What future for heating oil?

Current perspectives
The recent (2011) OFT Off-Grid Energy Study assessed that approximately four million UK households were not connected to the gas grid, of which around 1.6 million use kerosene for domestic heating, representing 6% of the total heating fuel market. LPG use as domestic fuel accounted for a further circa 200,000 households. In comparison, natural gas is used by almost 20 million households and accounts for just over 80% of the heating fuel market.

In addition to its use in the domestic sector, there are estimated to be between 200,000 and 250,000 commercial heating oil users.

A snapshot of the trend in total UK domestic regular kerosene demand since the start of the millennium shows the following:

Source: DECC Energy Trends: Oil & oil products, Supply & use of petroleum products.

So, it appears that the market has moved from the range of 2.2-2.5 million tonnes/year (2.7 to 3.0 billion litres/year) to one of slightly under two million tonnes( 2.5 billion litres) in the past couple of years – although the exceptional, extended winter of 2013 is likely to result in this year’s total demand climbing back towards 2.2 million tonnes.

Against this backdrop, it was encouraging to learn that oil boiler sales were 22% higher in Q1 2013 vs. Q1 2012, and that overall 2012 sales were up on those in 2011.

What might the future hold?

To gauge future market prospects, we will consider a range of ‘what if’ possibilities, as a way of mapping out the boundaries that may define the future for the sector. To do this, an approach from probability and decision analysis will be used, which identifies three possible cases or scenarios:

→ best possible outcome, known as the P10 case- where there is only a 10% probability of things being better

→ an average outcome, known as the P50 case- where there is a 50% probability of things being better.

→ a worst possible outcome, known as the P90 case- where there is a 90% probability of things being better.

In looking at these possible outcomes, there are three underlying assumptions which are common to each case:

• that the requirements in the Code for Sustainable Homes will result in negligible new build potential for oil fired systems, so enabling little/no scope for market expansion.

• that B30K (bio kerosene) will not qualify for incentives under the Renewable Heat Incentive (RHI), given that it comprises 70% fossil fuel and so could raise questions, at least from a PR standpoint, about the true credentials of the green agenda that underlies the scheme.

• that oil boilers will be capable of meeting the maximum permissible NOX emissions’ limit of 120 milligrams per kilowatt hour set by the EU for 2018.

The future state of the market is taken to be that in 2020, the key milestone date for achievement of the GHG (greenhouse gas) emissions’ target and contribution of renewable energy sources.

 

Three possible scenarios for kerosene

Best Case (P10)

This is one where the sector, through initiatives such as Oilsave, is able to mount effective efforts, through promotion of improved fuel efficiencies of boilers, better insulation and lower emissions etc., that enable it to retain the lion’s share of its existing outlets. However, these fuel saving initiatives result in reductions in consumption, which are projected to average 3% per annum over 2013-2020.

From a starting point ( 2013), assumed to be circa 2.2 million tonnes ( 2.75 billion litres), this results in a decline of just over 420,000 tonnes (525 million litres) over the period, to a market of just under 1.8 million tonnes.

Average Case (P50)

This is one where the government’s various initiatives, such as the RHI and Green Deal etc., in pursuit of its green agenda, result in a measure of attrition of existing oil outlets. When coupled with the fuel reductions pursued by the sector in defence of its existing market, described above, this results in an average decline in oil use projected at 5% per annum over 2013-2020.

The reduction in this scenario amounts to 660,000 tonnes (830 million litres) to a market of just over 1.5 million tonnes.

Worst Case (P90)

This is a more extreme version of the previous case (P50), the key difference being that the government decides to pursue a much more aggressive/ ambitious approach to its green agenda and provides more generous and attractive incentives to encourage transfer from oil use.

As a result, consumption falls by 50% from its 2013 level i.e. by 1.1 million tonnes (1.4 billion litres), to a market of 1.1 million tonnes in 2020.

 

As already stated, these ‘what if’ scenarios represent no more than an attempt to map out what the future may hold for kerosene’s use as a heating fuel, generating a range of possible outcomes in terms of changes in demand and resulting market size. Their plausibility rests primarily in the exercise of being able to identify the boundaries that may define the market in 2020 – the future state. As the range is a substantial one, there is a higher likelihood that the market size will fall somewhere within the best/worst case scenarios for 2020.

Food for thought and, hopefully, opportunity to consider and adapt business models, as appropriate, to ensure the future viability and success of the heating oil sector – with the P50 type scenario providing a starting framework for planning purposes.

Comment on the above is invited to jane@fueloilnews.co.uk

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