Risks and uncertainties of bioethanol production in the Netherlands
An exploratory study
8 December 2006
Supervisors
Prof. dr. Johan P.M. Sanders – Wageningen University Prof. dr. H.J. ter Bogt – Groningen University Author
Age J. van der Mei
Risks and uncertainties of bioethanol production in the Netherlands An exploratory study
8 December 2006
Supervisors
Prof. dr. Johan P.M. Sanders Prof. dr. H.J. ter Bogt
University of Wageningen University of Groningen
Author
Age J. van der Mei T +31 653 396 118
Abstract
Bioethanol experiences renewed interest as transport fuel. On EU level there are four factors driving the implementation of biofuels: reducing CO2 emissions (meeting Kyoto), reducing EU energy dependence, providing opportunities for EU farmers and reducing local emissions. The two main drivers are (1) reduction of CO2 emissions and (2) reducing the energy dependence. In the Netherlands, CO2 emission reduction constitutes the most important driver to pursue biofuels. This is followed by reduction of the Dutch energy dependence.
Currently, EU bioethanol production accounts for a small part of total world production. Production capacity is however growing rapidly and amounted to 2,3 million m3 in 2006 (RFA, 2006). The growing ethanol industry faces a number of risks in the coming years. The most prominent risk involved in bioethanol production are observed to be government policy, cattle feed price, ethanol price, raw material price, import tariff structure, the power position of oil distributors, the risk of a bad harvest and competition over (future) biomass resources.
Simulation analysis of a 4.100 cubic meter ethanol plant confirmed the largest risk to be the price risk for bioethanol and feed stock. The simulation showed a relatively lower risk for ethanol by-products. A trade-offs seems to exist between risk and return. The production of anhydrous ethanol in general yields a relative higher return, but higher risk as well as observed in the frequency distribution. Production of hydrous ethanol implies lower investments and operational costs, reducing the risk and return involved.
The ability to switch raw materials was found to be the most effective risk mitigation strategy. Increasing scale of production is viewed as another important strategy to make ethanol production more competitive. Developing new markets for by-products is identified as another effective risk mitigation strategy. Interesting, utilizing forward contracts and financial markets is hardly mentioned as a possible risk strategy and its effectiveness is judged relatively low. Even though the financial market could be used to reduce the impact of some of the most important risks, fluctuating ethanol and feedstock prices, it is not judged as highly effective.
Acknowledgements
An academic career can be marked by a few defining experiences. These experiences allows someone to leap into new knowledge, embark in unexplored fields of study and meet inspiring people. Embarking on economic research in the bioethanol industry proved one of these experiences for the author. Here, a number of persons are acknowledged who have help valuably in this research, and allowed the author to have a peak into the promising world of bioenergy. First and foremost, I want to thank professor Johan Sanders for his inspiring help and invaluable guidance. Our talks and discussions always proved challenging to an eager academic and has not only has inspired me, but also left me a more critical, analytical mind. Professor Henk ter Bogt has my gratitude for his guidance in challenging periods and in keeping the right focus in the research. My research colleagues. I want to thank them for a pleasant time and their critical reviews: Robert Bakker, Douwe Frits Broens, Emiel Wubbens and Onno Omta all added invaluable knowledge. To the interviewed experts, I express my sincere gratitude as for without their experience and time, this study could not have been performed. A number of these experts allowed the author to gather knowledge abroad. These much appreciated people are Professor Wetter, doktor Karsten Block, Jan Lindstedt, Kenneth Werling and Eva Sunnerstedt. My friends Alvar de Wolff and Aliocha Karpovitz I want to thank for their friendship and guidance. The last lines I reserve for Ben Brehmer. In pursued of becoming a dokter and doktorandus, we ventured into the developing world of bioenergy and presented, discussed, utiled, worked and travelled together, benefiting our knowledge and debating skills and becoming friends in the process. I sincerely hope to be able to work in this challenging and emerging field and meet many of the afore mentioned open and knowledgeable people again.
Index
1 Ethanol: back to the future ...5
2 Research design ...6
3 Social and economic dependence on oil ...9
3.1 Human development dependent on fossil hydrocarbons...9
3.2 Oil dependence in the transport sector...10
3.3. Geographic location of oil ...12
4 Environmental impact of burning fossil hydrocarbons ...13
4.1 Greenhouse gas emissions from transport ...13
4.2 Local emission from transport...15
5 Bioethanol as transport fuel ...17
5.1 A history of bioethanol ...17
5.2 Biofuel policy ...18
5.3 Ethanol market ...20
6 Production of bioethanol ...23
6.1 Production process...23
6.2 Production costs of ethanol ...24
6.3 Environmental performance: local and global emissions ...25
7 Uncertainty and risks of bioethanol ...28
7.1 Financial Risk Management ...28
7.2 Risks of bioethanol production ...30
8 Perceived risk and uncertainty in bioethanol production ...33
8.1 Identification of risk and uncertainty drivers ...33
8.2 Likelihood and impact of risk and uncertainty drivers ...44
8.3 Simulation of 4.100 m3 ethanol production plan...52
8.4 Possible risk management strategies ...57
9 Conclusion...59
References from literature ...63
Definitions ...67
Appendix: Methodological background...69
Appendix: employment opportunities from biofuels ...71
Appendix: ethanol production in Sweden and Germany...73
Appendix: Risk and uncertainty in economic literature ...75
Appendix: Euro-norms for Diesel and Gasoline cars...79
Appendix: Inpaqt simulation model for 4.100 m3 ethanol plant...80
Appendix: ASTM D5798 norm ...81
1
Ethanol: back to the future
Bioethanol for transportation purposes experiences renewed interest. Bioethanol’s prominence for transportation comes from its ability to reduce CO2 emissions, improve local air quality, increase energy security and provide alternative markets for farmers (IEA, 2004). Even though the mentioned benefits constitute topic of some debate; ethanol production facilities are emerging across Europe. EU25 production in 2005 was up by 73% compared to 2004 figures (EBIO, 2006) with ethanol for transportation use increasing more than six-fold since 1980 (F.O. Lichts, 2004). A recurring theme. Ethanol fulfils a role as transport fuel since the development of the automobile with recurrent success. Already in the beginning of the 20th century, the original T-Ford was designed to run on ethanol. The decline of ethanol use set in with the emergence of a cheap substitute, gasoline. During the 20th century, different gasoline-ethanol blends have been used. During World War II, ethanol was for example used as a E20 (20% blend) in gasoline in a number of European countries. In the 1970s, two oil crisis triggered renewed interest in the use of ethanol, especially in Brazil. The success of ethanol as a fuel comes mainly from its octane boosting qualities and its ability to substitute gasoline. However, its higher production price compared to gasoline has restricted wide spread use of ethanol.
2 Research
design
The European ethanol industry is regarded an infant industry operation in an immature ethanol market. Investing in ethanol production in Europe entails a considerable number of uncertainties. Economic research into ethanol production is not widely established in peer review magazines. The main literary body is written in different fields such as biochemical and engineering. Economic research into the drivers of economic uncertainty could help to improve understanding of its uncertainties. The next step would be to identify possible risk management strategies. To improve our understanding the research design will be exploratory. This leads to the main goal of this study. Identify the economic uncertainty –risks and opportunities- of bioethanol production in the Netherlands.
