Highlights

In 2015, the European Commission (EC) officially introduced a seven percent cap on food based biofuels thus limiting future production of these first generation or conventional biofuels and ensuring that only the most efficient plants will continue operating. Meanwhile, incentives to encourage second generation or advanced biofuels, such as the production of hydrogenated vegetable oils (HVO) have been very successful. The commercialization of cellulosic ethanol is lagging behind compared to the development of HVO. Imports of biomass, in particular wood pellets for heating and power, are surging.

Executive Summary

Policy and Programs

Regulations influencing the use of biofuels in transportation as well as biomass in the heat and power market are outlined in the EU Energy and Climate Change Package (CCP) and the Fuel Quality Directive (FQD). The CCP includes mandatory goals for 2020, one of which is a 20 percent share for renewable energy in the total EU energy mix. In the Renewable Energy Directive (RED), specific sustainability requirements are defined for liquid biofuels. These include minimum greenhouse gas emissions (GHG) reductions, land use and protection against conversion of high-carbon content lands, other environmental criteria, as well as economic and social criteria. The implementation of harmonized sustainability requirements for solid biomass has been postponed until after 2020.

On October 5, 2015, the Indirect Land Use Change (ILUC) Directive entered into force, an amendment to RED and FQD which introduced a seven percent cap (energy basis) on the share of food crop based (conventional) biofuels in EU transportation fuel by 2020 within a wider 10 percent target set by the RED. Furthermore, a non-binding 0.5 percent national target for advanced (non-food) biofuels was included. EU Member States will have until September of 2017 to enact the reformed legislation.

Conventional and Advanced Biofuels

In 2015, the blending of bioethanol and biodiesel was respectively 3.4 and 6.5 percent (energy basis), and thus well below the 10 percent target. The blending of conventional (food based) biofuels is estimated at five percent and still well below the seven percent cap. With the potential outlook of lifting EU wide mandates after 2020, the market conditions appear to be dim for conventional biofuels. A most cost effective approach to further green the transportation sector would be to introduce higher blends such as E10, and open the market for foreign produced biofuels. But both the imports of bioethanol and biodiesel have been cut off by high import and antidumping duties.

The blending of non-food based (advanced) biofuels is about 0.83 percent, and thus already surpassing the non-binding target of 0.5 percent for advanced biofuels by 2020. Since 2011, HVO production has taken of in the EU. In 2015, production is estimated at 2.3 billion liters, and is expected to increase to about 2.9 billion liters in 2017. The current capacity of cellulosic ethanol is about 85 million liters in the EU, and could possibly increase to about 300 million liters in 2020.

Biomass for heat and power

The European Commission (EC) expects the share of biofuels to be roughly twelve percent of the renewable energy use in 2020. While heat and power consumption from solid biomass is estimated to account for approximately 45 percent. The two main renewable biomass energy sources are wood pellets and biogas, the latter produced from a variety of feedstocks. With a consumption of about 20.5 MMT of pellets in 2015, the EU is the world's largest wood pellet market. Based on the EC mandates and Member State incentives, the demand is expected to expand further to nearly 22.5 MMT in 2017. The United States has the potential to supply at least half of the import demand, which would represent a trade value of potentially over US$ 1 billion in 2020.

Based on the current outlook of positive economic growth, the Europeans Commission (EC) projects the transportation sector to continue to growing until 2030. While passenger road transportation is forecast to increase, the efficiency of vehicles is also expected to improve by 21 percent in 2020 and 35 percent in 2030 relative to 2005. In addition, the demand for electrically chargeable vehicles, especially for passenger cars, are forecast to emerge as a more viable option for consumers around 2020 as a result of EU and national policies aiming to boost their penetration. Both the increased efficiency and electrification will reduce the use of gasoline significantly by 2030. The use of diesel is expected to remain relatively stable; however, recently EU Member States have enacted policy measures that restrict the use of diesel and this could potentially lead to higher gasoline consumption. In France, for instance, a carbon tax has been created and the taxes on diesel have increased while taxes on gasoline have decreased. Air transport is projected to be the highest growing sector of all passenger transport modes, mainly due to the increased share of intercontinental aviation. Use of energy by agriculture, construction and mining, and by other industries heavily depends on the economic outlook in the European Union.

Policy and Programs

The Renewable Energy Directive

The EU Energy and Climate Change Package (CCP) was adopted by the European Council on April 6, 2009. The Renewable Energy Directive (RED), which is part of the CCP package, entered into force on June 25, 2009, and had to be transposed into national legislation in all Member States (MS) by December 5, 2010. The CCP includes the “20/20/20" goals for 2020:

  • A 20 percent reduction in greenhouse gas (GHG) emissions compared to 1990
  • A 20 percent improvement in energy efficiency compared to forecasts for 2020
  • A 20 percent share for renewable energy in the EU total energy mix. Part of this 20 percent share is a 10 percent minimum target for renewable energy consumed by the transport sector, to be achieved by all MS.

The goal for 20 percent renewable energy use in the total energy mix is an overall EU target, but the RED sets a different target for each MS depending on the MS' capacity.

In contrast to the 20 percent overall EU total energy mix target, the 10 percent target for renewable energy in transport is obligatory for all MS. The most current official figures available from the EU for renewable energy use in the transport sector show a 6.0 percent share (volume basis) in 2014, up 0.6 percent from 5.4 in 2013.

Revision of the RED and FQD

Directive 2015/1513, covering indirect land use change (ILUC), entered into force on October 5, 2015, and amends both the RED and the Fuel Quality Directive (FQD). The ILUC Directive includes the following key elements:

  • 26 MS met their first 2011-2012 interim target and 25 MS are expected to meet their 2013-2014 target. Some have already met their 2020 targets;
  • Some MS may need to intensify their efforts in the coming years to keep on track with their targets;
  • There is increasing interest from MS to use cooperation mechanisms;
  • The share of renewable energy in transport was 5.4 percent in 2013 with a projection of 5.7 percent for 2014. The reason for the slow progress was mainly attributed to the uncertainty over the ILUC proposal.

Mid-Term Evaluation of RED

On April 2015, DG Energy published a mid-term evaluation of the RED. The study concluded that a number of provisions are found to be effective and efficient, whereas, the remaining provisions cannot be thoroughly assessed due to lack of data, delays in MS implementation, or limited use of the provisions so far. Meeting the mandatory transport target has been hampered by inter alia, the delay in the ILUC decision-making process.

The study recommended that the current provisions should not be modified as stable policies are key to investor security and achievement of the 2020 targets. Furthermore, the study suggested that the longer-term framework for renewable energy resources (RES) regulation in the EU should be decided on before 2020 to provide clarity on market outlook and continuation of the current RED provisions beyond 2020. This would ensure a seamless transition from the 2020 to the 2030 policy package, which will strengthen the current regulation and measures, and encourage investments in RES throughout the EU.

The study also analyzed six MS (Bulgaria, Estonia, Germany, Poland, Spain, and Sweden) on their handling of and attitudes towards the RED. It found that some MS lack ambition to exceed the 2020 RES target. Additionally, they concluded reporting duties under the RED are complicated for several MS. MS suggested that there is a need for binding targets for RES at MS level, rather than an overall EU target.

RED and Sustainability Criteria

The RED establishes two sets of criteria to promote sustainability of biofuels production: 1) GHG emissions savings and land use requirements must meet a 35 percent threshold of GHG emissions savings and will go up to 50 percent in 2017 and 60 percent for new installations in 2018; 2) biodiesel must be certified as having been produced sustainably on land that has not been converted from high carbon density conditions such as rainforest.

In order to receive public support or count towards mandatory sustainability targets, biofuels and bioliquids used in the EU must comply with the EU's sustainability criteria as featured in the RED and FQD as amended by the ILUC Directive. The EU has defined a set of sustainability criteria to ensure that the use of biofuels (used in transport) and bioliquids (used for electricity and heating) is done in a way that guarantees carbon savings and protects diversity.

