Valley's Ahead of Climate Game; the North-East's Biofuels Industry, Based on Teesside, Is on the Front Line of the Government's Charge to Stave off the Global Environmental Apocalypse of Climate Change. Nigel Stirling Asks How Well Equipped the Region's Sector - Europe's Largest - Is to Meet Government Targets for Slashing the Carbon the UK Releases into the Atmosphere
Byline: Nigel Stirling
BEFORE Sir Nicholas Stern's landmark report on climate change this week, the North-East had firmly established itself as the centre for biofuels production in Europe in the next few years.
The apocalyptic conclusions from the former World Bank chief economist's 579-page report only reinforced the Government's commitment to curb carbon commissions, one of the earliest manifestations of which was its Renewable Fuel Obligation.
The obligation, which has been mirrored in Europe, requires oil companies supplying UK forecourts to increase the proportion of biofuels they sell to 2.5% in 2008 and 5% by 2010.
Industry research suggests biofuels - either diesel mixed with vegetable matter such as rapeseed or palm oil, or ethanol, an alcohol-based fuel typically made from sugar cane or corn - save 40% to 50% of the greenhouse gases produced by mineral fuel, taking into account carbon expended on fertilisers and transport.
Stern's report will add to calls for the Renewable Fuel Obligation to be increased to 15% as part of Tony Blair's Climate Bill next year. The region's biofuels industry, based on Teesside, appears to be potentially a major beneficiary of any expansion in renewable fuels capacity in the UK.
One NorthEast head of innovation, industry and science Chris Pywell hailed this week's report as a significant development for the industry on Teesside.
He said: "Stern signals a change in the overall political environment for renewable technology. Clearly to measure the impact, it will be critical to see what measures will come forward over the next six months. But clearly the Government seems to be of a view that something needs to be done now to prevent future costs."
According to development agency figures, seven investors have signalled an intention or have already begun production of biofuels in the Tees Valley.
One NorthEast estimates these will yield pounds 1bn of investment in plant and up to 2,000 jobs, with as many jobs in linked industries, such as agriculture and early-stage processing. Mr Pywell says Teesside's long experience in petrochemicals gives it a natural advantage in attracting process industry start-ups, with its expertise in areas ranging from waste management to firefighting on industrial sites.
In the past month, Billingham's Biofuels Corporation has said it will push ahead with plans to build two huge biofuel plants alongside its current plant at Seal Sands.
The Aim-listed company, already Europe's largest biofuels producer, will more than double capacity in the next couple of years by building the 200,000-tonne-a-year plants beside its 250,000-tonne plant.
Speaking before the publication of the Stern report, Biofuels Corporation chief executive Sean Sutcliffe said: "Five per cent [carbon] savings is only a start. The UK is being cautious, but only because there has not been until now the volumes available to deliver the carbon savings.
"We have one of the biggest plants in Europe and when I go to customers in Europe they say to me that we are delivering a step-change to the biofuels industry by delivering significant quantities of high quality production."
But it has been far from plain sailing for the fledglingbiofuels industry both on Teesside and farther afield and there must be nervousness in Government circles about the sector's ability to ramp up production to the levels needed, based on its performance so far.
Biofuels Corporation's Seal Sands plant has been plagued by production delays, cost pounds 15m more than first projected and is currently 18 months, and counting, past its deadline for full production.
A pounds 50m one-off loss attributable to the closure of hedging contracts nearly finished off the business and the company was saved only when Barclays bank agreed to a pounds 71m debt package. Biofuels' share price crashed to an all-time low earlier this month.
Stockton's D1 Oils, which with Biofuels Corporation is one of only two biofuels companies listed on Aim, has seen its share price fall by nearly 50% since this time a year ago. The North-East pair's share price performance, an indicator of the City's confidence in the sector, has been caught up in a global malaise afflicting biofuels stocks.
Initial Public Offerings (IPOs) in Australia and the US have been aborted in recent months. And share prices since IPOs in those markets have crashed after teething problems with new technology and high prices of feedstock as a result of drought. As oil prices have eased in recent weeks, biofuels stocks globally have followed them down.
