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Modeling Energy Security and Economic Sustainability Issues of the U.S. Biofuel Industry Rocío Uría-Martínez Paul N. Leiby Gbadebo Oladosu 30th USAEE Conference Washington, DC. October 10, 2011 Research sponsored by the Laboratory Directed Research and Development Program of Oak Ridge National Laboratory, managed by UT-Battelle, for the U.S. Department of Energy OBJECTIVES Abiding national objective Central motivation for 2007 EISA legislation How could future boom and bust cycles in biofuel infrastructure be avoided/mitigated? Exploring energy security and economic sustainability implications of U.S. biofuel industry configurations and policies using system analysis tools Combinations of -feedstocks -logistics designs -conversion technologies -biofuel types -… Where in the supply chain is support most needed? Should it be taxes, subsidies, mandates, loan guarantees? Long-run optimization & Short-run simulations ENERGY SECURITY It is not just about displacing gasoline but also about creating reliable supply chains that are resilient to market shocks How correlated are ethanol and gasoline prices? For parity pricing on a gge basis, Pethanol = 0.67* Pgasoline WHOLESALE GASOLINE AND ETHANOL PRICES 4.00 CHARLOTTE (NC) 3.50 $/gallon 3.00 Crude Oil Sugar Wheat Maize Softwood 100% Sugar Wheat 1.50 Correlation coefficient = 71% 0.50 unleaded 87 octane gasoline ethanol Maize Softwood 3% 5% -1% 1% 100% 20% 10% 2% 100% 46% -23% 100% -10% 100% Data: IMF/IFS database, Commodity Prices & Indices, 5/2/2011 4/2/2011 2/2/2011 3/2/2011 1/2/2011 12/2/2010 11/2/2010 9/2/2010 10/2/2010 8/2/2010 7/2/2010 6/2/2010 5/2/2010 4/2/2010 2/2/2010 3/2/2010 1/2/2010 12/2/2009 11/2/2009 0.00 Cross-Correlations of Monthly Commodity Price Changes, 1990-Jan to 2008-Dec Crude Oil 2.00 1.00 Biofuels link agricultural and energy commodities 1990+ 2.50 U.S. Grain Ethanol Capacity vs. Gasoline Price Sources: Renewable Fuels Association, Official Nebraska Government Website Capacity Installed ECONOMIC SUSTAINABILITY Market volatility has been very challenging for the developing biofuels industry Gasoline Price Capacity Under Construction Capacity Idled Ethanol Plant Operating Margins Volatile, and Collapsed to Near Minimum Sustainable Ethanol price Line indicates minimum sustainable returns (“margin”) to Ethanol Production Plant. Actual returns highly variable. Other Operating Costs Net corn cost Plant “margin” SYSTEM CONFIGURATION MATTERS FOR ENERGY SECURITY AND ECONOMIC SUSTAINABILITY Long Run Vehicle Choice Conventional Vehicles E10 Diesel, middle & heavy cuts, chemicals Imported Gasoline FFVs Short Run FFV Fuel Choice Co-products Gasoline Blending & Retail Petroleum Refineries Light Heavy Domestic Crude Oil Ethanol Imported Ethanol Biorefineries Inventories Imported Crude Oil E85 bales uniform format Corn Cellulosic feedstocks Inventories INVENTORIES BioTrans model accounts for two types of inventories: Speculative inventoriesheld only when the market signals arbitrage opportunities Et ( P t 1 ) k Pt 0 , S t 0 Working inventoriesheld for operational reasons (typical stock-to-use ratio is 15%) May/July futures carrying charge in percent as of May Et ( P t 1 ) k Pt 0 , S t 0 End-of-cropyear US stocks of wheat as a function of CBOT futures spreads 10 5 0 -5 0 50 100 150 200 250 300 350 -10 -15 -20 -25 million bushels Net marginal cost of storage = marginal cost – convenience yield Convenience yield is