# Presentation: 070033

## Major Issues Affecting Biofuel Growth and Development in the U.S.

- EIA Energy Outlook, Modeling and Data Conference
- March 28, 2007
- Washington, DC
- Bryan Haney, Energy Analyst

- http://www.eia.doe.gov/oiaf/aeo/index.html

**Notes:**
Title:  Major Issues Affecting Biofuel Growth and Development in the United States
Presenter:  Bryan Haney
Goal of Presentation:  Outline the challenges that a growing biodiesel/ethanol industry will confront in the coming years and potential develoments that may be necessary to overcome these obstacles.  Talk will be mostly focused on ethanol since it is the heavyweight of the two biofuels, some interjection about biodiesel will also be made.
Further Information:  Based on AEO 2007 Issues and Focus Section -- See the Website for more info

## Why Biofuels?

-  High World Oil Prices
-  Renewable/Environment
-  Regulatory Incentive
-  Energy Security
-  Liquid Fuel
-  Agriculture
-  Because the President said so ...

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Why Biofuels?
What has made Biofuels such an attractive solution recently?
High World Oil Prices 
High prices have encouraged exploration for new energy sources.
Energy is Energy - biofuels compete with crude oil on a per Btu basis --> oil prices are high enough that biofuels are now roughly competitive with crude oil in the transportation sector
2.	Renewable - New fuel can be grown each year, most fuels are carbon-neutral or carbon negative
	Environmental - Emissions Benefits, Ethanol is an oxygenator that replaces MTBE, doesn’t pollute groundwater, biodiesel has low sulfur content
3.	Regulatory - Tax incentives exist to motivate biofuel development, RFS
4.	Energy Security --> reduce import dependence, energy supply-chain vulnerability, increase domestic energy supplies
5.	Liquid Fuel - very energy dense medium (as compared to hydrogen, other renewables), fits easily in existing transportation infrastructure
6.  Agriculture - Farmers enjoy the higher prices associated with biofuel feedstocks, good for rural economies, new source of income
7.	Because the President Said so ... State of the Union Address --> 35Bgal of “alternative” fuels by 2017

## Characteristics of Biofuels

|  | Biodiesel | Ethanol | Cellulosic Ethanol |
| --- | --- | --- | --- |
| Feedstocks | Soybean Oil
Canola Oil
Waste Grease
Animal Fats | Corn
Sugar Cane
Sugar Beets | Switchgrass
Woody Biomass
Biomass Residue |
| Common Blends | B2, B5, B20, B100 | <E10, E20, E85 |  |
| 2005 Production
(MMgal) | 91 | 3,900 | Small |
| Production Technique | Transesterification | Dry Mills
Wet Mills | Hydrolysis
Gasification/F-T |
| ASTM Standard | D 6751 | D 4806 |  |

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Major Characteristics of both Ethanol and Biodiesel
Primary Feedstocks in the United States
	Biodiesel - Soybean Oil
	Ethanol - Corn, Corn and More Corn
Common Blending Levels --> Each fuel can be blended with hydrocarbon equivalent in any amount
	Ethanol certified for use up to 10% in all cars built since late 1970’s
	E85 requires a FFV
	Biodiesel blends could be used in any engine (sort of), but only warranted for use generally up to B5 or B20 level
Production Levels from 2005 --> Major growth occuring in biofuel industry
Production Technique
	--> Biodiesel produced via a chemical reaction --> requires methanol, fatty-acid substance (I.e. vegetable oils)
	--> Ethanol produced by distillation (I.e. just like brewing beer)
	--> Cellulosic ethanol can be produced by a variety of methods --> all remain quite expensive compared to corn ethanol

## ?

- _A Booming Biofuel Industry_

| Year | Gasoline(billion gal) | Ethanol
(billion gal) | % of Gasoline Pool |
| --- | --- | --- | --- |
| 2000 | 128.7 | 1.63 | 1.27% |
| 2001 | 129.3 | 1.77 | 1.37% |
| 2002 | 132.8 | 2.13 | 1.60% |
| 2003 | 134.1 | 2.80 | 2.09% |
| 2004 | 137.0 | 3.40 | 2.48% |
| 2005 | 136.9 | 3.90 | 2.85% |

- Session 3 - Biofuels:  March 28, 2007

## Locations of Ethanol Facilities

- _Locations of Ethanol Facilities_

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Ethanol Plants are located primarily in the Mid-west close to corn supplies.
There are nearly as many plants under construction as are currently operating.

President Bush announcement in State of Union --> 35 billion gallons by 2017 --> MORE ETHANOL
Where will it stop?  Can we reach the President’s Goal?
What are the major obstacles to growth?

