Never before has there been such interest in biofuels production and use in the U.S. and around the world, particularly ethanol and biodiesel, which are the primary biofuels currently used in U.S. transportation fuel. Ethanol is generally made from corn and used in gasoline, while biodiesel can be made from many feedstocks, including soybean oil, animal fats and used cooking oil.

Ethanol has experienced tremendous growth in the U.S. as an important additive to gasoline-improving octane and reducing tailpipe emissions of primary air pollutants. Biodiesel production and consumption in the U.S. is in its infancy, compared with ethanol, and is generally used in state and federal fleet vehicles to comply with federal alternative-fuel and vehicle requirements. Still, demand for both biofuels is growing steadily, particularly for ethanol.

Demand for both ethanol and biodiesel in U.S. transportation fuel has been and will continue to be driven by federal and state public policy. Policymakers from the President to state legislators are interested in strengthening U.S. energy security through diversification of fuel use as well as increasing domestic fuel resources. Rural economic development and farm support serve as other powerful drivers.

Both the federal and state governments are mandating ethanol fuel-use standards and continue to offer a broad array of fiscal and other incentives to spur production and use. Many states offer numerous types of fiscal incentives to spur the production and use of ethanol and biodiesel and include usage requirements, tax exemptions or reductions, producer payments, tax credits for the purchase of flex-fuel vehicles (FFVs), and loans and grants.

One of the most important public-policy tools to support the production and use of ethanol and biodiesel has been their federal tax credits, which are $0.51 and $1 per gallon, respectively. Another has been the recent Congressional enactment of the Renewable Fuels Standard (RFS) under the Energy Policy Act of 2005.

Regulations to implement the RFS program were finalized by the Environmental Protection Agency this April. The RFS will require 4.02% renewable fuels in gasoline and diesel supply in 2007, increasing each year through 2012. The regulation will take effect this September.

Meanwhile, President Bush has announced a sweeping new program, the Alternative Fuels Standard (AFS), which would require 35 billion gallons of renewable and alternative fuels in annual gasoline and diesel supply by 2017. The AFS proposal has now been submitted to Congress.

Numerous proposals to require up to 60 billion gallons of renewable fuels annually in the coming years have been introduced in Congress, as U.S. policymakers seem to recognize that low-level biofuel blends will do little to add to the nation's energy security. Indeed, some officials and energy-security advocates note that only with significantly increased penetration of biofuels in the U.S. motor-fuel supply will real energy security benefits be realized. This has lead policymakers to call for higher-level ethanol blends such as those used in Brazil in conventional gasoline (generally 20% or higher ethanol volume).

Current production. Since 1978, annual fuel ethanol sales to U.S. refiners and gasoline marketers have grown from just 30 million gallons to more than 5 billion gallons in 2006, representing between 3% and 4% of gasoline supply, according to Hart Energy Consulting's newest study on the U.S. biofuels market, "Outlook and Impacts for Renewables in North American Refining and Gasoline Markets: 2006-2015." Jointly carried out with Informa Economics and OPIS, the study provides a comprehensive analysis of the impact of renewable fuels in the U.S. transportation-fuel market. The study also found that, in less than five years, the biodiesel market has grown from just 1 million gallons produced in 1999 to 300 million gallons produced in 2006.

Production capacity for these biofuels has grown quickly to keep up with demand. Hart's Global Biofuels Center (GBC) estimates that, as of late May, there are 124 ethanol-production facilities with a total capacity of 6.06 billion gallons per year. An additional 72 facilities are under construction, representing an additional 5.2 billion gallons of annual capacity. Another 337 plants are under consideration, and these could have capacity for another 25 billion gallons annually.

In addition, GBC estimates that, as of April, there were 137 biodiesel-production facilities operating with a total capacity of 1.17 billion gallons per year. On the whole, these plants are not operating at full capacity, with GBC projecting a 27% utilization rate. An additional 106 facilities are under construction with many scheduled to begin operating this year, representing an additional 1.63 billion gallons of annual capacity. Proposed production capacity at 100 facilities totals 1.77 billion gallons annually.

If demand is assumed to be at the very least what is required by the RFS, then forecasted production of ethanol far exceeds RFS requirements. However, before conclusion of the current Congressional session in October 2008, Hart Energy Consulting projects the current RFS will be extended to up to 12 billion annual gallons in 2012, and then increased to 10% of total gasoline supplies by 2015, creating an annual demand for 15 to 16 billion gallons of ethanol. Within 10 years, the commercialization of cellulosic ethanol production could drive that number to between 35 and 60 billion gallons per year, or ranging from 25% to 43% of the gasoline supply, representing at least a five-fold increase in the amount of ethanol in the gasoline supply.

Hart's analysis of demand through 2015 assumes that, in current economic conditions, all anticipated production capacity will be used, and that a certain level of imports will add to the U.S. minimum projected ethanol market range. Note that a 10%-by-volume average market share could reach 100% market penetration in 2015 or sooner as the Hart projections show the minimum range.

Biodiesel demand. Assuming the federal biodiesel tax credit is extended past 2008, when it is expected to sunset, production of biodiesel in the U.S. is expected to reach 1 billion gallons by 2010 and nearly 1.5 billion gallons by 2015. Without this tax credit, biodiesel production would only be profitable at oil prices above US$75 per barrel (depending on feedstock choice and price).

Still, the opportunity for biodiesel-production growth in the U.S. is significant when looking at the entire diesel market, which was 55 billion gallons in 2006. In the short term, given technical and capacity constraints, if biodiesel were blended at 2% (B2), then the market size for biodiesel stands at 837 million gallons. With biodiesel production at only 300 million gallons at the end of 2006, this would imply a potential B2 market-penetration rate of 35%.

If the blending were increased to the generally accepted maximum allowance without interfering with vehicle technology, 20% or B20, then the potential annual market is estimated at more than 8.5 billion gallons. These market projections show the potential for biodiesel, but realization of this market would require technological breakthroughs, an increase in the range of feedstocks and commercialization of the technology to be cost-competitive. Growth opportunities for biodiesel industries are numerous but the greatest source of potential demand is general consumer fuel.

In short, in the biofuels world, we are living in interesting times.

Ethanol and biodiesel production capacity will grow prodigiously. Corn-based ethanol is expected to supply 15 to 16 billion gallons of fuel per year in the next five years, roughly 10% of the gasoline market. Production of biodiesel in the U.S. is expected to reach 1 billion gallons by 2010 and nearly 1.5 billion gallons by 2015.



Tammy Klein is executive director of Hart Energy Consulting's Global Biofuels Center and a director of Hart's International Fuel Quality Center's global efforts on biofuels as well as public-policy developments with respect to fuel quality in North and South America. She previously practiced administrative and regulatory law. She can be reached at tklein@ifqc.org.

Comments