### Required Report

- public distributio n

Date: 6/30/200 9



### GAIN Report Number: CA903 7



# Canad a

BIOFUELS ANNUA L

Biofuels Annual

- Canad a

Approved By:

Robin Tilswort h

Prepared By:

Darlene Dessureaul t

Report Highlights:

Canada’s has a patchwork of provincial mandatory renewable fuel mandates but the federal

mandate of an annual renewable content of five percent in the gasoline pool by 2010, and a

two percent requirement for renewable fuel in diesel content by 2012 remains somewhat

elusive. Current estimates suggest the ethanol mandate will be in effect in September 2010

and biodiesel in 2011. In 2009, total domestic ethanol production capacity is estimated to

reach 1.42 billion litres in 2009 (approximately 3.6 % of gasol ine pool) compared to 2008’s

1.39 billion litres. In 2009, it is estimated that 69% of the production capacity for domestic

ethanol will be derived from corn, 30% from wheat and 1% from “other” feedstock such as

wood waste and wheat straw. Post forecasts that this will likely change to 75% corn, 23%

wheat and 2% “other” feedstock by the end of 2010. Overall Canada’s limited bio

- fuel

production capacity, both in the short and medium term suggests that Canada’s entry into the

global ethanol market is still quite distant.

### Post:

Ottaw a Commodities:

selec t



### Executive Summary:

1. Executive Summary

Canada’s has a patchwork of provincial mandatory renewable fuel mandates but the timeline

for the details and exact implementation date of the federal mandate of an annual renewable

content of five percent in the gasoline pool by 2010, and a two percent re quirement for

renewable fuel in diesel content by 2012 remains somewhat elusive. Current estimates are

that the proposed regulations will be published in the fall of 2009 for comment. The

regulations may then be modified based on the comments received an d published a second

time in June 2010. If this scenario holds, the ethanol section of the mandate would go into

effect in September 2010 with the two percent biodiesel mandate expected to follow in

sometime in 2011.

Meanwhile, three provinces represe nting roughly 46 percent of total net gasoline sales in

Canada have ethanol mandates. These mandates include 7.5 percent mandate in

Saskatchewan and 5 percent mandates in Manitoba and Ontario. The provinces of British

Columbia and Alberta are scheduled t o bring in 5 percent renewable fuel mandates in their

gasoline pools in 2010 and together account for 24 percent of net gasoline sales in Canada.

Quebec is contemplating a 5 percent renewable fuel content in its gasoline pool for 2012 and

accounts for 23 percent of net gasoline sales in Canada.

In 2009, total domestic ethanol production capacity is estimated to reach 1.42 billion litres in

2009 (approximately 3.6 % of gasoline pool). This represents only a small increase (1.8%)

over year 2008 domestic production capacity levels of 1.39 billion litres.

Should the projects under construction be realized, Canadian production is expected to reach

1.931 billion litres by the end of 2010, a production capacity that meets the government of

Canada’s target of 1.9 billion litres. In contrast, Canada’s biodiesel industry has seen a jump in

production capacity in 2009 but remains far from the 600 million litres of biodiesel required to

meet the federal mandate. By the end of 2009, domestic production capacit y of biodiesel is

expected to reach 216 million litres, a 71% increase over the 2008 production capacity of 126

million litres.

In 2009, it is estimated that 69% of the production capacity for domestic ethanol will be

derived from corn, 30% from w heat and 1% from “other” feedstock such as wood waste and

wheat straw. Post forecasts that this will likely change to 75% corn, 23% wheat and 2%

“other” feedstock by the end of 2010 should the planned plants be in operation by the end of

2010.

For bio diesel, in 2009, 49% of the production capacity is estimated to be tallow

- based (an

increase from 36% in 2008), 37% yellow grease

- based (a decrease from 59% in 2008) and

14% canola

- based, an increase from 2008 levels where canola

- based biodiesel accounted for

6% of the production capacity. By 2010 Post forecasts that tallow, yellow grease and canola

derived biodiesel production capacity will account for 46%, 37% and 17%, respectively.

Canada’s limited bio

- fuel production capacity, both in the short and medium term suggests thatCanada’s entry into the global ethanol market is still quite distant. While the possibility of

increased ethanol trade, especially between the northwest United States and Western Canada

(wheat

- ethanol to the United States and co rn

- based ethanol to Canada), is unlikely to develop

in the short to medium term, there is an increasing amount of trade taking place in the co

products of ethanol production.



### Author Defined:

2. Domestic Environment

A. Proposed National Biofuels Mandate

In late 2006 Canada’s government a renewable fuels strategy, including a national renewable

fuels mandate. Since that time, work to bring about the legislative amendments necessary

have been brought forth and federa l and provincial incentive programs encouraging the

development of a Canadian renewable fuels industry have been put in place. A Notice of Intent

was pu blished in the Canada Gazette Part 1 on December 30 th

, 2006 detailing the government

of Canada’s intentions in terms of federal regulations requiring renewable fuels. The mandate

calls for an annual renewable content of five percent in the gasoline pool by 2010, and a two

percent requirement for renewable f uel in diesel content by 2012, upon the successful

demonstration of renewable diesel fuel under the range of Canadian climatic conditions. Since

fuel regulations are a shared federal/provincial jurisdiction, provincial endorsement of such a

mandate is nec essary. Most provinces have, or plan to have, a provincial renewable fuel

mandate in place and most support the national mandate proposal.

B. Legislation Underpinning a Canadian Biofuels Mandate

In order for the government to be able to bring in a re newable fuels content mandate,

amendments to the Canadian Environmental Protection Act, 1999 were necessary. Bill C

- 33

,

which received royal ascent in late June 2008, amended the Fuels Division (Division 4) of the

Canadian Environmental Protection Act of 1999 (CEPA, 1999). These amendments added to

the regulation

- making power of the federal Cabinet by allowing it to make regulations

concerning blended fuels. In addition, the amendments allow for the federal cabinet, on

recommendation by the Environment Minister, to make regulations exempting producers or

importers of fuel who produced or import a quantity less than 400 meters cubed (m 3 ) per year.

C. Impatienc e with the Lack of Regulatory Certainty

At the time of this report, industry sources state that regulations for the new federal renewable

fuel standard are about six months behind schedule. Industry sources indicate that the

proposed regulations would be published in the fall of 2009 for commen t. The regulations may

then be modified based on the comments received and published a second time in June 2010.The ethanol mandate is expected to go into effect in September of 2010.

While political support for the bio

- fuels mandate remains strong since it is viewed as a vehicle

to help revitalize rural communities, some industry stakeholders have expressed impatience

with the delay in the publication of a clear regulatory design with regards the renewable fuel

standard. Some industry stakeholders have expressed concerns on whether or not a smooth

transition to 5 percent ethanol in the gasoline pool is possible. The Canadian Petroleum

Products Institute (CPPI) expressed concerns that since much of the compliance path

determination by individual com panies depends on the details of regulatory design, the delay in

the publication of the federal regulations has hampered the petroleum’s industry to make the

necessary adjustment. CPPI even suggested that the renewable fuel standard for

ethanol/gasoline a nd biodiesel be delayed until 2012, something governmental sources say will

not happen. Representatives from the Canadian Renewable Fuels Association (CFRA) take the

opposite view and urge the Canadian government to maintain and expand its support for the

biofuels industry and called for an accelerated process to implement and enforce the national

renewable fuels standard. The CFRA also asked that the programs be less complicated so that

potential investor uncertainty is avoided. A full transcript of the se comments to a

parliamentary committee is available at the following web

- address: Bio

- fuels and

competitiveness of Canadian agricultur e

.

D. Federal Programs to Encourage the Development of a Canadian Renewable Fuels

Industry

The excise tax exemption for renewable fuels was eliminated April 1, 2008. In addition to this

change, the Canadian government put in place several programs designed to promote the

development of a domestic renewable fuels industry. Several of the progra ms are designed to

encourage agricultural producer involvement and the usage of agricultural biomass.