To qualify for RED and FQD targets, biofuels consumed in the EU must comply with strict sustainability criteria provided in Article 17 of the RED. Rigorous requirements are set by the RED on the minimum level of GHG savings, appropriate land use, and monitoring requirements for any potentially adverse effects.

In order to demonstrate compliance with the EU sustainability criteria, biofuels need to be validated by either national verification systems or by one of 20 voluntary schemes approved by the EC and valid in the EU. Sustainability criteria must be met by all biofuels, whether produced within the EU or imported, and must meet a 35 percent GHG emission savings requirement compared to fossil fuels. As of 2017, the threshold is set to rise to 50 percent and to 60 percent by 2018, for new installations.

Environmental sustainability criteria covering bio-diverse and high-carbon-stock lands are likewise laid out in the RED. The biodiversity criteria apply to land that would have been classified as highly biodiverse in January 2008. The criteria state that biofuels may not be made from raw materials obtained from land with high biodiversity value, such as primary forest and other wooded land, biodiverse grasslands, or areas designated for nature protection purposes. Biofuels also cannot be made from raw materials produced on land with high carbon stock such as wetlands, peatlands, or continuously forested areas.

Agricultural raw materials produced within the EU, including biofuels, must be produced in accordance with the minimum requirements for good agricultural and environmental conditions that are established in the common rules for direct support schemes under the common agricultural policy (Cross compliance Article 17 § 6 of the RED). Other sustainability requirements cover environmental criteria for soil, water, and air quality, as well as social criteria, which focus on food price impact and adherence to International Labor Organization conventions.

MS competent authorities are responsible for ensuring that biofuels counted towards targets, mandates, and tax credits fulfill the sustainability criteria. MS are not allowed to have higher or lower sustainability criteria than those set by the EC, and must accept all certification systems recognized by the EC. However, with each MS having different checklists, there could be 28 different national certification schemes that must be registered and recognized by the EC.

The FQD complements the RED and mirrors some of the RED's content such as the sustainability criteria. A key requirement of the FQD is that all fuel suppliers must meet a 60 percent reduction in GHG emissions by 2020 across all fuel categories supplied to the market. This is designed to be consistent with the 10 percent use of biofuels and shift demand towards biofuels with higher GHG savings. In addition, the FQD limits ethanol blends to 10 percent or less when ethanol is used as an oxygenate, and places limits on palm oil and soy oil content of biodiesel.

GHG Emissions

The EC Joint Research Center (JRC) defines the GHG emissions savings for various raw materials, and production and supply pathways associated with the cultivation of the biomass, processing, transport, and distribution. Emissions savings and carbon emissions resulting from land-use change, adoption of improved agricultural practices, carbon capture and storage, or generation of excess electricity through cogeneration are also included.

When the default values are calculated, the EC applies a “discount factor" from the typical value to ensure that the biofuel pathway is not inflated. For example, the RED's GHG savings default value for soy diesel is 31 percent, which is below the minimum 35 percent GHG threshold defined in the RED sustainability criteria. The default GHG value for soybeans was calculated using a pathway where soybeans were first shipped from Brazil, and then transformed into soy oil and biodiesel in the EU. If the GHG value was calculated for soy-based biodiesel produced in the United States and shipped from the United States then it would have a GHG savings value of 40 percent and be above the 35 percent threshold. However, EC officials have stated they do not wish to have GHG saving numbers for different geographical areas, but prefer to base GHG numbers on specific pathways, such as no-till farming, to allow for easier updates. With no international standard in place for the calculation of GHG savings, there are concerns that protectionists could use GHG thresholds to hamper trade.

Voluntary Schemes

One way to ensure that biofuels meet the sustainability and GHG savings requirements of the RED is to have the biofuel certified by a voluntary scheme. Some of the MS have developed national voluntary systems, while others rely on voluntary schemes adopted by the EC. The EC considers voluntary schemes its preferred mean of obtaining certification, but there are no negotiations for bilateral agreements on biofuels certification even though this was an option mentioned in the Voluntary schemes (VS) verify compliance with the EU's biofuels sustainability criteria. VS check that biofuel production did not take place on land with high biodiversity, that land with high carbon stock was not converted for biofuel production, and that the production of biofuels leads to a sufficient level of GHG emission savings. For the purpose of certification, the entire production chain from the farmer growing feedstock to the final biofuel product is checked by independent auditors. Recognition by the Commission is granted for up to a period of five years.

Since the ILUC Directive amended the RED, the rules on VS have become stricter and yearly reporting by the VS is required. The reports must cover information on audits performed, transparency of the scheme, stakeholder involvement, market information, and compliance with the scheme and how non-compliance was dealt with. Based on these reports, the EC can prescribe standards on independent auditing. Non-compliance with these standards could result in losing a permit. For EC approved voluntary schemes, this will mean additional administrative burden without additional revenues. In September 2015, the EC issued new standards guidance that all VS would have to comply by.

In April 2015, the U.S. Soybean Export Council (USSEC) submitted an application for recognition of their U.S. Sustainable Soy Assurance Protocol (SSAP) under the RED to DG Energy. USSEC developed a RED specific protocol entitled SSAP/RED. The SSAP/RED recently met the Dutch Feed Industry Association's (NEVEDI) requirements for sustainable feedstuffs. In March of 2016, SSAP was positively benchmarked against the European Feed Manufacturers' Federation's (FEFAC) Soy Sourcing Guidelines through the International Trade Centre's (ITC) customized benchmark tool. USSEC sees this as a significant step towards meeting the EU's sustainability criteria. Archer Daniels Midland Co.'s (ADM) sustainability scheme, The Responsible Soy Standard, had also met FEFAC and ITC Soy Sourcing Guidelines as of November 2015.

Biomass Sustainability

While the current RED sets clear sustainability criteria guidelines for liquid biofuels, the EC had deferred setting mandatory sustainability criteria for pellets and other forms of solid biomass. However, as part of the new Renewable Energy Directive (RED II) for the post 2020 period, the EC is developing a new bioenergy policy expected to be made public in the last quarter of 2016. The legislative proposal on a renewable energy target for 2030 will include sustainability criteria for both biofuels and biomass.

For 2020 through 2030, the EC will develop a biomass policy aimed at maximizing the overall climate and environmental benefits of biomass and contribution to significant GHG emission savings. The EC decision was based on the assumption that current national, EU, and international legislation sufficiently ensures sustainable practices are being used. However, some MS (the largest importers), are moving forward on developing their own sustainability criteria.

Commission Communication on 2030 Climate and Energy Goals

In January 2014, the EC published its Communication along with a Proposal revising the EU Emission Trading System (ETS). The Communication, which sets out the 2030 framework, includes a reduction in greenhouse gas (GHG) emissions by 40 percent compared to the 1990 level, an EU-wide binding target for renewable energy of at least 27 percent, and renewed ambitions for energy efficiency. The Communication also states that biofuels produced from food based feedstocks will not receive 'public support' after 2020.

On October 24, 2014, European Heads of State and Government confirmed the EC's proposal by reaching an agreement on the 2030 Framework for Climate and Energy in an effort to maintain what the EU sees as its global leadership on the climate change issue. According to the Conclusions, the 2030 framework will be based on three targets:

  • Reducing greenhouse gas emissions by 40 percent;
  • Increasing the share of renewable energy to 27 percent of consumption;
  • These targets also fall in line with the EU's 2050 low-carbon economy, 2050 energy strategy, and the White Paper 2011 (the long term vision for fueling Europe's transportation sector).

2021-2030 Renewable Energy Framework

The EC is expected to present a new RED post-2020 (RED II) legislative proposal as part of the Renewable Energy Package in conjunction with an initiative outlining a bioenergy sustainability policy for 2030 focusing on:

  • Promoting renewable energy through a comprehensive approach to speed up the replacement of obsolete fossil fuel boilers with efficient renewable heating and increasing the deployment of renewable energy in district heating and Combined Heating and Power (CHP);
  • Supporting the local authorities in preparing strategies for the promotion of renewable energy and heating;
  • Incentivizing the uptake of renewable energy in heat production including CHP.

