September 20, 2003

EU: Biodiesel Industry Expanding Use of Oilseeds

Biodiesel production in Europe is growing, and is becoming an important part of the European market for rapeseed.  Annual biodiesel output is now over a million tons per year and requires the input of an estimated 2.7 million tons of oilseed.  Biodiesel is not cost competitive with petroleum diesel without subsidies or tax incentives except in cases where petroleum prices are high in the extreme and vegetable oil prices are low.  Biodiesel has a major advantage over petroleum diesel in that it is derived from renewable sources; thus, on a net basis, fewer greenhouse gases such as carbon dioxide are emitted into the atmosphere.  The political support for the production and consumption of biodiesel and renewable fuels appears to be present to expand the biodiesel industry.

Production Levels

European production of biodiesel has increased rapidly during the last several years and is now concentrated primarily in three countries.  According to the European Biodiesel Board in Brussels, Germany produced an estimated 450,000 metric tons in 2002, France produced 366,000 tons, and Italy produced 210,000 tons.

Sources in Germany, primarily the Union Zur Forderung von Oel-Und Proteinpflanzen E.V. (UFOP), estimate German 2002 production slightly more than 550,000 tons.  A time series of total EU biodiesel production could not be obtained, but sales in Germany have risen from 10,000 tons ten years ago.  Meanwhile, authorized production in France has risen from 20,000 tons ten years ago.

In France, the best estimates available for biodiesel production are the quantities of biodiesel authorized to receive reduction in the motor fuel tax for the French market.  (See "French Biofuel Situation," August 2003.)  (You may need to download the Microsoft Word reader.) Since those amounts are restricted, the authorized limits are approximate production levels.  Additional but lesser amounts of vegetable oil methyl ester are produced for the chemical industry.  Vegetable oil methyl ester is a useful organic solvent.

The beginning of the large increases in biodiesel production in Europe was 1993.  Changes in the European Union’s Common Agricultural Policy (CAP) established a set-aside program in 1992 whereby farmers were obligated not to grow food or feed crops on a portion of their arable crop land; however, they were allowed to plant rapeseed, sunflowers, or soybeans for industrial purposes.  The production of vegetable oil on set-aside for use in producing biodiesel was clearly an option, and the biodiesel industry has grown rapidly in the last ten years. 

Another big boost for biodiesel, especially in Germany, came when vegetable oil prices were relatively low, around US$400 dollars per ton, from early 1999 to mid 2002, and mineral diesel prices varied, but on average were relatively high during this period.  With biodiesel exempted from the mineral fuel tax, production began to look very attractive, and a large number of projects were started.  The French industry also benefited from low vegetable oil prices, but the amount of biodiesel receiving a reduced motor fuel tax was, and still is, limited according to the rules of the French program.

Currently, the European Union is in a state of over capacity, mainly in Germany, where the tax incentives were most favorable.  Many construction projects were approved in 2000,  and demand for biodiesel exceeded the available supply.  Nevertheless, capacity is expected to continue to rise, albeit at a slower rate.  New projects have been announced in the United Kingdom and Portugal.  The project in the United Kingdom will lead to the construction of the European Union’s largest biodiesel plant.  Plant capacity would be 250,000 tons per year and the target for beginning production is the middle of 2004.  The project in Portugal is the construction of a 100,000 ton capacity plant that will use soybean oil, rapeseed oil, or palm oil depending on market conditions.  Production in this plant is also planned to begin in the middle of 2004.

The Chemistry of Biodiesel Manufacturing

Chemically, biodiesel is fatty acid methyl ester.  The chemical process for producing methyl ester is well known and is considered quite simple.  Vegetable oil and methanol are combined in a reaction cylinder in the presence of a catalyst.  In the manufacturing plants that were visited, sodium hydroxide or sulfuric acid were the catalysts, but potassium hydroxide is also used.  The reaction (called transesterification) strips the fatty acids from the glycerin backbone of the vegetable oil molecule and attaches methanol molecules to the fatty acids.  Extra methanol is put into the reaction cylinder to drive the reaction to completion.  The output from the reaction cylinder is a mixture of fatty acid methyl ester, glycerin, leftover methanol, the catalyst, and some impurities such as free fatty acids.  The reaction chambers are a small part of the biodiesel facility.  Most of the equipment, such as centrifuges and vacuum chambers, are used in the process to separate out impurities and purify the products.

Costs and Benefits of Biodiesel

Cost of Production

It is a generally accepted view of the industry in Europe that biodiesel production is not profitable without fiscal support. (See Cost and Return Scenario for a 60,000 ton biodiesel plant).

