Biofuels currently account for just 0.3% of fuel supply. But under the renewable transport fuels obligation (RTFO), fuel suppliers will be required to blend a growing proportion of biodiesel or bioethanol in their fuel from 2008, reaching 5% by 2010 (ENDS Report 370, p 35).
Further details of the obligation were announced in the Budget, including interim targets of 2.5% for 2008/09 and 3.75% for 2009/10 (see p 7). Targets "should rise beyond 5%... so long as infrastructural requirements and fuel and vehicle technical standards allow, and subject to the costs being acceptable to the consumer."
To meet the 5% target, approximately one million tonnes of both biodiesel and bioethanol must be produced each year. However, the UK lacks the capacity - built or planned - to reach such levels.
Currently there are no bioethanol plants and just three producing biodiesel - Argent Energy's 50,000 tonnes per year plant in Motherwell, as well as ESL Biofuels in Frodsham and Global Commodities in Shipdham (see table).
The plants use tallow and used cooking oil as their feedstock, instead of virgin oils. However, their total capacity is only 81,000 tonnes per year and Argent is the only company supplying a major oil distributor.
Nearly 700,000 tonnes of additional biodiesel capacity is planned to be up and running by 2008 - but this still leaves a shortfall of around 250,000 tonnes per year.
The picture is bleaker for bioethanol. Only two plants are planned - British Sugar's in Norfolk and Green Spirit Fuels' in Somerset - and their total capacity is just 155,000 tonnes per year.
Of the planned biodiesel plants, Biofuels Corporation's 250,000 tonnes per year facility in Teesside is the largest. The plant began trial production in February and is expected to reach full production in July using palm, soya and rapeseed oil and technology supplied by Austrian firm Energea.
Greenergy, the other major player, is building a 100,000 tonnes per year plant in Immingham, near Hull. The company already has planning permission and an integrated pollution prevention and control permit to double its size. It has also begun feasibility studies for a plant in Liverpool, after grain distributor and processor Cargill took a 25% stake in the business (ENDS Report 374, p 7).
Unlike other companies, it will use UK-farmed rapeseed oil for half its feedstock, in spite of its relatively high price.
According to the biofuels industry, the RTFO is "unlikely" to provide enough incentive to investors to increase the production of UK biofuels to required levels.
In March, Graham Hilton of Green Spirit Fuels told a House of Commons inquiry that the government risked "total market failure" in biofuels unless it increased support (ENDS Report 374, p 46).
It must maintain the 20 pence per litre duty derogation, he said, and set a 30ppl "buy-out price" for companies that choose not to comply with the RTFO. However, the budget set a buy-out price of 15ppl.
Graham Meeks, head of fuels at the Renewable Energy Association, agrees. "For the scale we're looking at - 5% - you've got to get the oil majors to change their supply strategies so they buy biofuels, and the only way you were going to do that is set the buy-out price higher."
Oil companies say it will cost £150 million to upgrade refineries and distribution networks so they can take biofuels, with annual operating costs of £130 million, Mr Meeks said. However, commercial considerations are also discouraging investment, especially the oversupply of petrol in Europe, which oil companies do not want to exacerbate by using bioethanol.
The industry's hope is that agricultural firms invest in biofuel production - having both the budget and grain supply networks to do so. Mr Meeks points to Cargill's investment in Greenergy as evidence of this potential, but warned that the companies could equally build plant in Europe and sell fuel into the UK.
Futura Petroleum for example, the company supplying bioethanol to Morrisons, intends to supply the UK market from a plant it plans to build in Amsterdam next year.
Greenergy has distanced itself from the rest of the biofuels industry, publicly stating its support for the government's proposals. "We think the levels of support are right," said chief executive Andrew Owens. "It's created the will to invest."
However, the duty derogation has created a "gold rush mentality" that has led to "too many entrants coming into the market". Competition for feedstock among them could make UK producers uncompetitive.
The government intends to publish draft regulations for the RTFO in "early 2007".