The Economics of Biofuel Production and Use

1. The Economics of Biofuel Production and Use Guy Hitchcock

2. Biofuel production

3. Cost elements of biofuel production By product sales Conversion process Fuel distribution and retail Feedstock Conversion inputs

4. 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

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

6. 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

7. 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

8. 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

9. Conversion estimates for biodiesel from rape seed Conversion costs in €/litre

10. Conversion estimates for ethanol from wheat Conversion costs in €/litre

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

12. 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

13. Diesel pump prices across Europe including duty and VAT

14. Cost of RME VS EU diesel excluding taxes

15. Price of RME vs UK diesel including taxes

16. Cost of wheat ethanol vs EU gasoline excluding taxes

17. Price of wheat ethanol vs UK gasoline including taxes

18. 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

19. Biofuel use

20. 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

21. 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

22. Ford Focus FFV

23. 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 

24. Fuel costs

25. 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

26. 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

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

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

29. 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.