The RED II would aim at ensuring proper market conditions for the cost-effective development and deployment of renewable energy by:

  • Establishing an accountable and reliable system for the achievement of the 27 percent target;
  • Creating market conditions allowing for the cost-efficient financing and integration of renewable energy into the market;
  • Addressing remaining challenges related to the mainstreaming, deployment, uptake and integration of renewable energy in the EU energy markets and grids;
  • Promoting cooperation between MS in regional approaches to renewable energy and market integration and grid operation. In addition it would aim to compensate for market failures, such as inadequate inclusions of externalities in the cost of energy sources, as well as to avoid the creation of new market failures.

Public Consultation

The EC is currently analyzing the results of a public stakeholder consultation, which focused on gathering stakeholder's views on the revision of the RED. The results of the stakeholder's public consultation, which closed in February 2016, are expected to feed into the Commission's work on the proposal and would be available in the coming months.

Trade Policy

In 2012, the EC published a customs regulation which changed the HS code for ethanol used for fuel to HS/CN code 2207. Ethanol and gasoline blends with an ethanol content of 70 percent or more are classified as denatured ethanol under code 22.07.20.00, and charged with an import tariff of €10.20 per hectoliter. Previously, ethanol was imported under code 38.24, at an import duty of 6.5 percent. There seems to still be some uncertainties where blends between E30 and E70 would be classified.

For biodiesel, a code that covers fatty-acid mono-alkyl esters (FAMAE) was introduced in January 2008, and changed in January 2012. However, other forms of biodiesel could still enter under other codes depending on the chemical composition. Diesel with a biodiesel component of less than 30 percent can enter the EU under chapter 27.10.20 at a tariff rate of 3.5 percent.

Bioethanol

During 2009 – 2012, the major part of the bioethanol shipped to the EU was imported with a Binding Tariff Information (BTI) under the HS code 3824.90.97, subject to a tariff of 6.5 percent of the customs value. On April 3 2012, the EU's Customs Code Committee reclassified ethanol blends as denatured ethanol under HS 2207, subject to the higher import tariff of €102 per thousand liters (Regulation 211/2012). This reclassification was, however, insufficient to block trade.

On February 23, 2013, the EC adopted Council Regulation (157/2013) imposing a definitive AD duty on imports of bioethanol originating in the United States. The rate of the AD duty is set at €62.3 per MT, and is applicable in proportion by weight of the total content of pure ethyl alcohol produced from agricultural products. Ethanol for uses other than fuel is exempted from the anti-dumping duty. This duty is in addition to the import tariff of €102 per 1,000 liters, and as a consequence a volume of 1,000 liters of ethanol from the United States is charged with €151.2.

In June of 2016, the EU General Court ruled against the duties created by the 2013 regulations. They found that applying a weighted average duty to all U.S. bioethanol producers as a whole instead of separate duties for each sampled producer was not in keeping with EU law or WTO rules. The EC has two months to appeal the decision. The time requirement to make a decision on an appeal is 12 to 8 months. Based on the current EU Court's ruling the duty will probably be recalculated and imposed on a company-by-company basis instead of executed as a country-wide duty.

Biodiesel

In March 2009, the EC published Regulation 193/2009 and Regulation 194/2009, containing provisional anti-dumping (AD) and countervailing (CV) duty measures on imports of biodiesel from the United States containing 20 percent or more of biofuels. Both regulations were imposed by the EC on July 7, 2009 and were due to expire in July 2014. However, the European Biodiesel Board (EBB) lodged a request for a review of the duties on April 9, 2014, based on the grounds that an expiry of the measures would result in recurrence of subsidized imports offered at dumping prices. On July 10, 2014, the EC decided to undertake the investigation and as of September 2015, the EU moved to extend the duties against U.S. biodiesel an additional five years to September of 2020.

In May 2011, the EC published a Council Decision which extended the definitive AD and CV on biodiesel blends of 20 percent or less originating from the United States. The measures adopted by the EC were retroactive and extended to August 13, 2012. For U.S. companies that were investigated in 2009, the combined duties will apply €213.8 – €409.2 per metric ton (MT). Other U.S. companies will be subject to the highest combined duty of €409.2 per MT, based on the biodiesel content in the blend. The different duties have drastically reduced the imports of biodiesel from the United States.

In May 2013, the EC published regulation 490/2013 imposing a provisional anti-dumping duty on imports of biodiesel originating in Argentina and Indonesia. The provisional tariffs were effective beginning May 29, and range between 6.8-10.6 percent on imports from Argentina, and between 0-9.6 percent on biodiesel originating in Indonesia. During the investigation period (July 1, 2011-June 30, 2012) all imports from Argentina were found to be dumped, while a low level (2-6 percent) of the Indonesian biodiesel was found not to be dumped. The Argentine and Indonesian biodiesel sectors filed a complaint with the WTO on the EU biofuels quota and tax systems. In November 2013, the anti-dumping duties were made permanent.

Ethanol

Bioethanol (ethyl alcohol) or simply ethanol is made by fermenting the sugar components of plant materials. The most commonly used feedstocks are grains (corn, other coarse grain, and wheat kernels) and sugarcane. 'Synthetic' ethanol made from petroleum fuels is restricted to a very small market.

EU Production, Supply and Demand Tables

Ethanol Used as Fuel and Other Industrial Chemicals

(Million Liters)

Calendar Year

2010

2011

2012r

2013r

2014r

2015e

2016f

2017f

Beginning Stocks

621

440

315

88

250

349

374

254

Fuel Begin Stocks

588

407

282

55

217

316

341

221

Production

4,918

5,042

5,308

5,650

5,900

5,840

5,700

5,700

Fuel Production

4,268

4,392

4,658

5,000

5,250

5,190

5,050

5,050

-of which cellulosic (a)

0

0

0

0

75

75

75

85

Imports

1,284

1,663

1,245

676

447

295

230

230

Fuel Imports

880

1,285

886

595

367

215

150

150

-of which ETBE (b)

270

261

188

197

109

92

90

90

Exports

126

149

145

113

278

240

200

200

Fuel Exports

76

99

95

63

228

190

150

150

Consumption

6,257

6,681

6,635

6,051

5,970

5,870

5,850

5,820

Fuel Consumption

5,253

5,703

5,676

5,370

5,290

5,190

5,170

5,140

Ending Stocks

440

315

88

250

349

374

254

164

Fuel Ending Stocks

407

282

55

217

316

341

221

131

Production Capacity, First Generation

Number of Refineries

68

68

70

71

71

71

71

71

Capacity

7,570

7,759

8,468

8,480

8,480

8,480

8,480

8,480

Capacity Use (%)

65

65

63

67

69

68

66

66

Production Capacity, Cellulosic Ethanol

Number of Refineries

0

0

0

0

1

1

1

2

Capacity

0

0

0

0

75

75

75

85

Co-product Production(c) (1,000 MT)

DDG

2,469

2,508

2,767

2,764

2,929

2,862

2,797

2,834

Corn Oil

68

78

143

141

150

157

150

152

Feedstock Use (1,000 MT)

Wheat

3,772

3,892

3,073

2,535

2,798

2,575

2,575

2,575

Corn

2,350

2,695

4,924

4,855

5,174

5,415

5,177

5,231

Barley

647

735

440

649

541

525

524

521

Rye

1,119

692

404

792

846

627

661

732

Sugar Beet

9,127

8,308

10,418

10,453

9,364

9,041

8,809

8,808

Cellulosic Biomass

-

-

-

-

270

270

270

300

Market Penetration (million liters)

Fuel Ethanol

5,253

5,703

5,676

5,370

5,290

5,190

5,170

5,140

Gasoline

116,291

111,483

103,883

100,344

100,172

100,000

99,850

99,700

Blend Rate (%)

4,5

5,1

5,5

5,4

5,3

5,2

5,2

5,2


In 2014, EU bioethanol production peaked at about 5.3 billion liters. The sector benefitted from low feedstock prices and restrictive measures on bioethanol imports. While production expanded, consumption fell, and as a result the EU reached self-sufficiency in 2014.

