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The Economics of Fuel Ethanol - “ COSTS AND BENEFITS OF A BIOMASS-TO-ETHANOL PRODUCTION INDUSTRY IN CALIFORNIA”

The Economics of Fuel Ethanol - “ COSTS AND BENEFITS OF A BIOMASS-TO-ETHANOL PRODUCTION INDUSTRY IN CALIFORNIA”. Mike McCormack Transportation Technology Office California Energy Commission at the The Oregon Ethanol Forum: A Closer Look At Fuel Ethanol Village River Inn - Eugene Oregon

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The Economics of Fuel Ethanol - “ COSTS AND BENEFITS OF A BIOMASS-TO-ETHANOL PRODUCTION INDUSTRY IN CALIFORNIA”

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  1. The Economics of Fuel Ethanol -“COSTS AND BENEFITS OF ABIOMASS-TO-ETHANOL PRODUCTION INDUSTRY IN CALIFORNIA” Mike McCormack Transportation Technology Office California Energy Commission at the The Oregon Ethanol Forum: A Closer Look At Fuel Ethanol Village River Inn - Eugene Oregon May 8, 2001

  2. Background- Why is California Interested in Ethanol Production? Governor’s Executive Order in 1999 set a phase-out date for MTBE - Dec 31, 2002 Ethanol - only approved alternate oxygenate for use in California gasoline 580 to 715 million gallons of ETOH per year needed Gasoline use growing in California- 300 million gpy projected(15.7 billion gpy in 2004) Gasoline prices are high - ethanol blending economics favorable Conditions and economics may be right for projects in California Why not reduce our dependence on imported ethanol? Job creation and economic growth potential

  3. Background- So, what has happened in the last two years? • California Phase 3 gasoline regulations adopted in 1999 • California Environmental Policy Council approved ethanol as a environmentally acceptable alternative to MTBE • CARB initiated studies (in progress) to deal with vehicle/ fuel commingling and permeation issues • Energy Commission evaluated the feasibility of a waste-biomass to ethanol (cellulosic feedstocks) in 1999 (Report to Governor) • potential energy, environmental and economic benefits • favorable ethanol plant/project economics for a variety of feedstocks…. under the right circumstances • established costs of ethanol delivered to California • challenges and uncertainties identified • lingering issue - how soon can cellulosic technologies be ready?

  4. Background- Recommendations to Foster Biomass-to-Ethanol Development in California (1999 report to the Governor) • Staff recommended actions in 4 categories: • Policy • Research, Development, Demonstration • Market Development and Commercialization • Further study needs • Market development recommendation • Study the most appropriate forms of state financial and non-financial assistance to encourage technically sound and economically feasible biomass-to ethanol projects

  5. Background- Recommendations Continued (1999 report to the Governor) • Further study needs recommendation • Develop a method to determine the cost and public benefits associated with developing biomass-to-ethanol and biomass-to-other transportation fuels industry in California • Policy Recommendations • Develop and adopt a biomass-transportation fuels energy policy • Adopt carbon reduction goals • Adopt fuels diversity goals

  6. Background- Recommendations Continued (1999 report to the Governor) • RD & D Recommendations • Pursue joint funding opportunities that support demonstrations of several biomass-to-ethanol projects in the state • Develop program to improve collection, transportation and processing of cellulosic feedstocks • Initiate advanced engine development projects which use biomass transportation fuels

  7. State Budget Directive FY 2000/01 (Chapter 52) Determine the economic costs and benefits of a biomass-based ethanol production industry Assess the impact on consumer fuel costs from an in-state ethanol production industry and from imports Evaluate the impact on rice straw burning Provide recommendations on future steps

  8. Ethanol Production Scenarios Study Assumptions

  9. Ethanol Production Scenarios • Economic Assumptions and Inputs • 20 cent per gallon producer payment • 10% capital cost over 20 years • 20 year plant life • 26 years of ethanol production • IMPLAN used to calculate impacts on the state economy • 40, 20 and 10 million gpy plants assumed

  10. Ethanol Supply and Demand

  11. Biomass-Ethanol Production Scenarios

  12. California Biomass (Bone Dry Tons) Used in 200 Million Gallon Production

  13. 1 5 6 4 2 3 7 8 17 18 10 9 15 12, 19 14 11 13 16, 20 Assumed Distribution of Biomass Feedstock Supply Regions Cellulosic biomass regions

  14. Economic Costs and Benefit Impacts Over 20 Year Plant Life (State Outlay: 10% Capital, $0.20 Per Gallon Producer Payment)

  15. Annual Changes in Personal Income - 200 million gpy Industry (Y2000$)

  16. Major Findings - Economic Impacts State Cost (Assumed) Economic Forest Air 20% Capital, $0.40/gal Base Case (10% Capital $0.20/gallon) No State Cost, High Ethanol Price ($1,000) $0 $1,000 Personal Income ($ million NPV) over 20 years

  17. Major Findings - Price of Ethanol Delivered to California 2.20 Near term price with US Ban on MTBE (45 U.S. facilities) 2.00 1.80 Ethanol Price ($/gal) 1.60 Long term price (75 production facilities) 1.40 1.20 1.00 400 600 800 1000 1200 1400 Ethanol Supply ( Million gal/year)

  18. Major Study Findings • What are the economic impacts? • $1 billion over 20-year period, assuming state government incentives totaling $500 million for a 200 million gallon per year industry. • What is the impact on rice straw burning? • Rice straw burning in California will be curtailed in the near future under current air quality regulations. • Ethanol production would provide rice growers with an option to plowing rice straw into the ground to meet air quality regulations.

