The development of fuel ethanol in the EU

The development of fuel ethanol in the EU www.uepa.be Valérie CORRE Director General European Association of Ethanol Producers Tokyo, 20th March 2007 (final version) 1 Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 2

About Created in 1958. Represents almost all EU producers (national association or companies) of agricultural ethanol used for industrial, beverage and fuel purposes. All EU 15 producing countries + Slovakia + Hungary + Poland + Czech Republic and Turkey. s objective is to promote ethanol production in the EU with fair trade conditions. 3 Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 4

The EU in a changing world Green Paper Towards a European Strategy for the security of Energy Supply (2001): highlighted the EU s vulnerability. soaring oil prices (tripled since 03/99); World oil demand is expected to grow by 41% by 2030 (IEA). Oil demand to grow by 1.6% each year. increasing energy dependency (transport, domestic & electricity sectors) : 50% now and 70% in 20-30 years; cost is rising (240 billion Euros in 1999); instability of supplier countries (45% of oil imports from Middle East and 40% natural gas from Russia). Global Warming and the role of fossil energy in growing greenhouse gas emissions and in climate change. 5 The EU in a changing world Emissions in the transport sector are expected to rise by 50% (1990-2010). EU Transport is responsible for 21% of all GHG emissions. Road Transport: 84% of total CO 2 emissions in Transport (air transport 13%). CO2 emissions by energy source CO2 emissions by sector Services Coal Oil Industry Household Electricity Natural Gas Source: European Commission, EU - 2001. Transport 6

The EU has taken action... Directive 2003/30/EC on the promotion of the use of biofuels or other renewable fuels for transport. Two indicative targets: replace 2% of fuel consumption with biofuels by 2005; 5.75% by 2010. Currently being revised. Council Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity (Article 16): allowing full or partial de-taxation of biofuels. 7 Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 8

Why promote fuel ethanol consumption? It can immediately replace gasoline up to 10% with no technical hurdles in practically all existing cars. No change in existing distribution systems. The transport sector is 98% dependent on imported oil. Well-to-wheel study shows that fossil CO 2 emissions are 2.5 time less for fuel ethanol than gasoline*. In 2004, ethanol use in the USA reduced CO 2 equivalent greenhouse gas emissions by appr. 7.03 Million tonnes which is what is produced by 1 million cars (Source: Argonne s GREET, USA). (*source Direm/Ademe, France) 9 Why promote fuel ethanol consumption? Reduce dependency (+/- 40 Mtoe): valorisation of internal resources + offer new outlet for EU agricultural production + create thousands of jobs in the EU (144 000). Reduce price of oil. Energy balance is very positive for ethanol : 1 energy unit of oil gives 0.87 units of gasoline or 1 unit ETBE or 2.05 unit of ethanol*. (*source Direm/Ademe, France) 10

The EU fuel ethanol market Energy balance 1 energy unit of oil produces: energy unit 2,05 1,02 0,87 petrol ETBE ethanol 11 Source : ECOBILAN ADEME / DIREM - 2002 Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 12

Source: Eurostat Europe is the world 4th largest ethanol producer 25000 20000 15000 10000 5000 0 EU agricultural ethanol production (in thousand hl) (includes wine alcohol) 2000 2001 2002 2003 2004 2005 Source: 22 Mh (1,76 Million t) in 2005. The traditional sector segment is steady. 5.2 Mhl (416 thousand t) of synthetic ethanol. Total EU Agricultural production Of which, ethanol production for fuel uses 13 Ethanol exports to the EU market Agricultural ethanol exports to the EU (in thousand hl) 6000 5000 4000 3000 Import duties: undenatured: 19.2 /hl Denatured: 10.2 /hl 2000 1000 0 2000 2002 2003 2004 2005 2006 Duty free Duty reduced Duty paid Total 14

Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 15 The EU fuel ethanol market Fuel ethanol consumption EU fuel ethanol consumption (in thousand tonnes) & forecasts Mostly ETBE E-5 in Sweden and UK Reid Vapour Pressure limit (60Kpa / 70 Kpa). Objective 25000 20000 15000 10000 5000 0 930 1.300 (est.) 2005 2006 2005 2010 2020 0.2% 0.4% Achieved 3,700 24,000 10,700 2% 5.75% Targeted 10% 16 Source:

The EU fuel ethanol market Fuel ethanol consumption EU produced vs imported fuel ethanol 2005 - in thousand tonnes 1000 900 800 700 600 500 400 300 200 100 0 23% Imported 77% EU produced Source: Eurostat 14000 12000 10000 8000 6000 4000 2000 0 Brazil World fuel ethanol Production source: F.O. Licht USA Asia/China EU Canada Others 17 The EU fuel ethanol market 2005 Production by country Finland: TOTAL: 36 800 t 716 000 t Sweden: France: 130 160 t 100 800 t Latvia: 960 t Spain: Lithuania: 240 000 t 6 300 t Germany: Poland: 120 000 t 68 000 t Czech Rep: Hungary 1 120 t 12 000 t 18 Fuel ethanol production was at 436 thousand tonnes in 2004

