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Independent Pricing and Regulatory Tribunal

Ethanol supply and demand in NSW

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ii IPART Ethanol supply and demand in NSW

© Independent Pricing and Regulatory Tribunal of New South Wales 2012

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-92192972-4 S9-76

The Tribunal members for this review are:

Dr Peter J Boxall AO, Chairman

Mr James Cox PSM, Chief Executive Officer and Full Time Member

Ms Sibylle Krieger, Part Time Member

Inquiries regarding this document should be directed to a staff member:

Matthew Edgerton (02) 9290 8488

Alexandra Lobb (02) 9113 7757

Letitia Watson-Ley (02) 9290 8402

Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000

T (02) 9290 8400 F (02) 9290 2061

www.ipart.nsw.gov.au

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iii IPART Ethanol supply and demand in NSW

Contents

1 Executive summary 1 1.1 This review 1 1.2 Ethanol supply and demand 2 1.3 IPART’s findings 5 1.4 Implications for the operation of the Act and its exemptions 7

2 Regulatory and market context 8 2.1 NSW 8 2.2 Other states and territories 12 2.3 The Commonwealth 15

3 Supply of fuel ethanol 17 3.1 Australian supply capacity 17 3.2 Supply reliability and terms and conditions 28 3.3 IPART’s findings in relation to supply 34

4 Demand for fuel ethanol 36 4.1 Trends in petrol sales 36 4.2 Option of expanding the range of EBP by including ethanol in PULP 45 4.3 Price of EBP relative to RULP and PULP 47 4.4 E10 suitability of the vehicle fleet 52 4.5 Customer perceptions about EBP 54 4.6 IPART’s findings in relation to demand 57

5 Issues related to the operation of the market for petrol and ethanol 59 5.1 Coverage of the Act 59 5.2 Supplying ethanol to some regional/border areas 62 5.3 The off-station market for fuel 66 5.4 IPART’s findings in relation to operation of the market 66

Appendices 67 A Terms of Reference 71 B Proportion of NSW vehicles suitable to use E10 73 C List of stakeholders 75

Glossary 76

1 Executive summary

Ethanol supply and demand in NSW IPART 1

1 Executive summary

1.1 This review

The Premier asked IPART to assess current and projected levels of ethanol supply and demand. This is in the context of State demand for petrol and the mandated requirement under the Biofuels Act 2007 (the Act) for a volume fuel seller (volume seller) to ensure that ethanol accounts for 6% of their total petrol sales in NSW.1 A copy of the Terms of Reference (ToR) for this review is provided at Appendix A.

Under the ToR, we are to consider ethanol supply within and outside of NSW. We are also able to comment on the operation of the market for petrol and ethanol in NSW, if this is relevant to the assessment. We were given 6 weeks to complete this review and provide this report to the Premier.

The Government will use this assessment of ethanol supply and demand to inform the development of exemptions under the Biofuels Act 2007.

Our approach

We have consulted with key stakeholders, including volume sellers, ethanol producers and industry associations. In many instances, submissions and information received from stakeholders are confidential, as they contain some commercially sensitive information. For this reason, we rarely refer to stakeholders by name in this report.2

Due to the compressed timetable for this review, we were unable to follow our usual review processes, which include release of an Issues Paper, Draft Report and a public roundtable or hearing. Instead, we consulted 22 stakeholders. The stakeholders we consulted with are listed in Appendix C.

1 Total petrol sales includes sales of ethanol-blended petrol (EBP), regular unleaded petrol

(RULP), and premium unleaded petrol (PULP). It includes sales of petrol by retailers (petrol stations) and sales outside of petrol stations (eg, to farms, mines, industry, etc).

2 When in doubt, we have classified a submission or personal communication as confidential.

1 Executive summary

2 IPART Ethanol supply and demand in NSW

1.2 Ethanol supply and demand

We consider that there is currently sufficient supply of ethanol in Australia to meet demand in NSW under the 6% mandate. However, the supply of ethanol is highly concentrated. There are currently 3 producers in Australia and the largest provides two-thirds of total supply. Competition from imports is unlikely. Supply may be unreliable if 1 of the suppliers is unable to produce. The concentrated nature of ethanol supply may result in upward pressure on prices.

We do not expect the demand for ethanol to be sufficient to meet the 6% mandate, given current market conditions. The barriers include the narrow price differential between the price of E103 and regular unleaded petrol (RULP), community uncertainty about the suitability of ethanol-blended petrol (EBP), and a growing preference for premium unleaded petrol (PULP).

We do not think that the mandated level of ethanol sales would be reached even if EBP were to be sold at all petrol stations in NSW in place of RULP. Furthermore, it is unlikely that EBP would be sold at all petrol stations in NSW. This is because small retailers are excluded from the Act, and because of the higher costs of conversion and supply for some retailers, including those in rural and regional locations.

At present, the Act excludes retailers with 20 or fewer sites from the mandate. This, together with the general reluctance of volume sellers to blend ethanol with PULP and the policy goal of continuing to allow RULP to be available, makes the mandate harder to achieve. Some options for the Government to consider to modify exemptions policies are discussed below.

1.2.1 The broad ethanol supply and demand equation

The current combined production capacity of the 3 ethanol producers in Australia is in the order of 450 million litres (ML) per annum. There are also presently some stocks of ethanol in storage. We have also been informed that the 3 existing plants can increase production to 610 ML by 2016. As well, we understand there are 5 potential new ethanol production plants at various stages of planning in NSW, Queensland, and Victoria.

Overall demand for petrol is expected to remain constant (or even slightly decline) for the foreseeable future. This is due to growth in demand for alternative fuels, such as diesel. The means that the level of ethanol sales in NSW required to meet the 6% mandate is expected to remain constant at about 360 ML a year. Added to this, ethanol demand in other states is expected to be about 73 ML a year, assuming

3 E10 is regular unleaded petrol containing up to 10% ethanol. E10 is the most common form of

ethanol-blended petrol (EBP).

1 Executive summary


current levels of ethanol sales in these states, or 174 ML a year, if a 5% ethanol mandate on RULP is introduced in Queensland.4

Therefore, we find that supply of ethanol can meet the required demand in NSW in most circumstances. This finding excludes the occurrence of unexpected events such as natural disasters affecting production or the distribution of supply. These qualifications are applicable to most commodities. However, unlike other motor fuels, it is unlikely that shortfalls in ethanol supply would be offset by imports (see Section 3.1.4).

The supply of fuel ethanol is highly concentrated. There are currently only 3 producers in Australia, and the largest producer provides two-thirds of total national supply. As a result of Commonwealth Government policy, there is no scope for competition from imports. These circumstances have led some petrol sellers to be concerned about the reliability of supply and the terms and conditions of supply.

1.2.2 Given current market settings, demand is less than 6%

Australian Petroleum Statistics (APS) data indicated that EBP accounted for about 36% of petrol sales in NSW in 2011. EBP is primarily comprised of E10 – which is RULP that contains up to 10% ethanol. This suggests that ethanol comprises about 3.6% of all petrol sales in NSW. However, data from the NSW Office of Biofuels (which is part of DTIRIS) shows that ethanol accounted for 3.8% of petrol sales in NSW in 2011. Part of this discrepancy appears to arise because DTIRIS includes fuels containing greater than 10% ethanol (eg, ‘E85’) in its calculations.5

From 2006 to 2011, the market share of EBP in NSW increased from 0% to 36%. Over the same period, PULP’s market share has increased from 17% to 33%, while RULP’s share has declined from 82% to 31%. These trends reflect:

The introduction of the ethanol mandate in NSW and the roll-out of E10 to a significant number of petrol stations across NSW, often at the expense of RULP.

The increasing demand for PULP. Sales of PULP have increased across Australia, but not to the same extent as in NSW. This suggests that, when faced with a

4 There are currently no ethanol mandates in other states. The Queensland Government had

intended to introduce a 5% mandate on RULP, to apply from 31 December, 2010. However, in October 2010, it announced that it had suspended plans for this mandate.

5 For our review, we have used data on petrol sales from Australian Petroleum Statistics (APS). This is on the basis that this data is publicly available and allows us to compare petrol sales over time, between States and petrol types (RULP, PULP and EBP). APS reports EBP sales, but not actual volumes of ethanol sold. DTIRIS collects data on actual volumes of ethanol sold, but this data is not publicly available and it does not allow us to compare market shares of petrol types (as APS data does). We have identified a slight discrepancy between our estimate of ethanol sold based on APS data on EBP sales (36% EBP market share = 3.6% ethanol sales) and actual ethanol sales (3.8%) collected by DTIRIS. This likely reflects a margin of error in the APS data. Nevertheless, we consider that this slight discrepancy does not impact materially on our findings.

1 Executive summary


choice between E10 and PULP, a proportion of consumers previously using RULP will switch to PULP instead of E10.

We have extrapolated current trends in petrol sales to calculate a maximum possible EBP share of petrol sales of 58%, which equates to ethanol sales of about 5.8%. However, it is unlikely that this market share would be achieved. This is because it is based on assuming that:

RULP is removed from the market

EBP is rolled out to all service stations across NSW, including those that are not covered by the Act.

This estimate is also based on the assumption that current market conditions will continue unchanged. This includes the price of EBP relative to other types of petrol, the composition of the vehicle fleet, consumer perceptions of EBP, and that EBP is primarily confined to RULP and not PULP. Over time, however, changes could increase demand for EBP. For instance, our analysis indicates that the vehicle fleet is developing in favour of E10. Similarly, the maximum possible level of ethanol consumption would be higher if ethanol was more commonly included in PULP.

1.2.3 Operational issues

We identified the following issues relating to the operation of the Act and the ethanol and petrol markets:

A significant number (at least 25%) of service stations are excluded from the requirements of the Act, on the basis that they are operated by a person operating 20 service stations or less. This is likely to constrain the ability of primary wholesalers to comply with the 6% mandate, particularly since RULP still is available for sale. It also puts service stations subject to the Act at a competitive disadvantage.

Supplying EBP to regional areas can be more expensive. If E10 is rolled out to border zones at the expense of RULP, this could also undermine the competitive position of NSW sellers relative to interstate sellers.

Approximately 15% of petrol sales in NSW in 2011 were made outside of service stations (eg, direct to farms, mines and industry). One stakeholder has suggested that these sales should be excluded from the petrol ‘base’ when applying the mandate. This proposal is based on the view that farm equipment and machinery often can’t use EBP, and that it is often more expensive to transport ethanol to regional areas. Based on aggregate 2011 APS figures for NSW, such an adjustment would increase EBP sales from 36% to 43%, which suggests an increase in ethanol’s share from 3.6% to 4.3% of petrol sales.

1 Executive summary


1.3 IPART’s findings

Supply of fuel ethanol

1 Over 2012 to 2016, the production capacity of existing Australian ethanol producers is expected to be sufficient to meet NSW’s demand under a 6% mandate, assuming ethanol consumption in other States remains unchanged.

2 The capacity of existing Australian ethanol producers to meet NSW’s demand under a 6% mandate would be less certain if a 5% mandate for RULP was introduced in Queensland. However:

– The entry of 1 or more new ethanol production facilities into the market would help alleviate any shortage of ethanol supply relative to demand. Several ethanol production facilities are currently in the planning phase.

– It is unclear whether a 5% mandate will be introduced in Queensland. Further, even if this were to occur, it may be phased in over time, as has occurred in NSW.

3 The ethanol supply market in Australia is currently illiquid and highly concentrated. There are only 3 producers and no prospect of competition from imports. This:

– can undermine the reliability of supply

– may result in ethanol prices that are higher than they would be in a more competitive market.

Demand for fuel ethanol

4 In 2011, APS data indicates that EBP accounted for around 36% of total petrol sales in NSW. As EBP is primarily E10, this suggests that ethanol comprised around 3.6% of total petrol sales. However, data from DTIRIS indicates that ethanol accounted for 3.8% of petrol sales in 2011. Therefore, there appears to be a minor discrepancy between APS data and DTIRIS data. Part of this discrepancy appears to be because DTIRIS includes fuels containing greater than 10% ethanol (eg, E85) in its calculations.

5 We estimate the maximum possible EBP share of total petrol sales to be about 58%. This means that ethanol would comprise around 5.8% of total petrol sales. However, this maximum possible market share is unlikely. This is because the estimate assumes that E10 is sold:

– at all petrol stations across NSW – including stations not subject to the mandate

– in place of, rather than in addition to, RULP

– outside of petrol stations (‘off-station’), including direct to farms, mines and industry.

The estimate is also based on the assumption that current market conditions will continue unchanged. This includes the price of EBP relative to other types of petrol, the composition of the vehicle fleet, consumer perceptions of EBP, and that EBP is primarily confined to RULP and not PULP.

1 Executive summary


6 Over the period 2006 to 2011, PULP’s share of NSW petrol sales increased from 17% to 33%. Part of this growth is attributable to consumers switching from RULP to PULP, rather than from RULP to E10.

7 To date, volume sellers have generally not included ethanol in PULP for sale in NSW, although there are some exceptions.

8 Including ethanol in PULP as well as RULP could increase sales of ethanol towards the 6% mandate. Ethanol is included in PULP in markets overseas, including the USA. However, it may lead to increased petrol prices for some customers.

9 The price of ethanol can have a significant impact on the E10/RULP price differential, and hence potentially impact on demand for E10 (and ethanol).

10 The price differential between E10 and RULP has narrowed from 3 cpl in January 2007 to about 1.5 cpl in February 2012. This likely to be the consequence of:

– The replacement of RULP with E10. The price of E10 will tend to increase towards the price of RULP where RULP is not available, because the price of RULP is accepted by customers.

– The highly concentrated, illiquid market for ethanol in Australia.

11 As RULP’s market share and availability is decreasing, an increasingly important determinant of demand for E10 will be the price differential between E10 and PULP (rather than between E10 and RULP). This differential has been increasing over the last couple of years and has coincided with increased demand for PULP.

12 The vehicle fleet appears to be developing in favour of EBP. We estimate that:

– 73% of vehicles are E10 suitable, up from 66% in 2007

– 84% of vehicles will be E10 suitable by 2021.

13 There appears to be a lack of information about EPB in the general community. A Queensland Government marketing campaign promoting EBP appeared to positively affect EBP sales.