This market balance was also reached in 2015. Both production and consumption fell to about 5.2 billion liters. On an energy basis, this is equivalent to 32.6 million barrels of crude oil.

In 2016 and 2017, EU bioethanol production is anticipated to decline slightly to about 5.1 billion liters. The domestic bioethanol market has been affected by a shrinking domestic market as gasoline consumption is on the decline and national blending mandates are adjusted downwards. Despite theoretical average EU crush margins have been positive since mid-2015, many producers were subject to financial problems. Lack of capital forced plants to discontinue production in the United Kingdom, the Netherlands and Spain. As well in Romania, production is under pressure due to lack of profitability. Limited expansion is reported in Poland and Germany. In Poland, despite the fact that domestic production faces competition from imports, increasing demand will result in higher production levels. German bioethanol producers are able to increase production and market share as the high energy efficiency of their plants translates into higher greenhouse gas (GHG) reduction values and makes German bioethanol competitive with imports. Only in Hungary has capacity and production expanded significantly. In 2015, capacity was increased by about 80 million liters and that expansion is expected to continue up to 2018.

Since 2012, EU ethanol production capacity stabilized at about 8.5 billion liters. Further expansion of first generation bioethanol is expected to be limited. Expansion of cellulosic bioethanol production is restrained due to the lack of certainty in the EU policy making process. Also for 2020–2030, the EU renewables policy lacks a specific emission reduction target for transport biofuels.

Feedstock Use

In the EU, bioethanol is mainly produced from grains and sugar beet derivatives. Wheat is mainly used in northwestern Europe, while corn is predominantly used in Central Europe

In 2015, an abundance of corn on the domestic market benefitted production in Central Europe, in particular in Hungary. Corn is also the preferred grain in the Netherlands and Spain, where the majority of the ethanol plants are located at sea ports. While in 2014 and 2015, corn was imported from the United States, the corn for ethanol production is mainly sourced from the Ukraine. This is partly because of its non-GM content. Producers in northwestern Europe prefer to market their distillers dried grains (DDG) as non-GM to the domestic feed market.

In France, Germany, Belgium and the Czech Republic sugar beets are used for the production of bioethanol. As from October 2017, the EU sugar market will be liberalized. Beet ethanol produces higher savings towards the German GHG standards compared to wheat and corn. Investments for building new plants or refurnishing plants to produce beet ethanol are unlikely in the short term.

In the EU, the required feedstock for 2016 production (5,050 million liters of bioethanol) is estimated at 8.9 MMT of cereals and 8.8 MMT of sugar beets. This is about 2.9 percent of total EU cereal production and about 7.0 percent of total sugar beet production. Co-products of the bioethanol production are DDG (Distillers Dried Grains), wheat gluten and yeast concentrates. In 2016, the maximum theoretical production of co-products is forecast to reach 3.0 MMT. This is about 1.7 percent of total EU feed grain consumption

While EU bioethanol production reached its peak in 2014, consumption has already been on the decline since 2011. This trend can mainly be explained by lower gasoline use and the adjustment of blending mandates. Another factor is the blending of biofuels which count double towards the mandate. The reduction of the fossil fuel prices did not have a significant effect on biofuel consumption in the markets which are regulated by mandates and thus consumption of biofuels is fixed. Also has the price increase been tempered by the weakening of the € against the US$.

Despite lower transport fuel use, French bioethanol consumption is expected to remain stagnant. Consumption is supported by the increased number of stations that sell E85, currently 8 percent of the fuel stations in France.

Against the EU trend, bioethanol use is expected to increase in the United Kingdom and Poland.

Polish consumption of bioethanol is expected to increase during 2016 and 2017 as mandates gradually rise, and a limited share is fulfilled with double counting biofuels.

Transport Energy Taskforce set up last year concluded that "displacing petrol with higher bioethanol levels" such as E10 would "probably be required" to meet the EU target, as well as increased levels of biodiesel in diesel fuels. Currently, E10 fuel is primarily available in France, Germany and Finland. The United Kingdom will review its blending targets and will look at options on how to meet the EU requirements by shifting from crop-based biofuels towards renewable fuel from waste.

A surplus will be available in the France, the Netherlands, Belgium and in some Central European countries, mainly Hungary. Germany, the United Kingdom and Italy are expected to remain the main deficit markets in 2016 and 2017. A deficit is furthermore anticipated in the Nordic countries; Denmark, Finland and Sweden.

With the cap of seven percent for conventional biofuels and the potential outlook of lifting EU wide mandates after 2020, the market conditions appear to be dim for bioethanol. Conventional biofuels will likely be out competed with fossil fuels unless Member States will implement national policies to support feedstock and biofuels production. A most cost effective approach to further green the transport sector would be to introduce higher blends such as E10, and open the market for foreign produced biofuels. But both the imports of bioethanol and biodiesel have been cut off by high import and antidumping duties.

Trade

The European Commission (EC) imposed an anti-dumping duty on the bioethanol imports from the United States. On February 23, 2013, the duty was set at €49.20 per 1,000 liters for the coming five years. Adding up to the already imposed import tariff of €102 per 1,000 liters, a volume of 1,000 liters of ethanol from the United States is charged with €151.2. This rate significantly cut U.S. exports of bioethanol to the EU, and other less competitive suppliers that receive preferential duties were able to gain access to the EU. In 2013 and 2014 respectively, about 450 and 375 million liter of ethanol has been supplied through zero duty quotas, mainly used by Guatemala, Peru, Pakistan and Bolivia. During 2015, however, these EU bioethanol imports dropped further. The rising price of sugar is expected to reduce the cane ethanol production in Brazil as well as other South and Central American countries during 2016 and through 2017.

Currently of the 215 million liters of bioethanol, about 125 million liters is imported from the United States, and about 90 million liters is imported as ETBE (Ethyl tert-butyl ether). Similar to the cane ethanol from South and Central America, EU imports of corn ethanol from the United States are not anticipated to increase during 2016. In 2016, corn ethanol production in the United States is expected to stagnate, with limited volumes available for export. Currently EU domestic ethanol prices are too low to even attract significant volumes of duty free ethanol from foreign markets. Continuous plant outages could, however, cause a local shortage situation, and support a price increase sufficient to induce imports.

On June 9, 2016, the EU General Court ruled that the EC violated EU legislation by issuing a country-wide duty rather than imposing specific duties for each of the exporters. But even if the duty is dropped entirely, U.S. suppliers face several challenges in the EU market. Imports of U.S. ethanol will have to compete with duty free imports. Another barrier is the minimum greenhouse gas savings criteria which are rising to 50-60% from the current 35% threshold. Given these constraints it is not expected that even after full abolishment of the antidumping duty, U.S. exports will reach the 2011 record of 1.1 billion liters of ethanol of which about 900 million liters bioethanol.

Biodiesel / Renewable Diesel

EU Production, Supply and Demand Table

The EU is the world's largest biodiesel producer. Biodiesel is also the most important biofuel in the EU and, on an energy basis, represents about 80 percent of the total transport biofuels market. Biodiesel was the first biofuel developed and used in the EU in the transport sector in the 1990s. At the time, rapid expansion was driven by increasing crude oil prices, the Blair House Agreement and resulting provisions on the production of oilseeds under Common Agricultural Policy set-aside programs, and generous tax incentives, mainly in Germany and France. EU biofuels goals set out in Directive 2003/30 (indicative goals) and in the RED 2009/28/EC (mandatory goals) further pushed the use of biodiesel.

