Navigant Research Blog

Boeing Bets on Green Diesel

— January 31, 2014

The race for aviation biofuels has accelerated in the last couple of years.  More than 1,500 individual flights at least partially powered by biofuels have occurred since Virgin Atlantic powered the first commercial jumbo jet in 2008 with a blend of conventional jet fuel and biofuel derived from babassu and coconut oil.  More than 30 commercial carriers have flown with a blend of biofuels over this period.  Most recently, Boeing announced it would pursue ASTM certification for use of renewable green diesel for use in commercial aviation.

Despite aviation biofuels’ broad appeal among key commercial and military stakeholders, limited production and high costs have remained challenging barriers to the 3% to 6% share of global jet fuel consumption that the International Air Transport Association (IATA) believes is achievable by 2020.

Derived from diverse resources like algae, camelina, jatropha, and used cooking oil, the current pool of aviation biofuels is shallow due in part to a lack of production capacity – at least as measured against prevailing expectations just half a decade ago.  This is why Boeing’s recent announcement to pursue green diesel certification could change the game.  For the aviation industry, certification would enable green diesel to be integrated into existing supply chains at a cost that is competitive with petroleum-based jet fuel.

Plenty of Capacity

More chemically similar to fossil-based diesel than conventional biodiesel, green (or renewable) diesel’s advantage over incumbent biofuels is its compatibility with existing infrastructure.  This means that it can be dropped into existing pipelines, storage tanks, and most importantly, existing engine hardware.  This avoids the substantial costs associated with building out additional infrastructure, which conventional biodiesel and ethanol require – a bottleneck that has stymied conventional biofuels’ penetration into the global fuels supply chain.

Another advantage of green diesel relative to other advanced biofuels is availability.  In 2013, though green diesel contributed to just 2.7% of the total gallons of biofuels produced worldwide, it made up more than 95% of the advanced biofuels pool.  A recent International Energy Agency (IEA) report called green diesel the most successful advanced biofuels pathway with respect to scaling up production capacity.  According to estimates compiled for Navigant Research’s Industrial Biorefineries report, there is currently more than 900 million gallons of green diesel production capacity deployed across the United States, Europe, and Singapore.

Just two pathways – Bio-SPK and FT-SPK – have achieved ASTM certification for use as jet fuel.  At their current stage of development, both pathways have proven to be prohibitively expensive to use on a commercial basis.  Alaska Air and Horizon paid $17 per gallon in 2011; the U.S. Navy, meanwhile, has paid between $20 and $65 per gallon for advanced biofuels used in various non-combat operations.  While it is important to note that these prices are for relatively small quantities used primarily for testing, with green diesel’s wholesale cost in the range of $3 per gallon, it is currently available at price parity with petroleum-based jet fuel.  Jet-A wholesale costs are currently just under $3 per gallon.

Flight Path

Although ASTM approval for green diesel would be a boon for advanced biofuels and the aviation industry in the near term, the availability of sustainable feedstock to support a mature industry remains a hotly debated issue.

At best, green diesel certification provides a bridge to more scalable thermochemical conversion pathways for aviation biofuels: fuels derived from large-scale algae production, or more likely, the realization of industrial-scale non-food oil production from promising feedstocks like jatropha or camelina.  At worst, it buys the aviation industry a few more years to build on the difficult progress that has already been achieved.

While Boeing and commercial airlines are among the winners if green diesel certification goes through in the near term, refining stalwarts like Finland-based Neste Oil, Honeywell’s UOP, and Valero are also well-positioned to ride a surge in investor activity.

 

As Demand Falters, Biodiesel Industry Chases Power Generation Applications

— January 30, 2014

In the next few months, the Argentinian government is likely to impose a 10% biodiesel blending requirement for power generation, alongside an increase in biodiesel blending in its transportation sector from 8% to 10%.  Publicly, the announcement is hailed as an effort to boost the nation’s rapidly expanding biofuels industry while increasing the use of green fuels.  In reality, it represents a desperate pivot for the fast-rising biodiesel exporter to ramp up domestic consumption of biodiesel production as global export markets collapse.

Although demand for its use as a transportation fuel in recent years has risen, biodiesel is economically feasible for power generation in only the narrowest of circumstances.  The use of liquid biofuels in Argentina’s power generation fleet, however, is another ominous signal of the shrinking market for biodiesel exports.  Despite efforts like those in Argentina, globally, biodiesel’s role in power generation applications is likely to remain limited.

Ongoing debate in the European Commission (EC) has resulted in an increasingly conservative outlook for the biofuels market in the EU.  Driven by efforts to protect market share for steadily increasing domestic production and to sidestep difficult sustainability issues related to foreign producers, the EC has reevaluated liquid biofuels’ role in the EU transport sector several times.  The resulting policy uncertainty has led to a dramatic slowdown in biofuel project investment across the EU, according to a recent report from Agra CEAS Consulting, a joint venture between Imperial College London and Informa Plc.