The operation of the market

14 A significant proportion of petrol stations (estimated to be at least 25%) in NSW are not required to comply with the 6% mandate, even though the wholesalers supplying them with petrol are generally required to sell 6% ethanol.

15 The exclusion of these petrol stations from the requirements of the Act:

– constrains the ability of some volume sellers to comply with the Act

– undermines the competitive position of petrol stations that are subject to the Act.

16 It can be more expensive to supply E10 to regional areas, particularly if this necessitates a change from the most efficient fuel supply route.

17 It is likely to be difficult to monitor or enforce compliance of interstate volume sellers in relation to their sales of petrol for delivery in NSW.

1 Executive summary


18 If off-station sales of petrol were excluded when calculating ethanol sales as a percentage of total petrol sales, ethanol sales in NSW for 2011 would be 4.3% rather than 3.6% of petrol sales (based on APS data).

1.4 Implications for the operation of the Act and its exemptions

Drawing on our findings, a range of options is available to the Government to consider. Each has merits and concerns, which the Government will have to weigh to achieve a practical outcome that balances the goals of having a viable ethanol industry, providing choice for motorists in the type of fuel they can buy, and minimising increases in petrol prices.

The options include:

Removing the exemption for retailers with 20 or fewer sites. This broadens the base to which the mandate applies. However, it would raise significant concerns from small site owners, especially in non-metropolitan areas, due to the cost of ethanol conversion and regulatory compliance. It would also likely result in very limited supply of RULP and increase petrol prices for some consumers.

Excluding sales of PULP from the petrol sales base – ie, ethanol sales would have to be 6% of sales of RULP and EBP (rather than 6% of all petrol sales). This would enable continued availability of RULP and would be supported by the oil companies. However, it would require significantly lower volumes of supply from ethanol producers, who have geared up to higher levels.

Excluding the sales of fuel to off-station locations (such as farms and mining companies) from the base. This would assist in maintaining some sales of RULP and reduce costs of transporting ethanol to regional locations. Regardless of whether this category is left in the base, there is unlikely to be significant penetration of EBP to off-site users for the foreseeable future.

Excluding sales of petrol from sites in border towns. This would recognise the higher cost of transporting EBP from major NSW centres to these sites, which are presently mostly sourcing their (unblended) supplies from interstate. However, a major concern in the application of a border town’s exemption is the area of the State to which this could apply. It would need to be tightly defined. Already, the distribution zones from interstate suppliers extend significantly south of Queensland and north of Victoria. Also, there could be border or definitional ‘creep’, as towns near the exemption zone could seek to be included.

Strongly enforcing the current provisions. This would mean oil companies would have to more seriously examine the option of extending the blending of ethanol to some premium products at some locations. As outlined in this report, they have raised a number of concerns with the option of blending ethanol into premium petrol.

2 Regulatory and market context



This chapter provides an overview of fuel ethanol legislation in NSW and other jurisdictions within Australia. It outlines key provisions of the Biofuels Act 2007 (NSW) (the Act), the Biofuels Regulation 2007 (NSW) (the Regulation) and Commonwealth Government excise arrangements. These legislative provisions have a significant impact on fuel ethanol supply and demand.

2.1 NSW

2.1.1 The minimum ethanol requirement under the Act

The Act6 requires volume fuel sellers (volume sellers) to ensure that the volume of ethanol sold7 is not less than a specified percentage (currently 6%) of the total volume of all petrol sold by the seller in NSW8 over each quarter.

Under the Act:

Petrol means a petroleum based fuel (whether or not containing ethanol) for spark-ignition internal combustion engines that is sold as petrol, or petrol-ethanol blend, but does not include diesel fuel, aviation fuel, liquid petroleum gas and such other fuels as may be prescribed by the regulations.9

The specified minimum ethanol percentage under the Act has increased over time as set out in Table 2.1 below.

6 Formerly the Biofuel (Ethanol Content) Act 2007. 7 In ethanol-blended petrol (EBP). 8 The Act applies to the sale of petrol by a volume seller to a person in NSW or for delivery in

NSW (whether or not the sale is made in New South Wales) (Section 5(1)). 9 Section 1(3) of the Act.



Table 2.1 Minimum ethanol requirement for petrol sales by major retailers and primary wholesalers, as required under the Act

Date Required sales of ethanol as a percentage of petrol sales

1 October 2007 – 31 December 2009 2%

1 January 2010 – 30 September 2010 4%

1 January 2011a 6%

a The minimum ethanol requirement of 6% was suspended until the end of 30 September 2011 by order under Section 17(1) of the Act – NSW Government Gazette No 133 of 10 December 2010, p 5811 and No 66 of 3 June 2011, p 4667.

Source: The Act and various NSW Government Media Releases.

From 1 July 2012, primary wholesalers were to have been prohibited under the Act from selling RULP10 unless the petrol was E10.11 However, the NSW Government has recently introduced a Bill to remove this requirement.12

Who is required to comply with the minimum ethanol requirement under the Act?

The minimum ethanol requirement applies to ‘volume fuel sellers’ (volume sellers). Under the Act, ‘volume fuel seller’ means:

a major retailer; or

a primary wholesaler (see Box 2.1 below).

In 2011, volume sellers accounted for 99.6% of petrol sales in NSW.13

10 Under the Act, regular unleaded petrol that has a research octane number of less than 95. 11 Section 8 of the Act and clause 4A of the Regulation. 12 Biofuels Amendment Bill 2012. 13 We have calculated this figure by dividing total petrol sales of volume sellers in NSW (as

reported by DTIRIS) by total petrol sales in NSW (as reported by APS).



Box 2.1 Primary wholesalers and major retailers subject to the Act (as defined under Part 1(4))

A primary wholesaler means a fuel wholesaler who operates or supplies petrol or diesel fuelfrom any of the following facilities (whether or not in NSW) in connection with fuel wholesaling:

a) an oil refinery,

b) a shipping facility,

c) a facility to which petrol or diesel fuel is shipped by pipeline from an oil refinery or ashipping facility,

d) a facility to which petrol or diesel fuel is supplied by pipeline from a facility referred to inparagraph (c).

A primary wholesaler also includes a fuel wholesaler who engages in the blending of ethanolwith petrol (whether or not in New South Wales) to produce petrol-ethanol blend.a

A major retailer means a person who operates or controls the operation of more than20 service stations.

a Clause 4(1) of the Regulation.

Petrol sales by volume sellers in NSW equate to a total of about 6,000 mega litres (ML) per annum (as outlined in Chapter 4, this figure has remained relatively stable in recent years and is not expected to increase significantly). Consequently, volume sellers are required to sell about 360 ML of ethanol per annum (6% x 6,000 ML = 360 ML).14

To date, EBP has primarily been sold as ‘E10’ regular unleaded petrol – ie, regular unleaded petrol blended with up to 10% ethanol.15 This means that, to achieve 6% ethanol sales, 60% of volume sellers’ petrol sales in NSW must be E10.

2.1.2 Objectives of the Act

The intention of the Act is to develop a secure market for ethanol producers, and create a viable biofuels industry. It has the following objectives:

promote regional development (including job creation)

provide cheaper fuel for consumers

reduce Greenhouse Gas (GHG) emissions and air pollutants

14 In 2011, volume sellers sold 6,068 ML of petrol. 6% of this figure is 364 ML. (Source: DTIRIS

data, 2011). 15 According to the NSW Department of Trade and Investment, Regional Infrastructure and

Services (DTIRIS), the overwhelming majority of ethanol-blended petrol sales are E10. Other ethanol mixes that have been sold are E5 (V-Power Plus) sold by Shell in 2007/08, E85 sold by United and Manildra Park, and E-Flex (E70-E85) sold by Caltex since September 2010. (Pers Comm, DTIRIS to IPART, 27 February 2012).



find renewable substitutes for imported petroleum based products, improving Australia’s balance of payments and fuel security

provide a base to develop second generation biofuels.16

2.1.3 Exemptions under the Act and the Regulation

It is a defence to a prosecution for a failure to comply with a minimum ethanol requirement where it can be proved that the person took all reasonable steps to comply with the requirement. The Regulation specifies that the following constitutes reasonable steps17:

making all reasonable efforts to secure sufficient ethanol or petrol-ethanol blend supplies

upgrading their distribution infrastructure to enable it to distribute sufficient petrol-ethanol blend

ensuring the availability of facilities to sell EBP at retail outlets controlled by them, and

taking all reasonable action (on a continuing basis) to market EBP.18

The Minister is able, on the advice of the Expert Panel, to exempt a specified person from the minimum ethanol requirement if satisfied that compliance with the requirement:

is uneconomic because of the price at which ethanol is reasonably able to be obtained19, or

may result in a risk to public health or safety, or

other extraordinary circumstances demonstrated by the person.20

The Minister is also able, on the advice of the Expert Panel, to suspend the operation of a minimum biofuel requirement if satisfied that compliance with the requirement:

is uneconomic because of the price at which ethanol is reasonably able to be obtained or industry-wide ethanol shortages

may result in a risk to public health and safety

may increase the price of petrol for motorists

may have an adverse effect on grain or food stock availability or substantially inflate prices

16 See Second Reading Speech, Biofuel (Ethanol Content) Amendment Bill 2009 (NSW). Legislative

Council, 31 March 2009 (Hon Tony Kelly, Minister for Police, Minister for Lands and Minister for Rural Affairs).

17 Section 10(2) of the Act. 18 Clause 7 of the Regulation. 19 Section 15(1) of the Act. 20 Clause 9 of the Regulation.



may have a significant adverse environmental impact, or

for some other extraordinary reason.21

2.1.4 Administration of exemptions under the Act and the Regulation

The Act is administered by the NSW Office of Biofuels, which is part of the NSW Department of Trade and Investment, Regional Infrastructure and Services (DTIRIS). To date, exemptions under the Act have been provided to volume sellers on a case-by-case basis. Exemptions have been used as a means of ensuring that volume sellers continue to progress towards the mandate (which is currently 6%).

According to DTIRIS, volume sellers have sought exemptions for a range of reasons, including the following:

Delays due to development of storage, blending or on-site (eg, pumps, tanks) infrastructure.

Costs of infrastructure and conversion.

Reluctance of independent retailers and distributors to change from RULP to E10.

Ethanol supply disruptions.

Consumer preference for RULP or PULP over E10.

Increased ethanol prices and decline in price differential of E10 vs. RULP, leading to reduced demand from consumers and independent retailers.22

Exemptions have been granted on the condition that volume sellers continue to take all reasonable steps to roll-out and market E10. In some instances, specific requirements have been imposed on volume sellers as a condition of an exemption. These have included, for example, the requirement to compile monthly progress reports or to achieve specific objectives (such as conversion of a certain number of service stations).

2.2 Other states and territories

As outlined below, no other States in Australia currently have an ethanol mandate. However, until recently, Queensland had planned to introduce a mandate and it is a relatively large consumer of EBP.

21 Section 17 of Biofuels Regulation 2007. 22 DTIRIS, pers comm, 27 February, 2012.



2.2.1 Queensland

In 2006, the Queensland Government announced its proposal to introduce an ethanol mandate. The draft bill stated that the volume of ethanol must not be less than 5% of the total volume of RULP and EBP sold in Queensland from 31 December 2010. However, in October 2010, the Queensland Government announced that it had suspended plans for this mandate. This was due to uncertainty about excise arrangements. At the time, there was a Commonwealth proposal to progressively reduce the 38 cents per litre advantage that domestic ethanol production has over imported ethanol to zero by 2020.23 However, current arrangements have since been extended for another 10 years, until 30 June, 2021 (see Section 2.3). The implementation of the Queensland mandate is now under review.

2.2.2 Victoria

According to APAC Biofuels Consultants (APAC), the Victorian Government has previously considered a biofuels mandate. It currently provides grants to selected projects and supports ‘next generation’ agricultural technologies. APAC reports that grants have been awarded to wholesalers to construct ethanol blending facilities in Victoria, such as United Petroleum’s ethanol storage facilities at Hastings.24

2.2.3 Western Australia, South Australia, Tasmania and Northern Territory

APAC reports that these states have no plans to introduce a mandate for biofuels, although they may offer various types of support. For example, the South Australian Government operates its bus fleet on B5 and trains on B10 (biodiesel), and “is supportive of developing advanced generation feedstock.” Similarly, the Western Australian Government “may offer support mechanisms for development of biofuels in the State.”25

2.2.4 Sales of ethanol in each state

Figure 2.1 shows EBP as a percentage of total petrol sales for NSW, Victoria, Queensland and Australia. Table 2.2 presents volumes of EPB sold in these jurisdictions, and Figure 2.2 depicts each jurisdiction’s share of total EPB sales in Australia. These figures show:

In 2011:

– EPB accounted for about 36% and 14% of petrol sales in NSW and Queensland, respectively

23 www.cabinet.qld.gov.au/MMS/StatementDisplaySingle.aspx?id=72283, accessed 2 March,

2012. 24 Ibid. 25 Ibid.



– approximately 77% and 20% of all EPB sales in Australia were in NSW and Queensland, respectively.

Sales of EPB have steadily increased in NSW and Queensland since 2006, although EPB’s market share in Queensland declined from 2010 (22%) to 2011 (14%).

Figure 2.1 Ethanol blend as % of petroleum sales, 2006 to 2011

Note: NSW sales include Australian Capital Territory sales.

Data source: Australian Petroleum Statistics (APS).

Table 2.2 Annual sales of ethanol blend, 2006 to 2011 (ML)

2006 2007 2008 2009 2010 2011

NSW 30 163 677 1,048 1,764 2,208

VIC 4 5 25 105 134 92

QLD 114 325 605 819 904 577

AUS 148 493 1,307 1,972 2,803 2,877

Note: NSW sales includes Australian Capital Territory sales. NSW, VIC and QLD sales may not equal AUS sales due to small sales in other States.

Source: Australian Petroleum Statistics (APS).

Figure 2.2 Market share of EBP sales in Australia by State, 2006 to 2011

Note: NSW sales include Australian Capital Territory sales.

Data source: Australian Petroleum Statistics (APS).

