The Economics Of Biofuels: The Case of The U.S Market

April 27th. 2011

Biofuels

Feedstocks• Biomass that can be easily burned– Direct combustion to produce

• Heat• Electricity

• Plants that contain oil with high caloric value– Biodiesel

• Plants that have high content of sugar that can be fermented– Ethanol

• Hydrated• Anhydrous

Why Biofuels?

• Agriculture: Provides income for farmers and reduces the level of government subsidies.

• Energy: Provides substitutes for fossil fuels for motor vehicles

• Environment: Provides fuels that emit less carbon, both over the production chain and during consumption.

Origins

• Brazil’s biofuel program began as a response to falling sugar prices (1975).

• United States program began as a response to low corn prices in late 1970s.

• European program began as a subsidy to farmers in 1980s.

Biofuels

• First Generation:– Corn-based ethanol– Sugarcane-based ethanol– Biodiesel• Use as a straight vegetable oil (SVO)• Produced through transesterification into

diesel oil or bio-kerosene

Biodiesel

• Can be produced from a variety of plants– Algae– Rapeseed (in Europe)– Palm oil in (Asia)– Jetropha seed in (Africa/India)– Sunflower seeds in (South Africa)– Each feedstock has a different yield rate (algae, hemp

and palm oil = the highest)

• Has much higher energy density than ethanol• Can be used in cars, trucks, small generators,

pumps, etc.• US Congress has mandated the Air Force to use

biofuels for a percentage of its fuel by a future date.• Biodiesel blends referred to as B10 - B100

Ethanol (First Generation)

• Ethyl alcohol produced from sugars.• First used in 9000 B.C.• Prior to Prohibition, Ford used ethanol as a

motor fuel• Ethanol is produced from sugar derived either

directly from feedstocks such as sugarcane or by converting starches into sugars.

• Ethanol blends referred to as E10 - E25 - E85 - E100

• Ancillary products provide revenue stream

Ethanol (Second Generation)

• Ethanol derived from cellulosic material– Wood waste, strawgrass, corn stover, municipal

waste

• Process of using enzymes to convert cellulosic materials to starches and then to sugars is expensive, complex, and commercially unproven.

• Significant investment by DOE and venture capital firms to develop efficient processes that can be commercially competitive.

Challenge: Ethanol from Cellulosic Materials

• Moving from demonstration phase to full commercialization

• Obtaining financing in a world of $40 per barrel oil and limited credit

• Feedstock availability may be limited– Stover – 3 billion gallons– Wood – maximum availability around 89 million

dry tons (24% of biomass available sustainability from forest resources)

– Strawgrass – PNWL report– Municipal waste limited by quality specs

Economics of Ethanol

• Cost of ethanol production – a function of variables– Cost of feedstock– Cost of processing and transporting the

feedstock to the processing plant– Capital and operating costs of processing

facilities– Transporting final product to market

Energy Content

Methanol 19.7 mj/literEthanol 21 mj/literGasoline 34.8 mj/literBiodiesel 36 mj/liter

Ethanol has 35.3% less energy content than gasoline

E85 has 25% less energy than gasoline

Energy: United States

• Goal: 36 billion gallons by 2022 of which 16 billion must meet the definition of advanced biofuels. Includes ethanol from cellulosic material, sugars other than corn, waste material, biobutanol, and biogas.

• Renewable Fuel Standard requires that all gasoline sold in the United States contain a minimum volume of renewable fuel. EPA has authority to grant short-term waivers from this requirement.

• All biofuels must meet lifecycle greenhouse gas emission reductions from a baseline defined as the production chain for gasoline production. Regulations to implement this requirement were withdrawn by the EPA at White House request and are now being reviewed through an interagency process.

Energy (con)

• Emission reduction threshold for any biofuel is 20%, but for biofuels from cellulosic materials it is 60%, and for biodiesel it is 50%.

• Applies to “new facilities” only• EPA administers standard and will be

promulgating draft rules

Government Interventions

• United States– Federal tax credit for ethanol blends –

45 cents per gallon– Small producer tax credit – 10 cents per

gallon on first 14 million gallons produced

– State tax credits– 54 cents per gallon tariff on most

imports

United States Production

• The United States has approximately 13 billion gallons of ethanol production built, under construction or in advanced planning

• The is creating a short-term surplus of production capacity, thus depressing spot prices

Ethanol – January 2009

US ethanol production (2008) 9 billion gallons

(US ethanol production (2007) 6.5 billion gallons)

US capacity under construction 2.1 billion gallons

US consumption (2008) Approx. 9 billion gallons

US consumption if 100% of cars in US used E10

Approx. 12 billion gallons

Ethanol Prices (March 2009)

Gasoline (wholesale)

Ethanol (corn $3.54 per bushel)

$1.40 $1.65

Renewable Fuel Standard Schedule (2008 – 2013)

2008 9 billion gallons

2009 11.1 billion gallons

2010 12.95 billion gallons

2012 15.2 billion gallons (2 billion from advanced biofuels)

2013 16.5 billion gallons

2022 36 billion gallons

Issues (Short term)

• Unless car manufacturers produce cars that can use blends over E10, the US biofuel market will hit a “wall” in 2010.

• Food versus Fuel Biodiesel– Corn prices rose to $7.70 per bushel in 07 and

08 (Q1-Q2)– In the period, world corn prices increased by

50%– Livestock feed prices increased, thus

increasing the price of pork and dairy products.– Soybean fields converted to corn, increasing

soybean prices.

Issues (Long term)

• Carbon Reductions– How much carbon is emitted during the

production of biofuels as compared with production of gasoline• Low Carbon Fuel Standard (California)• Energy Security and Independence Act

required reductions in carbon content of the fuel as the country moves to cellulosic biofuels• Carbon emissions from sugarcane are

much lower – due to 80% less use of fossil fuel in the production process.

Issues (Trade)• Global investment in biofuels inhibited by WTO

rules, which treat all types of ethanol as an agricultural product and thus fall within WTO Agreement on Agriculture, which allows countries to impose tariffs.

• Classification of ethanol is based on chemical composition and does not distinguish between fuel and non-fuel use.

• Existing classification system is not scheduled for reassessment until 2012.

• Bush administration decided not to include ethanol on list of goods to be reclassified as “environmental good.”

• Certification process being developed by EU, US (California). Concern that such processes may inhibit investments outside the US.

Issue: Indirect Deforestation

• Princeton Study: Carbon in soils very high, especially in forested areas

• High corn prices may increase pressure on existing forests that may be cut to increase agricultural capacity, thus releasing significant amounts of carbon.

• Low carbon fuel standard and certification processes include those indirect effects. Industry groups opposed to including indirect effects.

Issue: Nitrogen Run-off

• To maximize biomass yields, additional nitrogen-based fertilizer may be required. Critics are worried that this will cause significant run-off problems.

• Fear that use of fertilizer to increase corn yield will acerbate nitrogen run-off and contribute to the size of the “dead zone” in the Gulf of Mexico.

• Sugarcane and cellulosic ethanol require less fertilizer than corn.

Other Countries as a Source of Ethanol• Ethanol from sugarcane can be

produced at costs significantly less than ethanol from corn.

• Over its production chain, ethanol from sugarcane emits much less carbon requiring less water.

• Brazil claims it can increase production by 3 billion gallons within two years and has built an export port at Santos.

• Significant unused capacity in the Caribbean, Central America and Columbia.