the benefit from holding a physical commodity Will biomass/ethanol speculative inventories keep probability of stockout sufficiently low? Is 15% a reasonable stock-to-use ratio for biomass feedstocks and/or ethanol? U.S. Petroleum Stock Variation 2005-2009 (Including SPR): - Typical within-year stock variation: 6% (9% excl SPR). - Max variation over 5 years: 22%. - Stocks are ~16% of annual demand (~25% incl SPR) These 5-year peak levels set in 2006 & 2007 1,800,000 5-year Ave. 5-year Min. 1,500,000 Source: IAF Advisors, Feb. 4, 2009 Corn production, and stocks fluctuate widely, (seasonally, and year to year), far more than oil - Typical within-year stock variation of 4X (400%). - Year-to-year peak variation over 5 years: 33%. - Stocks are ~80% of annual demand Corn Stocks, Production and Consumption (quarterly/seasonal) 14,000 Beginning stocks 12,000 Production Consumption Million Bushels 10,000 8,000 6,000 4,000 2,000 0 2001 2002 2003 2004 2005 Source: USDA, ERS, Feedgrains database 2006 2007 2008 BIOMASS FEEDSTOCK LOGISTICS SYSTEM DESIGN Uniform format Design Conventional Design Baled switchgrass Baled switchgrass FARM Average distance = 71 miles Long Term Storage Bales stacked along edge of field $5.36/dry ton Transport Bales on flatbed truck $4.61/dry ton; $0.12/dry ton-mile Short Term Queue Bales on asphalt pad BIOREFINERY (optimal size = 0.69 M dry tons) FARM Long Term Storage Bales stacked along edge of field $4.7/dry ton Average distance = 10 miles Transport Bales on flatbed truck $4.61/dry ton; $0.12/dry ton-mile Preprocessing Single grind $13.03/dry ton DEPOT Short Term Queue Pellets in bins Preprocessing Single grind $13.03/dry ton Handling Conveyors, dust control $2.38/dry ton Densification Pelleting $22.37/dry ton Average distance = 205 miles BIOREFINERY (optimal size = 6.38 M dry tons) Transport Pellets in train $5.23/dry ton, $0.027/dry ton-mile Short Term Queue Pellets in bins Handling Conveyors, dust control $0.21/dry ton Uniform format biomass as a way of reducing risk for biorefineries: • by broadening feedstock base • by offering homogeneous quality FLEXIBLE BIOREFINERIES Feedstocks Ethanol conversion processes Co-products corn dry milling DDGs biochemical carbon fiber stover electricity multifeedstock biochemical switchgrass forest residues Biorefinery feedstock costs Biorefinery revenue multifeedstock thermochemical C R higher alcohols ci * i * Z P * *Q i j j j i= feasible feedstock set J=feasible output set =feedstock i fraction =output j fraction Z= total input (dry tons) Q=total output (gallons) FLEXIBLE BIOREFINERIES 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 50% 40% 30% 20% 10% 200905 200901 200809 200805 200801 200709 200705 200701 200609 200605 0% Ethanol/Sugar Relative Value 60% 200601 Ethanol/Sugar Export Quantity Fraction of sugarcane used for ethanol versus relative export revenues (2006:M1 - 2009:M8) "percent of cane used for ethanol" relative export value: ethanol/sugar Brazilian sugarcane mills allow for changes in biorefinery product mix in response to relative product value FLEXIBLE FUEL VEHICLES Needed to increase consumption of ethanol beyond what can be absorbed in E10 blend RFS2 Volumetric Requirements and Ethanol Demand Potential 50 45 Billion Gallons 40 RFS2 Conventional Biofuels 35 30 25 RFS2 Conventional Plus Advanced Cellulosic Biofuel 20 RFS2 Conventional Plus Total Advanced Biofuel 15 E10 Blendwall 10 FFV Max E100 use 5 0 How much retail capacity is needed