0%

5%

10%

15%

20%

25%

30%

35%

40%

2006 2007 2008 2009 2010 2011

NSW VIC QLD AUS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2006 2007 2008 2009 2010 2011

NSW VIC QLD



These figures provide an indication of the relationship between ethanol sales and legislated mandates. The increase in EPB’s market share in NSW and Queensland coincided with the introduction or announcement of ethanol mandates in these states. The recent reduction in Queensland corresponded, in part, to the Queensland Government’s October 2010 announcement that it had suspended its planned ethanol mandate. The ACCC notes that the reduced ‘throughput’ of ethanol in Queensland in 2010/11 is:

…at least partly due to the impact of the January 2011 floods which affected production. It is likely that the suspension of the announced state government ethanol mandate may also have dampened demand for ethanol in Queensland.26

2.3 The Commonwealth

There is no federal mandate of ethanol in Australia. However, there is legislation that imposes:

a 10% cap on the concentration of ethanol blended petrol and a labelling requirement for retailers of E10, under the Fuel Standard (Petrol) Determination 200127

sustainability standards for biofuels, under the Fuel Quality Standards Act 2000.28

Locally produced fuel ethanol is subject to excise duty at the same rate as petrol (38.143 cents per litre). However, the Ethanol Production Grants Program (EPG) pays grants to domestic ethanol producers at a rate equal to the excise duty (38.143 cents per litre). Consequently, the ‘effective’ rate of excise on domestically produced fuel ethanol is zero. The EPG program was due to expire on 30 November, 2011. However, it has been extended for another 10 years from 1 December, 2011.29 After 30 June, 2021, the Australian Government will conduct a review of the taxation arrangements for biofuels.30

26 ACCC, 2011, Monitoring of the Australian petroleum industry, December 2011, p 33. 27 There are other ethanol-blended fuels containing greater than 10% ethanol that are currently for

sale. However, these are not defined as ‘petrol’ and therefore not covered by the 10% ethanol cap on petrol. For instance, ‘E85’ contains between 70% and 85% ethanol, and is only suitable for ‘flex fuel vehicles’. The Australian Government is in the process of developing an E85 fuel quality standard. In June 2011, it released a Position Paper on Proposed Fuel Quality Standard – Ethanol (E85) Automotive Fuel. The ACCC reported that a small number of retailers had commenced offering E85 in some city locations in recent years, including 40 Caltex sites across the country (ACCC, Monitoring of the Australian petroleum industry, December 2011, p 86).

28 ACCC, Monitoring of the Australian petroleum industry, December 2010, p 81. 29 www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/

52768.htm&page=5&H5 . 30 B Shorten MP, ‘Introduction of alternative fuels legislation’, Ministerial media release,

Parliament House, Canberra, 12 May 2011. Available at: www.dpm.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/078.htm&pageID=003&min=brs&Year=&DocType=0, accessed 5 March 2012.



The Commonwealth Department of Resources, Energy and Tourism (DRET) advised that EPG grants totalling $124.7 million were paid to the 3 ethanol producers in 2010/11.31

Imported fuel ethanol would be subject to customs duty at the same rate as the fuel excise. There have been no imports of fuel ethanol in recent years. The ACCC has noted that:

The tax treatment of fuel ethanol imports makes it unlikely imports will be able to provide competitive pressure on Australian prices in the short to medium term.32

31 Pers comm, DRET to IPART, 8 March 2012. 32 ACCC, 2011, Monitoring of the Australian petroleum industry, December 2011, p xlvi.

3 Supply of fuel ethanol



Petrol sales in NSW from volume sellers equate to about 6,000 ML per annum. This figure is not expected to change significantly in the foreseeable future. Therefore, volume sellers are required to sell approximately 360 ML of ethanol per annum to comply with the 6% mandate.

This chapter assesses ethanol supply capacity relative to the 6% sales requirement in NSW, but also takes into account demand for fuel ethanol in other states. It also considers ethanol supply reliability, including the terms and conditions of supply.

3.1 Australian supply capacity

Current supply capacity relates to the 3 existing producers. Future capacity relates to the ability of existing producers to expand their output plus the capacity of any new producers that commence operations.

3.1.1 Supply capacity of existing Australian producers

Production capacity

The market for fuel ethanol supply in Australia is currently heavily concentrated. There are presently 3 ethanol producers in Australia, all located on the east coast, without the prospect of competition from imports. Concentration is particularly prevalent in NSW, where 1 plant (Manildra) provides about 64% of Australia’s current ethanol production capacity and 100% of NSW’s production capacity.33

Currently, the 3 plants producing fuel ethanol in Australia are:

Manildra in Nowra, NSW.

Sucrogen in Sarina, Queensland.

Dalby Bio-refinery in Dalby, Queensland.

33 Based on 2011 APAC estimates. (APAC biofuels consultants, Australian Biofuels 2011-12, p 30.)



We have not been able to obtain independent verification of the production capacities of the 3 ethanol producers. This is not unexpected in a commercial environment (where producers are competing with each other and negotiating supply contracts with fuel volume sellers). We have, however, identified 2 publicly available estimates of production capacity (as reported by APAC Biofuel Consultants and the ACCC). We have also contacted the producers directly to obtain their estimates of production capacity. These 3 sets of estimates are provided below (see Table 3.1).

There appears to be some consensus amongst stakeholders that current production capacity is about 450 ML per annum. Future production capacity appears more uncertain. Table 3.1 shows the production capacity of the 3 existing producers is forecast to increase over the next few years, to between 490 ML (APAC estimates) and 610 ML (producers’ estimates) per annum by 2016.

Volume sellers have expressed concern about the relatively small difference between production capacities and ethanol sales. The ethanol producers have advised us that their production capacity can increase relatively quickly to meet demand, as has occurred in the past. We note, however, that this increased capacity may be subject to obtaining development approval.34 Nevertheless, we also recognise that it would be irrational for the ethanol producers to incur the cost of increasing production capacity too far ahead of demand.

Table 3.1 Australian ethanol production capacity of existing producers, 2010 to 2016

2010 2011 2012 2013 2014 2015 2016

APAC estimates

Manildra 210 250 300 300 300 300 300

Sucrogen 60 60 70 100 100 100 100

Dalby 80 80 80 90 90 90 90

Total 350 390 450 490 490 490 490

Producer’s advice to ACCC

Total 350 410 490 560 560 560 560

Producer’s advice to IPART

Total 386 386 466 536 536 610 610

Sources: APAC Biofuels Consultants, Australian Biofuels 2011-12, p 30; ACCC, Monitoring of the Australian Petroleum industry, December 2011, p 86; and IPART calculations based on information provided by Manildra Group, United Petroleum and Sucrogen.

34 For example, Manildra has development approval to expand its ethanol production capacity to

300 ML per annum (https://majorprojects.affinitylive.com/public/fb47a1fb8b62682e0f2ee16c48e2b13e/Project%20Approval.pdf). However, it is yet to receive approval to expand its plant beyond this level of production.



Storage capacity

Combined with production capacity, storage capacity can potentially add to supply capacity and security (depending on the feasibility of storage).

One ethanol producer has advised us that it has storage capacity for about 30 ML, with plans to expand this to 40 ML. However, this does not appear to have a significant impact on its supply capacity, as its stated supply capacity equals its stated production capacity. As evidence that supply is presently in excess of demand, it informed us that its quantity of ethanol in storage has increased significantly since June 2011.35

Another producer advised us that it has a 16 ML storage facility. It also noted that it has had to use this facility in recent times to store excess production.36

In response to our query on storage, a 3rd producer reported that ethanol blending facilities have been installed at oil company terminals and there are also private ethanol blending facilities in NSW.37

3.1.2 Supply capacity of new Australian producers

We are aware of 5 potential new ethanol production facilities in Australia. APAC’s estimates of the production capacities of these plants are listed in Table 3.2 below.

According to APAC, NQBE (North Queensland Bio-Energy) appears the most advanced. In February 2012, the Queensland Government approved NQBE’s development application for a sugar/ethanol/power generation facility in Ingham, capable of producing between 30 and 90 ML of ethanol per annum from mid-2015. NQBE would be a ‘swing producer’ – ie, swinging between various levels of sugar and ethanol production. It would produce a minimum of 30 ML of ethanol per year, but be capable of increasing this to 90 ML per annum, depending on the price for ethanol relative to sugar.38

APAC also notes that Flex Ethanol Australia (FEA) in Victoria seems to be more advanced with its plans for an ethanol production facility. It states that the unique feature (and potentially a major technical breakthrough) of FEA’s technology is the conversion of municipal waste to ethanol.39

35 Confidential submission to IPART, 21 February 2012. 36 Confidential pers comm, 20 February 2012. 37 Confidential submission to IPART, 27 February 2012. 38 APAC Biofuels Consultants, Australian Biofuels 2011-2012, Taking Stock, November 2011, p 29. 39 Ibid, p 30.



Table 3.2 Australian ethanol production capacity of potential new producers, 2010 to 2016 (APAC)

Operator Location 2014 2015 2016

NQBE Ingham, QLD 30 60 60

Austcane Ayr, QLD 87 87 87

Primary Energy Gunnedah, NSW 30 60 60

Marinna Junee, NSW 115 230 230

Flex Ethanol Australia Victoria 100 200 200

Total 362 637 637

Source: APAC biofuels consultants, Australian Biofuels 2011-12, p 30.

3.1.3 Determinants of new production/supply capacity in Australia

New ethanol supply capacity is dependent on a number of factors, including:

regulatory arrangements, and the level of certainty or uncertainty that this may create for existing and potentially new ethanol producers

production costs, particularly the cost of feedstocks

markets for co-products or by-products of ethanol production, and

the market price for ethanol, particularly in relation to the cost of ethanol production.

These factors are considered briefly below.

Regulatory arrangements

The Australian Government’s Grants Scheme

The ACCC notes that the Australian Government’s June 2011 announcement that the grants scheme for domestic ethanol production will continue until 2021 provides a positive environment for investors in ethanol production.40 It cites this ‘increased regulatory certainty’ as a reason why concerns about ethanol supply among some volume sellers appear to have lessened since the Queensland floods in 2011.41

The grants scheme also reinforces the effective barrier to imports of fuel ethanol (see Section 3.1.4).

40 ACCC, Monitoring of the Australian petroleum industry, December 2011, p 96. 41 Ibid, p 98.



Ethanol mandates

Government decisions on mandates are key drivers in investment in ethanol production facilities. The introduction of a mandate in another State would therefore impact on ethanol demand and supply. For instance, the introduction of a 5% mandate in Queensland may increase demand and stretch or exceed existing supply capacity (see Section 3.1.5). However, it would also likely increase the market price for ethanol (as generally occurs when demand increases relative to supply), which would promote the development of other production facilities, such as the 2 Queensland plants listed in Table 3.2 above.

Conversely, one ethanol producer noted that if a government reverses or reviews its decision on a mandate, or fails to adequately enforce it, this can create uncertainty and impede future investment in ethanol production.42

Costs of production

Feedstocks

The main feedstocks used to produce ethanol in Australia are wheat (waste starch), molasses and sorghum. These feedstock costs comprise 70% to 85% of ethanol production costs. Their price cycles are influenced by factors such as population growth and weather conditions (eg, drought).43

The key input to Manildra’s production of fuel ethanol is waste starch, which is a component of flour. Flour comes from wheat. The Manildra plant has also been designed to produce ethanol from other carbohydrate sources, including sorghum or molasses. However, these alternative feedstocks have not been used at the plant to date.

Australian ethanol producers are primarily located in the regions where the feedstock is sourced. This helps reduce transportation costs and ensures prompt availability of feedstocks for processing. Table 3.3 shows the feedstocks of the existing and planned ethanol plants.

42 Confidential submission to IPART, 27 February 2012. 43 EnergyQuest, Benchmarking the Price of Fuel Ethanol in Australia, July 2010, p 17

(http://www.accc.gov.au/content/item.phtml?itemId=961566&nodeId=58fc887c61d394fb594a16f6575c4b9c&fn=Benchmarking%20the%20Price%20of%20Fuel%20Ethanol%20in%20Australia%20-%20Energy%20Quest.pdf).



Table 3.3 Feedstock sources of existing and planned ethanol plants

Operator Feedstock

Existing ethanol plants

Manildra Starch, wheat & sorghum

Sucrogen Molasses

Dalby Sorghum and other grain

Planned ethanol plants

NQBE Sugar juice

Austcane Sugar juice, Molasses

Primary Energy Wheat, sorghum

Marinna Wheat (downgraded)

Flex Ethanol Australia Biomass

Source: APAC Biofuel Consultants, Australian Biofuels 2011-12, Taking Stock, November 2011, p 32.

Relationship between costs and production levels

One of the ethanol producers noted that as its production levels increases, its costs per litre of ethanol produced decreases.44 This is because the fixed costs of production are shared over a larger volume of output. This also indicates that production can be increased relatively easily, up to the capacity of existing plant and equipment. Once the capacity of existing plant and equipment is reached, further investment will be required to augment supply capacity.

The market for co-products or by-products of ethanol production

Ethanol production is often part of an integrated process that also produces co-products or by-products. For instance:

Manildra produces wheat gluten, wheat starch and dried distillers grain, in addition to ethanol45

Dalby produces feed for livestock and feedlots for distillers grain, as a by-product of ethanol production46

Sucrogen produces agricultural fertiliser and stock-feed, as by-products of ethanol production47

the proposed NQBE plant would be a ‘swing producer’ – swinging between various levels of sugar and ethanol production, depending on the price for ethanol relative to sugar.48

44 Confidential submission to IPART, 21 February 2012. 45 See: http://www.manildra.com.au/our_products/article/production_process, accessed

15 March 2012. 46 See: www.dbrl.com.au/distillersgrain.htm, accessed 15 March 2012. 47 See: www.sucrogenbioethanol.com/agservices, accessed 15 March 2012. 48 APAC biofuels consultants, Australian Biofuels 2011-2012, p 29.



These co-products or by-products can impact on the viability of ethanol production, and hence its supply. For example, as a result of the 2011 Queensland floods, demand for Sucrogen’s liquid fertiliser (a by-product of ethanol production) declined for a period of time, because local agricultural land was saturated. This meant that the plant couldn’t dispose of its waste, which, in turn, required it to temporarily cease ethanol production.49 On the other hand, a company producing several products, like Manildra, may have more opportunity to manage market risk. For example, higher wheat prices would increase Manildra’s ethanol production costs, but also likely increase the prices it receives for its wheat-based co-products.

