Report on RTFO Stakeholder Workshop 21 and 22 March

The workshops were introduced by Malcolm Fendick, Head of the Cleaner Fuels and Vehicles Division and senior responsible officer (SRO) for the RTFO Programme, and Rupert Furness, the RTFO Programme Director. They explained that the purpose of the workshops was to make certain that the draft Regulations were in good shape and also to ensure that there were no surprises at the end of the consultation period.  The workshops provided an opportunity to ask questions, to clarify points of detail and to discuss the first part of the consultation paper.  The RTFO team would be in listening mode.  There would be an opportunity to discuss the questions raised in the second part of the paper at a further workshop on April 24. Delegates were encouraged to submit written responses to the consultation document as soon as possible.

The questions were covered in order.

Question 1: is the definition of an obligated supplier appropriate? Are the compliance costs estimated in the attached Partial Regulatory Impact Assessment broadly accurate?

Rupert Furness explained that under Plan A the Obligation fell on those paying duty on fossil fuel.  Under Plan B, it fell on the owners of fuel as it crossed the duty point. The Government's current preference was for Plan B, as explained in the consultation document.

Attendees made the following points:

• Under Plan B large oil companies would effectively become the only purchasers of ethanol as refiners would not sell reformulated gasoline blend stock for oxygenate blending (RBOB) to third parties.  This was because if they did so it would give them an obligation without the means to gain certificates.  Large oil companies would therefore be able to use their commercial muscle to drive down the price, and to effectively control the ethanol market.
• Under Plan B retailers would have less control over the biofuel content of their fuel.

Questions included

• How would biogas fit into the scheme? It was pointed out that, if the Swedish example was followed, it could quickly grow in importance.

Rupert Furness explained that biogas would be eligible for RTF certificates, which could be sold on, or redeemed with the Administrator. The 21 March Budget had made clear that the duty incentive would last until at least 2012 on biogas, which would be an additional form of support for biogas.

• What were the practical differences between Plan A and Plan B?

Rupert Furness explained that under each scenario the same amount of biofuel would enter the market. There were different administrative impacts. Plan B had been developed to accommodate the sharing arrangements which were practiced by the large fuel companies. It would be counterproductive to introduce a system which led oil tankers to travel long distances in order to deliver a specific brand to a specific retailer.  A smaller number of companies were obligated under Plan B, but Plan B involved collecting a larger amount of data.

The following questions were raised in respect of the RIA:

• How would batch size be calculated? It would influence the costs of compliance.

Greg Archer (representing Low CVP which is carrying out the development of the technical guidance for carbon and sustainability reporting) made clear that a batch would be a homogenous volume of fuel irrespective of size.  Details of the technical guidance were outlined on the DfT website.  If it were all derived from palm oil which was subject to RSPO it would all be treated as a single batch for sustainability purposes. For carbon reporting where there might be small variables, aggregation would be allowed. Greg Archer emphasised that the Government did not want to discourage companies from using real data.

• Had there been estimates of compliance costs further down the supply chain?

It was confirmed that some of the costs of working with suppliers to develop reporting had been included. The possible premium costs of buying renewable fuel that had accompanying C&S data, as opposed to fuel that may not have such data, had not been separately identified.

• Had Low CVP done anything on the costs of RSPO certification?

Delegates were told that the RTFO is going to use a meta-standard relying on existing certification schemes, which meant that costs should be relatively low as feedstock producers may already be certified to a standard.

Question 2: is 450,000 litres an appropriate minimum threshold?

Rupert Furness explained that 450,000 litres had already been set by HMRC as the threshold at which biofuel producers had to provide monthly rather than quarterly reports. It was good practice for threshold levels to be consistent. In addition, it appeared a natural divide. There were a few companies which produced lesser amounts of fuel and a number of much larger companies which produced far more than that amount but there were not many companies which produced fuel around that point. The level was also low enough that it would not be advantageous for a large producer to break up their production into a number of smaller companies.

There appeared to be a general consensus that the threshold was appropriate though the point was made that there had been an expectation that the threshold would be lower.

Question 3: is it appropriate to calculate the level of the obligation as a percentage of obligated suppliers' fossil fuel sales despite the fact that this will make it a more stretching target?

Question 4: will setting the target in this way provide increased liquidity in the market for RTF certificates?

