or sold to other blenders to meet their obligation in lieu of their own physical blending, much like a book and claim system. It is possible, and even likely, that each class of RIN will have a different price in the compliance market and so although fuels may be physically identical, at the wholesale level they can have different prices based on mandate compliance. This differentiation through RIN classification of the commodity by process or inputs versus physical characteristics opens the door for arbitrage where a physically identical product is cross shipped between countries or trade is reorganized based on different compliance systems. It is generally assumed that much of the implied advanced gap of the RFS2 would have to be sourced from imported sugarcane ethanol or through additional use of bio-based diesel above its own mandate, as no other competitive fuels currently exist in the United States. The size of the undefined advanced gap is likely to influence the volume of US imports of ethanol from Brazil. (Meyer, 2013) Adjustments to the biofuel mandates There is an annual RFS review process where the Environmental Protection Agency (EPA) may propose waivers compared to the initial targets. The background of a decision to waive targets can be a severe risk of harm to the economy or environment of a state, region or the US, or inadequate domestic supply. The EPA, faced with inadequate productive capacity to meet the cellulosic biofuel mandate as legislated for , was forced to reduce the cellulosic biofuel mandate significantly while choosing to leave the total and advanced mandate in place. The shortfall in cellulosic biofuels coupled with the EPA decision to maintain the other mandates means that the size of the implied undefined advanced gap has grown and even created an extra need for undefined advanced fuels. This prompted an increase of biobased diesel as well as sugarcane ethanol imports from Brazil, and plentiful supplies of maize starch ethanol in the US prompted increased ethanol exports. Table 2 shows the original mandates, the updates from EPA, as well as the achieved biofuel volumes (in total generated RINs). Even the lowered mandates for cellulosic biofuels were not met. The other targets have been met, mostly by an increased use of biobased diesel, and imported sugarcane ethanol. 10

95 In its proposed rule for 2014, EPA lowered the level of the cellulosic biofuel mandate because of inadequate domestic supply, ánd reduced the overall renewables target. The main argument for the reduction of the overall target is that overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in Table 2. Waivers for biofuel mandates in (in million gallons), and achieved biofuel volumes in the US market (total generated RINs). Source of the data: EPA 2010* ** Original mandate Tot. renewable fuels Advanced fuels Biobased diesel Cellulosic biofuel Updated mandate achieved n.a. Original mandate Updated mandate achieved n.a. Original mandate Updated mandate achieved n.a. Original mandate Updated mandate achieved n.a. * 2010 RINs only from July till December ** 2014 targets proposed by EPA; Figures in bold deviate from the original figures; achieved = total generated RINs 2.2 Low Carbon Fuel Standard (LCFS) in California The California Air Resources Board (CARB) has implemented the Low Carbon Fuel Standard (LCFS) which rates individual fuels based on their GHG reduction score and sets a target for the reduction of GHG emissions. The policy requires the fuel to be consumed within California, but the RINs associated with the fuel can still be used to comply with the nationwide RFS2. Renewable fuels can therefore be counted both towards the LCFS and RFS2 as long as the fuel is consumed within the state. Under RFS2 threshold levels, there is no incentive to further improve the GHG reduction once the renewable fuel pathway exceeds the desired mandate. Under the LCFS, in theory, each improvement in the pathway would be accompanied by a larger GHG reduction score which would increase the value of the fuel in California. 11

96 2.3 VEETC and ethanol import tariff The Volumetric Ethanol Excise Tax Credit (VEETC) was created by the American Jobs Creation Act of VEETC expired on December 31, The tax credits included in VEETC were (Gruenspecht, 2013): 45-cents per gallon credit for blending ethanol in gasoline; 10-cents per gallon credit for small producers of ethanol. On top, there was a 54 cent per gallon tariff on ethanol imports, initiated in According to the US government, as it made no sense to give incentives as tax credits to ethanol produced abroad and it was not possible to verify the origin of blended ethanol - the benefit was compensate by the tariff on ethanol imports. This mechanism of ethanol import tariffs also expired end The import tariff on ethanol was waived for Caribbean nations. Much of the ethanol from the Caribbean region between 2005 and 2009 had its origin in Brazil. 12

97 3. Brazilian biofuel policy Brazil is the world's second largest producer of ethanol fuel (after the US) and the world's largest exporter (although the US seems to catch up in the past years). It uses cheap sugarcane as feedstock; the residual cane-waste (bagasse) is used to produce heat and power, which results in a very competitive price and also a low fossil energy input and high greenhouse gas savings. It is therefore qualified as advanced biofuel in the United States, also because it is recognized that emissions due to land use change (LUC and iluc) for sugarcane ethanol are low. In Brazil, ethanol is used in two ways: (1) as octane enhancer in gasoline, in the form of 18 to 25% anhydrous ethanol (minimum mandated by law), (2) as pure ethanol in neat-ethanol engines or flexible fuel vehicles (FFV), in the form of hydrated ethanol. Consumers with FFVs are able to use blender pumps when purchasing fuel and select the ethanol inclusion rate between the policy minimum and pure ethanol based on relative prices of ethanol and gasoline. Since the establishment of the National Alcohol Program (Proálcool) in 1975 ethanol was promoted in Brazil through heavy market intervention including fixed pricing, obligatory purchases and tax reductions on ethanol and dedicated ethanol cars. Minimum blends were established for ethanol-gasoline blending. Meanwhile, ethanol prices have been liberalized along with gasoline and sugar markets, although ethanol still maintained a (state dependent) tax advantage relative to gasoline. It is still required by law that all gasoline should be blended at 18 to 25 percent ethanol inclusion rates. The governments sets the minimum percentage of ethanol blend according to the results of the sugarcane harvest and the amounts of ethanol produced from sugarcane, resulting in blend variations, even within the same year (e.g. in April 2011 the minimum blend rate was reduced to 18%). The shift in supplies available for domestic consumption can occur either through production shortfalls or from increased trade demand. 13