## What are the Major Obstacles to Growth?

- BiofuelGrowth

- Resource Limits

- EconomicConstraints

- TechnicalChallenges

- InfrastructureRoadblocks

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Major Obstacles - Broken down into 4 General Categories
Resource Limitations - Where will feedstocks come from?  Will there be enough land available?
Economic Constraints - WOP - will people buy it?, Production Economics (Feestock Cost, Co-product Credit), Capital Costs, State and Federal Tax Credits, RFS --> how long and how large?
Infrastructure Roadblocks - How will fuel be distributed --> will gas stations carry it?  Will people buy biofuel cars? Developing new facilities to handle unique processing/transportation requirements of biofuels
Technical Constraints - Energy vs.Volume, Corrosion Issues, Fuel Quality, After-market biofuel kits, developing GMO crops

## Resource Limitations

*The amount of arable land in the United States is limited, no new land has been added, and existing land is under pressure to produce more than ever before.*

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Most common challenge discussed about potential of biofuel growth
Land supply is limited and the amount of arable land is decreasing
	Knee-Jerk Reaction --> Panic! There isn’t enough corn to feed all the gasoline cars in the United States! More Panic! Where will we grow our food?
2.There are competing uses for land for housing, crops, etc.

Three basic methods have been suggested to alleviate the Resource problem

## Overcoming Resource Limitations

-  _Find More Land_ - convert CRP, forestlands, and pastureland to cropland (for cellulosic)
-  _Use Existing Land More Efficiently_
-  Boost Corn/Soybean Yields
-  Engineer corn/soybeans to have more starch/oil
-  _Change the Resource Limits_
-  Cellulosic Ethanol
-  Use “2nd-Generation” feedstocks:  perennials, agricultural residue, forest biomass, dedicated oilseed crops, etc.

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Three methods have been proposed
Find more land - Convert other lands to be able to grow crops (I.e. convert pastureland, forestland, CRP acres to grow crops)
Use the land more efficiently - Boost the yields of existing bioenergy crops to use existing land more efficiently
Change the rules - Switch from corn and soybeans to dedicated energy crops more appropriate for biofuel production --> cellulosic ethanol, 

## The Conservation Reserve Program

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Most commonly quoted source of new acres is the CRP --> (See graph on previous page)

How likely is it that CRP acres will be converted to grow corn/soybeans?  How many acres?
Answer:  Not very likely
	1.  Many CRP acres have been permanently converted based on landscape cover, wetland restoration, wildlife habitat
	2.  CRP acres are under contract --> nearly 85% renewal rate
	3.  Most people like the CRP, it’s a good deal for farmers, environmentalists like it, recreationists like it
	4.  Many acres are “marginal” and probably not suitable for mono-cropping each year anyway
AT MOST, up to 10 million acres could be converted --> 1.5 billion bushels of corn @ 150bu/ac == 4Bgal ethanol

Role of CRP for second generation biomass crops is much different
	1.  Perennials seen to have less impact on land - limited erosion rate
	2.  Pilot programs underway in MN, IA, NY, PA to explore growing biomass on CRP lands
	3.  2007 Farm Bill proposes a biomass/conservation option for farmers

## Boosting Yields of Corn/Soybeans

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Breeding of corn/soybeans could result in considerable gains of corn over time
	Average annual increase in yield for corn = 1.8 bu/ac per year = 3.1 billion additional bushels by 2030 from 81 million acres of land
	Average annual increase in yield for soybeans = 0.5 bu/ac per year = 1.0 billion bu by 2030 from 75 million acres

How much further can new seeds/farm practices boost the yield of corn?
What is the upper limit on the number of bushels an acre can produce?
Can high yields be sustained from an environmental perspective?  Will sediment/nutrient/pesticide runoff increase?

## The Promise of Cellulosic Ethanol

- _The Promise of Cellulosic Ethanol_

- _ __Dedicated Energy Feedstocks_
-  Limited Interaction with Food/Feed Markets
-  More Environmentally Friendly
-  Potentially much cheaper
-  _Resources are Larger_
-  Derived from Waste Streams
-  Grown in less favorable conditions/on marginal land
-  _Liquid Fuel_
-  _Long-term Growth Potential_

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Cellulosic Ethanol is the darling of the Biofuel Industry - Why?
	--> It can overcome resource limits of corn/soybeans by changing the rules of the game
Dedicated Energy Feedstock
Crops not used food/feed - Less susceptible to price volatility, competitive pressure
Most energy crops are perennials, native plants --> reduces tilling, runoff, pesticide/fertilizer application
Resource Limits are Larger --> Billion Ton Vision
Other sources besides “food” crops can be used --> landfill, wood, ag residue, etc.
Marginal Land (I.e. CRP, pasture) can be used more efficiently
Still Liquid fuel --> bulk of transportation needs in the near future will still be ICE based
HUGE markets for the fuel, HUGE potential feedstock supply 

