Legislation drives the biofuel market

by Kim Johnson | Dec 20, 2013

The biofuel market has been growing worldwide, as it becomes an increasingly important addition to fossil fuels. A study by Pike Research predicts that the global biofuels market will double over a decade, from $82.7 billion in 2011 to $185.3 billion in 2021, while under the Kyoto Protocol, many countries committed to production of a certain level of biofuel to reduce greenhouse gas emissions.

The market, however, is still largely driven by politics, and the continued growth of the market, and the best opportunities for investors, depends on stable legislation. In this respect, the US remains best placed in terms of growth and market stability, while other countries, including the UK, lag behind. The UK, and indeed Europe as a whole, has made a promising start but current legislative uncertainty arising from political inertia is delaying further investment.

So how is the US biofuel market different to that of the UK? Since 2007 the Renewable Fuels Standard, the US mandate for biofuels, has increased year on year from approximately 4 billion gallons per year to approximately 13 billion gallons in April 2014, representing 10% of road fuels. This progressive demand stimulus witnessed a supply side response from the market with significant new build of ethanol plants between 2005 and 2009. This strong and consistent legislation has enabled the US to become a global leader in the bioethanol production. Needless to say, consistency of legislation in the future is important to the continued success of the US bioethanol industry.

Now, let’s contrast this with the UK. The UK, whose biofuel production is dependent upon both the EU-based legislation, known as the Renewable Energy Directive (RED), and the UK’s Road Transport Fuel Obligation (“RTFO”), both of which have seen on-going interference with the exact mandates. Critically, the previous 10% mandate for biofuels in road transport by 2020 now appears to be subject to amendment, but whether this will be replaced by an overall 6% target with a separate 7.5% target for bioethanol, or an overall 7% target for ALL biofuels, remains subject to debate at EU level. Moreover, within the UK, Government is unwilling to decide on the trajectory from the current 4.75% until after the next election in 2015, even though it takes at least 3.5 years to consent, develop and build new capacity. So even though we will need new capacity if we are to achieve the mandate by 2020, there is no mechanism for the market to do this or to signal the requirement for such new capacity.

A further contrast is that, while the US market has had a period of ten years to consolidate its biofuel market and gain investors’ confidence, the UK’s tinkering with its policies, means that the biofuel industry in the UK has not yet gained the traction it deserves with investors.

In light of this, where do we see the biofuel market for the US and the UK over the next few years? We believe that the US market, buoyed by a consistent legislative framework and market confidence, currently offers investors the chance to make an appropriate return. The UK remains strongly placed to do the same, provided it implements solid legislation and a committed implementation plan, allowing the private sector to respond to the market’s signals for demand.

Tim Levy
Director, FCP