Biodiesel production in the United States fell 61% from its 2008 high of 678 million gallons per year (MGY) to 263 MGY by January 2010.  Precipitated by the lapse of a key $1 per gallon producer’s tax credit that had enabled biodiesel producers to recoup the cost of production and offset feedstock costs, this drop forced producers to idle capacity and set off a wave of bankruptcies across the country.  Amidst the doom and gloom, the industry was largely written off as a peripheral player in EPA’s rejiggered Renewable Fuel Standard (RFS2).

Today, with the producer’s tax credit reinstated, biodiesel has become a lone bright spot under RFS2 and an early success among advanced biofuels.  Production capacity is expected to expand over the next few years. U.S. biodiesel production currently exceeds 1 billion gallons per year (BGY), thanks in part to expanding production of renewable diesel.  Assuming adequate feedstock access, Pike Research’s forecasts suggest that renewable diesel production could continue to surge in the United States over the near-term.

A Crude Replacement

To understand renewable diesel’s surge, it is important to note the difference between conventional biodiesel and renewable diesel.  Solazyme explains:

The molecules in biodiesel are primarily FAMEs (fatty acid methyl ester), usually obtained by transesterification. Renewable diesel is hydrocracked and refined, and is nearly molecularly indistinguishable from standard diesel that comes out of the pump.

A superior product to conventional biodiesel, renewable diesel is fully fungible with existing diesel infrastructure.  This means that it can be used in place of crude oil-based diesel without any corrosion of pipelines or loss of performance in existing engines.  This makes renewable diesel particularly attractive.  For investors and project developers, it means end-market access while sidestepping many of the regulations and approvals that have confined conventional biodiesel to “cottage” status in the United States.

Meanwhile, biodiesel’s past troubles demonstrate that subsidies matter in commodity-dependent industries.  In the high-volume fuel business, scale and low-cost production drive success.  Consumers have proven unwilling to pay premiums for “green” or “renewable” fuels, forcing producers to compete with petroleum-based diesel on price.  Biodiesel production collapsed in 2008 and 2009 – not because of any inherent technological shortcomings, but because it was crippled by wildly fluctuating feedstock costs and a simultaneous loss of subsidy support.

Largely dependent on soy and canola as feedstocks, North American producers manage thin profit margins while competing for these soft commodities on the open market.  Dramatic price increases are the industry’s Achilles heel.  Since tax credits help offset price surges, a lack of financial support can leave biodiesel producers with excess supply on the market and no way to recoup production costs.

This partly explains why fats, oils, and greases (FOGs) have been such a hot feedstock in recent years.  A waste byproduct of restaurants and animal processing, FOGs offer producers a relatively price-stable alternative insulated from the demand pressures of vegetable oils and other food-based feedstocks.  Although collecting used cooking grease from restaurants has proven logistically difficult at scale, chicken fat, pork lard, and beef tallow from the food processing industry have driven a mini-renaissance in renewable diesel production.  Dynamic Fuels, a joint venture between food processing giant, Tyson Foods, and Syntroleum, has demonstrated the efficacy of this approach at its 75 MGY capacity Geismar Plant in Louisiana.

Renewable Diesel Comes Cheap

Superior performance and FOGs are only part of renewable diesel’s recent success.  Renewable diesel has also led among peer advanced biofuel production pathways with competitive capital costs.  Based on public data, renewable diesel facilities are currently being built at between $2 and $4 per gallon, compared to more than $10 per gallon for many cellulosic and thermochemical-based pathways.  With petroleum refineries being sold for less than $0.10 per gallon, lower capital expense matters.

Renewable diesel facilities also boast larger average capacities, taking better advantage of economies of scale.  Neste Oil led the way globally with 200-plus MGY facilities in Rotterdam and Singapore.  Emerald Biofuels and Diamond Green Diesel are expected to join Dynamic Fuels with 85 MGY and 136 MGY capacity plants under construction, forming a renewable diesel corridor along the Mississippi River in Louisiana.

