This article is taken from the November/December issue of Renewable Energy Focus (REFocus) magazine. For a free subscription, click here.
COUNTLESS COUNTRIES around the world are banking on Brazil to help meet their biofuels mandates, which require an increasing proportion of transport fuels to come from renewables. However, while the world's oil majors have upped their activities in the field significantly, recent research indicates that policy makers need to have a major rethink - or risk missing their targets altogether.
There has certainly been major activity in the sector; Shell and Cosan announced one of the biggest biofuels deals to date, a multi-billion dollar joint venture called Raízen. It aims to produce and sell over 2 billion litres of low-carbon ethanol made from sugarcane in Brazil. For Shell, one of the largest distributors of biofuels, this is its first move into production. And it sends a clear signal that demand for biofuels is set to surge.
“Low-carbon, sustainable biofuels will be increasingly important in the global transport fuel mix,” says Peter Voser, Shell's ceo. Biofuels currently make up around 4% of transport fuel in Europe, and 3% in the U.S., but new energy policies in both regions are calling for more renewable, lower-carbon fuels for transport.
Under the Renewable Energy Directive (RED), EU member states are targeting 10% by 2020, while the U.S. will want 20% by 2022. Globally, Shell expects biofuels to meet about 9% of road transport demand by 2030, up from around 3% today.
As a result of RED, demand in Europe for alternatives to biodiesel has grown most noticeably: “Looking at the national action plans you see a much greater increase in ethanol consumption than in biodiesel consumption,” says Maelle Soares-Pinto, Hart Energy Consulting's director for Europe and Africa, Global Biofuels Centre. “This doesn't mean that ethanol is becoming the predominant biofuel in Europe, but there is a very sharp increase in the forecast consumption of ethanol.”
In addition, due to bioethanol's high greenhouse gas saving qualities, EU members are looking to the fuel to meet the Fuel Quality Directive mandate - reducing the greenhouse gas emission of fuels by 6%, over and above the RED targets.
So demand has even come from the likes of Germany, notes Tammy Klein, assistant vice president of Hart Energy. Germany is one of the largest, if not the largest, biodiesel producing and consuming countries (not only in Europe but in the world) so it's been seen as a surprise in some sense that a traditional biodiesel consuming market is suddenly looking to import sugarcane ethanol as a way to meet its targets on the Renewable Energy Directive, she notes. And demand from Japan and China will also add to the pressure on supply chains, she says.
Banking on Brazil
This all makes Brazil – the world's leading sugarcane ethanol producer – a key focus, and is why companies like Shell are increasing their activity there: “Brazilian sugar-cane ethanol is one of the most sustainable and lowest CO2 biofuels available,” says Mark Gainsborough, Shell executive vice-president Alternative Energies. It also “remains by far and away the most commercially viable advanced biofuel option,” adds Frederick L Potter, Hart Energy's executive vice president.
According to Brazilian sugarcane industry association, Unica, Brazilian sugarcane yields 7000 litres of ethanol per hectare of cane compared to 3800 litres for a hectare of corn in the US and 2500 litres for a hectare of wheat in Europe. “Turning sugarcane into ethanol offers a number of environmental benefits over other biofuel production processes,” adds Shell. “As it grows, sugarcane generally absorbs CO2 at a greater rate than other biofuel crops such as soy.”
Plus, ethanol made from Brazilian sugarcane “produces around 70% less CO2 than petrol, when the cultivation and production processes are taken into account”, it says. Unica says the use of ethanol in Brazil since 2003 has avoided over 103 million tonnes of the CO2 that the petrol it… …has replaced would have produced. By-products from the sugarcane-to-ethanol process, meanwhile, are also recycled as organic fertiliser, and plant waste (bagasse) is burned to produce power for the processing mills - with any surplus energy supplied to the national grid.
“Countries in Europe, along with the U.S., Japan and China, require more than three billion gallons in Brazilian sugarcane ethanol for their respective markets by 2020,” says Klein, noting that too few other countries are in a position to export advanced bioethanol supplies.
However, domestic demand for sugarcane ethanol in Brazil, which is already strong, is also set to grow further, meaning less export availability through 2020, she points out. “There's a lot of internal demand in Brazil itself because of the growth in the flexi-fuel vehicle market, and the economic growth that's going on in the country in general.”
Indeed, Brazil leads the world in the use of biofuels for transport and by 2030 they are likely to make up more than 40% of the country's transport fuel mix, double today's proportion. At the pump Brazilian motorists are offered the choice of pure ethanol or a blend of petrol (gasoline) and ethanol, and around 90% of the country's new cars can run on either fuel type.
“There is really going to be a supply constraint on Brazil,” says Klein, signalling a major supply chain bottleneck globally. Indeed, Hart Energy's latest research, published in Global Biofuels Outlook, 2011-2020: Projecting Market Demand by Country, Region and Globally, projects that “less than 10%-12% of the total supply requirements will be commercially available” by 2020.
Time to get real?
“Governments [around the world] are a little bit separated or divorced from the market reality,” Klein says. Soares-Pinto agrees: “Globally, not just in Europe, policies are [a] bit over ambitious. The volumes are just not there.”
Initiatives like Raízen will undoubtedly help. “We expect the development of advanced biofuels to benefit from Cosan's feedstock and its expertise in large-scale biofuels production. This has the potential to accelerate the future commercial viability of cellulosic ethanol,” says Gainsborough. “Ready to offer international markets a clean, renewable and economically viable solution” it is “a turning point in the search for alternative energy sources,” adds Rubens Ometto Silveira Mello, Cosan's chairman of the Board.
However, by Raízen's own admission, it's current annual production capacity will be enough to meet just 9% of current ethanol demand in Brazil alone, so while new players have entered the space, there needs to be a major increase in capacity expansion, Klein says. “There will be expansion of sugarcane acreage, but it's going to take a few years to catch up,” she says. Plus, getting the capital to expand production capabilities has been an issue. “Higher feedstock prices and less Government incentives have cooled capital lending in the finance sector,” she notes.
Of course, besides Shell, other oil giants like BP and Neste are also funding advanced biofuel projects, and this plays a critical role. “At the end of the day they are the ones paying the penalties when they don't meet the biofuel targets in many countries, so they have a commercial interest,” Soares-Pinto says. But development by the oil majors alone will not be enough.
“One of two economic and policy developments needs to occur,” says Potter. The price of Brazilian ethanol needs to increase further than it is now projected, to provide adequate market incentives for additional cane acreage and bioethanol production; otherwise the public policy targets in the U.S. and the EU, which rely so heavily on sugarcane ethanol and other advanced bio-ethanol supplies, need to be modified, he says.
The U.S. Congress “will ultimately have to modify the total RFS2 requirement by 2022 and modestly increase the longer-term requirements for corn-based ethanol under the programme to compensate for the shortfall in commercial cellulosic biofuels volumes,” Hart's outlook report says.
Part two: Biofuels Standards - for European players, sustainability requirements add extra pressure...
About the author: Gail Rajgor is a writer working across the energy & environment sector. She is the former publisher of Sustainable Energy Developments magazine.