11 April 2024

Chasing Zero: Biofuels And Renewable Transport Fuel Obligation Update

A consultation addressing a potential incentives loophole for renewable fuels and their chemical precursors in the UK through changes to the Renewable...
UK Energy and Natural Resources
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The Government has recently issued several publications impacting the UK renewable fuels market:

  1. a consultation addressing a potential incentives loophole for renewable fuels and their chemical precursors in the UK through changes to the Renewable Transport Fuel Obligation (RTFO) and upcoming sustainable aviation fuel (SAF) mandate (click here);
  2. a response to a consultation in 2022 confirming the Government's intention to bring recycled carbon fuels (RCFs) within the scope of the RTFO (click here); and
  3. a consultation regarding a future policy framework for biomethane production (click here)

1. Multiple Incentives Consultation

Currently, under article 16 of the RTFO (Article 16) any renewable fuel (or chemical precursor to that fuel) must not at the time of application for a renewable transport fuel certificate under the RTFO or at any time in the future:

  • be counted under any other UK renewable energy obligation (other than the RTFO); or
  • be counted under any a UK or EEA 'support scheme' the promotes the use of energy from renewable sources.

The Government is concerned that the globally traded nature of renewable fuels means that it might be possible for such fuels or chemical precursors to receive support both under the RTFO (and the future SAF mandate) in addition to support in their country of production. This could distort the market and be damaging to UK domestic suppliers.

In particular, following the departure of the UK from the European Union, the Government is concerned about the distinction between the treatment of fuels produced and imported from EEA member states and those produced and imported from countries outside the EEA.

Through the recent consultation the Government looked to promote a fair market by proposing three options to address the potential for multiple incentives being claimed in different countries. The three options were as follows:

Option 1 Article 16 would be amended to cover renewable fuel or chemical precursors supplied globally but the 'support scheme' definition would not include reference to tax-based incentives due to:
  • a lack of tax-based expertise and resources within the Department for Transport's RTFO unit;
  • potential difficulties in enforcing compliance; and
  • unknown adverse effects, for example a renewable fuel not being eligible under the RTFO due to a tax incentive that is not actually advantageous.

This is the Government's preferred option.

Option 2 Article 16 would be amended to extend the current rules applying to the UK and EEA to the rest of the world.

This option would capture any tax based support for fuel production and prevent that fuel from being supported under the RTFO or SAF mandate.

The Government is concerned that there could be complexities and unintended consequences if this approach were implemented.

Option 3 Under this option Article 16 would be amended so that renewable fuels produced in the EEA would be treated the same as the rest of the world.

This change would mean that fuels produced and supported in the EEA could be imported in the UK and be eligible for support under the RTFO or the SAF mandate, with the risk of undercutting UK domestic producers and therefore not favoured by the Government.

The consultation closed on 18 March 2024, after which the Department for Transport will publish a summary of responses. Any adopted proposal will also be included in the proposed sustainable aviation fuel mandate.

The consultation also noted that as both the RTFO and future SAF mandate required renewable transport fuels to achieve minimum greenhouse gas emissions savings, both the RTFO and SAF mandate will need to take account of carbon capture and storage CCUS) schemes being developed both in the UK and internationally. The Government flagged that as the CCUS sector developed further changes may be required to the eligibility criteria for fuels to ensure a level playing field is maintained for domestics and international producers.

2. Recycled Carbon Fuels

As non-renewable resources that come from fossil-derived wastes, RCFs are not currently supported under the RTFO. However, their potential role in meeting net zero targets means the Government is now seeking to incentivise their supply. In its recent consultation response, the Government outlined its approach in three key aspects of RCF policy.

1. Criteria for eligibility (a) Feedstock eligibility

In terms of feedstock eligibility, the RTFO Administrator will take a principles-based approach to determine the effects of the feedstock on carbon emissions, agriculture, other economic activities, sustainable development and the environment more generally.

Imported non-renewable feedstocks will need to meet the same criteria as those sourced in the UK.

The eligibility of feedstocks will be determined on a rolling basis with prospective RCF suppliers submitting applications at any time for assessment. This mirrors the RTFO's current approach to biogenic wastes and residues.

(b) Biogenic content requirements

Departing from an earlier consultation in 2021, the Government has decided to remove (with caveats) the explicit minimum biogenic content requirement, which had previously been suggested of at least 25%. However, the RTFO Administrator may, where appropriate, still include a minimum biogenic content requirement in the definition of specific feedstock types.

