Tuesday, May 19, 2009

By James Rickman

Today, the global demand for alternative energy biofuels is expanding at almost 20 percent per year through 2012 to over 92 million metric tons, despite recent concerns about the impact of biofuels on the environment versus world food supplies. Market expansion is led by a more than doubling of the global market for bioethanol, with the biodiesel market achieving even more rapid growth. Other biofuels will also achieve double digit gains, though from a smaller base.

So far in 2009, 15 auto manufacturers including General Motors (GM), Fiat SPA-Chrysler (FIATY.PK), Volvo (VOLVY.PK), Volkswagon Group (VLKAY.PK) and Ford Motor (F) have introduced 17 biofuel diesel models to the U.S. market, and announced the development of at least 15 more diesel autos expected by 2010. Thus, the growing resurgence of clean biofuel diesel technology in the U.S., coupled with the additional environmental, government policy and economic requirements looks promising.

The Obama administration’s budget for USDA in 2010 is a mixed scenario for agriculture. President Obama, as part of his overall energy plan, seeks to bring some relief to struggling ethanol producers, including refinancing. The Environmental Protection Agency has raised the amount of ethanol that must be blended into gasoline to 15% from 10%.

Just last week, the U.S. Department of Energy Biomass Program announced a $786.5 million program to rapidly development commercial bio-fuel. The money comes from the American Recovery and Reinvestment Act and is intended for the following specific projects:

* $480 Million Solicitation for Integrated Pilot- and Demonstration-Scale Biorefineries
* $176.5 Million for Commercial-Scale Biorefinery Projects
* $110 Million for Fundamental Research in Key Program Areas
* $20 Million for Ethanol Research

The stated goal of the money is to create "third-generation bio-fuels like green gasoline, diesel, and jet fuels." The highlights include $50 million to create a bio-fuels consortium that will push hard to make things like algae biodiesel manufacturing a reality and $20 million that will be used, in part, to "evaluate the impact of higher ethanol blends in conventional vehicles."

Companies such as PetroSun, Inc. are at the forefront of algae biodiesel production. When it comes to converting sunlight into biomass, algae is the most productive type of plant. Biodiesel from algae has the potential to produce enough fuel to drive a Prius-type car 370,000 miles per acre per year, compared to 2,000 to 31,000 for conventional biodiesel crops (i.e. corn), while ethanol from switchgrass could produce 32,500.

Furthermore, some strains of algae are as much as 40% oil by weight, leading to the hope of a large supply of oil which is much easier to convert into biodiesel than it is to ferment even corn (let alone cellulosic biomass) into ethanol.

The U.S. Department of Energy Biomass Program plans to use $110 million to support fundamental research in key program areas, distributed in the following manner:

* Expand the resources available for sustainability research through the Office of Science Bioenergy Research Centers and establish a user-facility/small-scale integrated pilot plant ($25 million).
* Create an advanced research consortium to develop technologies and facilitate subsequent demonstration of infrastructure-compatible bio-fuels through a competitive solicitation ($35 million).
* Create an algal bio-fuels consortium to accelerate demonstration of algae bio-fuels through a competitive solicitation ($50 million).

This recent announcement came as part of a series of Administration announcements on the Renewable Fuel Standard, the Energy title in the Farm Bill, and investments in energy research & development.

The Obama administration policy outlines the EPA’s strategy for increasing the supply of renewable fuels, poised to reach 36 billion gallons by 2022, as mandated by the Energy Independence and Security Act of 2007.

Increasing renewable fuels will reduce dependence on foreign oil by more than 297 million barrels a year and reduce greenhouse gas emissions by an average of 160 million tons a year when fully phased in by 2022. EISA will establish four categories of renewable fuels.

The alternative energy categories include:

* Cellulosic bio-fuels;
* Biomass-based diesel;
* Advanced bio-fuels; and
* Total renewable fuel.

