Ilona Noriete: Biofuel – (Not) a Solution for Reducing Fuel Prices

At the very beginning of summer, the wider public (once again) learned about the presence of biofuel in our daily lives. The government was looking for solutions to reduce fuel prices. Unable to agree on reducing excise or value-added tax rates, it decided to temporarily suspend the mandatory blending of biofuel with fossil fuel. With minor exceptions, biofuel is generally added to fossil fuel from April 1 to October 31. Thus, this period has come to an end, and it is now possible to assess the gains and losses.

Lowering the price of fuel is an important task. The Ministry of Economics proposed three ways to achieve this: reduce the excise tax, reduce the value-added tax, or abolish the mandatory requirement to add biofuel. And Latvia chose the third path… A widely promoted belief was that by eliminating biofuel blending, the fuel price would drop by 12–14 cents per liter. However, in reality, this has not happened. Finance Minister Jānis Reirs recently acknowledged this in an interview.

If we compare fuel prices in Latvia and Lithuania, Latvia’s price has not fallen below Lithuania’s price, as it should have, since Lithuania still maintains the biofuel blend – and does so all year round. Fossil fuel prices are roughly the same for both countries, as are wages, fuel station markups, logistics, and VAT. The only differences are that in Lithuania the excise tax is four cents per liter lower, while in Latvia traders pay about 1.5 cents per liter for fuel reserves.

So – subtracting those five and a half cents from the promised 12–14 cents, diesel in Latvia should have been 7–9 cents cheaper than in Lithuania. But in fact, it is not. On the contrary – in Lithuania, diesel is 1–3 cents cheaper! What’s more, recently the gap has even grown – in the first week of November, according to European Commission data, the price difference for diesel was as much as 7 cents!

When the ministry was still only preparing to make this decision, Neste had already warned in the media that fuel prices would not decrease at all because of the suspension of biofuel blending – or only very slightly, by one or two cents. This naturally raises the question – why did the planned reduction in fuel prices not take place, and where did that money go?

This question was raised over the summer, and as a result the Competition Council carried out its own investigation. Its final conclusions stated that competition in the retail sector is fairly strong, but that foreign fuel producers took advantage of the Latvian government’s decision for their own benefit. They gained a larger market share for their products by replacing biofuel.

Biofuel producers purchase raw materials in large volumes from local farmers, and the resulting product can then be consumed right here in Latvia. This means – Latvia has no oil, but it does have several biofuel producers who together can supply up to 10% of the country’s diesel consumption. Yet now, instead of the missing biofuel, we have brought in more fossil fuel, with the only beneficiaries being foreign fossil energy companies. Therefore, the government’s June decision to abolish the biofuel blending requirement for fossil fuels should be critically reassessed, taking into account how events have actually unfolded and whether consumers have seen any price benefits at all.

Biofuel Will Help Achieve Upcoming Emission Targets

Why is this issue important? Because Latvia – specifically, the outgoing government of Krišjānis Kariņš – has committed itself to fulfilling a whole range of targets set out in EU directives on emission reduction and the use of renewable resources. In this context, the use of biofuels takes on a positive significance – it is part of the task of “greening” transport.

This can be done in several ways. Electric transport, biomethane vehicles, hydrogen-powered cars, and second-generation biofuels are all known options – but so is the blending of conventional, first-generation biofuels into fossil fuels.

For example, Lithuanian law requires that 7% biofuel be blended into diesel, and that 10% bioethanol be added to 95-octane petrol. Other countries use additional mechanisms. For instance, a binding obligation on fuel suppliers to reduce emissions by a certain percentage each year – giving them some flexibility regarding the timing of sales. There are also other regulatory solutions in place.

In Latvia, biofuels have been used for more than ten years. From the very beginning, they were intended to be blended into both petrol and diesel. However, there is one essential difference – ethanol has always been blended into petrol year-round, whereas in Latvia this has not been the case for diesel (unlike in other countries, including Lithuania). The period during which biofuel must be mandatorily blended into fossil diesel runs from April to November. This stems from the once widely spread but misleading belief – justified by references to the different chemical properties of biodiesel – that blending in winter would cause problems for vehicles. Yet these seem to be myths created by vested skeptics. One need only look at Lithuania – despite the fact that our neighbor blends biodiesel into fossil diesel all year round, no “tragedy” has occurred – cars are still driving on the roads.

Riga Technical University’s leading researcher and associate professor Aiga Barisa, author of studies on sustainable transport strategy in Latvia, comments:

I will answer from the perspective of climate and energy policy goals. Latvia has committed to ensuring a certain share of renewable energy in the transport sector – 7% by 2030. Biofuel is one way to reach this target. So far, more than half of renewable energy in transport has come from biofuels. In Latvia, this is first-generation biofuel, used in blends with fossil fuel. In my view, such blending definitely needs to remain in place, and it was not right for the government to suspend it for a year and a half.

