Australia’s Regulatory Landscape in relation to the Biofuels Industry

November 13, 2016 |

bd-tl-111516-australia-smBy Jeff Olling, Australia and Pacific Rim Consultant for Lee Enterprises Consulting
Special to The Digest

Australian state and federal governments from both sides of politics have shown varying levels of support for the biofuels industry over the past few decades.

In 2000, the federal government enacted the Fuel Quality Standards Act 2000 (Cth), which provides a regulatory framework for setting national fuel quality and labelling standards for ethanol and biodiesel, amongst other fuel types. The framework was established in order to regulate the quality of fuel supplied so as to meet strict environmental requirements and bolster consumer confidence in the product.

Successive federal governments have also established various legislative schemes through which to provide significant financial support to biofuel producers. These schemes, predominantly in the form of grants, fuel excise relief and subsidies, were aimed at encouraging the development of a competitive and sustainable alternative fuels industry.

Most notable amongst these schemes was the Howard government’s Ethanol Production Grants Scheme (EPGP) which commenced in 2002. The objectives of the EPGP were to encourage the use of environmentally sustainable fuel ethanol as an alternative transport fuel, increase the capacity of the ethanol industry to supply the transport fuel market, and to improve the long term viability of the ethanol industry.

Throughout its twelve years in operation it consistently drew criticism for failing to meet its policy objectives. Specifically, critics noted that despite significant tax payer investment (estimated at $895 million[1]), little or no benefit had been achieved in terms of greenhouse gas abatement, air quality, fuel security, increased retail market competition or reduced petrol pricing[2]. It was further noted that the ethanol industry was unlikely to be commercially viable in the absence of the EPGP[3].

The continued failure of this, and other, schemes to meet their objectives, prompted the Abbott government to reconsider its policy position. It subsequently determined in its 2014-2015 budget that both the EPGP, and the grant scheme for biodiesel (the Cleaner Fuels Grant Scheme), would cease on 1 July 2015. Instead, the fuel excise on domestically produced ethanol and biodiesel would reduce to nil commencing on 1 July 2015, before increasing at a set rate on 1 July of each subsequent year until reaching their maximum rates of 32.77 percent of the petrol excise rate on 1 July 2021 and 50 percent of the petrol excise rate on 1 July 2030, respectively. As the rates are a percentage of the petrol excise rate, their value is to increase in line with the indexation of petrol which occurs biannually in February and August. Imported ethanol and biodiesel, however, would maintain an excise rate equivalent to that of petrol and diesel, respectively.

In addition, the Abbott government pronounced in the latest Energy White Paper that a critical precursor to turning the biofuels industry around was the production of cost competitive alternative fuels without ongoing assistance[4].

In light of the budgetary measures, the newly elected Turnbull government’s seemingly tacit approval of the Abbott government’s policy position of effectively abolishing tax payer assistance to the biofuels industry, and mounting domestic economic pressures, it appears that the support the industry has enjoyed over the last few decades is at an end for the foreseeable future.

 

Irrespective of the federal government’s tightening of its belt, the New South Wales (NSW) and Queensland state governments have recently made significant policy commitments to the development of the biofuels industry in their respective states.

The NSW government first demonstrated its strong commitment to the biofuels industry by introducing a biofuels mandate in 2007, through the Biofuels Act 2007 (NSW). That Act required liable retailers to meet targets for the sale of bio-based petrol and bio-based diesel, being 6 percent and 5 percent of the volume of petrol and diesel sales, respectively, by 2011.

Those targets were not met, and in fact, the market consumption of bio-based fuels steadily declined despite the mandate.

In the face of this decline, the NSW government sought expert advice on strategies to meet the targeted levels and also undertook a review of the operation of the Act. A similar review was also undertaken by the Independent Pricing and Regulatory Tribunal (IPART).

