The Role of Alternative Fuels

Subsidising domestic alternative fuel production is not necessary for energy security

• The reliable supply of conventional transport fuels (petrol, diesel and jet fuel) to the Australian market is underpinned by a diversity of supply options for petroleum products from domestic refiners and imports, and ready access to the global market for petroleum products in the event that domestic production is either disrupted or insufficient to meet Australian demand.
• Alternative fuels have a place in a diversified Australian liquid fuels market as long as they are available at a competitive price, reliably supplied, acceptable to consumers, and produced sustainably.
• These performance benchmarks apply equally to all fuels in the transport fuels mix (including conventional, gaseous and alternative fuels) if supply reliability and security is to be achieved.
• Biofuels and gaseous fuels have achieved market penetration in the past based on significant financial incentives provided by governments over many years and mandated market shares or volumes.
  • Despite this substantial government assistance, biofuels have not developed a sustainable position in the Australian transport fuels market.
• Alternative fuel supply reliability and security should be judged on the same basis as other liquid fuels – supply diversity, reliable supply and access to markets – which are not present currently.
• The market will transition to other fuel types if and when they are economic.

A national ethanol mandate would not be good policy for transport fuel reliability and security

• Currently there is no commercial access to imported ethanol (which pays the full excise rate) and this, together with weak consumer demand, is hampering the development of a reliable, competitive and sustainable domestic biofuels market.
• For example, in 2011, Australian fuel suppliers encountered significant problems in sourcing reliable and quality supplies of ethanol from limited domestic producers.
  • This was due to floods affecting ethanol feedstocks, plant reliability issues, and also due to the closure of ethanol plants for financial reasons (despite the ‘excise-free’ regime applying then).
  • Access to commercially viable imported ethanol during these times would have filled the void left by domestic producers. Instead, some suppliers were forced to withdraw this fuel from their product offerings to consumers due to unavailability and non-viability of ethanol imports.
  • The lack of reliable domestic supply of ethanol and the inability to import economically viable supplies causes production/manufacturing disruptions and places additional costs on biofuel blend suppliers to implement supply chain management changes. These additional costs and supply disruptions reduce the cost advantages for biofuels, and their acceptability to consumers, adversely affecting the achievement of a long term sustainable biofuels market.
• Biofuels supply reliability and security should be judged on the same basis as other liquid fuels – supply diversity, reliable supply and access to markets – which are not present currently.

Domestic biofuels production will not reduce Australia’s exposure to oil price shocks and lead to lower prices for motorists with current technology and costs

• Biofuels (ethanol and biodiesel) are globally traded commodities.
• Biofuel feedstock costs can be heavily influenced by crude oil prices or linked to refined product prices.
• There are direct links in some instances between crude prices and biofuel prices (eg. ethanol contracts (for E10 blends) are formula linked to crude prices and E10 retail prices closely follow ULP prices.
• The ability of biofuels to ameliorate price increases in the future is also limited when considering the additional supply chain costs for fuel suppliers associated with these fuels.
  • There are major costs to the petroleum industry in safely and reliably blending and distributing ethanol blend fuels and in appropriate handling and storage facilities. Special attention/testing is also required through the supply chain to ensure the quality of ethanol blends is maintained.
  • It is reasonable for fuel suppliers and retailers to expect to recover these additional costs.
• Thus, any large scale substitution towards biofuels from conventional petroleum based fuels would bring fairly limited (if any) price or volatility relief for transport fuel users.
  • This is demonstrated by the close correlation between E10 and ULP prices and the small difference in retail prices between them, largely explained by a lower ethanol excise rate and the lower energy content (fuel economy) of E10.