The EU biodiesel market 2005 EU biodiesel consumption: 3,184 Million tonnes 2006 Production capacity: 6,069 Million tonnes Germany France Italy Czech Rep Poland Austria Slovakia Spain Denmark UK Others Source: European Biodiesel Board Share of biofuels in the EU (2005) (Source: EurObserv ER 2006) Fuel ethanol share: 18,5% Biodiesel share: 81,5% 19 The EU biodiesel market The EU is the world leader in biodiesel production and consumption. Import duty of 6.5% ad valorem. No imports of biodiesel. In 2005, the EU imported about 100 thousand t of palm oil; 50 thousand t of soya oil, 160 thousand t of Australian rapeseed and 1 thousand t of Canadian rapeseed to produce biodiesel. The EU is long in gasoline (exports to the US, inter alia) and short in diesel (imports from Russia, inter alia). Diesel is taxed much less than gasoline in most EU countries. believes the market should be balanced through harmonised taxation. It was estimated that the EU will need to import about 4 Million t of vegetable oil to achieve the 2010 objective of 5.75% (source: panorama 2007). Issue of land availability: 1 ha of oilseeds produces 1,4 tonne of biodiesel compared with 5,8 tonnes of ethanol with 1 ha of sugarbeet and 2,5 tonnes of ethanol with 1 ha of cereals. 20

The EU fuel ethanol market four years later... In 2005, the EU overall penetration of biofuels was at 1.1% compared to 2% targeted for 2005. Indicative target is not efficient. There is a variety of systems in place within the EU to promote biofuels consumption (obligations or not, tender system or not, etc). Biofuels are supported by a number of tax incentives which allow them to be competitive with conventional fuels. However, tax breaks mean less revenue for governments (fuels are heavily taxed in the EU). But the benefits of biofuels consumption are not counted (internalisation of external costs) : positive impact on the environment, on health, job creation, less oil imports, etc. 21 The EU biofuels market The EU fine-tunes its strategy... Energy Package (01/07): comprehensive approach towards promoting green, competitive and secure energy supply. The EU wish to lead the technological path towards a sustainable and competitive economy. At least 20% of renewable energy by 2020; Reduction of 30% if other developed countries follow suit. A binding minimum target of 10% biofuels by 2020 to be achieved by each Member states. Importance of environmental certification & second generation biofuels. The European Council has approved these targets on 8-9 March 2007. 22

The EU fuel ethanol market Raw materials needed (estimation; Mt= million tonnes) Targets Qty ethanol Cereals Sugarbeets 2010 5.75% (energy content) 11 Mt 8 Mt eth (75%) 28 Mt Cereals. 3 Mt eth (25%) 33 Mt Sugarb 2020 10% (energy content) 15 Mt* + 9 Mt 2nd Gen. 11 Mt eth (70%) 40 Mt Cereales. 4 Mt eth (30%) 50 Mt Sugarb Surface (Million ha) 5,5 1 * A fuel consumption of 312 Mtoe is assumed within the EU with a 55:45 ratio for Diesel and Gasoline respectively; SEC(2006) 1721/2. 23 Source: The EU fuel ethanol market Imports are not counted: the Commission estimated that the EU could achieve an objective of 11% of biofuels penetration by 2020 with no imports and no impact on food sector. However, imports will take place. Second generation biofuels is taken into account. If imports are not balanced (above 22% of consumption) the share of 2nd Generation biofuels was estimated to drop down to 17%. It was estimated that the EU has a potential of about 41,3 Million t of cereal and oilseeds straw and 164 million t of wood that could produce 33 Mtoe (million tonne oil equivalent) of biofuels per year (source: panorama 2007). Technological improvement are not included in the estimate: crop yields and in ethanol production. R&D is essential also to get to the 2nd generation biofuels. Bulgaria and Romania are not include in the calculation. Significant agricultural potential. 24

The EU fuel ethanol market Investments The industry is needed ready to invest. 2005 fuel ethanol production: 716,000 t Target 2010: 11 Mt (5.75%) We need: About 40 units of 250,000 t (EU-25) Capital investment: 6 Billion Euros 25 Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 26

The EU Agricultural Potential We need less than 5% of arable land to achieve the 2020 fuel ethanol target 6.5 Million ha 164 Million ha of cultivated land (EU-25) 27 EU cereal production (2005/2006 campaign - EU-25) (Source: EU Commission) Total production: 258 Million tonnes - Surface 51,5 Million ha Yield t/ha EU-25: 5,01 EU-15: 5,5 EU-10: 3,86 Corn (19%) 6 Million ha Barley ( 21%) 13 Million ha Durum wheat (3%) 3.5Million ha Other (12%) Soft wheat (45%) 19 Million ha Compared to previous campaign: 422 thousand ha less for corn: too much water 322 thousand ha less rye: not eligible for intervention 28