Table 2.1

Federal Programs to Promote a Domestic Renewable Fuels Industry

Program Name Budget

Allocated /

Administering

Ministry or

Agency Type of

Program Program Design / DurationEcoEnergy for

Biofuels Overview • C$1.5 billion ;

Administered by

Natural

Resources

Canada • Production

incentive

program

(subsidy);

production

capacity building • Provides incentive rates of up

to $0.10/liter (L) for renewable

alternatives to gasoline and

$0.20/L for renewable

alterna tives to diesel for the

first three years, declining in the

6 years thereafter; Program

runs April, 2008

- March 31,

2017

Biofuels

Opportunities for

Producers Initiative • C$20 million;

Administered by

Agriculture and

Agri

- food

Canada;

funding

delivered

through

regional

industry

councils • Direct payment,

encourage

producer

ownership /

involvement • Provides financial as sistance

to develop bio

- fuel feasibility

studies (suitability of bio

- fuel

production in local community)

and business plans; funding was

available for projects with

greater than one

- third producer

ownership; Closed on March 31,

2008

ecoAGRICULTURE

Biofuels Capital

Initiative • C$200

million;

Administered by

Agriculture and

Agri

- Food

Canada • Loan (repayable

contributions) • Encourages producer

equity/ownership in bio

- fuel

facilities. The program helps

fund projects that use

agricultural feedstock to

produce bio

- fuels and requires

agricultural producer equity

investments of 5% to meet the

eligibility requirements. The

fund ing increases as producer

investment increases, however

a contribution cap of C$25

million applies; In effect April,

2007

- March 31, 2011

Agricultural Bio

pro ducts Innovation

Program (ABIP) C$145 million;

Administered by

Agriculture and

Agri

- food

Canada Grants • Seeks to mobilize research

networks that conduct scientific

research projects with a specific

focus on developing effective

and efficient technolo gies for an

agricultural biomass conversion;

evolve beyond bio

- fuels

production to a sustainable, bio

based economy; Program runs

multi

- yearAgri

- Opportunities

Program • C$134

million;

Administered by

Agriculture and

Agri

- Food

Canada • Loans

(repayable

contributions) • To accelerate the

commercialization of new

agricultural products, processes

or services that are currently

not produced or commercially

available in Canada and that are

ready to be delivered to the

marketplace with focus on

projects geared to new agri

fo od, agriculture or bio

products; Program runs April

2006

- March 31, 2011

NextGen Biofuels

Fund • C$500

million;

Administered by

Sustainable

Development

Technology

Canada • Loans

(repayable

contributions) • To increase production

capacity of 2nd g eneration bio

fuels; to spur investment with

the private sector in

establishing large

- scale facilities

for the production of next

generation renewable fuels, to

address the gap between

demonstration and

commercialization; Program

runs April 2006

- March 31

, 2011

E. Provincial Mandates and Programs to Encourage Renewable Fuels Industry

Development

Provinces have led the way in terms of developing mandates on renewable fuel contents.

However, inconsistencies in provincial requirements may frustrate the flow of bio

- fuel trade

within Canada. There is concern that with each provincial government imple menting its own

complex and un

- harmonized set of production and/or consumption incentives with differences

in eligibility and duration has created barriers to trade and may encourage production in areas

where this activity is not well suited. In addition, in the absence of a federal mandate, is

confusing for the petroleum industry which is struggling to know how to organize itself.

Canada’s refinery industries are mostly in western Canada (Alberta) and on the east coast

(Newfoundland and Labrador) while t he urban centers are in central Canada (Quebec and

Ontario). Within the Notice of Intent, the federal government makes note of these barriers and

sees the federal mandate as a means to work with provinces at harmonizing provincial

mandates to eliminate in ter

- provincial trade barriers. However, given the lead time the

provinces have in developing their provincial regulations, the ability of the federal government

to carry out this role is unclear.

Several provinces have implemented provincial mandates on the amount of ethanol required in

the gasoline pool. Certain provinces have also brought in legislation and regulations that willresult in a renewable fuel standard for diesel fuel that will likely come into force ahead of the

federal biodiesel manda te. Table 2.2 summarizes the incentive measures provinces that are

currently in effect:

Table 2.2

Provincial Mandates, Tax Exemptions, Incentives, and Conditions

ALBERTA

Mandate Incentives Conditions/Duration

Intends to

mandate a

renewable fuel

standard of 5%

ethanol content in

gasoline and 2%

per cent

renewable content

in diesel by 2010. Renewable energy

producer credit:

The producer credit

amount is $0.09/L for

production from plants

with a capacity of 150

million liters or more a

year.

For plants with capacity of

less than 150 million liters

per year, the credit

amount is $0.14/L Conditions : In order to be eligible

for the renewable energy producer

credit, the product must be

produced at a facility lo cated in

Alberta.

Duration : The credit program runs

from April 1, 2007

– March 31,

2011.

BRISTISH COLUMBIA

Mandate Incentives Conditions/Duration

Intends to

mandate a 5%

renewable fuel

content in the

gasoline and

diesel supply

pools in 2010. Excise Fuel Tax

Exemption :

The ethanol and biodiesel

portion of the motor fuel

(use in internal combustion

engine) is exempt from the

provincial fuel tax a nd is

also exempt from the

province’s new carbon

tax. Biodiesel fuel used for

non motor purposes

(residential or commercial)

is exempt from the

provincial sales tax.

B.C. offers a full rebate

(14.5 cents per liter) on

E85 to E100 blends. Condition s : As of July 1, 2004, the

ethanol portion , including

denaturant, of an ethanol/gasoline

or gasoline/diesel blend is exempt

from tax if the ethanol portion is

not less than 5% or more than

25% of the volume of the blend.

Effective February 20, 2008,

ethanol used as colored fuel,

marine diesel, locomotive fuel, jet

fuel or aviation fuel is exempt from

tax. This includes the portion used

in any biodiesel fuel blend and any

ethanol blend in which the ethanol

portion is from 5 % to 25%

. Previously, ethanol was only

exempt from tax when used in

motor vehicles on a highway

. Duration : No duration specified.

Carbon Tax Exemption

Ethanol and biodiesel are

exempt under the Carbon

Tax Act. Duration : No duration specifiedMANITOBA

Mandate Incentives Conditions/Duration

5% pool average

ethanol content in

gasoline from

January 1, 2008

– March 31, 2008;

8.5% pool

average ethanol

content in

gasoline beginning

April 1, 2008

Plans to bring in a

biodiesel mandate

in 2010. Direct Payment Production

Incentive

20 cents/liter producer

incentive beginning

January 1, 2008 until Dec

31, 2009.

15 cents/liter producer

credit from January 1,

2010

- December 31, 2012

10 cents/liter from January

1, 2013

- December 31,

2015. Condition : To be eligible for the

credit, the ethanol has to be

produced and sold in Manitoba.

The incentive is capped on an

annual basis by the amount of

ethanol required for the mandate.

Dur ation : January 1, 2008

– December 31, 2015.

Excise fuel tax exception

for E10

2.5 cents per liter tax

exemption on E10 blends.

Provincial fuel tax rate is

11.5 cents per liter. Condition s:

To be eligible for the provincial

excise tax exemption, the ethanol

blend must be E10 produced and

sold within the jurisdiction.

Duration : No specific duration

ONTARIO

Mandate Incentives Conditions/Duration

All gas sold must

contain 5%

ethanol, beginning

in January 2007;

Amount increase

to 10% by 2010

(still tentative) None None

QUEBEC

Mandate Incentives Conditions/Duration

None, but

provincial

government is

considering a 5%

bio

- fuel content

mandate in its

gasoline pool by

2012. Tax Credit Refund

On April 21, 2005, the

government announced a

refundable tax credit, to be

granted for a maximum of

10 years, to corporations

th at produce ethanol from

renewable material and sell

the ethanol for use in

Québec. Conditions :

To be eligible for the exemption,

the ethanol must be produced and

sold in Quebec

Additional conditions to be entitled

to the credit is that the tax credit

is limited to a maximum ethanol

production credit of 126 million

liters and no tax credit is given for

the month in which the average

monthly price of crude oil is equal

to or greater than US$65 a barrelor the total cumulative production

of ethanol excee ds 1.2 billion liters

Duration :

April 1, 2006

- March 18, 2018

SASKATCHEWAN

Mandate Incentives Conditions/Duration

All gas sold must

contain 7.5%

ethanol, began

mid

- 2006. Ethanol Fuel Grant Program

Grants for eligible fuel

distributors. Conditions : The ethanol must be

produced and consumed in

Saskatchewan.

Duration :

No duration specified.

(i) Alberta Biofuel Policies

Biofuels Strategy/Policy Documents:

The build up of biofuels production capacity in Alberta has largely been the result of its nine

point bioenergy plan, first announced in October 2006. In December 2008, the government

built on this plan and announced its Provincial Energy Strategy

.

Renewable Fuel Standards:

As part of the strategy, the government of Alberta announced its intention to implement a

renewable fuel standard of 5% ethanol content in gasoline and 2% renewable content in diesel

by 2010. In addition, to meet the standard, the greenhouse gas emissions over the production

and manufacturing life cycle of the renewable fuel must be at least 25% lower than emissions

from producing and manufacturing the same quantity of traditional fossil fuels.

Production Incentives:

As mentioned in Table 2.2, the p rovince of Alberta offers a renewable energy producer credit.

