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Financial Times: April the cruellest month for biofuels

By Chris Tighe
Published: March 23 2008 19:23 | Last updated: March 23 2008 19:23

From “environmentally friendly fuel” to the campaigners’ slogan “Don’t be fooled; biofuels”, few sectors have suffered such an abrupt switch in publicity.

Next month should have been a landmark for the UK’s fledgling biofuels sector, the government introducing on April 15 its Renewable Transport Fuels Obligation (RTFO) to underpin the home market for the UK’s early entrants, which are clustered mostly in Teesside and Humberside.

Instead, the sector struggles not only to counter a wave of negative publicity by environmental organisations questioning biofuels’ impact on climate change, land use and food prices – but also with commercial challenges that during the last year have made UK biofuel production uneconomic.

The most important of these commercial pressures are the very high prices of vegetable oils and, crucially, the impact of imported US B99 biodiesel. The 11p-a-litre US government subsidy borne by this imported biodiesel has made it uneconomic to produce biodiesel in the UK – the factor behind this month’s announcement from Teesside-based D1 Oils that it is reviewing staffing levels at its refining and trading operations in Middlesbrough and Merseyside.

As well as raising the threat that 35 jobs – half D1’s UK total – may go, the announcement affected its shares. The price lost a third in a day. Having floated in 2004 at 160p and once seen shares touch 304p, it closed on Thursday at 48p.

The price slide prompted the resignation of non-executive director Karl Watkin, D1’s founder and first chairman. He attacked “so-called experts on climate change” for not distinguishing between non-sustainable biodiesel feed stocks and jatropha, the wasteland, inedible plant which D1 intends to use as its feedstock once plantations, which it is helping set up globally, mature.

Mr Watkin is considering whether to make a bid for D1, which reports full-year results next month.

Biofuels Corporation, also based in Teesside and which went private last year after currency hedging and technical hitches racked up £100m debt, is currently focusing on glycerine refining. “We have got a plan to make this business competitive notwithstanding the very difficult market environment,” says chief executive Sean Sutcliffe.

Nobody in the sector denies the immediate outlook is challenging.

But the wave of new Teesside and Humberside plants being constructed, planned or proposed demonstrates a conviction challenges will be overcome. Crucial to this is the European Biodiesel Board which is compiling a detailed dossier soon to be submitted to the European Commission about damage caused by subsidised US imports. The result could be a countervailing duty.

North East-based biofuels consultant Ian Waller says: “It’s about having the right feedstock and technical choices.”

Mr Waller is involved in biodiesel technology development company Quicksilver, which is raising funds through Imprimateur Capital for a pilot plant at Teesside’s Centre for Process Innovation. And Future Capital seeks £135m from private investors for Vireol, to develop two wheat-to-ethanol refineries in Humberside and Teesside.

The government-imposed RTFO from mid-April requires oil companies and traders to mix 2.5 per cent of biofuel into transport diesel, rising to 5 per cent in 2010. The 2.5 per cent obligation translates into annual UK biofuel demand of 1m tonnes, rising to 2m in 2010.

In Teesside, Ensus, which has private equity backing, is at work on the UK’s first world-scale bioethanol plant with 400,000 capacity at a cost of £250m. It is scheduled to open in 2009. It has contracted to sell all its output to Shell for 10 years.

North East Biofuels, an umbrella group for sector companies, says Teesside already has nine operating biofuel companies and four others in prospect. In Humberside and Yorkshire, at least 12 developments are being considered.

Regional development agency One NorthEast takes the bullish view biofuels may be worth £1bn to the regional economy by 2027.

Yorkshire Forward’s head of sustainable development Michael Smith is worried about “people jumping on the bandwagon”. He says: “We are dealing with a fledgling industry which is full of uncertainty.”

Copyright The Financial Times Limited 2008

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