Considered in Grand Committee
My Lords, this statutory instrument proposes an important change to the Renewable Transport Fuel Obligations Order 2007, or RTFO. Renewable transport fuels are more expensive than fossil fuels and rely on the RTFO support mechanism to create demand and incentivise their supply. This SI changes the price used to calculate any buy-out payment due under the renewable transport fuel obligation certificate trading scheme. It would increase that buy-out price from 30p per litre to 50p per litre. This change is necessary to ensure the continued supply of biofuels and other renewable fuels by increasing the potential level of support. It would also ensure continued delivery of carbon savings.
The 2007 order establishes targets driving the supply of renewable fuels in the UK. It does this by placing obligations on larger suppliers of fuel to ensure the supply of renewable fuels. The amount of renewable fuel that must be supplied is calculated as a percentage of the volume of fossil fuel supplied in a calendar year. This obligation level, or target, has increased over time and is currently 9.75%. These increases have supported the market for renewable fuels and were accompanied by improvements to their sustainability. The RTFO target gradually increases until 2032 at which point, without further legislative agreement, the yearly target would be 12.4% in each subsequent year.
The 2007 order also provides for a certificate trading scheme, which supports a market for suppliers of renewable fuels. Under the scheme, obligated fuel suppliers must acquire sufficient renewable transport fuel certificates, or RTFCs, to meet their obligations by either supplying renewable fuels or purchasing RTFCs. Alternatively, they can make a buy-out payment. This buy-out option, and increasing its price, is the focus of the statutory instrument.
Enabling suppliers to pay a buy-out rather than having to acquire RTFCs caps the cost of the RTFO scheme. It protects consumers of fuel from exceptional spikes in the price of renewable fuels. However, in normal market conditions, the continued success of the RTFO scheme relies on the supply of renewable fuels. Biofuels are the main type of renewable fuel supplied under the RTFO. Recent increases in the cost of biofuels relative to petrol and diesel mean there is a potential commercial incentive for suppliers to make a buy-out payment. Any reduction in biofuel supply will affect greenhouse gas emissions savings in transport, creating a gap in UK carbon budgets. It also could damage our biofuels industry and future investments needed to keep us on the path to net zero.
The RTFO applies UK wide and has been highly successful in reducing carbon emissions. Through it, we have seen the average greenhouse gas savings of renewable fuels increase from 46% in 2008-09 to 83% in 2019. The renewable fuels supplied under the RTFO saved almost 5.5 million tonnes of carbon dioxide emissions in 2019, equivalent to the emissions of 2.5 million combustion engine-powered cars. Indeed, renewable fuels currently contribute around a third of the savings required for the UK’s transport carbon budget. Clearly, we need to ensure that the RTFO continues to provide effective market support.
The amendment in this statutory instrument does just that and follows a consultation carried out over the summer. The consultation proposed two options: an increase in the buyout price from 30p per litre to either 40p per litre or 50p per litre. The vast majority of respondents, 56 out of 61, agreed with the Government’s assessment of the urgent need to increase the buyout price. Of these 56, 45 agreed with our preferred option: to increase the buyout price to 50p per litre.
In proposing this statutory instrument, the department has carefully considered a balance of interests, recognising that potential additional costs in meeting the RTFO would ultimately fall to the consumer and the need to maintain a competitive biofuels market which continues to deliver reductions in carbon emissions. I believe that the increase in the buyout proposed strikes the right balance. I commend this instrument to the Committee.
My Lords, I am very grateful to the Minister and particularly grateful to her for allowing us to forewarn her of questions that we might want to raise, not least because I think we are all exploring our way in terms of this order. There have been times, over the five years that I have been in your Lordships’ House, when I have come into the Chamber or Committee not to pontificate or provide pearls of wisdom but actually to learn something. That is why I signed up for this Grand Committee discussion this evening.
I confess that I was unaware of the technicalities and substantial impact that this programme has had since 2007 on carbon emissions and the way in which trade and the buy-out system works. So I have given notice to the Minister of my simple—or even simplistic—question: are we talking here about providing incentives to expand and develop this critical market for the future, or are we providing a balancing disincentive for market failure? Although I have read the Explanatory Note to which the Minister referred, I am still completely confused by it, and sometimes I do not mind admitting it.
I support this Motion, but I believe that we have such a long way to go in meeting the strategic objective of zero emissions targets by 2050. I wanted to ask the Minister a question. I have been studying the Green Book review published last week, which enjoins government departments and those seeking to spend money to fix their minds on the strategic objective ahead. In this case, I select net zero by 2050 as the strategic objective. I wonder how you build a case of contributory objectives which help you to get to the strategic objective. I built an imaginary case, aimed at reducing the amount of diesel burned in this country by very large amounts, by various actions. It mostly concerns electrification of the railway and the substitution of HGVs by electric trains. My calculation shows that you would save a lot of diesel fuel—and I mean a lot.