For more information on the program see the following link:

Renewable Energy Producer Credit Program

Table 2.3

Alberta: Provincial Programs to Encourage the Development of a Biofuels

Industry

Program name: Bioenergy Infrastructure

Development Grant Program Commercialization/Market

Development Program

Budget Allocation: C$ 6 million C$ 24 million

Administering Ministry

or Agency Alberta Energy Alberta Energy

Type of Program: Financing grant Financing grantProgram Design or

Purpose: To assist municipalities with

the development and

distribution infrastructure of

biofuels and energy. Designed to increase

production capacity through

the market development and

commercialization of

biofuels.

Duration Beg an April 1, 2008 and

originally was to end March

31, 2009 but extended to

March 31, 2011 Began April 1, 2008 and

originally was to end March

31, 2009 but extended to

March 31, 2011

Additional notes: Some program modifications

due to its extension. For

more on how this affects the

programs see FAQs

. Some program modifications

due to its extension.

Context: According to the most rec ent data, Alberta boasts approximately 13% of Canada’s

total population, 11% of net gasoline sales and 3% of ethanol production capacity.

(ii) British Columbia Biofuel Policies

Biofuels Strategy/Policy Documents:

In 2007/2008, the province of British Columbia (BC) committed to bioenergy and renewables

and set an objective to lower greenhouse gases emissions by 33 percent by 2020. The

province, under its Ministry of Energy, Mines and Petroleum Resources, unveiled 2 strategy

documents/plans related to using bioenergy resources to reduce greenhouse gases. The first is

the BC Energy Plan

, unveiled late February 2007. This document sets out the necessary steps

for reducing BC’s greenhouse gas emissions and commits to investments in alternative

technologies, including biofuels for transportation. The second is the BC Bioenergy Strategy

which was made public at the end of January 2008.

Renewable Fuel Standard:

The BC Energy Plan includes the implementatio n of a 5% average renewable fuel standard for

diesel (higher than the anticipated federal mandate of 2%), and supports the federal action of

increasing the ethanol content of gasoline to 5% by 2010. Underpinning the commitment for a

renewable fuels mandat e for transportation fuels is the Greenhouse Gas Reduction (Renewable

and Low Carbon Fuel Requirements) Act which received royal assent on May 1, 2008. The

regulations for this act were pub lished in December 2008.

Consumption Incentives: Motor Fuel Tax Act and Carbon Tax Incentive

The consumption incentives for ethanol and biodiesel are in the form of tax exemptions. BC

has both a tiered motor fuel tax and a carbon tax. The Motor Fuel Tax Act sets out the

exemptions for ethanol and biodiesel. Effective July 1, 2004, the ethanol portion, includingdenaturant, of an ethanol/gasoline or gasoline/diesel bl end is exempt from tax if the ethanol

portion is not less than 5% or more than 25% of the volume of the blend. Effective February

20, 2008, ethanol used as coloured fuel, marine diesel, locomotive fuel, jet fuel or aviation fuel

is exempt from tax. This in cludes the portion used in any biodiesel fuel blend and any ethanol

blend in which the ethanol portion is from 5% to 25%. Previously, ethanol was only exempt

from tax when used in motor vehicles on a highway. Ethanol blends greater than 85% are

100% exempt

.

Effective February 21, 2007, biodiesel is exempt from tax when used on

- highway. This

exemption includes the biodiesel portion of any blend of biodiesel and diesel fuel, as well as

pure biodiesel (B100). Effective February 20, 2008, biodiesel used as co loured fuel, marine

diesel, locomotive fuel, jet fuel or aviation fuel are exempt from tax. This includes the portion

used in any biodiesel fuel blend and any ethanol blend in which the ethanol portion is from 5%

to 25%. Previously, biodiesel was only exem pt from tax when used in motor vehicles on a

highway.

The Carbon Tax Act is the legislation that sets out the low carbon fuel requirement for a 10%

reduction in carbon content of fuel by 2010. BCs new carbon tax came into effect on July 1,

2008. Under the Carbon Tax Act, the renewable fuel potions of blended motor fuel are exempt

from taxation. It is expected that the low carbon requirement will increase the demand for

biofuels.

Table 2.4

British Columbia: Programs to Promote a Provincial Renewable Fuels Industry

Program

Name Budget

Allocated /

Administering

Ministry or

Agency Type of Program/ Program Design / Duration

BC

Bioenergy

Network C$ 25 million ▪ Grant; funding assistance

▪ Capacity building; to encourage the development and marketing of wood

- to

bioenergy and other bioenergy technologies

Ministry of

Energy, Mines

and Petroleum

Resources; BC

Bioenergy

Network ▪ Began April 1 2008 and has no specific end date

Additio nal note: The projects funded so far include 1.82

million $Can in funding assistance to Lignol Energy

Corporation, 3 million $Can to Nexterra, and 400 thousand

$Can to Cedar Road, $100,000 investment in University of

British Columbia’s Clean Energy Researc h Centre (CERC)

Liquid

Biofuels

Program C$ 10 million ▪ Grants, funding assistance

▪ To help build up liquid biofuels production capacity

Ministry of

Technology,

Trade and

Economic ▪ Call for applications went out late November, 2008, and

application date closed January 2009

Additional note: Projects that were awarded funding were

announced in April 2009. Two of the eight projects areDevelopment projects which use woody biomass to produce cellulosic

ethanol. The remaining six projects are for biodiesel

production. For more information on these projects, see:

Approved Liquid Biofuels Projects

. Innovative

Clean

Energy

Fund C$ 25 million

per year ▪ Grants, funding assistance

▪ To address specific energy and environmental problems that

have been identified by the province by supporting the pre

commercial energy technology that is new or commercial

technologies not currently used in the province (note: the

funding is not specifi c to biofuels, but alternative fuel

technologies are eligible)

Ministry of

Technology,

Trade and

Economic

Development ▪ Originally established in December 2007, originally to run

two years, has been extended another 3 years, ends in 2011

Additi onal note: The first round of funding was been

awarded/announced in July 2008. For more information on

these projects, see: ICE Fund Project Round One

Context: According to the most recent data, British Columbia boasts approximately 11% of

Canada’s total population, 13% of net gasoline sales and virtually no commercial ethanol

production capacity.

(iii) Manitoba Biofuel Policies

Biofuels Strategy/Po licy Documents:

Manitoba is developing its ethanol and biodiesel industries under the Energy Development

Initiative section of the Ministry of Science Technology Energy and Mines. Information on

Manitoba’s biofuels initiatives is available on the provin ce’s Energy Development Initiative

website.

Renewable Fuels Mandate:

The implementation of The Bio

- fuels and Gasoline Tax Amendment Act was enacted in the fall

of 2007. The mandate requiring that 8.5% of the gasoline pool contain ethanol came into effect

on January 1, 2008, beginning with a 5% ethanol content requirement for the first quarter of

the year and moving to 8.5% for the remainder of 2008 and subsequent years. Manitoba is

also preparing for the implementation of a biodiesel mandate in 2010. In December, 2007 the

Province of Manitoba passed the new The Biofuels Act

. The new legislation sets out Manitoba’s

biodiesel program which includes strict licensing and fuel quality requirements and the option

for a future biodiesel mandate. Details of the licensing requirements as well as the application

for biodiesel producers can be found on the website of the Manitoba Biodiesel Energy Office

website.

Production Incentives:The gasoline tax exempti ons for ethanol have been replaced by a direct producer grant that

decreases over a period of eight years. The staggered, decreasing production incentives are as

follows: 20 cents/liter producer incentive beginning January 1, 2008 until December 31, 2009;

15 cents/liter production incentive beginning January 1, 2010 until December 31, 2012; 10

cents/liter producer incentive beginning January 1, 2013 until December 31, 2015. To be

eligible for the incentive, ethanol must be produced in Manitoba and sold in Manitoba to fuel

suppliers. More information on the program is available at: Ethanol Fund Grant Regulation

.

Context: According to the most recent data, Manitoba boasts approximatel y 3% of Canada’s

total population, 4% of net gasoline sales and 9% of ethanol production capacity.

(iii) Saskatchewan Bio

- fuel Policies

Biofuels Strategy/Policy Documents:

Saskatchewan is also going forward with its “ Go Green ” strategy. The strategy promotes

environmentally friendly transportation. Initiatives include working with industry to develop

E85 (fuel blends with 85% ethanol and 15% gasoline) corridors in the province, developing a

1.4 billion liter biofuels industry in Saskatchewan, and implementing a Government and Crown

vehicle purchase policy that requires all vehicles to be hybrid electric, alternative or flex

- fuel,

or within the top 20 per cent ef ficiency in their class.

Renewable Fuels Mandate:

Saskatchewan currently has a 7.5% ethanol content requirement in its gasoline.

Production Incentives:

Saskatchewan does not provide fuel tax exemptions for alternative fuels but does provide

grants to fuel distributors through the Ethanol Fuel Grants Program

. To be eligible for the

grants, the ethanol used by the distributor has to have been produced at a facility located in

Saskatchew an from biomass grown in Saskatchewan.