An exploratory research design can assist in identifying events which drive the economic uncertainties. In general, the purpose of an exploratory study is to give explanations for situations that appear in little understood environments. In this role, research tries to give new insights and shed light on phenomena (Robson, 2002). Since the ethanol industry is not yet well established in the Netherlands, three countries are taken to represent the ethanol industry. The scope of the study encompasses the ethanol industry in Sweden, Germany and the Netherlands. The study design is flexible and exploratory in nature. This allows for new questions to be added as the study progresses.
Research method
This paragraph presents a detailed account of the procedures used to execute the research. The research was performed in two stages: the first stage contains a literature study and includes interviews with experts in Sweden, Germany and the Netherlands. The second stage consists of a validation of the interview results. Validation is pursued by sending a questionnaire to the interviewees. The information obtained in the interviews and questionnaire is applied to simulate the economic risks of a 4.000 cubic meters ethanol production facility.
The interviewees are selected so as to obtain input from different stakeholders in the ethanol industry. Experts from the following fields were interviewed: ethanol producers, oil companies, ministries and researchers. A list of interviewees is added in the Appendix. The interviews were performed during 2006. In the next step, the questionnaire allows the participants to rank the impact and likelihood of the identified events; creating a thorough understanding of the perceived risks and opportunities. A few open questions were added to incorporate a number of uncertain issues, such as for example ethanol demand after 2010. Possible risk mitigation strategies were often mentioned by the interviewees and they are added in the results. The risks and uncertainties are structured according to the categories of the Enterprise Risk Management. The driving factors encompass political, technologic, economic, natural environment and social/cultural categories (COSO, 2004).
Methodology
The selected research methodology is subjective in nature to suit the main goal of the research: perceived uncertainty and risk of ethanol production in the Netherlands. Here, a description and evaluation of the selected research methodology is given. The topic of this study is the uncertainty involved in ethanol production in Europe. The nature of the phenomenon determines the most appropriate research methodology (Ryan, Scapens, 1992). The nature of risk depends on the definition used. A search of the financial literature show two ontological views of risk: operationalism and subjective probability. The most well-known, operationalism, is provided by Frank Knight (1921) who called risk: measurable uncertainty. Measurable uncertainty can be reflected using a priori and statistical probability. Unmeasurable uncertainty accordingly, is formed by opinion. Other authors referring to this topic classify them as: objective and subjective probability.
Objective probability is commonly used in risk techniques, especially in the accounting profession. The techniques generally entail both probability and exposure. Probability in this instance is defined as a metric of uncertainty. Known information is used in the form of historic, a posteriori, data which is utilized to give probability estimates. In this view, information which is pertinent to a decision can at best be known only in the form of specified probability distributions (Byrne, Charnes, et.al. 1968).
Subjective probability puts forth that different individuals can perceive the same risk situation differently. Contextual differences appear to influence perceived risk and for example show to be partly dependent upon mood, feelings and the way problems are framed (Tversky, Kahnman 1981).
intentional and geared at a certain goal, and it has meaning in its social and historical context: minimizing exposure to uncertain future events.
Validity
The flexible qualitative research design affects the internal and external validity of the study. Internal validity is determined by how much control has been achieved in the study (Ryan, Scapens, 2002). External validity is determined by the extend to which the results of the study may be generalised to other settings. This main goal is to identify and describe the economic uncertainty in ethanol production. As such, the internal validity is relatively low to moderate since the study poses a lower level of control compared to more quantitative research. The main focus of the study is to incorporate new knowledge using a flexible research design. To improve the internal validity a questionnaire and simulation are performed to test the impact of the various uncertain events. Compared to internal validity, the external validity is higher for its results and conclusions are drawn from interviews and questionnaires from participants in the ethanol industry. This improves external validity for the observed uncertainty can be generalized in different settings. It is observed however that external validity suffers somewhat from the difference in technologies used, government policies in place and the rapid changing ethanol market.
A peer group and data triangulation was employed to bias on the researcher part and improved validity. The peer group consisted of researchers from the Wageningen University working on biochemical conversion and engineering. A semi-structured list of questions was used to impose structure in the interviews and is added in the Appendix. Future research could utilize more structured questionnaires based upon this study and improve internal validity.
Limitations and scope of research
3
Social and economic dependence on oil
The identification of uncertain factors in bioethanol production requires a look at the impact of its main substitute, oil. This chapter describes the human dependency on energy and oil. Most of the energy comes from fossil resources. The transport sector forms the focal point in the oil dependency issue. This chapter touches upon the amounts of oil used, the availability worldwide and its geographical spread and how this affects energy available for transport.
Energy as basic building block for societies
Progress of human society has required the exploitation of energy resources. The history of human culture can be viewed as the continuous development of new energy sources and their related conversion technologies. The progression of energy technology has increased the comfort, longevity and welfare of human society. In antiquity, humans predominately used muscle-, wood-, water- and wind power as energy sources. Houses were small, transport was local and technology was limited to simple tools. In the 18th century, the use of coal in James Watt’s steam engine sparked the industrial revolution in England. New technologies allowed transporting costs to decline and larger cities to appear. In the 20th century, oil and gas surfaced as new energy sources; transport costs declined and global trade and communications thrived. Backtracking these developments, it can be found that muscle- wind- and water power have been replaced by fossil hydrocarbons: first coal, then oil and now, increasingly natural gas. The global use of hydrocarbons for fuel has increased nearly 800-fold since 1750 and about 12-fold in the twentieth century (Nature, 2003). In the 21st century, energy in the form of heating, electricity, transport fuels and chemicals will prove vital building blocks for human society. Future fertile and stable social-economic conditions requires a reliable, sufficient and sustainable supply of energy at reasonable prices.
3.1 Human development dependent on fossil hydrocarbons
Energy and human well-being are closely related. Hydrocarbon-based energy facilitates three main areas of human development: social, economic and environmental (Munasinghe, 2002). Some authors revere to these dimensions as the
three P’s derived from People, Planet and Profit. The three dimensions are presented to illustrate their relationship to energy.
The social dimension. The Human Development Index (HDI) is taken to represent social development. The HDI of the United Nations shows an index figure of 0.93 in 2002 on average for North America and EU15. For the developing nations the figure is around 0.65 (Human Development Report
Relationship Human Development and Energy Consumption y = 0.1394Ln(x) - 0.2602 R2 = 0.7177 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 0 2000 4000 6000 8000 10000
Oil consumption per capita
2004). High correlation seems to exist when human development and energy use per capita is compared. The correlation between the two variables is 72%. This constitutes a high correlation linking development of humans to the amount of energy used.
The environmental dimension relates to energy use as well. The correlation between greenhouse gasses (GHG) and energy use in a nation is 98% (IEA, 2003). The explanation of this near perfect correlation is straight forward: the energy comes from burning hydrocarbon bonds which emit CO2 and causes local air quality to deteriorate.
