Navigant Research Blog

Ethanol Growth Lies in Optimization, Not Mandates

— January 31, 2014

The last 2 years have been punishing for the ethanol industry.  In August 2012, the Environmental Protection Agency (EPA) and National Highway Transportation Safety Administration (NHTSA) revised the treatment of flex-fuel vehicles (FFVs) under CAFE standards so that manufacturers will no longer receive credit for FFV sales beginning in 2017 if they cannot provide data proving E85 (gasoline with up to 85% ethanol) use by the FFV.  Then, in November 2013, the EPA proposed a reduction of an estimated 3 billion gallons of biofuels blending quotas for 2014 under the Renewable Fuel Standard (RFS).  Additionally, while the EPA has approved the use of E15 (gasoline with up to 15% ethanol) in model year (MY) 2001 vehicles and newer, major automakers have been hesitant on the fuel, in some cases approving its use only in MY 2012 vehicles and/or newer.  As a result, there are few stations that supply E15.

All of these setbacks mean that the market for ethanol in the United States has peaked at 10% of retail gasoline consumption and has flatlined in recent years.  Additionally, Navigant Research forecasts in a forthcoming report, Biofuels for Transportation Markets, that retail gasoline consumption will fall before 2022 thanks to increasing fuel economy standards and interest in alternative fuel and light duty diesel vehicles.

Despite ethanol’s recent tribulations, though, there are opportunities for sustainable growth.

E30 = $

A report developed by researchers at Oak Ridge National Laboratory (ORNL) finds that the use of E30 (gasoline with up to 30% ethanol) can significantly improve vehicle efficiency in optimized engines, compared to a conventional internal combustion engine fueled with regular gasoline.  Efficiency gains are achieved through the high-octane properties of ethanol, which improve combustion, thus mitigating engine knocking and allowing for greater downsizing of the vehicle engine.

The findings are important because they identify an opportunity for ethanol to become an economic product for end consumers.  To date, E85 has failed to catch on in the United States because the fuel shows no significant improvement in reducing fuel costs due to the lower energy density of ethanol compared to that of straight gasoline.  While there are currently many FFVs on U.S. roads, on average FFV drivers rarely fill up with E85.  Reasons include a lack of available infrastructure and low driver awareness.  However, those reasons would evaporate if the cost of driving on E85 were significantly less than driving on E10.  If the latter were the case, E85 compatibility would be a more valuable selling point for automakers than it is now, consumers would be well aware of the cost savings, and demand for E85 would be robust and drive infrastructure development.

If it’s true that an ethanol blend above 10% can improve fuel efficiency given the right engine, then the cost savings to the end consumer will spur growth in a market that has stagnated.  Realizing this opportunity, though, requires significant buy-in from automakers that would have to develop the optimized engines and the assurance that fuel retailers will have the optimized blends available.  Those factors will likely require government support.

 

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.

 

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