if RFS-2 advanced cellulosic biofuel objective Is attained entirely/partially with ethanol? How much would it cost to build that capacity? APPROACH: BioTrans System Design is Novel, While Building on Existing Capabilities BLM POLYSYS Simulate bioenergy crop production given changes in policy, economic, or resource conditions Modeling framework developed at INL to simulate bioenergy feedstock supply logistics from the field to biorefinery BILT TAFV, HyTrans Biofuel supply chain transportation and optimization model developed at ORNL ORNL Dynamic market optimization to balance motor fuel supply to demand BioTrans-Long-Run Model Petroleum Sector Simple supply, Refineries (ORNL-RYM, NEMS runs) Integrates summary representations from each of above - Dynamic Optimization by GAMS - Annual, 20 years - 9 Census Divisions - Multiple sectors - Balances markets and determines fixed capital (biorefineries, retail capacity) BioTrans Stochastic Short-Run Simulations Simulate monthly over 1 year (Python) -Shocks from oil producer behavior, disruptions and accidents -Shocks to yields from weather events: droughts, floods, pests -Infrastructure reliability Oil Security Metrics Model Provide framework for quantifying and measuring energy and economic security impacts Other Measures of Sustainability - Long run economic costs - GHG Emission Coefficients (GREET) - Water Use Coefficients Electric Sector External runs for demand (NEMS, ORCED) BASECASE RESULTS: FEEDSTOCK SUPPLY MIX & COST 300 FEEDSTOCK VOLUMES USED IN ETHANOL PRODUCTION Balanced set of cellulosic feedstocks is optimal at the national level although there is regional specialization 200 perennials corn stover 150 forest residue corn 100 50 2.5 0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Cellulosic ethanol cost is expected to be below that of grain ethanol for most pathways COST PER GALLON OF ETHANOL 2 $/gallon million dry tons 250 1.5 Conversion cost 1 Logistics cost Feedstock cost 0.5 0 2015 2025 2015 2025 2015 2025 CRN.DRYMILL.D4 STV.BCHEM.D4 PER.TCHEM.ROC BASECASE RESULTS: FEEDSTOCK LOGISTICS DESIGN COSTS The tradeoff between transportation costs and capital costs does not provide justification to adopt uniform format design for biomass feedstocks Number of new cellulosic biorefineries (2010-2030) uniform format design: 203 conventional design: 260 Net present value of costs associated to production of grain and cellulosic ethanol (2010-2030) Biorefinery conversion cost conventional Biorefinery capital cost uniform format Storage cost Transportation cost Preprocessing cost Feedstock cost 0 50 100 150 billion $ 200 250 300 BASECASE RESULTS: STOCKS AND BIOREFINERY TYPES Flexible biorefineries help minimize total system costs over the planning period even though they are 20% more expensive to build 180 BIOREFINERY CAPITAL STOCK 160 million dry tons 140 120 DRY MILL 100 BCHEM 80 BCHEMFLEX 60 TCHEMFLEX 40 Supply availability for multiple feedstocks changes over time and a flexible biorefinery can adjust to those changes 20 0 30 20 CELLULOSIC BIOMASS INVENTORIES 15% stock-to-use ratio unconstrained 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 On the other hand, the model only chooses to keep speculative stocks. Working stock costs do not meet a counterbalancing benefit under perfect foresight conditions million dry tons 25 BASECASE RESULTS: E85 RETAIL CAPACITY Optimal station and pump share vary significantly from region to region 1.2 1 E85 STATION SHARE 