Navigant Research Blog

Bioenergy Seeks a Distribution Model

— February 1, 2012

The energy industry is particularly adept at taking raw material and turning it into products.  Whether producing heat, power, or fuel, the model has proven exceptionally efficient at moving highly concentrated and homogenous resources over long distances through intricate supply chains. 

For the oil industry, time and investment has allowed for the development of a multi-trillion dollar, asset rich supply chain that spans the globe.  Benefitting from staggering economies of scale and capitalizing on a century of experience, this distribution model supplies the lifeblood of modern civilization.  The bio-based economy, which aims to take the carbon trapped in biomass and supplant a portion of this fossil fuel monopoly on the back of renewable feedstocks, must turn this model on its head if it is to realize the ambitions of its most ardent proponents.

To date, bioenergy has gained traction mimicking the fossil fuel model, siphoning expanding volumes of concentrated commodity goods to produce power and fuel.  Today’s ethanol industry was built almost exclusively on corn in the U.S. and sugar cane in Brazil; biodiesel on rapeseed and palm oil in the EU and soy in the U.S.  For biopower, wood is the feedstock of choice.  These industries were essentially bolted onto existing supply chains. 

Until recently, this model has proven to be marginally profitable, largely supported by subsidies and production encouraged by ambitious government mandates.  Generally, biomass resources are consumed locally due in part to the logistical and economic inefficiencies associated with transporting over long distances.  But as more and more governments impose biofuel and biopower production mandates, and restrictions on international trade ease, demand for concentrated feedstock is quickly outstripping available supplies.  

Facing this reality, the bioenergy industry has been on an aggressive R&D campaign to expand its feedstock pool.  From switchgrass to miscanthus, camelina to jatropha, and macroalgae to microalgae, the proliferation of feedstocks suggests that the path to global scale will be anything but straight.  With a number of industrial biotechnology ventures aiming to tweak the characteristics of various feedstock strains, innovation is happening quickly.  Even so, as I discussed in Pike Research’s report, Biofuels Markets and Technologies, it will be at least a decade before large volumes of such varietals are widely available.     

While numerous reports suggest that there is more than enough biomass available globally to meet substantial demand from biopower and biofuels production, the costs associated with harvesting, aggregating, transporting, and processing many of these feedstocks have proven to be mostly prohibitive.  And this assumes sufficient acreage has been planted to support such efforts.  Even where feedstock tonnage is available, supply chains have proven far too immature to attract the scale of investment needed to keep pace with ambitious production mandates.

The degree of complexity associated with processing such a wide variety of feedstocks is of serious concern.  Differing characteristics suggest that all biomass will have to be processed locally before shipping further afield.  Whether this can be done economically remains to be seen. 

And so the bioenergy sector finds itself at a crossroads.  On one hand, it could continue expansion of proven conversion processes using commodity-based feedstocks (e.g. fermentation of corn starch and sugar cane for fuels or combustion of wood for power); on the other, double down on advanced feedstocks to unlock further growth in the biobased economy.  A decision either way will have long-term consequences, necessitating annual investment in the billions and sinking capital into new infrastructure.  

Based on our analysis, over the next decade growth of the biobased economy is likely to be supported by biomass hubs centered on existing commodity-based feedstocks as depicted in the figure below, from the International Energy Agency:

The model will help meet demand growth in international markets, but more robust growth is likely to be tempered by rising feedstock costs.  To compete head-to-head with fossil fuels, bioenergy will need to upend the traditional energy model and optimize a complex network of supply chains built around a slew of diverse, locally-grown feedstocks.


Kick-Starting the Bio-Based Economy

— January 30, 2012

Massive, varied, and intricately woven into the fabric of modern industrial society, the global chemical industry was valued at over $4 trillion in 2011, according to Pike Research’s Green Chemistry report.  The non-pharmaceutical chemicals industry in the United States is valued at around $700 billion per year.