98 4. Volumes and prices of ethanol traded between Brazil and the US 4.1 Ethanol production volumes in the US and Brazil The US and Brazil are the main ethanol producers in the world. In the Brazilian production, four stages can be distinguished: (1) start-up from 1975 until 1984; (2) stabilization between 1984 and 2001; (3) growth from 2003 until 2008; (4) stabilization after The US caught up with Brazilian production in 2005 and has seen a tremendous growth until After 2010 volumes have more or less stabilized because of the cap on corn-based ethanol in the RFS2, as well as the approaching blend wall of E10. Figure 2. Fuel ethanol production volumes in Brazil and the US (data source: F.O.Licht s & EIA) 4.2 Trade between the US and Brazil In the past the US was a net importer of ethanol to fulfil the demand of its domestic ethanol market, most of it coming from Brazil and the Caribbean area (most of which is also Brazilian ethanol). However, since 2010 the US is a net exporter of ethanol, mainly to Canada, the EU, and in 2011 also a considerable amount to Brazil. Since 2011 we see the phenomenon that large volumes of sugarcane based ethanol are imported from Brazil, while also considerable amounts of corn based US ethanol are exported to Brazil. 14

99 Figure 4. Ethanol imports and exports from the US, and trade with Brazil. Source of the data: EIA This new situation can also be seen on the following figure, displaying total ethanol imports and exports from Brazil. While in the 1990s Brazil relied heavily on imports to fulfil its domestic ethanol demand, this situation changed around 2000 and Brazil became the biggest ethanol exporter. Meanwhile, in the past years, exports have more or less stabilized between 2 and 3 billion litres, and in the past years there were even imports of ethanol to Brazil, most actually coming from the US. The question is if this was a one-time phenomenon, or that a trend of bilateral trade was triggered by policy. There are various factors impacting this mutual trade between the US and Brazil: Seasonal fluctuations. Brazilian sugarcane harvest season is between March and November. Unlike corn, sugarcane cannot be stored because it goes bad after a couple of days, forcing mills to process the entire crop while harvesting. Crop yields may vary year by year. Typical examples are the low sugarcane yields in Brazil in 2011 and the draught in the US in 2012 leading to low corn yields was a particular case with a low production in Brazil and the surplus in the US. Crop prices (maize, sugarcane) are related to world markets and may favor one or the other ethanol type. Ethanol market in Brazil: next to pure ethanol distribution, there is a mandated minimum ethanol blending in gasoline, 18-25%, so there is continuous demand for ethanol on the domestic market. The level may be adjusted according to harvest yields and actual ethanol production. In Brazil, the domestic market that is almost inflexible is the market for anhydrous ethanol (used of blending). In theory, because of FFVs, the market for hydrated ethanol is much more flexible. RFS2 targets in the US: the biofuel targets in the US make distinction between advanced and non-advanced biofuels, with separate targets (cap on corn based 15

100 ethanol, minimum target for advanced biofuels). The different biofuel types have different RIN prices. Some changes in US policy, e.g. the ethanol blending credit (0.45$/gallon), and the import tariff of 0.54$/gallon (0.14$/litre) for imported ethanol (waived for Caribbean), both expired end EU market: historically, trade flows (mostly exports from Brazil) were impacted by the European market. The amount exported from Brazil to Europe is relatively small, and the US took over this market in the past years. Figure 3. Total imports and exports of ethanol from Brazil. Source of the data: UNICA 2014, Macedo Prices The following figure shows the price evolutions of ethanol on the US domestic market (CBOT), and the ethanol exported from Brazil (FOB). Before 2009, Brazilian ethanol was considerably cheaper than US ethanol. Prices were comparable in 2009 and 2010 (leading to a disadvantage for Brazilian ethanol with the import tariff). In 2011 and 2012 prices for Brazilian ethanol were even higher than domestic US ethanol. The fact that Brazilian ethanol at that time was still imported to the US, despite that it was more expensive, is a clear sign that these trade flows were policy induced. In 2013, prices were comparable again, this time without import tariff, due to the recovery process in Brazil (e.g. more investments on sugarcane production). 16