2. Ensuring RCF sustainability The safeguards that exist under the RTFO to maintain sustainability and environmental standards will also be applied to RCFs. In this regard the Government confirmed that:
  • A 'single default' counterfactual method will be applied to determine whether RCF feedstocks deliver environmental benefits. Emissions resulting from the production and use of the relevant RCF would be compared against emissions resulting from the next likely end-of-life use of that feedstock. The RTFO Administrator will also have an option to define alternative counterfactuals where necessary.
  • The carbon intensity applied to the displaced electricity in the counterfactual will be based on the grid average emissions of Government's most recent yearly figures.
  • The efficiency of conversion in counterfactual use for energy from waste (electricity only) will be 22%, with industrial waste gases being determined on a plant-by-plant basis.
  • Energy content allocation will be used where an RCF production plant produces multiple co-products.
  • To receive RTF certificates a minimum greenhouse gas emission savings threshold must be met which will be tied to the grid carbon intensity and become more stringent over time.
  • Reporting and verification requirements for RCFs will reflect the existing RTFO requirements.
  • Only one of the RTFO's 'sustainable waste criteria' will be applicable to RCF suppliers, being that adequate monitoring or management plans are in place to address the local environmental impacts caused by sourcing or processing the waste.
3. Rewarding RCF supply Departing from its initial proposal of a level of reward of 0.5 development renewable transport fuel certificates (dRTFCs) per litre equivalent to the relevant RCF supplied, the Government confirmed it will proceed with a reward rate of 1 dRTFC/kg/litre.

This incentivisation is considered sufficient as it (i) remains lower than truly renewable development fuels with greater carbon savings and (ii) ensures that the reward rate is not so high that the production of RCFs is made more favourable than the production of a non-development fuel waste-based biofuel.

The passage of the Energy Act 2023 last year means that the Department for Transport now have the necessary powers to amend the RTFO to include RCFs. The relevant amendments to the RTFO will be implemented under secondary legislation when parliamentary time allows.

3. Biomethane Production Policy Framework

In a call for evidence, the Department for Energy Security and Net Zero (DESNZ) has published a consultation on developing a new policy framework for biomethane production that would incentivise the continued growth in biomethane industry following the end of Green Gas Support Scheme (GGSS) in March 2028 and enable the UK biomethane industry to contribute meaningfully to net zero targets.

DESNZ's objective in developing a new policy framework is to ensure a smooth transition following the end of the GGSS in March 2028 and "to facilitate a biomethane market where a sufficient volume of biomethane is produced to meet strategic aims, in a way that is environmentally sustainable, efficient, and commercially viable." To this end the consultation focuses on five key areas:

1. Design and scope of a new policy framework DESNZ proposes (and invites comments on) a number of key principles in respect of biomethane production:
  • sustainability;
  • security;
  • adaptability;
  • commercial viability; and
  • compatibility.

Respondents are asked to provide insight on their view of biomethane market barriers so that these can be identified and addressed, as well as to comment on the opportunities posed by various biomethane production methods.

2. Role of biomethane Referencing the Biomass Strategy published in August 2023, the consultation details the role of biomethane and its potential in reaching net zero goals, whilst noting that there is no current annual target for biomethane production. It aims to gather evidence on whether a target should be set and, if so, what parameters should be applied.
3. Accelerating biomethane growth Evidence is sought on the economics of biomethane production, including:
  • the revenue potential of the green gas certification market and renewable transport fuel certificates;
  • the costs and profits relating to carbon capture on anaerobic digestion (AD) plants;
  • the barriers to maximising revenue from carbon dioxide; and
  • the role of gate fees.

DESNZ expects that some form of incentive mechanism will be required to support growth in the biomethane industry and the consultation seeks to understand which market based mechanism is best placed to provide to do this and shift the industry towards being financially self-sustaining. The mechanisms under consideration include:

  • contracts for difference
  • a supplier obligation underpinned by a tradeable certification scheme (like the RTFO)
  • grants and loans from Government; and
  • a hybrid option.
4. Sustainability DESNZ has identified opportunities to improve or amend biomethane sustainability standards and encourages respondents to provide evidence on key sustainability factors in biomethane production, such as feedstocks, digestate and methane emissions.

Recognising the particular impact of feedstock sustainability on the overall biomethane production process, the consultation outlines the six minimum criteria that could be used for assessing feedstocks:

  1. costs;
  2. greenhouse gases;
  3. air quality impacts;
  4. land use;
  5. water quality requirement; and
  6. water quality impacts.
5. Planning and standards Evidence is sought on the difficulties concerning the planning and permitting processes for AD plants, in order to minimise these going forward, and on potential changes to the permitting regime so that AD sites for waste and non-waste feedstocks have the same regulatory standards applied to them.

Also highlighting a regulatory gap in the biomethane production process, as well as plant and equipment standards for AD plants, the consultation questions whether a future framework should include broader guidance on overarching AD plant building, maintenance, and operating standards.

The consultation notes that whilst current plant locations are decided via a market-led approach, this could be altered to a government-led approach after which industry would develop the plants, for example, through a competitive process.

The DESNZ consultation closes on 25 April 2024, with responses used to inform the development of a new policy framework and publication of a more detailed future consultation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

11 April 2024

Chasing Zero: Biofuels And Renewable Transport Fuel Obligation Update

UK Energy and Natural Resources


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