The rise of bio-chemicals promises to transform that industry.  Bio-based chemicals and plastics – often referred to as bio-based products – are commercial or industrial products (other than food or feed) that are derived from biological products or biomass.  They serve as direct replacements for the building blocks used in petrochemical production.

At last week’s 3rd Annual Bio-based Chemicals Summit, in San Diego, upstart biomass innovators and stalwart petrochemical industry stakeholders converged to capitalize on opportunities in the emerging bio-based economy.  Excitement is high, but it is largely a derivative of unrealized potential in the biofuels industry.  That potential could be accelerated by federal action: this week, President Obama is expected to unveil his Blueprint for a Bioeconomy.  (The bio-chemical sector is covered under our Bioenergy Advisory Service, which was launched last week.)

The bio-based segment of chemical production looks poised for dramatic growth.  As discussed in our recent report, Biofuels Markets and Technologies, there has been a significant shift away from a primary emphasis on biofuels production towards high-value, low-volume bioproducts in the last couple of years.  Currently, the US Department of Agriculture (USDA) estimates that at least 20,000 bio-based products are currently being manufactured in North America.  USDA has certified dozens of products with a “bio-preferred” label, which denotes a high percentage of bio-based ingredients.

The shift in strategy away from biofuels and towards bio-based products aims to generate near-term revenue to facilitate broader scale-up efforts.  Ultimately, stakeholders envision a pervasive, renewable bio-based economy, comprising power, heat, fuel, and chemicals production derived from biomass resources.

The strategy flies in the face of existing biofuels policy in the United States, which one presenter in San Diego called “ass-backwards.”  From subsidies to loan guarantees to grants, the federal government has relied on a number of mechanisms to ramp up biofuels production.  Where there are bio-based chemical incentives, they are typically treated as complimentary to biofuels policy.

Shifting this paradigm is of chief concern among bioproduct advocates.  Bioproducts, the logic goes, are a natural stepping stone to biofuels production, which is tasked with supplanting an entrenched and highly profitable petroleum fuel industry.  The price tag for doing so is daunting – roughly $16 billion per year to meet the Renewable Fuels Standard (RFS) mandate.  Requiring less capital and feedstocks, widespread bioproducts production is viewed as a lower hurdle that can spearhead development in the utilization of biomass as a replacement to crude oil.

Despite its promise, the bioproducts market faces many challenging obstacles that will likely stifle growth in the United States over the near-term.  Three key issues are summarized briefly below:

  • First, EPA’s regulation of industrial chemicals under the Toxic Substances Control Act (TSCA) may lead to delays and increases in the time-to-market.  While bio-based chemicals are subject to review, many petroleum-derived chemicals were grandfathered in when the regulation came into force in the 1970s.
  • Second, limited access to feedstocks may confine production to areas with access to regional biomass supply chains, potentially stifling growth in the industry.  Even where feedstocks may be prevalent, cost remains a barrier to the commercialization of biobased production from advanced (non-commodity) feedstocks, such as camelina, jatropha, algae, and switchgrass.
  • Third, accessing capital for scale-up remains a difficult challenge.  Although higher-value bio-based products require less capacity than biofuels production, many investors are wary of building a first plant given the associated technology and market risks.  Without steel in the ground, it’s difficult for the industry to accurately assess the risks of subsequent investment.

Biofuels Rulings Shift Geopolitical Landscape

— January 17, 2012

A series of recent policy-related developments within the biofuels industry may have set the stage for what could prove to be a significant shift in biofuel geopolitics over the next decade. 

To recap: the European Court of Justice (ECJ) affirmed an earlier ruling that held the imposition of carbon taxes on flights touching down or taking off on EU soil did not infringe international law or the Open Skies Agreement; a U.S. District Court ruled that California’s Low Carbon Fuel Standard (LCFS) violates the U.S. Constitution; and the long-standing U.S. ethanol producer credit (aka “VEETC”) slipped quietly into the history books.