101 Figure 4. Evolution of US ethanol commodity prices (CBOT) and traded ethanol price from Brazil (FOB) Source of the data: US: TradingCharts.com (June 2014); Brazil: UNICA (June 2014) RIN (Renewable Identification Numbers) The current mechanism in the US stimulates biofuels according to the RFS2, through Renewable Volume Obligations (RVO) and Renewable Identification Numbers (RIN), which are a kind of tradable certificates having a market price. If RIN prices increase, blenders are encouraged to blend greater volumes of biofuels, based on their abilities to sell both the blended fuel and the separated RIN. If a biofuel is already economical to blend up to or above the level required by the RFS program, such as ethanol was from 2006 through much of 2012, one would expect the RIN price to be close to zero. When the biofuel is more costly than non-renewable fuels but is needed to meet RFS standards or must be blended in greater volumes to be economic, the RIN value should increase to a point at which firms will increase biofuel blending (see biodiesel RINs). Before 2013, Renewable Identification Number (RIN) prices for corn ethanol, which can be used to meet only the overall target for biofuels under the Renewable Fuel Standard (RFS) program, had consistently ranged between $0.01 per gallon to $0.10 per gallon, and were substantially lower than biodiesel RIN prices, which can meet multiple targets. At the start of 2013, corn ethanol RIN prices began to increase sharply, reaching highs around $1.00 per gallon in early March and even higher in the summer of Since then, all RIN prices have stabilized again around 0.3 to 0.5 $/gallon. Ethanol RIN prices are now in the same order (or only slightly lower) than biodiesel and advanced fuel RIN prices. The increase in the ethanol RIN price reflects the market's concern that the rising RFSmandated volumes (released by EPA on 7 February 2013) and the E10 ethanol blend wall will 17

102 contribute to future significant increases in the cost of blending biofuels to meet the RFS statutory volumes. Figure 5. Evolution of RIN prices for corn ethanol (D6), biodiesel (D4) and advanced biofuels (D5) Source: OPIS, University of Illinois In the period advanced biofuel RINs were pricing between 0.40 and 0.80 $/gallon, which was considerable higher than the RINs for corn ethanol. This created an extra incentive of 0.1 to 0.2 US$/litre, also for sugarcane ethanol which is qualified as advanced biofuel. From 2013, this RIN price difference more or less disappeared, although high fluctuations can be noticed. 18

103 5. Main conclusions 5.1 Critical issues and risks Incentives for technologically advanced biofuels in the RFS2 were insufficient for deploying these types of biofuels: Cellulosic biofuel targets in the RFS2 were very optimistic at least in the short to medium term. From the start in 2010, cellulosic biofuel targets have been waived, down to less than 1% of original targets, and even those targets were not met on the market. In , the original advanced biofuel target (of which cellulosic biofuels were part) remained as in the original RFS2, meaning that the gap needed to be filled by other advanced biofuels, i.e. biobased diesel and sugarcane ethanol. So the incentives for cellulosic biofuels do not seem to be sufficient, and have merely promoted more imports of Brazilian ethanol. E10 blend wall creating uncertainty in the fuel markets: Ethanol blending in gasoline in the US on average reaches between 9 to 10%, so in practice, the blend wall of 10% (E10) is reached. There are some efforts to further promote E85 (in flex-fuel vehicles), and also to extend the blend wall to E15 for released gasoline models (in principle this should be possible for a high share of the gasoline fleet). However, there are lots of concerns from vehicle manufacturers and fuel distributors, which also feed into the public. So the blend wall seems to be a practical barrier, which may impede further expansion of ethanol in the US fleet (corn based, sugarcane based, and in particular cellulose based ethanol due to higher production costs and market uncertainties). This creates uncertainty on how to fulfil the RFS mandates, with higher expected costs, and creates fluctuations in the price of RINs. This in its turn creates instability on biofuel markets. Volatility of RIN markets: RIN prices have proven to be very volatile (see Figure 5), which makes it difficult to reach a solid business case for new advanced biofuels (other than commercial ones like sugarcane ethanol or biobased diesel). The uncertainty of the blend wall is an extra barrier for cellulosic ethanol. Cap on corn ethanol creates exports: The RFS2 caps the amount of non-advanced biofuels (i.e. corn ethanol). With production capacity higher than this cap, the US has now become a net exporter of ethanol, with the main partners being Canada, the EU, some Asian countries, but also Brazil in the past 3 years. So in practice, the US is importing sugarcane ethanol to fulfil its advanced biofuel targets, while it exports an excess of corn ethanol. Intra-trade between Brazil and the US: At a certain stage (in 2011), there was a high intratrade between the US and Brazil: the US was importing sugarcane ethanol from Brazil to fulfil its advanced biofuel targets; meanwhile Brazil was falling short of ethanol because of lower sugarcane harvests. Two consequences resulted from this: Brazilian authorities reduced the general blending mandate from 25% to 18% in April 2011, and on the other hand Brazil started to import corn ethanol from the US. This created an intra-industry trade of physically identical but policy differentiated biofuels. This intra-trade of physically identical ethanol incurs additional transportation, adding costs and releasing additional GHG emissions, and therefore moderating some of the anticipated advantages of (advanced) biofuel use. Moreover, substituting Brazilian ethanol (in Brazil) with corn ethanol (having lower greenhouse gas performance) creates a carbon leakage in Brazil. When quantifying the combined effects, through the intra-trade of 2011, around 80-90% of the GHG advantage for sugarcane ethanol was lost, in , this effect amounted to around 20% 19

