Economic Analysis of Advanced Biofuels in the UK, NNFCC 11-011

This report examines the economics of advanced biofuels in the UK.

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The UK has a 10% legally binding renewable energy target for the transport sector set as part of the Renewable Energy Directive (RED). In addition, the Fuel Quality Directive (FQD) requires a fuel and energy supplier, for land based transport and other non-road mobile machinery, to reduce the lifecycle greenhouse gas (GHG) emissions associated with the fuel/energy by a minimum of 6% per unit of energy. The Gallagher review indicated that advanced biofuels could contribute between 1% and 2% of the energy of the UK's transport fuel needs. Advanced biofuel technologies are currently under development and there is uncertainty about their feasibility and deployment. There are a number of advanced biofuel projects being considered in the UK that could make an important contribution towards the UK meeting its RED and FQD targets.

The economic analysis presented in this report covers two scenarios developed by the NNFCC for the development of advanced biofuels in the UK to 2020. These two scenarios have been developed based on the evaluation of each biofuel pathway against the strengths of the UK and stakeholder engagement.

• Scenario 1: modest development where the UK produces the equivalent of around 23 Petajoules (0.56Mtoe) per annum of advanced biofuels by 2020.
• Scenario 2: strong development where the UK produces the equivalent of 47 Petajoules (1.12Mtoe) per annum of advanced biofuels by 2020 (including using an additional feedstock for the production of synthetic diesel).

In the absence of an advanced biofuels industry in the UK, the RED and FQD targets would be entirely met through UK production and imports of first generation biofuels (this is referred to as the 'counterfactual' scenario in our analysis).

We have used the data collected by the NNFCC to complete the assessment of the economic value of having an advanced biofuels industry in the UK. Our approach identifies the potential incremental revenue requirement to support an advanced biofuels industry in the UK and compares this to the potential benefits in terms of higher value employment and GHG emissions savings (excluding any existing government support that may be available to the biofuels industry). For each scenario, we have quantified the following:

• Costs: these are expressed as potential government support requirements to make advanced biofuels economically viable.
• Benefits: higher value employment in R&D, construction and operation of advanced biofuel plants (including second round effects) and savings from reduced GHG emissions relative to first generation biofuels.

The analysis covers a 20 year period (from 2010 to 2030) and we have discounted the costs and benefits using HM Treasury' Green Book discount rate of 3.5% to get a present value (PV) of the costs and benefits. The net present value (NPV) of each scenario is then calculated by subtracting the PV of costs from the PV of benefits. A positive NPV implies that the present value of benefits is greater than the costs, with all values presented in 2010 prices. Additional benefits from royalties have been identified separately and we have presented the NPV analysis in two ways; excluding the royalty benefits and including the royalty benefits.

We have included all the processes in each scenario in calculating the NPV. As the processes produce different types of biofuels that will be required in the future (ethanol, synthetic kerosene, synthetic diesel and butanol), it is unlikely that the NNFCC targets can be achieved only with one technology. However we also present the results for the processes independently of each other.

The NPV analysis shows that using Mid-point feedstock prices and Central price assumptions for biofuels, there is a positive NPV of having a UK advanced biofuels industry under both scenarios. In addition, including other benefits such as royalty payments that could be achieved by UK companies licensing their knowledge abroad, the NPV would be higher. However, we note that the results are sensitive to the assumptions used and therefore developing a greater understanding of how feedstock and biofuel prices are likely to evolve in the future may reduce the range of outcomes included in this report.