In the early 1990’s, when the biodiesel industry was incurring heavy start-up costs, the contract price for rapeseed used in biodiesel manufacture was much lower than for rapeseed used for food.  This was possible because rapeseed for biodiesel was grown on set-aside land where the growing of crops for food and feed are not allowed.  Farmers, with no better option, were willing to produce oilseeds (primarily rapeseed) under contract for less than the food use market price.  The amount of oilseeds, which can be grown on set-aside land in Europe, is restricted by the Blair House Agreement.  For a farmer to raise oilseeds on set-aside they must sign a contract with a buyer who registers the contract with the appropriate national government agency.  However, since 1998, contract prices have been similar to cash prices.  For example, in the central growing areas of France, cash prices have been from €40 per ton higher to €40 per ton lower than contract prices.  (1 euro = 1.17 US dollars)  Contract prices are set prior to planting; so consequently, market prices can move higher or lower than any particular contract price.

Because of the European's commitment under the Blair House Agreement to limit production of oilseeds on set-aside land to one million metric ton soybean meal equivalent, the expanding biodiesel industry has reached the point where it must now use oilseeds from non-set-aside land, imports of oilseeds, or imports of vegetable oil. (See Gains Report #GM2021)

Some biodiesel producers, when they do not have enough contract rapeseed, will purchase rapeseed oil.  This minimizes accounting difficulties that would result from trying to keep contract rapeseed separate from non-contract rapeseed.

The other reactant in producing biodiesel is methanol.  Methanol is a readily available commodity in the chemical industry.  It is produced from natural gas.  Methanol is valued at around €250 to €280 per ton, but the price varies with the price of natural gas.  A catalyst is necessary for the reaction, but the catalyst used varies from one biodiesel manufacturing plant to another.  Sodium hydroxide (NaOH), potassium hydroxide (KOH), and sulfuric acid (H₂SO₄) are three that are used.  Though chemically they remain unchanged in the reaction, the catalysts are somewhat difficult to purify after going through the reaction chamber, so consequently they are not reused.  KOH has the advantage in that it is useful as a fertilizer and can be spread on agricultural land after the process.  The advantage with H₂SO₄ is that it is less expensive.

Glycerin is produced as a co-product with methyl ester, and it has economic value.  One part of glycerin is produced to every 10 parts of methyl ester.  In the typical biodiesel plant, crude glycerin is produced which is about 80 percent pure, water being the principal impurity.  It has a price of about €500 per ton.  With some additional investment, crude glycerin can be converted to pharmaceutical glycerin at 99.5 percent purity, which carries a price quoted at €1030 per ton.  Representatives from the pharmaceutical industry have warned, however, that the demand for glycerin is relatively inelastic, and if large amounts of glycerin are produced by an expanding biodiesel industry it will push the price of glycerin down substantially.  With the low price of petroleum diesel and high price for vegetable oil in place in May 2003, glycerin is an important component in the overall profitability of biodiesel manufacture.  As recently as 1998, the price of glycerin was not helping with the overall profitability of the biodiesel industry, but the total still worked because of high diesel and low vegetable oil prices at that time.

A biodiesel plant has perhaps a 10-year life expectancy for accounting purposes.  A biodiesel plant with a capacity of 60–100,000 tons might cost  €30 million, but subsidies may be available to defray costs.  As a result, amortization of investment for a nominal size biodiesel plant might come to €4.7 million per year.

Marketing and Competitiveness Issues

Biodiesel competes in the market with petroleum diesel.  Prices are volatile, sometimes favoring biodiesel industry expansion, sometimes not.  An analysis by the Foreign Agricultural Service's office in Berlin last year found that biodiesel prices for 100 percent biodiesel were about 7 eurocents per liter (or 10 percent) cheaper than petroleum diesel.  However, in May 2003, other sources reported that retail prices of mineral diesel were dropping below prices for biodiesel.

The reformed Common Agricultural Policy adopted in June 2003 sets a carbon credit payment of €45 per hectare for farmers for growing non-food crops.  The payments will be for non-set-aside land only.  Oilseed growers believe this subsidy will be insufficient to induce the production of industrial crops on a sustained basis, and believe that a €100 per hectare payment for growing non-food crops would be more appropriate.

Biodiesel in its pure form is somewhat less stable in storage than is petroleum diesel.  Automobiles that run on biodiesel often have an extra fuel filter in the fuel line to remove sediments that accumulate from the oxidation of biodiesel.  It is worth mentioning that petroleum diesel is also not 100 percent stable and does degrade in storage. 

