On 15 April 2018, the Renewable Transport Fuels and Greenhouse Emissions Regulations 2018 (the “Regulations”) came into force, amending the Renewable Transport Fuel Obligations Order 2007 (the “RTFO”) and implementing the renewable transport fuel requirements of the Low Carbon Fuel Standard Directive 2015 and the Sustainability of Biofuels Directive 2015.
What is the RTFO?
The government introduced the RTFO to support its policy on reducing greenhouse gas emissions from vehicles by incentivising the use of biofuels. The RTFO obliges suppliers of at least 450,000 litres (or equivalent) of transport and non-road mobile machinery fuel per year in the UK (an “Obligated Fuel Supplier”) to register with the Department for Transport (the “Administrator”) and demonstrate that a certain proportion of their annual fuel supply originates from renewable and sustainable sources. However, suppliers of less than 450,000 litres (or equivalent) of transport and non-road mobile machinery fuel per year in the UK can freely register with the Administrator to become an Obligated Fuel Supplier if they so choose.
What constitutes “supply” of Fuel?
The supply of fuel is determined by reference to the entity owning the fuel and/or paying the fuel duty at the time it falls due (or if duty is not payable on the fuel in question, at another applicable assessment time). Therefore, it seems that an Obligated Fuel Supplier could be any of the producer of the fuel, the entity that supplies it to a retailer or the end user.
How does an Obligated Fuel Supplier meet its RTFO obligations?
An Obligated Fuel Supplier will meet its obligations under the RTFO by either:
RTFCs are redeemed at a rate of one RTFC per one litre or kilogram (as the case may be) of sustainable, renewable fuel supplied by the fuel supplier. RTFCs can also be obtained at double this rate from a supplier who provides fuel from certain wastes or residues, fuel from dedicated energy crops and renewable fuels of non-biological origin (“RFNBOs”). Much like Renewable Obligation Certificates, RTFCs are freely tradable in an open market.
In certain cases of non-compliance with RTFO, the Administrator has powers to impose civil penalties up to a maximum of the lesser of £50,000 or 10% of turnover derived form fuels covered by the RTFO.
What changes do the Regulations make to the RTFO?
The main changes made by the Regulations to the RTFO are as follows:
The total volume of fuel supplied in 2018 by an Obligated Fuel Supplier must now include no less than 7.25% of renewable and sustainable fuel. This percentage will increase year on year until 2032 where the percentage will be set at 12.4% for that year and subsequent years.
- An Obligated Fuel Supplier may only use a certain amount of crop-derived biofuels to contribute towards meeting its obligations under the RTFO. This new “crop cap” is set at 4% of the total volume of fuel supplied for 2018 to 2020 and from then on it will decrease year on year until 2032 where the percentage will be set at 2% for that year and subsequent years.
- A new “development fuel” target has been introduced. A development fuel is defined as a fuel made from certain sustainable wastes, residues or RFNBOs, including double RTFC rewarded fuels but excluding certain oils and fats. In 2018, at least 0.1 % of the total fuel supplied by an Obligated Fuel Supplier will have to be “development fuel”. This percentage target increases year on year until 2032 whereby it reaches 3.196%.
- Renewable fuel used in aviation in the UK is now eligible for reward under the RTFO
Impact of the Regulations
The changes made by the Regulations clearly demonstrate an increased commitment by the government to the use of biofuels in the UK. As well as causing the likely increase in demand for biofuels within the market place, the Regulations may also increase demand for, and the value of, RTFCs year on year. This will be an advantage to those who already hold RTFCs and may encourage fuel suppliers who may not automatically qualify as Obligated Fuel Suppliers to register with the Administrator for an opportunity to be eligible to redeem RTFCs. The result of this would be an expanding market place beyond that resulting from the introduction of the aviation sector by the Regulations.
The Regulations will hopefully provide additional support to developers of facilities producing bio-fuels. This could either be through the RTFC’s they are obtaining which they can monetise (particularly with the potential increase for demand as discussed above) or because fuel suppliers become more willing to pay a premium for bio-fuels in order to minimise their RTFO buy-out liability.
The Regulations have also kick-started further developments in the biofuels industry, one example being the recent request from a cross-party group of senior MPs to introduce E10 fuel (i.e. fuel that is made of 90% unleaded fuel and 10% ethanol) in the UK. If introduced, E10 fuel will have a cross-sector impact, particularly in the transport and infrastructure industries.
Bio-fueled vehicles provide a genuine alternative to electric vehicles, particularly in respect of HGVs. Therefore, with the continued government backing, the likely opening up the biofuels market and the potential knock-on effects to other sectors, the Regulations provide both instant and long-term opportunities for producers of biofuel, investors in infrastructure and funders alike.
If you wish to contact a member of the CMS Infrastructure and Project Finance team to discuss any related issues, please speak to: