Navigant Research Blog

The Global Biofuels Industry: A Promising Future

— December 17, 2014

As I described in my previous blog, the global biofuels industry faces an uncertain future amid declining crude prices and a surge in shale oil production in key markets like the United States.  Creating even greater uncertainty, the Environmental Protection Agency (EPA) recently announced that it is abandoning 2014 rulemaking around production quotas for biofuels under the Renewable Fuel Standard (RFS2), a clear concession to the controversy that has plagued the rule in recent years.

While these shifts will likely further dampen investor appetite for biorefinery projects focused on producing biofuels for ground transportation, the industry continues to advance on several fronts.

By Air

The commercial aviation industry, for example, has played an important role in driving research and development investment as well as providing a strong demand signal to producers.  More than 25 international carriers from all global regions have tested or piloted biofuels programs in the last 3 years.  These efforts have resulted in more than 60,000 biofuel miles flown according to Navigant Research’s report, Aviation and Marine Biofuels.

 Commercial Airline Biofuel Miles Flown by Flight Type, World Markets: 2008-2013 

(Source: Navigant Research)

Earlier this month, Boeing completed a test flight using a blend of 15% green diesel – a synthetic, drop-in substitute for diesel – and 85% petroleum jet fuel.  To meet growing demand, several high-profile, dedicated biojet biorefinery projects have begun construction.  Led by the Oslo Airport’s commitment to receive 660,000 gallons of biojet fuel beginning in March 2015, emerging bioports also demonstrate a commitment to ensuring that biofuels play a permanent role in future aviation.

The advantage commercial aviation offers the advanced biofuels industry is consolidated infrastructure and like-minded potential off-take partners.  According to the International Air Transport Association (IATA), 1,600 airports worldwide fuel 95% of the world’s flights.  This compares to more than 161,000 gas stations in the United States alone.  This lowers the capital needed to invest in infrastructure to bring fuel to the customer and streamlines contracting opportunities that should accelerate commercial deployment of biojet fuel under favorable market conditions.

By Sea

The U.S. Navy is also moving forward with its goal of sailing its Great Green Fleet in 2016, a fleetwide overhaul aimed at integrating energy conservation into the U.S. fighting fleet, in part by powering ships and aircraft using biofuels.  In anticipation, the Navy has procured nearly a half million gallons of advanced biofuels to support early testing and certification initiatives.  Biofuels were also included in the Navy’s annual procurement for bulk fuels this year for the first time ever.

But non-road transportation applications are not the only area where biofuels are gaining ground in energy applications in recent months.

Primary Energy

In the developing economies of sub-Saharan Africa, Southeast Asia, and Latin America, the wide availability of biomass, combined with limited access to reliable sources of energy, provides significant opportunities to expand the utilization of bioenergy as a primary energy source.  Conversion of agricultural waste into biogas that is consumed in gas-fueled generator sets, for example, can help anchor community microgrids.  These opportunities build off an already established tradition of utilizing biomass for traditional energy (e.g., burning wood or dung for cooking and as a source of heat) and well-established technological processes.

As discussed in the United Nations’ report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives report, the developing world remains a significant growth opportunity for biofuels.  Biofuels used in off-grid cooking applications to industrial power generation continue to gain traction as key target opportunities for ethanol fuels, biodiesel, and emerging advanced biofuels.

Bio Niches

Supply chains to support these opportunities have begun laying the early foundation for an emerging global bioeconomy centered on renewable biomass for economic activities, including commodity and food trade, the IT and automotive industries, and environmental technologies.

While the refocus of investment away from ground transportation applications to a wider range of opportunities will mean less biorefinery capacity built through 2020, these niche opportunities are expected to result in the development of specialized capacity expansion in spite of cheap and plentiful oil.


The Global Biofuels Industry: A Future in Doubt

— December 11, 2014

In its recent report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the United Nations (UN) notes that although the emerging biofuels industry has made great strides in the past decade – with ethanol and biodiesel becoming established commodities traded on all continents – significant barriers to commercialization persist across the developing world.  Global biofuels forecasts published in Navigant Research’s report, Market Data: Biofuels, support the view that future capacity deployment is heavily contingent on accessing a shrinking pool of capital investment targeting the industry.

