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September was a very eventful month in Swedish biofuels, with the potential to affect the global direction of biofuels. In fact, current events in Sweden have the potential to define whether or not there is an influential global biofuels industry in decades ahead. To those unfamiliar with the current state of biofuels, this might seem odd. But there are very clear drivers for this.
Sweden is already a biofuels leader
Firstly, Sweden and the Nordics are already global leaders in biofuel usage – a result of both politics and geography. Given Nordic preferences, Sweden and its neighbours are inclined to identify renewable fuels, rather than rely on oil. And, given their relatively low populations and vast forested areas they have the biomass available as feedstock. Sweden is amongst the highest percentage users of biofuels in transport fuels globally.
Secondly, Sweden is a leading vehicle manufacturer, particularly the truck producers, Scania and Volvo, with their global sales. Within the transport industry it is assumed that cars will increasingly migrate towards batteries. But batteries are a long way from being able to provide the energy density to drive heavy trucks over long distances. Biofuels are one of the few technically and commercially viable solutions, and Sweden has two global champions with the potential to develop the engine technologies for new biofuels.
But despite the apparent advantages that Sweden has, the biofuels industry has stunted development. Perversely, Sweden imports the vast majority of its biofuels, rather than manufacturing it from its own forests. And despite having the technical knowhow to develop trucks that run clean biofuels, the launch of new models running specialised fuels has been limited by lack of market interest. Consequently, the current Swedish consumption of biofuels is dominated by vehicles that run a blend of imported biofuel mixed in relatively low proportions with fossil diesel. The result is neither particularly green, or clean, emitting the same toxic chemicals from the exhaust as diesel.
Pre-existing government policies failed to drive change
The existing state of the bio-industry is a consequence of government policies leading up to this point. Despite various governments being sympathetic to the desire to develop domestic demand and supply in its bio-economy, pragmatic concerns have limited progress. Economic factors such as the cost impact of biofuels on drivers (and voters) combined with challenging external factors, in particular EU state aid rules, which made it difficult for the government to incentivize industry development.
In 2018, the Löfven government introduced new rules designed to adapt the goal of driving increased biofuels consumption and the development of domestic production to EU regulations. The most important part of the new system was the system called Reduktionsplikt (reduction obligation). Rather than incentivizing biofuels consumption through tax breaks, it demands that oil companies sell fuel with a minimum percentage of biofuels. For diesel this is 21%, a level which the government forecast should rise through successive increases in the obligation, such that by 2030 it would rise to 40%.
This system, which does most of the heavy-lifting in terms of driving the biofuel consumption, applies to so-called låginblandad (low-blend) biofuels. For höginblandad (high-blend, or pure biofuels) a different system was left in place. This system allowed very generous tax breaks to apply for certain biofuels such as ethanol, biogas and HVO100 (vegetable oil/animal fat). The high-blend system was meant to encourage development of production, which suffered from poor economies of scale. And it relied on a waiver of EU rules, which the EU gave for two-year periods. This system has done little to motivate the construction of new production, for the very obvious reason that it is impossible to build and make a return on a multi-billion biorefinery within the two year period that the waiver applies for. However, it has maximized the incentives for oil companies to sell as much high-blend biofuel as they can get their hands on. However, that has however been limited, as Sweden already takes a large proportion of the entire global production of HVO.
(Mundus International has covered this at length in the Monthly Policy Review for subscribers. For a public summary, in Swedish, of the tensions within the existing system, see this blog by Magnus Nilsson.)
The government eyes reform
Forced to acknowledge the existing system’s failure to drive innovation and change, the government announced a series of major reforms in September. On September 11, it issued a press release to say that it was raising the bar, with the 2030 objective for diesel moved from 40% to 66%. This was done in an unusual way, likely driven by political tensions within the government and external timing pressures. The press release announced that the government intended to make decisions about the 2030 target, but in fact, only proposed legislation that would change the 2021 target, from 21% to 26%.
Then, as part of the budget, which was presented officially on September 21, the government proposed that it would provide considerable incentives for biofuels developers and further development of the biofuels system. In addition to more direct funding of production facilities a huge system of new credit guarantees was unveiled. Via this proposal, the government agrees to underwrite the risk of a credit default by a biofuels developer; charging them an insurance premium for doing so. The total exposure that the Government allows for is SEK 50 billion over 2021-2023.
The Government believes that the cumulative effect of these changes is to make both the equity returns to biofuels developers more attractive, and at the same time make it easier for them to finance the development of their production plants, by minimizing the default risk to lenders.
Preem announces its bombshell
Whether or not the Government has found the right mix to encourage Swedish production of biofuels is as yet, unproven. But there was one immediate consequences. On September 28, Preem, a Swedish oil refiner announced that it was withdrawing its application to expand and upgrades its Lysekil refinery, near Gothenburg (see Nordic Green News, 28/09/20).
This highly contentious project, which bolted together a traditional “fossil” refinery debottleneck with an innovative biofuels development threatened to split the government. Faced with a decision on whether to approve or reject the project the pro-jobs Social Democrats were set against the pro-environment Greens. The Government was saved face when Preem’s Board decided to backdown. In the immediate aftermath of the decision Swedish media has declared this single decision as a marking the beginning of the end of the oil age in Sweden.
A new dawn for biofuels in Sweden?
But does the end of Preem’s dreams to upgrade its refinery mark the dawn of a new bio-dream? Not necessarily. In the short term, all that must happen is that Sweden will begin to import even more biofuels than it has before. But global supply is already limited, and so it will increase the price. That will make the apparent returns on investments into Swedish biofuel production more attractive, stimulating investment in plants. However, as plants take some 3-5 years to build and cost billions, developers face large risks. Typically a refinery looks to pay back its investment over two decades or more. Adding the lead time means that anyone who wants to start building a plant today, needs to feel confident that their economics will still be attractive in 2045. With current levels of global uncertainty this requires great faith.
The Government believes that the credit guarantees will help. But, by the 2030s technologies and politics are likely to have evolved. Hydrogen may have become a commercially viable fuel in this timeframe, or challenges with battery energy-density may have been overcome. And biodiesel remains the main biofuel. Biodiesel is still a diesel, which means that when it burns it can be deadly.
There are other much cleaner biofuels, but the engine technology for these has not been launched in a fully commercial way. And, as the Government has not yet improved the system of incentives for high blend fuels, innovations are still unlikely to be made in this sector. A review of the entire system is being undertaken by the Swedish Transport Administration, and things may change again in 2021 when that is released.
Disclaimer: The author has worked extensively in the development of biofuels in Sweden. His views are both informed and coloured by this experience.