U.S. Biofuels : Near-term challenges and prospects

This is a guest post from Pradeep Indrakanti a regular contributor to this blog and author of the Energy Engineering Blog.

Introduction:

Recent high crude oil prices reaching 140 $/barrel and federal incentives have spurred biofuel production. Additionally, as noted by a 2007 McKinsey report, cellulosic biofuels have the potential to be a negative cost means to abate CO2. However, the majority of the current ( I generation ) U.S. biofuel production consists of corn converted to ethanol via fermentation ( ~6.5 billion gallons of ethanol in 2007 , ~250 million gallons of biodiesel in 2006). First generation biofuels in the US primarily comprise of corn ethanol and soy biodiesel. This conversion of food to fuels has not been without its disadvantages. For example, concerns about food for fuel, resource (land, water, energy) requirements, as well as net energy balances have made first generation biofuels a topic of debate. In this article, I will examine the some near-term challenges and opportunities for the U.S. biofuel industry , and discuss some of Obama’s biofuel energy policies.

In comparison to I generation biofuels, II generation biofuels such as ethanol from cellulose, fuels from lignin likely have lesser environmental impacts. However logistical issues (gathering waste biomass) as well as enzyme costs are the main impediments for the commercialization of this technology. Additionally, in the case of waste biomass from crop refuse, the amount of biomass (ex: corn stover) to be left in the field to replenish the soil carbon is still a subject of research. The so-called III generation biofuels (algal biodiesel, high-photosynthetic rate plants) have the advantage of higher specific yields, but more research needs to be performed before they can be commercialized. For example, algal biodiesel economics are primarily affected by the algal yields, and improvements in algae productivity significantly improve the algal yields and overall economics.

The current economic downturn and lower demand for commodities has impacted several corn ethanol producers who locked into higher corn prices, anticipating an uptrend in commodity prices. VeraSun, for example, has filed for bankruptcy protection and is hoping to renegotiate agreements with corn producers. In the short-run, additional corn ethanol plants are not likely to be constructed because of lower demand for gasoline and tight credit markets . More about the general effects of the credit crisis on various sectors of the energy industry from an article on The Oil Drum .

Biofuels in Obama’s energy plan:

  1. Federal mandates for biomass-derived fuels and a National Low-Carbon Fuel Standard (LCFS): The Obama-Biden energy plan (referred to as Obama energy plan) calls for 60 billion gallons of biomass-derived fuels by 2030. In comparison, U.S. currently consumes 143 billion gallons of gasoline annually, and current bioethanol production is ~7 billion gallons/year. However, the McKinsey report projects only 15 billion gallons of biofuels (as opposed to 60 in the Obama energy plan), of which 10.8 billion gallons would be provided by starch-based ethanol, and less than 4 billion gallons would be provided by cellulosic biofuels. Given that current corn-based ethanol production is about 7 billion gallons/year, it is clear that achieving the figures in Obama’s energy plan will require massive increases in second-and third-generation biofuel production. The LCFS will mandate fuel suppliers to decrease the carbon content of their fuel by 5% by 2013 and 10% by 2018.


  2. Impact of regional/federal greenhouse gas trading programs on biofuel demand and utilization: Obama has mentioned that he will work to implement a cap-and-trade program to limit U.S. CO2 emissions, where the CO2 offsets would be auctioned. Whereas it is not clear whether political support to pass such legislation in the current economic environment exists or not, it is somewhat certain that clean fuel standards and green energy credits would be enacted before a federal cap-and-trade bill. On the other hand, regional cap-and-trade programs ( RGGI , MGGA and WCI ) also aim to limit regional GHG emissions. Particularly, MGGA, comprised of many corn-growing, ethanol-producing Midwestern states will likely have strong support for biofuels as a source of CO2 offsets in its program. On the other hand, the use of agricultural land to grow biofuel crops will conflict with other measures in a cap-and-trade regime. Two such examples are biomass co-firing in cement kilns and coal plants, and conservation-tillage leading to agricultural carbon sequestration in the soil. Such conflicting measures could lower the land/biomass availability for I/II generation biofuel production. Therefore, these apparent conflicts should be well addressed in any federal/regional carbon legislation. More about current climate policy proposals from the Resources for the Future and the Pew Center on Global Climate Change .


  3. Flex-fuel vehicles: The Obama energy plan will mandate all new vehicles by 2012 to be flexible fuel vehicles (FFVs) which can run on gasoline-ethanol blends of upto 85% ethanol (E85). It is not clear if such FFVs could be operated on other fuels such as biomass-derived butanol .


  4. Economic incentives for biofuel production: Obama will likely continue Bush’s goal of producing at least 36 billion gallons of biofuels by 2022, which also includes a tax credit of 0.51 $/gallon of ethanol blended into gasoline. He proposes to eventually extend this to cellulosic ethanol. This is likely a measure to prevent further job losses in the corn ethanol industry, which is suffering from the low crude oil/gasoline prices. I note here that his support for ethanol tax subsidies was one factor that set him apart from McCain in the Iowa election. Additionally, the 2008 Farm Bill included a tax credit of 1.01 $/gallon of biofuel produced from renewable cellulosic feedstock. Legislation pending in the Congress also aims to provide excise and income tax credits (1.50 $/gallon) of fuel produced from algae.


Summary:

In the near-term, the demand for biofuels will be affected by existing federal mandates, world oil prices, credit markets and regional cap-and-trade programs. Of these, providing access to lines of credit and accelerating research in advanced biofuels would be some of the near-term initiatives that could help meet the 60 billion gallons/year target for biofuels. Any policy actions taken should not result in unintended consequences. For example, a recent study found that meeting the renewable fuel standards for biofuels by corn ethanol production would worsen the “dead zone” in the Gulf of Mexico. Additionally, the use of agricultural land to grow fuel-producing crops will likely result in conflicts with other means of carbon mitigation. Balanced policy measures addressing the larger picture are required for sustainable biofuel production.

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