Although Pike Research’s report, Clean Diesel Vehicles, forecasts that clean diesel vehicles will capture a slightly higher percentage of new light and medium duty U.S. vehicle sales than hybrids, even with sustained growth in renewable diesel production, volumes are likely to still be a drop in the overall fuel bucket.  With diesel confined to niche vehicle fuel status, renewable diesel producers’ future is likely to be in the heavy duty vehicle and aviation biofuel markets.  As conversion technologies developed by Honeywell’s UOP and Eni have demonstrated, hydrotreatment of traditional biodiesel feedstocks like fat can produce a range of distillates like renewable diesel and aviation biofuels at competitive costs.  With costs and performance competitive for these applications, feedstock access will dictate how long the industry can replicate its early success.

The worst drought in half a century across the U.S. Midwest is having a devastating impact on agricultural production.  Conditions have deteriorated such that the USDA is forecasting the 2012-2013 harvest to be the lowest in 17 years, with corn prices up by more than 60% over the past two months.

Rising corn costs, a key ingredient in animal feed in the U.S., are expected to drive up the cost of meat, dairy, and eggs.  As a result, the corn starch ethanol industry – a favorite punching bag for just about everyone who doesn’t make a living off of it – finds itself in the crosshairs, with opposition building amongst a diverse group of domestic and international stakeholders.

Admittedly, all this seems to paint a grim picture for biofuels.  In our forthcoming Biorefinery report, Pike Research has slashed its U.S. corn starch ethanol production forecasts for 2012 and 2013.  At the same time, we maintained a strong growth projection for the industry in the U.S. and abroad over the next decade.  The drought matters, but its long-lasting effects will be small.

Corn Starch Ethanol Growth Plateaus

Long before the drought, momentum behind corn starch ethanol had deteriorated in the United States.  Currently accounting for more than 46% of global biofuels production, the industry expanded rapidly over the last decade, due in part to an annual subsidy worth $6 billion.  That subsidy was scrapped at the close of 2011, as industry proponents shifted their focus to expanding end-market access.

What’s more, under the EPA’s revised Renewable Fuel Standard (RFS2), the volume of ethanol derived from corn starch that can be blended into existing gasoline supplies is capped at 15 billion gallons starting in 2015.  This policy has already sent a clear market signal that corn starch ethanol’s future will be significantly restrained, thus diverting industry investment to advanced alternatives over the last few years.

As a result, the corn starch ethanol boom of the 2000s has given way to a next wave of advanced conversion technologies.  In our forthcoming Biorefinery report, we project that 50+ new advanced biorefineries – using non-food feedstocks – will be built annually in the U.S. by 2022.

Regulatory Backlash to Nowhere

Fearing a global food crisis caused by the U.S. drought, the United Nations called for an immediate cessation of government-mandated U.S. ethanol production, a directive that is likely to be repeated many times throughout the next decade.  On the domestic front, decreasing corn supplies have stoked debate about whether the RFS2 corn starch ethanol mandate should be scaled back.

Backlash in the U.S. and abroad is unlikely to materialize into regulatory action, though.  International organizations like the U.N. have no legal authority to compel the United States to adopt or abandon specific policies; meanwhile, the ethanol industry annually contributes more than $45 billion to U.S. GDP and helps ensure some semblance of global equilibrium between liquid fuel supply and demand.  Despite its shortcomings, corn starch ethanol is a mature industry with steel in the ground and an established track record of revenue generation.  Although RFS2 may be up against the ropes, Big Corn is a heavyweight in the Washington political arena, and ethanol is a primary beneficiary.

Consolidation Improves Industry Health

Ultimately, as my colleague, Alex Lauderbaugh, commented earlier on this blog, industry consolidation bodes well for advanced biofuels.  Companies like Gevo and Butamax, which are currently embroiled in a contentious patent dispute, are among those next generation biofuel companies particularly advantaged by the troubles of the first-generation ethanol industry.  These companies aim to retrofit existing biorefineries to produce isobutanol, a molecule that qualifies as an advanced biofuel under RFS2.

While the current drought will put a dent in U.S. ethanol production for 2012 and 2013, the biofuels industry will emerge leaner and better-positioned to expand both conventional and advanced production capacity over the next decade.  Although our recent forecasts show U.S. biorefinery infrastructure attracting nearly $60 billion over the next decade, only a fraction of this total is expected to be the result of new corn starch ethanol capacity.

