Written evidence submitted by the Federation of Petroleum Suppliers (CGE0028)
About Federation of Petroleum Suppliers
The Federation of Petroleum Suppliers Limited (FPS) is the trade association for the heating oil distribution industry and ancillary interests in the UK and the Republic of Ireland. It provides members with a collective voice for the industry at national level, services to assist members in optimising their business efficiencies including depot audits, certification schemes, tanker driver training. The FPS also promotes best practice in the industry through the FPS Code of Practice.
Membership is organised on a geographical basis with regional meetings, and the FPS also organises an annual exhibition FPS EXPO and member conferences. Governance is through a council, to which each region nominates a representative.
The FPS offers support and a voice for the oil distributor at government level to try to ensure a fair deal for the industry as well as enabling distributors to meet and discuss current issues.
1.1 FPS believes that a liquid fuel (whether a bio fuel or a carbon neutral e-fuel) should have a major role in meeting the future needs of off grid homes and it is a mistake to focus so much on electric solutions which offer high cost/low efficiency solutions for 1.5m households in the UK (of whom a sixth are in fuel poverty).
1.2 Oil is such a good solution for 1.5m homes across the UK. There is decent supply, an effective distribution network and low-cost installation requirements to use oil for heating and cooking. These are excellent benefits which could be retained using a bio or carbon neutral liquid fuel. Ongoing running costs continue to be the best versus the alternatives. The recent report dated 31 July 2018 by Independent provider of home heating costs, Sutherland tables, which indicates that heating a standard 3-bedroom home with oil in Great Britain is £1133 per annum compared to an Air source heat pump radiator system at £1751 per annum and electricity (storage heaters) is £1992 per annum. Furthermore, heating oil has been the cheapest off grid energy since Jan 2015 according to Sutherland Tables thus providing oil consumers with effective and cheaper heating.
1.3 We believe the Government should look at a tiered approach to achieving the 2050 carbon reduction target. The policy framework should set a pathway of home heating carbon emission reductions with set targets/milestones (tied to the Clean Growth Strategy and 2032 carbon budget)
1.4 The government should not define how those milestones or targets are met nor the technology that should be used to meet them. That way industry can adapt all aspects of technological innovation thereby providing the means for consumers to make cost competitive choices in meeting those targets.
1.5 The government should set a date on the phasing out of 100% fossil-based fuel and change the standard specifications of the fuel. The dates for this regulation (declining percentage of fossil-based fuel in the liquid fuel mix by year) should be set to achieve a balance between meeting the target set by the Paris agreement but also giving industry time to implement innovative solutions. A set date for future regulation is a means to enable the introduction of new products in a controlled manner (e.g. a date when a carbon neutral fuel is introduced across aviation and home heating as without that control the supply chain could be disrupted, and consumers negatively impacted).
1.6 A pathway will allow our long-sighted FPS members to see sight of a future in which they could invest time and energy (and play a part in getting the right messages to the end consumers whom they talk to daily).
1.7 Such a pathway would also give consumers the opportunity to make short term efficiencies such as: -
1.8 A pathway would also allow primary refiners, importers and distributors to invest in new technologies and evaluate the capability and supply options for carbon neutral fuels which are just emerging AND align the change in any home heating fuel with the same change in the aviation industry.
1.9 In addition, we should not forget on grid buildings that use sulphur free gasoil for their back-up generators (e.g. schools, banks and hospitals). They will also be interested in using a carbon neutral fuel. If the domestic distribution market reduces due to premature regulation, then these buildings will have reduced supply choice and potentially higher costs. Back-up generators are also used in the combined heat and power sector, in businesses as back up for sprinkler systems (to ensure they work when power is off) and more and more businesses will likely be using generators to cover periods of high electricity demand from the grid.
1.10 Distributors rely on kerosene sales to support other parts of their business. Without those sales, many distributors will re-evaluate their businesses and instead of investing in the assets, look to sell. This will have a negative impact on other sectors such as agriculture and marine who rely on the distribution network that our FPS members provide. Transport fuels (diesel) and off road (sulphur free gasoil) are currently sold at very low margins, in effect, subsidised by the higher margin heating oil revenues in the winter. This model is very finely balanced with industry margins just below 1% (stark comparison to regulated businesses) which is good news for consumers. Changing this winter model could result in needing increased margins from the other sectors.
1.11 Some family business members of the Federation of Petroleum Suppliers (FPS) have been in existence for over 50 or 60 years. They started delivering coal or milk and expanded into oil products. They constantly look to reduce costs in their business through operational optimisation (better logistics) and innovation (back office systems) which is passed onto the consumer. If government provides pathways that encourage innovation and investment (without closing off possibilities like carbon neutral liquid fuels) then many of our FPS members have proven track records in taking advantage of new markets and possibilities.