The Saskatchewan Ministry of Agriculture administers the Saskatchewan Ethanol Program

.

Table 2.5

Saskatchewan: Programs to Promote a Provincial Renewable Fuels Industry

Program

Name Budget

Allocated /

Administering

Ministry or

Agency Type of Program/ Program Design / Duration

SaskBio C$ 80 million ▪ Loans, repayable contributions of up to 10 million dollars

▪ Created to provide an opportunity for Saskatchewan residents to participatein value

- added biofuel production in Saskatchewan through investment

ownership in biofuels facilities

Ministry of

Agriculture ▪Began December 2008, end date Decemb er 2012

Additional note: program conditions includes 5%

Saskatchewan ownership and annual production capacity of a

new facility of 2 million liters per year

Context: According to the most recent data, Sadkatchewan boasts approximately 3% of

Canada’s total population, 3% of net gasoline sales and 24% of ethanol production capacity.

(iv) Ontario Biofuel Policies

Biofuels Strategy/Policy Documents:

Ontario is the largest ethanol

- producing province in Canada and has been a leader in building

ethanol production capacity in Canada. Its ethanol strategy has two components; (1) a

renewable fuel standard mandate, and (2) the Ontario Ethanol Growth Fund (OEGF) that was

created in 2005.

Renewable Fuels Standard:

As of January 1, 2007, the gasoline tax exemption of 14.7¢ a liter on the ethanol portion of the

ethanol

- blended gasoline was no longer in effect. At the same time, a mandate that requires

an average of 5% ethanol be blended in the gasoline sold in Ontari o came into effect.

Provincial Programs to Support the Development of a Regional Biofuels Industry:

The Ontario Ethanol Growth Fund (OEGF) provides:

C$32.5 million for capital assistance to help meet financial challenges; cannot exceed

10¢ per liter

C$60.5 million per year from 2007

- 2017 for operating assistance to address changing

market prices; no operating grant will exceed 11¢ per liter of ethanol

C$16 million in support of independent retailers selling ethanol blends; Independent

Gasoline Blender’s Transition Fund,

C$7.5 million in private and public funds for research and development opportunities

Context: According to the most recent data, Ontario boasts app roximately 39% of Canada’s

total population, 40% of net gasoline sales and 55% of ethanol production capacity.

(v) Quebec Biofuel PoliciesBiofuels Strategy/Policy Documents:

Quebec currently has no mandate in place for renewable fuel content in gaso line. The

provincial government is considering a 5% bio

- fuel content mandate in its gasoline pool by

2012. More information on Québec’s ethanol initiative is available on the following website:

http://www.mrnf.gouv.qc.ca/english/energy/sources/sources

- biomass.jsp

Production Incentives:

Quebec currently has in place a temporary refundable tax credit (maximum $0.185 per liter),

to be granted for a maximum of 10 years, to corporations that produce ethanol from renewable

material and sell the ethanol for use in Québec. It began April, 2006 and expires in 2018. An

eligible corporation’s ethanol production must be sold in Quebec to a person holding a

collection officer’s permit issued under The Fuel Tax Act. Additional conditions to be entitled to

the credit is that the tax credit is limited to a maximum ethanol production credit of 126 million

liters and no tax credit is given for the month in which the average monthly price of crude oil is

equal to or greater than US$65 or the total cumulative production of ethanol exceeds 1.2

billion liter s. The reasoning for this limitation is that it was assumed that ethanol would be

competitive with gasoline is the price of crude oil exceed 65$US a barrel. More information is

available on the web site of Revenue Quebec.

While some corn production t akes place in Quebec, Quebec’s focus is on the development of

cellulosic ethanol. It is Quebec’s intention to use wood from its forestry industry to grow its

ethanol market. This technology seems to be moving closer to commercialization given the

recent joint venture announcement between Enerkem

, a Quebec

- based gasification and

catalysis technology company, and Greenfield Ethanol, Canada’s leading ethanol producer.

Context: According to the most recent data, Quebec boasts approximately 23% of Canada’s

total population, 21% of net gasoline sales and 9% of ethanol production capacity.

(vi) Biofuel Policies in Atlantic Canada

Biofuels Strategy/Policy Documents:

The biofuels sector has stru ggled to establish a presence in the Atlantic Provinces due to a lack

of provincial government support and a lack of biofuel initiatives. Several Atlantic provincial

governments have begun looking over their energy strategies and are struggling to evaluat e

the feasibility of a renewable energy industry for their respective provinces. No unified biofuel

strategy has yet been unveiled. One of the key organizations pushing for the development of a

biofuels industry is the Atlantic Bioenergy Taskforce

. Atlantic Canada renewable fuels will likely

focus on technologies that use wood residue as feedstock3. Energy Markets

A. Energy Production and Consumption Patterns

Unlike the United Sta tes, energy security is not a factor behind the recent and projected

growth in Canada’s ethanol industry. Canada has the world’s second largest proven oil

reserves (estimated at 179.2 billion barrels) and is one of the top 10 oil

- exporting countries in

th e world. According to the National Energy Board of Canada (NEB), in 2008, Canadian

production of crude oil and equivalent averaged 2.7 million barrels (US liquid) per day, and

represents a 2.5% increase over 2007. The NEB states that the rate of growth s lowed in 2008

relative to 2007 due to downtime for maintenance and tying new facilities.

Table 3.1

Growth in Canadian Oil Production, Consumption and Net Exports*, 2002

- 2008; in

'000 barrels per day

2002 2003 2004 2005 2006 2007 2008

Total Oil Production 1 2,950 3,110 3,135 3,092 3,287 3,422 3,353

% change 5% 1%

- 1% 6% 4%

- 2%

Total growth (2002

- 2008) 14%

Crude Oil Production 2 2,171 2,306 2,398 2,369 2,525 2,616 2,593

% change 6% 4%

- 1% 7% 4%

- 1%

Total growth (2002

- 2008) 19%

Canadian Consumption 3 2,078 2,207 2,300 2,345 2,297 2,364 2,318

% change 6% 4% 2%

- 2% 3%

- 2%

Total growth (2002

- 2008) 12%

Net Exports of Petroleum 871 903 836 795 990 1,058 1,035

% change 4%

- 7%

- 5% 25% 7%

- 2%

Total growth (2002

- 2008) 19%

*expressed in liquid(l) barrels

Source: Energy Information Agency, US Dept. of Energy

1 total oil production includes lease condensate, natural gas liquid, and other liquids, and refinery

processing gain (loss). Negative values indicates refinery processing loss

2 in cludes lease condensate

3 consumption of petroleum products and direct combustion of crude oil

B. Energy Demand by the Transportation Sector

While Canada is a significant producer of oil, it also ranks among the world top 10 consumers

of petroleum. As illustrated in Table 3.2, transportation, on average between years 2004 and

2008, accounted for nearly one quarter, 24

- 25% of total energy deman d. Of that share, motor

gasoline and diesel fuel oil account for 87% of the energy used (see Table 3.4). Based on data

from the US Department of Energy, Canada decreased its consumption of petroleum in 2007

(see table 3.1), and this decrease in consumpti on is reflected in the reported drop in use inindustrial consumption of energy (reflection of the economic slowdown). In contrast, the level

of consumption in the transportation industry in 2008 increased marginally from year 2007

levels. The NEB report s that this slight increase in consumption is due to growth in population

and commercial sector but also the growth rate in energy consumption has slowed

considerably from years 2006

- 2007 levels when Canadian increased their transportation

energy consumpti on by 4%.

Table 3.2

Domestic Energy Consumption; in petajoules

2004 2005 2006 2007 (a) 2008 (a) Change

07/08

Residential (b) 1,421 1,403 1,347 1,448 1,466 1.2%

Commercial 1,468 1,493 1,425 1,471 1,499 1.9%

Industrial (b)(c) 5,015 4,857 4,967 5,166 5,090

- 1.5%

Transportation 2,483 2,519 2,514 2,616 2,624 0.3%

Total 10,387 10,272 10,253 10,701 10,679

- 0.2%

(a) includes consumption of imported energy

Source: National Energy Board

A closer look at the use of energy within the transportation industry shows that on average for

the last seven years, the share of energy used for freight averaged 40% per year and the

share of energy used for passenger transportation averaged 56%.