The price of ethanol

The market price of a commodity is the key determinant of supply (and demand). All other things being equal, the higher the price of a commodity, the greater the level of supply. A higher price for a commodity indicates that demand has increased relative to supply, and it consequently acts to make higher levels (and potentially alternative sources) of supply viable.

The prices received for ethanol vs. its costs of production

Under current supply agreements between ethanol producers and volume sellers, the wholesale price of ethanol is not linked to feedstock costs. It is instead based on the Terminal Gate Price (TGP) of unleaded petrol, less a discount, but subject to a price floor and ceiling.50 Therefore, subject to the level of discount and price floor and ceiling in the supply contract, a producer’s margin depends on the difference between its costs of production (which are largely comprised of feedstock costs) and petrol prices. The wider this difference, the more economically viable it is for the producer to supply ethanol (all other things being equal).

Figure 3.1 compares the national average Terminal Gate Price (TGP51) of unleaded petrol, excluding GST but including excise,52 to feedstock costs. This shows that sorghum and molasses have generally offered higher margins to producers than wheat – which suggests there is greater potential for future ethanol production to be based on these feedstocks. That said, the market for co-products or by-products from the production process could also impact on margins and, in turn, the viability of an ethanol production facility or process. APAC’s November 2011 report notes that:

Prices of key feedstocks (not adjusted for energy) with the 38.1 cpl Ethanol Produced Grant support relative to the price of regular unleaded petrol have shown reasonable margins of 40 cpl to 50 cpl over the past 12 months.53

49 Confidential pers comm, 20 February 2012. 50 Confidential pers comm, 21 February 2012. 51 The Terminal Gate Price is used as a benchmark price for petrol. It is the price for a spot

purchase of petrol from a terminal. 52 For Australian ethanol producers, the 38.14 cpl excise is offset by the Ethanol Production Grant

of the same amount. 53 APAC Biofuel consultants, Australian Biofuels 2011-12, Taking Stock, November 2011, p 29.



Figure 3.2 compares the national average TGP of unleaded petrol, excluding GST and also excluding excise, to feedstock costs. Figure 3.2 illustrates the importance of the Ethanol Production Grant. Comparing feedstock costs with the TGP (excluding GST and excise), it would have been difficult for producers to achieve a margin above their feedstock costs without the excise relief. As noted above, the Australian Government has announced that this assistance will continue until 2021.

The price of ethanol is discussed further in Section 3.2.2.

Figure 3.1 Ethanol feedstock costs relative to the national average RULP TGP (excluding GST, including excise), January 2003 to June 2011

Note: The ethanol feedstock costs have been converted to their petrol price equivalent. The figure compares the feedstock price with the TGP on a ‘litre for litre’ basis (ie, without adjustment for the energy differential between ethanol and petrol). Data source: APAC Biofuel Consultants, Australian Biofuels 2011-12, Taking Stock, November 2011, p 34.

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Figure 3.2 Ethanol feedstock costs relative to the national average RULP TGP (excluding GST & excise), January 2003 to June 2011

Note: The ethanol feedstock costs have been converted to their petrol price equivalent. The figure compares the feedstock price with the TGP on a ‘litre for litre’ basis (ie, without adjustment for the energy differential between ethanol and petrol). Data source: APAC Biofuel consultants, Australian Biofuels 2011-12, Taking Stock, November 2011, p 35.

The role of price in equating supply and demand

Like most markets, the supply of ethanol is related to demand through price.

Increased demand relative to supply would be likely to increase the price of ethanol. However, this would be expected to ultimately encourage more supply in the market, which would then put downward pressure on prices, and so on.

Equally, increased supply relative to demand would be likely to decrease the price of ethanol. However, this would be expected to ultimately encourage more demand in the market, which would then put upward pressure on prices, and so on.

We therefore caution against taking a static view of ethanol supply and demand, as the market is likely to be dynamic. We also caution against examining demand and supply in isolation from one another, as they are linked to each other through the market price.

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3.1.4 Supply from overseas

World ethanol production is dominated by the USA (50%) and Brazil (38%). Brazil is the world’s largest exporter of ethanol and the USA is a net importer. Asian ethanol producing countries, including China and Thailand, are balanced in ethanol consumption and production. Brazil is considered the most likely source of fuel ethanol for Australia.54

However, it is generally recognised that imports of fuel ethanol into Australia are currently not feasible. There are several reasons for this:

The Australian Government’s Ethanol Production Grants Program ($38.143 cents per litre) effectively exempts domestic producers of ethanol from excise duty ($38.143 cents per litre). Imported ethanol would be liable for the excise duty, but not eligible for the Ethanol Production Grants Program.

The cost of transporting/shipping ethanol from overseas is likely to be relatively high (specially dedicated chemical tankers are required).

Ethanol storage facilities around the Australian coast are limited and not geared to accept large cargo.55

The inability to import ethanol undermines the reliability and competitiveness of the ethanol supply chain.

3.1.5 Supply capacity versus demand

We estimated the potential demand for ethanol in Australia out to 2016 under the following 2 scenarios (see Table 3.4)56:

the 6% mandate in NSW is met and the current market share of EBP in other States continues

the 6% mandate in NSW is met, a 5% mandate in Queensland is met (from 2013)57 and the current market share of EBP in other States continues.

54 EnergyQuest, Benchmarking the Price of Fuel Ethanol in Australia, Report to the Australian

Competition and Consumer Commission, July 2010, p 6. 55 APAC, Australian Biofuels 2011-12, Taking Stock, November 2011, p 36. 56 Ethanol demand estimates into the future are based on the assumptions that total petrol sales in

each State remain stable, that (except as otherwise noted) the current market share of EBP in each State continues, and that EBP is comprised of E10. NSW ethanol demand is calculated assuming the 6% mandate is met throughout the forecast period (ie, EBP comprises 60% of total NSW petrol sales from 2012 to 2016). QLD ethanol demand under the second scenario is calculated assuming the 5% mandate on RULP (rather than all petrol) is met from 2013 (ie, EBP comprises 50% of combined RULP and EBP sales from 2013 to 2016).

57 As per the Queensland Government’s earlier plans for the 5% mandate, we have assumed it applies to RULP and EBP sales only, rather than all petrol sales.



Table 3.4 Potential Australian demand for ethanol (ML), 2012 to 2016

2012 2013 2014 2015 2016

NSW 6% mandate met 433 433 433 433 433

NSW 6% and QLD 5% mandates met 433 534 534 534 534

Note: Demand in other States (without mandate) assumes continuation of current EPB market shares. For States other than NSW, Queensland, and Victoria, this current market share is zero or negligible.

Source: Australian Petroleum Statistics, Table 3B (http://www.ret.gov.au/resources/fuels/aps/pages/default.aspx, accessed February 2012).

We then compared these estimates to the production capacity estimates outlined in Table 3.1. As illustrated in Figure 3.3, if only the NSW mandate is met, there may be excess ethanol production capacity of around 57 ML to 177 ML by 2016, based on APAC and producer estimates, respectively.

If the Queensland mandate is fully introduced (and met) from 2013, the outcome is less clear. There may be an ethanol supply shortage of 44 ML, based on APAC data. Alternatively, data from the producers indicates that, while supply may be tight in 2013 to 2014, there would be excess production capacity of 76 ML from 2015.

However, there is doubt that volume sellers in Queensland would be able to roll-out EBP to a sufficient number of petrol stations to comply with a 5% mandate by 2013. Also, if it were to introduce a mandate, the Queensland Government may elect to gradually phase it up to 5%, as per the approach adopted in NSW (as outlined in Table 2.1 in Chapter 2). This suggests we have erred on the side of higher than probable demand in factoring in the Queensland mandate in Figure 3.3.

As a further word of caution, we note that it can be misleading to look at demand and supply in a static sense or in isolation from one another. For example, it may be misleading to compare the production capacities of existing producers to demand under the NSW and Queensland mandates, given that supply is likely to increase (at least in part) with demand.

Figure 3.3 Estimated potential ethanol demand and supply in Australia based on existing production capacity, 2012 to 2016 (ML)

Data source: See Tables 3.1 and 3.4.

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Potential supply from existing ethanol plants (APAC)Potential supply from existing ethanol plants (producers' advice to IPART)Ethanol demand - mandate met (6% NSW)Ethanol demand - mandate met (6% NSW, 5% QLD)



Concerns about the sufficiency of ethanol supply are largely removed if the production capacity of new producers is also taken into account (see Figure 3.4). Again, however, these estimates must be interpreted with caution. In particular, it is unlikely that producers would install capacity far in excess of current demand, which is what Figure 3.4 implies.

Figure 3.4 Estimated potential ethanol demand and supply in Australia based on existing and new production capacity, 2012 to 2016 (ML)

Data source: See Tables 3.1, 3.2 and 3.4.

We note that, as outlined in Section 3.2 below, it is not so much shortfall in annual production capacity per se that has created some supply concerns to date. Rather, it is the heavily concentrated nature of supply (3 producers), without the prospect of competition from imports, which creates concern about reliability and security of supply. These concerns were heightened following 2011, when 2 of the 3 producers had to temporarily cease production due to floods in Queensland.

3.2 Supply reliability and terms and conditions

Volume sellers have expressed concern about the highly concentrated nature of ethanol supply in Australia (ie, 3 producers, without import competition).

They argue that this:

does not allow for sufficient supply reliability, which can result in periods of inadequate supply or excessive prices

provides ethanol producers with considerable market power, which can affect the terms and conditions under which ethanol is supplied.

These views are discussed further below.

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3.2.1 Supply reliability

Supply reliability is a significant concern to volume sellers. In submissions to IPART, they referred to:

the fact that there are only 3 producers in Australia, with no likelihood of competition from imports

supply interruptions experienced in 2011, when 2 of the 3 producers were temporarily unable to produce ethanol

the implications of supply shortfalls and interruptions.

The lack of a ‘liquid’ international market for ethanol and alternative sources of supply

All 3 ethanol producers have been operating uninterrupted since the second half of 2011. Submissions to us indicated that, since that time, supply has been meeting demand. However, the prospect of future supply interruptions, given the highly concentrated structure of the supply market, concerns volume sellers.

Volume sellers cited the 2011 supply interruptions (see below) as evidence of the lack of supply reliability and security in the ethanol market. They contrasted it with other fuel or petrol types (eg, oil, petrol, gas, diesel), which can be traded on an international, ‘liquid’ market and imported relatively easily and quickly if local production is insufficient or interrupted.

A volume seller noted:

A robust, secure and competitive supply chain for ethanol in NSW requires the development of at least one more ethanol production facility in or near the state or the ability to import ethanol at no effective tax penalty relative to domestically produced ethanol.58

Supply interruptions in 2011

Supply interruptions were experienced during the first half of 2011 due to floods in Queensland. APAC estimates that the floods reduced ethanol production by 30 ML.59

Sucrogen’s Sarina plant was shut down for about 150 days from mid-January to the end of May 2011.60 Sucrogen was shut down because its feedstock (molasses) was affected by the floods and it could not dispose of its effluent (which is actually used as fertiliser), as agricultural land was saturated.

58 Confidential submission to IPART, 29 February 2012. 59 APAC, Australian Biofuels – Client Update – February 2012, p 2. 60 ACCC, Monitoring of the Australian Petroleum Industry, December 2011, p 85.



The Dalby plant was also closed for around a month.61 It was flooded and could not access clean water for a short period of time.

The implications of supply interruptions

Supply interruptions or temporary shortfalls could be addressed through the exemption regime under the Act (ie, volume sellers could conceivably be provided with exemptions to reflect supply interruptions or temporary shortfalls).

However, regardless of the ability to gain an exemption, volume sellers state that such interruptions impose costs on E10 sellers and consumers. Several volume sellers argued that supply interruptions such as those experienced in 2011:

cause disruption and cost to those service stations that have invested in E10 roll-out

undermine the confidence of service stations to invest in E10 roll-out, particularly independents or franchisees

undermine consumer confidence in E10.

One volume seller reported that, even though it was able to obtain additional supply from Manildra during the 2011 Queensland supply interruptions, it was not able to avoid site level E10 ‘stock outs’ and disruptions. This was due to carrier constraints, terminal access issues and site signage obligations. Therefore, for periods of 2011, it was forced to sell E10 as a 9% blend to stretch ethanol stocks across more blended litres and, in some instances, to erect signage at sites notifying motorists that the product for sale was RULP rather than E10. It noted that supply interruptions damage consumer perceptions of E10 and reduce wholesale customers’ and franchisees’ confidence to displace RULP with E10.62

3.2.2 Terms and conditions of supply

We requested information from ethanol producers and volume sellers on the terms and conditions of supply, including price. However, apart from high level observations and concerns (outlined below), we were unable to obtain detailed information due to confidentiality agreements between these parties and concerns that the information may get into the public domain.

61 Ibid. 62 Confidential submission to IPART, 29 February 2012.



Contract terms (including guaranteed supply)

Some volume sellers have expressed concern that they have only been able to secure relatively short-term supply contracts with ethanol producers (eg, 6 months63) or that prices have been subject to review or change on a short-term basis (eg, 1 to 5 months64). In general, it appears that supply contracts have been for terms of between 3 months and 18 months.65

In contrast, ethanol producers have advised that contract durations are at the purchaser’s request66, or the result of mutual agreement with purchasers.67 One producer has indicated that it is the major oil companies that have been reluctant to enter into supply contracts.68

Apart from the duration of a supply contract per se, a significant concern for volume sellers is that ethanol producers do not provide guaranteed supply from alternative sources if the producer’s facility suffers an unexpected shutdown.69 One volume seller states:

There is no accountability for the producer to maintain product supply under the current regime and there are no regulatory consequences for producers when they do not supply product.70

The price of ethanol

The current general approach to setting wholesale ethanol prices

Under current supply agreements, ethanol prices generally equal:

TGP of regular unleaded petrol less a discount plus transportation costs.

As part of the contract terms, however, ethanol prices are also usually subject to a floor and ceiling. Tying the price of ethanol to the price of petrol protects volume sellers against fluctuations in prices of ethanol feedstock (agricultural commodities). The discount relative to unleaded petrol and the ethanol price ceiling and floor can be subject to negotiation.