By 2022, the U.S. government requires 36 billion gallons annually of renewable fuels, of which 16 billion gallons must be cellulosic bio-fuels; and 1 billion gallons must be of biomass-based diesel. In order to relieve any food versus biofuel concerns at most 15 billion gallons of the renewable fuel mandate can be met with conventional bio-fuels, including corn and soy-based ethanol. The remainder can be met using algae or switchgrass crops.

The bio-fuel diesel commercial fleet and consumer markets are primed for potential growth in the U.S. due to the fact that diesels are now much cleaner and more fuel efficient, typically getting 20 to 40 percent more miles to the gallon than a comparable gasoline engine while emitting 15% less CO2 . Also, while different state regulations initially delayed the introduction of diesel technology in the United States, most automakers have now developed diesel engine technology that meets the emissions requirements in all 50 states. Analysts from J.D. Power & Associates expect continued growth in the diesel market, with diesels accounting for more than 9 percent of new vehicle sales by 2016, up from the current 2.3 percent in 2009. J.D. Power also predicts that U.S. diesel vehicle sales will exceed 1 million units by 2013. Some see the future of the U.S. diesel market resembling the Western Europe model, where fuel prices and concern for the environment have shaped public policy to encourage diesel vehicle sales so much that they now account for nearly 52% of new vehicle sales.

The bad news is the U.S. plans to cut spending for farm programs, placing a hard cap of commodity program payments of $250,000, phasing out direct payments to farmers with gross sales over $500,000 and making cuts in the federal crop insurance program.

The USDA just released its initial assessment of crop supply, demand and price prospects for the 2009/10 season. According to the May World Agricultural Supply and Demand Estimates, total U.S. corn use for 2009/10 is projected to be three percent higher than the current year with higher expected food, seed, and industrial (FSI) use and exports more than offsetting a decline in projected feed and residual use.

Total usage in the FSI category use is projected seven percent higher with a 350-million-bushel rise in ethanol corn use accounting for most of the increase. The 4.1 billion bushel estimate for ethanol reflects the increase in the Renewable Fuels Standard, as well as improved blending incentives as higher gasoline prices increase demand for ethanol.

At the same time, exports are projected to increase by nine percent “as world corn trade and feeding are expected to recover modestly in 2009/10, partly reflecting a reduction in global supplies of low-cost feed quality wheat.”

Domestic corn feed and residual use is projected down 2 percent with reduced animal numbers and increased availability of distiller’s grains. U.S. corn ending stocks for 2009/10 are projected down 28 percent to 1.1 billion bushels as use is expected to exceed production by 470 million bushels. The season-average farm price is projected at $3.70 to $4.50 per bushel compared with the record $4.20 reported for 2007/08 and the $4.10 to $4.30 projected for 2008/09.

The latest planting progress update has less than half of the nation’s corn crop planted, which is the same as last year at this time, but well behind the five year average of 71 percent. The biggest concerns are Illinois and Indiana, with just about ten percent of the crop in the ground - compared to over 55 percent last year and the average of 70-85 percent. Another problem area is North Dakota with only seven percent complete.

Additional pressures on corn supply are due to the fact it is the primary feedstock for ethanol production. About 20 percent of the nation’s corn supply went into ethanol in 2008—some 3.0 billion bushels. Ethanol can also be made from other grains such as sorghum as well as from “biomass” sources such as corn cobs, cornstalks, algae, wheat straw, rice straw, switch-grass, vegetable and forestry waste and other organic matter.

A new campaign by American farmers and supporters of biofuels presents technological innovations over the last 20 years that have cut the land needed to produce one bushel of corn (56 pounds) by 37 percent and decreased soil loss by 69 percent.

