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Red diesel: Everything you need to know

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Effective 1 April 2022, red diesel (also known as rebated fuel) will no longer be permitted to power off-road vehicles and equipment. The Government ban – one of several measures designed to reduce the use of fossil fuels and meet air quality targets – will have a significant financial impact on the construction industry, at a time when companies are already facing extended economic uncertainty.

What is red diesel?

Red diesel is the same as ordinary (white) diesel – but it contains a dye which stains the interior of engines, tanks, and pipework. This helps track and trace illegal use of the fuel in non-commercial settings. Currently, red diesel attracts a rebate of 46.81p per litre – an effective duty rate of 11.14p per litre. White diesel has no rebate and, therefore, a duty rate of 57.95p per litre.

With 1 April 2022 looming, most construction companies will need to make a straight switch from red to white diesel at an additional expense of 46.81p per litre – five times as much duty as before.

How will this impact the construction industry?

The immediate impact will be on cost and cash flow, and it will be felt more widely than just in the construction industry – with price increases inevitably passed on, at least in part, to consumers. As one of their biggest expenses, construction companies will still have to absorb significant increases even after hiking their own charges.

At the same time, construction companies are also facing a series of one-off costs just to stay compliant ahead of the ban coming into effect. These include the cost of removing or running down red diesel, purchasing additional tanks, vehicles or equipment, and sourcing alternatives before the April deadline.

Another threat to business is the increased likelihood of theft, with both red and white diesel becoming more and more attractive as the price of fuel at the pumps reaches historic highs. The high number of vehicles and large stores of fuel at construction sites are coming under particular threat.

Can the Government help?

Originally, due to come into effect last year, the ban on red diesel was deferred due to the pandemic. There have been widespread calls on the government to delay again in 2022, until new equipment becomes available, or risk construction companies falling out of business. However, the ban is unlikely to be put off or reversed at a time when the Government needs to recoup some of the enormous sums invested in support packages over the past two years.

After 1 April 2022, red diesel will still be permitted for use in agriculture. This may expose loopholes whereby a construction company can redefine what it is or what it is doing on a project-by-project basis. However, this is causing another issue for plant hire companies, who will hire to both construction and agriculture businesses and must now pay to flush the tank each time a machine is hired or ringfence machinery for one industry, not the other.

What can I do in the short-term?

We already have hybrid and electric excavators – though electric excavators are uncommon as typically construction sites lack charging points, and a diesel generator is then required on-site. Hybrid excavators are a good solution to increased fuel costs – but only in some situations. Where a machine remains stationery, for example loading trucks, there is an opportunity to save energy and fuel. However, tracking, digging, and carrying heavy weight creates a significant drain on both.

For many construction companies, it’s a case of wait and see. In most cases there are few options other than to closely monitor the market and take decisive action to ease the burden of increased costs as and when new technology arrives. There are short-term solutions – such as hydro-treated vegetable oil (HVO) – but beyond that we predict big changes in construction.

Fossil free HVOV is a renewable diesel replacement. It is the lowest emission diesel replacement fuel available. HVO is made entirely from waste and is defined as renewable and sustainable, whilst being highly refined. It is a genuine green drop in alternative to diesel.

You can use HVO in any diesel engine without requiring any changes to the engine. Manufacturers have approved HVO and identified there is no degradation in performance. HVO burns more cleanly and more thoroughly helping you save in costs in fuel efficiency.

HVO is an ideal replacement for red diesel – but only as a short term-fix as carbon tailpipe emissions are reduced but not eliminated. That’s where hydrogen engines come in.

What is the long-term solution?

In 2020, JCB developed the first hydrogen-fuelled combustion engine that emits no CO2 to power its own range of off-road vehicles. Whilst not yet commercially available, the hydrogen engine is set to create the biggest shift in construction for the past 30 years, as a cheap and 100% sustainable alternative.

Hydrogen is a clean, renewable, and transportable fuel capable of powering larger, heavier equipment, with additional benefits including the availability of hydrogen engines for roughly the same cost as a diesel engine, and compatibility with traditional powertrains.

Should I invest?

Not all construction companies will have the liquidity to invest in new machinery. However, for those that do, now might be the best time with Government incentives aimed at accelerating the UK’s economic recovery still available, including the 130% super-deduction capital allowance on qualifying plant and machinery investments, which allows companies to cut their tax bill by up to 25p for every £1 they invest until 31 March 2023.

The Recovery Loan Scheme (RLS) is also still available to lend on new technology, and last autumn the government announced new and improved tax incentives on research and development (R&D). This represents an opportunity for construction companies to trial emerging technology – at a time when innovation is most needed to help reduce costs – with much reduced risk.

How can Paragon help?

Whatever you decide to do, Paragon can help finance the right deal. If you’re looking to invest in new or used construction vehicles or machinery, either through purchase or lease, our specialist team will help you understand all the implications and make the best decision – with flexible finance options.

Where cashflow is an issue, we can introduce you to Paragon’s invoice finance team. Together, we will find a solution that works.

With a wealth of experience providing funding to British businesses in the construction sector, our specialist underwriters personify our lend to learn ethos. We can look further than your credit limit and we are helping construction companies throughout the UK finance the equipment they need, quickly and affordably.

Find out more and contact us at: https://www.paragonbank.co.uk/business/asset-finance/construction

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