  19. Major Study Findings • What are the potential impacts on consumer fuel prices? • Near-term: Uncertainty in securing adequate supplies of ethanol to meet needs could lead to escalating ethanol market prices with resultant increase in the cost of gasoline to consumers. • What are the potential forest and emission impacts? • Reduction in the frequency and intensity of forest fires and improved forest health. • Reduced emissions from wildfires and agricultural burning.

  20. RecommendationsState Investment in Cellulosic Ethanol • Because technologies for ethanol production from cellulose have not been commercially proven: • The state should co-fund activities to advance commercially unproven technologies towards market readiness on an accelerated schedule. • The state should provide technical and financial support for one or more biomass-to-ethanol production projects to verify technical and economic performance of commercial scale demonstration facilities.

  21. RecommendationsState Investment in Cellulosic Ethanol • The cost and availability of cellulose feedstocks in California for ethanol production remains problematic: • The state should fund activities to enhance the availability and quality of cellulose resources for ethanol production. • The form and duration of state financial support for emerging biomass-to-ethanol markets is crucial to the development of an industry capable of competing with conventional ethanol production: • The legislature should direct an appropriate state agency to develop and implement a market incentives program to increase the certainty of markets for California produced ethanol.

  22. RecommendationsOther Steps to Foster Cellulosic Ethanol • Besides direct financial assistance, California can assist the development progress of a biomass-to-ethanol industry in other ways. California state agencies with biomass-to energy related interests should be directed to pursue coordinated program activities in order to resolve issues and challenges: • Facilitate the communication among stakeholders for harvesting of forest materials for ethanol feedstock. • Develop appropriate revisions to state laws affecting use of agricultural and municipal waste and residues for ethanol feedstocks. • Siting, permitting and environmental impact assessment assistance to prospective biomass ethanol projects.

  23. RecommendationsExploring Opportunities for Conventional Ethanol Production • Since cellulosic waste-based ethanol production is a technology yet to be proven on a commercial scale, conventional ethanol production in California based on the use of agricultural commodities such as sugar cane, sugar beets, and grains/starch such as sorghum could contribute to the State’s ethanol supply needs sooner than a waste-based ethanol industry: • The legislature should direct the Energy Commission together with the California Department of Food and Agriculture to study the costs and benefits, assess state resources, and determine appropriate forms of state support (if needed) for this type of ethanol industry.

  24. RecommendationsMitigating Consumer Fuel Price Impacts • Due to the potential for price increases in ethanol imported into California with MTBE phase-out in California by December 31, 2002, actions are appropriate to reduce impacts on consumer’s fuel costs: • The legislature should direct the Energy Commission to explore means to increase the state’s ethanol import options, balance ethanol demand growth with available supplies, and limit ethanol price fluctuations.

  25. RecommendationsExamining Other Renewable Fuel Options • California’s potential biomass energy opportunities include a variety of other approaches to producing liquid fuels, other forms of energy and co-products from waste and residual materials and agricultural commodities: • The state should continue to actively explore other technological paths that offer attractive means of supplying portions of the state’s future energy needs from renewable biomass resources.

  26. Summary and Conclusions • Supply - Hypothetical moderate and aggressive ethanol production scenarios fall short of ethanol needs for gasoline blending in California - even by 2010 • Economics - IMPLAN input/output model shows more than a $1 billion return to California over 20 years (200 million gallons per year industry) and creates jobs • 1600 jobs • Benefits -Environmental benefits for cellulosic biomass are real but calculated benefit ($500 million) is soft

  27. Summary and Conclusions (continued) • Cost of ethanol delivered to California • long term price $1.53 to $1.80 by bidding away from other states(62 cent gasoline) • MTBE ban nationwide moves price for any volume to over $2.00 per gallon in the short term • California production would depress the cost of delivered ethanol by 10 cents per gallon(soft guess) • With gasoline price at $1.00 per gallon, ethanol command $1.70 to 1.90 per gallon(low to high demand) in the long term • results of the ESAI 1999 study need to be updated given plant expansion and new plant construction planned

  28. Summary and Conclusions (concluded) • Consumer fuel cost • A 50 cent per gallon ethanol cost swing would add about $0.03 per gallon to the cost of gasoline(@ 5.7 volume %) • Timeline - First cellulosic plant no sooner than 2004-2005 • opportunity exists for conventional ethanol from agricultural commodities (corn, wheat, sugar cane) 2002 -2003?

  29. For More Information about Biomass-to-Ethanol Activities... Biomass-Ethanol Project Team Pat Perez, Fuels Resource Office Mike McCormack, Transportation Technology Office (916) 654-4527(Pat) or (916) 654-4652(Mike) (916) 653-4470 FAX • pperez@energy.state.ca.us mmccorma@energy.state.ca.us or visit our web site at: www.energy.ca.gov/mtbe/ethanol/

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