104 of the GHG advantage. So there is a clear carbon leakage effect in this phenomenon which needs to be taken into account. Figure 6. Quarterly bilateral ethanol trade between Brazil and the US in , with and without exports through the Caribbean countries Source: Meyer, 2013, based on GTIS data Impact on Brazilian ethanol prices: The intra-trade drives up ethanol prices in Brazil (see also Figure 4), the extent of which depends critically on the size of domestic supplies relative to Brazil s own blending mandate and where domestic demand sits relative to that mandate. Exports typically represent 10% of Brazilian ethanol production. In 2011 and 2012, Brazilian ethanol (FOB) was more expensive than US corn ethanol still imports were attractive because import tariffs have been removed and there were quite high RINs for advanced biofuels to compensate for higher costs. Meanwhile, the situation has more or less stabilized and US ethanol exports to Brazil have been largely reduced (while imports of Brazilian ethanol to the US are still important). Prices of Brazilian ethanol have stayed in the higher end and are now in the same range as US ethanol. The main reason is that US markets are now completely open for Brazilian imports since import tariffs has been removed, but also the advantage of higher RINs for advanced biofuels has more or less gone away since Impact of promotion mechanisms The main promotion mechanism for advanced biofuels in the US are the RFS mandates, implemented through Volume Obligations for fuel supplies and tradable certificates (RINs), which have a certain market value. There are specific separate targets for advanced biofuels, and subtargets for biobased diesel and cellulosic biofuels. The growth of cellulosic biofuels has clearly stayed below expectations, and in the past 4 years, the subtarget for cellulosic biofuels was consistently reduced by EPA. The question is whether current promotion mechanisms are the right ones to stimulate further growth of technologically challenging cellulosic biofuels. Meanwhile, imports of Brazilian sugarcane ethanol (recognised as advanced biofuel by US authorities) have partly compensated for the underperformance of cellulosic biofuels. There is a consistent import of Brazilian sugarcane ethanol to the US, being one of the cheapest ways to fulfil the advanced biofuels mandate, and with the current RFS system (and the abolishment of import tariffs on Brazilian ethanol) this seems to remain. 20

105 In normal seasons, Brazil is able to export about 2 to 3 Billion litres per year to the US. For these volumes, the domestic prices will not increase a lot. But Brazil will not be able to export much more than that, in short-term, at low prices. In periods when Brazil is struggling with low sugarcane yields (as was the case in 2011), when in fact they only have sufficient volume to cover the domestic ethanol market, the import demand from the US market may lead to intra-trade (also shipping ethanol back from the US to Brazil) and lower blending mandates in Brazil. Ultimately, this has a large impact on greenhouse gas emissions (carbon leakage), and on prices. 21

106 References Argus (2013). Argus White Paper: Argus RINs prices. argusmedia.com, April % pdf S. Barros (2013a). Brazil Sugar Annual Report. USDA Foreign Agricultural Service, GAIN report BR13001, April S. Barros (2013b). Brazil Biofuels Annual Annual Report USDA Foreign Agricultural Service, GAIN report BR13005, December ATO_Brazil_ pdf C2ES (2013). Renewable Fuel Standard. C2ES Centre for Climate and Energy Solutions H. Gruenspecht (2013). Biofuels in the United States: Context and Outlook. US EIA. Presented at the Biofuels Workshop, Institute of Medicine, National Academy of Sciences, January 24, 2013, Washington DC. S. Irwin (2014). Will the EPA Reverse Itself on the Write Down of the Renewable Mandate for 2014? The Message from the RINs Market. Farmdocdaily, Department of Agricultural and Consumer Economics, University of Illinois, February 19, R. Johansson, L. McPhail (2013). What is driving Renewable Identification Number (RIN) prices? Insights from a Medium-run RIN Pricing Model. Presentation, April Phail_ pdf P. Lamers, C. Hamelinck, M. Junginger, A. Faaij (2011). International Bioenergy Trade A Review of Past Developments in the Liquid Biofuel Market. Renewable and Sustainable Energy Reviews (15:6); pp S. Meyer, J. Schmidhuber, J. Barreiro-Hurlé (2013). Global Biofuel Trade - How Uncoordinated Biofuel Policy Fuels Resource Use and GHG Emissions. ICTSD Programme on Agricultural Trade and Sustainable Development; Issue Paper No. 48; International Centre for Trade and Sustainable Development, Geneva, Switzerland, May NREL (2013). Energy Analysis - International Trade of Biofuels. May OPIS (2014). OPIS Renewable Fuels / RIN Credits. Oil Price Information Service RFA (2014). Ethanol Facts: Trade. Based on figures of US Census Bureau, Foreign Trade statistics. Last updated: March TradingCharts.com (2014). Monthly Commodity Futures Price Chart - Ethanol (CBOT), S$/gallon - TFC Commodity Charts. Accessed on 18 April UNICA (2014). Production data, export and import figures, prices and quotes. Brazilian Sugarcane Industry Association. Accessed 18 April US DOE (2014). April 2014 Monthly Energy Review. DOE/EIA-0035(2014/04) (p141 fuel ethanol overview) US EIA (2013). What caused the run-up in ethanol RIN prices during early 2013? US Energy Information Administration. 13 June

107 US EIA (2014). Annual Energy Outlook 2014 Market Trends-Oil/Liquids. US Energy Information Administration. April US EPA. Renewable Fuel Standard (RFS). Accessed April