63 Confidential pers comm, 21 February 2012. 64 Confidential submission to IPART, 29 February 2012. 65 Confidential submission to IPART, 20 February 2012; and confidential pers comm, 9 March

2012. 66 Confidential pers comm, 20 February 2012; and confidential pers comm, 9 March 2012. 67 Confidential submission to IPART, 21 February 2012; and confidential pers comm, 9 March

2012. 68 Confidential submission to IPART, 27 February 2012. 69 Confidential submission to IPART, 29 February 2012. 70 Confidential submission to IPART, 29 February 2012.



Prices of many agricultural commodities are tied to oil prices because ‘energy’ is usually one of the largest inputs into the production process, particularly for more processed goods. It is not unreasonable, with the lack of a ‘liquid’ market for ethanol, to peg the price of ethanol to unleaded petrol, especially as ethanol is used as a fuel.

A price floor and ceiling

Setting the price of ethanol to the TGP of unleaded petrol, subject to a discount, protects volume sellers (ethanol purchasers) against risks associated with variations in commodity prices. This approach, therefore, appears to be favoured by volume sellers.71 However, volume sellers have noted that the inclusion of a floor price in the contract terms has reduced any discount relevant to the price of unleaded petrol.72 One volume seller observed that the price it pays for ethanol has only very rarely risen above the floor price, and then by only 1 to 2 cpl.73

We note that the floor and ceiling price arrangements provide protection to both ethanol producers and volume sellers. A price floor protects ethanol producers in the event that the price of unleaded petrol, adjusted for the discount, falls below their production costs; while a price ceiling protects volume sellers by limiting the extent to which ethanol prices can rise. Further, it is not unusual for agricultural commodity supply contracts to include price floors and ceilings, given the potential for price volatility. The levels at which the price floors and ceilings are set will likely reflect the relative market power and bargaining strength of each party.

Price changes

Some volume sellers have expressed concern that, at times, ethanol producers have used the mandate and the relative lack of competition in the ethanol supply market to seek significant price increases and the right to review prices on a short-term (eg, monthly) basis.74 One volume seller noted that an ethanol producer sought significant price increases during the first half of 2011, which coincided with reduced supply in the market (as a result of the Queensland floods).75

Under the current general approach to setting prices, it appears that ethanol prices can change as a result of changes to:

the TGP of unleaded petrol

the agreed level of discount relative to the TGP

the agreed level of ethanol price floor or ceiling.

71 For example, confidential submission to IPART, 27 February 2012. 72 Confidential submission to IPART, 27 February 2012. 73 Confidential submission to IPART, 24 February 2012. 74 Confidential submission to IPART, 20 February 2012; and confidential submission to IPART,

28 February 2012. 75 Confidential submission to IPART, 20 February 2012.



Based on limited data provided to IPART, the ethanol price paid by some volume sellers did increase substantially from late 2010 through to the end of the first quarter of 2011. However, there was also a corresponding increase in unleaded petrol prices during some of this period (see Figure 3.5). Therefore, it is unclear whether these ethanol price increases were triggered by the production shutdowns in Queensland (prompting ethanol producers to seek increased prices in response to reduced supply) or by the ethanol pricing formula itself (which is tied to the price of unleaded petrol). We note that the price for ethanol feedstocks, which affects producer margins, remained relatively stable during this period.

We also note that, when supply declines relative to demand, prices would generally be expected to increase. In fact, this increase plays an important signalling role to consumers and potential new sources of supply. In a competitive market, prices would rise as a result of a shortfall in supply, which would generally be expected to bring demand and supply into equilibrium over time, by moderating demand and/or encouraging additional supply. However, in the Australian context, additional supply is constrained, at least in the very short-term, by the inability to import ethanol at economic prices. Movements in demand are also restricted to some extent by the NSW mandate, as volume sellers are compelled to pursue 6% ethanol sales, unless they apply for exemptions.

Figure 3.5 Index of RULP terminal gate and key feedstock prices, April 2009 to June 2011

Data source: APAC, Australian Biofuels 2011-2012, Taking Stock, November 2011. The ethanol feedstock costs have been converted to their petrol price equivalent. The figure compares the feedstock price with the TGP on a ‘litre for litre’ basis (ie, without adjustment for the energy differential between ethanol and petrol).

Sustainability

Under the Act, ethanol must comply with a biofuel sustainability standard in order to count towards the 6% mandate. The Biofuels Regulation 2007 defines this standard as the Global Principles and Criteria For Sustainable Biofuels Production—Version Zero, published by the Roundtable on Sustainable Biofuels (RSB) on 13 August 2008.

0.75

0.85

0.95

1.05

1.15

1.25

Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11

TGP (national ave) index Molasses feedstock index

Sorghum feedstock index Wheat feedstock index



A volume seller noted that this standard requires a specified level of greenhouse gas emissions or abatement, taking into account the lifecycle of ethanol production. For example, under the RSB criteria, ethanol feedstock defined as ‘waste’ from other production processes (such as waste feedstock from starch production) are not required to count in greenhouse gas emissions generated prior to this waste serving as a raw material for ethanol production. However, raw materials such as grain or non-waste feedstock like starch by-products are required to have their total greenhouse gas emissions from ‘land to tank’ measured.76

The volume seller reported that the recent audit and certification of Manildra’s Shoalhaven Starches Ethanol facility to RSB Version 2.0 stated that “It is possible the feedstock into the Ethanol Plant could contain a mix of waste or RSB compliant product and non-waste or RSB non-compliant product. The percentage of certified/compliant product versus non-certified/non-compliant product is outside the scope of this assessment”.77

On this basis, the volume seller argues that the RSB certification awarded to Manildra only covers part of its ethanol production, and that the supply of ethanol meeting the sustainability standard as required by the Act may remain stable despite increased ethanol production.78

We have not examined this issue in detail in this review, and we have assumed that the supply capacities listed in this chapter are all able to be counted towards the 6% mandate. Nevertheless, we consider that there should be mechanisms in place to provide stakeholders with assurance that ethanol supplies are consistent with the sustainability standards of the Act.

3.3 IPART’s findings in relation to supply

IPART’s findings in relation to ethanol supply are as follows:

1 Over 2012 to 2016, the production capacity of existing Australian ethanol producers is expected to be sufficient to meet NSW’s demand under a 6% mandate, assuming ethanol consumption in other States remains unchanged.

2 The capacity of existing Australian ethanol producers to meet NSW’s demand under a 6% mandate would be less certain if a 5% mandate for RULP was introduced in Queensland. However:

– The entry of 1 or more new ethanol production facilities into the market would help alleviate any shortage of ethanol supply relative to demand. Several ethanol production facilities are currently in the planning phase.

76 Confidential submission to IPART, 20 February 2012. 77 Certification Audit Report for Manildra Group of Companies, Shoalhaven Starches Pty Ltd by

NCS International dated 19-21 December 2011, Record of Stakeholder Comments and Interviews, p 7.

78 Confidential submission to IPART, 20 February 2012.



– It is unclear whether a 5% mandate will be introduced in Queensland. Further, even if this were to occur, it may be phased in over time, as has occurred in NSW.

3 The ethanol supply market in Australia is currently illiquid and highly concentrated. There are only 3 producers and no prospect of competition from imports. This:

– can undermine the reliability of supply

– may result in ethanol prices that are higher than they would be in a more competitive market.

4 Demand for fuel ethanol



This chapter considers in more detail sales of, and demand for, fuel ethanol in NSW. It analyses trends in petrol sales since the ethanol mandate came into effect. By extrapolating these trends, and making assumptions about current market settings, it estimates maximum possible ethanol sales.

The rest of this chapter then examines these current market settings and discusses their potential impact on demand. They include:

the range of petrol sold as ethanol-blend petrol (EBP)

the price of EBP relative to other petrol types

the vehicle fleet’s suitability to use EBP

customer perceptions about EBP.

4.1 Trends in petrol sales

While petrol sales have been static in NSW, the ethanol mandate has had a major impact on their composition. Many consumers switched from RULP to either EBP or PULP. In this context, we note that EBP has primarily been sold as RULP containing up to 10% ethanol (‘E10’). That is, it has largely been quarantined from PULP.79

A key driver of EBP sales has been the fact that it has been rolled out to a significant proportion of petrol stations across NSW. In many cases, EBP has replaced, rather than being offered in addition to, RULP.

4.1.1 Unchanged volume of ethanol required to meet mandate

Petrol sales in NSW have remained stable over the last 6 years (at an average of about 6,071 ML per annum). This trend is expected to continue for the foreseeable future, due to factors such as continued growth in diesel sales (at the expense of petrol – see Figure 4.1) and improvements in fuel efficiency.80

79 Australian Petroleum Statistics (APS) reports sales of ‘ethanol-blended petrol’ (EBP), rather than

E10 per se. DTIRIS reports that the overwhelming majority of EBP sales are E10. 80 Confidential pers comm, 13 February 2012. In fact, some volume sellers predict that total petrol

sales will decline by between 1% and 3% per annum (confidential submission, 24 February 2012).



Figure 4.1 Annual petrol & diesel sales in NSW (2006-2011)

a Includes Australian Capital Territory sales.

Data source: Australian Petroleum Statistics, Table 3B (http://www.ret.gov.au/resources/fuels/aps/pages/default.aspx, accessed February 2012).

A consequence of static petrol sales is that the ethanol mandate will remain relatively unchanged in volumetric terms. That is, volume sellers will be required to sell around 360 ML of ethanol per annum.

4.1.2 Switch from RULP to EBP and PULP

Over the 6 years to December 2011:

EBP became the main fuel purchased in NSW

there was a significant move away from RULP

the market share of PULP almost doubled (see Figure 4.2 and Table 4.1).

After a relatively rapid increase in market share from 2006 to the middle of 2010, the growth in EBP sales slowed. As such, its 2011 market share of 36% does not meet the ethanol mandate, which effectively requires E10 to comprise 60% of all NSW petrol sales.

The decline in RULP’s market share is likely due to volume sellers reducing its availability by removing it from petrol stations.

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Data source: Australian Petroleum Statistics, Table 3B.

Table 4.2 Annual average growth in petrol sales (2006-2011)

NSWa VIC QLD SA WA AUS

PULP 13.9% 5.3% 5.7% 5.3% 6.8% 8.7%

RULP -17.5% -2.1% -5.9% -2.3% -0.7% -6.7%

EBP 136.9% 86.6% 38.3% n.a. n.a. 81.1%

Overall petrol sales 0.2% -0.5% -1.3% -1.3% 0.6% -0.5% a Includes Australian Capital Territory sales.

Note: The volume of ethanol blended fuel sold in SA and WA is relatively small. Premium unleaded covers 95 & 98 octane.

Source: Australian Petroleum Statistics, Table 3B (http://www.ret.gov.au/resources/fuels/aps/pages/default.aspx, accessed February 2012).

4.1.3 EBP is now available at a significant proportion of petrol stations

The roll-out of E10 across NSW

Underpinning EBP sales volumes is the roll-out of E10 at petrol stations across NSW. Since 2007, E10 has been offered at an increasing number of petrol stations across the State. The drivers behind this roll-out have been the ethanol mandate and the previous requirement in the Act that all RULP must be E10 (which is currently deferred and subject to repeal).

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The Australasian Convenience and Petroleum Marketers Association (ACAPMA) provided us with information on the current E10 status of about 80% of NSW’s petrol stations. It indicates that 63% of these petrol stations offer E1084, comprising:

18% that offer E10 and RULP

45% that offer E10 as the only type of regular petrol (ie, in place of RULP).

E10 roll-out by volume seller

Based on information provided by volume sellers, we have calculated that between 63% and 95% of petrol stations they supply and control offer E10 (see Table 4.3). Estimates of E10 roll-out by volume seller provided by DTIRIS differ, ranging from 41% to 97%.

Some of this difference may be due to the latter figures including some independent petrol stations in their estimates. That is, stations which may display the badge of a volume seller or be supplied by a volume seller, but are actually run independently.

Table 4.3 E10 rollout by volume seller (as of February 2012)

Volume seller Proportion of sites converted to E10

Reported by volume sellera Estimated by NSW DTIRISb

A 80% 55%

B 76% 80%

C 85% 72%

D 95% 97%

E 63% 41%

Average NSW 80% 69% a This includes owned and operated sites as well as independent sites who have chosen to convert as a proportion of total controllable sites – ie, excluding sites that are not covered by the Act. b Includes independent sites where the major has no control to enforce conversion.

Note: Volume sellers have been labelled ‘A’ to ‘E’ for reasons of confidentiality.

84 ACAPMA data, 2011. Note there are some (360) petrol stations where it is “unknown” whether

they have E10 or not. These have been excluded from the analysis.



The geographic distribution of the E10 roll-out

Roll-out across NSW has generally been confined to Sydney and other major centres, with less availability of E10 in rural and regional areas (see Table 4.4). Volume sellers state that this is because it is prohibitively costly to transport ethanol to some regional areas (see Chapter 5). It’s also been suggested to us that it can be more costly to convert tanks and pumps to supply E10 in regional areas, as stations may generally be refurbished less frequently than in urban areas. (A lower rate of refurbishment implies a higher cost per refurbishment.)

We’ve been informed that ethanol is a solvent and corrosive in nature to the tanks and pumps used for conventional fuel. It’s been reported to us that conversion costs can be up to be $800,000 per site, excluding foregone sales during the conversion process.85 However, it has also been mentioned that the cost of upgrade can be as little as a few thousand dollars, if tanks are well maintained and conversion is scheduled in as part of routine maintenance (eg, tank cleaning).86 We have been unable to review or verify these estimates.

Turnover at petrol stations is generally lower in regional locations. This may lead to less frequent tank cleaning or replacement, which may impact on the cost of E10 conversion.

Table 4.4 Proportion of volume seller stations yet to be converted by location

Companya Sites outside Sydney(%) Sydney sites (%)

A 88% 12%

B 92% 8%

C 94% 6%

D 94% 6%

E n/a 4%

a Volume sellers have been labelled ‘A’ to ‘E’ for reasons of confidentiality.

Note: This data includes sites that are considered outside of ‘control’ of the major company.

Source: DTIRIS 2011 data.

85 Confidential pers comm, 13 February 2012. 86 Confidential pers comm, 24 February 2012.



Stakeholder observations on the E10 roll-out

Some volume sellers provided feedback from their experiences with rolling out E10 to their petrol stations.

