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.

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.

Cheap, abundant, and replenishable – so long as societies continue to consume – garbage (or, as the industry refers to it, municipal solid waste, or MSW), is a rising star in the fast-emerging advanced biofuels landscape.  The MSW we toss into landfills by the hundreds of millions of tons each year is laced with carbon well-suited for conversion to power, heat, and fuels.

While generating power from trash is well-established in the European Union, in the United States and, increasingly, emerging markets like China and Brazil, conversion to liquid fuels is currently at the cusp of early commercialization.  Projects in development today aim to produce the spectrum of alternative fuels, but among them renewable jet fuel remains the biggest prize.  All told, Pike Research estimates the theoretical potential for biofuels production from global waste to be around 35 billion gallons per year today.  This would more than double current production of biofuels worldwide while extracting untapped value from nearly 1.5 billion tons of waste.

Despite this potential, just 12 named projects are in the pipeline today, worth an estimated 200 million gallons of new production capacity.  While high upfront capital costs and structural market barriers are partly to blame, the staggering complexity inherent in MSW-to-biofuel project development described by presenters at the Orlando conference was a revelation.

Anatomy of a Deal

Solena Fuels, a company developing the GreenSky London project with British Airways to turn trash into sustainable aviation fuel at Heathrow Airport in London, provides an illustrative example.  As the company’s President and CEO, Robert Do, outlined in his presentation at the MSW-to-Biofuels conference in Orlando the mash-up of diverse strategic interests on the deal meant creating an entirely new contract that amassed nearly $1 million in legal fees and took 1.5 years to finalize.

To reduce feedstock risk, Solena negotiated separate supply contracts with three waste processors, allowing it to hedge against price and supply continuity risk.  While Solena brings its proprietary plasma gasification platform to the 550,000 ton per year facility, it has partnered with three technology partners to provide everything from controls and instrumentation to expertise and equipment for Fischer-Tropsch synthesis of the syngas produced in Solena’s reactors.  On the back end, GE will provide equipment to produce 20 MW of power to run the plant while exporting an additional 20 MW to the U.K. grid.  Meanwhile, the project includes off-take contracts for 16 million gallons of jet fuel and diesel to British Airways as well as naphtha, composed of a mixture of hydrocarbons similar to high-octane gasoline.

Backed by three financing partners – principally British Airways and Barclays Capital – the project is expected to come online in 2015.  More than 10 separate companies are directly involved in the project.

If successful, the GreenSky London project could be a watershed moment for advanced biorefinery project development, providing a blueprint for galvanizing strategic interests and managing risk in order to capitalize on abundant waste feedstock opportunities worldwide.

The U.S. EPA’s Renewable Fuel Standard (RFS) – a complex rule that mandates petroleum refiners purchase specified volumes of alternative fuel or pay fines – faced a setback in January when a federal appeals court ruled that the agency had overstepped its statutory authority in forcing refiners to buy fuel that did not yet exist.  According to the suit brought by the American Petroleum Institute (API), petroleum refiners were required to purchase 20 million gallons of cellulosic biofuels between 2010 and 2012.  Only 20,000 gallons were produced last year, the first such fuels ever produced at commercial scale.

Cellulosic biofuels – a class of alternative fuels produced using sugars extracted from the woody, inedible casings of plant materials and other organic waste – represent less than 1% of the volume of biofuels mandated under RFS today.  By 2022, that share will rise to 44% if the rule remains intact.

While the EPA upped its annual cellulosic biofuels target to 14 million gallons this year in spite of the ruling (and anemic production to date), many critics are using cellulosic biofuels’ slog toward commercial viability as a beachhead for broader attacks on the biofuels industry.  Combined with the persistent backlash against first-generation biofuels produced from corn starch, sugarcane, and other commodity crops, the fallout could precipitate a repeal of biofuel mandates and targets abroad as well.

Fallout Abroad

The global biofuels industry currently finds itself stuck in a dilemma: it faces the problem of too much production of conventional biofuels that potentially contribute to increasing global food prices on one hand, and too little production of advanced biofuels, leading to the erosion of confidence in commercial viability for emerging technologies, on the other.   Many developing countries, looking at exploding demand for fuel, are unwilling to proceed with mandatory biofuel blending mandates despite having hinted at efforts to do so in recent years.  Cellulosic biofuels woes in the United States would likely hasten this retreat.

According to Pike Research estimates, just 12 billion gallons worth of ethanol and biodiesel is required to be blended in gasoline and diesel consumed worldwide in 2013, representing under 2% of global fuel consumption.  Combined with voluntary blending policies, the total volume of ethanol and biodiesel consumed would rise to 51 billion gallons by 2020.  That’s less than 4% of fuel consumption, but it would require a significant acceleration in industry investment.

Production-focused mandates like the RFS in the United States go even further.  Targeting the supply of biofuels rather than actual consumption, policies in effect today would require an 75 billion gallon global alternative fuel market by 2020 ‑ roughly 5% of total fuel production.

China, which represents the biggest prize for biofuels producers in the developing world, has shown the greatest reluctance to jump on the biofuels train despite surging fuel demand.  While it has rolled out trial blending mandates in nine provinces, policies aimed at shoring up food security have generally won out, resulting in the country satisfying its thirst for biofuels by importing from neighboring countries like Thailand and Indonesia.

The EU, which has set a 2020 target of supplying 10% of the transportation sector’s energy use from renewable sources, has begun to impose strict sustainability standards that restrict access for biodiesel produced for export in countries like Indonesia, Malaysia, and Argentina.

In the United States, meanwhile, any repeal of the RFS – in part or whole – would remove a key anchor in the already shaky global biofuels policy foundation.  Although the United States does not impose federal mandates on consumption per se, RFS accounts for over half of the mandated biofuels production volume worldwide.  With or without policies in place, our forecasts point to restrained biofuels growth over the next decade.