## Slide 12

- Session 3 - Biofuels:  March 28, 2007

## Economic Constraints

-  _World Oil Price_
-  _Feedstock Price/Co-Product Values_
-  57% of ethanol production cost is the feedstock
-  70-78% of biodiesel production cost is the feedstock
-  High Value Co-Products essential to lower costs
- _Saturation of Co-Product Markets_
-  Large supply of DDGS, crude glycerin can depress prices
-  _Federal Tax Incentives_
-  _Blended Biofuels vs. Dedicated Biofuels_

- Session 3 - Biofuels:  March 28, 2007

**Notes:**

World Oil Price
	Price for energy is set by the world price of oil --> biofuels must be competitive or cheaper for consumers to purchase
Energy is Energy, regardless of which form it comes in.  Biofuel BTU = Oil BTU.  High Oil Prices are required before biofuels can compete with oil on a $/BTU basis.
What is the price of oil for which ethanol can be produced profitably?
Feedstock Prices/Co-Product Values
Biofuel production creates large quantities of co-products (DDGS, crude glycerin) --> high value for co-products offsets the feedstock costs and reduces final consumer cost.  In an era of high corn prices, high value co-products will be critical for keeping prices low.  Viability of new feedstocks wil depend on the value of co-products.
Oversupply of Co-products - depression of prices in other market, reduction of co-product value, less competitive with oil
Biodiesel Glycerin Example --> crude glycerin now worth less than $0.05/lb --> cheap enough to be free
DDGS --> limits to percentage that can be contained in animal feed, too much will cause prices to fall
Blend Markets vs. Dedicated Alternative Fuel Markets
Short-term --> easy to add biofuels in low-level blends and this market will absorb most of the biofuels produced for some time
Long-term --> to achieve significant reductions of oil imports, environmental benefits --> must move to high-blend biofuels
Tax Incentives
How long will they last?  Will the incentives be changed as the market grows and the Federal Treasury takes a hit?

## Slide 14

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
What will the world price of oil be?
	Corn/Soybean Biofuels can compete so long as high high oil prices are maintained
	Alternative feedstocks (cellulosic, etc.) will become more competitive as prices rise
	Oil Price Volatility?  How will biofule market weather the highs/lows of oil prices

## The Importance of Co-Products

**Biofuel Feedstock**

**Biofuel Production Facility**

_**Co-Products**_**DDGS****Crude Glycerin**

_**Biofuels**_**Ethanol****Biodiesel**

- Non-FuelMarkets

- Oil/FuelMarkets

- _The Importance of Co-Products_

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Co-Products play a critical role in determining biofuel prices
	--> Revenue of Biofuel producers set by the price of oil --> Biofuels compete directly with oil as energy source
	--> Costs determined by feedstock cost and co-product credits --> coproducts critical if revenues > costs
			--> Current co-products:  DDGS from Ethanol, Crude Glycerin from Biodiesel
			--> Co-products must have high value to offset costs, maintain competitiveness with oil
			--> Tell Biodiesel/Glycerin story
	--> New feedstocks must have high-value coproducts
			--> Mustard Seed for Biodiesel --> use meal as a pesticide, etc.

## Regulatory Incentives

-  EPAct 2005 - Renewable Fuel Standard
-  7.5 billion gallons by 2012, 250 million from cellulosic
-  Biofuel Tax Credits
-  $0.51/gal for ethanol - expire/reauthorize in 2010
-  $1.00/gal for biodiesel from virgin oil feedstocks
-  $0.50/gal for biodiesel from recycled/waste feedstocks
-  Biodiesel tax credit - expire/reauthorize in 2008
-  Import Tariff on Ethanol  - $0.54/gal extended to 2009
-  State Incentives?

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Many Regulatory Incentives to produce Biofuels
Outline incentives - note they are critically important to the biofuel industry
Incentives have historically been renewed, extended or altered
Will they continue in the future?
The cost to the Federal Treasury will be significant over time
RFS set to be surpassed, does the government really need to provide support to biofuels?