Where the roll-out led to E10 replacing RULP:

One volume seller observed that a proportion of RULP users traded-up to PULP instead of using E10 (from a 20:80 PULP:RULP average ratio at its petrol stations when RULP was available, to a 45:55 PULP:E10 mix after E10 replaced RULP).87 That is, about 69% of RULP users switched to E10 and approximately 31% to PULP.

Another volume seller observed a similar pattern at its petrol stations. It lost a proportion of customers to nearby stations where RULP was available. Of those customers retained, 72% switched from RULP to E10 and 28% switched to PULP, resulting in a 42:58 PULP:E10 mix.88

A third volume seller reported that, following conversion of 12 petrol stations from offering RULP, E10 and PULP to offering E10 and PULP only, the market shares for RULP, E10 and PULP changed from 67%, 13% and 20%, to 0%, 58% and 43%, respectively. That is, with the removal of RULP, E10’s market share increased (from 13% to 58%), but so did PULP’s market share (from 20% to 43%).89

This third volume seller also provided an example in its submission showing that prior to E10 fully replacing RULP at a major site in Western Sydney in 2012, the site was selling 61% RULP, 21% E10 and 17% PULP. Following full conversion, the same site sold 58% E10 and 42% PULP, with a total loss of volume sales of 18.5%.90

Where the roll-out resulted in both E10 and RULP being offered at the same sites:

the E10 penetration as a percentage of overall petrol sales at one stakeholder’s sites rarely exceeded 20%, even though E10 was cheaper than RULP (between 1 and 3 cents per litre lower).91

Another stakeholder found that, across 35 petrol stations, its average petrol market shares for 10 weeks in 2010/11 were 74% RULP, 8% E10 and 19% PULP.92

87 Confidential submission to IPART, 27 February 2012. 88 Confidential submission to IPART, 29 February 2012. 89 Confidential submission to IPART, 24 February 2012. 90 Ibid. 91 Confidential submission to IPART, 29 February 2012. 92 Confidential submission to IPART, 24 February 2012.



4.1.4 Unlikely to meet ethanol mandate even if E10 roll-out is increased

Australian Petroleum Statistics (APS) data indicated that EBP comprised approximately 36% of petrol sales in NSW in 2011.93 However, EBP’s market share needs to increase to around 60% in order for ethanol to account for 6% of petrol sales in NSW, assuming EBP continues to be comprised primarily of E10. With growth in E10 sales slowing, it is unlikely that the mandate will be met based on current trends in petrol sales.

Assuming the E10 roll-out is increased, our analysis indicates that the maximum EBP market share in NSW would be 58%. This equates to an ethanol share of total petrol sales of about 5.8%. However, this estimate of maximum market share is unlikely to eventuate. This is because the estimate assumes that E10 is sold:

at all petrol stations across NSW – including stations not subject to the mandate

in place of, rather than in addition to, RULP

outside of petrol stations (ie, ‘off-station’), including direct to farms, mines and industry.

This estimate is also based on the assumption that current market conditions will continue unchanged. This includes the price of EBP relative to other types of petrol, the composition of the vehicle fleet, consumer perceptions of EBP and that EBP is primarily confined to RULP and not PULP.

Our estimate is calculated as follows:

If the 2011 RULP share (31%) were allocated to E10, this would increase EBP’s hypothetical market share to 67% of petrol sales. However, this market share would be challenging to achieve in practice, given the demonstrated and significant preference for some consumers to switch from RULP to PULP, rather than to E10.

However, if the 2011 RULP market share were allocated between EBP and PULP using a 70%:30% ratio (see Box 4.1), this would result in the following market shares:

– EBP – 58%

– PULP – 42%.

93 When reporting NSW sales figures, APS data also includes sales in the Australian Capital

Territory (ACT).



Box 4.1 Calculating the likely market share of EBP and PULP

Looking at the market share of petrol sales in NSW, over the period 2006 to 2011 (Table 4.1):

RULP lost 51 percentage points

these percentage points were split between:

– EBP, gaining 36 percentage points, and

– PULP, gaining 15 percentage points.94

This equates to the loss in RULP market share being split between EBP and PULP in a 70%:30% ratio.

Using the formula:

2011 market share + allocated gain from RULP 2011 market share = new market share

EBP: 36% + (31% x 70/100) = 58%

PULP: 33% + (31% x 30/100) = 42%

This estimate of 58% for maximum EBP market share is in line with the upper end of forecasts provided by volume sellers. If RULP were removed from the fuel mix, several volume sellers indicated the market share of E10 would likely be around 55% to 58%, based on current trends and sales figures at stations where RULP had been replaced with E10 (see Section 4.1.2).95

There are many factors, however, that may alter these current trends, and so impact on the sales of EBP. IPART has identified the key factors that determine demand for EBP and discussed them in the following sections.

4.2 Option of expanding the range of EBP by including ethanol in PULP

In NSW, ethanol has primarily been confined to regular petrol – ie, E10 RULP. There have been a few exceptions. For example, 1 volume seller is in the process of blending 10% ethanol with PULP.96 Nevertheless, E10 RULP currently comprises the overwhelming majority of EBP sales in NSW.97 In fact, several volume sellers have suggested that the 6% mandate should relate to total sales of RULP by volume sellers, rather than total sales of all petrol types. Currently, E10 comprises about 54% of total RULP sales in NSW (which means ethanol comprises about 5.4% of total RULP sales in NSW).

94 Figures may not reconcile to Table 4.1 due to rounding. 95 Confidential submission to IPART, 29 February 2012; and Confidential submission to IPART,

27 February 2012. 96 Confidential submission to IPART, 27 February 2012. 97 Australian Petroleum Statistics, Table 3C, Calendar Year 2011.



There is scope to increase ethanol sales by also including it in PULP (eg, PULP95 and/or PULP98). Further, by expanding their range of EBP products, there may be scope for volume sellers to be more strategic and selective in their roll-out of EBP. For example, they could theoretically maintain or increase standard RULP availability/sales in some areas (instead of E10 RULP), while still progressing towards the overall 6% mandate.

However, volume sellers have argued against including ethanol in premium petrol products. Their arguments include the following:

Current market shares and customer behaviour (including the share of customers that shift from E10 to PULP when E10 replaces RULP) suggests that many customers do not want ethanol-blended PULP.98

Petrol terminals and logistic networks are currently equipped to blend and distribute ethanol with RULP. Blending ethanol with PULP would require some re-configuration of blending and delivery infrastructure, at significant cost. As PULP already carries a significant price premium, full cost recovery would be unlikely.99

For ethanol to be blended across a wider range of petrol types (particularly PULP), ethanol supply would need to be more reliable. Supply disruptions, such as those that occurred as a result of the Queensland floods in 2011, would have greater adverse impacts if more petrol types were tied to ethanol.100

The major volume sellers have invested considerable money in developing, and differentiating, their PULP products (ie, their proprietary brands of PULP). In many instances, the inclusion of ethanol was not considered in the research and development of PULP products.101 Proprietary brands of PULP account for just under half of all PULP sold.102

Tank and pump space is limited at petrol stations, particularly at smaller sites. If ethanol were included in PULP and a station was subject to the 6% mandate, this would likely be at the expense of 1 of the unblended petrol types currently offered for sale at petrol stations.103

While the incompatibility of E10 in vehicles may be overestimated by motorists, there remains a proportion of vehicles and machinery that can’t use EBP. As a consequence, every petrol station must supply at least 1 grade of unblended petrol to have a viable business.104

98 Confidential pers comm, 16 February 2012. 99 Confidential pers comm, 27 February 2012; and Confidential submission to IPART, 29 February

2012. 100 Confidential pers comm, 27 February 2012. 101 Confidential submission to IPART, 27 February 2012. 102 2011 Australian Petroleum Statistics, Table 3B.

(http://www.ret.gov.au/resources/fuels/aps/pages/default.aspx, accessed February 2012). 103 Confidential pers comm, 15 February 2012. 104 Confidential submission to IPART, 29 February 2012.



On this basis, we consider that it is unlikely that most volume sellers in NSW will voluntarily sell ethanol-blended PULP.

We note that in the USA and Europe, ethanol is blended with all petrol types, including premium petrol. Further, while most new European cars are designed to operate with premium fuels, we understand there is no technical barrier to including ethanol in these fuels. Such cars could use a premium EBP, provided they were E10 suitable (see Section 4.4.)105

That said, introducing ethanol into PULP may lead to less choice for consumers who can’t or don’t wish to use EBP. This may mean that they pay higher petrol prices. For example, if PULP95 is blended with ethanol, they may have to purchase unblended PULP98. In particular, smaller petrol stations, such as those in regional areas, may be unable to offer unblended petrol as an alternative to EBP, given limited tank/pump space.

We also note that the distribution of ethanol-blended PULP to regional areas would face similar challenges to that of E10. That is, it is more costly to supply border zones with EBP when compared to unblended petrol (see Section 5.2.1). Furthermore, the cost of converting stations to sell EBP may be higher in regional locations, given generally lower turnover. These higher costs may flow through to petrol prices.

4.3 Price of EBP relative to RULP and PULP

There is a consensus among stakeholders that the price of E10 relative to RULP and PULP can impact significantly on the demand for E10, and therefore the ability of volume sellers to meet the ethanol mandate. The section below discusses these price relativities.

4.3.1 How is the E10 price set?

Based on consultation with ethanol producers and volume sellers, our understanding of how the prices of E10 and ethanol are set is outlined below.

E10

E10 is made up of 10% ethanol and 90% petrol (usually RULP). Therefore, the price of E10 is largely set by reference to the terminal gate price (TGP) of RULP.

105 Personal communications with AIP (Australian Institute of Petroleum) and FCAI (Federal

Chamber of Automotive Industries), February 2012.



Ethanol

The price of the ethanol component of E10 is also linked to the price of petrol.

Under current ethanol supply contracts, the price volume sellers pay for ethanol is calculated using the formula:

Ethanol price = terminal gate price of unleaded petrol less discount plus freight costs.106

The discount is subject to negotiation between ethanol suppliers and volume fuel sellers. In general terms, it reflects differences between ethanol and unleaded petrol. These differences include a different energy content of ethanol relative to petrol and the fact that ethanol is effectively subject to no excise, due to the Ethanol Production Grants Program (see Section 2.3).

The formula for the price of ethanol can also be subject to a floor and ceiling price (see Section 3.2.2).

4.3.2 Decrease in price differential for E10 and RULP

During 2007 to 2010, the average price of E10 nationally was around 2.5 to 3.0 cents per litre (cpl) lower than RULP (see Figure 4.4).

This trend was generally reflected in prices at Sydney and Brisbane locations monitored by the ACCC, with Sydney locations at the upper end of this range for much of this time. The price differential was greater in Melbourne for the first 3 years of this period, but came within the national average range by mid-2010.

Since February 2011, the price differential has narrowed significantly – both nationally and in the main capital cities where E10 is sold – and fallen below the 2.5 to 3.0 cpl range. It fell to 1.7 cpl nationally by October 2011. At some locations, the price of E10 actually exceeded the price of RULP, particularly in Sydney in the second half of 2011.107 That said, the average price differential was generally greater in Sydney than in Brisbane or Melbourne during this period.

106 Confidential pers comm, 21 February 2012. 107 ACCC, Monitoring of the Australian petroleum industry, 2011, p 100.



Figure 4.4 Average price differences between RULP and E10 across the monitored locations (January 2007 to September 2011)

Data source: ACCC analysis based on Informed Sources data (ACCC, Monitoring of the Australian petroleum industry, December 2011, p 100).

While some of the reduction may be attributable to data issues108, comments from stakeholders support the finding that the price differential is now below 2 cpl, and closer to 1.5 cpl.109 Some volume sellers indicated that this was the case at their sites.110 Further, NRMA analysis revealed that the price differential was 1.5 cpl in Sydney in February 2012.111

Stakeholders nominated 2 main reasons to explain why average E10 prices were increasing relative to RULP:

The E-10 roll-out generally means that E10 replaces RULP and, in turn, moves towards RULP’s price.112

Ethanol producers are exercising their market power to increase the price for ethanol, which flows through to E10 prices.113

With respect to the first reason, phasing out RULP effectively removes a competitor to E10. Therefore, the price of E10 will tend to increase towards the price of RULP where RULP is not available, because the price of RULP is accepted by customers.

108 The ACCC only includes retail sites in its E10 price monitoring if they sell both E10 and RULP.

Section 4.1.3 indicates that sites in this category are a relatively small proportion of all sites. 109 Confidential pers comm, 22 February 2012; and confidential pers comm, 23 February 2012. 110 Confidential pers comm, 15 February 2012; and confidential pers comm, 21 February 2012. 111 NRMA submission to IPART, 28 February 2012. 112 NRMA submission to IPART, 28 February 2012; and confidential pers comm, 22 February 2012. 113 Confidential submission to IPART, 27 February 2012.

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As to the second reason, the ACCC has noted there is a risk that limited ethanol supply (combined with growing mandated consumption) may lead to higher ethanol prices, causing the price of E10 to increase relative to RULP.114

As E10 only contains 10% ethanol, the price of ethanol has a relatively limited effect on the price of E10. However, it can have a significant impact on the E10/RULP price differential. For instance, all other things being equal, a 20% increase in the price of ethanol, should equate to a 2% increase in E10’s retail price. Assuming a retail price of $1.38 per litre115, a 2% increase equates to an increase of 2.76 cpl – which eliminates the E10/RULP price differential.

While we are unable to assess the extent to which ethanol producers are exercising their market power to increase ethanol prices, we do note that the Australian ethanol market is highly concentrated. Further, it is effectively protected from import competition. Unlike other fuel types, there is no ‘liquid’ international market for ethanol and alternative sources of supply (see Chapter 3). This tends to suggest that some of the narrowing price differential is a consequence of the highly concentrated, illiquid market.

4.3.3 Increase in price differential for E10 and premium unleaded

There is no formal monitoring of E10 and PULP price differences. The ACCC has traditionally focused on E10 and RULP prices. However, this comparison may be less relevant now in view of the E10 rollout reducing supplies of RULP. With E10 and PULP becoming the main fuels available to NSW motorists, it may be more instructive to monitor the price relativities of these fuels.