Matt Drinkwater, head of biofuels at New Energy Finance, a specialist provider of financial information and research to renewable energy investors, says investors remain wary of the industry's exposure to commodity markets.
He said: "Its fortunes rely on the oil and agricultural industries. Agricultural commodities have been stable of late, but they are two of the most volatile commodities around historically."
D1 Oils in particular has taken a large punt on its choice of feedstocks. The company, founded by North entrepreneur Karl Watkin, will feed its plants worldwide with the jatropha plant, which while having the advantage of being able to be grown on non-arable land, is still to be proven as a biofuels feedstock.
Mr Drinkwater says: "D1 began planting in 2005, so it'll be 2007 when they have the first proper harvests and we see what the yields are like."
Unlike soya or corn, jatropha is inedible, leaving D1 without a valuable opportunity for product diversification if the crops fail to live up to expectation.
"If [the crops] are economic then fine, but if they aren't, then there is not a lot they can do with it," Mr Drinkwater says.
Will Wallis, an analyst specialising in biofuels stocks at City broker Numis, says sentiment for biofuels stocks has cooled in the past 12 months as some of the earlier predictions on the sector have failed to materialise.
The realisation that the sector does not have a mortgage on renewable energy will also have an effect on the industry, Wallis says.
He said: "What Stern places emphasis on is the relative costs of reducing emissions and of doing nothing. It is the economics of climate change. Of all the options, biofuels is not the most expensive, but it is not the cheapest either. Nuclear energy and making power plants more efficient is a much cheaper way of reducing emissions while solar panels, for example, are much more expensive."
However, for the industry to move forward, and achieve the economies of scale needed to reduce the fuel's cost relative to its rivals, the sector needs investment.
A natural source of funding would be oil companies, which if they are to meet the Government's targets by 2010, will need a reliable supply of biofuels.
Mr Drinkwater says the oil majors are happy to sit on the sidelines of the emerging technology for the time being.
He says: "They think in terms of long term development plans. There is a certain amount of scepticism from the oil companies.
"There seem to be plenty of entrepreneurs out there that are willing to raise the money and take a risk on the first generation of plants for them not to get involved."
BP and chemicals group DuPont this summer announced a joint research project to develop polymers - for eventual use in synthetics and non-fuel uses - using biofuels. The pair will also work on biobutanol, which produces more energy than ethanol and can be used in vehicles more easily without modification to engines.
Mr Drinkwater says these divergent technologies could be the catalyst for further involvement in the sector from the traditional oil industry.
He said: "The technology from the first generation plants is fairly mature. The margins are not that high. Where the work is being done now, on developing molecules that can be used in polymers, is where the higher value is." As in all emerging technologies, there appears to be a good measure of risk still involved in the biofuels industry's next stage of development. But the political imperative to be seen to be tackling climate change will mean investment is likely to keep on flowing, although there are likely to be a few more bumps on the way.
New Energy Finance's Mr Drinkwater, seemingly with as much as an eye on where the sector has come from as on its future prospects, concedes:" [Biofuels] is a thesis investment. It is a coherent story and if it works, it will work fantastically well. If it doesn't, then it will go wrong just as spectacularly."
STEP CHANGE: Biofuels chief executive Sean Sutcliffe' ON THE EDGE: Shares in the North-East's quoted biofuels producers - Biofuels Corporation and D1 Oils - have been stricken by production setbacks and sector nerves. Left, Tony Blair opens Biofuels last June.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Valley's Ahead of Climate Game; the North-East's Biofuels Industry, Based on Teesside, Is on the Front Line of the Government's Charge to Stave off the Global Environmental Apocalypse of Climate Change. Nigel Stirling Asks How Well Equipped the Region's Sector - Europe's Largest - Is to Meet Government Targets for Slashing the Carbon the UK Releases into the Atmosphere. Contributors: Not available. Newspaper title: The Journal (Newcastle, England). Publication date: November 1, 2006. Page number: 28. © 2009 MGN Ltd. COPYRIGHT 2006 Gale Group.
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