I am not absolutely convinced yet of my figures, but I wanted to ask whether, in seeking a strategic objective, one is hamstrung by the different departmental objectives rather than looking at a problem in an overall fashion, which includes where the investments take place—for example, are less favoured parts of the country helped by this, or by the greater reduction in emissions in various places, or the reduction in traffic congestion? Does the work in the Green Book take us to a new place in terms of looking at investments on a broader rather than a narrow focus?
Having listened to my noble friend Lord Blunkett, I feel a lot happier to know that I am not the only one who is not an expert on this SI. The purpose of the order, as the Minister said, is to increase the renewable transport fuel obligation buyout price for fuel suppliers to 50p per litre from 30p per litre for obligation periods beginning on or after 1 January 2021. Annual obligations for the supply of renewable fuels are set for fuel suppliers under a similarly named 2007 order that commenced in April 2008. The obligations can be met by supplying renewable fuel, by purchasing renewable transport fuel certificates from other suppliers, or by paying a sum—a buyout price—to the Secretary of State. As the Minister said, it is that sum that this order has the effect of increasing.
The Government have said that increasing the buyout price to 50p per litre will mitigate the risk of suppliers buying out of their obligations and the UK losing greenhouse gas savings. Renewable fuels supported under the RTFO order have reduced greenhouse gas emissions from transport over the last 12 years and, as we heard from the Minister, they are contributing a third of the greenhouse gas emissions required for the UK’s current transport carbon budget.
Further, the Government have said that the buyout price increase will help protect the renewable transport fuel obligation scheme against rising prices for biofuels and ensure that investment in UK biofuel facilities continues to have a market. As I understand it, in August 2019 the cost differential between renewable fuels and the fossil fuels for which they are a substitute was approaching a level at which it would cost less to buy out an obligation under the RTFO rather than continue to supply renewable fuels.
Fuel suppliers are likely to pay the buyout only if the cost of renewable transport fuel certificates regularly exceeds 30p per litre. In January this year, offers for renewable transport fuel certificates for the 2020 compliance year were 30.25p per litre and since the beginning of July offers have regularly been higher. Offers for 2021 RTFCs have been reported as high as 33p per litre in September this year. RTFCs are issued for every litre of sustainable and renewable fuels blended. Lifting the buyout to 50p per litre will result in a maximum additional cost of 2p per litre to the motorist.
The renewable transport fuel obligation is designed to reduce greenhouse gas emissions from transport fuel by setting annual biofuel blending obligations for fuel suppliers. As we heard from the Minister, the obligation is 9.75% this year and will increase incrementally to 12.4% by 2032. Could the Government say in their response on what basis that incremental increase is determined; what was the percentage figure fixed in 2008; and, in 2032, what proportion of greenhouse gas emissions required for the UK’s current transport carbon budget will be contributed by renewable fuels supported by the RTFO order?
I have just a few questions on the Explanatory Memorandum. Paragraph 7.6 refers to civil penalty provisions and states:
“It is planned to consider this matter as part of other changes to the RTFO Order that will be consulted on in due course.”
What are the
“other changes to the RTFO Order”,
and by when will they have been consulted on? Paragraph 10.4 of the Explanatory Memorandum refers to “obligated suppliers”. How many obligated suppliers are there in total who are covered by the terms of this order?
Paragraph 12.1 of the Explanatory Memorandum refers to a maximum cost for 2021 to 2030 that would be incurred if all suppliers opted to buy out of the main obligation in each obligation period. How much has been paid out under the buy-out provision option under the RTFO Order 2007 to date in total, and of that how much has been in the last two years for which figures are available? To what purpose has any such money been put?
Paragraph 13.2 of the Explanatory Memorandum refers to transport fuel suppliers who are exempt from the renewable fuel obligation and fuel suppliers for whom the obligation is reduced. What is the reduction for those in that category, and how many suppliers are in that category? Finally, is it felt that the case still exists for having that reduced rate, bearing in mind the Government’s desire to enable renewable fuels to contribute to the UK’s future carbon budgets?
My Lords, I thank all noble Lords for their consideration of this statutory instrument. I join other noble Lords in declaring my previous lack of a full understanding of this very important area. It has been a very useful discussion and I am grateful for the questions raised, particularly those raised by noble Lords who were able to share them with me in advance. I will, of course, write where I do not cover everything.