Rupert Furness explained that the policy intention was to ensure that biofuel sales made up 2.5%, 3.75% and 5% of total transport fuel sales.  In 2010, for example, for every 100 litres of fuel sold by an obligated company, 95 would be from fossil sources and 5 from renewable sources.  For the reasons discussed at earlier workshops, however, the Obligation was to be expressed as a percentage of an obligated company's fossil fuel sales rather than as a percentage of its total fuel sales (i.e. 5/95ths rather than 5/100ths).  The level of the obligation, which was expressed to four decimal places, was the mathematical result of doing it this way.

Points made included:

• Neither a 5% nor a 5.2632% target was overly stretching: both should be deliverable.
• The 5.2632%% target could not be met because of blending tolerances and only small volumes of high blend products
• It would be more encouraging if the buy-out price increased progressively over time. This had been done in respect of the tax on the use of landfill sites where it had had a real effect. It would give farmers and producers a better incentive to plant feed crops.
• There was a danger that oil companies would buy out of the obligation and the cost would be passed on to the motorist. So it was possible to lose out both in terms of lack of carbon savings and higher prices.
• The German Government provided far tougher penalties to ensure that targets were met.
• There was likely to be very little liquidity in the market for certificates
• Obligated companies wanted realistic targets to be set as they would not be able to meet the target for all batches and would therefore need to find ways of making up the shortfall.
• The UK needed to move towards a 10% biofuel level at some point therefore it was right that the market should be given an incentive to develop higher blends.
• The move to blends of 10% would be dependent on changes to the fuel standard.
• There was no need to be constrained by the European standard; a lot of individuals and companies were ready to buy higher blends including E85.
• There might be a rush for biofuels at the end of every compliance period leading to price rises.
• It was unlikely that demand would be uneven because it would be difficult to meet the obligation unless purchases of biofuels were made throughout the year. Big companies' risk advisers would not let them wait until the end of the year.

• Obligated companies would be competing for supplies; if they were unable to meet the targets the price to the consumer would rise.

• Rupert Furness explained that the Government was unlikely to stand by if the obligation did not prove effective in achieving carbon savings. It was likely that under such a scenario the buy-out price would be adjusted - Ministers had made a commitment to this effect. Adjusting the buy-out price would be relatively straightforward, although it would require a new RTFO order and it could not be done during an obligation period.

  Question 5: is it appropriate to exclude sales of road fuel gases from the calculation of suppliers' obligations?

  Rupert Furness explained that LPG and CNG had not been included in the obligation.  The reasons for this were that:

  • There was no bio substitute for LPG.
  • LPG and CNG were generally regarded as environmentally friendly alternatives to petrol and diesel, and including them in the calculation of companies' Obligations might send a mixed message.
  • LPG and CNG made up a very small percentage of total road transport fuel sales.  Including them in companies' obligations would add a great deal of complexity to little benefit.

  Points made in discussion included:

  • CNG produced lower carbon emissions than other fuels; as the objective was to reduce carbon emissions, they should be favourably treated.
  • CNG should be treated as a renewable fuel.
  • CNG should not be burdened with the obligation.
  • CNG might produce lower carbon emissions at the point it was used as a fuel but upstream manufacture could be high in carbon usage.
  • LPG producers should not be let off the hook; they already enjoyed generous tax treatment. CNG should be included in the obligation to stimulate development of a bio substitute.

  Question 6: should the RTFO have an end-date defined in the RTFO Order, and if so what should it be?

  Rupert Furness explained that Ministers had made clear that they wanted the obligation to run until at least 2020. The question was whether a specific end date should be included on the face of the legislation.

  All delegates wanted the RTFO to exist for a reasonable length of time in order to ensure that investment decisions could be made with a degree of certainty. There were mixed views about an end date; some delegates favoured ten years, others felt that an end date would lead to stagnation in the period before it was due to close and it was therefore better to leave it open.

  Specific points included:

  • There should not be an end date because it would need a positive action to stay the same whereas without an end date cancelling the obligation would require a positive action.
  • It should be open ended because investors needed to know that they would not be left with a stranded asset.
  • Leaving it without an end date was the best way to create certainty.
  • It might be better to have an indication of the minimum period it would be in force.
  • It would be beneficial to have a period of notice such as 10 years, or failing that 5 years, before it could be cancelled.
  • Farmers and investors in feedstock needed as much certainty as possible. There was a lack of investor confidence at the moment.

  Question 7: does the suggested approach to eligible fuels provide a proper framework for identifying those fuels which should count as renewable fuels for the purposes of the RTFO?