1.12 If oil is only seen as part of the problem and not part of the solution (as a new carbon liquid or bio liquid fuel) then many resellers or distributors will review their business plans. This could result in limited investment in their businesses (new trucks, tanks etc) and their people. Many could decide that this is the time to sell and thereby consumers will have reduced choice in the immediate short term potentially giving rise to temporary supply issues and/or higher prices.
1.13 A joined-up approach alongside DfT and the Road to Zero Transport solution is required to ensure that the capability of electricity networks now and in the future can meet all government needs. We believe that to be doubtful especially not from electricity generation that has zero fossil use in its production and not with the current network at 99% of its capability. By working closely with the Road to Zero and The Aviation Working Group, carbon neutral liquid solutions for the 1.5 million homes in the UK that use oil will come sooner.
1.14 FPS actively supports the Industry Contact Group set up by OFTEC and BEIS and will continue to contribute to this discussion group. We believe that the group can play an important part in helping BEIS shape strategy by bringing together the whole of the supply chain (UKPIA, FPS & OFTEC) whilst achieving the carbon reduction goals of 2050 AND protect the cost (and choice) of heating systems available to the consumer.
2.1 Off Grid Housing and Insulation
2.1.1 It is important to understand the very specific nature of the housing stock that our FPS members service with heating oil – generally larger, older homes, in rural locations with poorer than average insulation. This is an important factor as migration of these types of houses over to electrification, regardless of which sort, is very much at the “very hard” and “very expensive” end of the spectrum. The design of these houses (and this includes a very high proportion of farm houses and buildings) is such that retrofitting Heat Pumps will require a huge capital expenditure to improve the insulation of the properties. If this work is not carried out, the running costs of any form of heat pump would be prohibitive.
2.1.2 A major challenge here is that the demographics mean that many of the owners are cash poor and asset rich (pensioners, farmers etc) and they will find it very difficult to raise the required capital to undertake major refurbishment of these homes.
2.1.3 Households urgently need access to more affordable and practical low carbon heating solutions. This is especially true for those living off-gas grid where properties tend to be older with the lowest EPC ratings and so are harder to treat. Incidences of fuel poverty are also higher in rural areas, making cost an even more crucial factor. Research by National Energy Action and the Campaign to Protect Rural England shows that rural areas are five years behind urban areas in the energy efficiency of homes.
2.1.4 A very high proportion of oil heated homes are in rural areas, much colder than within urban centres and often at higher elevation. This means that even in a milder winter, the demands on the heating systems are much higher than normal. Heat Pumps (and other low carbon heating such as bio-mass) are unable to provide the higher levels of heating required when temperatures drop significantly. More rural than urban households are in fuel poverty (15.5% v 10.4%) and many off grid homes are older dwellings which tend to have a higher proportion of households in fuel poverty compared to newer dwellings. Households in dwellings built between 1900-1918 were most likely to be fuel poor (18.6 per cent) with an average gap of £379. This is compared to just 4.2 per cent of fuel poor households in dwellings-built post 1990 with an average fuel poverty gap of £226. Households not connected to the gas grid are approximately 1.5 times more likely to be fuel poor than the national average.
These households simply can’t afford the high upfront installation costs of renewable heating technologies and, even if they could, switching to an Air Source Heat Pump would, in this scenario, likely increase their heating costs (source: Sutherland Tables, July 2018). This would force many more into fuel poverty and to live in cold homes with the associated health risks which would undoubtedly further increase the already unacceptably high rate of excess winter deaths in this country.
However, swapping a standard efficiency oil boiler for a condensing model would immediately reduce running costs and emissions and take many households out of fuel poverty. A further benefit would be a likely reduction in Excess Winter Deaths, for which cold homes are a major contributory factor. Based on ONS data and a recent report by leading energy charities National Energy Action (NEA) and Energy Action Scotland (EAS) investigating the major challenges the UK experienced during the severe cold weather earlier this year, in England alone there were as many as 1,724 extra deaths during the 'Beast from the East' (22 February to 3 March 2018). Across the UK the number the number may even be as high as 2000.
2.1.5 1.5 million homes in rural England, Northern Ireland, Scotland and Wales are heated by oil as well as a further 250,000 businesses. 16% of English Households who use oil for heating are classed as fuel poor - the national average is 11%. People who live in rural areas typically live in harder-to-treat, energy-inefficient properties with solid walls. Solid walls leak heat much more quickly than modern double wall constructions – in rural areas, 20.6% of households are given F and G ratings for energy efficiency, compared with just 2.8% in urban areas. The fuel poor urgently need support to help better insulate their homes and/or upgrade their boiler systems which will reduce their costs AND reduce carbon emissions.
