05 February 2007 00:00 [Source: ICB]
Biofuels - ethanol and biodiesel - are the hottest energy components around at the moment. The backing of European, US and other governments around the world for their use in transport fuels is creating intense interest in these alternatives to traditional fuels from refined crude.
The area is not so much like the Wild West, but the Yukon or Klondike gold rushes, where some got rich, but others lost out. Total equity investment into biofuels was $2.0bn (€1.5bn) over the nine-month period from the final quarter of 2005 to the third quarter of 2006. This is second only behind the $5.6bn of equity put into solar energy over the same period, according to Michael Liebreich, CEO of New Energy Finance.
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Speaking late last year at the World Refining Association's European Biofuels Forum 2006 in Warsaw, Poland, Liebreich said total global investment in energy in 2005 was $500bn. And of this, about $1 in every $11 invested went into biofuels. By 2010, Liebreich estimates that the world will be investing around $100bn in energy projects, with about $1 in every in $6 going into clean fuels.
"Is this the bubble? There will be people who will lose their shirts, but we will find a transformed sector in the future," he told delegates.
But the fastest-growing area for biofuels is not in projects or technology it is in deals. There were 254 deals reported in 2005, which saw $7.2bn invested in 2006, he estimates, there will have been 289 deals with around $8.8bn invested. And the number of IPOs and secondary offerings of biofuel-based firms leapt last year. Around $1.5bn was raised in the second quarter of 2006, compared with $75m in the last three quarters of 2005.
"There is a gold-rush mentality at the moment investors are confused between technology and project finance, but the amount available is essentially unlimited," notes Liebreich. "How much do investors understand the market?" he asks, adding "will venture capitalists [who are investing increasingly now] be the long-term owners? Or will [ownership] return to oil and agribusiness?"
These are probably unanswerable questions at present, but the biggest investors in biofuels, by a long way, are the agricultural companies. This sector invested $8.9bn between January 2001 and August 2006, said Liebreich. This compares with $1.4bn from financial investors and $1.3bn by independent developers over the same timeframe. US-based ADM tops the list with $1.5bn, followed by Spain's Abengoa with around $679m in the same period and Tereos with around $280m.
Liebreich defines biofuels as "a policy-driven market." He adds: "Investors hate policy risk because they cannot control it." So, the smart ones diversify into different geographical regions. Other, relatively savvy, financial investors are looking at joint ventures with the existing agricultural players. But while smaller biofuel players are glad of the investment income, the larger ones are happy for financial investors to bear the risk.
Perhaps they are wise too, because not only are the markets driven by national or regional policies, which can change at short notice, but there is no clear winning technology there are at least four alternative technologies available for substituting petrol and more for diesel. Additionally, there doesn't seem to be a clear winning strategy based around integration with the oil firms and their logistics or the large agricultural suppliers.
Should you invest in a plant or technology with a single feedstock, or will your technology base allow for a range of feeds and fuels? There is little integration along the potential chains from seed to fuel tank, leaving many investors to try and catch the value in their segment of the chain.
Perhaps surprisingly, the potential environmental benefits of fuels made from renewable resources that can be regrown have only recently become the main reason for much of the interest in these innovative fuel sources. In Europe, at least, much of the initial interest from the European Commission and the EU centred around giving farming communities more reasons to stay together.
As Alexandra Langenheld, the seconded national expert on regulatory policy and promotion of renewable energy at the European Commission's directorate general for energy and transport, explains, offering new outlets for agriculture is one of the key planks of the EU biofuels strategy.
But, as Martin Von Lampe, agricultural economist from the OECD, asked at the recent 2006 European Biofuels Forum: what if the needs of farmers and of the environment are different? The question can be extended further: what if the needs of the environment and the need for more fuel to sustain economic expansion are in conflict?
These questions are at least in part why the European Commission is reviewing its biofuels policy in its recently revealed and wide-ranging Strategic Energy Review. This aims to produce a green paper in March 2007, and to produce a road map for the future of energy use in the EU in 2008. It will cover aspects of energy use and "biofuels could be used as appropriate," Langenheld says.
The Commission believes biofuels to be of great importance in the energy mix because they are more sustainable than fossil fuels. And, although they may not be the cheapest ways to reduce greenhouse gas emissions - their use can offset the rising trend in greenhouse gas emissions in transport. Transport emissions of carbon dioxide in the [then] 25 member countries in the EU increased by 246m tonnes/year from 2000 to 2005. In the same period, industrial emissions of carbon dioxide fell by 123m tonnes/year. The net rise has been around 27m tonnes/year. But, said Langenheld: "This trend is not expected to improve much in the next 15 years." Between 2005 and 2020, the EU 25 is likely to emit a further 126m tonnes/year, with transport accounting for 77m tonnes/year of this.
The second plank of EU support refers to the security of energy supply. The sector with the most insecure source of energy is transport, because it relies almost entirely on imported raw materials. This is a common theme across the globe. European policy rests on the Commission's 2003 biofuels directive, which set reference values for the market share of biofuels, of 2% by the end of 2005 and 5.75% by 2010. The process was to be driven by member states setting national indicative targets, which are not enforceable.
Although in the 2003 directive member countries were not given a stick to beat energy users into using biofuels, they were armed with a carrot to persuade them. EU countries are allowed to offer tax breaks to promote biofuels under the 2003 energy taxation directive.