Biodiesel has a higher gel point than petroleum diesel and thus it may be more difficult to use in temperate regions in the winter.  Additives are available for both biodiesel and petroleum diesel to make them flow better in cold temperatures, but petroleum diesel has an advantage in this area.  Consequently, it is likely that pure biodiesel will have to remain below mineral diesel in price to be competitive.  Blending biodiesel with petroleum diesel as is done in France mitigates the cold flow problem. 

Biodiesel has more lubricity than does petroleum diesel; consequently, it reduces engine wear.  Sulfur in petroleum diesel also increases lubricity, but as emission standards for vehicles are becoming more stringent, sulfur is being removed from petroleum fuels.  As a result, biodiesel has some usefulness as an additive.

In Europe as elsewhere, new automobiles are sold with warranties.  Warranties are invalidated if one uses unapproved fuels.  Some manufacturers have approved the use of rapeseed methyl ester as a fuel with some models, while other manufacturers have not.  For the most part, only rapeseed methyl ester, and not methyl esters of other oilseeds, has received approval from car manufacturers because rapeseed methyl ester is what they have tested.

The Degree of Environmental Benefits

The energy efficiency ratio of rapeseed methyl ester is considered favorable.  Taking into consideration energy used in cultivation, production of fertilizer, transportation of products to market, etcetera, the energy ratio is 1.98.  That is, the energy value of rapeseed methyl ester is about twice as great as the amount of energy it takes to produce it.  The comparable energy ratio for ethanol production is 1.2.  If one includes the energy content of the co-products, glycerin and rapeseed meal, the energy efficiency of rapeseed methyl ester is 3.45.  If one also includes the energy value of rape straw, the energy efficiency is 6.35.

Source:  Shell Global Solutions, April 2002

One of the principal reasons for the support biodiesel manufacture is getting from the European Union and national governments within the European Union is that the use of biodiesel reduces the net production of greenhouse gases.  There is, however, a notable lack of agreement as to the amount of greenhouse gas savings that are actually achieved.  The EU Directorate General published a figure of 60 percent reduction in CO₂ emissions.  A publication by Shell Global Solutions estimated a reduction in CO₂ emissions of 53 percent.  The Shell study also included a rough estimate (or unproven estimate) of nitrous oxide emissions from the use of nitrogen fertilizer, which lowered the greenhouse gas savings to 39 percent.  The exact quantity of N₂O emitted from a field used to grow rapeseed remains unproven.  Furthermore, N₂O degrades over time as part of the natural nitrogen cycle.

N₂O is 310 times more effective than CO₂ at trapping heat in the atmosphere.
Source:  Well to Wheels Assessment  of Rapeseed Methyl Ester Biodiesel in the U.K. Shell Global Solutions, April 2002

Tax Law Affects Biodiesel Production

The Kyoto Protocol, signed in 1997, requires from the European Union a commitment to reduce, by 2008 to 2012, greenhouse gas emissions by 8 percent from the 1990 level.

The European Union is now at the cusp of a transition from a stage of experimentation with biofuels to a stage of early implementation.  On May 14, 2003, the EU Commission adopted the Promotion Directive that sets for member states the target that at least 2 percent of petrol and diesel used for motor transport should be from renewable sources.  The percentage will increase to reach 5.75 percent in 2010.  The French Agency for Environment and Energy Management (ADEME) estimates that the 2010 objective would require industrial rapeseed plantings to increase from currently 3 million hectares in the European Union to 8 million hectares.  The EU Commission will monitor the member states, which will have to justify where they may not have met the targets.  This directive is for sales and not production, so a country could import biofuels rather than produce their own biofuels to comply with the directive.  However, to entice sales, Europeans may find it not to be politically expedient to give tax advantages to imported product rather than developing domestic biofuel industries in their individual EU countries.

A proposed Detaxation Directive, (in Europe, the reduction of taxes on biofuels is often referred to as detaxation) waiting for input from the EU parliament, directs that member states will be allowed (but not mandated) to give fiscal resources to promote biofuels.  It would mandate minimum levels for motor fuel that would have to be imposed, but would allow detaxation for motor fuels from renewable sources.  According to the Directive, detaxation should be proportional to biofuel content.  There should not be overcompensation for biofuels, and support levels should take into consideration the costs of raw materials.  There will be no special delegation for each project.  Analysts feel that this Directive is likely to be adopted by the end of 2003 and will be implemented in 2004.