2.2 Boiler Equipment and Metering
2.2.1 Oil boiler development has evolved over the years with the deployment of high efficiency condensing boilers since 2007 and low NOx solutions from the Ecodesign directive. Modern high efficiency oil condensing boilers are on average more than 90% efficient. Installing an oil condensing boiler is an excellent way to reduce running costs compared with non-condensing boilers and a fuel saving of up to 30% can be expected. A more efficient oil condensing boiler can also reduce CO2 emissions by 30%.
2.2.2 OFTEC believes that there are 400,000 ‘zombie’ boilers in the UK. These are non-condensing boilers that are old and inefficient. The first stage of any carbon plan should be to support consumers who wish to upgrade their old boilers to new condensing boilers. Use of the latest high efficiency condensing oil boilers, with blue flame technology reduces emissions (particularly NOx levels in the flue gases), such that the boilers will meet new emissions limits introduced in September 2018.
2.2.3 Under ECO2 from April 2017 to December 2017 there have been 11,407 oil boiler replacements installed. It is encouraging that oil was finally included in ECO3 but we think that more needs to be done to encourage many households to change. Government need to find a solution to help these households upgrade their boiler equipment and gain significant carbon savings.
2.2.4 Government also needs to find a way to rollout smart metering systems and controls (on tank and boiler) so that consumers can monitor and tweak their energy use and suppliers can more easily monitor stock levels thereby smoothing demand peaks. Suppliers can provide the equipment for tank monitoring, but consumers need to be made more aware of the benefits form this AND to want to use zonal controls in their home to reduce their heating costs. Government should look to rollout subsidised smart controls to off grid homes.
2.2.5 A recent study of 650,000 Energy Performance Certificates (on and off grid) showed that only 12% achieved a category A, B or C rating. Therefore only 12% of the households can install an air source heat pump system that will be efficient. Many of these D, E and F households (off grid) would be better staying on a liquid fuel system or to think about a hybrid system so that homes are able to switch to different technologies in the future as/if they become cost competitive. Liquid fuels can play a part in helping all homes to be upgraded to at least band C by 2030.
Liquid Fuel Solutions - supply
2.2.6 There will be carbon neutral or bio fuels for heating in the UK. They will gradually replace the fossil element in the distribution system with minimal impact on the supply chain. Industry data currently suggests that 3.9 billion litres of kerosene is used in the UK for domestic and commercial purposes (14.5 billion litres of similar product used in the Aviation industry). It is impossible to understand technical barriers now whilst the make-up of the future fuel is unknown. However, the introduction of methanol as part of the bio element of petrol was a low-cost implementation. Tanks and tanker seals needed to be replaced at a cost of circa £500 per 44 tonne tanker (including labour) ONLY for those tankers that were transporting full loads of methanol to terminals (not for onward delivery on the petrol/methanol mix).
2.2.7 We understand that DfT claim that all the FAME in the UK will be required to satisfy transport carbon reduction needs and therefore there is none available for the kerosene market. We do not believe that as experts suggest that the demand for diesel itself will decline but even if we did, we believe that there are other bio sources that will come into the market as demand increases. Currently, FAME costs are higher than the oil itself meaning that any blend of product will cause the cost to the consumer to rise but even a B30K (30% FAME and 70% Kerosene) blend would be cheaper than air source heat pumps (according to Sutherland Tables) and as supply and demand of FAME or bio products changes then the price will also change.
2.2.8 An independent study undertaken by OFTEC concluded that there were suppliers of bio type product who were working with the Aviation Industry already and would be willing to work within the domestic kerosene market as this would provide a perfect flattening of seasonal demand.
2.2.9 FPS has also been in contact with another supplier who suggest they are capable of currently supplying 200 million litres of bio product for blending into kerosene. This alone would be enough to create a 5% blend now.
2.2.10 FPS and OFTEC are in contact with UKPIA and TSA (whose members control the primary supply chain in this country either refining or importing product as required). We are seeking to understand how they plan to incorporate bio product into their fuels. We believe that some of their members will see this as an opportunity rather than a threat. Government need to use fuel specification standards to regulate the pathway from a zero mix today to 100% bio or carbon neutral by 2050.
2.3 Liquid Fuel Solutions – Work in Progress
2.3.1 There were successful trials of a bio liquid fuel called B30k (30% FAME and 70% Kerosene) in 2010. The heating systems continued to operate efficiently. The carbon emissions from this mix are lower than LPG (0.225 kgCO2/kWh v 0.242 kgCO2/kWh). More recently, OFTEC members have been conducting laboratory combustion trials burning Hydrated Vegetable Oil (HVO) blended with kerosene at blends between 60% and 100% HVO.
2.3.2 We understand that Virgin Atlantic are also working on a new fuel with a company called Lanzatech and have had success with an carbon neutral product http://www.iata.org/pressroom/Documents/Virgin-atlantic-saf-press-release.pdf.
