Renewable Transport Fuel May Be Bad, But It Is Cheap(er)

The EU has revealed that because of environmental criticisms there will be no renewable transport fuel component in any Renewables Directive post 2020. But the biomass liquid fuel sources thus driven from the market are relatively cheap, and the renewables for electricity that must take up the slack are comparatively expensive. This new direction increases consumer cost in an area where willingness to pay is already at an end, making still more damaging a policy that is already deeply ill-advised.Marie C. Donnelly, Director for Renewables at the European Commission, has announced, obiter dicta at a “breakfast seminar” on the 3rd of May, that there will be no mandatory transport fuel component in the EU Renewables Directive post 2020. At present, the Directive of 2009 requires that 10% of a country’s final transport fuel consumption, i.e. the fuel pumped into a vehicle’s tank, is from renewable sources, the only mandatory subcomponent in the overall target.The EU is presenting this change of direction as motivated by criticism of the environmental impacts of farming biomass sources for transport fuels, and these impacts are certainly real and undesirable. In effect, subsidies for transport fuels make it economically rational for farmers to convert the available water resource into fuel rather than food, with an obvious effect on food prices.However, and unsurprisingly since it is impossible to do just one thing, the removal of the transport component has consequences for the remainder of the target, greatly increasing probable consumer cost. While the details of the future Directive are not known, reference to the present targets as they bear on the UK will illustrate the principle of this point.The EU Renewables Directive (2009) requires that 20% of the Final Energy Consumption (FEC) in the European Union states should be from renewable sources by 2020, with 10% of transport fuel being renewable. The national target set for the UK with this overall aim sets a renewable level of 15% of FEC (up from 1.5% in 2009), one of the largest multiples faced by any member state.Thus, the UK’s target is for approximately 230–270 TWh of renewable energy in 2020. Those unfamiliar with the target may be surprised at the uncertainty in the specification, but it arises inevitably from the fact that the target is a set percentage of an unknown quantity, energy consumption in 2020. While there are disadvantages to this, for example it is peculiarly difficult to design policies and assign budgets, it is also administratively attractive, since it is remarkably easy for governments to conceal probable costs by making optimistic assumptions about the effects of energy efficiency measures on demand.Bearing in mind these uncertainties, we can calculate from the UK’s National Renewable Energy Action Plan (NREAP) that the 230 TWh share would be made up as follows:

• Transport  fuel: 45 TWh (10% of UK transport fuel)
• Electricity: 120 TWh (approximately 30% of UK electricity)
• Heating and cooling: 70 TWh (about 12% of UK heating and cooling)

Thus the mandatory transport fuel component accounts for about 20% of the whole renewables target. This matters because transport fuels are derived from biomass, which is, hydro aside, the renewable closest to being fundamentally economic. Biomass is a relatively energy dense source, and, crucially, liquid renewable transport fuels have no system cost, over and above that which applies to conventional liquid fuels. This contrasts sharply with renewables for electricity, which are capital intensive and intrinsically expensive, and which also impose heavy system integration costs through expansion of the grid network, the addition of rapid response generators to compensate for errors in the weather forecast, and, crucially, the under-utilized operation of a conventional fleet little diminished in size.If any future renewables target provides no transport fuel subcomponent, and indeed subtly discourages such renewable energy, the deficit would have to be taken up by other sources. Since heating and cooling is proving to be extremely difficult, in the United Kingdom at least, this task will tend to fall to the electricity sector, which already has the highest share, some 30%, and is threatening UK consumers with vastly inflated electricity prices (in 2020 the UK’s Dept of Energy itself has estimated that a medium sized business will see prices 76% higher in the low fossil fuel scenario that seems likely), and annual cost of about £7.6 bn a year year in 2020.By comparison, the transport fuel component of the target threatens to put 1 or 2% on the price of a litre of fuel (see paragraph 9 of the annex to this letter of 29th October 2015  from the Secretary of State, Amber Rudd), which is certainly very undesirable, but not of the same of the order of magnitude as the electricity policy costs, and is dwarfed in any case by Road Transport Fuel Tax.Indeed, since the costs of still larger volumes of renewable electricity are strongly non-linear, due to the best sites being used first and the character of the system costs, any further increment in the electricity sector burden will have still greater price per unit effects. Even assuming present subsidy levels are adequate, 45 TWh of renewable electricity would cost upwards of £3bn a year in subsidy alone if generated from offshore wind. It is difficult to believe that this will be acceptable to public.What do we learn from all this? Firstly, that setting energy targets results in unforeseen consequences requiring corrective chopping and changing in policy, and exactly the sort of instability that politicians and businesses claim to think so undesirable.Secondly, that ‘corrections’ to policy errors will tend to increase costs to consumers rather than reduce them.And, thirdly, that the United Kingdom should not enter into any future EU Renewables Directive, and that it would in fact be wise, and is perhaps now necessary to resile from the present commitment, which contains, as the Commission now admits, at least one serious error, and, it is not unreasonable to infer, probably many more.