Navigant Research Blog

Despite Evidence, Food vs. Fuel Fight Continues

— July 3, 2013

A recent study released by ABF Economics, an agriculture and biofuels economics consultancy, has found no direct correlation between the Renewable Fuels Standard (RFS) – and thus increased ethanol production ‑ and increasing food prices.  The finding backs up a 2010 World Bank study that cited higher oil prices as the leading cause of increased food prices globally, reversing the institution’s earlier stance that linked increases to global biofuel policies.

The ABF report displays the complexity of the multiple drivers behind increasing global food prices.  High oil prices, rapidly expanding global demand for agricultural commodities, speculation in commodity markets, and expansionary U.S. monetary policy all play a role.  Of particular interest to corn-based ethanol producers in the United States, food price inflation has slowed since 2007, the year the RFS was last revised.

Although the study lends some good juju to conventional biofuels, which have been at the center of the contentious “food vs. fuel” debate since 2008, the study is likely to have little impact on the current direction of biofuels scale-up efforts.

A ‘Crime Against Humanity’?

When Jean Ziegler, then the UN Special Rapporteur on the Right to Food, called biofuels a “crime against humanity” in late 2007, ethanol production in the United States and Brazil was coming off a record surge in production capacity.  Biodiesel consumption, meanwhile, had also begun taking off in Europe, with growing demand met by emerging biodiesel production hubs like Indonesia and Malaysia.  The ethanol and biodiesel industries found ample support in the policy agendas of then Presidents Bush (U.S.) and Lula (Brazil) as well as European Union efforts to increase the consumption of renewable fuels across member states.  Surging oil prices, meanwhile, thrust biofuels into the spotlight as an antidote to energy insecurity.

But reports published in 2008 by Oxfam and World Bank added fodder to the backlash, linking biofuels to the steep increase in global food prices in 2007-2008.  Although OECD and others have taken a more cautious stance on the connection between biofuels and higher food prices, the debate has continued to simmer.  A policy shift away from conventional biofuels in favor of next generation alternatives derived from non-food commodity crops like cellulosic materials, algae, and jatropha, among others, was intended to spark a renaissance in biofuels scale-up, but, at least so far, this vision has failed to materialize.  Forecasts in Navigant Research’s recently published report, Market Data: Biofuels, reflect this reality.

Mind the Ceiling

Among the most lasting impacts of the food vs. fuel debate on the global biofuels industry is the integration of sustainability standards into public policy.  The RFS, the foundation of the U.S. biofuels regime, calls for 36 billion gallons of production by 2022, but caps conventional ethanol production at 15 billion gallons while imposing controversial greenhouse gas accounting thresholds for various fuel pathways.  In the European Union, meanwhile, the pendulum has swung decisively in favor of a sustainability regime that seeks to drive investment away from commodity crop-derived biofuels toward next generation non-food alternatives.  Thanks to greater efficiencies inherent in the sugarcane value chain, Brazil currently maintains the largest sustainable biofuel industry in the world, but has failed to skirt the global biofuels backlash.

Despite evidence like the ABF study, it’s unlikely that sustainability “safeguards” will be discarded as political and investment momentum continues to coalesce around next-generation feedstocks, technologies, and conversion pathways.  Companies like Novozymes (enzymes) and EdenQ (Cellunator), which have introduced product lines over the past year that improve ethanol production yields from corn, will likely see the greatest benefit from an improving food vs. fuel calculus for commodity grains.  Even so, expansion in commodity grain- and oil-based biofuels is nearing its economic, ecological, and political ceiling – regardless of which side of the debate the food vs. fuel evidence settles.


Climate Plan Promises Brighter Future for U.S. CHP Market

— June 28, 2013

President Obama’s climate change speech this past week signaled a revamped effort by the Administration to tackle emissions from industrial facilities.   To date, the effort by the Environmental Protection Agency (EPA) to set regulations targeting boiler emissions from new coal plants and industrial facilities has carried the Administration’s climate change torch.   But the President’s speech signaled a willingness to use broad executive authority to clamp down on existing facilities, expanding opportunities for a combined heat and power (CHP) industry that has seen a sharp drop off in new growth from its PURPA heyday.