2.3.3 We also understand that BP are working with Fulcrum to produce aviation fuel from waste products in the US https://www.bp.com/en/global/corporate/media/latest-news/construction-begins-on-waste-to-fuel-plant.html
2.3.4 The European Confederation of Fuel Distributors (of which FPS are part) have produced a report on an e-fuel (synthetic carbon neutral) that is being developed in Germany. Only water, carbon-dioxide (such as from the atmosphere) and energy from renewable sources are needed to produce e—fuels. The first industrial large-scale plants are anticipated in the medium term. We are currently looking to obtain a sample of this product for testing in UK burners but there is no reason to suggest that the results will be any different from Germany.
2.3.5 Eurofuels (of which OFTEC are a part) have also published a report on heating with liquid fuels which provides further information on how liquid fuels can be part of the solution https://www.eurofuel.eu/images/Heating_with_liquid_fuels_Guide.pdf. At the February Eurofuels Lignofuels conference in Amsterdam on Feb 8th, 2018, Tristan Suffys, Secretary General of Eurofuels presented perspectives for renewable liquid fuels in heating. https://www.eurofuel.eu/images/Eurofuel_presentation_-_Lignofuels_conference_080218.pdf.
2.3.6 A comprehensive study by a third party in Germany http://www.upei.org/all-news/item/422-status-and-perspectives-of-liquid-energy-sources-in-the-energy-transition will be presented in at EU level in Brussels on November 21st. This makes a strong case for power to liquid synthesised fuels playing a large part in the future energy market and especially home heating.
2.3.7 We believe that Government needs to create the same drive for development in the UK as we are seeing in Europe. There needs to be government funded research into e-fuels. Whilst we recognise the commercial sensitivities of some of the current work, it would also be good if Government could encourage companies to share work in progress especially in the Aviation industry as any change in this area will also open opportunities for the off-grid oil users.
3.1 Less than 2% of the UK’s Greenhouse Gas emissions come from oil fired heating. (Source DECC 2012 report).
3.2 This country requires around 3.9 billion litres of kerosene for home and commercial heating. Aviation requires 14.5 billion litres – so home/commercial heating is only 21% of total demand.
3.3 Based on recent studies of EPCs, only 180,000 households of the 1.5m using oil in the UK will possibly be able to effectively and efficiently convert to solutions such as air source heat pumps (ASHP)
3.4 It will cost these 180,000 homes at least £8,000 to buy the ASHP (without any modifications to the central heating). A new condensing oil boiler is around £2,500.
3.5 16% of the 850,000 homes in England that use oil are classified as fuel poor versus a national average of 11%. It is likely that that 16% will be higher for Wales and Northern Ireland based on their national statistics. Therefore, it is likely that a minimum 16% of the remaining 1.32m homes using oil need a solution that does not worsen their fuel poverty.
3.6 Running a 3-bedroom house on oil is 66% of the cost of running the same home on ASHP (source Sutherland Tables). At current FAME prices, you could achieve a K30 mix (30% FAME and 70% kerosene) and still be cost competitive to running an ASHP.
3.7 FAME is not the only answer. Trials in Austria running 100% HVO (Hydrated Vegetable Oil) are working well and GTL (gas to liquid) solutions in this country are already available. Companies already working with the Aviation industry (79%) also want to work with the home/commercial heating industry (21%) as it will provide winter demand for their production. Other companies suggest that they can provide sufficient biofuel to already cover a national K5 mix for home/commercial heating.
3.8 Only 11,407 boilers were swapped out under ECO2. There needs to be a much better scheme in place to encourage the 400,000 non-condensing boilers to be upgraded.
3.9 Upgrading a boiler to a condensing type will increase efficiency by 30% thereby reducing costs and carbon emissions by a similar amount.
3.10 The cost of converting the 1.32m homes to something like ASHP is likely to be around £15,000 per home. This is based on the cost of the ASHP, an upgrade to the central heating (required as many current systems will not work effectively with ASHPs) and additional insultation (again required to make the ASHP effective). The total cost of this conversion could be £19.8billion or £1.32billion per year over 15 years.
3.11 The cost of converting the boilers (assuming that over time all of the 1.32m homes would need changing) would be £3.3billion or £220million per year.
3.12 If government wanted to fully subsidise these homes to help them change (without making them additionally fuel poor) they would have to pay the differential – circa £1.1billion per year. They would also have to help the fuel poor with annual fuel bills.
3.13 That £1.1billion per year would be better spent an immediate boiler replacement scheme for the 400,000 non-condensing boilers (total cost only £1billion) and on encouraging the development of synthesised fuels (e-fuels) and bio fuels so that this country can offer liquid fuel solutions as part of a pathway to 2050 which offers consumers the same cost competitive, efficient solution for their homes.