Where do these developments leave the industry?

While the inclusion of airline emissions in the EU’s ETS indicates that the buzz around aviation biofuels won’t fade anytime soon, the threat of costly trade wars by the United States and China in response to the ruling could put a crimp on the expansion of international biofuel trade flows.

Meanwhile, just as the expiration of VEETC eliminates an estimated $6 billion worth of annual subsidies to the ethanol industry, the lucrative California fuel market is (at least for now) once again open for Midwest ethanol producers, and likely at the expense of Brazilian ethanol (more on this below).

On the whole, the decisions are generally good for advanced biofuels and corn-based ethanol alike.

Aviation Biofuels Lack Production Volumes, Not Willing Buyers

In the case of advanced biofuels, the decision to uphold the carbon fee suggests that international carriers will not escape the added costs associated with doing business in Europe, adding further incentive to integrate carbon-cutting technologies.  As I discussed in an earlier blog, the combination of impending offset purchases and high oil prices appears to be forcing the aviation industry’s hand when it comes to fossil fuel alternatives, which has been signaling strong demand for sustainable advanced biofuels in recent years (note that first-generation biofuels lack the performance characteristics necessary to power commercial and military aircraft).

Although expected, the ruling is generally good news for energy feedstock producers looking to commercialize next generation feedstocks like camelina, jatropha, switchgrass, and algae, and seeking reliable markets and off-take contracts to offset the risk associated with growing relatively unknown crops.

But the advanced biofuels story is not about lack of demand, which suggests that the ECJ decision may actually not have much impact at all.  In the case of the aviation industry, rising oil prices mean that demand for biofuel alternatives is deep, durable, and widespread.  Even without the EU tax, assuming adequate supply, price parity with petroleum-based fuels, and sufficient distribution logistics, aviation fuel buyers would be clamoring to lock-up every last drop of advanced biofuels production.

Meanwhile, with the threat of trade wars from the United States and China among others, costly tariffs and other punitive measures could actually stifle biofuels development, an unintended consequence of the aviation tax.

Corn-based Ethanol Gets a Boost

Over on the other side of the pond, Judge Lawrence J. O’Neill’s December 29 decision declaring California’s carbon fuel standard unconstitutional represents a significant victory for Midwest corn ethanol producers (see my 2010 article on the LCFS and Green Federalism for more on the legal issues).  The California Air Resources Board’s (CARB) policy, introduced in 2007, aims for a reduction in the “life-cycle carbon intensity” of fuels consumed in the state by 10 percent over the next decade.  Due to corn ethanol’s inherent inefficiencies, the policy excludes most of the corn-ethanol produced in the United States from one of the world’s largest fuel markets.

Implementation of the policy had led to the peculiar situation where Midwest ethanol producers were shipping their offending product 6,000 miles to Brazil to make up for a shortfall in sugarcane ethanol production.  Midwest corn’s exclusion from California, coupled with a national blending wall policy, put a serious constraint on U.S. producers’ scale-up ambitions.  The ruling may put corn ethanol back in the domestic driver’s seat, at least for now.

Looking Beyond 2012

As discussed in Pike Research’s report, Biofuels Markets and Technologies, we expect the production of conventional biofuels – namely corn- and sugarcane-based ethanol – to increase steadily over the next decade as demand for alternatives to petroleum-based fuel outstrips advanced biofuels production volumes.  The corn-based ethanol industry appears to have established viability, and even without the VEETC, we foresee an increase in production as access to markets like California and the likely raising of U.S. blend walls (e.g. implementation of E15 or expansion of E85) opens up new opportunities for producers.

The key question raised by these decisions: where will the production go over the next decade?  As corn-based ethanol ventures beyond VEETC, the industry will need to fight for market access at home and abroad despite this most recent victory.  Meanwhile, the EU may be positioning itself as the primary market for advanced biofuels at the expense of U.S. and China.


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