The revised Renewable Energy Directive (RED II) was passed in 2018 to come into effect in 2021 and was poised to guide European Union renewable fuel policy to 2030, but while the ink seems hardly dry a re-envisioning of the legislation is already being proposed under the auspices of the Fit for 55 initiative. At the heart of Fit for 55 is the premise that the EU needs to go further faster to deliver the sort of GHG emission reductions that would be consistent with avoiding the worst impacts of climate change. For the RED III that means increasing the centrepiece renewable energy target from 32% to 40%.
The Fit for 55 package is not just about ratcheting up high level aspiration though. If the Commission’s proposal passes muster with the Parliament and Council it will also mean an overhaul of numerous sub-targets and regulatory structures, including those governing incentives for the supply of biofuels and e-fuels. These changes are intended to strengthen the market pull to advanced alternative fuel technologies, but they also herald some fairly fundamental changes in the way that renewable fuel policy works in the EU, and I’d like to briefly discuss three of them.
For advanced biofuel technology developers the big news is an increase in the 2030 supply target. The term ‘advanced biofuels’ is always a bit fraught as different stakeholders tend to have different ideas about precisely what ‘advanced’ actually means, but in the regulatory context it refers to biofuels produced from a list of feedstocks given in Part A of Annex IX of the RED, primarily cellulosic and ligno-cellulosic materials. The target increases from an effective level of 1.75% of energy supplied to road and rail, up to 2.2% of energy supplied to the whole transport sector. This increase will be welcomed by the ever-nascent advanced biofuel industry, but an incremental increase in ambition will not resolve the structural issues that have hindered industry development to date – in particular, it doesn’t answer the persistently intractable question of how prospective fuel producers should assess the future value proposition of contributing to those targets (I have discussed this at more length elsewhere). Targets are not a magic wand that can guarantee deployment, and the details of Member State implementations will continue to make or break this part of the policy. The revision still only does so much to support Member States to make their advanced biofuel targets deliver.
For e-fuel technology developers there is a more fundamental change with the introduction of a 2.6% target as a fraction of energy supplied to the transport sector in 2030. In the RED II, e-fuels were stuck in a sort of targeting no-man’s land, excluded from counting towards the advanced biofuel target and denied the ‘double counting’ applied to waste-based biodiesel. This new target puts e-fuels front and centre – and in the fine print it offers a big opportunity for the refining industry to extract some value from RED III. Often when I hear talk of e-fuels I immediately think about drop-in liquid transport fuels produced from hydrogen, but the RED III definition of ‘renewable fuels of non-biological origin’ is broader than this, including both hydrogen supplied to fuel cell vehicles and hydrogen used “for the production of conventional fuels”. Oil refineries already use significant quantities of hydrogen to clean fuel up (‘hydrotreating’) and to increase the yield of higher value fuel molecules (‘hydrocracking’), almost all of it produced from natural gas via steam methane reforming. The proposed text seems to create an opportunity for European refiners to comply with at least part of the target by switching from using fossil derived hydrogen to renewable hydrogen from electrolysis. This could be a confusing factor for developers of ‘true’ power to liquids fuel technologies. If oil refineries installing electrolysers deliver a large part of the target it puts a big question mark over how much additional liquid e-fuel will be needed to meet the 2030 target (or indeed interim targets), and uncertainty is a problem for investment.
The third big change is that the overall target for renewable fuel use in transport (including advanced biofuels, e-fuels, waste-based biodiesel and food-based fuels) would move from an energy basis with lots of double-counting incentives to a greenhouse gas saving basis with no double-counting incentives. It’s important to note that the Member States have considerable leeway to decide how to implement these targets locally (for example Germany currently has a greenhouse gas saving target even under the energy framing of the RED II, and double counting is extended to fuel suppliers only at Member State discretion) but if this part of the text is passed without major amendment this signals an overhaul of regulatory structures and changes to the value hierarchy between the different categories of fuels. Moving to a greenhouse gas saving target strengthens the value signal to deliver more climate-efficient production systems, but the shadow of indirect land use change will continue to hover in the background. As the UK’s Gallagher Review pointed out all the way back in 2008, it remains problematic to try to incentivise fuels based on climate performance when a large term in the carbon balance – indirect land use change – is omitted. Expect to see a lively debate about whether the new framework fairly deals with the various fuel categories – and an awful lot of disagreement about what ‘level playing field’ really means!