  Rupert Furness explained that the proposed method which linked eligible fuels to the duty incentive made it easier to administer. When companies were developing a new fuel they approached HMRC so that it could be added to the list. This was normally done at an early point and there was normally enough time before it reached production.  In future, whenever a new fuel (e.g. biobutanol) became eligible for a fuel duty incentive, the RTFO Order would need to be revised to make it eligible for RTF certificates.  This process would be relatively straightforward, although it would take a number of months since a new RTFO Order would require consultation and Parliamentary debate.

  Delegates had mixed views about the proposed approach. Some were content that the link to the duty incentive should be maintained; others felt that a wider spectrum of fuels should be eligible.  Some delegates made the point that eligible biofuels should reach predefined fuel quality standards (such as EN14214 for biodiesel). Points made included:

  • Vehicle manufacturers depended on fuel reaching specified standards.  If substandard fuels get into vehicles, as had occurred recently, it could give biofuels a bad name; it was essential therefore that only those biofuels meeting existing fuel quality standards should be eligible for RTF certificates.
  • Restricting RTF certificates to those fuels which met existing quality standards would rule out those biofuels for which no quality standards had yet been agreed.  It would also penalise smaller producers and those producing biodiesel from feedstocks such as soy (as EN14214 had been drawn up with rapeseed in mind).
  • There should be a list of eligible fuels drawn up by the Administrator; this would provide more flexibility.
  • There should be engagement with the standard setting bodies to ensure that appropriate standards were set for new biofuels.
  • The hurdle for a new biofuel to become eligible should be a low one.
  • If the duty incentive were discontinued the HMRC list would no longer exist, therefore an alternative method needed to be found.
  • The Government should introduce a provision in primary legislation for the Administrator to add eligible biofuels.
  • A measure which would allow the addition of new biofuels to the eligible list more than once a year would be welcome.
  • The RTFO should be future-proofed; therefore there needed to be a system under which the Administrator's office could develop its own list of eligible fuels. It would be possible to develop a list of fuels now and refer to a specific standard.
  • It was important biofuels made from waste vegetable oil should be eligible. They constituted good biofuels which met HRMC criteria but could fail to meet standard specifications because of variety in feedstock. Testing was expensive for small producers at £700 per test. If anything changed so that production was no longer cost effective there would be a strong environmental impact because waste oils would go to landfill.
  • The EU standards did not just hit small manufacturers; they could also affect larger producers; biofuels made out of soya failed to meet the iodine specification.

  Question 8: in advance of internationally agreed standards, is there more that can be done to help ensure that biofuels are sustainably sourced, for example through voluntary standards or agreements?

  There was strong support among attendees for agreed international, or at a minimum EU, standards. There were different views about what might be done in advance. One delegate questioned what was being done by the Government to promote an EU standard. Rupert Furness explained that measures included:

  • Low CVP working with the Dutch to ensure that methods and approaches were consistent.
  • Low CVP and the RTFO team working with Commission officials to ensure that common standards would be developed.
  • The Secretary of State writing to the Commission stressing the need for a common standard.
  • The sustainability reporting criteria being drawn up so far as possible from common building blocks.

  He stressed that the team would consider what more might be done.

  Other points made by delegates included:

  • The environmental NGOs believed strongly that there should be minimum standards on sustainability reporting and were concerned that they were not present.
  • Sustainability standards should also be applied to biomass for electricity generation as well as to biofuels for road transport.  The Dutch apply the same standards to both and there was no reason why the two sectors should be treated differently.
  • There needed to be an approach which stimulated continuous improvement.
  • The All Parties Transport Group should take a lead in pressing for an agreed standard.
  • The Dutch and Germans were doing considerably more than the British Government.
  • The initiative needed to be led by Ministers and from the very top of Government; it needed political push.
  • The UK was taking a lead and doing more than other countries in developing sustainability standards.

  Question 9: Would obligated suppliers or others wishing to acquire certificates consider these checks and balances to be sufficient to protect against any possible fraudulent claims of RTF certificates from the RTFO Administrator?

  Delegates sought clarification about what would happen if a producer sold fraudulent certificates.  Rupert Furness explained that if certificates were issued on what was later found to be a fraudulent return, they would be revoked in the account of the company concerned. Certificates could not be revoked after the ending of the Obligated Period. However, if a company had sold on certificates and had disappeared or did not have any legitimate certificates in their account, the Administrator would attempt to find the company to which they had been sold and would revoke them notwithstanding that they had been bought in good faith.