When the second directive is adopted, member countries must follow up with implementing laws for the directives to have there intended effects.  The new system would replace the current system where a number of countries have been allowed special exemption to experiment with reducing motor fuel taxes in order to encourage consumption of renewable fuels.

In France, the tax reduction for vegetable oil methyl ester is 35 eurocents per liter.  For ethanol, the tax reduction is 38 eurocents per liter.  The normal mineral fuel tax in France is 58 eurocents per liter, thus the remaining tax for vegetable oil methyl ester is 23 eurocents per liter and for ethanol it is 20 eurocents per liter.  In order to prevent excessively large budget implications, biodiesel production units must agree to production oversight and limitations.  The Government of France only allows reduced tax levels to be paid on authorized amounts of biodiesel or ethanol from specified production facilities.  Authorized production for 2002 totaled 318,000 tons from five facilities.  Biodiesel producers hope to have an official agreement of an additional amount of 70,000 metric tons by the end of 2003.  There is no labeling requirement for biodiesel, so motorists in France are normally not aware when they have biodiesel in their vehicle: however, one fuel company recently began selling a biodiesel blend under the brand name of “Ecodiesel” in order to take advantage of concern for the environment.  The percentage of biodiesel in blends is normally around 2 or 5 percent, but may increase to 30 percent for captive fleets of approximately 4,000- vehicles (e.g. city buses or highway maintenance vehicles) in 30 communities across the country.

In Italy, the 2001 Financial Law (L388/2000) introduced a 3-year study in excise tax reduction on some products for the purpose of safeguarding the environment.  Ethanol and ETBE (ethyl-tertiary-butyl ether) obtained from agricultural sources are given a reduction in excise tax of 29 eurocents per liter.  The available budget for this tax reduction is about 15.5 million euros.  This law also increased the amount of excise free biodiesel from 125,000 tons to 300,000 tons.  The Ministry of Industry is authorized to start a pilot project, to promote the use of pure biodiesel in the motor transport system.  The expressed main objectives of Italian bioenergy development programs are the decreasing of fossil fuel imports (greater than 80 percent of total primary energy consumption) and fulfilling the commitment, undertaken within the Kyoto Protocol, to reduce CO₂ emissions by a factor of 6.5 percent with respect to the 1990 level.

In Germany, the current program of development of the biodiesel industry is not a special exemption from European Union law, but rather is based on a loophole in the law.  The motor fuels tax in Germany is based on mineral fuel.  Since biofuel is not a mineral fuel, it can be used for motor transport without being taxed.  Unlike France and Italy, where biodiesel is blended with mineral diesel, biodiesel sold in Germany is pure, or 100 percent, methyl ester.  There is no mineral tax on biodiesel in Germany, so when diesel prices were high and vegetable oil prices were low biodiesel became very profitable.  Additionally, there have been no restrictions on the quantity of biodiesel that can be exempted from the mineral fuel tax, so there has been a huge investment in biodiesel production capacity.  Germany is expected to have over 1 million tons of production capacity by the end of 2003, exceeding demand at current prices, despite the motor fuel tax exemption.  Sales, which had been accelerating rapidly, disappointed proponents in 2002 when new users began experiencing some of the fuels limitations.

Industry representatives point out that the current situation is one where there is a lack of uniformity in the biodiesel fuels available to the consumer in the European Union.  In France, products contain a maximum of 5 percent rapeseed methyl ester and are sold to the general public for use in cars and trucks, or in some cases as home heating fuel according to the mixtures that each petroleum company selects.  Another product for captive fleets contains 30 percent biodiesel, and 100 percent biodiesel is available in Germany.  Standard blending throughout the European Union will be more likely should the Detaxation Directive receive final approval and be implemented.

Over the last decade, an increasing number of vehicles are being built to consume diesel rather than gasoline.  In France, for example, 63 percent of vehicles use diesel and 37 percent use gasoline.  Diesel appeals to the European driver for a number of reasons:  motor fuel taxes have been higher on gasoline than on diesel, improved technology has overcome pollution and poor starting characteristics of diesel vehicles, diesel vehicles tend to last longer than gasoline vehicles, diesel vehicles generally require less maintenance, and diesel cars get better fuel mileage.  With Europeans increasing their reliance on diesel, European Union petroleum refiners are finding it necessary to export excess gasoline and import diesel which is in short supply.  The imbalance is advantageous for biodiesel over ethanol, because biodiesel can extend the supply of diesel, whereas, use of ethanol would only require increased exports of gasoline.

(1 euro = 1.17 US dollars)

For more information, contact Paul Provance
with the Production Estimates and Crop Assessment Division, at (202) 720-0881