Navigant Research Blog

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.

 

Hunting Fertile Fields, Advanced Biofuels Providers Look Abroad

— October 18, 2013

With nearly 70% of global biofuels production centered on the United States’ corn and Brazil’s sugarcane harvests, concentrated commodity feedstocks have been the common denominator in biofuels industry growth over the past decade.  Advanced biofuels companies seeking to produce next-generation fuels derived from non-food feedstocks are attempting to replicate this model – without the associated social and environmental externalities of using food-based crops.  Access to land for mass feedstock production is a difficult challenge for which many innovative strategies have been proposed.

Companies like SG Biofuels, Ceres, and others are squarely focused on biotechnology innovation, involving complex biological modifications at the crop’s cellular and genetic level.  The central focus of these efforts is the optimization of dedicated energy crops for growth in a variety of locations where food crops are not currently grown, including poor soils and areas lacking irrigation.  Among these, jatropha, camelina, energy grasses like miscanthus, and dedicated trees like eucalyptus have received the most attention.

But optimizing crop strains to thrive in a variety of climates and soils is only half the battle.  Recent experience has shown that the success of even miracle next-generation feedstocks like jatropha, which can produce oil-rich seeds in poor soils and without irrigation, is exaggerated.  As with food crops, bountiful energy crop harvests (i.e., lots of biomass material for biofuels production) require irrigation and nutrients.

Land Ho!

Meanwhile, finding suitable tracts of land with nutrient-rich soil and irrigation for which a large quantity of crops can be grown – but without diverting land otherwise dedicated to food production (see The New York Times blog on food vs. fuel) – remains an elusive goal.  Increasingly, governments and corporations are looking abroad.

Since the food crisis of 2007-2008, foreign direct investment into countries with undeveloped agricultural potential has accelerated.  According to data compiled by the Oakland Institute, an estimated 56 million hectares of land (nearly the size of France) has been acquired in the developing world by international governments and investors since 2008.

Last month, China announced that it will invest billions of yuan into 3 million hectares (7.5 million acres) of farmland in Ukraine, its biggest overseas agricultural project.  This will more than double China’s current portfolio of 2 million hectares (5 million acres), mostly concentrated in Latin America and Southeast Asia.

China is not alone in this quest.  According to a policy paper published by the Woodrow Wilson International Center, “One of the largest and most notorious deals is one that ultimately collapsed: an arrangement that would have given the South Korean firm Daewoo a 99-year lease to grow corn and other crops on 1.3 million hectares of farmland in Madagascar – half of that country’s total arable land.”  Government and institutional investors across other developed economies, including Japan, the United States, the European Union, and wealthy Gulf states, are all actively involved in this rush.

Complicated by the checkered history of international land grabs, this trend is not without its critics.

Balancing Objectives

While intentions may be in the right place in most instances, the past has shown that consolidation of cultivatable land for foreign or multinational interests can often lead to the displacement of local subsistence farmers, as well as other negative environmental impacts.  In recent years, governments have, at least publicly, imposed more restrictions on biofuels investments abroad to prevent a scramble toward destructive plantation-style feedstock cultivation.

The EU’s Renewable Energy Directive (RED) mandates that member states derive 10% of energy consumption within the transportation sector from renewable sources by 2020.  Recently signed legislation caps the contribution of conventional food-based biofuels, calling for a rapid switch to advanced biofuels.  A slew of sustainability standards, meanwhile, aim to mitigate the negative impacts of large-scale dedicated energy crop production for advanced biofuels.

In Navigant Research’s recently published report, Advanced Biofuels Country Rankings, issues such as available arable land and potential for sustainable feedstock hubs figure heavily into assessments of the potential of individual countries to support advanced biofuels commercialization.  At one time regarded as an issue exclusively focused on conventional biofuels, access to land for advanced biofuels production is proving equally sensitive.

 

The Road to Clean Energy is Greased With Fossil Fuels

— August 14, 2013

In recent months, both the United Kingdom and Germany have initiated fossil fuel expansion plans in the face of coal and nuclear retirements during the next decade.  Although the development plans coincide with ambitious clean energy agendas, the respective governments’ decisive shifts in favor of fossil-based generation stand in direct contrast to their official decarbonization policies in accordance with EU’s Renewable Energy Directive.

Currently in the midst of a comprehensive Energy Market Reform (EMR) effort to spark investment in renewables, the U.K. government has doubled its shale reserve estimates and cut shale production’s tax rate by half.  In Germany, momentum has been building this year behind efforts to expand the nation’s coal fleet, with a number of new projects slated for development across the country.

In both cases, recent developments in oil and natural gas markets have played a decisive role with unpredictable consequences for renewable deployments.

Coffee and Tea

The interplay of oil and natural gas commodities is a funny business.  Although oil’s primary role is to power a massive, worldwide transportation network, traded globally, its fluctuating value serves as a proxy in electricity markets for everything from natural gas prices to power purchases agreements (PPAs).  Natural gas, for its part, is at once a climate change nuisance in its natural state – it is roughly 70 to 90 percent methane by volume, a greenhouse gas 21 times more potent than carbon dioxide – and a climate change boon for countries like the United States, seeking to decarbonize power production with ample supplies of relatively clean-burning natural gas, instead of coal.  It is also a commodity produced and consumed in relatively close proximity.

The indexing of natural gas prices to crude oil – or fixing the traded price of the former to the latter – has helped insulate high-priced renewables seeking a foothold in economies throughout Europe and Asia.  A function of European importers who needed a price reference for newly produced natural gas in the 1960s, the practice remains common through many European and Asian markets.

Although steeped in historical precedent, oil-gas indexing is not without its critics.  It “makes about as much sense as pegging the contract price for coffee supplies to tea prices, adjusted for caffeine content,” commented Michael Lynch in a recent Forbes article.

Tale of Two Countries

Dependent on natural gas imports from Russia, for now, Germany is handcuffed by this reality.  The indexing of natural gas to Brent crude, which has hovered mostly above $100 per barrel since the beginning of 2011 makes natural gas a high-priced commodity.  For a country that derives 22 percent of its total primary energy supply from natural gas, energy independence remains an elusive goal.

Even so, Germany has pursued an ambitious effort to become more self-reliant in energy.  Aided by an aggressive Feed-in-Tariff (FiT) and insulated from cheap natural gas, Germany has seen a rapid uptake of distributed renewables like solar, wind, and biogas.  With nuclear facilities shutting down in the wake of the Fukushima Daiichi accident, and renewables still unable to deliver the scale of capacity expansion needed, the country has been forced to double down on coal.

By virtue of historical circumstance, natural gas prices are not nearly as intertwined with international oil prices in the U.K. as they are in continental Europe.  Though the country is a few years behind the U.S. with respect to exploiting shale gas deposits, natural gas will figure heavily into the future U.K. generation mix.

In recognition of this reality, the U.K. government recently eliminated subsidies that, since its inception, would have been available to dedicated biopower under EMR.  Though biopower is one of the few renewable options that can supply baseload power – a stabilizing force in electricity markets – the U.K. government has always expressed reservations about the cost-benefits associated with dedicated electricity production from biomass.

The contrasting German and U.K. experiences muddle predictions for the future uptake of renewables.  While recent movements in the relative price of oil and natural gas have begun to upend long-held structure in the energy production sector, renewables remain both a beneficiary and a victim.

 

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