Economic development is the third dimension from the framework of Munasinghe. Energy use and economic activity are strongly related for most industrial and developing economies. The energy usage in the most developed nations ranks among the highest in the world. Illustrating this point, the International Energy Agency (IEA) states in its 2006 Oil report that oil consumption in 2006 has peaked at 84.8 million barrels per
day. Of this amount, North America and Europe (EU15) use almost half of this amount at 36 million barrels. The economic GDP purchasing power parity and the energy usage shows a strong correlation. The energy consumption per capita and purchasing power per capita is show in the figure Relationship purchasing power and oil consumption. The correlation of both variables is 78% which implies that economic development and energy use are strongly connected.
Summarizing, economic and social development in a nation is strongly connected with energy use per capita. In general, people are dependant on energy for their social well being and affluence. But, the energy consumed comes primarily from fossil. This creates a dependence on those hydrocarbons. To determine the dependence on fossil hydrocarbons in the transport sector, three aspects have to be determined: (1) the amount of fossil carbons used, (2) the rate at which they are depleted, (3) and the geographic source of these hydrocarbons.
3.2 Oil dependence in the transport sector
Moving to oil. The fossil hydrocarbon which supplies in excess of 95% of all transport vehicles is oil. The transport sector has an important economic and social goal. Freight traffic is essential for trade and production systems whereas personal mobility is needed for business and social life. Transportation systems use the following oil products as transport fuel: diesel, kerosene and gasoline. The dependence on fossil oil in the transport sector generally above 95%. The Netherlands for example has an oil dependence for use as transportation fuel exceeding 98% (ECN. 2005). From the total of 462 peta joule use in transport, 457 peta joule comes from oil. In 2004,
the total transport sector in the EU15 washed down 317 million ton oil equivalent per year (Mtoe) (EU Energy and Transport 2005). This amount constitutes about 30% of the total energy used in the EU15 (total amount = 1005 Mtoe). The trends are similar for EU25 and for other developed nations. To determine dependency we next turn to the availability and geographic source of the hydrocarbons used for transport: oil.
Availability of oil for transport
The amount of oil available on earth co-determines the dependency on oil. Oil is the main hydrocarbon and is used as raw material to produce transport fuels. The most used model to predict oil production and depletion was devised by Marion King Hubbert. Hubbert proposed the theory that the discovery and production of oilfields over time would follow a single-peaked, symmetric bell-shaped curve. The production would peak according to Hubbert, when 50% of the ultimate recoverable reserve (URR) had been extracted (Hubbert, 1962). The ultimate recoverable reserve describes the total quantity of oil that can ever be produced world-wide. The one trillion barrels already produced to date have to be subtracted from this amount.
Most estimates of remaining conventional oil resources are based upon expert opinion. The group of experts are made up of geologists and others familiar with the region. Lower expert estimates suggest the URR is no greater than about 2,3 trillion barrels. The middle estimate consists of 3 trillion barrels and the highest estimate reports 4 million barrels which is mentioned in the most recent report from the US Geological Survey (2003). Given the Geological Survey assumptions1 and expert estimates of the URR, the Hubbert model predicts that oil production will increase until at least 2025. This would suggest that oil production will be able to meet growing demand. But another essential question has to be answered to determine if transport systems are at risk from their dependency on oil. Where does the oil come from?
1 Some of the most important assumptions behind the calculations are: (1) only conventional oil is considered using
Trade in Energy: Oil imports EU15 Year 2001 amount Germany 152.751 France 115.221 Netherlands 110.128 Italy 106.942 Spain 79.727 United Kingdom 73.063 Belgium 51.989 Sweden 25.502 Greece 23.324 Portugal 18.191 Finland 15.437 Austria 13.364 Ireland 10.296 Denmark 9.141 Luxembourg 2.487
Note: 1.000 Metric ton oil eq.
Source: EIA, Energy Balance of OECD countries 2003
3.3. Geographic location of oil
Oil is used by all 220 nations in the world, but oil is not evenly distributed over the nations. The major exporting nations number 38 in total and this number is expected to decrease through the depletion of the once extensive resources of North and South America (Nature, 2004). According to the Directorate-General of the European Union (2005), 81% of the imported oil comes from just 5 nations: Former Soviet Union, Norway, Saudi Arabia, Libya and Iran. Except for Norway, these countries are located in instable regions. Supplying more than 80% of the imported oil to the EU, these five countries wield a power position and are capable of disrupting oil supply. Cartel building can occur when supply is limited to a few large producers. A cartel is a group of formally independent producers whose goal it is to fix prices, to
limit supply and to limit competition. The OPEC is a cartel and has operated with changing success. The power position can be utilized by restricting production, thereby raising prices and posing a threat to oil availability.
To summarize, oil dependence in the transport sector is very high; reaching more than 95% in most developed countries. Oil supply is expected to increase in the coming two decades, but the energy dependence on a few oil exporting nations in instable political area’s will
increase.
Crude Oil Imports in EU15
4 Environmental impact of burning fossil hydrocarbons
The economic and social impact of energy use has been dealt with in the preceding paragraphs. Here, the environmental impact of burning hydrocarbons use is discussed. It appears that the economic growth and increase in social well-being is realized at an environmental cost. The 2005 Millennium Ecosystem Assessment presents the relationship between development and impact on the environment with a strong statement: “the changes that have been made to ecosystems have contributed to substantial net gains in human well-being and economic development, but these gains have been achieved at growing costs in the dorm of the degradation of many ecosystems services, increased risks of non-linear changes, and the exacerbation of poverty for some groups of people. A possible solution is increasing the sustainability of our energy system. ”Sustainability according to the Brundtland-rapport (1987) is development which can meet the current needs without degrading the ability of future generations to meet their own needs. The issue is considered to be closely tied to economic growth and the need to find ways to expand the economy in the long term, without using up natural capital for current growth at the cost of long term growth. Natural capital in this respect encompasses land use, eco-systems, air quality, water availability, and other natural resources. It exceeds the breath of this report to consider all ecosystem aspects of using fossil hydrocarbons. Instead, attention is directed to green house gas (GHG) emissions and local air pollution from burning hydrocarbons for transport purposes.
4.1 Greenhouse gas emissions from transport
When hydrocarbons are burned, greenhouse gasses are emitted into the atmosphere. The effect on climate of greenhouse gasses is the retaining of heat in the earths atmosphere. Warmth of the sun is retained by gasses such as water vapour, CO2, methane, ozone etc.2. Carbon dioxide (CO2), methane and ozone are among the largest anthropomorphic greenhouse gasses which are emitted by volume. More potent greenhouse gasses are from the family of fluorocarbons, but these constitute but a small amount of total anthropogenic emissions. GHG are important for the earth’s ecology. For the presence of greenhouse gasses allows habitation; without greenhouse gasses the earth would be 30°C cooler and inhabitable. The scientific consensus on global warming is that Earth is warming, and that humanity's GHG emissions are making a significant contribution (IPCC, 2001). This consensus is summarized by the findings of the Intergovernmental Panel on Climate Change. In the Third Assessment Report, the IPCC concluded that "most of the warming observed over the last 50 years is attributable to human activities". This position was recently supported by an international group of science academies from the G8 countries and Brazil, China and India. Burning fossil fuels emits mainly CO2 into the atmosphere affecting the climate systems on earth. The reason is that CO2 previously contained in the earth’s crust did not take part in the carbon cycle. Carbon dioxide is the most important GHG and is believed to be the main driver in global temperature changes. CO2 is part of the biogeochemical cycle by which carbon is exchanged between biosphere, geosphere, hydrosphere and atmosphere of the Earth. At current levels it is estimated that CO2 alone contributes 16°C degrees to global temperatures (IPCC, 1994).