0.9 1 E85 PUMP SHARE 0.8 0.7 0.8 0.6 D3 0.6 D4 0.4 ROC D3 0.5 D4 0.4 ROC 0.3 0.2 0.2 0.1 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 0 1.2 E85 RETAIL LOAD FACTOR Cost of E85 retail infrastructure is heavily dependent on load factor 1 0.8 D3 0.6 D4 0.4 ROC 10-15 c/gallon for utilization factors comparable to those of E10 pumps 0.2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 0 Over $1/gallon for low utilization factors SCENARIO: FEEDSTOCK PRICE SHOCK Doubling the cost of corn and corn stover in years 2024 and 2025 million gallons DRY MILL ACTIVITY LEVEL (Census Division 3) 7000 7000 6000 6000 5000 5000 4000 4000 3000 3000 2000 1000 FB1: flexible biochemical available FB0: flexible biochemical not available SU1: stock-to-use ratio >=15% SU0: unconstrained stocks 2000 FB1SU1 FB1SU1_shock FB0SU0 1000 FB0SU0_shock 0 0 2024 BIOFUEL PRODUCTION RELATIVE TO BASELINE FB1SU1_shock FB0SU0_shock Census Division 3 0.16 0.58 Census Division 4 1.09 1.08 Rest of the country 1.05 0.99 Total 0.96 0.96 SCENARIO: FEEDSTOCK PRICE SHOCK Feedstock price shock propagates to ethanol but not to the pump 3 ETHANOL PRICE AT BIOREFINERY GATE_ROC 2.6 2.8 2.4 2.6 2.2 2.4 2.2 2 2 1.8 1.8 2014 2012 2010 2030 2028 2026 2024 2022 2020 2018 2016 2014 2012 2026 FB0SU0_shock 1 2010 1 FB0SU0 2024 1.2 2022 FB1SU1_shock 2020 1.2 2018 1.4 2016 FB1SU1 2030 51% increase in Pethanol (FB1SU1) 58% increase in Pethanol (FB0SU0) 1.6 1.4 2028 1.6 E10 PRICE AT THE PUMP_ROC 4 4 3.8 3.8 3.6 3.6 3.4 3.4 3.2 3.2 3 3 2.8 2.8 2.6 2.6 2.8% increase in PE10 (FB1SU1) 3.1% increase in PE10 (FB0SU0) 2.4 FB1SU1 2.4 FB0SU0 2.2 FB1SU1_shock 2.2 FB0SU0_shock 2030 2028 2026 2024 2022 2020 2018 2016 2014 2012 2030 2028 2026 2024 2022 2020 2018 2016 2014 2 2012 2 2010 $/gge A 100% increase in supply costs for corn and stover leads to: 3 2010 $/gallon 2.8 SCENARIO: FEEDSTOCK PRICE SHOCK Total NPV of costs and savings from flexible biochemical biorefineries (FB) and 15% stock-to-use ratio (SU) (2010-2030) Cost of adding FB and SU to the system: $14.2 billion Cost of coping with disruption with FB and SU: Cost of coping with disruption without FB or SU: $7.1 billion $13.4 billion Net savings from FB and SU: $6.3 billion We would need 2.2 shocks of this magnitude over a 20-year period to make the flexibility investment worthwhile Even though the system as a whole experiences savings, some supply chain participants (dry mill owners) are actually made worse off by the extra flexibility FINAL REMARKS Biofuels are an important piece of the puzzle in the quest for alternative fuels that would reduce U.S. dependence on petroleum However, we should think more rigorously about how energy security is obtained, and how the biofuel supply chain itself can improve resilience. Demand flexibility is currently limited by the “blend wall”: E10 blends cannot absorb ethanol volumes much beyond current production levels With diverse feedstocks and technologies, a major supply/price shock for a single feedstock may have only a modest effect on retail prices of fuel blends, but could have pronounced effects on the profitability of biorefineries Flexibility elements (inventories, FFVs, flexible biorefineries, biomass preprocessing) reduce price variance but increase average price SUPPLEMENTARY SLIDES Approach Effectively Aggregating and Disaggregating Across Different Scales (E.g. for Feedstock Supply Data) FITTED CURVE FOR D4SB MODEL Aggregated to fitted continuous supply curve Corn CD4 