Biodiesel & Renewable Diesel (HVO) (Million Liters)

Calendar Year

2010

2011

2012r

2013r

2014r

2015e

2016f

2017f

Beginning Stocks

807

528

562

820

534

550

555

560

Production

10,707

11,041

11,082

11,983

13,341

13,535

13,680

14,155

>of which HVO production

430

467

933

1,531

2,388

2,356

2,558

2,865

Imports

2,400

3,164

3,293

1,393

632

538

530

545

Exports

117

100

116

416

183

243

320

260

Consumption

13,268

14,070

14,001

13,246

13,774

13,825

13,890

14,430

Ending Stocks

528

562

820

534

550

555

555

565

Production Capacity, Biodiesel

Number of Biorefineries

250

266

267

250

238

237

237

238

Nameplate Capacity

23,201

24,727

26,384

25,852

25,440

24,927

24,927

25,495

Capacity Use (%)

44.3%

42.8%

38.5%

40.4%

43.1%

44.8%

44.6%

44.3%

Production Capacity, HVO

Number of Biorefineries

1

4

4

5

10

11

11

13

Nameplate Capacity

430

1,610

1,610

1,745

2,748

2,863

2,863

4,260

Capacity Use (%)

100.0

28.9

58.0

87.7

86.9

82.5

89.6

67.4

Feedstock Use for Biodiesel + HVO (1,000 MT)

Rapeseed oil

6,700

6,660

6,100

5,750

6,100

5,880

5,680

5,800

UCO

500

700

740

1,080

1,800

2,060

2,210

2,300

Palm oil

690

700

1,430

2,000

1,580

1,700

1,790

1,940

Soybean oil

1,085

950

740

860

890

800

880

930

Animal fats

300

340

360

415

920

970

980

1,000

Sunflower oil

140

280

300

300

320

330

300

305

Other (pine oil, fatty acids)

10

90

140

145

170

175

200

205

Market Penetration, Biodiesel + HVO (Million Liters)

Biodiesel+HVO,

on-road use

13,268

14,070

14,001

13,246

13,774

13,825

13,890

14,430

Diesel, on-road

192,156

192,919

189,046

189,022

194,022

194,780

195,380

195,990

Blend Rate (%)

6.9

7.3

7.4

7.0

7.1

7.1

7.1

7.4

Diesel, total use

267,656

261,954

257,768

257,095

256,065

256,000

256,000

256,000

Production Capacity

The structure of the biodiesel sector is very diverse and plant sizes range from an annual capacity of 2,000 MT owned by a group of farmers to 600,000 MT owned by a large multi-national company. EU biodiesel production capacity is expected to remain flat in 2016 at 24.9 billion liters and increase to 25.5 billion liters in 2017, when a new biodiesel facility in France is expected to start production. Biodiesel production facilities exist in every EU member state with the exception of Luxemburg. In contrast, hydrogenated vegetable oil (HVO) production is concentrated in only five countries. The majority of HVO capacity consists of dedicated plants, although in Spain HVO is co-processed with conventional fuel in oil refineries. EU-28 HVO production capacity stands currently at 3.0 million liters and is forecast to increase to 4.2 million liters in 2017, when two new facilities will start production in Italy and France.

Production

EU biodiesel production is driven by domestic consumption and competition from imports. In 2014, EU production benefitted from substantially lower imports and higher domestic consumption. As a result, biodiesel production increased by 11 percent, mainly in Germany, Spain, and the Netherlands. The increase in the Netherlands production can largely be attributed to increased HVO production. In 2015 and 2016, production is estimated to remain fairly stable while 2017 is forecast to see a small increase of 3 percent. The latter is the result of new HVO plants in France and Portugal, and a mandate increase in Germany.

The ranking of the top five producing EU Member States (Germany, France, Netherlands, Spain, and Poland) remains unchanged, while the United Kingdom is forecast to drop from seventh place in 2015 to tenth in 2017. This drop is caused by imports from other Member States, which are more competitive than domestic production.

EU Biodiesel/HVO Production Main Producers (Million Liters)

Feedstock Use

Rapeseed oil is still the dominant biodiesel feedstock in the EU, accounting for 49 percent of total production in 2015. However, its share in the feedstock mix has considerably decreased compared to 72 percent in 2008, mostly due to the higher use of recycled vegetable oil / used cooking oil (UCO) and palm oil.

UCO was the second-most important feedstock in 2015. The use of UCO has received a push after some Member States (Austria, Belgium, Croatia, France, Hungary, Ireland, the Netherlands, Poland, Portugal, Slovenia, and the United Kingdom) introduced double-counting . The double counting measure wasn't implemented in all Member States partly as it negatively affects biofuels consumption. The largest EU producers of UCOME (biodiesel produced from UCO) were the Netherlands, the United Kingdom, and Germany.

Palm oil came in third place in terms of feedstock use in 2015. Its use has further increased mainly because of its use for HVO production. Currently, palm oil is mainly used in the Spain, the Netherlands, Finland, Italy, and France, and to a much lesser extent in Germany, Portugal, Romania, and Poland.

The use of soybean and palm oil in conventional biodiesel is limited by the EU biodiesel standard European Norm EN14214. Soybean-based biodiesel does not comply with the iodine value prescribed by this standard (the iodine value functions as a measure for oxidation stability). Palm oil-based conventional biodiesel reportedly does not provide enough winter stability in northern Europe. The higher iodine number permitted in Spain allows for an intensive use of soybean and palm oil in biodiesel production for domestic consumption. The iodine number for Spain is 140 g/mg, as defined in Royal Decree 61/2006 different to the 120 g/mg established by EN14214. However, it is possible to meet the standard by using a feedstock mix of rapeseed oil, soybean oil, and palm oil. The vast majority of soybean oil is used in Spain, France, and Italy. Smaller amounts are being used in Portugal, Germany, Bulgaria, Romania and the United Kingdom.

Animal fats benefitted far less from double-counting as the range of Member States that allow double-counting for animal fat (Denmark, Finland, France, the Netherlands and the United Kingdom) is smaller than that for UCO. In addition, in Germany TME (biodiesel made from tallow) use does not count against the biofuel mandate at all and its production is exported to other Member States. Increases of animal fat use are a result of new plants rather than a function of feedstock price, as using animal fat requires changes to the technical equipment. In 2015, the Netherlands were by far the largest user of animal fat for biodiesel production, followed by France, the United Kingdom, Germany, Denmark, Spain and Austria. Although at a smaller scale, in 2015, UCO and animal fat use registered a steady increase in Portugal.

Sunflower oil only comprised three percent of the total biodiesel feedstock and is mainly used in France and Greece, together accounting for 81 percent of EU sunflower oil based biodiesel production. The category “other" includes pine oil and wood (Sweden), fatty acids (Germany), and cottonseed oil (Greece).

The majority of palm oil is imported, while a large share of soybean oil is crushed from imported soybeans. In contrast, the majority of rapeseed oil is of domestic origin. The 5.68 MMT of rapeseed oil feedstock projected for 2016 is equivalent to about 14.2 MMT of rapeseed. This also generates about 8.5 MMT of rapeseed meal as byproduct, most of which is used for animal feed. Similarly, the 0.88 MMT soybean oil will have to be crushed from 4.4 MMT of soybeans. This will generate about 3.5 MMT soybean meal.

Consumption

Biodiesel consumption is driven almost exclusively by Member State mandates and to a lesser extent by tax incentives. After years of rapid use increases, EU biodiesel consumption peaked in 2011 and declined in 2012 and 2013, by 3 and 5 percent, respectively. The decline was largely the result of two factors: double-counting and reduced mandates. Double-counting of certain biofuels was applied in Germany (2011-2014), the Netherlands, the United Kingdom, Portugal, Austria, Italy (2012 until early 2014). In Spain the measures were published in April 2014, but will only enter into force after more detailed guidelines are issued. With double-counting a reduced volume of biofuels is needed to reach the mandate. In addition, Spain reduced its consumption mandates from 7.0 percent down to 4.1 percent at the beginning of 2013. In 2014, consumption rebounded by 4 percent as decreasing consumption in Italy, Poland and the United Kingdom was more than offset by increases in France, Austria, and Germany. In 2015, consumption remained more or less flat as decreases in Germany, the United Kingdom, and the Czech Republic were compensated by an increase in Sweden and smaller increases in a variety of other Member States. In Sweden, biodiesel consumption benefitted from a tax change that put E85 at a disadvantage.