Data provided by the NRMA indicates that the average PULP price generally increased relative to E10 over the period September 2009 to February 2012. This trend was particularly evident from January 2011 onwards (see Figure 4.5).

114 ACCC, Monitoring of the Australian petroleum industry, December 2011, p 13. 115 This is the average E10 capital city price for the 3rd quarter of 2011 (ACCC, Monitoring of the

Australian petroleum industry, December 2011, Table D2, p 393).

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Stakeholders have also suggested to us that demand for E10 is sensitive to its price relative to substitutable fuels (ie, RULP and PULP).120 In support of this view, APAC has noted that the lower price of E10 compared to RULP has driven demand for E10.121

Stakeholders have also indicated that the price differential between E10 and RULP needs to exceed a certain ‘threshold’ before consumers switch to E10. Some nominated a price differential of at least 2 to 3 cpl.122

One reason put forward for this threshold is that E10 has a lower energy content, and therefore fuel efficiency. Ethanol has around 70% of the energy value of RULP.123 This equates to E10 having 97% of the energy value of RULP, and so being 3% less fuel efficient than RULP.

The price difference between E10 and RULP needs to take account of this lower fuel efficiency. When it falls below the 2 to 3 cpl threshold, E10 no longer offers consumers value for money. The price difference does not offset the reduced mileage of E10.124

If motorists are increasingly only able to choose between E10 and PULP at petrol stations, the price differential between these 2 fuels (rather than between E10 and RULP) will have a growing importance in determining demand for E10. At present, the trend is for their price differential to widen.

4.4 E10 suitability of the vehicle fleet

While many vehicles can use E10, there are some which are incompatible with this fuel. It is generally accepted that vehicles made before 1986 fall into the latter category (although some of these vehicles also can’t use RULP either).125 Further, vehicle manufacturers may not recommend E10 be used in some of their models made after 1986 for technical reasons.

We considered the E10 suitability of NSW’s vehicle fleet, to understand whether this was a significant factor inhibiting greater E10 uptake. Specifically, whether it set a ‘ceiling’ on demand for EBP that was inconsistent with the 6% mandate.

120 That said, one volume seller, however, thought that consumers were not overly sensitive to the

price differences between fuel types. For example, when E10 prices moved from 3 cpl to 1.5 cpl less than RULP, it did not experience much change in E10 sales. (Confidential pers comm, 15 February 2012).

121 APAC, Benchmarking the Price of Fuel Ethanol in Australia, July 2010, p 14. 122 Confidential pers comm, 27 February 2012; confidential pers comm, 28 February 2012; and

confidential submission, 24 February 2012. 123 APAC, Benchmarking the Price of Fuel Ethanol in Australia, July 2010, p 6. 124 Comments from stakeholders to the ACCC. Monitoring of the Australian petroleum industry,

December 2011, p xxiii. 125 These vehicles predominantly have carburettor equipped engines and steel fuel tanks, which

cannot operate on ethanol blended fuels (FCAI).



We focused on passenger and light commercial vehicles in NSW that used petrol as their fuel source. Our analysis drew on vehicle registration data from Roads and Maritime Services. We matched this data to the Federal Chamber of Automotive Industries’ list of vehicles able to operate on E10. (Appendix B provides more information on our methodology).

We found that 73% of these vehicles were E10 suitable in 2011, up from 66% in 2007. Over that same period, the proportion of vehicles considered unable to use E10126 dropped from 30% to 23%. Vehicles whose E10 suitability was unknown accounted for around 4% of the fleet during this period127 (see Figure 4.6)

Figure 4.6 E10 suitability of NSW vehicle fleet, 2007-2011

Data source: RMS & FCAI data, IPART analysis. See Appendix B.

We also considered future trends in E10 vehicle suitability. Assuming the annual average growth in E10 suitable vehicles from 2007 to 2011 continues at the same rate128, these vehicles will comprise 84% of the NSW fleet by 2021 (see Figure 4.7).

126 That is, vehicles either classified as unsuitable on the Federal Chamber of Automotive

Industries’ list or manufactured before 1986. 127 Vehicles in the Roads and Maritime Services’ database that were manufactured after 1986 and

not referred to in the Federal Chamber of Automotive Industries’ classification of E10 suitable vehicles were allocated to the ‘unknown’ category.

128 Average annual growth rates over the period 2007-2011: ‘E10 suitable: 4%, ‘Unsuitable’: -4%, ‘Unknown’: 3%, ‘Vehicles pre-1986’: -12%.

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Figure 4.7 Forecast of E10 suitability of NSW vehicle fleet, 2021

Data source: RMS & FCAI data, IPART analysis. See Appendix B.

The ethanol mandate effectively requires 60% of all NSW petrol sales to comprise E10. Our analysis indicates that the NSW fleet is technically able to meet this requirement, in that E10 suitable vehicles account for well over 60% of passenger and light commercial vehicles.129

That said, recent petrol sales trends in NSW indicate that some consumers are choosing to purchase PULP for their vehicles even though they may be E10 compatible. In other words, it is unlikely that all of the E10 suitable vehicles are operating on E10, so the actual volume of E10 sales remains below the level suggested by the fleet’s technical capacity.

The NRMA has informed us that it is conducting a fleet analysis using a similar methodology to IPART’s analysis. Its focus is on vehicles that use RULP (rather than any type of petrol) as their fuel source.130 It is hoping to determine what proportion of these vehicles are able to use E10. Its results were not available in time to be considered in our review.

4.5 Customer perceptions about EBP

The sections above show that there is currently a large discrepancy between E10’s share of the petrol market (about 36%) and the share of the vehicle fleet that can use E10 (73%). Some motorists may be fully aware of their vehicle’s compatibility and performance with E10, yet still prefer RULP or PULP. Other motorists, however, may lack knowledge or information on E10 and its compatibility with their vehicle.

129 Passenger and light commercial vehicles comprise around 90% of all petrol-powered vehicles

registered with the Roads and Maritime Services. 130 This excludes vehicles recommended to run on PULP.

E10 suitable84%

Unsuitable11%

Unknown4%

Vehicles pre-19861%



Stakeholders generally thought that there was scope to provide more information and/or marketing to support EBP. It was noted that:

There appears to be some general doubt or uncertainty in the community about the types of vehicles that can use E10, the impact of ethanol on vehicle performance and fuel efficiency, and the environmental benefits or other social merits of E10.131

The Queensland Government had run a marketing campaign promoting EBP in the lead-up to introducing its now postponed mandate, which appeared to positively affect sales.132

The introduction of the Act and the mandate significantly changed the petrol industry. However, it was accompanied by relatively little information to consumers and other stakeholders.133

Volume sellers make their greatest margins on, and often differentiate themselves by, their premium fuels. Therefore, these fuels are subject to a high degree of promotion, relative to E10.134

In reviewing press clippings and anecdotal evidence throughout this review, our observation is that there appears to be a lack of information about EPB in the general community.

Available information on customer views is summarised in Box 4.2 below.

131 ACCC, Monitoring of the Australian petroleum industry, December 2011, p 96. 132 Confidential pers comm, 22 February 2012. 133 Confidential pers comm, 15 February 2012; confidential pers comm, 22 February 2012. 134 Confidential pers comm, 13 February 2012; confidential pers comm, 23 February 2012; and

confidential pers comm, 24 February 2012.



Box 4.2 Customer perceptions of ethanol blended petrol

There has been little research done on consumer attitudes to or acceptance of E10. In 2003 and2005, the Australian Automobile Association (AAA) conducted national motorists’ attitudessurveys. Recently, some major oil companies have also done some basic in-house research.

The Australian Automobile Association (AAA)

The AAA 2005 survey of 768 motorists nationally shows that, prior to a mandate in NSW:

25% of motorists were ‘happy’ to buy EBP (this had increased by 3% since 2003). 35% ofmotorists were not happy or had reservations. The remaining 19% were unsure.

Regional consumers were generally ‘happier’ than urban consumers to buy EBP.

Of the motorists happy to buy EBP, their main reasons for buying it was that it made nodifference (presumably to the performance of their vehicles).

Of those consumers not happy or holding reservations, the main reason for their attitudeswas that EBP was ‘unsafe’ for their engines.a

In-house recent research of oil majors

2010 in-house research by an oil majorb on consumer attitudesc suggests that:

There was high awareness of EBP being sold (92% in Sydney, up from about 60% in 2004).

Of those aware of EBP in Sydney, approximately 16% in 2004, and 63% in 2010 hadpurchased EBP.

There were only 15% of motorists in Sydney in 2010 that had not used EBP who wouldconsider the product.

Another major oil companyd conducted a survey in 2011 of 200 Sydney consumers who usuallyconsumed PULP (95 and 98). It asked these consumers whether they purchased any other fuelsfor any vehicles in their households, aside from PULP. It found that:

50% of these consumers refuse to purchase any petrol other than PULP

13% purchase E10

12% purchase E10 or RULP

26% purchase RULP.

Of those who would consider only using RULP (not E10), the reasons were: I don’t think E10 isgood for my car (46%); My car is not suitable for E10 (33%); I don’t trust the product (E10) (29%);It’s not good value for money (21%); I don’t think my car can use E10 (15%); Don’t know (4%);and Other (4%).

a AAA, 2005, Motorists’ Attitudes 2005 ANOP Survey, p 18. b Confidential pers comm, 14 February, 2012. c Similar sample sizes were used for this research (n=700+). d Confidential pers comm, 4 March 2012.



4.6 IPART’s findings in relation to demand

IPART’s findings in relation to ethanol demand are as follows:

4 In 2011, APS data indicates that EBP accounted for around 36% of total petrol sales in NSW. As EBP is primarily E10, this suggests that ethanol comprised around 3.6% of total petrol sales. However, data from DTIRIS indicates that ethanol accounted for 3.8% of petrol sales in 2011. Therefore, there appears to be a minor discrepancy between APS data and DTIRIS data. Part of this discrepancy appears to be because DTIRIS includes fuels containing greater than 10% ethanol (eg, E85) in its calculations.

5 We estimate the maximum possible EBP share of total petrol sales to be about 58%. This means that ethanol would comprise around 5.8% of total petrol sales. However, this maximum possible market share is unlikely. This is because the estimate assumes that E10 is sold:

– at all petrol stations across NSW – including stations not subject to the mandate

– in place of, rather than in addition to, RULP

– outside of petrol stations (‘off-station’), including direct to farms, mines and industry.

The estimate is also based on the assumption that current market conditions will continue unchanged. This includes the price of EBP relative to other types of petrol, the composition of the vehicle fleet, consumer perceptions of EBP, and that EBP is primarily confined to RULP and not PULP.

6 Over the period 2006 to 2011, PULP’s share of NSW petrol sales increased from 17% to 33%. Part of this growth is attributable to consumers switching from RULP to PULP, rather than from RULP to E10.

7 To date, volume sellers have generally not included ethanol in PULP for sale in NSW, although there are some exceptions.

8 Including ethanol in PULP as well as RULP could increase sales of ethanol towards the 6% mandate. Ethanol is included in PULP in markets overseas, including the USA. However, it may lead to increased petrol prices for some customers.

9 The price of ethanol can have a significant impact on the E10/RULP price differential, and hence potentially impact on demand for E10 (and ethanol).

10 The price differential between E10 and RULP has narrowed from 3 cpl in January 2007 to about 1.5 cpl in February 2012. This likely to be the consequence of:

– The replacement of RULP with E10. The price of E10 will tend to increase towards the price of RULP where RULP is not available, because the price of RULP is accepted by customers.

– The highly concentrated, illiquid market for ethanol in Australia.

11 As RULP’s market share and availability is decreasing, an increasingly important determinant of demand for E10 will be the price differential between E10 and PULP (rather than between E10 and RULP). This differential has been increasing over the last couple of years and has coincided with increased demand for PULP.



12 The vehicle fleet appears to be developing in favour of EBP. We estimate that:

– 73% of vehicles are E10 suitable, up from 66% in 2007

– 84% of vehicles will be E10 suitable by 2021.

13 There appears to be a lack of information about EPB in the general community. A Queensland Government marketing campaign promoting EBP appeared to positively affect EBP sales.

5 Issues related to the operation of the market for petrol and ethanol



This chapter considers issues related to the operation of the market for petrol and ethanol that impact on ethanol supply and demand and the 6% mandate.

As outlined below, we have identified the following operational issues:

the coverage of the Act

the supply of fuel ethanol to some border areas, and the impact of the ethanol mandate on the fuel market in these areas

the sale of fuel outside of petrol stations (eg, direct to farms, mines, industrial facilities, etc).

5.1 Coverage of the Act

Under the Act, the 6% mandate applies to ‘major retailers’ and ‘primary wholesalers’ (which are both classified as ‘volume fuel sellers’). As noted in Chapter 2 (Box 2.1), a major retailer means “a person who operates or controls the operation of more than 20 service stations.”135 Therefore, a person who operates or controls the operation of 20 or less service stations is excluded from the requirement to sell 6% ethanol (or 60% E10).

5.1.1 The ownership and control of petrol stations

It can be difficult for a third party to identify who controls the operation of a service station. A service station may display the brand of an oil major, yet be independently owned or operated or have a commercial relationship with the oil major that limits the extent of control the major has over the operation of the station. The ACCC notes:

While most retail sites carry the brand of a refiner-marketer, in practice refiner-marketers only operate a small percentage of sites. Independent operators have a significant and growing presence in the retail sector.136

135 Part 1, Section 4A of the Biofuels Act 2007. 136 ACCC, Monitoring of the Australian petroleum industry, December 2011, p 21.



ACAPMA separates the operation of service stations into 5 categories:

refiner-marketer (oil majors) – sites owned and operated by oil majors

supermarket – eg, sites owned and operated by major supermarkets

franchisees – sites owned or sub-leased by the franchisee, who pays a royalty to the oil major

commission agents – agents own the service station and receives a commission on fuel sold, but oil major controls the supply and sale of fuel

independent retailers – independently owned and operated (however, they can sell petrol under the brand of one of the refiner-marketers or under their own brand name).137

Table 5.1 provides estimates of the proportion of service stations in NSW within each category. The categories are listed in order of the level of control that petrol wholesalers can exert over petrol stations. This ranges from stations owned and operated by wholesalers (3%) to stations that are independently owned, operated and branded (23%).