Achieving greater levels of efficiency by simultaneously generating electricity and useful heat, CHP allows facility owners to reduce their fuel expenses while also cutting emissions.   According to the U.S.  CHP database, maintained by ICF International on behalf of Oak Ridge National Lab (ORNL) and the Department of Energy (DOE), 82 gigawatts (GW) of CHP capacity was installed across the country by mid-2011.  Industrial facilities represented 88% of total capacity, with refineries processing petroleum and manufacturing chemicals accounting for nearly 40 GW.

Although hosting a relatively broad base of CHP deployments across a number of applications, the U.S. CHP industry has room to run as measured against leading markets like Denmark, the Netherlands, and Finland.  Installed CHP capacity accounts for  around 30% of total generation capacity in these countries; CHP represents just 8% of generation capacity in the U.S.

Drumbeat Continues

Presaging Obama’s double-down on climate change, a drumbeat of executive orders and state-level commitments over the past 12 months has renewed interest in exploiting CHP opportunities across the U.S.

In August 2012 Obama issued an executive order that called for 40 GW of new CHP capacity to be deployed in the industrial sector.  Although non-binding, the effort seeks to stimulate $40-$50 billion in new capital investment.  A corollary executive order directs federal facilities to use CHP when life-cycle cost analysis indicates energy-reduction goals will be met.  Meanwhile, a surge in natural gas production, along with the stabilizing of Henry Hub prices – a useful proxy for tracking national movements in the price of NG – is expanding the field of potential viable projects.


In the oil- and gas-rich state of Texas, the CHP industry has thrived despite low electricity rates and narrow spark spreads (the difference between the delivered electricity price and the total cost to generate CHP, and a widely used measure of CHP viability).  The state accounts for 17 GW of installed CHP capacity, or 21% of total U.S.  capacity.  In Texas, home to 5% of the world’s refining capacity – facilities that produce commodity products and have high around-the-clock thermal load demand – efficiency plays a key role in driving profitability.

Recent bills signed into law by Texas Governor Rick Perry supporting CHP technology dovetail with the Obama Administration’s broader climate change agenda.  The bill removes regulatory barriers and improves the business climate for cogeneration facilities in Texas.

For the U.S. as a whole, the transition away from coal-based power generation is opening up opportunities for technologies like CHP to expand power generation capacity while reducing demand-side pressure on the grid.  After annual capacity growth declined 92%, from an average 2,700 MW from 2000 to 2004 to 207 MW a year from 2005 to 2010, the CHP market appears to be responding to positive signals.


Facing an Uncertain Future, Advanced Biofuels Seek New Markets

— April 18, 2013

With a debate over the efficacy of the U.S.’ Renewable Fuel Standard (RFS) reopened on Capitol Hill in Washington and policymakers in Brussels wrestling with conflicting reports about whether biofuels impact the environment and global food prices, it’s just another day in the in the office for the global biofuels industry.  While the questions remain the same, the temperature of the debate feels different this time around.

Last year, severe drought prompted the UN to urge U.S. policymakers to scale back or waive mandated volumes of corn starch ethanol production.  In January, a U.S. federal appeals court ruled in favor of the American Petroleum Institute (API), arguing that the Environmental Protection Agency (EPA) could not require refiners to buy credits for cellulosic fuel since there has yet to be any gallons produced commercially and at scale.

Meanwhile, across the pond, European policymakers are struggling to align alternative fuel ambitions with strict sustainability standards.  Progress has been clouded by recent reports complicating an already contentious debate over the land use impacts of increased biofuels production.  Clarity on the issue appears increasingly elusive.

These events have cast considerable doubt on the future of biofuels production in the United States and the EU, the first and third largest markets for biofuels respectively.  Current production offsets just 4% to 5% of petroleum consumption despite outsized ambitions from end-users like commercial airlines, defense, and ground transportation.  The mandates have been likened to filling a swimming pool with a thimble.

Shifting Gears

At the core of biofuel ambitions over the next decade is the commercialization of a host of conversion technologies targeting everything from agricultural residues to algae.  While conventional biofuels like ethanol and biodiesel derived from commodity crops are widely commercialized, advanced biofuels are still clawing their way toward commercial relevance.

First-of-kind biorefineries have come online in the past year with dozens more currently under construction, but the process has been slow, expensive, and arduous.  Navigant Research’s recently published study forecasts that just 9 billion gallons of advanced biofuel will be produced globally by 2020, a far cry from the lofty targets set by current mandates.

If the climate of uncertainty flowing from developments in Washington and Brussels persists, a mass exodus among advanced biofuel interests away from fuels production and toward bio-based products can be expected.  This migration is already several years in the making, but up to this point, most stakeholders have been content to hedge their bets in multiple markets.