Total Greenhouse gas emission EU15
0
200
400
600
800
1000
1200
AU
T
BE
L
DN
K
FI
N
FR
A
DE
U
GRC
IR
L
IT
A
LUX NL
D
PR
T
ESP SW
E
GB
R
M
illio
n
me
tr
ic
t
o
n
s C
O
2
2003
1990
Target under Kyoto
Source: adapted from annual European Community greenhouse gas inventory, 2005
However, effects of greenhouse gas emissions are a complex issue and are debated among scientists. The estimates rely on expert judgement and extensive computer modelling. Changes could result in rising sea and land temperatures, rising sea levels, melting ice caps and more extreme weather, putting especially people in seaside area’s at risk (IPCC, 2001).
The transport sector is one of the most important GHG emitting sectors. The transport sector in the EU15 contributes about 23% of the total GHG amount (EEA, 2005). The GHG emission from transport exists mainly of carbon dioxide. Even though most sectors within the EU15 are reducing their GHG emissions, the transport sector has shown a considerable increase in CO2 emission over the 1990-2003 timeframe (see figure: CO2 emissions change per sector). The reason for this growth is the strong increase in road and air transport. From 1990 till 2003, carbon dioxide emission from road transport increased with 25%; from air transport with 55%. Water and rail transport emissions declined over this period (Energy and Transport in figures 2004).
Reiterating, anthropomorphic emissions of greenhouse gasses are partly responsible for climate changes and could result in higher average temperature, more extreme weather and rising sea levels. Although the EU is committed to an 8% GHG reduction, it obtained only an 1,7% reduction in 2003 compared to 1990 levels. The transport sector contributes a rising share of 23% of total GHG emission in the EU. Stabilising and curbing CO2 emission resulting from transport is key in reducing overall CO2 emissions and obtaining Kyoto targets.
4.2 Local emission from transport
Local emissions arise from the burning of transport fuels. Road transport emits five major pollutants: benzene, carbon monoxide, nitrogen dioxide, particulate matter (PM10 and PM2,5) and ozone. Lead and sulphur emissions have almost disappeared. In the recent past, lead and sulphur additions to fuels were restricted which resulted in lead-free gasoline’s and de-sulphurized fuels. The five major and some minor remaining pollutants are tackled in the EU under the Euro norms. The Euro fuel norms are a series of mandatory European emission standards applying to new road vehicles sold in the EU. Euro IV is in effect since 1-1-2005. The Euro V will be in effect for heavy duty vehicles from 2008 and for passenger cars from 2010.
CO2 emissions change per sector
Local emissions EU15
0
10000
20000
30000
40000
50000
60000
CO
NO
VOC
Sulfur
Thous
a
nd m
e
tr
ic
t
o
ns
1990
1995
2000
So urce: RIVM /M NP 2005, 2001In the Netherlands, local emission of NOx exceeded EU regulations in 2005. One of the effects was a restriction in available building permits. For example, on 2.000 kilometres of highway the NO2 norms were exceeded in 2002 (RIVM, 2002). Local emissions impact the environment and can pose respiratory problems and acidic rain. Future policies are geared to reduce local emission from transport with the implementation of Euro-V and VI norms.
5
Bioethanol as transport fuel
Oil provides essential sources of energy to the transport sector, however at a cost of increasing dependency and environmental harmful emissions. The transport sector accounts for more than 30% of the final energy consumption in the EU (Energy and Transport, 2004). Beside the high energy consumption the sector also shows the strongest increase in CO2 emission of any sector. Biofuel use for transport have the ability to reduce the EU dependence on imported energy, increase the security of energy supply in the medium and long term, promote renewable energy sources and meet the Kyoto emission goals (EU Directive, 2003/30/EC).
Biofuels are transportation fuels derived from biological (e.g. agricultural sources). The biofuels exist in liquid form for example ethanol and biodiesel, or gaseous form for example biogas and hydrogen (IEA 2004). The European Directive 2003/30/EG defines biofuels as “liquid or gaseous fuel for transport produced from biomass”. Biomass consists of the biodegradable fraction of products, waste and residues from agriculture, forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste. The EU acknowledged the following fuels as being biofuels: bioethanol, biodiesel, biogas, methanol, dimethylether, ETBE, bio-MTBE, synthetic biofuels, bio-hydrogen and pure vegetable oil. Bioethanol comprises ethanol produced from biomass and/or the biodegradable fraction of waste, to be used as fuel (EU Directive 2003/30/EC).
5.1 A short history of bioethanol
Bioethanol has a long history already as a car fuel, dating back to the use of it in 1908 Ford T-model. Henry Ford was ahead of his time with his model T, for it could be modified to run either on gasoline or pure alcohol. It was one of the first attempts to create a flexible fuel car. Ethanol was used in the United States as fuel well into the 1920s and 1930s. Blends were also common as Standard Oil already in the 1920s marketed a 25-percent ethanol gasoline blend in the Mid-West. On the European mainland also Germany and Sweden used ethanol as an anti-knocking agent in gasoline. In Germany in the 1920s, ethanol was blended with gasoline and obtained roughly a 10% market share (Wetter, Brugging, 2004). In Sweden, during the 1940s, ethanol was blended as high as 20% with gasoline (Werling, 2006). However, by the end of the 1940s the ethanol blending with gasoline largely disappeared. Efforts to sustain the U.S. ethanol program failed because fuels from gasoline and natural gas became available at large quantities at low cost. This eliminated the economic incentives for ethanol production from domestic crops. In the 1970s the world-wide interest in biofuel and ethanol was renewed due to oil supply disruptions in the Middle East. The disruptions and high oil prices triggered Brazil to launch the Pro-Alcohol program.
Brasil and the Pro-Alcohol programme
Percentage biofuels
Year % by energy % by volume
2007 2,00% 3,02%
2008 3,25% 4,87%
2009 4,50% 6,75%
2010 5,75% 8,52%
Source: Staatsblad 2006, 542
from the 1920s on a much larger scale. Under the Pro-Acohol programme, farmers were paid generous subsidies to grow sugar-cane, from which ethanol was produced. The price at the pump was also subsidised to make the new fuel competitive with gasoline, which triggered the motor industry to produce increasing numbers of vehicles to run on pure ethanol. This ethanol, or hydrous ethanol, still contained a small amount of water and was not mixable with gasoline. The result was in the mid-80s that more than 90% of cars were designed for alcohol use.