Based on the advice and outcomes of the reviews, the Biofuels Amendment Act 2016 (NSW) was recently enacted with bipartisan support in both Houses of Parliament. Generally, the Amendment Act, which is largely aimed at ensuring the 6 percent biofuel mandate is reached, widens the application of the Act, alters the exemption and defence criteria, provides powers to IPART to set determinations on the price of wholesale ethanol, and affords the NSW Government information gathering powers. It also provides for a review of the Act within three years, to ascertain if the policy objectives remain valid and whether the terms of the Act remain appropriate for securing those objectives.

Queensland has also recently legislated a biofuels mandate under the Palaszczuk government. The stated policy objectives of the Liquid Fuel Supply (Ethanol and Other Biofuels Mandate) Amendment Act 2015 (Qld), which amends the Liquid Fuel Supply Act 1984 (Qld), are to provide assurance to existing ethanol and biodiesel producers and stimulate investment in the biofuels industry in Queensland, contribute to regional growth and jobs creation, reduce greenhouse gas emissions from motor vehicles, and take advantage of the emerging second generation technologies for biofuels from a range of feedstock[5].

Generally, liable retailers are to meet targets for the sale of bio-based petrol and bio-based diesel, being 3 percent and 0.5 percent of the volume of petrol and diesel sales, respectively. The government’s intention is that both mandates will commence on 1 January 2017, and that the bio-based petrol mandate will increase to 4 percent after 18 months.

Any increases will be subject to a review by the Productivity Commission, with subsequent percentages prescribed in regulations. Such a review would consider economic, social and environmental factors to ensure the mandate is supporting domestic production, as opposed to growing an import market from interstate and abroad.

Having identified the industrial biotechnology and bio-products sector as a priority industry with global growth potential, the Palaszczuk government has also committed $20 million in funding for an Asia-Pacific hub for bio-futures industries as part of its recently released Queensland Biofutures 10-Year Roadmap and Action Plan[6].

This funding is being equally directed to four key areas: a Biofutures Industry Development Fund to financially assist companies complete due diligence and achieve financial close to allow better access to venture capital markets; a Biofutures Acceleration Program to identify strategic catalytic investment opportunities and attract a signature keystone investor or investors to Queensland; a Biofutures Commercialisation Program that will specifically assist businesses, in partnership with a Queensland research organisation, manage the significant risk in the development and scale-up of technology; and the establishment of Biofutures Queensland, a dedicated industry sectoral unit that will be the state’s focal point for biofutures industry support[7].

State Development Minister, Dr Anthony Lynham, said that the government’s vision for the state was for a $1 billion sustainable and export-oriented industrial biotechnology and bioproducts sector, attracting international investment to the state by 2025. According to Dr Lynham “We have a favourable climate, a strong existing agricultural sector, a highly skilled workforce, well developed supply chains, proximity to South-east Asia and a world class research and development sector…All those factors, combined with a Government committed to working in partnership with the private and academic sectors, means we have what it takes”[8].

Irrespective of the Queensland government’s policy commitment, Biofuels Association of Australia’s Chief Executive, Mark Sutton, considers that the mandate does not go far enough. In order to ensure significant investment in the industry, Mr Sutton considers that a mandate of 5 percent or higher is required. He also calls for further work on educating motorists on the compatibility of biofuels with most vehicles, and their environmental benefits, to bolster consumer confidence[9].

It now remains to be seen how the market, and investors, respond.

[1] Australian National Audit Office, The Ethanol Production Grants Program, 28 January 2015.

[2] Bureau of Resources and Energy Economics, An assessment of key costs and benefits associated with the Ethanol Production Grants program, February 2014.

[3] Ibid 2.

[4] Department of Industry and Science, Energy White Paper 2015, April 2015.

[5] Explanatory Notes, Liquid Fuel Supply (Ethanol and Other Biofuels Mandate) Amendment Act 2015 (Qld).

[6] June 2016

[7] Department of State Development, Queensland Biofutures 10-Year Roadmap and Action Plan, June 2016.

[8] Joint media statement Premier and Minister for State Development, Government backs in Qld as Asia-Pacific biofutures hub, 5 June 2016.

[9] Biofuels Association of Australia website, Biofuels hub another step forward, 7 June 2016.

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