As the UN report notes, conditions in the 2000s that drove annual investment in biofuels in the range of $10 billion per year – including uncertainties related to the price of petroleum products and peak oil speculation – have largely dissipated.  With shale oil & gas production on the rise in key biofuels markets like the United States and the price of crude sliding well under $100 per barrel, market realities have shifted.

Poor Timing

For the emerging advanced biofuels industry, the timing of this macroeconomic shift could not have come at a worse time.  While growth aspirations for the global biofuels industry shifted away from conventional pathways, such as corn starch, to ethanol, palm oil, and biodiesel during the financial crisis of 2008, greenfield biorefinery projects producing advanced biofuels have only just come online in the past year.

The development of these facilities involves capital costs in the hundreds of millions.  Since many of these projects were initiated and financed during a time when macroeconomic realities were quite favorable, a primary concern going forward is whether these first-of-kind facilities can spark additional investment to drive sustained capacity expansion.

This is unlikely given current realities.  To put this into perspective, according to our market data report mentioned above, global biofuels capacity – including conventional and advanced pathways – was just shy of 40 billion gallons per year at the end of 2013.  This represents 4.2% of the global liquid fuel market, or just under 1% of global final energy consumption.

Another $25 Billion Off

Advanced biofuels installed capacity – the focus of current commercialization efforts – accounts for just 1.2 billion gallons, or less than 2% of global biofuels production.  While that’s by no means insignificant, there’s still a long way to go in terms of reducing dependence on liquid fossil fuels, which account for 35% of global final energy consumption, according to data published by the Energy Information Administration (EIA).

In order for advanced biofuels to meet projected production capacity requirements by 2020 under expected biofuels supply mandates in key markets like the United States, European Union, China, and India (Brazil relies mostly on blending quotas), $25 billion to $35 billion in annual investment will be needed over the next 6 years, according to Navigant Research estimates.  This is a tall order for a suite of technology platforms that are not yet at price parity with petroleum-based fuels.


In Ethanol, Cellulosic Coming to Push Out Corn

— October 20, 2014

The last few months have been big for cellulosic biofuels in the United States.  The first of three commercial-scale cellulosic ethanol plants to come online this year, Project Liberty, opened in Iowa in September.  In July, the U.S. Environmental Protection Agency (EPA) expanded the definition of the cellulosic biofuels pathway to include biogas used for transportation via compressed natural gas (CNG), liquefied natural gas (LNG), or electricity.  At full capacity, Project Liberty will produce 25 million gallons annually; the two other plants scheduled to open this year will run at 25 and 30 million gallons, respectively.  If the plants are successful, this could be the beginning of cellulosic ethanol supplanting corn-based ethanol’s hold in the U.S. biofuels market.

Cellulosic ethanol’s major advantage over corn-based ethanol is that its feedstock is organic material waste rather than food/grain.  This avoids controversial issues regarding food vs. fuel and minimizes the conversion of arable land to farm land, which experts contend makes cellulosic ethanol far more environmentally sustainable and less politically divisive than corn-based ethanol.  The disadvantage of the fuel is that it’s ethanol.

Flat Gas

Ethanol’s end market is gasoline, primarily used for light duty vehicles in the United States and Brazil.  It can only supply up to 10% of the fuel in a vast majority of the vehicles in use in the United States due to regulatory constraints and reluctance on the part of automakers and fuel retailers to adopt higher ethanol-gasoline blends.  If gasoline consumption in the United States was growing, this aspect wouldn’t be a problem, but it’s not.

In Navigant Research’s reports, Global Fuels Consumption and Light Duty Vehicles, it is estimated that light duty vehicles account for 94% of gasoline consumption in the United States.  Over the next 10 years, the light duty vehicle fleet will become far more energy efficient, thanks to vehicle electrification, vehicle lightweighting, and engine downsizing.  The end result is that the amount of gasoline-ethanol blends consumed in 2023 will likely be 12% less than 2014 levels.

