UK development fuel 2020/21 certificates traded; talks on future offtakes continue

22 Jun 2020 | Sean Bartlett

UK development fuel certificates have been reported trading for the first time, according to trade sources, amid growing signs of the transitioning face of UK biofuel supply. 

The trades were reported to Energy Census and shed light on the pricing dynamics of the nascent market as obligated parties and potential suppliers alike prepare for further advances in the mandate.

The development fuel Road Transport Fuel Certificates were heard traded at values between 70 pence and 73 pence/certificate for the years 2020 and 2021, which compares to a buyout value for the obligation of 80 pence.

The trades underline that physical development fuels, which can include synthetic gas projects using household waste or hydrogen-based fuels, are starting to reach the UK market, with the UK confirming the first certificates had been issued, but declining to provide further details on the fuel supplied.

Meanwhile, discussions with market participants indicated that buyers are attempting to buy offtake for further into the future at much lower prices.

They cited reasons such as the technical risk related to delivery and potential excess returns on investment for suppliers.

Details on counterparties and the total amount of the trades this week were not available, but the volume for a portion of the trades at 72-73 pence for the year 2020 was 5-8 million certificates, according to one source.

The target for development fuels in 2020 is 0.15% by volume of total fuel supply, which would equate to around 74 million certificates based on 2019 figures.

However, the impact of Covid-19 containment measures is likely to mean the figures for 2020 will of course be very different.

This target ramps up quickly in the coming years, at 0.5% of fuel supply in 2021, 0.8% in 2022 and then increasing a further 0.2 percentage points per year to finally account for 2.8% of total supply by 2032.

The targets are viewed as challenging to meet by obligated parties, with available volumes still very small and much of the potential technology and feedstock pathways still unproven or in the early stages of technical development.

With the total buyout cost set to be over £500 million per year by the mid-2020s, the incentive is certainly there to press ahead with new projects, both for those newer to the fuels market and for obligated parties themselves.

Negotiations continue

While development fuel RTFCs for the 2020 obligation period have reportedly changed hands at values close to the buyout price, buyers are taking a tougher stance on deals for offtakes in the years ahead, say sources, and are looking for prices as low as 30-40 pence per certificate in some cases.

In the current year, with supply still so limited and the only alternative for buyers being to pay the buyout price, it would appear to be a sellers' market.

For agreements further ahead though, obligated parties are attempting to turn the tables, relying on the prospect of increased supply options, as well as the need for some producers to be able to book in that future revenue right now to secure much-needed financing, according to sources.

While nominally the delivery risk is on the side of the producers and price risk with the buyers, buyers are also factoring in the need to potentially secure offtakes for volumes greater than they actually need, from multiple suppliers, in order to have confidence in requirements ultimately being covered.

In addition, at least one large buyer is using their calculation of an appropriate return on investment for the producer financiers as a negotiating tool, based on the risk of the project, said a source.

The most crucial factor for any forward deals may be the financing aspect though, which could force the hand of sellers in the near-term said another source.

“There’s a simple reason [they need to sell] and that’s (because) they can’t generate finance without selling some offtake," said the source.

What is a development fuel?

To be recognised as a development fuel, the fuel must be either made from feedstock recognised as double-counted for certificates by the DfT (but not used cooking oil or tallow), or renewable fuel of non-biological origin.

It must also be either hydrogen, aviation fuel, or a substitute natural gas. 

Alternatively to the above criteria, it could be any fuel that can be blended with BS EN standard road fuels such that the renewable portion of the finished fuel is at least 25% of the volume.

All development fuels generate two development fuel certificates per unit, meaning that the target is effectively halved, and in the case of gases multiple certificates are created per kilogram supplied to account for the much lower densities.

Hydrogen, for example, generates 4.58 certificates per kilogram and so 9.16 development fuel certificates are created for each kilogram of hydrogen supplied that meets the feedstock criteria.