The European Union is raising its targets for emission reductions. Moreover, it is important to distinguish between the near future – up to 2030 – and the longer term, stretching to 2050, when climate neutrality must be achieved by all. As Aiga Barisa emphasizes: “In the long term, the forecast is that biofuels will be replaced by electricity and hydrogen. But for now, while these technologies are still relatively expensive in terms of costs, biofuel is the best solution.”

When speaking about different generations of biofuels, it should be noted that the EU’s position is to gradually phase out first-generation biofuels, which are produced from food crops – rapeseed, grains, and others – and transition to second- and third-generation biofuels, produced from all kinds of organic residues, waste, and wood materials. This is regulated by the Renewable Energy Directive, which sets clear percentage targets (3.5%) for how much of total consumption must come from advanced biofuels. These targets are expected to rise year by year, which means the role of first-generation biofuels in this sector will diminish.

If we ask whether Latvia can also produce second- and third-generation biofuels, I believe that, technologically, it is possible. The other question is whether there will be sufficient raw materials and markets for the products.

Precisely for this reason, the production of second-generation biofuels in Latvia is currently operating at low capacity.

Emission Targets Are Changing the Market

Biofuels – like many products in the European Union – flourished thanks to EU directives. In other words, the EU created demand in the name of ambitious goals.

Kaspars Naglis-Liepa, researcher at the Institute of Economics and Regional Development and associate professor, reminds us: “Clearly, this was an artificially created market, driven by concerns about environmental impact and climate change. It was an attempt to artificially generate a market for a product that didn’t really exist, because society demanded measures to reduce climate change. Of course, this had huge consequences. One aspect – not everyone was ready to accept these technologies, including car manufacturers themselves. Moreover, most manufacturers, and also at the EU policy level, have expressed their commitment to gradually – and fairly quickly – ending the production of internal combustion engine cars. Another aspect – the lack of interest from fuel traders, or their willingness to find loopholes in regulations in order to avoid using biofuel. For example, selling so-called ‘winter’ fuel without blending all year round.”

The availability of raw materials and the capacity to reduce emissions determine to what extent each type of biofuel is truly “sustainable.” Sustainability is a very important aspect in EU legislation. Naglis-Liepa also stresses this point. In fact, a sustainability certification proving compliance is crucial, especially regarding how much emissions are saved compared with fossil fuels.

Alternatives for “Greening” the Transport Sector

To promote the use of biofuels, the European Union (EU) has adopted relevant legislation requiring countries to establish a legal framework and impose obligations on fuel suppliers to use renewable energy. Considering that the market price of ethanol and biodiesel will continue to be higher than that of petrol or fossil diesel, the EU has set targets through directives to increase biofuel use. This is because transport is the most energy-intensive sector, and currently there are no other instruments that can make the energy used there “greener.” To add – no other instrument or product that could have a sufficiently large impact, be available in large volumes, at a moderate and affordable price, and most importantly, be applied immediately.

Justs Dimants, researcher at the Faculty of Business, Management and Economics at the University of Latvia and author of publications on renewable energy resources, is convinced that the latest technologies are not yet ready for widespread use: “Essentially, at present, biofuel is the only alternative to fossil fuel – with the caveat that this applies if we want to reduce greenhouse gas emissions and all other forms of pollution right now. One aspect to consider is the average age of Latvia’s vehicle fleet. Another is the so-called green alternatives, namely electricity and hydrogen. Hydrogen still has a very long way to go, as there is practically no private infrastructure at all – only corporate or company-level infrastructure. Of course, there are some successful projects in the US, in California, in Iceland, and a few other places, but they are local. Obviously, as long as fossil fuel prices do not exceed the costs of alternatives, such projects are unlikely to develop on a large scale.”

“When it comes to electricity, firstly, our charging infrastructure is not sufficient for everyone to charge an electric car. Secondly, our purchasing power is not high enough for everyone to afford such a car. The existing vehicle fleet itself already reflects the purchasing power of Latvia’s population, while the size of the used car market further highlights that we will not be able to switch to something else in the near future. Considering that most cars are used vehicles, many more than ten years old and diesel-powered, at present the only way we can reduce our environmental impact is probably through the use of biodiesel. Of course, development must continue, investment in new technologies is needed, and in the long term we must look toward other solutions. But right now, there are no other real alternatives.”

“If all fossil energy resources are imported and cannot be obtained here, then in the field of biofuels we do have our own local producers. Essentially, they help maintain an active domestic economy in Latvia in these difficult global times, while also supporting exports.”