Development Fuels are Hitting the UK Market (but is 10% of target enough?)

The trade in UK Development Fuel RTFCs is underway with recent evidence (reported by Energy Census) suggesting that agreements have been reached on a trade price between £0.70 to 0.73 per certificate (2020/2021) on a trading volume of circa 6.5 million tickets (note: circa 10% of certificate demand in 2020 based on 2019 fuel volume figures; circa 220 m certificates are required in 2021 (Covid may have an overall impact on final volume demand in these early years)).

This is close to the buyout price of £0.80 per certificate and illustrates that the value of the certificates is likely to remain high until such time that the volume of advanced biofuel hitting the market is at a level to meet demand. The reduction in price is likely to be a function of the sellers desire to provide a competitive position to the existing buyout price to enable a secure sales volume demand.

Evidence was also presented to indicate that market players were working to hedge longer term pricing at a discount on fixed deals. However, producers of fuels that comply as development fuel are (globally) few and far between with long runways in place until significant volumes of compliant fuel can realistically come to market. This is due to a number of factors including funder risk perception with respect to a new market, process development delays with existing projects coming to market and perceived fuel market inertia.

What is a development fuel?

A development fuel, for the purposes of the RTFO, is produced from defined feedstocks that attract double counted certificates (2 certificates) per litre of fuel produced (alternatively it can be produced from renewable fuel of non-biological origin – e.g. wind fuelled electrolysis to produce Hydrogen).
Their production is seen as more expensive than standard biofuels (such as crop based biofuels and treated vegetable oils) and therefore they attract a higher buy out price to assist in developing the business case for plant development – investment in plants to deliver development fuels is much higher than for normal biofuel production. However, they deliver a much higher carbon saving per litre of fuel.

The development fuel products must be:
• Renewable fuel that can be blended at ≥ 25% of the finished fuel volume in BS EN standard road fuels (Sustineri’s fuel meets this requirement)
• Hydrogen, produced from renewable energy sources
• Aviation grade fuel that can be used directly as a blend stock in aircraft
• Substitute natural gas.

There is an increasing volume requirement up to 2032 for development fuels to meet the targets set.

These targets are considered as difficult to meet as the infrastructure required to produce the necessary fuels is still going through the development stage, with funding mechanisms proving a challenge due to perceptions of ‘new technology’ risk. However, the prize is there for those projects that can demonstrate the ability to deliver fuels of the necessary standard – market of >£500m per year by the mid-2020s.

Sustineri’s opinion

Our first project is due to come online in time to meet the real demand for certificates and we are working towards this timeline. Other projects are on a similar trajectory and the market will look a lot different in 2025, although production volumes are still likely to fall below demand requirements based upon existing market development status.

We believe that our projects will be delivering into the UK and European markets within this timeframe. In addition, although targets have been set for development fuel requirements, there is potential for these to be increased as projects start to come online. Precedent for this has been set by consideration to increase the buyout price for standard biofuels to drive more sustainable market behaviour with the supply of these fuel grades.

Our belief is that once it is proven that development quality fuels can be delivered there will be a push away from fossil petrol towards increased advanced biofuel volume use to assist in decarbonising the internal combustion engine (ICE) fleet during the energy transition towards a low carbon future. This will significantly reduce the carbon intensity of road transport using ICE fuels whilst enhancing the progression to electric and hydrogen fuelled vehicles in the UK's transport future.