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109 Authors Marek Gawor Stefan Majer DBFZ Daniela Thrän UFZ & DBFZ Project coordinator Luc Pelkmans VITO Study accomplished under the authority of IEA Bioenergy Task 40 Published in August 2014 Conditions of Use and Citation All materials and content contained in this publication are the intellectual property of IEA Bioenergy Task 40 and may not be copied, reproduced, distributed or displayed beyond personal, educational, and research purposes without IEA Bioenergy Task 40's express written permission. Citation of this publication must appear in all copies or derivative works. In no event shall anyone commercialize contents or information from this publication without prior written consent from IEA Bioenergy Task 40. Please cite as: Gawor et al Impact of promotion mechanisms for advanced and low-iluc biofuels on biomass markets: Straw for bioenergy. IEA Bioenergy Task 40. August Disclaimer This report was written for IEA Bioenergy Task 40 Sustainable Bioenergy Trade. While the utmost care has been taken when compiling the report, the authors disclaim any legal liability or responsibility for the accuracy, completeness, or usefulness of any information contained herein, or any consequences resulting from actions taken based on information contained in this report. 2

110 Impact of promotion mechanisms for advanced and low-iluc biofuels on markets: Straw for bioenergy August 2014 Authors: Marek Gawor (DBFZ) Stefan Majer (DBFZ) Daniela Thrän (UFZ) Project coordinator: Luc Pelkmans (VITO) 3

111 Table of Contents 1. Introduction Background Scope of the overall study Scope of this report 6 2. Promotion mechanisms for the use of straw for bioenergy in Germany, Denmark and Poland Germany Denmark Poland Volumes and prices of straw used for energy Critical issues and risks Impact of promotion mechanisms on straw markets Impact in the past years Anticipated trends in the future Lessons for policy makers 21 4

112 1. Introduction 1.1. Background With current discussions on indirect effects of biofuels (the indirect land use change or iluc debate ), and the aim to broaden feedstocks to non-food biomass, policies are trying to put focus on biofuels from waste, residues and lignocellulose materials, so called advanced biofuels with low iluc impact. Next to the general biofuel incentives, these biofuels are getting extra support through specific promotion mechanisms. Examples are the doublecounting mechanism for advanced biofuels in the EU, and the specific targets for advanced biofuels in the US. While technologically challenging lignocellulosic ( 2 nd generation ) biofuels are developing slower than expected, markets so far seem to have focused on cheaper options, using waste and residues or cheap feedstocks in more conventional biofuel technologies to take advantage of these extra incentives. Typical examples are used cooking oil or animal fats which are used for biodiesel production in the EU, or sugarcane ethanol to fulfil advanced biofuels targets in the US. However well these policy measures intended to be, some of these may create unintended effects. These promotion mechanisms induce market movements and also trading of specific biomass and biofuel types. Other applications relying on these (residue) materials - traditionally very cheap feedstocks may be impacted by this, both in terms of available volumes, and in terms of feedstock prices Scope of the overall study In this study, some typical cases are presented where promotion mechanisms for advanced biofuels have had an impact on markets and trade, or may be anticipated to impact markets and trade in the future. The study focuses on some concrete cases. The selected cases are: 1. Used cooking oils and animal fats for biodiesel: impact of the double-counting mechanism for advanced biofuels in the European Renewable Energy Directive on market prices and trade flows, analysed for the Netherlands and Italy. 2. Sugarcane ethanol: impact of the subtargets for specific advanced biofuels in the US Renewable Fuels Standard (RFS2), where sugarcane ethanol is classified as advanced biofuel. This has had a clear impact on prices and trade patterns between Brazil and the US. The other two are more prospective cases, where we can learn from a stimulated demand for straw or woody biomass in the past (for stationary bioenergy). With the introduction of advanced biofuel technologies (based on lignocellulosic feedstocks), these feedstocks may experience an additional demand for biofuels production (also stimulated by specific promotion mechanisms such as double counting): 3. Crop residues (straw) for bioenergy: straw may play an important role for advanced biofuels in the future. In countries such as Germany, Denmark or Poland, this is an 5

113 emerging feedstock for energy and biofuels. There are already some experiences we can take into account from the promotion of straw for stationary energy, e.g. in Denmark. 4. International trade of US wood pellets for bioenergy in the EU: Renewable Energy promotion in certain EU Member States is causing considerable trade flows from the US to the EU. There is clear that there are interactions with existing wood markets and forestry practises. In the future there may be additional effects when demand for cellulose-based biofuels enters these markets. For each case, the specific relevant promotion mechanisms in place, volume and price evolutions of the specific feedstocks, emerging trade patterns and impact on other applications/markets are discussed. Impacts can be increased competition or additional pressure to ecosystems; however, it may also induce new possibilities and synergies for certain markets. Potential future impacts are also anticipated, e.g. on straw or woody biomass when advanced biofuel technologies get more mature. The case studies themselves are available as separate reports. All reports are available at: Scope of this report The use of organic residues like straw for the production of bioenergy is considered to be an environmentally beneficial and socially acceptable option for bioenergy provision. Agricultural residues like straw seem to have the advantage of low competition with other land uses and thus comparably low corresponding land use change effects. Currently, legislations on European and national level are developed towards an improved framework for the energy-related utilization of these raw materials. At European level, the double counting mechanism in the Renewable Energy Directive 1 promotes their application for biofuel production. On a national level, support schemes for renewable energy production are increasingly promoting the use of agricultural residues (e.g. the Renewable Energy Sources Act 2 in Germany). Nevertheless, there are a number of uncertainties with regard to the actual potential of agricultural residues like straw that could be used for the production of bioenergy in a sustainable manner. The purpose of this chapter is therefore twofold: 1) to describe the status of the current use of straw for bioenergy production in three European countries and 2) to discuss the potentials and opportunities to increase the share of straw for bioenergy on a mid-term level. The special focus will be the production of advanced biofuels and the possible shape of the potential market in the future. 1 European Commission (EC), Directive 2009/28/EC; Act on granting priority to renewable energy sources; Available at: last accessed [German] 6

