German Biodiesel Industry Peaks, Trouble Ahead

Starting in 2004, the German government exempted biofuels from taxes in a bid to reduce CO2 emissions—and introduced a raft of subsidies that sparked a rapid expansion of the biodiesel industry, the biggest in the world. Boosted by high oil prices, biodiesel sales in Germany rose to 2.8 million tons in 2006, accounting for almost 5 percent of the country's total transport fuel sales.

But biodiesel industry sources in Germany estimate that only about half the 5 million ton capacity will be used in 2007 following a dramatic slump in demand after taxes on biofuels were introduced. The government made the move in response to a ruling by the European Commission that Germany's tax relief scheme overcompensated biofuel producers.

"The biodiesel industry has peaked; capacity has grown very quickly and outstripped production and now some companies might even go bankrupt as the industry consolidates," Norbert Allnoch, director of the International Economic Platform for Renewable Energies (IWR Internationales Wirtschaftsforum Regenerative Energien), an independent research body located in Munster, told RenewableEnergyAccess.com.

The Berlin government is nonetheless continuing to target support to the one biodiesel used in a blend with convention diesel fuel—1.5 million tons in 2006. On January 1, 2007, the government made it legally binding for all fuel companies to add 5 percent biodiesel to conventional diesel sold on their forecourts and so eased the simultaneous imposition of the tax of 47 euro cents on every liter of biodiesel for blends.

As a result of the requirement, Germany is set to meet the European Union's target for biofuel use of 5.75% in 2010. It is estimated that biofuels saved Germany 12.7 million tons of C02 in 2006. Another 1.3 million tons of pure biodiesel was sold in Germany on the open market in 2006, and it is these sales that have been hammered by the new taxes amounting to 9 euro cents introduced in August last year.

"Pure biodiesel is not competitive when taxes are put on it, especially if the oil price falls," Karin Retzlaff from the Association of German Biofuel Industry (Verband der Deutschen Biokraftstoffindustrie), told RenewableEnergyAccess.com.

This is a problem since customers of pure biodiesel are mainly transport companies that are looking to reduce the fuel bills of their huge fleets of lorries by tanking with the cheapest fuel wherever they find it.

"The price difference right now is already critical for pure biodiesel but we fear that sales will drop even more next year," said Retzlaff.

A liter of biodiesel was 5 euro cents cheaper than conventional diesel at the petrol stations in Germany on Friday, August 17th, 2007, but a liter of biodiesel gives 5 to 7 percent less energy than the equivalent in diesel.

Taxes on pure biodiesel are set to increase further by 6 cents every year starting on January 1, 2008 and to reach 44 euro cents a liter by 2012, Retzlaff said.

Future of Pure Biodiesel in Germany Bleak
"Biodiesel producers will need to find new export markets to make up for the drop in demand in Germany, but there are opportunities, for example, in eastern and southern Europe," said Alloch.

In addition to the new taxes, it is predicted that biodiesel producers will be squeezed by a rise in the price of rapeseed. Rapeseed oil is the raw material that is used to produce more than 70 percent of biodiesel in Germany.

"The reports we are getting are that the harvest this year has been poor and the rapeseed has a low oil content." Retzlaff said. "Higher rapeseed prices will make biodiesel producers uncompetitive even if oil prices rise."

In 2006, rapeseed was grown on about 1.5 million hectares of land in Germany, or 11 percent of the total agricultural land area; approximately 7.0 million hectares was used to grow crops for food.

Imported soybean and palm oil made up another 20 percent of the raw material for biodiesel.

"Looking to the future, more set-aside land in Germany and also in the European Union will probably be needed to produce crops for food because of poor harvests due to climate change, and so there is not much room for expanding the production of rapeseed," Allnoch said.

The environmental advantages of growing rapeseed for biodiesel have also been hotly debated. A recent study by scientists claimed that the amount of nitrous oxide produced by rapeseed is more damaging to the earth's atmosphere than the equivalent amount of CO2 produced by burning conventional fossil fuels in vehicles.

Tobias Dunow, spokesperson for the German environment ministry, said that the key objective of the government is accelerating the development of a second generation of biofuels.

"More pure biodiesel would require a new network of petrol stations to be built and for car engines to be modified, and that doesn't make economic sense," Dunow told RenewableEnergyAccess.com. "We would like to see the second generation biofuels developed as soon as possible."

Dunow said the government is looking at technologies such as Biomass-To-Liquid processing.

Allnoch predicted that biodiesel would remain an important part of Germany's energy mix until the second generation of biofuels comes onto the market in 2015 or later.

"Biodiesel is an important fuel in our transition to the next generation of biofuels," he said. "The experience that has been gathered in producing biodiesel will pave the way for the second and third generation technologies, but these technologies might not be the perfect solution either."

In 2006, Germany used 28,200,000 tons of diesel for transport fuel, 21,800,000 tons of petrol, 2.5 million tons of biodiesel, 1,080,000 tonnes of plant oil and 480,000 tons of bioethanol.