For 2016, EU biodiesel consumption is expected to show a marginal 0.5 percent increase, again masking different developments across Member States. Forecasted consumption increases are driven by a mandate increase in the Netherlands and increased total diesel use in France. The decrease in Germany is a result of the transition from an energy-based use mandate to a minimum greenhouse gas (GHG) reduction mandate in 2015. Companies are inclined to calculate actual GHG values rather than using the default values of the RED as fuel companies favor biofuels with a better GHG reduction value. This reduces the physical amount of fuel needed to meet the mandate. In the Czech Republic an increase in the excise tax for biofuels makes biodiesel more expensive compared to fossil diesel. For 2017, consumption is forecast to increase by 2.8 percent as mandates increase in Spain, Portugal, and the Netherlands. France expects an increase in total diesel and biodiesel use.

In 2015, France, Germany, Italy, the United Kingdom, and Sweden were the largest biodiesel consumers in the EU, accounting for 63 percent of EU biodiesel consumption. Projections for the following years indicate that the top five countries will remain the same

Trade

In an attempt to curb down the biodiesel imports from Argentina and Indonesia, the EC enforced anti-dumping duties (AD) on biodiesel imports from these origins as of May 29, 2013. As a result, imports from both countries have dropped considerably in 2013 and almost ceased in 2014. The void was partially filled with domestic EU production and partially with higher imports from countries not covered by AD. Here the biggest beneficiaries were Malaysia, South Korea, India, and Brazil.

In 2015, most biodiesel, about 527 million liters, was imported under HS code 3826.00.10 containing at least 96.5 percent biodiesel. The equivalent of 1 million liters and 10 million liters was respectively imported as blend under HS code 3826.00.90 (containing between 30 and 96 percent of biodiesel) and 2710.20.11 (containing at most 30 percent biodiesel), respectively. It is assumed that most of the product traded under the last HS code is B5. The majority of biodiesel imports occur through the Netherlands, Spain, and Bulgaria.

Biodiesel imports are constrained by the sustainability requirements laid down in the Renewable Energy Directive (RED). Since April 1, 2013, all biofuels must achieve greenhouse gas (GHG) savings of at least 35 percent. Default values of biodiesel produced from both soybean oil and palm oil are set lower than that in the RED.

EU biodiesel exports to destinations outside the bloc are marginal and normally only amount to around one percent of production. The exceptional increase of exports in 2013 was due to higher exports to the United States and can be attributed to one company taking advantage of an elevated demand and the U.S. blenders' credit. The latter expired at the end of 2013 and was only reintroduced for 2014 very late in the year. As a result, EU exports to the United States and thus total exports dropped sharply in 2014. In 2015, the top three export destinations were Norway, Switzerland and the United States receiving 68, 28, and 6 percent of EU exports, respectively. The blenders' credit was reinstalled in December 2015 until the end of 2016. As a result, exports picked up again in the first three months of 2016. In addition, biodiesel exports increased to Norway and Switzerland. For the full calendar year exports are expected to increase by 30 percent. However, if realized this would still be less than three percent of EU production. For 2017, exports are forecast to fall back as the U.S. blenders' credit expires at the end of 2016.

Advanced Biofuels

As biofuels replace fossil transport fuels and generally have lower greenhouse gas (GHG) emissions, they are considered an important product of the bio-economy. In particular advanced or second generation biofuels, fuels produced from non-fossil, non-food materials. Because hydrogenated vegetable oils (HVO) can supply specific fuel markets such as aviation, and can fully replace fossil fuels in a mix (drop-in fuels, but are not necessarily produced from non-food feedstocks. In the RED, biofuels produced from non-food feedstocks get a double credit. On April 28, 2015, the European Parliament supported a 0.5 percent non-binding Member State target for such non-food based biofuels in 2020.

Production of Advanced Biofuels

Since the past six years, the production of hydrogenated vegetable oils (HVO) has taken off in the EU. HVO can be produced from waste oils and fats and can fully substitute petroleum fuels, such as kerosene. In 2015, HVO production is estimated at 2.3 billion liters, and is expected to increase to about 2.9 billion liters in 2017. With new plants in Italy and France, production could further expand to about 4 billion liters in 2020. The commercialization of cellulosic ethanol is lagging behind compared to the development of HVO. The current capacity is about 85 million liters in the EU. Expansion of capacity has been announced in Finland (200 million liters) and France (315 million liters). But given the limited support, the capacity for cellulosic ethanol production could possibly increase to a maximum of about 300 million liters.

Specific mandates are important for the further commercialization of advanced biofuels. Italy was the first EU Member State to mandate the use of advanced biofuel. The Decree requires gasoline and diesel contain at least 1.2 percent of advanced biofuel as of January 2018 and 2019, rising to 1.6 percent in 2020 and 2021, and 2 percent by 2022. Reportedly also Denmark considers to implement a specific target, namely 0.9 percent blending mandate by 2020 for use in transportation.

Finland / The Netherlands: Neste Oil has developed a process of hydrogenation to produce hydrogenated vegetable oils (HVO) with the product name NExBTL. The product is sold as drop-in fuel for road transport and used by commercial airlines. In addition to drop-in biofuels, the Neste plants also produce renewable naphtha, propane and alkanes. In Finland, Neste operates one plant with two lines of about 215 million liters each. In 2010, Neste Oil opened up a renewable diesel plant in Singapore with an annual capacity of 910 million liters and a similar scale plant in Rotterdam in 2011. Current annual production capacity of the plant in Rotterdam is a maximum of 1,280 million liters. During 2015 and the first half of 2016, all HVO plants operated at full or nearly full capacity with the exception of a nine week outage of the plant in Rotterdam. In 2013, 2014 and 2015, Neste exported significant volumes of its product to the United States and Canada. By the end of 2016, Neste plans to produce annually about 40,000 MT of renewable propane at the site in Rotterdam. Neste Oil is gradually replacing palm oil with waste fats and oils. In 2015, 68 percent of the feedstock consisted of waste fats and oils. The waste and residues consist of mainly palm fatty acid distillate (PFAD), animal fats, UCO, and in smaller volumes, tall oil pitch, technical corn oil, and spent bleaching oil. The company's goal is to use only waste oils and fats as feedstock as from 2017.

Spain: In July 2011, the company CEPSA started producing HVO at two refineries and since February 2012, the company REPSOL started producing HVO at one refinery. Spanish HVO production increased from 179 million liters in 2013 to 376 million liters in 2014.

Italy: In 2014, an HVO plant with an annual capacity of 400 million liters was opened in Venice, Italy by Energy Group Eni SpA. Up to mid-2017, the biorefinery is expected to produce approximately 460 million liters per year. By the second half of 2017, the facility is forecast to produce 540 million liters of advanced biofuels per year. The feedstock, currently palm oil, will then include also animal fats, used oil, oils from algae, and various types of biological waste. On January 20, 2016, the biofuel was distributed to 3,500 fuel stations across Italy, with the final fuel containing 15 percent renewable diesel. Eni is expected to convert the Gela refinery in Sicily into a renewable diesel production facility to produce 680,000 million liters per year. The reconversion is expected to start in 2016 and the facility is likely to be fully operational in 2017. The reconversion will follow the model adopted for plant in Venice

Finland: In 2015, the forest product company UPM opened a HVO plant in Lappeenranta, Finland. The capacity of the plant will be about 115 million liters per year. The feedstock used is tall oil, a residue of pulp production. In December 2015, the Finnish Market Court judged that the advanced process of UPM doesn´t fall under the scope of the patents of Neste.

