London (Platts)--20Nov2012/1124 am EST/1624 GMT

The European Commission does not plan to "cap the production and consumption" of first-generation biofuels as it moves to overhaul its biofuels policies, but it will "cap the incentives" for their production, Hans van Steen of the EC's Directorate-General for Energy said Tuesday.

"We are not proposing to limit the production or consumption of crop-based biofuels. We are proposing to cap the incentives. There's a difference," van Steen said at an industry event in London.

"Will member states have to scale back on their use? No. But if consumption goes beyond our target, it will not count towards the overall EU mandate," he said.

His comments came on the heels of a European Commission proposal released in October that would reduce the use of first-generation biofuels to 5% of all energy used in transportation by 2020. The original goal set in 2009 allowed for a maximum of 10% use of first-generation renewable fuel.

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The proposal, which is unlikely to be voted on and fully implemented before 2015, would also eliminate subsidies for food-based biofuels after 2020.

A batch of scientific studies concluded over recent years have pointed to biofuels as the key cause for rising world food prices and the displacement of highly biodiverse land.

Hanging over this debate is a report from the International Food Policy Research Institute for the EU which showed that the expected environmental gains of replacing fossil fuel with biofuels might be canceled out when taking land use change into account.

"The modeling [for calculating indirect land use change] has improved in the last five years, but there are still significant uncertainties. We still don't have enough knowledge to pin down the precise impact of land use change," Steen said.

Nonetheless, Steen claimed there is sufficient knowledge to "know that first generation biofuels do have an impact [on land use change]. And we wanted to send a strong signal to the market on where the investments should be made."

The European Commission proposal calls for incentives for biofuels with no or low indirect land use change, namely those made from waste or non-crop, non-land-using feedstocks. These biofuels will count up to four times more than first-generation biofuels towards the overall EU mandate.

Thomas Gameson, a public affairs manager at Spanish biofuels producer Abengoa, said the EU is not providing the right incentives for the production of second-generation biofuels.

"The way the industry moves depends on the policies to support or discourage production. At the moment, there is not enough security for the sector to build a very expensive project."

He said biofuels companies could take around a decade to build and recoup investments on a production plant. "That's a substantial amount of time, in which we cannot have policy U-turns," he said.

Currently, Europe does not have any second-generation biofuels plants operating at commercial scale.

The biofuels sector has criticized the European Commission proposal saying it could wipe out years of heavy investments in building capacity to produce first-generation ethanol and biodiesel.

Oil major BP, which hosted the the panel discussion in London on Tuesday, holds a 45% stake in Vivergo Biofuels. Vivergo is slated to open one of Europe's biggest first-generation biofuels plant before year-end, only months after the EU launched the proposal to overhaul its policies.

The project, estimated at around $500 million, will transform feed wheat into fuel ethanol.

--Guilherme Kfouri, guilherme_kfouri@platts.com
--Edited by Alisdair Bowles, alisdair_bowles@platts.com

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