WTO Complaints

Corresponding legislation to impose antidumping tariffs on Argentina and other biodiesel exporting nations has caused exports from those countries to plummet in the past year.  According to the Wall Street Journal, the taxes on Argentine biodiesel range from €217 to €246 ($298-$336) per metric ton, “having the direct and immediate effect of closing the European market to Argentine biodiesel and affecting exports worth over $1.5 billion per year,” according to the country’s foreign ministry.

In mid-December, Argentina’s government filed a formal complaint to the World Trade Organization (WTO), challenging the imposition of 5-year antidumping tariffs.  The complaint is the third from the leading biodiesel producer.

Argentina has relied on the EU for 90% of its biodiesel sales, worth nearly $2 billion in revenue in 2012.  Built on the back of a highly efficient, modern, and large-scale soy industry, Argentina’s biodiesel output increased nearly 14-fold between 2007 and 2012.  With heavy investment resulting in a fleet of production plants already in the ground, the government is anxious to find new markets for the nearly 1 billion gallons of production capacity in place if the antidumping tariffs are upheld.

Plan B

Faced with the prospect of high production capacity and no outlet for its products, Argentina is trying to force excess biodiesel into its power generation sector.  This may not be the worst outcome, according to a 2009 study published in Science in which the use of biofuels to produce electricity to power electric cars was deemed to be a more efficient use of farmland than producing liquid biofuels.

But while the connection between electrons derived from biodiesel-based power generation and their end-use in electric vehicles remains tenuous, the direct use of biodiesel in generator sets (gensets) is not.  This makes crediting such use – such as in Renewable Portfolio Standards in the United States  – more straightforward.  Since many developing economies that rely heavily on refined petroleum products for primary energy use face rising diesel costs, alternatives such as biodiesel produced from domestic resources may provide an inexpensive alternative for gensets used for distributed power generation.

Still, Argentina’s power generation sector is not lacking in raw inputs.  According to the Energy Information Administration, 93% of domestic generation comes from hydroelectricity and natural gas.  Estimates suggest that the country holds the third-largest shale gas reserves in the world, behind the United States and China.  In a country flush with resources, the channeling of biodiesel into Argentina’s power generation sector is likely to be a temporary stopgap measure to soak up fuel from the country’s growing production base.

For the time being, Argentina’s industry may be stuck between a rock and hard place.  As discussed in Navigant Research’s report, Market Data: Biofuels, the EU’s biofuel broodings are likely to result in tepid demand for imports in the coming years.  Meanwhile, Argentina’s heavy reliance on soy-based feedstock means that sustainability issues may hamper longer-term expansion into emerging end-markets, such as aviation biofuels.



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Bioports Emerge as Runway for Aviation Biofuels

— December 6, 2013

In spite of a mountain of uncertainty facing the biofuels industry, aviation biofuels continue to gain momentum.  Unlike the incumbent conventional biofuels industry, the entirety of the aviation value chain is readying for takeoff as the industry marches toward broad-scale commercialization.

Recent industry headlines demonstrate a high-level of coordination among stakeholders.

In sugarcane-rich Brazil, for example, bargain airline GOL Linhas Aereas Intelligentes recently announced a partnership with Boeing and Amyris, an emerging player in the advanced bio-based economy, to use sustainable aviation biofuel on 200 flights during the World Cup in 2014 and in 20% of flights during the Rio Olympics in 2016.  The partnership aims to speed the research, development, and approval of sustainable aviation biofuels using sugarcane as a primary feedstock.

GE Aviation, meanwhile, has signed an agreement to purchase synthetic biofuel derived from cellulosic biomass, natural gas, and water electrolysis-generated feedstock from the Washington, D.C.-based D’Arcinoff Group, for testing jet engines.

Fast-growing LanzaTech has moved aggressively to secure front-end partnerships with industrial producers in China and India, using flue gas from heavily polluting facilities like steel mills and fermenting it into chemicals and fuels.  Building on an aviation biofuels supply agreement with Virgin Atlantic, LanzaTech recently announced that it is ‘the first’ to have its jet biofuel certified by the independent Roundtable on Sustainable Biomass (RSB).

Bioports

Strategic partnerships across the aviation biofuels value chain highlight the range of pathways to commercialization that are being explored globally, but emerging business models seek to go one step further.

Aviation biofuel supply chain integrator companies like SkyNRG seek to condense the upstream, midstream, and downstream components of liquid fuel production into bioports, or regional production hubs.  The company pairs available feedstocks with appropriate conversion technology solutions at sites like Schiphol Airport and the Port of Rotterdam in the Netherlands and Brisbane Airport in Australia.

