The Economics of Biofuel Production and Use

Guy Hitchcock

Biofuel production

Cost elements of biofuel production Feedstock Conversion process

By product sales

Fuel distribution and retail

Conversion inputs

Liquid biofuel feedstocks

    Biodiesel – oil bearing crops – – Rape seed, sunflower, soya oil, palm oil Waste vegetable oils Bioethanol – starch and sugar crops – Cereals, sugar beet, sugar cane All feedstocks are traded on the food commodity markets Typically feedstock accounts for 80-90% of biofuel cost

Rape seed, wheat and crude oil prices, 1997-2007

Biomethane feedstocks    Commercial or domestic waste may provide a revenue for AD as a waste treatment option Agricultural manures are used in partnership with farmers, with digestate spread back to land Energy crops have a cost of lost food production

Second generation fuels

    Wide range of input feedstocks – Woody biomass, waste, etc Generally lower cost feedstocks Non-food crops so less competition with food Can use whole crops so get better land use and energy balance

Conversion costs

   Capital cost of conversion plant Operating cost of plant such as labour, energy costs and other input materials Revenue from by products – – – Biodiesel: crush cake, glycerine Wheat ethanol: distillers grains Biomethane: bio-fertilisers

Conversion estimates for biodiesel from rape seed

Conversion costs in €/litre Plant cap ex Plant op ex By-product income Total Small

0.425

SAC Large

0.227

0.265

0.160

0.184

0.043

IEA Concawe Small Large Large

0.046

0.076

0.145

0.20

0.05

-0.023

Conversion estimates for ethanol from wheat

Conversion costs in €/litre IEA Concawe BTG ITPS Plant Cap Ex Plant Op Ex By-product income Total Small

0.10

0.24

0.07

0.27

Large

0.06

0.22

0.07

0.072

0.148

0.084

0.21

0.136

0.28

0.15

0.13

0.012

0.210

0.114

0.108

Biomethane and 2 nd conversion costs generation   Biomethane – – Less data on costs Swedish experience suggests 0.65-0.75 €/kg 2 nd generation – – Not yet commercially available Study estimates for cellulosic ethanol 0.16 to 0.26 €/litre

Fuel tax incentives

   VAT fixed for all fuels Fuel duty – – – 100% reduction for all biofuel 100% reduction for a limited amount Partial reduction Obligations – UK RTFO provides revenue from tradable certificates

50 40 30 20 10 0 110 100 90 80 70 60 Diesel pump prices across Europe including duty and VAT

Tax and Duty Excluding Tax and Duty

Cost of RME VS EU diesel excluding taxes

Price of RME vs UK diesel including taxes

Cost of wheat ethanol vs EU gasoline excluding taxes

Price of wheat ethanol vs UK gasoline including taxes

Summary of production economics

   Feedstock cost accounts for 80-90% of cost of liquid biofuels Feedstocks are traded on food markets and so affected by food demand Taxes are next biggest impact with duty reductions generally needed to make biofuels cost competitive

Biofuel use

Cost elements of biofuel use

   Vehicle costs – – Capital cost of vehicles Additional maintenance and servicing costs Fuel costs – – Base cost of fuel Fuel consumption and mileage Taxes and financial incentives

Vehicle costs - 1

  Biodiesel – – No additional capital Possible additional service costs • Additional fuel filter changes • Possible shorter service intervals Bioethanol – – – €0-1,500 additional capital for FFV Conversion kits approx €500 No additional servicing costs

Ford Focus FFV

Vehicle costs 2

  Biomethane capital costs – – – cars and vans: €2,500 - €5,000 dual-fuel diesel heavy duty vehicles: €25,000 - €40,000 spark ignition heavy duty vehicles: €35,000 €50,000 Biomethane servicing – possibly 0.01€/km more than diesel

Fuel costs

Fuel

Biodiesel Bioethanol

Fuel cost

Similar to diesel Similar to gasoline Biomethane bi-fuel or dedicated 30-50% less than diesel Biomethane – dual fuel 30-50% less than diesel

MPG

1-5% less than diesel 25% less than gasoline Same as gasoline, 15-20% less than diesel Similar to diesel

Taxes and financial incentives

    Vehicle grants Company car tax reductions – as are available for example in the UK and Sweden Reduction on congestion charges or road tolls Reduced parking charges for biofuel cars

Full life costing

    Capital cost of the vehicle, amortised over its life Fuel cost over the life of the vehicle accounting for fuel consumption and annual mileage Servicing and maintenance costs National and local incentives such as vehicle tax reductions, congestion charge reductions and parking benefits

Full life costing: EU average gasoline and diesel, biofuels with no duty

Full life costing: UK tax and duty rates for all fuels

Summary of use economics

  – – – – Cost effectiveness of biofuel use depends on: – vehicle costs and how these are amortised over the life of the vehicle; service and maintenance costs; fuel costs and fuel consumption for the vehicle; vehicle mileages; national and local taxes and incentives These factors will vary from use to use, and between countries, regions and even cities.