It serves to remember the tumultuous ethanol market developments of Brazil which followed. The Brazilian government subsidized ethanol production by paying producers the difference between their production cost and the price they received from distributors (Laydner, 2003). When oil prices collapsed in the mid-1980s, the subsidy became a heavy burden on the government’s budget. Furthermore, when in the late 1980s the high world market sugar prices prompted distilleries to switch away from ethanol to sugar production, the whole Pro Alcohol program collapsed. Producers of ethanol changed their flexible production facilities to produce sugar for the world market, leaving no fuel for the pure ethanol vehicles to run on; an event that cause riots in Brazil in the 1980s. Two important drivers, oil prices and sugar prices, combined to make ethanol production economically unfeasible and saw a great decline in the amounts of ethanol produced. In 1997, the sales of ethanol vehicles reach a lowest level of 1.075 vehicles which could run on ethanol – this constituted only 0.06% of total sales.
Renewed interest in the 1990s was based on different drivers beside the competing oil and sugar prices. The environmental advantages of ethanol over oil provided a new driver for governments to support ethanol production and use. After the liberalisation of the ethanol industry in the late 1990s, the ethanol prices are now driven by market forces and can fluctuate freely.
5.2 EU and Dutch biofuel policy
The EU has implemented the Directive 2003/30/EC in 2003 “... on the promotion of the use of bio fuels and other renewable fuels for transport.” It states that member states in the EU have indicative targets to implement a minimal amount of bio fuels (reaching 5,75% in 2010 and 20% in 2020). To support these strategies, member states have been given the right to support biofuels under the Counsel Directive 2003/96/EC in which fiscal
stimulation measures can be used. The government in the Netherlands has indicated to follow the indicative target, starting in 2007 with 2% blending (Beleidsbrief biobrandstoffen, maart 2006). Obligatory blending will be predominant in reaching the target amounts in 2010. Bioethanol and/or ETBE3 is able to supplant gasoline and
MTBE in fuel applications. In fuel, bioethanol can be used up to at least 10% blend (E10) in gasoline without adaptations to the engine. These blends are normally is referred to as low blends. When the amount of bioethanol exceeds 20% adaptations to the engine are needed. The fuels used in adapted engines are referred to as high blends. The fuel standard for biodiesel has emerged in
recent years and is the DIN EN 14214 norm. The fuel standard for ethanol is still under development. Currently, the gasoline standard CEN 228 is setting the quality demands for ethanol. The current EU biofuel policy emerged in the early nineties. Several Green and White papers emerged stating the EU’s energy challenges, ambitions and strategies. In the White book of the European Commission “The European transport policy for the year 2010: time to choose”, assumes that between 1990 and 2010 the CO2 emission of the transport sector will rise with 50% to 1.113 billion tons. Road transport is the biggest source of new CO2 emissions of the total transport sector with 84% of the total emissions. The White book calls to reduce the dependence upon oil in the transport sector. In 2002, the oil dependence in the EU transport sector was 98% and has to be reduced by implementing alternative fuels, such as biofuels.
Under the Directive, each year the member nations have the obligation to report to the Commission on the status of: (1) the measures taken to promote the use of biofuel, (2) the national resources allocated to the production of biomass for energy and, (3) the total sales of transport fuels and the share of biofuels, pure or blended. The report is in before the 1st of July and where appropriate, report on any exceptional conditions in the supply of crude oil or oil products that have affected the marketing of biofuels and other renewable fuels (Directive 2003/30/EC). Member states have the access to different supportive policy measures. Counsel Directive 2003/96/EC allow member states to utilize fiscal stimulation measures for up to a period of six years.
Biofuel policy the Netherlands
The Dutch government has indicated to follow indicative targets set by the EU Commission. To comply with the indicative targets the policy focuses on two branches: a general and innovative branch. The general branch takes care for market wide implementation of biofuels. In 2007, fuel suppliers are obligated to sell 2% of the total sales with biofuels (on energy basis). For 2010, the goal is to implement 5,75%. The innovative branch stimulates the development and introduction of innovative biofuels. More advanced biofuels are able to increase the CO2 reduction, reduce costs and prevent spill-over to other environmental themes (Van Geel, March 2006). Future certification of durability information is regarded as essential. The obligation to include biofuel applies for gasoline and diesel separately. This will guarantee that both markets will start biofuel developments. High percentage and pure biofuels can be utilized to meet the target as well. Fuel suppliers which do not adhere to the inclusion demands face a financial penalty.
promising. However, few innovative developments are expected for E85 from second generation production methods. Nonetheless, the government considers stimulating the fuel in a different manner. Specific details are not mentioned in the report.
5.3 Ethanol market
Ethanol supply in 2005 amounted to 45,9 million m3 (F.O. Licht, 2005). Of this amount Brazil and the United States produce the largest share of world production. Brazilian production of ethanol reached 15,2 million m3 in 2005 growing almost 10% over the last 7 years (Carvalho, 2005). United States production totalled in 2005 almost 17 million m3, lifting the total production above the Brazilian operations for the first time (Renewable Fuel Association, 2006) (American Coalition for ethanol, 2006). Production installation under construction amounts to another 7,1 million m3. The surge in new ethanol installation can partly explained due to the Bush administration promoting ethanol and setting targets to raise output strongly towards 2012. Production in the EU has to be compared on a different scale. Production totalled about 0,6 million m3 in 2004 (Rabobank, 2005). Production in the EU amounted to 2,3 million m3 (Renewable Fuel Association, 2006) mainly due to capacity increases in France, Germany and Spain. In the Netherlands, even though no production is currently in operation, plans to start new production are in place in Amsterdam, Rotterdam and The North of the Netherlands.
Annual World Ethanol Production
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Br
az
il
U.
S.
Ch
ina Ind
ia
Fr
an
ce
Ru
ss
ia
Sou
th
A
fric
a
U.
K.
Sa
ud
i A
ra
bia
Sp
ain
Th
ail
and
G
er
m
an
y
2004
2005
Source: RFA, 2006
Ethanolproduction 2005
Country mln litres Ktonnes
Spain 303 241.2 Germany 165 131.3 Sweden* 153 121.8 France 144 114.7 Poland 64 50.9 Hungary 35 27.8 Finland 13 10.3 Latvia 12 9.5 Lithuania 8 6.3 Netherlands 8 6.3 Italy 8 6.3 Total 913 726.4
Notes: * about 90 mln litres is based on wine alcohol purchases
Source: European Bioethanol Fuel Association 2006
Although production and consumption of ethanol is increasing rapidly, no market place for ethanol is clearly established and the market still has to mature. Added difficulty is the different ethanol blends which are traded. With hydrous and anhydrous ethanol being the largest. In Chicago resides the Chicago Board of Trade (CBOT) which has emerged as the first marketplace for ethanol. The market volatility is limited on the CBOT, with ethanol future contacts averaging 34 per day in the second quarter of 2006 (Chicago Board of Trade, 2006). The ethanol market can be viewed as an market with many elements typical of an emerging market: rapidly rising volumes and strong price fluctuations.
Bioethanol demand in the Netherlands
In 2005, the total biofuel amount within transport fuels amounted to 0,022% (energy basis) in the Netherlands. Biodiesel, ethanol and ETBE were not utilized in 2005. The growth in biofuel use in the Netherlands has been 0% from 2003 to 2005 (EU Commission, 8-2-2006). The EU25 fared better, with 0,6% in 2003 and 1,4% in 2005 (energy basis). In 2010, meeting the 5,75% requirement in the Netherlands: roughly 400m3 biodiesel and 600m3 bioethanol is needed. This is if biodiesel en bioethanol would both take half of the requirement calculated on an energy basis. The higher ethanol need comes from its lower energy content compared to biodiesel.