Table 3.3

Energy Use by Transportation Sector; in petajoules

2000 2001 2002 2003 2004 2005 2006

Total Energy Use 2,282 2,277 2,306 2,362 2,465 2,501 2,492

Freight 947 898 892 938 1,002 1,028 1019

Passenger 1,255 1,291 1,323 1,331 1,368 1,376 1,374

Off road 80 89 92 93 95 97 100

Shares (%) 2000 2001 2002 2003 2004 2005 2006

Freight 41% 39% 39% 40% 41% 41% 41%

Passenger 55% 57% 57% 56% 55% 55% 55%

Off road 4% 4% 4% 4% 4% 4% 4%

* year 2006 is the year for which the most recent data is available

Source: Office of Energy

A breakdown of transportation energy use by fuel type reveals that gasoline and diesel fuel

account for an average of 56% and 30%, respectively, of the fuel type used, and dominate as

the transportation sector’s main energy sources (see table 3.4).

Ta ble 3.4

Transportation Sector Energy Use by Source; in

petajoules

2002 2003 2004 2005 2006

Total Energy Use 2,306 2,362 2,465 2,501 2,492

Electricity 3 3 4 4 4

Natural Gas 2 2 2 2 2Motor Gasoline 1,333 1,355 1,384 1,378 1,380

Diesel Fuel Oil 662 698 745 782 783

Light Fuel Oil and Kerosene 0 0 0 0 0

Heavy Fuel Oil 65 67 69 68 57

Aviation Gasoline 4 3 3 3 3

Aviation Turbo Fuel 225 223 246 256 253

Propane 12 12 13 10 12

Coal 0 0 0 0 0

Shares(%) 2002 2003 2004 2005 2006

Electricity 0.1% 0.1% 0.2% 0.2% 0.2%

Natural Gas 0.1% 0.1% 0.1% 0.1% 0.1%

Motor Gasoline 57.8% 57.4% 56.1% 55.1% 55.4%

Diesel Fuel Oil 28.7% 29.6% 30.2% 31.3% 31.4%

Light Fuel Oil and Kerosene 0.0% 0.0% 0.0% 0.0% 0.0%

Heavy Fuel Oil 2.8% 2.8% 2.8% 2.7% 2.3%

Aviation Gasoline 0.2% 0.1% 0.1% 0.1% 0.1%

Aviation Turbo Fuel 9.8% 9.4% 10.0% 10.2% 10.2%

Propane 0.5% 0.5% 0.5% 0.4% 0.5%

* year 2006 is the latest year for which data was available

Source: Office of Energy

C. Imports and Exports

The Canadian NEB estimates total crude oil exports at 1.79 million barrels (US liquid) per day,

in 2008, which represents a less than 1% decrease from 2007 levels. According to the Energy

Information Administration (EIA), Canada remained the largest expor ted to the United States

for crude oil in 2008, ahead of both Saudi Arabia and Mexico.

Despite Canada’s position as a net exporter of crude oil, much of the requirements of eastern

refineries are met with foreign produced crude oil. In 2008, the NEB r eported that crude oil

imports decreased from 2007 levels by 2.3% to 840,000 barrels (U.S. liquid) per day, which

represents 47% of total refinery feedstock requirements in Canada. Canadian oil production is

unevenly distributed across Canada and results in Canada’s eastern provinces, where most of

the population is located, being net importers. Due to better transportation networks, imports,

of which 59% originate from OPEC countries, 34% from the North Sea and 7% from NAFTA

countries, help meet the requ irements for the Atlantic region, Quebec, and Ontario. According

to the NEB, Quebec was the largest regional importer of crude oil with 90% of their refining

needs being supplied from international sources. The NEB also reports that refineries in

Ontario are increasing their feedstock sourcing from Western Canada.

4. The Canadian Ethanol Industry

A. Ethanol Production and Distribution Capacities

Based on the trend of net sales of gasoline used for road motor vehicles over the past five

years (see Table 4.1 below), a federal mandate of 5% renewable fuel content would require aminimum of 1.9 billion liters.

Table 4.1

Sales of Fuel Used for Road Motor Vehicles, Canada; in 1000 liters

2003 2004 2005 2006 2007 Average 06/07

Net sales

of

gasoline 38,421,608 38,911,752 38,484,324 38,653,955 39,640,225 38,822,373 2.55%

Net sales

of diesel

oil 14,720,634 15,671,144 16,216,420 16,611,819 17,196,304 16,083,264 3.52%

Source: Statistics Canada; 2007 year for which most recent data is available

Should the projects under construction be realized, Canadian production is expected to reach

1.931 (see Table 4.2) billion liters by the end of 2010, a production capacity that meets the

government of Canada’s target of 1.9 billion liters. Current produ ction capacity by the end of

2009 is expected to increase only slightly from 2008 levels due to the economic slowdown

which has resulted in several construction plans for ethanol plants being delayed until oil prices

recover and the economy improves. Prod uction capacity is expected to reach 1.415 billion

liters in 2009, a 1.8 percent increase compared to 2008 (1.39 billion liters). The anticipated

increase is due to anticipated production from the North West Bio plant which is expected to

come on line tow ards the end of 2009.

Table 4.2

Fuel Ethanol Production Plant

- Existing, Expanding, Under Construction

Status Location Company Name Primary

Feedstock Expected

Capacity

(million

liters)

Existing Varennes Quebec GreenField Ethanol corn 120

Existing Westbury, Quebec Enerkem wood waste 5

Existing Chatham, Ontario GreenField Ethanol corn 150

Existing Ottawa, Ontario Iogen wheat straw 2

Existing Sarnia, Ontario Suncor Energy corn 200

Existing Tiverton, Ontario GreenField Ethanol corn 26

Existing Johnstown, Ontario GreenField Ethanol corn 200

Existing Collingwood, Ontario Collingwood Ethanol corn 50

Existing Aylmer , Ontario IGPC corn 150

Existing Minnedosa, Manitoba Husky Energy wheat, corn 130

Existing Lloydminster, Saskatchewan Husky Energy wheat 130

Existing Weyburn, Saskatchewan NorAmera Bioenergy wheat 25

Existing Lanigan Saskatchewan Poundmaker wheat 12

Existing Belle Plaine, Saskatchewan Terra Grain Fuels wheat 150

Existing Red Deer, Alberta Permolex wheat 40

Under

construction St

- Clair, Ontario (expansion

of current plant) Suncor corn

200

Under

construction Havelock, Ontario Kawartha Ethanol corn

80

Under Hensall, Ontario GreenField Ethanol corn 200construction

Under

construction Unity, Saskatchewan North West Bio

Energy wheat

25

Under

construction Edmonton, Alberta GreenField

Ethanol/Enerkem

Inc. municipal

landfill waste 36

TOTAL:

1,931

Source: Canadian Renewable Fuels Association

In 2009, it is estimated that 69% of the production capacity for domestic ethanol will come

from corn, 30% from wheat and 1% from “other” feedstocks s uch as wood waste and wheat

straw. Post forecasts that this will likely change to 75% corn, 23% wheat and 2% “other”

feedstock by the end of 2010 should the planned plants be in operation by the end of 2010. In

2009, Ontario alone is estimated to account for 56% of current domestic ethanol production

capacity. Quebec is estimated to account for 9% of current domestic ethanol production

capacity and the western provinces of Manitoba, Saskatchewan, and Alberta combined are

estimated to account for 35% of d omestic ethanol production capacity.

B. Canadian Ethanol Production Business Models

While the federal and provincial programs have been designed to encourage ethanol plants

with greater agricultural producer/rural community equity or investment, Canad ian ethanol is

being produced by companies that range from (a) energy companies and energy marketers, to

(b) companies which focus on grain

- based ethanol production that often have some degree of

producer equity/investment, to (c) co

- operatives, to (d) com panies focused on a range of

activities such as grains, or other sources of renewable fuels. Only one multinational

corporation, ADM, has involved itself in the production of Canadian ethanol. ADM has invested

in Husky’s large wheat

- based ethanol product ion facility in Lloydminster, Saskatchewan. To

date, multinationals have not expressed interest in Canadian produced ethanol, seeing Canada

primarily as a market for US

– produced ethanol. This may change now that the Canadian

government has unveiled its n ew programs and production incentives.

