Navigant Research Blog

Distributed Biogas Gains Footing in Revised Standard

— September 8, 2014

In July, the U.S. Environmental Protection Agency (EPA) finalized an extension of the beleaguered Renewable Fuel Standard (RFS2) to carve out a pathway for renewable biogas to qualify as a cellulosic fuel.  Expanding the scope of the RFS2 beyond liquid transportation markets could have promising implications for the slow-to-emerge cellulosic biofuels market.

Under the RFS2, the EPA requires domestic refiners and importers of transportation fuel to blend increasing volumes of renewable fuels into conventional gasoline and diesel.  The EPA sets the renewable volume obligations for various renewable fuels every year, and regulated entities must demonstrate their compliance by acquiring and retiring renewable identification numbers (RINs), which are publicly traded credits that fluctuate in value.

RINs provide an important financial incentive for the nascent advanced biofuels industry, helping these fuels compete with conventional fuels in the marketplace.  Cellulosic biofuels, a fuel pathway slated to deliver the greatest volume under the rule, have fallen short of expectations every year due to less capacity being built than otherwise predicted.

Expanding Universe

Under the expanded rules, biogas-derived compressed natural gas (CNG), liquefied natural gas (LNG), and electricity used to power electric vehicles would qualify for cellulosic RINs.  The final rule is likely to lead to a substantial increase in the production of cellulosic biofuels and create new markets for materials previously regarded as waste.  Opportunities for upgrading biogas to so-called bioCNG or bioLNG – also referred to as biomethane or renewable biogas and already used in fleet applications like garbage trucks and municipal buses – currently show high promise for biogas-to-transportation fuel.

As outlined in the U.S. government’s Biogas Opportunities Roadmap report released last month, biogas has broad applications across a range of diverse industries.  Livestock farms, industrial wastewater treatment facilities, industrial food processing facilities, commercial buildings and institutions, and landfills all produce biogas – either directly or in the form of waste feedstocks that can be converted into biogas.  According to Navigant Research’s Renewable Biogas report, the biogas capture market across the United States is expected to reach more than $4 billion in annual revenue by 2020.

All in all, biogas remains a vastly underutilized resource across the United States when compared to countries like Germany that have used a range of incentives to drive investment, particularly in agricultural applications.

The Curse of Versatility

The challenge for biogas in the United States is that to some it’s a fuel source, to others a waste mitigation strategy, and to others a distributed generation resource.  That makes it difficult to tailor policies that address all potential opportunities.  Adding to the confusion, distributed biogas is often treated by utilities as a strategic resource alongside solar PV and small wind, when in fact it can be utilized in the form of a traditional generator set, a fuel cell, or sometimes concurrently, in combined heat and power configurations.

With these issues in mind, the EPA’s final rule relating to biogas introduced a relatively novel and subtle feature for renewable energy markets: incentive flexibility.  Under the rule, the EPA not only expands the scope of RFS2, but allows the same amount of renewable electricity derived from biogas to give rise to RINs for transportation applications and renewable energy credits for electricity generation, while also qualifying for incentives under state renewable portfolio standards.

This potential for multiple revenue streams unlocks the versatility of biogas as a resource and is likely to attract new investment in the U.S. biogas market.

 

Going Small, Gas-to-Liquids Finds a Niche

— July 2, 2014

Typically, converting gaseous fuels like natural gas to liquids requires high upfront capital investment and substantial energy inputs to maintain operations and results in significant energy loss.  Despite these challenges, smaller-scale gas-to-liquid (GTL) deals have increased sharply of late.  They include a joint development project involving Waste Management, NRG Energy, Velocys, and Ventech to develop a platform than can convert landfill gas to renewable fuels and chemicals.

To date, GTL projects have been built in only the most extreme cases – where macroeconomic trends are especially favorable or when liquid fuels are unavailable (e.g., Germany during World War II and South Africa under apartheid, both of which relied on coal-to-liquid conversion).

These narrow circumstances explain why just five GTL facilities are in operation globally today, despite GTL technologies being proven commercially.  The most high-profile project, Shell’s Pearl Plant in Qatar, commissioned in 2011, cost a whopping $18 billion to construct, or about $8 per gallon of annual production capacity.  With such a high price tag, the project’s return on investment (ROI) hinges on a free supply of natural gas feedstock and a per-barrel oil price in excess of $40 (brent crude was trading at about $110 per barrel just before ISIS’ recent advance in Iraq).  Meanwhile, Shell recently cancelled another high-profile GTL project slated to be built in Louisiana, citing high estimated capital costs and market uncertainty regarding natural gas and petroleum product prices.  In short, commodity prices matter.

