Setting the bar high
April 01, 2007
by World Grain Staff
Report from the Energy Information Administration foresees the U.S. falling short of the Bush Administration’s ambitious biofuels production goals
by Arvin Donley
President George Bush in March set the bar high for future U.S. ethanol production, calling for 35 billion gallons of renewable or alternative supplies blended into gasoline by 2017. But a report released by the Energy Information Administration (EIA) in February foresees the U.S. falling short of that goal, even in a favorable scenario for the biofuels industry that features low-cost ethanol and high-priced gasoline.
In its updated Annual Energy Outlook 2007 (AEO2007) reference case, which projects market conditions through 2030, EIA said it expects ethanol output to reach about 11.5 billion gallons in 2017. Unlike the Bush Administration, which believes cellulose will become a major ethanol feedstock during the next 10 years, EIA concluded that a relatively small amount of ethanol (2%) will be produced using cellulosic sources, such as switchgrass and wood chips, by that date. The report said about 94% of ethanol produced in the U.S. during the next decade will come from corn, with imported ethanol accounting for the other 4%.
The EIA arrived at these projections by analyzing known technological and demographic trends and assuming current laws and regulations that impact the biofuels industry are maintained throughout the projections.
In the AEO2007 reference case, real world crude oil prices are expected to decline from their 2006 average level through 2015. After that point, real prices are expected to rise as demand continues to grow and higher cost supplies are brought into the market. In 2030, EIA projects that the average real price of crude oil will be above $59 per barrel in 2005 U.S. dollars, or about $95 per barrel in nominal dollars.
As a result of these higher prices and recently enacted federal legislation that is considered biofuel-friendly, the use of alternative fuels, such as ethanol and biodiesel, is projected to increase substantially, growing from 4 billion gallons in 2005 to 14.6 billion gallons in 2030. At that time, according to the reference case, the U.S. ethanol supply will be produced from both corn and cellulose feedstocks, but domestic corn is expected to account for 13.6 billion gallons, or 93% of that total.
EIA notes that the high risks and capital outlays associated with large-scale commercial cellulosic ethanol plants are the main reason for the conservative production estimates. The report said that capital costs for a first-of-a-kind 50-milliongallon-per-year cellusoic ethanol plant has been estimated at $375 million, compared with $67 million for a similar-sized corn-based plant. Other studies have provided lower cost estimates. A detailed study by the National Renewable Energy Laboratory in 2002 estimated total capital costs of $200 million for a 69-million-gallon-per-year cellulosic ethanol plant. EIA said it expects some cellulosic ethanol production to come online between 2010 and 2015, with production estimates of 250 million gallons per year during that period. The variable that could alter this forecast, EIA said, would be a major technological breakthrough that would make cellulosic ethanol more economically viable for expanded production.
The Bush Administration, determined to meet its 2017 ethanol production goal, recently announced $385 million in grants to help finance six refineries that will make cellulosic ethanol. There are currently no large-scale cellulosic ethanol facilities operating in the U.S.
SHORT-TERM OUTLOOK The U.S. produced about 4.9 billion gallons of ethanol and 250 million gallons of biodiesel, made mainly from soybeans, in 2006. According to estimates based on the number of plants under construction, ethanol production capacity could rise to about 7.5 billion gallons in 2008 and biodiesel capacity could jump to 1.1 billion gallons, possibly resulting in excess capacity in the near term, EIA said.
Ethanol consumption is expected to rise to 11.2 billion gal- lons, representing 7.5% of the gasoline by volume, in 2012.
The profit margin of corn-based ethanol and soybean-based biodiesel plants is largely determined by the price of those feedstocks. Until recently, relatively low commodity prices coupled with the receipt of federal tax credits has made the U.S. biofuels industry profitable.
But the recent surge in the price of corn, driven higher mainly because of the growing demand in the biofuels sector, is negatively impacting the bottom line at ethanol plants. Biodiesel facilities are also feeling the pinch, as soybean prices also have trended upward in recent months.
As ethanol production increases, competition for corn supplies among the fuel, food and export markets, along with the decline in the marginal value of ethanol co-products, is expected to make production more expensive.
Some studies have suggested that up to 16 billion gallons of ethanol (slightly more than 10% of the total gasoline pool) can be produced from corn in 2015 without adversely affecting the price of corn and upsetting domestic food, feed and export markets. Others disagree with that assessment.