Last month Coskata, a well-regarded advanced biofuel company profiled in our 2011 Biofuels Markets and Technologies report, announced that it will shelve plans to build a U.S. Department of Energy-backed commercial biomass-to-ethanol conversion facility in Alabama.  Instead, the company will focus on commercializing a natural gas-to-ethanol facility, aiming to ride the shale gas wave sweeping across the United States.

Natural gas has always featured prominently in Coskata’s long-term plans, but will now ride shotgun as the company seeks a financially viable road to commercialization.  For a segment of the biofuels industry still navigating the Valley of Death, Coskata’s lane-change shifts the commercialization landscape for advanced biofuels significantly.

The announcement is also a blow for gasification conversion platforms – a process that uses heat and, in some cases, a limited amount of oxygen to convert biomass into a synthesis gas (syngas) – and points to a more challenging road to scale-up for the advanced biofuels industry as a whole.

Race to Cheap Feedstock

Like other companies (e.g., Sundrop Fuels and Primus Green Energy) that sought to rely on abundant forest and agricultural residues for near-term fuels production, Coskata has found relatively inexpensive natural gas too hard to resist.

The pivot to natural gas does not necessarily suggest that biomass gasification is a non-starter from a technological standpoint, but rather that the current economics related to the biomass component appear to be mostly prohibitive.  Non-food biomass feedstocks and handling are typically the most expensive piece of advanced biofuel production facilities, and they often come with a great deal of supply risk.  Establishing logistically and economically viable supply chains and biomass handling infrastructure has remained a persistent barrier to advanced biofuels scale-up, as I discussed earlier on this blog.

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 this material have proven to be high.  The biomass sourcing and gasification challenge ultimately forced RangeFuels into bankruptcy last year.  For its part, Coskata acknowledges it is faced with challenging economics associated with using biomass as a raw resource.

Already partnered with French oil and gas giant Total, Coskata is among the most well-funded advanced biofuel companies in the field.  Meanwhile, producing syngas from natural gas is a well-established, commercially viable pathway.  Mitigating feedstock cost also lowers the barrier for advanced biorefineries, which, given the many associated risks – feedstock, technology, and policy – face significant financing challenges from the venture and private equity communities.

Ultimately, Coskata’s gamble is intended to eliminate a key component of risk for advanced biofuel projects and lower the barrier to commercial ethanol production from non-food feedstocks.

Biomass Syngas Woes

Although many advanced biofuel companies share the biomass gasification front-end step with Coskata, they differ in the technology used to convert the syngas to fuel or chemicals.  Given the steady drumbeat of biomass syngas defectors, it seems clear that biomass or gasification (or a combination of the two) is untenable in the near-term.

While the abandonment of the biomass gasification front-end component may be a short-term solution for getting steel in the ground, Coskata and other gasification start-ups could very well jump ship on the advanced biofuels bandwagon altogether if natural gas gains momentum as a transportation fuel in the United States and other key markets.  Currently, programs to convert natural gas to biofuel are not supported by federal mandates or loans.  And for Coskata, there is the additional challenge of accessing a saturated ethanol market in the U.S., unless it can find traction in nascent bio-based chemical and product markets.

Long-term, the natural gas pivot could fast-track a number of once promising advanced biofuels ventures to commercial success.  But with at least 1800 additional biorefineries required to meet global biofuels mandates alone by 2022, costing an estimated $580 billion, the apparent shelving of biomass syngas technologies points to a more constrained expansion of advanced biorefinery infrastructure over the next decade.

An airport may not seem like the most obvious platform to deploy sweeping smart energy upgrades.  Globally, airports represent only a fraction of the building infrastructure worldwide – accounting for around 1% of commercial square footage globally, according to Pike Research’s Global Building Stock Database report.

Integrated with sustainability measures, though, airports have the potential to champion energy efficiency and smart energy efforts worldwide while also boosting their host cities economically.  With large footprints and plenty of open space around runways, there are a number of low-hanging fruit opportunities that have yet to be exploited.