* Energy used to produce a bushel of corn has decreased by 37 percent since 1987 and greenhouse gas emissions per bushel dropped 30 percent.
* Over the past 25 years, farmers have slashed the amount of fertilizer required to grow corn. Producing a bushel of corn today requires nearly 40 percent less nitrogen than in 1980.
* Natural gas is by far the largest supplier of energy for ethanol production, used in 85 percent of ethanol production.
* Ethanol production results in nearly twice as much energy than used in its production – and using ethanol in place of conventional gasoline helps cut greenhouse gas emissions by up to 59 percent.
* Ethanol is replacing more and more foreign oil. The production of 9 billion gallons of ethanol in 2008 is equivalent to eliminating 10 months of imports from Venezuela.

Each gallon of corn ethanol today delivers as much as 67% more energy than is used to produce it.

Benefits of alternative energy biofuels:

* Ethanol adds oxygen to gasoline—helping it combust more completely and reducing the level of toxic exhaust emissions.
* Ethanol reduces our nation’s dangerous and expensive dependence on imported oil.
* The ethanol industry creates jobs and investment across the nation—especially in rural areas.
* Ethanol increases America’s fuel supply—helping keep gas prices down.
* Ethanol adds value to America’s corn harvest and helps reduce the cost of federal farm programs.

Biomass materials such as corn stalks, wheat straw, switchgrass and other renewable feedstocks will contribute to the resource base available for energy use. It is estimated that America can supply a sustainable volume of biomass materials in excess of 1.3 billion tons per year—enough to produce approximately 60 billion gallons of ethanol each year.

Progress on the debate about biofuels is tipping towards supporting the next generation of biofuel industries: algae production, cellulosic ethanol, waste biomass utilization and fully integrated bio-refineries.

The U.S. currently consumes 140 billion gallons of gasoline annually. So a $1.00 increase in the price of gas represents a $140 billion impact on consumer spending—with many of those dollars flowing to foreign oil producers.

In contrast, about 7 billion bushels of corn are used for food and feed each year. Even a $2.00 increase of corn prices would have one-tenth the impact of gasoline price swings—if all costs were passed along to consumers - dollars that are preserved within communities throughout the United States.

The “bio-fuel holy grail” maybe found in accomplishing the challenge of growing and rapidly transforming algae cheaply into bio-crude for commercially. The entire United States’ supply of imported oil could potentially be grown on 20 to 40 million acres of marginal land, leaving the 450 million acres of fertile American soil that are presently farmland still available to feed the population.

Conclusion

The economic, security and environmental issues continue to spur biofuel demand. World bioethanol demand has benefitted from a powerful farm lobby in the United States that has succeeded in passing a renewable fuel mandate, as well as long term rising oil prices that have boosted bioethanol demand in Brazil. Growing concerns about global warming have helped stimulate both bioethanol and biodiesel demand in the European Union, while several countries in the Asia/Pacific region have instituted biofuel programs as a means of boosting their local economies. Though protective sentiments will remain high, global trade in biofuels will continue to develop, as many countries in Western Europe, North America and Asia/Pacific find that they cannot fully satisfy demand with domestic production.

Despite, or perhaps even because of, the success of biofuels in recent years, questions have begun to arise about the wisdom of using biofuels as an alternative energy source going forward. While the impact of biofuels on world food supplies is expected to be a short term issue, the potential negative impact of biofuels on the environment could have longer term consequences. In spite of these concerns, though, countries’ overarching need for energy security and domestic economic development will continue to drive rapid increases in consumption, most notably in the large North American market.

World biofuel production will track increases in demand as most countries seek to foster domestic biofuel industries, both to reduce reliance upon imported oil, and to foster domestic economic development. This will continue to favor the development of cereal-based (maize and wheat) bioethanol capacity in North America and Western Europe, as well as sugarcane-based bioethanol production in Latin America. Likewise, biodiesel production will center on soy oil in the Americas, rapeseed oil in Europe, and palm (and increasingly jatropha) in the Asia/Pacific. Third-generation cellulosic bioethanol and algae biodiesel technologies will remain an increasingly significant part of any sustainable energy plans.

Disclosure: At the time of writing this article, the author had no direct financial interest in the companies listed.

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