Bain & Company holds that the biofuels industry is in crisis. Having experienced a dramatic take-off in the early 2000s, with dramatic annual growth in ethanol consumption between 2003 – 2010, growth is now stunted.
Fernando Martins and Juan Carlos Gray of the firm report that a range of problems are responsible including rising production costs, inadequate infrastructure for blending ethanol, wavering government support for subsidies and tax credits, and waning consumer interest.
Concerns over biofuels’ impact on food prices, along with tighter budgets due to the global economic crisis in 2008 and 2009, have left many governments less willing to support the industry.
The US is the largest ethanol market in the world, producing and consuming approximately 60% of the global supply. Corn is the main feedstock, and has traditionally been heavily subsidized by national and state governments.
According to Bain & Company, corn is less efficient and less environmentally friendly than sugarcane for making ethanol. On average, an acre of sugarcane produces twice as much ethanol as an acre of corn, and corn ethanol produces twice the greenhouse gas emissions (GHG). It costs US$ 122 more to produce a cubic metre of corn ethanol than it costs to produce the same volume of gasoline from oil.
Martins and Grey explain that although biofuels have been around in the US since the 1930s, the market began to take off more seriously when the government introduced a 40 cents/gal. tax break for producers, which has been set at 51 cents since 2005. The tax credits did little to promote adoption of biofuels until around 2000, when rising oil prices made alternative energy more competitive.
These oil price increases – along with corn farmers looking for new markets and growing public concern over both methyl tert-butyl ether (MTBE) contamination of groundwater and GHG emissions caused by traditional fossil fuels – led most states to introduce ethyl tert-butyl ether (ETBE) as an alternative to oxygenate gasoline additive.
These factors also prompted the federal government to encourage ethanol demand by setting consumption mandates. In 2005, the Renewable Fuel Standard (RFS) was created under the Energy Policy Act (EPAct). This originally required that 7.5 billion gal. of renewable fuel be blended into gasoline by 2012. Then in 2007, the RFS was expanded to include biodiesel and other fuel categories, and the target was increased to 36 billion gal. by 2022. In 2009, the mandate was further revised to require that 16 billion gal. should come from advanced cellulosic biofuels. The new rules sparked massive growth in the industry, and corn prices hurtled higher to levels that eliminated the need for subsidies to corn farmers.
So why the decline?
According to Bain & Company, the global economic crisis is to some extent responsible for a less profitable biofuels industry.
American citizens have been driving less and buying smaller, more fuel efficient cars in order to make their money go further. Meanwhile banks, facing tighter balance sheets, were less willing to lend for new biofuels projects.
Furthermore, until 2010, there was an oversupply of biofuels, which reduced profitability. The industry also failed to produce advanced biofuels (those not based on corn) due to both technical and commercial challenges.
The 2007 RFS stipulated that the US should consume 250 million gal. of cellulosic ethanol in 2011 and increase consumption to 500 million gal. in 2012. However, almost none has been produced to date. Only a few small plants are operating or under construction, and the expected production capacity in 2014 is 89 million gal. and 44 million gal., respectively, reports Bains & Company.
Even after the EPA significantly lowered 2013 targets, from 500 million gal. to 6 million gal., actual production was still just a small fraction of these requirements. Refiners has little choice but to pay fines and pass cost increases on to consumers.
Finally, and unsurprisingly, public support for biofuels has waned. Corn based ethanol has proven to be less environmentally friendly than other versions, and production costs are high. Furthermore, the food for fuel trade off has pushed food prices up, raising concerns about global food security.
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/16102014/the-biofuels-industry-in-crisis-1430/