Modular Mode

In light of this limited market uptake, the recent surge of smaller-scale GTL projects is unexpected.  Targeting stranded or associated gas resources, however, these systems are able to skirt many of the macroeconomic barriers to the large-scale GTL projects described above.

Usually wasted or unused, stranded or associated gas presents a number of financial challenges to bring to market using conventional infrastructure.  In other words, the problem lies not in getting the gas out of the ground, but in finding a practical, economical, and efficient way of moving it to market.

In the case of stranded gas – gas fields located near local markets that are usually too small or in places too distant from industrialized markets – smaller-scale GTL processing can convert natural gas into a liquid product that is cheaper to transport.  In associated gas applications, where gas is either flared or injected into oilfields to maximize recovery, smaller-scale GTL can unlock new revenue streams.

Smaller and Safer

In both cases, smaller-scale GTL conversion has significant advantages over conventional infrastructure.  Shrinking the hardware allows greater tailoring of systems to the local resource supply and reduced construction costs.  The modularity of GTL systems allows capital to be allocated in phases, reducing risk to project investors.  And because the modules and reactors are designed only once and then manufactured many times, much of the plant can be standardized and shop-fabricated in skid-mounted modules.

The opportunity for smaller-scale GTL remains significant.  Stranded and associated gas is relatively abundant (estimated at 40%-60% of the world’s proven gas reserves).  One of the more exciting opportunities that has gained attention more recently is the pairing of frontend conversion technologies for processing abundantly available solid biomass and waste into synthetic gas (or syngas) which unlocks many more opportunities globally for smaller GTL platforms.  Navigant Research’s recently published Smart Waste report forecasts that annual revenue from municipal solid waste energy recovery will increase to $6.5 billion worldwide by 2023, due in part to the expansion of emerging technologies like small-scale GTL.

 

Gasification Projects Drive Smart Waste Evolution

— June 27, 2014

As the waste industry slowly evolves toward more integrated solutions for municipal solid waste (MSW) management, increasing volumes of trash are now being handled by so-called smart technologies.  Waste-to-fuels (W2F) – a subsegment within the energy recovery market that converts MSW into finished fuels, like ethanol and jet fuel – has become especially active, with advanced gasification technologies reaching important commercial milestones.

Enerkem, a Canadian company that recently gained first-mover status with the opening of a 10 million gallon per year (MGY) waste-to-methanol plant in Edmonton last month, is the first pure-play W2F project in development to reach the commissioning stage.  The company plans to add an advanced ethanol module later this year.  In April, British Airways and U.S.-based Solena Fuels (which are jointly developing GreenSky London, a 19 MGY facility converting landfill waste into jet fuel, bionaptha, and renewable energy) announced the selection of a site to commence commercial development and commissioning by 2017.

Faced with high capital costs, both projects depend on the low cost and widespread availability of waste as a feedstock to drive initial viability and future expansion.

Landfilling

According to World Bank estimates, nearly 1.5 billion tons of MSW is generated globally each year.  This total is expanding rapidly due to urbanization and rising levels of affluence in developing economies across Asia Pacific and Africa.

While 16% of MSW generated globally is never collected in the first place, and 27% is diverted for either material or energy recovery, more than 50% is still dumped in landfills, according to Navigant Research estimates.  Although there is plenty of trash to go around for higher value applications like W2F, market development depends on tightening regulations driving landfill diversion, since landfilling is typically the lowest-cost solution in areas where waste is actively managed.

In Western Europe, and to a lesser extent, North America, where waste diversion is gaining the most traction, momentum appears to be increasingly on the side of emerging companies like Enerkem and Solena Fuels commercializing breakthrough energy recovery conversion technologies.

Smart Waste

As forecast in Navigant Research’s report, Smart Waste, annual revenue in the smart MSW technology market – of which, energy recovery is a key subsegment – is expected to more than double from $2.3 billion in 2014 to $6.4 billion in 2023.  Annual revenue from smart MSW technologies is expected to surpass conventional technologies by 2019.

Annual MSW Management Revenue by Technology Type, World Markets: 2014-2023

 

(Source: Navigant Research)

While Waste Management in North America remains an active investor in Enerkem and other early-stage companies commercializing smart MSW technologies and solutions, traditional waste haulers face a revenue decline similar to that faced by traditional electric utilities.  As more MSW is targeted as a strategic feedstock, there is less trash for waste haulers to manage, resulting in less and less revenue.

Despite this evolution, companies like Enerkem and Solena Fuels still have a long road ahead.  These companies must compete for municipal contracts – in most cases, with traditional waste haulers – often pitting the high capital cost of an advanced energy conversion facility against landfilling on one hand and relatively inexpensive fossil fuel refineries on the other.