Table 5.1 Proportion of service stations by ownership/operation classification

Degree of control Classification % of total service stations

Total control Company Operated

3%

Company Operated (Supermarket)

12%

Commission Agent (Oil major)

4%

Commission Agent (Independent Wholesaler)

8%

Commission Agent (Supermarket)

8%

Franchisee

17%

Branded Independent 25%

No control Independent 23%

Source: ACAPMA Data, 2011.

137 Australasian Convenience and Petroleum Marketers Association (ACAPMA) submission to

IPART, 27 February 2012.



5.1.2 Concerns with coverage of the Act

Volume sellers have expressed concern with the coverage of the Act. As explained below, this is on the grounds that it limits their ability to comply with the mandate and creates an uneven playing field.

Limited ability to comply with the Act

Primary wholesalers rely on purchases of E10 by petrol stations to meet the 6% mandate. However, they state that they have no or limited control over many petrol stations, a large number of which are not subject to the mandate and are therefore not compelled to purchase E10. This limits the ability of the primary wholesalers to comply with the mandate, and contributes to the discrepancy between current sales of ethanol (about 3.6%) and the mandate (6%).138 It also explains some variation in E10 sales and roll-out across volume sellers, given their different organisational structures and commercial arrangements.

Impacts on competition

Volume sellers also argue that petrol stations not subject to the mandate have a competitive advantage over those that are. They report that stations replacing RULP with E10 in order to comply with the mandate have lost business to nearby stations offering RULP.139

The proposed amendment to remove the requirement that all RULP must be E10

Volume wholesalers have noted that, until recently, they were able to refer petrol stations to the Act’s and Regulation’s requirement that all regular petrol sold had to be E10 by 1 July, 2012. However, given the Government’s proposed amendment to remove this requirement, petrol stations not subject to the Act will have no obligation to purchase E10. This amendment, therefore, may act to further limit the ability of volume sellers to comply with the 6% mandate and to compete with stations offering RULP.

The number of service stations not subject to the mandate

We have found it difficult to estimate the proportion of petrol stations in NSW not subject to the 6% mandate.

We understand that about 48% of service stations are classed as ‘independent’ (see Table 5.1). However, a portion of these ‘independent’ stations may be classified as ‘Major retailers’ and therefore subject to the mandate.

138 Confidential submission to IPART, 29 February 2012. 139 Confidential pers comm, 13 February 2012; confidential pers comm, 15 February 2012;

confidential pers comm, 16 February 2012; and confidential pers comm, 21 February 2012.



We also understand that the Service Station Association’s NSW members have about 500 service stations, which accounts for about 25% of petrol stations in NSW. Its members are generally independent (ie, free to make their own business decisions) and not captured by the definition of ‘Major retailer’ under the Act.140

This suggests that at least 25% of service stations are likely to be excluded from the requirement to comply with the 6% mandate, regardless of the fact that the wholesaler supplying them with petrol is likely to be subject to the 6% mandate.

5.2 Supplying ethanol to some regional/border areas

Volume sellers have expressed concern regarding roll-out of E10 to regional areas, particularly in interstate border zones. These concerns relate to the cost of transporting E10 to these areas and competition from interstate suppliers.

5.2.1 Cost of supplying some regional areas

In the absence of a requirement to sell EBP, some regional areas in NSW are supplied petrol from terminals in other States, as this is cheaper and more efficient than transporting petrol from terminals located in Sydney and Newcastle. For example, southern NSW is supplied from Victoria, south-western NSW from South Australia and northern NSW from Queensland. Figure 5.1 depicts these supply zones.

Volume sellers argue that it is costly to supply EBP to these border zones, as it generally has to be transported from Sydney rather than the lower-cost interstate routes. One volume seller estimates that changing the supply point for Albury from Melbourne to Sydney will increase logistics costs, resulting in E10 retailing at around 3 cents per litre more in Albury than RULP over the river in Wodonga.141

Although ethanol is produced in NSW in Nowra, it is delivered by truck to the major petrol terminals, where it is stored until it is blended prior to transportation for direct delivery to petrol stations or intermediary depots. There are currently very limited capabilities for E10 supply ex-Victoria. We also understand that there is presently no E10 available from terminals in Adelaide.

140 Confidential pers comm, 27 February 2012. 141 Confidential submission to IPART, 20 February 2012.



Figure 5.1 Map of NSW with areas supplied from interstate

Note: Red dots are indicative of petrol stations in NSW but are not a complete nor comprehensive collection.

Data source: Google Maps and ACAPMA’s ‘Zones of Influence’.

5.2.2 The geographic distribution of E10 roll-out

The higher cost of supplying some regional areas is reflected in the geographic distribution of E10 across the state. Table 5.2 shows that 75% of petrol stations in urban areas sell E10, compared to 4% in outer regional areas.

Table 5.2 Proportion of NSW petrol stations by location

Area Number of Stations Converted for E10a

Urban 57% 75%

Inner regional 29% 20%

Outer regional 12% 4%

Remote 1% 0%

Very remote 1% 0%

a Numbers may not tally due to rounding.

Note: Postcodes have been classified based on Australian Standard Geographical Classification Remoteness Postcode List.

Source: ACAPMA Data, 2011.

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It’s also been argued that interstate service stations, offering RULP, can out-compete nearby NSW stations that have been converted to E10.146 However, this issue is not unique to border areas, as a number of service stations throughout the State are exempt from the Act as they are not classified as a major retailer under the Act (as discussed above).

As noted above, E10 roll-out in regional areas has been relatively limited to date. This suggests that the above mentioned concerns are yet to materialise to any great extent. Rather, they largely represent potential impacts of more extensive E10 roll-out across the State, particularly if this is at the expense of RULP.

5.3 The off-station market for fuel

Petrol wholesalers supply to the retail market (service stations) and also directly to farmers, mining companies and other commercial operations (ie, what we call the off-station market).

In 2011, the retail market accounted for about 85% (5,184 ML) of total petrol sales in NSW, while the off-station market equated to 15% (914 ML).147

One stakeholder has suggested that sales of petrol to the off-station market should be excluded from calculations when determining the percentage of ethanol sold.148 This would reduce total sales of petrol against which ethanol sales are assessed. This proposal is based on the view that farm equipment and machinery often cannot use EBP, and that it is often more expensive to transport ethanol to regional areas.

Based on aggregate 2011 figures for NSW, such an adjustment would increase ethanol sales from 3.6% to 4.3%.

5.4 IPART’s findings in relation to operation of the market

IPART’s findings in relation to the operation of the petrol and ethanol markets are as follows:

14 A significant proportion of petrol stations (estimated to be at least 25%) in NSW are not required to comply with the 6% mandate, even though the wholesalers supplying them with petrol are generally required to sell 6% ethanol.

15 The exclusion of these petrol stations from the requirements of the Act:

– constrains the ability of some volume sellers to comply with the Act

– undermines the competitive position of petrol stations that are subject to the Act.

146 Confidential pers comm, 24 February 2012. 147 Australian Petroleum Statistics, Products by State Marketing Area (NSW) calendar year 2011,

Table 3.C. 148 Confidential pers comm, 24 February 2012.



16 It can be more expensive to supply E10 to regional areas, particularly if this necessitates a change from the most efficient fuel supply route.

17 It is likely to be difficult to monitor or enforce compliance of interstate volume sellers in relation to their sales of petrol for delivery in NSW.

18 If off-station sales of petrol were excluded when calculating ethanol sales as a percentage of total petrol sales, ethanol sales in NSW for 2011 would be 4.3% rather than 3.6% of petrol sales (based on APS data).


Ethanol supply and demand in NSW IPART

6

Appendices

5 Issues related to the operation of the market

for petrol and ethanol


A

Terms of Reference

Ethanol

A

supply and de

Terms of Ref

emand in NSW

ference

IPART 71

A Te

72 IPART

erms of Referen

T Ethanol supp

nce

ply and demandd in NSW

B Proportion of NSW vehicles suitable to use E10



IPART’s analysis of the proportion of NSW vehicles suitable to use E10 is based on data provided by:

Roads and Maritime Services (RMS), on registered vehicles in NSW

Vehicle and fleet manufacturers, through the Federal Chamber of Automotive Industries (FCAI), on the capability of their vehicles to operate on E10.

It also relies on assumptions used by Orbital Australia Pty Ltd in its report to the Federal Government on the operation of Australian fleet vehicles using ethanol blend fuels.149

B.1 RMS data on NSW registered vehicles

RMS provided IPART with the number of registered vehicles in NSW:

sorted by make, model, marketing description and year of manufacture

as at 31 December for each year, 2007 to 2011 inclusive.

To focus our analysis on those vehicles relevant to the ethanol mandate, the data only included petrol-powered vehicles.150 In addition, since the FCAI list only has information on passenger or light commercial vehicles151, the data was further restricted to these types of vehicles. These criteria cover around 87% of all vehicles registered in NSW as at 31 December 2011.152

149 Orbital Australia Pty, Assessment of the Operation of Vehicles In the Australian Fleet on Ethanol

Blend Fuels, Report to the Department of the Environment and Water Resources, February 2007. 150 IPART’s definition of ‘petrol-powered’ covers the following RMS categories: unleaded petrol,

petrol, electric/petrol, petrol/LPG (dual fuel), petrol/compressed natural gas, petrol/kerosene (dual fuel) and steam (petrol powered).

151 IPART’s definition of ‘passenger or light commercial vehicles’ generally covers vehicles under 4.5 tonnes Gross Vehicle Mass. That is, passenger vehicles, off-road vehicles, people movers, small buses, motorcycles, scooters & light trucks (as defined by RMS: http://www.rta.nsw.gov.au/publicationsstatisticsforms/statistics/registrationandlicensing/registration_glossary.html). It also includes mobile homes.

152 IPART analysis.



Some of the RMS database contained data not attributable to a model, only to a make. IPART made the following assumptions about ‘unknown models’:

If the make is listed as completely E10 suitable from 1986, then the ‘unknown models’ are also considered to be E10 suitable.

If only selected models from that make are E10 suitable, the ‘unknown models’ are classified as ‘not listed’ as suitable.

B.2 FCAI list

Several vehicle manufacturers and importers have provided the FCAI with information on the capability of their vehicles to operate on E10. The FCAI has compiled this information into a list of whether or not a vehicle is E10 suitable.153 It was last updated in 2009. While this does not include all vehicles makes/models, it does cover the major makes/models.

We made several assumptions when interpreting the FCAI list. Vehicles made before 1986 are unsuitable for E10154. Further, where the FCAI listing indicated E10 suitability:

on a date split (eg, July 2005), the annualised RMS data was split on a pro-rata basis

post a certain year (eg, post 2005), it was interpreted as post 1 January of that year

for all models of a make, it was assumed to mean all models are either ‘suitable’ or ‘unsuitable’

for only specific models of a make, it was assumed that all other models are not listed (rather than ‘suitable’ or ‘unsuitable’)

based on technology choice (eg, fuel injected) or variants of a model (eg, Ford Laser with 1.3L engine), assumptions about the take up of the technology or the proportion of models that the variant represents are based on assumptions made by Orbital Australia Pty Ltd’s in its 2007 report155

We also exercised our judgement when deciding whether the vehicle model or marketing description in the RMS database matched the vehicle description on the FCAI list.

153 FCAI, Can my vehicle operate on Ethanol blend petrol? http://www.fcai.com.au/environment/can-

my-vehicle-operate-on-ethanol-blend-petrol- (accessed February 2012). 154 According to the FCAI, vehicles made before 1986 were predominantly equipped with

carburetor equipped engines and steel fuel tanks, which are unsuitable for ethanol blended petrol.

155 Orbital Australia Pty, Assessment of the Operation of Vehicles In the Australian Fleet on Ethanol Blend Fuels, Report to the Department of the Environment and Water Resources, February 2007.

C List of stakeholders


C List of stakeholders

In carrying out this review, we consulted with the following stakeholders:

APAC Biofuels Consultants

Australasian Convenience and Petroleum Marketers Association (ACAPMA)

Australian Competition and Consumer Commission (ACCC)

Australian Institute of Petroleum (AIP)

Biofuels Association of Australia (BAA)

BP Australia Pty Ltd

Caltex Australia Ltd

Coles Express

Dib Group Pty Ltd

Freedom Fuels

Lidocole Pty Ltd

Manildra Group

Mobil Oil Australia Pty Ltd

National Roads and Motorists’ Association Ltd (NRMA)

Neumann Petroleum Pty Ltd

NSW Department of Trade and Investment, Regional Infrastructure and Services (DTIRIS)

Service Station Association (SSA)

7-Eleven Stores Pty Ltd

Shell Australia Ltd

Sucrogen Ltd

United Petroleum Pty Ltd

Woolworths Ltd

Glossary


Glossary

ACCC Australian Competition and Consumer Commission

AIP Australian Institute of Petroleum

APS Australian Petroleum Statistics

cpl Australian cents per litre

DTIRIS The NSW Department of Trade and Investment, Regional Infrastructure and Services. It includes the NSW Office of Biofuels.

E10 See EBP

EBP Ethanol blended petrol, of which E10 (unleaded petrol with up to 10% ethanol) is the most common blend.

FCAI Federal Chamber of Automotive Industries

GL Gigalitres (billion litres)

KL Kilolitres (thousand litres)

Mogas Motor gasoline – commonly used international term for the benchmark of unleaded petrol in the Asia-Pacific region, including Australia

ML Megalitres (million litres)

MON Motor octane number

Petrol Unleaded petrol includes RULP, PULP and E10. Petrol and unleaded petrol are terms that are used interchangeably

PULP Premium unleaded petrol, RON 95 or higher

RON Research octane number – a measure of efficiency of petrol at resisting engine knocking

Glossary


RULP Regular unleaded petrol, RON 91

TGP Terminal Gate Price – can be defined as a price for a spot purchase of petrol from a terminal. It is also used as a benchmark price. From an industry perspective, the TGP is the price a purchaser expects to pay when they arrive at a wholesaler’s terminal wanting to purchase a tanker load of 30 000L of petrol.

The Act Biofuels Act 2007 (NSW)

Unleaded petrol See petrol, these terms are used interchangeably

ethanol supply and demand in nsw€¦ · 2ipart ethanol supply and demand in nsw 1.2 ethanol supply...

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