EIA estimates that between 33% and 38% of domestic corn production would be needed to produce 12 to 16 billion gallons of ethanol in 2015, compared with the 20% that was used for ethanol feedstocks in 2006.
Likewise, the U.S. biodiesel industry relies almost exclusively on soybean oil as a feedstock. EIA noted that soybean oil has historically been a surplus product of the oilmeal crushing industry, available in large quantities at relatively low prices. At production levels nearing 300 to 600 million gallons of biodiesel per year (less than 2% of diesel fuel pool), the marginal cost of using soybean oil as a feedstock rises to the point where other oilseeds — canola, rapeseed, sunflower and cottonseed — become viable feedstocks.
RESOURCE UTILIZATION EIA said increases in the supply of corn and soybeans as biofuels feedstocks will likely come from a combination of three strategies:
• increasing the amount of land used as cropland; • boosting the yields of existing energy crops;
• replacing or supplementing corn with cellulosic biomass and soybeans with oilseeds more appropriate for biodiesel production.
The report said all three strategies may be required to overcome the constraints of currently available feedstocks and sustain biofuel production levels that could displace at least 10% of gasoline consumption.
According to the most recent Agricultural Census in 2002, the amount of cropland available in the lower 48 states in the U.S. is 434 million acres, or 23% of the total land area. The total amount of cropland has been declining for the past 50 years and has increasingly become concentrated in the Midwest, a trend that is likely to continue.
EIA said the cultivation of crops for biofuels will compete with other agricultural uses, such as pasture land and idle land, much of which is in the Conservation Reserve Program (CRP).
With a limited supply of cropland available for biofuel feedstocks, increasing yield on an annual basis could significantly boost available supplies of corn and soybeans without requiring additional land. With more than 80 million acres devoted to corn and more than 70 million used for soybean production in 2006, even small increases in annual yield could boost supplies significantly.
Average corn yields increased from 86.4 bushels per acre in 1975 to 151.2 bushels per acre in 2006, while average soybean yields jumped from 28.9 bushels per acre to 43 bushels per acre during that period.
EIA said if corn yields continue to increase at the same rate (approximately 1.8 bushels per acre per year), production could increase by more than 3.1 billion bushels (29%) by 2030 without requiring additional acreage.
Similarly, soybean production could increase by nearly 1 billion bushels per year by 2030 without additional acreage if yields continue to grow at the current rate of one-half bushel per acre per year.
In addition, EIA said improvements in biofuel collection and refining, and bioengineering of corn and soybeans also could contribute to improved biofuel yields. Research on methods to increase the starch content of corn and the oil content of soybeans is also ongoing.
DISTRIBUTION ISSUES Another issue that could limit the growth of the U.S. biofuels industry, EIA said, is problems with developing the necessary infrastructure for collecting, processing and distributing large volumes of biofuels. Currently, nearly all U.S. biofuel production facilities are located close to corn- and soybeangrowing areas in the Midwest to minimize the transportation costs for bulky, unrefined materials.
The fact that these facilities are far from the major biofuel consumption centers on the East and West Coasts presents a logistics problem. Unlike petroleum, biodiesel and ethanol cannot be blended at the refinery and batched through existing pipelines. That’s because ethanol can easily be contaminated by water and biodiesel dissolves entrained residues in a pipeline. Consequently, railroad cars and tanker trucks made from biofuel-compatible materials are needed to transport large volumes of biofuels to market.
EIA noted that limited rail and truck capacity has complicated the delivery of ethanol, contributing to regional ethanol supply shortages and price spikes between April and June 2006.
Feedstock and product transportation costs and concerns remain problematic for the biofuel industry and have led some biofuel producers to explore the prospect of locating near a dedicated feedstock supply or large demand center to minimize transportation costs and susceptibility to bottlenecks.
Distribution of biofuels to end-use markets is also hampered by a number of other factors, EIA said. Although E10 (fuel containing 10% ethanol) is readily obtainable throughout the U.S., there are a limited number of fueling stations for E85 (fuel containing 85% ethanol) and biodiesel. Some station owners may be averse to carrying B20 (fuel containing 20% biodiesel) or E85, because the unique physical properties of the blends may require costly retrofits on storage and dispensing equipment.
Recent EIA estimates for replacing one gasoline dispenser and retrofitting existing equipment to carry E85 at an existing fueling station range from $22,000 to $80,000, depending on the scale of the retrofit.