To start with the question raised by the noble Lord, Lord Blunkett, when he asked if it is an incentive to maintain supply or a punishment to maintain the market, I am going to be very unhelpful and say that it is neither. The increase in buy-out price is simply necessary for the market to function. We need to make sure that there is a continued supply of biofuels and other renewable fuels under the RTFO and ensure the continued delivery of carbon savings. Obviously, a buy-out price set at the wrong amount would not allow that market to function, because suppliers would then pay a buy-out, rather than having to acquire the RTFCs which, as a whole, obviously cap the cost of the RTFO scheme and protect the consumer from the exceptional spikes. So, the buy out is one element of a very well-designed and successful scheme, and it serves as a release valve to make sure that the consumer is never forced to pay a very large amount for their fuel.
The noble Lord, Lord Bradshaw, raised a number of issues not wholly related to the SI before us today. I would like to reassure him that the Department for Transport is studying very carefully the changes to the Green Book, and we will consider all the issues he raised, in terms of looking at where we are going to do our investment in transport infrastructure in the future. The noble Lord will also know that we have a transport decarbonisation strategy, which my department is working incredibly hard on at the moment, and which will serve as a path to net zero in the future.
On the questions raised by the noble Lord, Lord Rosser, in 2019 there were 19 obligated suppliers covered by the terms of this order, and these are obviously the ones that supply significant amounts of fuel, which I will come on to. Of course, there are exempted suppliers, which the noble Lord, Lord Rosser, also mentioned. These fuel suppliers supply less than 450,000 litres of transport fuel, and they are exempted from the obligations of RTFO. In these circumstances, 450,000 litres is not a very large amount. Furthermore, there is a second group of suppliers that supply less than 10 million litres of transport fuel, and they do not have an obligation on the first 450,000 litres of their supply—again, a few percentage points of their supply. This is basically to ensure that there is no cliff edge when you get to 450,000 litres.
In 2018 and 2019, there were not many fuel suppliers benefiting from this reduction in obligation—four and two respectively. To put that into context, those exemptions represented a very small fraction of the 52 billion litres of total fuel supply covered by the RTFO in 2019 and of the potential greenhouse gas emissions savings. We have no plans to review this.
The noble Lord, Lord Rosser, also asked about the amount of buyout incurred. To date, there has been no significant buyout under the main obligation in the 2007 RTFO order. Buyout amounts relate to a very small number of companies and are therefore considered commercially sensitive. In the last two years—2018 and 2019—all obligated suppliers have met their obligation. In 2019, two obligated suppliers used buyout to make up around 10% of their main obligations. That meant that less than 0.1% of the total main obligation was met through buyout—the sort of level we hoped for.
All money received from suppliers buying out is paid to the Treasury. It is Consolidated Fund and not ring-fenced for any particular purpose. I can reassure noble Lords that the Government take investment in biofuels and sustainable fuels very seriously. We have developed a target to incentivise specific advanced renewable fuels because they are of strategic importance for use in sectors which are difficult to electrify—for example, heavy goods vehicles and aviation. We have an advanced biofuels demonstration competition called the Future Fuels for Flight and Freight Competition, which provides up to £20 million of capital funding and offers real opportunities. As part of the Government’s 10-point plan, a new package of support for sustainable aviation fuels has been announced. This includes a further £15 million in competitive funding to support the production of sustainable aviation fuels in the UK. Although the money goes to the Treasury, sometimes it comes out again.
The noble Lord, Lord Rosser, mentioned how the RTF obligation level has changed over time. The level was set at 2.5% for 2008-09 and has been increased on several occasions since. Increases to the obligation level to 2032 were made in 2018, following an extensive consultation in 2017. These increases to targets were set on the basis of providing longer-term policy stability for industry, increasing the supply of waste-derived fuels and encouraging the production of advanced low-carbon fuels. The RFTO is expected to deliver greenhouse gas emissions savings of nearly 7 million tonnes of carbon dioxide equivalent per year by 2032. As laid out in the Government’s energy and emissions projections 2019, this will make up around one-sixth of transport sector savings in 2032 as a result of policies implemented so far. The Government recognise that we have to do more to reduce emissions during the period to 2032. As I mentioned previously, the DfT will publish the transport decarbonisation plan very soon.
The noble Lord, Lord Rosser, mentioned a future consultation on the RTFO order. The final content of the consultation on further changes to the RTFO planned for next year is still being worked up. We are reviewing whether there is an opportunity to increase greenhouse gas savings from the scheme, in addition to technical and consequential changes, such as those to civil penalties. We anticipate that the consultation will also include measures in response to suggestions from industry as to how the RTFO might support, for example, recycled carbon fuels, and the rules relating to renewable hydrogen. We expect the consultation to be concluded next year.
This is a small and thankfully non-controversial amendment which has been subject to consultation. All noble Lords now understand a little more about RTFO than previously, which is all to the good because it is an important scheme which supports the renewable fuels industry. I hope that the Committee will join me in supporting this statutory instrument.
That completes the business before the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room.
Committee adjourned at 6.40 pm.