Similar to the microgrid model, which combines the generation, transmission, and distribution components of the electric power industry into a single site, bioports can operate independent of the broader petroleum market and supply dynamics.  This model has many advantages despite aviation biofuel contracts being astoundingly complex.  Solena Fuels, which has inked deals with 14 separate airlines, racked up nearly $1 million in legal fees to develop a first-of-kind contract to supply British Airways with aviation biofuel derived from municipal solid waste (MSW) at London Heathrow.  However, once such agreements are in place, they can be replicated with airlines around the world.  As one industry stakeholder commented, “Once you’ve worked with one airline, you’ve worked with them all.”

Corporations On Board

The current cost of aviation biofuels remains a further challenge.  Complementing its bioport approach, SkyNRG is leveraging corporate partnerships with Nike, Heineken, Philips, and others to help co-fund the development of sustainable jet fuel.  The corporate sponsors deliver much needed revenue for SkyNRG projects with airline partners while helping corporations achieve sustainability goals.  SkyNRG aims to enlist more than 100 corporations into its corporate travel program by the end of 2014.

This model takes advantage of concentrated demand and expanding integration of cleantech at airports worldwide.  Unlike ground transportation, there is no Tesla for the commercial aviation industry at the moment.  Higher oil prices and declining quality of aviation fuels due to a higher percentage of heavy oils point to increasing interest from commercial airlines and the airport operators serving them.  The emergence of supply chain integrators is a sign of a maturing industry poised for rapid growth.

 

EPA Resets the Biofuel Industry

— November 27, 2013

Earlier this month, the EPA proposed revisions to biofuel blending quotas for 2014 under its controversial revised Renewable Fuel Standard (RFS2).  With a proposed reduction of an estimated 3 billion gallons – a volume roughly equal to 20% of current nationwide biofuels production – it’s the first time the agency is seeking to reduce the total biofuel requirements below the legislated targets.

Covering conventional ethanol produced primarily from corn starch and conventional biodiesel produced from food-based vegetable oils like soy, along with advanced biofuels derived from non-food feedstocks, RFS2 is the backbone policy driving biofuels production in the United States today.  The EPA has adjusted annual volumes for advanced biofuels in prior years, but the recent announcement is unprecedented both in the political dimensions and market ramifications.  It’s also the first time the agency has attempted to put the brakes on conventional ethanol production.  As described by Jason Bordoff, former special assistant to President Obama and senior director for energy and climate change at the National Security Council, the announcement marks a “drastic change in the Administration’s biofuel policy.”

Why the shift?  Below is a brief look at the key forces at play.

Big Oil’s New Swagger

Moving further offshore, mining heavy oils, and channeling investments into next-generation biofuels, oil majors have been scrambling for new growth opportunities in recent years.  In an unexpected reversal of fortune, these companies are positioned to ride a wave of new production from shale oil that has many analysts predicting the United States could become the world’s leading producer of oil within the decade.  Petroleum companies have recently slashed their biofuel investment portfolios while waging an all-out attack on the RFS2 in the courts and on Capitol Hill.  While not quite a “capitulation” by President Obama,  as some described it, the recent announcement by EPA represents a significant victory for the incumbent oil industry, which maintains that it should not be penalized under RFS2 when there is insufficient volume of biofuels to blend in the first place.

The EPA seems increasingly comfortable with facilitating a smooth commercialization glide path for biofuels rather than forcing a top-down overhaul of the liquid fuels market.  Biofuels Digest summarizes the EPA’s intent under the ruling this way: “The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution.  Rather, the EPA opts for a more passive role of providing a market for those capacities that are, in fact, built – based on incremental, if any, changes in infrastructure.”  The onus for attracting investment has been placed squarely on the back of the emerging biofuels industry.

Crashing Ethanol’s Party

Higher pump prices in recent years, meanwhile, have resulted in consumers driving less.  At the same time, improved efficiency under CAFE standards means it takes less fuel to travel the same distance.  The rise of the Prius and Tesla’s recent success are harbingers of an emerging fleet of next-generation vehicles that will further trim consumption.  As a result, as biofuels production increases and oil demand flatlines, the headroom for absorbing supply has shrunk much faster than policymakers predicted when drafting the original RFS2 mandate.

Corn starch ethanol is proving to be a victim of its own success.  The United States currently produces roughly 50% of the total gallons of biofuel produced globally – mostly ethanol – which nearly exceeds the capacity of the U.S. gasoline market to absorb excess production (see blend wall issue).

(Source: EIA)

Policymakers, meanwhile, have shown a reluctance to incentivize demand in new consumer markets.  E15 (15% ethanol) has proven to be complex to implement and E85 (85% ethanol) has been a nonstarter.  This leaves the U.S. ethanol industry in an awkward position.  Either it must now initiate a grassroots campaign to attract billions in new investment for distribution infrastructure or look to export markets to offload excess supply.

 

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