114 2. Promotion mechanisms for the use of straw for bioenergy in Germany, Denmark and Poland 2.1 Germany According to Weiser et al. 3 approximately 29.8 million tonnes of straw (fresh matter) are produced annually in Germany ( ). Between 8 and 13 million tonnes of this theoretical potential could be used sustainably for energy or fuel production. Highest straw potential (4 tonnes per ha) can be found in parts of Schleswig-Holstein, Mecklenburg-West Pomerania, North Rhine-Westphalia and Lower Saxony. But there are also regions that show a net deficit (see Figure 1). Figure 1. Quantity of annually sustainable available straw relative to the cereal cultivation area (Ton ha -1 yr -1 ) Note: considering three different methodologies for the humus balance (VDLUFA lower (a) and upper (b) values method and the Dynamic Humus Unit method (c)) according to Weiser et al This highlights the potential contribution of straw to renewable sources of energy. However, even though straw is one of the most important agricultural residues in Germany, it is not yet used for energy purposes extensively. Current practices in agricultural management suggest that cereal straw is either chopped after threshing the grain and spread onto the field with a combined harvester, or it is harvested, baled and utilized for animal husbandry. Nevertheless, the transition from straw based livestock housing to housing types with slotted floors decreased the demand for cereal straw as litter significantly. 3 Weiser et al. Integrated assessment of sustainable cereal straw potential and different straw-based energy applications in Germany, Applied Energy, DOI: /j.apenergy Ibidem. 7

115 Driven by the intense public debate about the sustainability of a large scale use of energy crops, the interest in straw as a potentially sustainable feedstock for bioenergy is currently increasing significantly in Germany. Most important instrument for the promotion of electricity from renewable energies in Germany is the Renewable Energy Sources Act. The purpose of this Act is to facilitate a sustainable development of energy supply and to promote the further development of technologies for the generation of electricity from renewable energy sources. To achieve this purpose the Act aims to increase the share of renewable energy sources in electricity supply in Germany to at least: 35 percent by no later than 2020; 50 percent by no later than 2030; 65 percent by no later than 2040; and 80 percent by no later than 2050; and to integrate these quantities of electricity in the electricity supply system. The 2012 amendment of the Renewable Energy Sources Act included a specific instrument to promote the use of straw for the production of electricity. According to this amendment, electricity producers receive an additional bonus payment per kwh of electricity for the use of straw. Other instruments to promote the use of straw for bioenergy in Germany are the Renewable Heating Act 5 and, for the promotion of advanced biofuels from agricultural residues, the national biofuel quota 6 and the German Energy Tax Act 7. The Energy Tax Act includes a paragraph under which a number of specifically defined biofuels can be exempt from the energy tax. The definition of these advanced biofuels includes biofuels from straw (e.g. ethanol from lignocellulosic biomass). However, one of the main differences with regards to the ratio of straw utilised for energy production between Germany and countries like Denmark are the strong thresholds for direct emissions from straw combustion in Germany. These thresholds lead to a significantly higher technical effort and thus investment costs for straw combustion plants compared to Denmark. Due to these technical and economic restrictions the current number of installed straw combustion units in Germany is estimated at approximately 130 plants 8. 5 Act on the Promotion of Renewable Energies in the Heat Sector, available at: last accessed Sechsunddreißigste Verordnung zur Durchführung des Bundes -Immissionsschutzgesetzes (Verordnung zur Durchführung der Regelungen der Bi okraftstoffquote); Available at last accessed on [German] 7 German Energy Tax Act, available at: last accessed on [German] 8 Hering, Thomas: Energetische Halmgutnutzung in Deutschland, 2. Internationale Fachtagung Strohenergie, conference proceedings, [German] 8