Ethanol blends. Ethanol for transport purposes is usually blended with gasoline, but can also be used as high blend or pure fuel. Generally two routes exist to blend ethanol into gasoline. High blends and low blends. Ethanol can only be blended when all water is removed from the ethanol (99,7% purity). In the case that water comes in contact with the ethanol-gasoline blend the ethanol absorbs the water and this causes it to branch from the gasoline. This risk is always present when transporting or storing ethanol. Transporting ethanol through pipelines is not yet an option due to this reason (Greenberg, 1999) Interesting development takes place in the transporting field with a stable diesel-ethanol mixture which can be shipped through a pipeline. The mixture contains 80% diesel, 15% ethanol and 5% blending agent to raise cetane levels. Currently the most important blends are E5 (5% ethanol-95% gasoline) mostly in Europe, E10 (10% ethanol – 90% gasoline) used under the name of gasohol in the United States, E20-E30 which is a common blend in Brazil and E85 (85% ethanol-15% gasoline). Anhydrous ethanol is used as pure fuel in modified engines and in E95, when it is used in modified diesel engines in busses.
and Spain as mix with gasoline. ETBE consists of 47% bioethanol and 53% of isobutylene and is therefore counted as half-renewable. Isobutylene is a by-product of the oil industry.
Flexible fuel vehicles expand bioethanol market
Flex fuel vehicles provide multi fuel usage option. Since 2003, high ethanol blends have made a comeback in Brazil. Driver behind the comeback is a technological breakthrough in engine technology. The technology allows engines to run on 85% of ethanol and 15% gasoline or pure gasoline -or any mix of the two. A special computer chip analyses the mixture and adjusts the motor according to how much ethanol and how gasoline it contains. These flex-fuel cars have spurred new interest into high-blend ethanolfuels. In 2005 the flex-fuels market share in Brazil amounted to 53,6% of the market (Carvalho, 2006). Spain, France and Sweden are leading countries in Europe considering ethanol production, with other European countries and especially Germany are scheduled to catch up quickly. Sweden pioneered in Europe when it introduced the flex-fuel cars in 1994. The costs of producing and transporting ethanol are despite the newer technologies and scale up still above the gasoline price. Except for Brazil, government subsidies are needed to make ethanol a viable fuel to be used. Sweden and Germany have opted for tax exemption; the United States has instituted a subsidy of 54 cent per gallon. To discover the reasons for the high prices we have to look at production costs and market forces at work.
Key role of oil companies
The fact that most of the ethanol is blended, or used as ETBE, means that oil companies are the primary users of bioethanol. When dealing with biofuels, the oil companies are required to adhere to fuel standards set by the European Commission. The standard for gasoline in Europe is the 2004 EN 228. It allows blending of up to a maximum of 5% bioethanol and 15% ETBE. The most
important requirement is the maximum vapour pressure which cannot exceed 60 kPa (and 70 kPa in countries with a severe arctic climate) (EU Directive 2003/17/EC). The conditions in which vapour pressures are high and could exceed the norm is in summer time when temperatures are highest. Oil company concerns with fuel quality means that a stable and easy to handle fuel is preferred over an unstable mixture. Even though ETBE is more energy intensive to produce
compared to pure bioethanol, the stable nature is of importance to oil companies. Furthermore, the hydroscopic nature of ethanol causes it to attract water in certain conditions which hamper long-term storage and pipe-line transportation.
Ethanol application Explanation Mix
E5 Low blend with petrol 5% ethanol, 95% petrol
E85 High blend with petrol 85% ethanol, 15% benzine
E100 Hydreous ethanol 95% ethanol, 5% water (formerly in Brazil)
E-diesel Low blend with diesel 5% ethanol, 5% additive, 90% diesel
6
Production of bioethanol
The interest in biofuels is soaring for energy-security, economic and environmental reasons. But, drawbacks are surfacing as well sparking the debate with issues such as potential higher fuel cost, increase in some emissions and potential land use change. Bioethanol comes from a biological and renewable origin and is normally derived from purpose-grown energy crops or by-products of agriculture, forestry of fisheries. When produced sustainable, bioethanol has the potential to be more or less carbon-neutral. Furthermore, it can reduce harmful local emissions (for example carbon monoxide and fine particle matter) and waste when compared to fossil fuels. The use of biomass from indigenous sources shows promise to improve the security of energy supply. Moreover, recent technology advances in technology have improved the sustainability and economics of producing biofuels.
6.1 Production process
In chemistry, an alcohol is an organic compound in which a carbon atom of an alkyl group is bound to a hydroxyl group (-OH). The most commonly used alcohols are methanol (methyl alcohol) and ethanol (ethyl alcohol). Methanol is an example of a primary alcohol while ethanol is a secondary alcohol. In more general usage, alcohol refers to ethanol or alcohol from grains. Although raw materials have changed; the production process is relatively unchanged the last decades. It involves the fermentation of sugars using yeast. The yeast metabolises the available carbohydrates in the absence of oxygen. All materials which contain sugars can ferment into alcohol. Furthermore, all materials which can be transformed to yield sugars can subsequently utilize to yield alcohol. Ethanol is produced from ethane or sugars. When biological raw materials are used it is referred to as bioethanol.
The production of bioethanol production is similar to alcohol production and has not fundamentally changed the last decades. The production process consists of five steps: (1) biomass production, (2) conditioning of the raw material, (3) fermentation of the sugars, (4) distillation and (5) purification of the ethanol. Ethanol can be acquired from a broad range of biological inputs, like wheat, corn, sugar cane and sugar beet. Basically, if a crop contains considerable amounts of sugars or materials which can be converted into sugar, such as starch or cellulose, it can be used as raw material. Raw materials can also be derived from waste- or by-products, such as molasses and C-starch, for ethanol production. Ethanol production consists of the following abstract steps:
Biomass production refers to the growing of biological material to be used in non-food applications such as energy- or industrial production. The biomass characteristics are import for the conversion technologies which are used. The conditioning of the biomass consists of cleaning the materials and readying the material for fermentation. Fermentation of the now available sugars produces alcohol
Biomass
from the sugars. Traditionally, this process is performed by the enzymes of bakers yeast to ferment the six-carbon sugars (mainly glucose). Distillation of the resulting fermentation broth removes the in- solulable and produces a concentrated ethanol-water mixture. The last steps of purification clarifies the ethanol-water mixture to 99,7% volume percent. The resulting product is anhydrous ethanol viable to be used in gasoline or diesel blends and for ETBE production. Since the feedstock determines the conversion technologies used the three main raw materials will be separately discussed. The raw materials are sugar, grain and cellulosic biomass.
The most straight forward production of ethanol is to use six-carbon sugar containing materials that can be fermented to ethanol directly. Sugar cane and sugar beets provide these sugars. To produce ethanol the sugars are first removed through processes such as crushing, soaking and chemical treatment. Consequently, the sugars are fermented to alcohol and distilled to the desired purity. The sugar cane process is unique in the sense the cane (also bagasse) can be used for process heat which can be utilized in the process. Sugar cane is mainly used in Brazil and sugar beet is mainly used in France. The by-products from the sugar industry, molasses contain a high amount of sugars and are also used in Brazil and Europe. Sugar containing crops are not primarily used as raw material for the high cost of sugar has comparatively made the material to expensive compared to grains (IEA, 2004).