2010 4.4 Model Equilibrium on Fitted Curve 4.2 $/bushel POLYSYS DATA, e.g. Census Division 4 4 3.8 3.6 Fitted 3.4 POLYSYS 3.2 3 0 2000 4000 6000 8000 million bushels • Identify price level corresponding to cumulative production in the original data Disaggregated model solution • Identify counties producing under at model equilibrium for results display and sustainability analysis Progress: State of development of LR model • V0.9 Implementation – Complete analytical specification of LR Model, Multi-stage pathways, field to gas-tank – Long-run, nonlinear dynamic model, 2010-2030 – Depicts 7 stages in the feedstock’s path from farm to biorefinery – Census Division based (testing with regions 3 and 4, Rest-of-Country) – Four feedstocks (corn, stover, perennial grasses; forest), twenty annual periods (2010-2030) and five conversion processes – “Working” stocks representation – Biorefinery technology choice • Biochemical vs. thermochemical pathways • Initial representation flexible biorefineries (flex thermo, flex or ded biochem) • Co-products – Allows tracking economic sustainability (based on ethanol price, and coproducts and key input prices) and environmental sustainability (e.g., GHG and water footprint) issues. – Coupled to basic model of demand markets, vehicle and fuel choice Issue: Reliability - Variability of Biofuels Supply and Price • Gasoline/diesel and biofuels are subject to different long-run forces, and different supply/demand shocks; but are also linked • Q: How do gasoline and ethanol prices move in relations to one another, • • at different points in supply chain (plant-gate to retail)? • over the long run and short run? Q: What does this imply for diversification benefits of alternative fuels? OIL 3 SPOT PRICE INDEX MAIZE US(GULF PORTS) SUGAR CARIBBEAN (N.Y.) WHEAT U.S.GULF PORTS SOFTWOOD LOGS INDEX (UNITED STATES ) 350 Cross-Correlations of Monthly Commodity Price Changes, 1990-Jan to 2008-Dec 300 2008M4 2006M1 2005M6 2004M1 2002M8 2001M3 1999M1 1998M5 1996M1 1995M7 1994M2 1992M9 1991M4 1989M1 1988M6 1987M1 1985M8 0 1984M3 Maize 1982M1 50 1981M5 Wheat 1979M1 100 1978M7 Sugar 1977M2 150 1975M9 Crude Oil 1974M4 200 1972M1 1990+ 1971M6 250 1970M1 Price Index (Nominal, 1980-M1 = 100) 400 Softwood Crude Oil 100% Sugar Wheat Maize Softwoo d 3% 5% -1% 1% 100% 20% 10% 2% 100% 46% -23% 100% -10% 100% Data: IMF/IFS database, Commodity Prices & Indices, Monthly, 1970 to Dec 2008. U.S. Census Regions and Divisions 1 9 8 4 3 2 ECONOMIC SUSTAINABILITY 5 6 7 Source: http://www.eia.doe.gov/emeu/reps/maps/us_census.html E85 Retail Capacity Evolution number of retail stations number of pumps per station estimated maximum throughput per pump Fixed parameters Options to increase E85 throughput increase number of retail stations offering E85 increase number of E85 pumps in stations offering E85 Annualized cost of new E85 retail infrastructure 0.14 1.2 0.10 1 0.08 0.06 0.04 $15,000/dispenser 1.4 0.12 $/gallon $102,000/underground storage tank $/gallon Costs: increase utilization factor of existing E85 pumps Annualized cost of new E85 retail infrastructure 0.8 for pump share=0.12 0.6 0.4 for 100% load factor 0.02 0.2 0.00 0 0 0.1 0.2 pump share 0.3 0.4 0.1 0.3 0.5 0.7 utilization factor 0.9 INITIAL ILLUSTRATIVE D4SB MODEL RESULTS: Biorefinery Flexibility Reduces Response Cost To Supply Shocks Scenario: Doubling in the cost of stover in 2020 and 2021 FLEXIBLE BIOCHEMICAL AND THERMOCHEMICAL CONVERSION PROCESSES: Cellulosic