Did it work? Not entirely. By 2005, the EU 25 should have had 2% of the transport fuel pool made up of biofuels. Only Germany (3.75%) and Sweden (2.23%) beat the target. The EU average was 1%. Langenheld said in November that the EU may be able to say that around 4% of the fuel pool is composed of biofuels by 2010.
This is partly why the Commission announced a change in the target to 10% by 2020 instead of 20% and is now proposing to make it obligatory for member states to use biofuels in their energy mix. However, that change in legislative climate may be good for innovation in Europe. The earlier level of about 4% by 2010 is, according to Peter Tain, secretary general of the European Petroleum Industry Association (Europia), about as much biofuel as Europe can produce via conventional routes. In the future, his maximum ethanol scenario sees fuel making up around 7% of road fuels and a similar amount of synthetic diesel.
Langenheld says there are good reasons for using biofuels. The first-generation biofuels generate 40-45% less greenhouse gas over their full life-cycle than gasoline. Second-generation biofuels could generate 65-85% less carbon dioxide than gasoline. The overall winner at the moment is sugarcane-produced ethanol from Brazil, which has a carbon footprint that is 90% smaller than conventional gasoline. Biodiesel from palm oil could generate only 45% of the carbon dioxide that gasoline generates over the whole of its life-cycle, but it must be grown on land that is not rainforest or otherwise important for the environment or biodiversity.
Because first-generation biofuels, made using crops that are traditionally grown for food, such as wheat, corn, rapeseed oil or canola in northern latitudes and palm oil in equatorial regions, are seen increasingly in competition with food uses for crops, the price of crops has risen. The price of corn traded on the Chicago Board of Trade reached a five-year high last November. That is with current fuel ethanol production consuming 15-18% of corn grown in the US.
Food worries are not confined to the US. The Malaysian government imposed a moratorium on building new biodiesel plants using palm oil in the country in mid-2006. This was because of the risk that palm oil, which is used for cooking, could be diverted into more lucrative diesel applications with potentially politically destabilising effects. More recently, Malaysian government ministers have proposed growing more oil palms on previously logged rainforest as a way of replacing some of the carbon-capturing capacity of the lost forest.
Speaking at the International Biofuel and Alternative Energy Conference in Kuala Lumpur, in early December, Malaysia's commodities ministry's parliamentary secretary Datuk Dr S Vijayaratnam said there have been criticisms that Malaysian oil palm plantations were adversely affecting the habitat of the orang-utan and the environment. This in turn affects Malaysia's reputation as one of the major palm oil producers to some degree, but, he said these claims were not based on facts.
In the US, the environmental debate centres around the amount of energy that biofuel crops can deliver, compared with the amount of energy it takes to grow, harvest, transport, ferment, purify and deliver ethanol to motorists. Most of the interest in the US is in ethanol, because relatively few US cars are diesel-powered.
The US debate is polite, but the two sides are clearly drawn. On one side are bloggers, such as C Scott Miller's BIOconversion Blog. Miller is pro-ethanol as a short-term solution to the US energy problems on the other side are people such as David Pimentel, an entomologist from Cornell University, and Tad Patzek, professor of civil and environmental engineering of the University of California, Berkeley, who oppose the use of ethanol for the longer term. Much of the pro-ethanol arguments echo those in Europe around using biofuels to increase energy independence, pay farmers more and generate jobs in the rural economy.
The arguments against focus on the stress that greater cultivation of crops will put on the environment, especially if growing more crops puts a strain on the water supplies in semi-arid states.
In fact, water demands and alternative uses such as food will severely constrain the long-term future of biofuels from food crops. The future may rest with second-generation fuels those made from non-food crops or the parts of crops that are not used for food offer greater long-term potential. But they are technically difficult to produce. There are no clear answers to the biofuels conundrum and the debates look set to run for some time yet.
Most biofuel practitioners divide the world into first- and second-generation technologies. But, there are also technologies that are either almost here or only available in limited quantities.
Biofuels include: ethanol, sometimes called bioethanol, produced mostly by fermenting sugars from crops as diverse as wheat and cassava and biodiesel, produced from the oily seeds of plants such as canola and oil palm or made from reprocessed cooking fats after use.
Some use straight vegetable oil in their diesel engines. Car manufacturers do not recommend this.
The intermediate technologies differ from fermentation, but microorganisms may play a role in them. They include:
These technologies are further away from commercialisation than first generation technology, but offer the prospect of greater volumes of fuel.
This usually aims at using the cellulose, hemi-cellulose or lignin found in the stems of grasses such as wheat, barley, oats and rye or, for the more adventurous, woodchips. The goal is to break this down into simple sugars that can be fermented into ethanol or converted into diesel. There is a lot of work in this area at the moment because the potential of biomass is so much greater than from crops.
However, there is no consensus that second-generation fuels will be more sustainable than first-generation fuels for transportation. This is because, once again, the energy input needed to convert plants into fuels reduces their benefits. The greatest benefits, some argue, would simply be to grow the crops, harvest them, and burn the resulting waste and generate electricity.
You can see both US positions on the Big Biofuels Blog at:
C Scott Miller's BIOconversion Blog: http://bioconversion.blogspot.com
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