The starchy component of grain crops are mostly used for ethanol production in Europe and in North America. Corn is primarily used in America and wheat primarily in Europe. The starchy material is converted to sugars using enzymes. When the starch are converted into six-carbon sugars, the process continues with fermentation as mentioned above. Starchy biomass contains a considerable amount of non-starch material mainly in the form of cellulose. If the cellulosic parts could be used as well the ethanol yield would increase considerably.
Sugars and starch make up only a small part of plants. Cellulose, hemi cellulose and lignin make up most of the biomass components. Cellulose and hemi-cellulose (from here cellulose) can be converted to six-carbon sugars that can be used for fermentation. The process is more complicated than converting starch and requires pre-treatment of the biomass with for example acids and enzymes. A large array of raw materials contains cellulose for ethanol production: agricultural wastes, forest residues, municipal waste, waste from the paper and pulp industry and energy crops (EIA, 2004). Energy crops are developed and grown specifically for fuel purposes. Utilizing grasses and woody crops like switch grass and poplar opens up an extensive land area that can be used for growing energy crops which cannot be used for producing sugar and grain crops. The grasses and woody crops require lower energy input to grow and are usually in a ten year rotation harvest system (Murray, 2002). Research and development mainly takes place in Canada, the United States and Sweden, no large-scale commercially viable scale is currently operational. Preliminary results are promising and if the new technology becomes available, large amounts of low-cost, low greenhouse gas emitting and high feedstock potential ethanol could be within reach.
6.2 Production costs of ethanol
government policies. The result is that production costs differ considerably per region. The following regions will be discussed and compared for production costs. The EU employs mostly wheat and some sugar beet/molasses. The U.S. employs predominately corn for bioethanol production. Brazil employs sugar cane for its ethanol production. Comparing production costs is difficult due to the effect of subsidies, and tax breaks influencing the production prices. The average production costs in the EU using wheat and beet are € 433 p/m3 and € 374 p/m3 respectively (F. O. Lights, 2004). The average production costs in the United States using corn (in large scale facilities) is $ 290 p/m3 (IEA, 2000a). While the average production costs in Brazil using sugar cane are around € 180 p/m3 of ethanol (Rabobank, 2005). The reason for the price differentials are identified as: (1) plant scale, (2) experience curve effects, (3) lower capital and labour costs and (4) higher energy and feedstock cost.
Production costs ethanol (EUR/m3)
Cost item Wheat (EU) Beet (EU) Cost item Corn (US)
Feedstock € 290 € 240 $230,00
Labour € 14 € 14 Labour/adm/maintena $50,00 Insurance,fees,repaurs € 10 € 10 Chemical cost $30,00
Energy cost $40,00
Other € 187 € 159 Capital $50,00
Gross production costs € 501 € 423 $400,00
By-product credit € 68- € 49- -$110,00
Net production cost € 433 € 374 $290,00
Source: F.O. Licht, Rabobank, 2005 IEA 2000a (In 2000 dollars)
Cost of Brazilian ethanol imports to the EU Cost item
Production costs € 176,9 Fobbing costs € 25,0 Processing costs € 41,7 Freight costs € 41,7 Gross production costs € 285,3 Import tariff € 192,0 Transport costs € 10,9 Total costs € 448,2 Source: Rabobank, 2005
EUR/m3
Analysing production costs, more than 50% of the total production costs depends on the raw material costs. The implication is that fluctuations in the raw material price can affect the total production costs substantially. The reason that Europe produces ethanol from beets and wheat is heavily dependant upon the import tariffs for natured and denatured ethanol in the European Union. Effectively, they facilitate ethanol production in Europe.
6.3 Environmental performance: local and global emissions
Energy and GHC estimates for ethanol production Gasoline Energy input/ energy output Net energy Gain GHG emissions reduction Conventional (Greet V1.6) 1,24 -19% -MTBE (Greet V1 1,48 -33% -Corn Wang (2002) 0,76 31% 32% Shapouri (2002) 0,75 34% n/a Grabowski (2002) 0,82 21% n/a Pimentel (2001) 1,34 -25% -30% Wheat Levington (2000) 0,9 11% 29% ETSU (1996) 0,98 2% 47% EU Commission (1994) 1,03 -3% 19% Sugar Beet GM et. Al (2002) 0,65 54% 41% EC (1994) 0,64 56% 50% Levy (1993) a 0,84 19% 35% Levy (1993) b 0,56 78% 56% Sugar Cane Macedo et.al. (2003) a 0,12 830% 92%
Macedo et.al. (2003) b 0,09 1020% n/a
Note: Levy uses different proces eficciencies for the estimates. Studie a uses low efficiency and b high efficiency. Macedo looks at average values in a and best practice in b. To determine GHC emmission, Wang's 2001a results were added.
The petroleum allocation refers to the making of fertilizers, power farm equipment, transport feedstock and produce the biofuels. Determining the estimates of how much fuel is used to produce one liter of biofuel depends on a few
important assumptions. The energy balance of the whole process determines the amount of net
energy gained in producing the bioethanol. The net energy gain is defined as the difference between the energy in the biofuel (output energy) and the energy needed to produce the
product (input energy). The net energy gain is usually expressed as a percentage of the input energy. The net energy balance can also be determined for gasoline and MTBE (a lead replacement). The input energies are life-cycles
energies that include energy needed for extracting and refining crude oil. Starting with gasoline and MTBE, the energy
balance is 1,24 for conventional gasoline and 1,48 for MTBE (Andress, 2002). This implies that the energy gain is between -19% and -20% negative for gasoline and around -33% for MTBE.
Modern ethanol production processes show a different picture. All recent studies except one report energy balances below one i.e. more energy is produced than was needed in the production life-cycle process (Levelton, 2000) (Wang, 2001) (Levy, 1993) Levington, 2000) European
Commission, 1994). The exception to the positive net energy reports is Pimentel 2001. The recent energy balances estimates report positive energy gains when producing ethanol. Where in the past the gains were negative, harvest and industrial practices have greatly improved the overall process efficiency of the ethanol production processes. Besides process efficiency, several other potentially important factors are worth mentioning. The process energy used, the allocation of by-products credits and vehicle fuel economy affect the GHG emission reduction to some extend. Besides the net energy gain reported above, the oil displacement is even higher. The input energy used comes in the form of oil, gas, some coal and biomass streams. Oil is primarily used in the farm equipment and represents only a small amount of total input. Shapouri et. al. (2002) estimates that only about 17% of input energy is from petroleum. Given this estimate it implies that only 0,12 to 0,15 energy units of oil are required to produce one energy unit of ethanol (IEA, 2004).
obtained from the net energy gain. Supposedly, the higher use of natural gas as energy source causes less greenhouse gasses to be emitted given the same amount of energy used. But the wide range in variation in energy gain outcomes suggest that more research is needed. The very positive energy gains from Brazilian ethanol are mainly caused by the use of bagasse for energy input requirements. The bagasse is burned to supply the proces energy. The largest energy input requirement comes from fertilisers and cane transportation. More study is required into this topic since all the estimates for Brazilian ethanol are derived from one author only, Macedo. The Pimentel (2001) study fuelled debate about the positive impact of ethanol production from agricultural resources. The stark different estimates emerged from a few important different assumptions: (1) the high energy used to produce the nitrogen fertilizer, (2) by-productss do not receive an energy credit, (3) a high energy requirement for ethanol conversion and (4) Pimentel includes an energy value for the steel, cement and other material needed for production of equipment, farm vehicles and the ethanol plant.