EU cereal production by country (2005/2006 campaign) Total EU-25 cereals production: 258 Million tonnes (Mt) EU-15: 198 Mt EU-10: 60 Mt France 64,107 Ireland 1,938 Poland 26,725 Germany 45,933 Netherlands 1,866 Hungary 16,114 UK 21,169 Portugal 694 Czech Rep. 7,660 Italy 19,022 Slovakia 3,518 Spain 12,930 Latvia 2,810 Denmark 9,238 Lithuania 1,315 Sweden 4,977 Estonia 760 Austria 4,874 Slovenia 576 Greece 4,153 Cyprus 88 Finland 4,058 Malta 0 Belg/Lux 3,071 (Source: EU Commission) 29 Cereal uses in the EU (2005/2006 campaign) (Source: EU Commission) EU-25 cereals production: 258 Mt + Imports 10 Mt = 268 Million tonnes Exports (8%) Food (21%) Animal feed (58%) Seeds (3%) Industry (9%) Biofuels (1%) 30

The EU Agricultural Potential A lot of opportunities 8% of cereals exported by the EU is criticised for being trade distorting (export refunds): about 21 Mt of cereals could be used in the EU energy sector. Intervention stocks (only for corn, bread making wheat, sorghum and barley): mechanism to manage the market. Less used now with price increases. Still 3.6 Million tonnes of stock of corn. Under CAP, 5,7 Million ha of set-aside land which could be cultivated for the non-food sector. Today, less than 1 Million ha is used. Unutilised potential: 4,7 Million ha. 31 The EU Agricultural Potential A lot of opportunities Aid for energy crops: premium of 45 EUROs per ha for up to 2 Million ha. In 2005 only 570 thousands ha were used under this scheme. EU Sugar Reform: reduction of production (30%): the energy sector is a fantastic alternative outlet. Conversion of sugar mills into ethanol production plants? Romania and Bulgaria: more than 20 Million ha of utilised agricultural area. 0.7 ha of agricultural land per capita compared to 0.4 in the EU 25 (Commission paper, SEC(2006) 1721). Achieving the 2010 target would also reduce the EU s dependency on proteins for animal feed by 1/3. The EU imports 33 Million tonnes of DDG s (a by-product of ethanol production) per year from USA, inter alia. 32

Road map 1- About 2- The EU in a changing world 3- Why promote fuel ethanol? 4- The EU ethanol market 5- The EU fuel ethanol market 6- The EU agricultural potential 7- The challenges ahead of us 33 The challenges ahead of us Building an EU fuel ethanol industry LEGAL ASPECTS are now being worked out by the Commission as European Council gave its green light to a binding minimum target of 10% by 2020 for biofuels. Clear legislative framework is needed with intermediate binding target to give industry visibility. TRADE ASPECTS have to be addressed: The EU fuel ethanol industry is a nascent industry already competing with mature industries which have long been supported. Imports should not exceed a certain percentage of EU fuel ethanol consumption (balanced approach). In the USA, duty free imports are taped at 7% of US fuel ethanol consumption. 34

The challenges ahead of us Building an EU fuel ethanol industry TECHNICAL ASPECTS: Revision of the fuel quality directive to allow for direct blending of ethanol. Revision on its way. Certification of biofuels: the EU wish to promote best CO2-saver biofuels, including 2nd Generation biofuels. What parameters? what methodology? What controls? What costs? Global acceptance and implementation is paramount here again. Simple and non discriminatory food/non food agriculture. World fuel ethanol consumption is expected to increase substantially: common standards are needed to make ethanol a global commodity. 35 The challenges ahead of us Building an EU fuel ethanol industry ECONOMIC ASPECTS: Promoting biofuels and green energy is generally more expensive than the energy it aims to replace. Competitiveness should include environmental and social costs if we are serious about sustainability. Polluting the earth must be as uneconomic as possible (ex.: EU Emissions Trading System). The success of the Brazilian story is also that ethanol prices have always been kept below gasoline prices. This is a pre-requisite for a smooth biofuel penetration as oil price s volatility is expected to increase in the future. 36

The challenges ahead of us Global co-operation is key Global warming has no frontier: reducing greenhouse gas emissions is paramount to preserve the planet and its inhabitants. Strong increase in world demand for energy, food water etc... Development must be sustainable: environmentally friendly, with high degree of energy efficiency and incentives to curb consumption. The Issue of competitiveness: the costs of strong and urgent action will be less that the cost of inaction (Stern Report). Also flooding, hurricanes, droughts create poverty and migrations which create problems wherever it takes place. 37 THANK YOU! European Union of Ethanol Producers Avenue des Nerviens, 63 B- 1040 Brussels Belgium www.uepa.be 38