Table 4.3

Canadian Ethanol Producer Business Models

Energy Producers and Marketers:

Suncor Energy

Husky Energy Location / Primary Feedstock / Plant Capacity / Start

- up

Plant 1:

Sarnia, Ontario / Corn / 200 million litres / 2006

Plant 2:

St

- Clair, Ontario / Corn / 200 million litres / 2010

Plant 1:

Minnedosa, Manitoba / Wheat, some corn / 130 million litres /

2007Plant 2:

Lloydminister, Saskatchewan / Wheat / 130 million litres / 2006

Grain Based Ethanol Plants with Producer Equity:

Gree nField Ethanol

Poundmaker

Terra Grain Fuels

IGPC

Kawartha Ethanol

North West Bio

Energy Location / Primary Feedstock / Plant Capacity / Start

- up

Plant 1:

Varennes, Quebec / Corn / 120 million litres / 2007

Plant 2:

Chatham, Ontario / Corn / 150 mil lion litres / 1996

Plant 3:

Tiverton, Ontario / 26 million litres / 1989

Plant 4:

Johnstown, Ontario / Corn / 200 million litres / 2008

Plant 5:

Hensall, Ontario / Corn / 200 million litres / 2010

Lannigan, Saskatchewan / Wheat / 12 million litres / 1991

Belle Plaine, Saskatchewan / Wheat / 150 million litres / 2008

Aylmer, Ontario / Corn / 150 / 2008

Havelock, Ontario / Corn / 80 million litres / 2010

Unity, Saskatchewan / Wheat / 25 million litres / 2009

Renewable Fuels Companies:

NorAmera

Bioenergy

Iogen

Enerkem

GreenField

Ethanol/Enerkham

Joint Venture Location / Primary Feedstock / Plant Capacity / Start

- up

Weybur, Saskatchewan / Wheat / 25 million litres / 2005

Ottawa, Ontario / Wheat straw / 2 million litres / 2004

Westbury, Quebec / Wood waste / 5 million litres / 2005

Edmonton, Alberta / Municipal landfill waste / 36 million litres /

2010

5. The Canadian Biodiesel Industry

A. Biodiesel Production and Distribution Capacities

The Canadian government’s Notice of Intent anticipates that to reach its objective of a federal

mandate of 2% renewable fuel content in diesel fuel, 600 million liters of diesel fuels will be

required. Despite the Government of Canada’s announcement that it intends to mandate

renewable fuel content in diesel fuel, the growth in biodiesel production capacity has not

increased significantly until very recently. A stronger driver of the increase in biodieselproduction capacity seems to be provincial mandate s which are likely to into force ahead of the

federate mandate.

Table 5.1

Bio

- diesel Production Plants (Current, Expanding, Under

Construction)

Start

- up Location Company

Name Feedstock Capacity

(million

liters)

2005 Montreal,

Quebec Rothsay tallow 30

2008 St

- Alexis

- des

Monts, Quebec Bio

- Diesel Quebec

Inc yellow grease 10

1996 Foam Lake,

Saskatchewan Milligan Bio

- tech canola oil 1

2006 Hamilton,

Ontario BIOX Corporation tallow, yellow

grease, palm

oil 66

2009 Winnipeg,

Manitoba Greenway

Biodiesel Canola 20

2005 Calgary,

Alberta Western Biodiesel

Inc Multiple

feedstock 19

2009 Mississauga,

Ontario Methes Energies

Canada Multiple

feedstock 5

2010

- under

construction Beausejour,

Manitoba Eastman Bio

- Fuels Canola 11

2009

- under

construction Arborg,

Manitoba Bifrost Bio

Blends Canola 4

2009

- under

construction Lethbridge,

Alberta Kyoto Fuels Tallow 66

2011

Feasibility

Analysis

Stage Sturgeon,

Alberta Canadian

Bioenergy Canola 225

TOTAL: 457

Source: Canadian Renewable Fuels Association

Canada’s biodiesel production capacity by the end of 2009 is expected to reach 216 million

liters, a 71% increase over the 2008 production capacity of 126 million liters. This is if the

production form Bifrost Bio

- Blends and Kyoto Fuels come online before the end of 2009 as

anticipated. Even with the current plants, plants under construction and the potential 225

million liter Canada Bioenergy/ADM plant that is currently under consideration, the federal

biodiesel mandate is unlikely to be met solely with domestic production. Future growth, of the

Canadian biodiesel industry may be limited the industry’s ability to secure cheap feedstock.

Most of the current and forecasted increase in biodiesel comes from rendered animal by

products and industry sources p ut a ceiling on potential production from rendered animal fatsat 250 million liters. High prices for oilseeds may hinder Canada’s ability to supply the

majority of the feedstock necessary for the balance of the volume required.

The federal government ’s new biofuel strategy programs are geared more towards ethanol and

are therefore limited in their ability to address the limiting factors for biodiesel market growth.

This has implications when trying to determine what the profitability for embarking on a

biodiesel venture. For example, crushing plants can be used to produce oil for both bio

- diesel

production and human consumption, but the federal government does not want to

inadvertently subsidize crushing capacity for oils destined for human consumpti on. Many

investors, seeing the potential for bio

- diesel, hope to cash in on the federal government’s

ecoABC Initiative, a program to assist in the construction of biofuel facilities that have a

minimum of five percent producer investment. The Saskatchewa n Bio

- diesel Development

Council raised a red flag when it warned biodiesel proponents that crushing components of bio

diesel ventures would not be eligible for the repayable contributions. The Saskatchewan

Biodiesel Development Council is frustrated by t his, arguing that this violates the equity in

support that is supposed to exist between ethanol and biodiesel.

6. Import Regimes for Biofuels

Due to the North American Free Trade Agreement there is no tariff on renewable fuels

produced in the United States and imported into Canada; however, Canada does have a tariff

on ethanol imported from other countries such as Brazil ($0.05 per liter).

W hile the current differences in provincial tax exemptions for renewable fuels do not greatly

affect production decisions, the unlikely combination of lower oil prices (e.g. return to pre

- 2005

levels), and higher grain prices could make certain provincial t ax

- exemption restrictions

obstacles to expanding the industry.

7. The Economics of Biofuel Production in Canada

The long

- term viability of producing biofuels in Canada will depend on a multitude of factors

including plant size, production types, co

- pr oducts, feedstock costs, energy prices, and

production/consumption incentives. The required increase in biofuel production set out by the

federal mandate will necessitate a build up of infrastructure to support the industry.

A. Factors Affecting the L ong

- term Viability of a Canadian Biofuel Industry

A multitude of studies in Canada and elsewhere have been conducted on the cost of production

for different plant sizes for ethanol production. Economic studies conducted in the United

States have shown t hat there are large economies of scale in biofuel manufacturing. It was

estimated that tripling of a plant size reduced capital costs by 40% and operating costs by 15

-

20%. All new Canadian ethanol plants under construction, with the exception of Collingw oodEthanol and North West Bio Energy, are all large

- scale facilities designed to capture these

economies of scale. The eligibility limits outlined by the federal government production

program is 200 million liters per year, production limits that Canadia n plants currently are

below.

The economic viability of biofuels depends on the value of co

- products helps reduce per gallon

costs of production for ethanol. Different milling processes produce different co

- products. Wet

milling processes can also prod uce corn oil, corn gluten meal, corn gluten feed, and carbon

dioxide. Canada’s smaller and earliest ethanol plants are wet milling plants. These plants,

however, only produce wet distillers grains as co

- products, since they do not meet the

economies of s cale needed to warrant the production and marketing of the other potential co

products. These plants produce wet distillers grains (DDGs) that are consumed by local cattle.

Potential for large

- scale wet milling plants is limited as the large cattle and d airy production

does not take place in areas close enough to the ethanol plants due to transportation costs. It

is for this reason that Canada’s large scale plants are dry

- milling plants for which the by

products are distillers dried grain, condensed syru p, and carbon dioxide. By drying the DDGs,

it is possible to market this feed substitute to livestock markets that are further away. Possible

market intervention by the Canadian Wheat Board may limit a plant’s ability to extract full

value for its co

- pro duct. Additional limiting factors for extracting full value from the co

products and ethanol include a lack of efficient distribution channels and infrastructure.

Infrastructure and shipping logistics of feedstocks, fuel

- ethanol and its co

- products are also

factors that will affect Canadian competitiveness. With most refineries and most of the

populations in the east, and much of the increase in biofuel production capacities occurring in

the west, infrastructure and distribution issues become increasing ly important. Industry

sources see a short

- to

- medium term increase in rail usage. Proximity to railways has been

important when choosing locations for ethanol plants. Ethanol feedstock, ethanol and ethanol

co

- products will however have to compete with o ther, perhaps higher priced goods. Rail

connections with neighboring U.S. states may also increase. Any overseas deliveries of DDGs

are being done via vessels and therefore necessitate getting the co

- products to the coastlines

economically

.

The profit margins of ethanol production and its ability to compete with petroleum will continue

to be affected by the energy

– based inputs used in ethanol production and feedstock

production. In 2009, while natural gas prices have fallen dramatically due to the global

economic recession, feedstock prices remain high compared to historical averages. A resource

for tracking the profitability margins of ethanol and biodiesel can be found at the following

website: Center for Agriculture and Rural Development

. The same trend holds true for

biodiesel that is made with vegetable oils such as soybean oil and canola oils.