  Delegates expressed concern about this eventuality. Some delegates expressed a preference for a system under which an offending company might suffer a cash penalty. Rupert Furness explained that there were no powers under the Energy Act to impose such a penalty. It was suggested that an amendment should be introduced should the RTFO team be successful in gaining a slot for a short Bill. Other points included:

  • There should be a bond system similar to that operated in respect of the duty incentive.
  • Voluntary disclosure had been offered by the large fuel companies and would avoid the need for an auditor's statement.

  Question 10: are the proposed arrangements for the recycling of the buy-out fund appropriate?

  Rupert Furness explained that the current intention was to recycle all monies in the buy-out fund as set out in the consultation paper: the Energy Act required this.  It was not clear, however, how effective this mechanism would be as an incentive to deliver the policy aims of the RTFO.  The Government was therefore keen to have the flexibility to amend the RTFO Order in future to allow buy-out payments to become effectively straight fines, with any monies in the buy-out fund being retained by central Government.  This would only be considered if it became apparent that the recycling mechanism was not working (e.g. if obligated companies were all buying out of some or all of their Obligations, passing the additional costs to consumers, and then receiving a big windfall payment from the Government at the end of each compliance period).  Such a provision was also needed in case of any future challenge by the European Commission.

  Many delegates expressed the view that recycling should be retained. Points made included:

  • If recycling were abolished it could represent a stealth tax.
  • If recycling were abolished the money would go into the Consolidated Fund while it should support the development of new fuels.  If it wished to retain buy-out payments, the Government should consider ring-fencing any monies in the buy-out fund for spending on low carbon transport initiatives.
  • Money being recycled to competitors would provide a strong disincentive to non compliance with the Obligation.

  Question 11: what are likely to be the impacts of the RTFO on micro-scale biofuel producers, and how might any adverse impacts be mitigated?

  The point was made by delegates that the duty incentive was very important for small producers. Some delegates considered that it should be retained for the smallest producers.

  Concerns were expressed that farmers who used biofuels would not be able to claim certificates for fuel that was not used as a road fuel. Rupert Furness confirmed that where farmers were paying the rebated duty rate on biodiesel they would not be eligible to claim RTF certificates: only those paying the full biodiesel duty rate of 28.35 pence per litre would be eligible to claim them.  Other points made included:

  • The Government should not encourage DIY biofuel production because of the health and safety risks.
  • It was more important to structure the rewards system for the whole market rather than to create special concessions for small producers. Small producers could benefit from meeting niche requirements for higher blend mixes. Ensuring that such blends gained greater rewards was more equitable and would not lead to market distortions.
  • The RTFO carried challenges for small producers but also provided opportunities.

  Question 12: are the proposed arrangements for civil penalties and for revocations appropriate?

  Most of the possible discussion points on Question 12 were covered under Question 9 but one delegate queried whether the Government would compensate oil companies should the Administrator make an error. Rupert Furness responded that, in addition to the appeals processes outlined in the draft RTFO Order, obligated companies would ultimately have redress to Judicial Review if the Administrator were guilty of maladministration.

  Possible changes to the Energy Act

  Rupert Furness explained that the Energy Act had been drafted in haste and detailed work had showed that there were ways that it could be improved. It was by no means certain that the legislation would proceed as it was difficult to get legislative slots. If it went ahead the following measures were sought:

  • Flexibility to appoint the Secretary of State as the Administrator rather than the requirement for it to be an NDPB.
  • A data sharing gateway with HMRC.
  • The ability to spend money on the RTFO ahead of the RTFO Order being enacted.
  • The ability for the Secretary of State to direct the RTFO Administrator on the format of carbon and sustainability reports.
  • The ability to remove the requirement to recycle any payments in the buy-out fund to those holding RTF certificates

  He stressed again that there was no immediate intention to make use of the flexibility to remove the recycling requirement, but that it could provide useful flexibility for the longer term if recycling turned out not to deliver the policy objectives of the RTFO or if the European Commission challenged it in future.

  Delegates generally confirmed that they thought recycling should remain.

  • The Administrator should not be run from within DfT: it should have a greater degree of independence.
  • If primary legislation were introduced it would open the way to a number of possibly unhelpful amendments to the Energy Act.
  • The Government was right to seek the power not to recycle payments from the buy-out fund, as this provided sensible flexibility for the longer term.