Enerkem’s Edmonton facility is estimated to cost $7.50 per gallon of production capacity to build.  GreenSky London, which incorporates the Fischer-Tropsch gasification process to convert MSW to synthetic gas (syngas), is expected to cost more than $14.00 per gallon of production capacity.  While the initial capital cost of such facilities is expected to decline over time, both platforms will depend on multiple revenue streams to be commercially viable.

 

Lufthansa Leads Biofuels Hunt

— May 6, 2014

Lufthansa announced last month that it has teamed up with U.S.-based Gevo to research the blending of alcohol-to-jet (ATJ) fuel with conventional kerosene for use in commercial flights.  While it’s not surprising that ATJ will be on the fast track for testing and ASTM approval for use in commercial operations, Lufthansa’s support of the ATJ biojet pathway demonstrates that it’s conducting an intensive search for a viable advanced biofuels conversion pathway.

Lufthansa is among the leading airlines that have sought partnerships with emerging companies at the vanguard of biofuels innovation.  On paper, the German carrier accounts for more than 40% of the biofuels purchased by commercial airlines since 2008.  It was the first commercial carrier to operate biofuels-powered flights, launching an initiative to fly more than 1,000 commercial flights between Hamburg and Frankfurt in 2011 powered by biofuels derived from jatropha, camelina, and animal fats.

Succumbed

In some respects, Lufthansa has become the canary in the aviation biofuels coal mine.  It abandoned the Hamburg-Frankfurt route in 2011, citing difficulty finding a sufficient volume of biofuels.  The move presaged a dramatic decline from 31,000 biofuels miles flown in 2012 by commercial carriers to just 3,000 in 2013.

Commercial Airline Biofuels Miles Flown by Flight Type, World Markets: 2008-2013

 

(Source: Navigant Research)

Among the industries actively seeking alternative liquid biofuels, the aviation sector has been one of the most aggressive in pursuing its sustainability goals.  While laudable, this significantly narrows the potential feedstock pool for an industry anxious to lower operating costs, hedge against future oil price spikes, and improve its carbon footprint.  The drop-off in biofuels miles flown reflects the challenge of pairing a low-cost conversion technology with an abundant and sustainable feedstock.

At least 75% of global biofuels production today is derived from just two feedstocks: cornstarch in the United States and sugarcane in Brazil.  The remaining share is produced from other food-based feedstocks like soy, canola, palm, and coarse grains converted to first-generation ethanol and biodiesel.  Despite a relative abundance, both ethanol and biodiesel lack key performance attributes of kerosene-based jet fuel, making them nonstarters for use in jet engines.

Just two fuel pathways are approved for commercial use in the aviation industry today.  The first, FT-SPK, is a gasification and catalytic process (Fischer-Tropsch) that was put into use by the Nazis during World War II and in South Africa under apartheid.  The second, HEFA (or Bio-SPK), involves hydrotreating oils derived from oil-bearing plants, animal fats, and used cooking grease.  This latter pathway has supplied nearly 100% of the fuel burned in the nearly 600,000 miles of biofuels-fueled flights that have occurred since 2008.

A disproportionate share of the biofuels consumed by airlines during this period has been produced from used cooking grease, a feedstock typically discarded as waste.  While produced in abundance in urban areas, the relative volume of used cooking grease represents just a drop in the bucket compared to the nearly 90 billion gallons of kerosene-based jet fuel consumed annually by commercial airlines and militaries around the world.  It was never the silver bullet envisioned by the aviation industry for offsetting petroleum use.

The Search Continues

While many commercial carriers remained focused on participating in demonstration flights and establishing commercial routes, Lufthansa refocused its efforts on scouring the globe for technologies with the potential to operate at an industrial scale.

In 2012, the airline inked a deal with Australia-based Algae.Tec to build a large facility in Europe based on a modular design that uses shipping containers.  Although the algae industry remains an outlier in the crowded advanced biofuels technology landscape, along the algae frontier, Algae.Tec is an even greater outlier with a potentially game-changing platform.

Lufthansa’s recent deal with Gevo to pursue ATJ offers the airline another potential pathway to industrial-scale biojet production based on fermentation.  With the lion’s share of global biorefinery infrastructure based on fermentation platforms, Gevo is pursuing a capital-light approach based on the retrofitting of existing conventional ethanol refineries.  Assuming ASTM approval of ATJ, Navigant Research’s recent Aviation and Marine Biofuels report projects that 180 million gallons of ATJ will be produced globally by 2024.

 

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