The Cellulosic Edge

Consumption of ethanol is driven by the Renewable Fuel Standard (RFS), which mandates specific volumes of biofuels be blended into the fuel supply.  The standard is adjusted each year to reflect anticipated industry production volumes by biofuel pathway, so that biofuels producers can be assured their product will be purchased by blenders.

Given cellulosic ethanol’s sustainability appeal over conventional ethanol, and the limited market in which these pathways compete, and despite the high cost of cellulosic compared to conventional ethanol, it’s likely that annual adjustments to the RFS will ensure that cellulosic production feeds into the U.S. fuel pool at the expense of conventional ethanol.  That means that the EPA may be inclined to lower conventional ethanol mandates against increases in cellulosic capacity – making cellulosic more valuable to blenders than conventional ethanol.  As a result, conventional U.S. ethanol will likely become an export fuel, going to foreign markets that currently make up a little over 45% of the global market.


Distributed Biogas Gains Footing in Revised Standard

— September 8, 2014

In July, the U.S. Environmental Protection Agency (EPA) finalized an extension of the beleaguered Renewable Fuel Standard (RFS2) to carve out a pathway for renewable biogas to qualify as a cellulosic fuel.  Expanding the scope of the RFS2 beyond liquid transportation markets could have promising implications for the slow-to-emerge cellulosic biofuels market.

Under the RFS2, the EPA requires domestic refiners and importers of transportation fuel to blend increasing volumes of renewable fuels into conventional gasoline and diesel.  The EPA sets the renewable volume obligations for various renewable fuels every year, and regulated entities must demonstrate their compliance by acquiring and retiring renewable identification numbers (RINs), which are publicly traded credits that fluctuate in value.

RINs provide an important financial incentive for the nascent advanced biofuels industry, helping these fuels compete with conventional fuels in the marketplace.  Cellulosic biofuels, a fuel pathway slated to deliver the greatest volume under the rule, have fallen short of expectations every year due to less capacity being built than otherwise predicted.

Expanding Universe

Under the expanded rules, biogas-derived compressed natural gas (CNG), liquefied natural gas (LNG), and electricity used to power electric vehicles would qualify for cellulosic RINs.  The final rule is likely to lead to a substantial increase in the production of cellulosic biofuels and create new markets for materials previously regarded as waste.  Opportunities for upgrading biogas to so-called bioCNG or bioLNG – also referred to as biomethane or renewable biogas and already used in fleet applications like garbage trucks and municipal buses – currently show high promise for biogas-to-transportation fuel.

As outlined in the U.S. government’s Biogas Opportunities Roadmap report released last month, biogas has broad applications across a range of diverse industries.  Livestock farms, industrial wastewater treatment facilities, industrial food processing facilities, commercial buildings and institutions, and landfills all produce biogas – either directly or in the form of waste feedstocks that can be converted into biogas.  According to Navigant Research’s Renewable Biogas report, the biogas capture market across the United States is expected to reach more than $4 billion in annual revenue by 2020.

All in all, biogas remains a vastly underutilized resource across the United States when compared to countries like Germany that have used a range of incentives to drive investment, particularly in agricultural applications.

The Curse of Versatility

The challenge for biogas in the United States is that to some it’s a fuel source, to others a waste mitigation strategy, and to others a distributed generation resource.  That makes it difficult to tailor policies that address all potential opportunities.  Adding to the confusion, distributed biogas is often treated by utilities as a strategic resource alongside solar PV and small wind, when in fact it can be utilized in the form of a traditional generator set, a fuel cell, or sometimes concurrently, in combined heat and power configurations.

With these issues in mind, the EPA’s final rule relating to biogas introduced a relatively novel and subtle feature for renewable energy markets: incentive flexibility.  Under the rule, the EPA not only expands the scope of RFS2, but allows the same amount of renewable electricity derived from biogas to give rise to RINs for transportation applications and renewable energy credits for electricity generation, while also qualifying for incentives under state renewable portfolio standards.

This potential for multiple revenue streams unlocks the versatility of biogas as a resource and is likely to attract new investment in the U.S. biogas market.


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