France: Commercial production of HVO has not yet taken off in France but several projects have recently been announced. In April 2015, the French group Total stated that it will convert its refinery site in La Mede (southern France) into the largest biodiesel plant in France. The new biorefinery would be put into operation by the end of 2017. Total is planning to invest € 200 million to produce 570 million liters of HVO per year. In addition, it aims at producing jet fuel for civil aviation, the objective being to account for 30 percent of EU market shares in the jet fuel sector. The biorefinery is planning to produce around 40 percent of HVO out of waste oil, and to import vegetable oils in addition. Current biodiesel producers have expressed concern that this project could lead to an overcapacity situation in the French biodiesel sector and to a drop in rapeseed production in France. Another project in France is the BioTFuel project, a cooperation of Avril, Axens, CEA, IFPEN, ThyssenKrupp and Total. This project aims at producing 230 million liters of advanced biodiesel and bio-jet fuel per year from one MMT of biomass by 2020.

Biomethanol

The Netherlands: In June 2010, the advanced biofuel plant BioMCN started production. The plant has a capacity of 250 million liters and produces biomethanol from glycerine. The glycerine is a byproduct of biodiesel production. Biomethanol can be blended with gasoline or used for the production of bio-MTBE, bio-DME, or synthetic biofuels. On December 18, 2012, BioMCN received a grant of €199 million for the construction of a commercial scale biomass refinery using wood residues as feedstock. Through torrefaction and gasification, the feedstock will be transferred into syngas and finally biomethanol. Full commercialization of the project is expected to take four years.

Cellulosic Ethanol

Spain: In 2008, Abengoa Bioenergy completed a demonstration plant in Babilafuente (Salamanca). The plant has an annual capacity of 5 million liters and used wheat and barley straw as feedstock. The process is based on enzymatic hydrolysis. Since 2013, the plant has been converted to waste to biofuels technology, by which 25,000 MT of urban solid waste per year can be processed to produce 1.5 million liters of biofuels. The straw-based technology is now being implemented at a commercial stage in Hugoton (Kansas). The announcement of the sale of all Abengoa's non-core assets (such as the first generation biofuels business units) as part of a debt-restructuring plan, may affect advanced bioethanol production in Spain, as second generation assets share location and services with first generation plants.

France: Abengoa was planning to build a second-generation bioethanol in France but there has been uncertainty about this project for years and the launch date is still to be determined. The feedstock would be corn stover and wheat straw. The capacity of the new plant would be about 315 million liters of ethanol per year. The total investment amounts to € 200 million.

Italy: In 2013, Beta Renewables started the commercial production of cellulosic ethanol. Beta Renewables is a joint venture between Biochemtex, a company of the Italian Mossi Ghisolfi Group and the U.S. fund Texas Pacific Group (TPG). The Crescentino plant has an annual production capacity of 75 million liters using 270,000 MT of biomass. The feedstock consists of wheat straw, rice straw and husks, and Arundo donax, an energy crop grown on marginal land. Wood waste from the forest industry and lignin from the ethanol plant are used as feedstock at the attached power plant. Based on the specific government mandates, advanced biofuels production is expected to expand further in Italy during the next five years.

Finland: By the end of 2016, a cellulosic ethanol plant with an annual capacity of 10 million liters plans to be operational. The capacity can be scaled up to 100 million liters. The feedstock will be saw dust. This Cellunolix project is managed by St1 Biofuels Oy in cooperation with North European Bio Tech Oy. In addition, there are plans to build two larger plants of about 50 million liters.

Biomass for Heat and Power

This Chapter describes the EU market for biomass intended for the production of heat or power. The heat or power is either generated through direct combustion or through the production of biogas. Forestry products, such as chips and pellets are the main feedstock for direct combustion, while for the production of biogas, a wide range of inputs are used.

Wood Pellets

Calendar Year

2009

2010

2011

2012

2013

2014

2015c

2016c

2017c

Beginning Stocks

393

467

696

713

642

506

1,148

1,182

1,002

Productiona

7,940

9,186

9,470

10,652

12,200

13,000

13,500

14,000

14,500

Importsb

1,698

2,515

3,115

4,367

6,096

6,547

7,172

7,500

8,000

Exportsb

64

72

68

90

132

105

138

180

200

Consumptionc

9,500

11,400

12,500

15,000

18,300

18,800

20,500

21,500

22,500

Ending Stocks

467

696

713

642

506

1,148

1,182

1,002

802

Production Capacity

No. of Plantsa

499

497

516

Capacitya

13,694

14,845

15,000c

15,980

17,000c

18,500c

19,000

19,500

20,000

Cap. Use (%)

58%

62%

63%

67%

72%

70%

71%

72%

73%


The EU is the world's largest wood pellet market, with consumption of about 20.5 MMT of pellets in 2015. Based on the EC mandates and Member State incentives, the demand is expected to expand further to nearly 22.5 MMT in 2017. Future consumption will significantly depend on a range of market factors and in particular Member State incentives and conditions.

With a production of about 13.5 MMT in 2015, about fifty percent of global production, the EU is the world's biggest producer of wood pellets. Compared to production plants in North America, plants in the EU are mainly small or medium-sized. Most of the main pellet producing countries have a sizeable domestic market for residential heating pellets. Recent growing demand for pellets has supported a further increase in domestic production.

Germany is the third largest wood pellet producer in the world after the United States and Canada. It has currently about seventy production facilities for wood pellets with a total annual production capacity of 3.5 MMT. In 2015, production amounted to 2.0 MMT, 90 percent of which were produced from residues of the timber industry. The second largest producer in the EU is Sweden. Depending on domestic use, Swedish self-sufficiency fluctuates between 70 and 90 percent. In years of high demand, Sweden imports from Russia and the Baltics. French wood pellet production expanded significantly during the past five years. The growth in pellet production is driven by a strong increase in the demand for collective residential heating and industrial power production. Also in Austria pellet production is steadily rising. Like Germany, Austria is a net exporter of wood pellets. Another growing pellet producer is the Czech Republic. Czech production increased from about 150,000 MT in 2010 to 200,000 MT in 2015. About half of this production expansion is exported, mainly to Italy and Austria. There is an excess of capacity present in most Member States, but particularly in Spain. Only about a third to a half of annual production is being used. Use of this capacity has, however, shown steady growth during the past four years supported by increased domestic demand.

The Baltic Region and Portugal are almost exclusively producing for the export market. Wood pellet production has expanded rapidly in Latvia, Lithuania and Estonia. In 2015, exports totaled 2.7 MMT, an increase of 0.5 MMT compared to 2014. The main markets are Denmark, the United Kingdom, Italy and Sweden. With about 1.5 MMT, Latvia is the main producer in this region. The Baltics are producing both for the residential and industrial markets, and production expansion is expected for both markets. Portugal has increased its production since 2008, and exports nearly its entire production to the United Kingdom and Denmark.

The major raw material for pellets has traditionally been sawdust and byproducts from sawmills. With increasing competition for sawdust resources, a broader sustainable raw material is becoming necessary. There is increased interest in forest residues, wood waste and agricultural residues, but even these additional feedstocks will not be sufficient for supplying the full demand in Western Europe. Overall, EU wood pellet production is not expected to be able to keep up with the demand from both the residential heating market and for power generation.

Consumption

While the EU produces about fifty percent of world production, EU demand represents about 75 percent of the market. In 2015, total EU consumption was 20.5 MMT of which about 65 percent was used for heating and 35 percent for power. Residential use for heating is a relatively stable market compared to industrial use for power generation. About 60 percent of the pellet demand is estimated to be for household use. However, the past three winters have been relatively mild and coupled with the low prices for fossil inputs, has tempered the use of pellets for residential heating. Medium-size use of pellets for energy use by industries or public buildings such as hospitals and swimming pools is generally less dependent on weather conditions. Demand for industrial pellets depends primarily on EU Member State mandates and incentives, which accessibility in some Member States, such as the Netherlands, has been uncertain or put on hold. The major users of wood pellets in the EU are the United Kingdom, Italy, Denmark, Germany, Sweden, Belgium, France and Austria.