## Blended vs. Dedicated Biofuels 

*Short-term demand for biofuels is primarily for blends.  Long-term demand required for sustained industry growth must come from high-percentage, dedicated biofuels.*

| 2005 Biofuel Production (billion gallons) |  |
| --- | --- |
| Biodiesel | Ethanol |
| 0.091 | 3.904 |

| Potential Blend Market (billion gallons) |  |
| --- | --- |
| E10 | 13.7 |
| B2 | 0.86 |
| B5 | 2.16 |
| B20 | 8.64 |

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Ethanol Biodiesel have some benefits over oil that a premium can be charged for
	--> Ethanol is an oxygenator used in Reformulated Gasoline
	--> Biodiesel increases lubricity, has some net emission benefits
	--> Both of these provide an incentive to blend small fractions of biofuels with oil
Result:  In the short-term all biofuels will be blended --> potential markets listed above (note they are less than the 35 billion gallons that President Bush recommended)
Problem:  Long-term growth cannot be for the same reasons as the blend market
	--> Long-term growth will require dedicated, high-blend biofuels
	--> Cost must be extremely competitive with oil --> consumers will buy least-cost energy source
	--> Need pumps, pipelines, biofuel vehicles.

The major growth obstaclee facing biofuels is bridging the gap between “blend market” and “total market” --> requires whole new paradigm
	--> 

## Infrastructure Roadblocks

-  “Pumps, Pipelines and People”
-  Pumps - limited # of high-blend biofuel pumps
-  Pipelines - high transportation costs to end-markets
-  Low consumer awareness, limited # of FFV’s

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Pumps, Pipelines and People

## Limited Biofuel Pump Availability

| Fuel | # of Stations | % of Total |
| --- | --- | --- |
| All Fuels | ~169,000 | 100% |
| Biofuels (Total) | 2,125 | 1.25% |
| E85 | 1,157 | 0.7% |
| Biodiesel | 968 | 0.5% |

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Many Many gas stations in the United States
< 2% carry some kind of dedicated biofuel blend
many are required to carry E10, but all cars can use E10, so it does little to improve biofuel availability for dedicated fuels
National Ethanol Vehicle Coalition keeps track of all the E85 pumps --> numbers are increasing rapidly, but some states have far more than others --> most E85 vehicles are not near and E85 pump
How many pumps are required to make E85 available nearly everywhere?  --> Don’t know, but look at the fact that Diesel isn’t available at many gas stations, yet is still considered easily available.

## Transporting Biofuels to Market

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Ethanol Price Map

Major Producing Regions are in the Mid-west
Major Consuming Regions are on the Coasts
Map above shows how retail spot prices for ethanol rise for areas most distant from the producing regions --> Transportation costs are a significant factor!!
	Most Ethanol transported by tanker car --> shuttle trains much more efficient, reduce switching costs
	Ethanol cannot be batched through existing pipelines because easily contaminated with water
	Will a pipeline be built in the future?  To where?

## Limited Numbers of FFV’s

- _Limited Numbers of FFV’s_

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Very few FFV’s produced relative to normal cars each year
Per-unit incremental cost is small  (~$200) but requires a whole engine assembly plant
FFV’s that are produced are generally very large, low-mpg, large, expensive vehicles --> CAFÉ Credits
Many people not aware they have an FFV --> “Go Green, Get Yellow” Campaign --> tell Dad Story :)
~5-6 million FFV’s have been produced for the domestic market

## Technical Challenges

-  Cellulosic Ethanol Capital Costs/Production Technology
-  Retrofitting Pumps, Fuel Systems, Fuel Distributors
-  Maintaining Fuel Quality
-  After-market Biofuel Kits - emissions certification
-  New Engine Designs - Biofuel Only?
-  Energy Content and Fuel Volume

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
Significant Technical Challenges must be overcome by industry
	--> Cellulosic Ethanol --> make it cheap enough to compete not only with corn-ethanol, but with Oil
		--> Capital Costs are very, very large --> R&D required or cost-sharing (gov’t loans) necessary to bring costs down
	--> Infrastructure --> Ethanol/Biodiesel have unique transportation requirements --> Retailers/Distributors must retool to accommodate new fuels, but also blends of fuels (I.e. Biodiesel must be kept warm in Winter)
	--> Fuel Quality is of critical importance for consumer acceptance
	--> How to convert existing cards to run on Biofuel --> after market kits technically illegal
	--> New engine designs may be biofuel only to optimize energy recovery of fuel --> R&D necessary
	--> Energy Content vs. Fuel volume --> will consumers pay more per Btu? Can new engine designs overcome this problem?

## Energy Content and Fuel Volume

- Session 3 - Biofuels:  March 28, 2007

**Notes:**
GGE
Gasoline:  1.00
E100:  0.67
E85:  0.76
Diesel:  1.11
Biodiesel:  0.95

## Conclusion

- BiofuelGrowth

- Resource Limits

- EconomicConstraints

- TechnicalChallenges

- InfrastructureRoadblocks

- Session 3 - Biofuels:  March 28, 2007

## Thank you

- Energy Information Administration
- www.eia.doe.gov
- Bryan Haney
- bhaney@udel.edu

- Session 3 - Biofuels:  March 28, 2007