Take Berlin, which is counting on its new Berlin Brandenburg Airport Willy Brandt (BER) to give the city a major economic push while at the same time making it a vital transport hub.  The airport will incorporate sophisticated recycled heat and power systems to reduce operating costs, and draw on Brandenburg’s leadership in renewable energy innovation.  The new airport “is a crucial stage in Berlin’s return to becoming a global city,” Burkhard Kieker, CEO of the tourism organization visitBerlin, told CNBC.

Meanwhile New Songdo, in South Korea, provides a glimpse of the continued integration of smart cities and airports.  The project is squarely focused on streamlining economic activity between South Korea and lucrative markets in Japan, China, and further afield.  As an incentive to New Songdo’s developers, the Korean government has agreed to construct a 7-mile, 6-lane bridge from New Songdo City directly to Incheon International Airport and provide all utilities.  Incheon, for its part, aims to be carbon neutral by 2013 and plans to build a new eco-friendly passenger terminal that will source power from solar panel and wind turbine installations.

While airports may be viewed as platforms for smart energy integration, it’s the potential for highly visible demonstration projects that is particularly exciting.  Three key aspects of airports make them ideal platforms for integrating smart energy technologies:

Smart City Meets the Aerotropolis

In his book, Aerotropolis, John D. Kasarda explains, “Airports will shape business location and urban development in the 21st century as much as highways did in the 20th century, railroads in the 19th and seaports in the 18th.”  This is significant because airports have become an unavoidable exchange point along the supply chain for the global exchange of goods and services.  According to Kasarda, one-third of all products consumed are shipped by air.  He estimates that passenger and cargo service will double or triple over the next 20 years.  Airports have become hubs of economic activity unto themselves, as evidenced by the integration of high-end retail as well as artistic and recreational attractions.

The idea of an aerotropolis shares many parallels with the Smart City concept, which Pike Research has discussed in past reports and in its recent Sustainable Megacity webinar.  Multi-dimensional in form and function, smart cities aim to integrate clean technology into a cohesive ecosystem, improving the lives of residents while facilitating sustainable, economic growth.  Similarly, the aerotropolis is a complex ecosystem of technology, infrastructure, and functionality requiring 24/7 power and thermal conditioning.  Any disruption in power can lead to significant economic loss for airlines and for the businesses that reside onsite, and in the worst case frustrate international aid efforts in the event of a significant natural disaster.  These attributes make airports attractive targets for distributed generation projects.

Closed Ecosystem

One of the unique characteristics of airports is that they are closed systems.  This reduces the administrative complexity of integrating innovative solutions (less stakeholders to satisfy than a large city, for example), while also skirting many of the infrastructure challenges associated with clean technology deployments in the broader market.

As my colleague, Anissa Dehamna, explains in her recent blog on port policies, “Although vehicles (trains, trucks, ships) carry goods away from ports, the fleets and activities at a port itself remain within a fixed area.  This makes them ideal for alternative fuel fleets because infrastructure can be installed at a few key sites in a port and then entire fleets can be fueled.”  The same is true for airports.  Refueling of ground fleets, for example – baggage carts, fuel trucks, and tow tractors – is made easier by the fact that such vehicles operate around a hub where refueling can take place around the clock.

Concentration of Demand

Like ports, concentration of demand for things like fuel at airports overcomes many obstacles preventing the widespread scale-up of clean technology solutions like biofuels.  With biomass (feedstock) resources unevenly distributed, aggregation and processing can be prohibitively expensive.  For this reason, municipal solid waste (MSW) has been targeted by a number of companies as a potentially low-cost feedstock for biofuels.  Through advanced gasification pathways, these companies are aiming to produce jet fuel for commercial aviation partners in a growing number of projects worldwide, such as at London’s Heathrow and other sites internationally.

By 2015, fast-growing China is aiming to build 70 new airports and expand 100 of its current ones.  Growth in the Middle East, and to a lesser extent, Europe, will allow for sustainability and clean technology to be increasingly integrated into these facilities.  Whether greenfield builds, retrofits, or expansions of existing airports, smart airports have the potential to be showcase projects that can raise the profile of their host cities and accelerate the deployment of clean technologies.