116 Beside these small scale combustion units a number of activities regarding the use of straw in large scale CHP units and the production of advanced biofuels have started recently. In 2013, the currently biggest facility for the production of heat and power, with an overall capacity of 50 MW was built in Emlichheim 9 (Germany). Since autumn 2012, Clariant and the TFZ Straubing are operating a demonstration plant with an annual capacity of 1000 tonnes (bioethanol output) for the production of ethanol from straw 10. Furthermore, the production of biomethane from straw is seen as a promising future option. One of the biggest German producers of biomethane has started the (co-) fermentation of straw in biomethane production facilities in Zörbig and Schwedt (Germany). 2.2 Denmark The introduction of support mechanisms for bioenergy in Denmark can be traced back to the year According to Jørgensen 11, the development of the Danish biomass energy market was possible thanks to the introduction of so-called Danish Biomass Action Plan, which drove Danish power plants to use biomass for production of power and heat. The fastest development of the market occurred with the help of the action plan implemented in 1993, which aimed at the use of 1.0 million tonnes of straw and 0.2 million tonnes of wood chips by In 2007, these amounts were exceeded significantly (1.4 million tonnes of straw and 2.3 million tonnes of wood, respectively 12 ). According to the new energy plan biomass shall be further supported to achieve a share of 30% renewable energy in the energy sector by 2025 and 10% in transportation sector by Additionally, dedicated development and demonstration plants are in place to support the development of e.g. 2 nd generation biofuels. 13 As a result of these consequent and long-lasting political actions, the straw market in Denmark belongs to most developed in entire Europe. It is strongly dominated by the farm scale boilers, which represent approximately 30% of the total straw consumption in the home market. The combustion systems are mostly designed for big bales feeding. In recent years, the combustion efficiency has improved. However, there is a need for continuous improvements for minimization of the emissions. Currently, approximately 7000 units are installed in Denmark (compare Table 1) 14. Due to less favourable policies in the recent times, the use of straw is declining since 2009 (compare Figure 2). Table 1. Overview of straw fired units in operation 15 Market Number of units (approx.) Farm scale boilers 7,000 9 See also: [German] 10 See also: [German] 11 Jørgensen, H. (2007): Current status on biorefineries in Denmark. Available at Country_status_Denmark_IE42_ pdf, last accessed Ibidem. 13 Ibidem. 14 FNR Tagungsband 2012: Gülzower Fachgesprpäche. 2 Internationale Fachtagung Strohenergie. 29./30. März 2012, Berlin. Band 38. Anders Ewald: Länderbericht: Denmark. [German] 15 Ibidem. 9

117 District heating boilers 50 Combined heat and power - CHP plants 7 Co-firing 1 Dedicated PF power plants 1 Figure 2. Annual straw production in million ton and the use of straw for different purposes in Denmark. Source: 16. The district heating area of the market can be characterized by a constant number of installations (approximately 50), with simultaneously increasing levels of consumers receiving district heating. Currently, approximately 60,000 consumers are using heat from this source of renewable energy, and 20% of the straw resources are used. The average size of the installation is 3.8 MW, with the range between 0.4 MW to 11 MW thermal output 17. Other pathways of straw use in Denmark are limited: only few CHP plants are using straw, one power plant is co-firing straw pellets, and there is one dedicated power plant running on straw 18. The development in this sector focuses on the increase of efficiency (through e.g. increasing steam temperature). Additionally, gasification solutions are being tested. It has been estimated that straw has the potential to substitute 7% of coal in the energy generation sector. Moreover, straw pellets which have the largest potential to substitute fossil fuels, may be produced in Denmark, thus reducing the transportation distances. The straw potential originates mainly from wheat and barley cultivation. The total amount of agricultural residues is 8.3 million tonnes per year, corresponding to an energy resource of approximately 33 TWh 19 (Table 2): 16 Bang, C. et al (2013): Analysis of biomass prices. Future Danish prices for straw, wood chips, and wood pellets. Available at energi/bioenergi/analyse-bioenergi-danmark/analysis_of_biomass_prices_ _- _final_report.pdf (last accessed ). 17 Ibidem. 18 Ibidem. 19 Pellet atlas: Development and promotion of a transparent European Pellets Market. Creation of a European real-time Pellets Atlas. Pellet market country report: Denmark. 10

118 Table 2. Agricultural residues potential, Denmark, 2000, in thousand tonnes. Adopted from 20 Type of plant Residues potentials in 1000 tonnes Wheat 3796 Rye 486 Barley 3821 Oats and mixed cereals 251 Total 8354 An interesting option for the increase of renewable energy generation is the use of pellets (especially made from wood and agricultural residues) in industrial installations providing heat and electricity to a larger number of consumers. In Denmark, small producers focus on substrates other than straw. The Vattenfall company, on the other hand, produces and utilizes approximately thousand tonnes of straw pellets annually. The feedstock is obtained locally, mainly from farmers in Sealand 21. The potential technical problems related to the use of straw or mixed pellets may not be omitted, however: Slag generation Malfunction of the incineration system Corrosion and fouling Higher costs and worse properties that in case of wood pellets 22. Figure 3 to Figure 4 give an insight into the development of the Danish straw energy market with respect to volume of the production, generation of renewable electricity or fuel prices according to the statistical data (compare 23 ). As the figures reveal, there are no spectacular changes of the market within the past decades. The use of straw for energy from 2006 to 2009 has been slightly increasing from 1 to 1.5 million tonnes, with diminishing use of straw for bedding and forage and also a diminishing share of the not-used straw potential. However, after 2009, a decrease may be noticed. From the mid-1980s up to the year 2000 straw generates a rather constant amount of renewable energy between 10 and 13 PJ, slightly increasing to PJ in the past 10 years (Figure 3). The price level of straw (paid by district heating facilities) is quite constant up to 2007 at about 100 DKK/MWh (54 per tonne for straw as delivered, with average humidity of 11-14%, recently increasing to around 130 DKK/MWh (70 /tonne) (Figure 4). 20 Ibidem. 21 Ibidem. 22 Ibidem. 23 Straw to Energy. Status, Technologies and Innovation in Denmark Statistic Denmark, after Danish Energy Agency. 11