In Italy, Germany, France and Austria pellets are mainly used in small-scale private residential and medium-sized industrial boilers for heating. In some Member States, such as Sweden, Germany, Austria, France and Spain, household heating with biomass as input receives subsidies or tax deductions by the federal and local governments. In most countries, however, government funding is limited. Italy expects to be the largest European market for the household use of pellets; according to the National Renewable Energy Action Plan statement, the use of pellets was 3.3 MMT in 2015 and will increase further to 5 MMT in 2020. However, only 20 percent of domestic demand is met by domestic production, with the remaining 80 percent being covered by increasing imports. Market logistics and economics indicate that in the close future North America will become the major supplier.

Industrial Use of Pellets

In markets such as the United Kingdom, Belgium, and the Netherlands residential use is negligible and the demand is dominated by large scale power plants. The large scale use of wood pellets by power plants is driven by the EU mandates for renewable energy use in 2020. The governments of these countries opted to fulfill their obligations mainly by the use of biomass for the generation of electricity. As these countries lack a sufficient domestic production of pellets they largely dependent on imports.

The UK Government enforced the Industrial Emissions Directive, which boosted consumption from 1.4 MMT in 2012 to 6.7 MMT in 2015. In 2016, consumption is expected to reach 7.2 MMT. The UK government has mandated electricity suppliers to source an increasing proportion of their electricity from renewable production. market will continue to increase for wood pellets in the near-term. Existing capacity is expected to reach full operation in the next year; the conversion of an additional large electricity generator capable of using 1.5 MMT of wood pellets in the place of coal is set to be completed mid-2017.

The wood pellet market in Sweden and Denmark is diverse. Wood pellets are being used in small boilers in private homes, medium-sized district heating plants and in large Combined Heat and Power (CHP) plants. Both countries have a high target for renewable energy use in 2020, 49 and 30 percent respectively. Both goals have already been reached, with a major part obtained from biomass. In Denmark, CHP plants are mainly using pellets for the generation of heat during the cold season. During 2012 – 2016, Danish consumption of pellets stagnated around 2.1 MMT but as more coal plants are converted to using pellets this is expected to grow in 2017.

Current Belgian industrial use is estimated at about 1 MMT to 1.3 MMT per year. A stable market is foreseen for wood pellets in 2016 and 2017. However, the closing of a power plant in Ghent scheduled for 2018 would imply a reduction in imports into Belgium of between 500,000 tons and 600,000 tons annually. Further increases are uncertain as the Belgian government recently retracted funding for a new plant. In addition, the license of a power plant in Wallonia, which uses between 400,000 MT and 500,000 MT of wood pellets annually, will expire in 2017. However, significant interest in tendering for this plant has been demonstrated.

In the Dutch Energy Accord co-firing of biomass is capped annually at about 3.5 MMT of wood pellets. In the Accord it was furthermore decided that biomass will be subject to specific sustainability criteria. It is still uncertain what the implications of this will be for the sourcing of pellets. Apart from the Dutch power sector, the Dutch chemical sector was planning to use wood pellets; however, due to low fossil fuel prices these plans have reportedly been put on hold. The Dutch use of pellets is expected to gradually increase as of mid-2017.

Also in France, there is a potential for industrial use of pellets. There is pressure from the local forest sectors to use local wood, but demand is gradually outpacing domestic supply. Some new bioenergy projects are located close to harbors and are already using imported pellets.

Since 2008, EU demand for pellets has significantly outpaced domestic production. This has resulted in increased imports from the United States. In 2015, U.S. exports totaled 4.3 MMT, representing a value of US$ 825 million. If trade flows remain consistent with current patterns, the United States has the potential to supply at least half of the import demand, which would represent a trade value of potentially over US$ 1 billion in 2020. Other significant exporters of pellets to the EU are Canada and Russia. In response to the EU demand for industrial pellets, capacity has expanded in the supplying regions. These third country imports could, however, be affected by the implementation of sustainability requirements by the individual Member State governments, in particular by the Dutch, Danish and Belgian Governments.

Pellet Sustainability Criteria

A key factor to being able to capture the demand in the EU market and benefit from its growth potential is the sustainability of the supply. European traders and end-users of industrial wood pellets are calling for clear, consistent, harmonized and long term government regulations. The EC was expected to come forward with a proposal on sustainability criteria for biomass destined for the generation of power, heat and cooling, but the EC has announced such regulations will not be implemented before 2020.

As a result, imports into the EU continue to be affected by biomass sustainability requirements imposed by the individual Member State governments. Awaiting the sustainability criteria of the Member States, the industry is actively formulating their own criteria. For non-industrial wood pellets, the European Pellet Council (EPC) developed sustainability criteria called ENplus, based on EN 14961-2. It includes sustainability requirements for the entire supply chain. In 2015, nearly 7.7 MMT were ENplus certified. For industrial pellets, the Sustainable Biomass Partnership (SBP) developed a sustainability scheme based on existing programs, such as the Forest Stewardship Council (FSC) or Program for the Endorsement of Forest Certification (PEFC). The SBP made their program compliant with requirements in the United Kingdom, Denmark, and Belgium.

In the Dutch Energy Accord of September 2013, it was decided that the biomass will have to be subject to strict sustainability criteria, requiring forest level certification. In addition the Dutch require information on greenhouse gas (GHG) emissions, carbon debt and indirect land use changes (ILUC). These strict conditions may make it impossible for Dutch byers to implement long term contracts with pellet producers. If the Dutch requirements are not harmonized with the other EU markets, this would not allow pellets to be traded as a commodity between the different markets.

Biogas

The European biogas sector is very diverse. Depending on national priorities, i.e. whether biogas production is primarily seen as a means of waste management, as a means of generating renewable energy, or a combination of the two, countries have structured their financial incentives (or the lack thereof) to favor different feedstocks. According to the latest available data, in 2014, Germany and the United Kingdom, the two largest biogas producers in the EU represented the two ends of the scale. Germany generates 93 percent of its biogas from the fermentation of agricultural crops and crop residues while the United Kingdom, along with Greece, Estonia, Ireland, and Portugal, relies almost entirely on landfill and sewage sludge gas. All other countries use a variety of feedstock combinations in price was guaranteed for 20 years from the erection of the plants. However, changes to the German renewable energy law (EEG) in 2012 and 2014, reduced the attractiveness of investing in new plants. As a result, further increase in biogas plants will be minimal. Instead, investments will likely focus on rejuvenating existing plants.

Biogas production is increasing in the Czech Republic (driven by feed-in tariffs to compensate for the cost of production) and Denmark (driven by the goal to use 50 percent of livestock manure for biogas production by 2020). In France, the government seeks to increase the number of biogas facilities by means of investment support and electricity purchase prices, however, the administrative burden and a lack of profitability for investors is limiting expansion. According to its National Renewable Energy Action Plan (NAP), Hungary wants to increase its biogas production capacity from 45 MW to 55 MW by 2020. However, the increase is stifled by problems with the green energy feed-in system and the low electricity purchase prices, which make further investments into biogas facilities economically unattractive. In the Netherlands, low electricity prices have even led to a decline in biogas production.

The majority of the biogas is used to generate electricity and/or heat. The trend is toward the so-called cogeneration plants which produce electricity and capture the process heat at the same time (Germany, the Netherlands, Austria, Czech Republic, and Poland). The heat can be supplied to nearby buildings or sold to district heating systems. A growing number of large scale operations are purifying the biogas, which contains 50-75 percent methane, to bio-methane (99 percent methane) and subsequently entering it into the natural gas grid (Germany, Austria).

The use of purified biogas as transportation fuel is still marginal in most EU countries with the exception of Sweden and Germany. In 2014, the EU consumed 134 MT of oil equivalent (TOE) of biogas for transportation uses: 84 TOE in Sweden and 50 TOE in Germany.