Green fuels set for breakthrough

Environmentally-friendly substitutes for petrol and diesel, long championed by green campaigners, have been commercially available for years.

But their high price relative to fossil fuels, along with the expense and inconvenience of adapting cars to run on them, has so far prevented them from penetrating the mass market.

Now, there are signs that a surge of entrepreneurial activity in the alternative fuels sector, coupled with rising oil prices and ever more strident warnings over climate change, could be about to change all that.

Market debut

The most striking measure of the new mood of confidence sweeping the industry is that, for the first time, alternative fuel companies are listing on the stock market to fund future expansion.

The Biofuels Corporation, based in Teesside, floated on London's AIM market last month, and London-based D1 Oils is scheduled to follow suit in September.

Both firms produce biodiesel, seen as the green fuel most likely to make major inroads into the mainstream market.

Biodiesel, currently available at about 100 petrol stations in the UK, is an environmentalist's dream.

A modified vegetable oil made from crops such as rapeseed, it is renewable, and generates up to 60% fewer of the emissions that cause global warming than regular diesel.

But biodiesel's biggest advantage over other alternative fuels is that most diesel cars can be easily and cheaply adapted to run on it, without any loss of performance.

Cost equation

The main challenge for the biodiesel industry now is to produce the fuel cheaply enough to compete head-on with diesel on the garage forecourt.

The industry consists of a fragmented network of small companies, and as a result, production costs - and prices - are high.

In the UK, biodiesel currently costs about 4 pence more per litre at the pump than regular diesel, despite a 20p per litre tax concession introduced by the government in 2001.

Faced with this price premium, British motorists have voted with their wallets, with sales of biodiesel stalling at a paltry 24 million litres a year, compared with annual petrol and diesel consumption of about 20 billion litres.

The Biofuels Corporation and D1 Oils are leading a concerted push to narrow or eliminate the price gap, hoping to tap into pent-up demand for affordable green fuel.

"The consumer awareness is there, but we need the economics to fall into place," says D1 Oils chief executive Mark Quinn.

"We're confident that price is the issue."

His counterpart at the Biofuels Corporation, John Nicholas, is equally certain that the market is ripe for expansion.

"We've been looking at this for two years, and we feel we're here at the right time," he says.

Bigger is cheaper

Both firms aim to use the proceeds of their stock market flotations to fund efficient, large-scale production facilities, passing on the cost savings to consumers.

The Biofuels Corporation is planning to build Europe's biggest biodiesel plant, capable of producing 250,000 tonnes of the fuel every year, at Seal Sands on Teesside.

D1 Oils, meanwhile, is planning to supply biodiesel worldwide from plantations of oil-bearing crops - including jatropha, a tropical shrub - covering more than 70,000 hectares in Africa and Asia.

Whether they manage to wean more drivers off the fossil fuel habit remains to be seen.

Last month, a report from the UK Petroleum Industry Association (UKPIA) said the wide availability and comparatively low cost of petrol and diesel would help them see off any challenge from alternative fuels for the foreseeable future.

According to its co-author, UKPIA technical director Malcolm Watson, substantial price reductions would be needed to encourage a significant take-up of biodiesel.

"There's plenty of oil around, and in the meantime, biofuels are simply too expensive. They cost two to three times more to produce," he says.

Way forward

However, the attempt by Biofuels Corporation and D1 Oils to shake up the alternative fuel market may be helped by wider political and economic developments.

Firstly, the European Union has urged member states to ensure that 2% of all transport fuels are derived from renewable sources by 2005.

The target is not obligatory, and the UK, for one, looks certain to fall far short of it.

But the green fuels industry is nonetheless hopeful that it may persuade some European governments to stimulate biodiesel sales through, for instance, further tax cuts.

Green fuels enthusiasts in the UK point to Germany, where the biodiesel accounts for about 20% of the diesel market thanks to a favourable tax regime.

Secondly, last month's surge in oil prices, triggered by soaring global demand and unrest in the Middle East, has reminded consumers that fossil fuels are a finite resource whose supply can sometimes be precarious.

While biodiesel producers are not counting on a sustained rise in oil prices to transform the economics of their industry, they say turmoil in the oil market has rekindled interest in alternative fuels.

http://news.bbc.co.uk/2/hi/business/3850549.stm