B. Impacts of Ethanol Production on Feedstock MarketsCorn and wheat are the main feedstock for ethanol production in Canada and the introduction

of the mandatory renewable fuel content by the Canadian government will undoubtedly have

an impact on production patterns. At this time, there are no official stat istics for the amount of

corn and wheat directed into ethanol production. Table 7.1 provides estimates and forecasts on

the quantity of corn and wheat that has and will be directed into ethanol production. These

estimates are calculated from the point in time when plants have reached, or are

expected to reach, full capacity (not based on plant production capacity on the start

- up

dates).

Table 7.1

Quantity of Feedstock Used in Ethanol Production*; in MT

2006 2007 2008 2009(e) 2010(f)

Corn 701,040 1,183,640 1,390,523 2,384,806 3,604,006

Wheat 215,543 525,780 761,746 1,145,032 1,188,212

*estimates, does not include ethanol produced from municipal landfill waste, nor woody

waste

conversion factors:

1 bushel corn or wheat = 10 liters ethanol

1 bushel corn = .0254 MT

1 bushel of wheat = .021772 MT

Calculated from when plants reach full production capacity

(i) Ethanol Produced from Corn

Ontario is the largest corn

- producing province in Canada and, not surprisingly, where 56% of

the Canadian ethanol production takes place. Corn at this time, is the main feedstock for

Canadian ethanol production. Corn production also takes place in Quebec

.

Table 7.2

Quantity of Corn Used for Feed, Ethanol Production; in 1,000 MT

Year Domestic Corn

Production Corn

Imports 1 Corn

Imports 2

from US Corn for

Feed 3 Corn for

Ethanol 4

2005 9,361 2,155 2,150 7,830 560

2006 8,990 1,899 1,893 8,275 701

2007 11,649 3,117 3,105 8,900 1,184

2008 10,592 2,000 1,992 9,600 1,391

2009(f) 10,550 2,350 2,340 9,100 2,384

1,2 import data based on a calendar year, all corn excluding popping corn; source:

Statistics Canada

3,4 no official statistics exist, estimates based on production in a calendar year

Corn is estimated to account for 65% of the feedstock used in ethanol production in Canada in

2008. In 2009, and 2010, corn is expected to account for 68%, and 75% of ethanol feedstock,

respectively, as more corn

- based ethanol plants come online. In 2008

, it is estimated that1,391 thousand metric tons (TMT) of corn was directed into ethanol production. In 2009, it is

estimated that 2,384 TMT of corn will be directed towards ethanol production, a 72% increase

from 2008 levels. This increase in demand fr om the ethanol industry however is offset by a

decrease in demand from Canada’s shrinking livestock industry and therefore the corn

plantings are expected to remain at the same level as in 2008. Canada is forecast to produce

10.6 million metric tons (MMT) of corn in 2009, and to import 2,350 TMT, mainly from the

United States. The forecasted increase in corn imports is due to lower levels of domestic

supply. With the forecasted expansion of the corn

- based ethanol industry in 2010, the amount

of corn requ ired in 2010 is an estimated 3.604 MMT (see table 7.1), a 51% increase over the

year 2009 requirements.

The increase in demand for corn by the ethanol plants, and Canada’s limited corn

- production

capacity due to climatic factors will result in the feed and ethanol industry in Canada competing

for corn. Many analysts say that this reduction in corn availability could be met with the

ethanol by

- product of DDRs. The Canadian livestock industry disagrees and has been very

vocal on this issue, pointing to increases in feed costs as a reason for lower livestock output.

Any shortfall in the ability to meet demand for corn domestically due to the re

- direction of corn

into ethanol use and away from feed will likely be met by imports of U.S. corn. However, the

volume of potential increases in imports of U.S. corn will be mitigated by a shrinking Canadian

livestock industry (and therefore a reduced demand for feed), the untapped corn growing

capacities in Ontario and Quebec, high corn prices, and the ability to use feed corn substitutes

for such as barley and DDGs.

(ii) Ethanol Produced from Wheat

Wheat is the feedstock for most of the balance of Canada’s ethanol production. In 2008, it

accounted for 35% of the feedstock, and is estimated to account for 32%, and 25% of the

grain

- based ethanol feedstock for years 2009, and 2010, respectively. The n ewer wheat

ethanol plants have more flexibility built

- in as the pipes are larger and allow the use of other

feedstock, such as corn, when wheat feedstock may be too expensive. The Husky Energy’s

wheat

- based ethanol plant in Minnedosa, Manitoba uses corn w hen wheat feedstock was

unavailable or too expensive. However, Husky Energy has agreed that 80% of the feedstock

used to produce ethanol will come from Manitoba producers. The agreement is with the

Manitoba government and expires after 8 years.

Table 7.3

Quantity of Wheat Used for Feed, Ethanol Production; in TMT

Domestic

Wheat

Production Wheat

Imports 1 Wheat

Imports 2

from US Wheat

for

Feed 3 Wheat for

Ethanol 4

2005 26,775 18 17 5,056 150

2006 25,265 26 25 4,800 2152007 20,054 25 23 4,000 526

2008 28,611 22 20 3,864 762

2009(f) 23,950 20 18 3,564 1,145

1,2 import data based on a calendar year and includes only HS code 1001; source:

Statistics Canada

3,4 not official statistics, estimates based on production in a calendar year

As shown in Table 7.3, in 2009, it is estimated that 1,145 thousand metric tons (TMT) of wheat

will be directed towards ethanol production, a 50% increase from year 2008 levels. Canada is

forecast to produce 24.0 MMT of wheat in 2009, a 16.3% decrease fro m 2008 levels. By 2010,

the openings of wheat

- based ethanol plants in Western Canada will increase the demand of

wheat destined for ethanol production to 1188 MMT (see Table 7.1), which represents a slight

increase over the estimated 2009 wheat utilizatio n for ethanol.

As the ethanol industry grows, demand for different wheat varieties is also expected to grow

resulting in increased competition between wheat end

- users, such as the Canadian ethanol

producers, livestock producers and the milling industr y. The need for high

- yielding, low

- protein

wheat by the livestock industry and the ethanol plants are in direct conflict with the needs of

the flour industry. Increases in ethanol efficient wheat is expected to affect production

patterns and result in mor e Canadian wheat farmers seeding area to lower protein/high starch

wheat such as Winter Wheat and Canadian Prairie Spring Wheat rather than higher

protein/lower starch wheat varieties used by the milling industry. The livestock sector,

especially the hog sector, competes for the same wheat varieties as the ethanol sector.

There are additional layers of complication when using wheat as a feedstock in ethanol

production, depending on the co

- products produced and the markets for which they are

destined. The Canadian Wheat Board (CWB) controls the sales of wheat for human

consumption and export and therefore as long as the ethanol is going to be used as fuel and

the DDG's are going to be fed to livestock, the CWB has no involvement. If the plant

fractio nates the grain and it removes components that can be used for human consumption

such as wheat gluten, then a portion of the wheat technically, has, to be purchased through

the CWB. For the most part, ethanol plants purchase their wheat in the same way a feed mill

does, either directly from farmers or from a grain company. While the CWB promotes

industrial uses for its western

- grown grains, its current position is that although its mandate

allows it to enter the market for sales of wheat for ethanol produ ction, it will not do so.

(iii) Ethanol Produced from Sugercane or Sugar Beets

Canada does not produce ethanol from sugarcane or sugar beets, nor are there any

expectations that it will on a large scale.

C. Impacts of Biodiesel Production on Feedstock Markets(i) Biodiesel Produced from Canola and Animal Fats/Oils

With a 2% biodiesel mandate in place, the choice of feedstock comes into question. While

biodiesel can be made from a variety of feedstocks

, prices and availability are the determining

factors of which one will be used. While canola, due to the abundance of the Canadian

production, was thought to be the natural choice for feedstock, studies suggest that this may

not be the case. Key competi tors facing canola oil for use in biodiesel are rendered oils (yellow

grease), rendered animal fats (tallow), palm oil (which would be imported as Canada does not

produce palm oil), and soybean oil. Canola and soybeans are high priced feedstock for

biodie sel since they are priced as food oils in the international markets while palm oil and

rendered fats are priced at feed and industrial use levels.

Most of the growth in biodiesel production capacity has been taking place in Western Canada,

spurred on by provincial mandates.