119 Figure 3. Production of renewable energy in Denmark. 24 Figure 4. Fuel prices in DKK/MWh of the various types of fuels for the district heating purposes. 25 (100 DKK = 13.4 ; 1 tonne straw ~ 4 MWh) It might be concluded, that with a great probability, the situation on the market and the role of straw will not be dramatically changed. Certainly, energy-related use of straw will play a role and may even increase further if cellulose biofuels start off. 24 Danish Energy Agency: Annual Energy Statistics (accessed May 2014). 25 Straw to Energy. Status, Technologies and Innovation in Denmark Danish District Heating Association, after Danish Energy Agency. 12

120 2.3 Poland Renewable energy installations (e.g. small hydropower plants) have been present in Poland in smaller scale since many decades. However, the most vivid development of the renewable energy market took place after the introduction of the support schemes conne cted to the EU 2020 goals. In Poland, the support takes the form of a quota system based on a system of various certificates, depending on the type of the renewable energy generated, type/size of the installation or details of applied technology (e.g. efficiency of the installation). For renewable electricity, green certificates and penalty fees for not fulfilling the required quota play the most important role in the system. Electricity produced from straw might play an important role in the future. However, the development of the entire market is not predictable. The increase of prices for green certificates during the first years after the establishment of the system allowed installation owners to make viable business plans for future installations. However, around the year 2012, the dramatic fall of the prices for green certificates made the planning of new installations uncertain. In many cases, the electricity producing companies have stopped buying the contracted amounts of biomass. Therefore, no drastic changes of the renewable energy market structure in Poland shall be expected in the coming years, and this applies also for the energy-related use of straw 26. Even though the prices for green certificates have meanwhile partially recovered, the uncertainty of the investors remained. The full consequences of these negative developments will be visible first in few years. The government will, however, be forced at least to support renewable energy sources in order to achieve the planned share of 15.5% renewable energy by 2020 (19.3 for electrical energy). The development of the straw market in the last decade indicates that straw may play a significant role in the entire process. As for the estimated resources available, the numbers vary according to the source: According to the FNR land report: the surpluses of straw in Poland amounts to 9-12 million ton, while 30 million tonnes of straw are produced yearly, from which 19 million tonnes are used for agricultural purposes 27 ; Brzóska and Węglarzy (2006) estimate the production of straw at million tonnes annually, with straw surplus estimated at 7-8 million tonnes 28 ; In 2009, according to the Main Statistical Office, 29 million tonnes of straw has been obtained (basic grains without rapeseed). A constant increase of the straw production can be observed 29 ; Kozłowski and Cygan (2011) estimate the average straw yield at around 3.5 tonnes of straw per hectare with the total annual Polish surplus of straw in the period of 26 Raport o rynku biomasy w Polsce. Available at last accessed on Association Polska Biomasa. [Polish] 27 FNR Tagungsband 2012: Gülzower Fachgespräche. 2 Internationale Fachtagung Strohenergie. 29./30. März 2012, Berlin. Band 38. Länderbericht: Polen. [German] 28 Wiadomości Zootechniczne, R. XLIV (2006), 3: 3-14: Odnawialne źródła energii pochodzenia rolniczego. Wykorzystanie słomy dla celów energetycznych. Franciszek Brzóska, Karol Węglarzy. [Polish] 29 Main Statistical Office (GUS) after Kozłowski, Cygan. [Polish] 13

121 at 7.6 million tonnes, increasing in year 2009 even 10.2 million tonnes 30 (see Table 3). Table 3. Production of straw from basic grains in Poland in million tonnes. Agricultural area remained constant Straw production [million tonnes] Agricultural area, basic grains [thousand ha] Potentials of straw for energy-related use are also estimated at the regional levels (compare Figure 5 and Figure 6 for two different studies). Both studies estimate high potentials for the following regions: Wielkopolskie, Opolskie, Kujawsko-Pomorskie or Pomorskie. Figure 5. Average straw yields in Poland in 2009 in million tonnes per region. Red colour: Straw yield, yellow colour: estimated surplus for the energy-related purposes Wiktor Kozłowski, Krzysztof Cygan: Współspalanie słomy z węglem w dużym kotle energetycznym (2011). [Polish] 31 Ibidem. 32 Ibidem. 14

122 Figure 6. Straw potential in Poland in thousand tons. 33 The original goals of the renewable energy generation (i.e. creation of local added value, renewable energy generation in modern, highly efficient installations) have not been, however, achieved in Poland. According to Association Polska Biomasa, co-firing in existing (large scale) installations remains the simplest method to achieve the required quotas set up by the authorities. In 2012, dedicated installations for biomass combustion used only 1.5 million tonnes of biomass, in comparison to 6 million tonnes of co-fired biomass 34. The already mentioned problems with the straw combustion (e.g. slag formation) are slowing down the development of the market. However, several local companies which provide e.g. heat and warm water use already straw-fired boilers (e.g.. in Lubań the installation has a total power output of 8 MW 35 ). However, there is no data available showing the overall amount of straw-fired installations in Poland. 33 Renata Jaworska: Rynek Biomasy w Polsce mocne i słabe strony. Uniwersytet Łódzki, Wydział Ekonomiczno-Socjologiczny. [Polish] 34 Raport o rynku biomasy w Polsce. last accessed on Association Polska Biomasa [Polish] 35 Paweł Wójcik: W Lubaniu grzeją słomą. Available at last accessed on [Polish] 15