Ethanol Production, Shock 7000 7000 6000 5000 4000 3000 2000 1000 0 biochemical-stover biochemical-perennials 6000 biochemical-perennials million gallons biochemical-stover 5000 4000 3000 2000 2030 2028 2026 2024 2022 2020 2018 2016 2014 2010 2012 0 2030 2028 2026 2024 2022 2020 2018 2016 2014 2012 1000 2010 million gallons Cellulosic Ethanol Production,Baseline STOVER-DEDICATED BIOCHEMICAL CONVERSION PROCESSES: 7000 6000 5000 4000 3000 2000 1000 0 7000 6000 thermochemical-perennials million gallons biochemical-stover Cellulosic Ethanol Production, Shock biochemical-stover thermochemical-perennials 5000 4000 3000 2000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2030 2028 2026 2024 2022 2020 2018 2016 2014 2012 1000 2010 million gallons Cellulosic Ethanol Production, Baseline INITIAL ILLUSTRATIVE MODEL RESULTS: Biorefinery Flexibility Reduces Response Cost To Supply Shocks Scenario: Doubling in the cost of stover in 2020 and 2021 Scenario: Doubling in the cost of stover in 2020 and 2021 Production from Price Path for Cellulosic Ethanol Biochemical and Therrmochemical pathways, stover & No feedstock perennial grass flexibility for Complete feedstock Biochemical flexibility for Biochemical 1.9 1.8 1.7 1.6 1.5 1.4 baseline-flexible biochemical 1.3 shock-flexible biochemical 1.2 baseline-inflexible biochemical 1.1 shock-inflexible biochemical 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 1 2010 $/gallon Census Division 4. FARM MATERIAL BALANCE IN REGION R, PERIOD T Q biomass,field,r,t ≥ Q biomass,collection,r,t = DEPOT Q biomass,transport,r,t QIN biomass,storage,r,t QOUT biomass,storage,r,t STORAGE/BLENDING TERMINAL BIOREFINERY Q biomass,preprocessing,r,t Q biomass,storage,r,t Q biomass,other,r,t formatted Ycrop Q formatted,preprocessing,r,t Q formatted,transport,r,t Q co-product,refining,r,t co product Y formatted = Q formatted,refining,r,t biofuel Yformatted Q biofuel,refining,r,t From regions R’ M biofuel,transport,r,t From petroleum sector Q biofuel,transport,r,t X biofuel,transport,r,t QIN biofuel,storage,r,t Q gasoline,refined,r,t Q biofuel,blending,r,t = QOUTbiofuel,storage,r,t blend Ybiofuel PUMP Q – quantity QIN – flows into storage QOUT – flows out of storage X – exports M – imports YAB - yield of A per unit of B Q blend,blending,r,t Q blend,consumption,r,t = = Q blend,distribution,r,t Q blend,retail,r,t Q biofuel,storage,r,t BASECASE RESULTS: FEEDSTOCK SUPPLY Marginal costs_stover 140 140 120 120 100 100 80 D3 60 D4 $/dry ton $/dry ton Marginal costs_corn ROC 40 80 D3 60 D4 20 20 0 0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Marginal costs_perennials Marginal costs_forest residues 140 140 120 120 100 100 80 D3 60 D4 ROC 40 20 $/dry ton $/dry ton ROC 40 80 D3 60 D4 ROC 40 20 0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 LOGISTIC DESIGN UNIFORM LOGISTIC DESIGN as a way of reducing risk for biorefineries: a) by broadening feedstock base so that a given biorefinery will not be captive of local supply b) by offering a more homogeneous quality that minimizes process adjustment costs Optimal biorefinery size (Thermochemical. Rest of the country. 2020) Conventional logistic design 2.25 million dry tons Pioneer logistic design 20 million dry tons SWITCHGRASS.TCHMFLX.ROC_PIONEER 250 200 200 150 150 miles 250 100 100 50 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 50 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 miles SWITCHGRASS.TCHMFLX.ROC_CONVENTIONAL vintage vintage