Table 7.4

Quantity of Feedstock Used in Bio

- diesel Production*; in million

liters

2006 2007 2008 2009 (e) 2010(f)

Soybean oil 0 0 0 0 0

Rapeseed Oil 0,99 0,99 7,92 42,6 265,3

Palm Oil 0 0 0 0,0 0,0

Animal Fats 48,5 48,5 48,5 54,0 113,9

Recycled Vegetable

Oil 65,3 70,3 75,2 90,1 90,1

*Conversion factor: 1 liter feedstock = 1.10 liters bio

- diesel; Note: feedstock

quantity calculated from point at which plant operates at full capacity

Canola production has reached record high levels in recent years, and increased demand from

canola oil for use as an oil in the food retail industry has resulted in higher prices. Canola

producers have responded by planting record acres. Despite this sup ply response, some

industry observers suggest that canola could remain too expensive, and that a 2% biodiesel

blend could be met with cheaper feedstock. As the demand for the cheaper feedstock

increases, so will their prices. This may result in canola be ing used to fill the void created in

various markets such as the soap and chemical markets. Industry information indicates that a

demand for 503 million liters of biodiesel could and will likely be met from yellow grease, tallow

and imported palm oil as f eedstock. In this scenario, canola oil use would remain mainly for

food, with some going into soap and chemical production and feed and an even smaller amount

going for export. In addition, canola may be used as an additive to biodiesel to help improve

t he flow and storability. Soybeans would be used exclusively for food use and tallow would be

diverted from feed use into biodiesel.

While canola use for biodiesel by

- itself may be expensive, the co

- products from biodieselproduction may make the economics work. Canadian Bioenergy and ADM are currently

conducting a feasibility analysis to determine if it would be profitable to build a large scale

biodiesel plant using canola as a feedstock. The plant will likely also be producing glycerine as

a co

- product. Other co

- products include meal to be used in animal feed. There are limits on

the profitability using canola as a feedstock if by

- products are part of the everyday production

process. For example, off

- seed canola may not be a suitable feedstock if the meal must be

sold since meal from off

- seed canola may not meet quality standards. Despite these

limitations, co

- products and the pr oduction capacity of the plants (it would be capable of

supplying over 40% of the federal 2% biodiesel mandate), and Alberta and British Columbia’s

biodiesel mandates may make the economics will work, despite the new, higher level, of

commodity prices.

D

. Fuels Produced from Other Biomass

There has been growing interest and investment in producing bioenergy from sources other

than the traditional grains of corn and wheat. There have been a series of announcements

over the last year of joint ventures t o make cellulosic ethanol and biogas. Two of the most

significant announcements include the joint cellulosic ethanol ventures announced by

GreenField Ethanol and Enerkem, as well as Iogen’s plans to build a commercial scale cellulosic

ethanol plant in Sas katchewan.

In 2008, GreenField Ethanol and Enerkham announced plans to built and operate a commercial

cellulosic ethanol plant using Enerkem’s technology. Enerkham, a Quebec

- based gasification

and catalysis technology company, has developed technology which converts biomass such as

municipal solid waste and wood residue into cellulosic ethanol. In June 2008, the companies

made the announcement that the plant would be built in Edmonton. The $70 million facility

will initially produce 36 million liters of biofuel a y ear. The City of Edmonton and the

Government of Alberta through the Alberta Energy Research Institute are contributing $20

million to the facility.

Biogas is also of increasing interest and investment. Two of the three bio

- energy projects

granted fun ding under Alberta’s Biorefining Commercialization and Market Development

Program and the Bio

- energy Infrastructure Development Program are for the development of

biogas as an alternative source of energy. Kingdom Farm Inc. received a significant grant to

review the potential for bio

- gas being applied to large scale Alberta hog operations. Highmark

Renewables Research also received a significant grant to carry

- out bio

- gas feasibility study on

a large scale dairy operation.

Most fuels derived from sour ces of biomass other than grains remain at the research level and

have not yet reached commercialization. In Canada, especially in British Columbia and Quebec

cellulosic ethanol produced from wood residues (wood waste) are of special interest. Onecompan y that is moving forward quickly with the development of this technology is Lignol

Energy Corporation

, a company which specializes in cellulosic ethanol and biorefining. Lignol

announced the completion of it s end

- to

- end production of cellulosic ethanol from its fully

integrated industrial

- scale biorefinery pilot plant in Burnaby, British Columbia in 2009. The

start up phase commenced in April 2009 but remains a pilot project.

E. Potential Trade Impacts

As Canada continues to build its bio

- fuel production capacity through its diverse federal and

provincial programs/strategies, potential trade issues such as World Trade Organization (WTO)

disciplines, biotechnology, and inter

- provincial barriers that are contrary to the national

treatment principle embodied in the WTO and the NAFTA may present policy complications.

Confrontations reflecting these concerns are likely still a long ways off as an international

trade/market for ethanol and bio

- diesel has yet to develop. In the meantime, Canada will be

concentrating its efforts on building up the industry.

The possibility of significant volumes of ethanol trade, especially between the northwest U.S.

and Western Canada (wheat

- based ethanol to the United Stat es and corn

- based ethanol to

Canada), is unlikely to develop in the short to medium term. This is due mainly to the fact

that Canada does not have excess ethanol production capacity, which would permit exports

being shipped to the United States. In addit ion, the transportation, distribution and

infrastructure issues around ethanol trade have yet to be resolved.

No official trade statistics exist for either fuel

- grade ethanol or biodiesel trade. However,

industry statistics suggest that Canadian imports of fuel ethanol are exclusively from the

United States, and for the 2002

- 2007 period, these imports hovered around 70

- 100 million

liters a year.

Table 7.5

Fuel Grade Ethanol Exports to U.S. from Canada

(in Thousand Barrels)

2004 2005 2006 2007 2008

148 77 196 58 83

Source: Energy Information Administration

Canada does, however, provide trade statistics for industrial

- grade ethanol. The bulk of

industrial ethanol trade (HS 22.07.10 and 22.07.20) takes place with the United States (see

Table 7.6 a,b, 7.7 a,b). In 2008, Canadian exports of denatured alcohol ( ethanol that cannot

be used for beverages nor for hospital use) was 17.1 million litres pure alcohol (MLPA) and

64% was destined for the U.S. market. Canadian exports of undenatured alcohol in 2008 were

37.8 MLPA, with 36% of those exports being sent to t he United States.Table 7.6a

Canada Ethanol Exports (2003

- 2006); in '000 Liters Pure

Alcohol

HS code Description 2005 2006 2007 2008

Total Ethanol 35,439 57,413 58,683 54,860

220710 Undenatured 16,606 19,957 39,627 37,773

220720 Denatured 18,834 37,457 19,057 17,086

Source: World Trade Atlas, Statistics Canada

Table 7.6b

Canada Ethanol Exports to U.S. (2003

- 2006); in '000 Liters Pure

Alcohol

HS code Description 2005 2006 2007 2008

Total Ethanol 23,703 40,698 42,782 28,374

220710 Undenatured 9,867 8,460 27,824 17,499

220720 Denatured 13,836 32,238 14,958 10,875

Source: World Trade Atlas, Statistics Canada

As illustrated in Table 7.7a,b, Canadian imports of denatured ethanol increased in 2008.

Imports of undenatured ethanol dropped slightly to 22.1 MLPA in 2008 from 23.1 MLPA in

2007. Imports of undenatu red ethanol from the U.S. increased slightly in 2008 rising to 17.1

from 15.145 MLPA in 2007.

Table 7.7a

Canada Ethanol Imports (2004

- 2007); in 1,000 Litres Pure

Alcohol

HS code Description 2005 2006 2007 2008

Total Ethanol 152,058 100,325 553,792 594,706

220710 Undenatured 29,397 34,782 23,095 22,128

220720 Denatured 122,661 65,530 530,697 572,578

Source: World Trade Atlas, Statistics Canada

Table 7.7b

Canada Ethanol Imports from U.S. (2004

- 2007); in '000 Liters

Pure Alcohol

HS code Description 2005 2006 2007 2008

Total Ethanol 113,536 78,379 455,349 502,196

220710 Undenatured 21,809 26,385 15,145 17,120

220720 Denatured 91,726 51,994 440,267 485,077

Source: World Trade Atlas, Statistics Canada

8. Conclusion

The federal government’s biofuel strategy has resulted in increased biofuel production capacity

in Canada. However, Canada’s ability to compete in grain

- based ethanol production with the

United States or low

- cost production countries without government su bsidies and market

intervention is limited. The long term

- viability of the Canadian grain

- based biofuels industry

will depend on a multitude of factors including plant size, production types, co

- products,

feedstock costs, and energy prices. The increase in bio

- fuel production required by the federalmandate will necessitate a build up in infrastructure. Cellulosic ethanol provides an additional

means of achieving the environmental objectives of the Canadian bio

- fuel mandate, and while

there seems to be i ncreasing levels of investment in this technology, the technology remains at

the pilot project levels.

More detailed trade statistics are needed to measure the trade developments of the bio

- fuels

market and the markets for the co

- products. Canada’s limited production capacity, both in the

short and medium term suggests that Canada’s entry into the global ethanol market is still

quite distant. While the possibility of increased ethanol trade, especially between the

northwest U.S. and Western Canada ( wheat

- ethanol to the United States and corn

- based

ethanol to Canada), is unlikely to develop in the short to medium term, there is an increasing

amount of trade taking place in the co

- products of ethanol production.