Ethanol production can be concluded to be energy positive and to reduce greenhouse gasses if modern processes and practices are utilized (Shapouri, et.al. 2002). The positive energy gain from sugar beets compared to wheat would be interesting to compare the exact differences and spur more investigation in using beets as raw material in Europe. It seems that further reductions could be obtained when biomass would be used to supply part of the process energy. After Brazilian example, the energy gains could increase considerably; reducing fossil fuel dependence and increasing GHG emissions.
7
Uncertainty and risks of bioethanol
The preceding chapters provided an overview of bioethanol production techniques, markets, policies and environmental advantages. Bioethanol production in Europe is growing rapidly and the ethanol c market bolstered by EU inclusion regulation. Yet, the market still has to mature. Uncertain future states of the world affect the bioethanol producers and distributors. The future contains events which impact the economic performance of bioethanol production. The negative events are normally described as risks; whereas the positive events are described as possibilities. Determining the future potential of bioethanol and how it is affected by possible positive and negative events requires an understanding of uncertainty, risk and opportunity. From now on risk. This chapter defines risk and opportunity, identifies different theories which deals with risk and puts forth methods for risk management.
Uncertainty stems from events that impact the economic performance of a venture. Events can result in both negative and positive impact or stated otherwise, contain both downside risk and upside potential. Knowledge of the events and how to manage these is important for any venture undertaken. Nowadays, almost all business risks can nowadays be insured, hedged or diversified against. Financial markets are becoming increasingly advanced in pricing, isolating, repackaging and transferring risks. Risk management techniques such as, scenario building, simulation analysis and risk mapping are some techniques to identify risks and opportunities. These techniques will be used to determining the uncertainty of ethanol production in Europe.
Professional risk assessment views risk the probability of an event occurring with the impact that the event would be and with its different circumstances. Different definitions of risk can be found in the economic literature: uncertainty is defined here as knowing the impact of an event but not the likelihood by which it will happen. Risk constitutes the possibility that an event will occur and adversely affect the achievement of objectives. Opportunity describes the possibility that an event will occur and positively affect the achievement of objectives. The financial profession defines risk as the variability of returns. The variability describes the fluctuation of the return around its mean. See the Appendix for a teatrise on risk in economic literature)
7.1 Financial Risk Management
theory: which actions to take minimizing costs while maximising the reduction of negative effects of risk. Strategies encompass transferring risk to another party, avoiding risk, reducing the negative effect of an event or accepting part or all of the consequences of a particular risk.
Traditional risk management targeted negative events stemming from physical or legal causes such as, natural disasters, fires, accidents, death. More modern methods that have emerged from these practices are Probabilistic Risk Assessments and the Enterprise Risk Management framework (COSO, 2004). Enterprise Risk Management is used to deal with uncertainty in decision making. It views the firm as an entity which consists of interrelated components with each component affecting the other in a multidirectional, iterative process. Determining and clarifying which trade-offs exist between risk and return enhances an entity‘s capacity to create value. Entity value is maximized when management sets strategy and objectives to strike an optimal balance between return goals and the related risks. Risk assessment in this sense is used to determine the likelihood and impact of the different risks and to determine the appropriate risk responses. First, the inherent risks to an entity are determined. Next, the appropriate risk responses are determined to apply to the inherent risks. Inherent risk is defined as the risk to an entity in the absence of any action taken to alter either the risk’s likelihood or impact (COSO, 2004). Risk responses, which can take the form of avoidance, acceptance, reducing and sharing, are taken to reduce the inherent risk to acceptable levels. i.e. acceptable levels from the investors’ point of view. The risk responses are taken in a cost-effective way where the risks are reduced as long as marginal utility is higher than the marginal costs of the appropriate risk response. On the supposition that marginal utility and marginal costs can be determined.
Although widely used, the Enterprise Risk Management (ERM) has emerged mainly from working practices, trade press and industry surveys and has less of an academic grounding (Hoyt, 2003). Drivers to adopt an ERM program supposedly stems from a combination of external and internal factors (Miller, 1992; Miccolis; Shah, 2000). The benefits mentioned in literature are decreased volatility in earnings and stock price, reduced external capital costs, increased capital efficiency and creating synergies between different risk management activities (Cumming, Hirtle, 2001; Lam, 2001; Meulbroek, 2002).
Events
Events affect the achievement of the business objectives. An event is an incident or occurrence emanating from internal or external sources that affects implementation of strategy or achievement of objectives. These events can both have positive and negative impacts. The value of event identification is to mould uncertainty into risks. The difference lies in knowing the level of probability. Events can range from the
obvious to the obscure and the effects from inconsequential to highly significant. The risk of an event happening can be described by the possibility of its occurrence and the impact of the event. External and internal
factors can drive events that affect achievement of objectives and how effective strategy can be External driving factors Internal driving factors
Political Technology
Technological Firm infrastructure
Economic Personnel Natural environment
implemented. To be able to categorise these factors the two categories are used: external risks and internal risk. External drivers encompass economic, natural environment, political, social and technological categories. Within these sub-categories, economic risks could also be described as market risk. The internal drivers of event identification are infrastructure, personnel, process and technology. The advantage of the above division is the overview it poses to which risks can be controlled internally and which risks are of a less controllable character.
7.2 Risks of bioethanol production
Economic uncertainty of ethanol production can stems from a variety of events. Event categories provide a useful way to group the risks. Investors in an ethanol production plant face risk in three major risk categories: (1) processing technology risks, (2) marketing and operation risks, and (3) government and regulatory risks. Processing technology risk refers to the risks involved in the physical processing facility used in ethanol production. Examples of these risks are plant engineering, plant construction, feedstock storage and the movement of product within a plant (Coltrain et al., 2006) Determining the process technology risk in a proposed plant is difficult for little historical data is available.
The two phases of plant engineering and construction and plant operation each have their unique risks. The first phase of engineering and construction encounters risk in (1) the newness of the process, (2) level of expertise of the engineer, (3) plant location and (4) environmental issues. Risk in the operational process can stem from (1) poor construction, (2) environmental regulations, (3) new technology (Coltrain et al., 2006). Construction risk is higher when the company building the facility is new to ethanol production or if a new feedstock or process is used to produce ethanol. Location risk arises when it proves more difficult to obtain all the necessary environmental permits leading to costly delays. Environmental risk can arise when hazardous materials are found at the building site or when environmental regulation tightens. Technology risk enclosed in the operational phase is that the used technology becomes obsolete and cannot compete with newer technologies.