Currently, the bio-based products market offers shorter runways to revenue than the fuels market.   In the low-margin, high-volume business of fuel production, profitability is predicated on economies of scale, which in many cases, are still a decade away for market interests.

By comparison, the bio-products market offers lucrative interests in high-margin, low-volume markets like food, feed, pharmaceuticals, chemicals, polymers, and paper.  Algae players are a key constituent in this group and are chasing high-value omega-3 fatty acid production.  Selling north of $2,000 a ton, omega-3s are a popular nutritional supplement, made more so by the increasing cost of seafood products due to overfishing.  By comparison, biofuels generate anywhere from $200 to $500 per ton.

The consequence of all of this is that advanced biofuels production at scale (for the sake of argument, greater than 7.5 billion gallons annually, or 1% of global petroleum fuel consumption) remains perpetually stuck on the horizon.  This will likely force policymakers to dial back biofuel ambitions to assuage public outcry for support of “snake oil.”  With Washington and Brussels jumping headfirst back into the debate, one wonders whether the biofuels industry has already reached this point.  Nevertheless, bio-based products and materials could provide a key stepping stone to advanced biofuels production profitability at scale.


Feedstock Shortages Fuel Pellet Boom

— April 12, 2013

Facing unresolved feedstock challenges – including access, cost, and security of supply – the global biomass power market is teetering on the verge of obsolescence.  Combined with controversy around emissions, changes in subsidy programs, and a boom in natural gas power generation, an increasing number of projects have  been cancelled in recent months across the United States and Europe.  Meanwhile, a wave of biomass pellet plant installments may presage an industry boom – albeit much later than otherwise expected.

In the United Kingdom alone, roughly one-third of announced biomass power projects across the country have been abandoned in recent years.  Many of these were dedicated facilities, ranging from 100 MW to 300 MW of capacity.

The Achilles heel of biomass power production is sourcing an adequate supply of feedstock at a reasonable cost.  Biopower’s problem is not so much a function of scarcity – biomass is ubiquitous and currently the fourth largest energy resource worldwide after coal, oil, and natural gas – but it’s an inefficient source of carbon relative to fossil fuels.  Unlike coal, oil, and natural gas, biomass lacks density in two ways.  First, it’s scattered across large swaths of land (such as forest thinnings from national forests) and must be collected and aggregated.  Second, its energy density is three-fifths that of coal, adding a premium to the cost of transporting volumes from source to customer.

Competing against low-price fossil fuels like coal and natural gas, biomass feedstocks can’t afford to rack up costs associated with harvesting, aggregating, processing, and transportation without heavy subsidization.  Where coal producers capture efficiency through economies of scale and an international transport infrastructure, biomass production remains, at best, a cottage-based market.

Pellet Pull

For these reasons, the financial viability of biomass power falls off a cliff when resources are sourced outside of a 50-mile radius, making larger projects with bigger biomass appetites much riskier.  These projects typically bank on a concentrated local source combined with the import of biomass pellets from international suppliers, a market still in its infancy.

Today, wood pellets are one of the largest internationally traded solid biomass commodities used specifically for energy purposes, but they represent only a fraction of the scale of the global coal trade.  Biomass pellets have lower moisture content than raw biomass, which decreases fuel degradation during the storage period, increases energy density, and creates a more homogeneous composition, all of which translate to higher energy efficiency during combustion.

Growth in biomass power generation is dependent upon the expansion in the international trade of wood pellets over the next decade – principally from Canada, the Southern United States, Russia, and Baltic region of Europe to the European Union and Asia Pacific.  Responding to the sudden surge in the global trade of industrial biomass pellets, Energy Exchange APX-ENDEX was launched in November 2011, becoming the world’s first dedicated exchange for biomass renewable energy.  The exchange is expected to bring more transparency to the market by adopting several certification schemes for industrial wood pellets already used in today’s bilateral contracts in order to ensure that the wood pellets originate from sustainable wood sources.

With the trade in industrial pellets still in its infancy, many biomass power plant operators like RWE in Germany and Drax Group in the United Kingdom have taken matters into their own hands, investing in upstream pelleting facilities outside their domestic markets.  Many oil majors – from Conoco to Chevron – are getting in on the action as well.  Although the biomass pellet market is heating up, it will be 5 to 10 years before biomass power generation picks up steam.


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