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.
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.