Planting seeds on the forecourt

Biodiesel and bioethanol are cropping up with increasing regularity, both on petrol station forecourts and in politicians’ speeches. But can they really take on fossil fuels? Roz Bulleid reports

Running cars on fuel derived from recently harvested plant material, rather than the fossilised version, is not a new idea. Henry Ford designed his Model T motor car to use ethanol distilled from grain as well as petrol, and Brazil responded to the oil crisis of the 1970s by turning to the same fuel, generated in this case from sugar cane.

On the whole, however, bioethanol remained the preserve of a few specialist companies and enthusiasts. That is until the past few years, which have seen rising interest in biofuels – as bioethanol and its more recently developed sister, biodiesel, are collectively known.

Cutting it: Brazilian ethanol offers substantial greenhouse gas reductions

Bioethanol is chemically identical to other forms of ethanol, and is derived mainly from sugar cane or grain. Methods for generating ethanol from woody substances such as straw, timber and even household waste are being developed, but this type of second-generation cellulose-based bioethanol is not expected to become commercially viable until after 2010, according to the International Energy Agency (IEA). Biodiesel is generally derived from vegetable oil, although some animal fat can also be used.

The recent surge in interest in these fuels has been prompted by a number of factors. In the US, which included its first set of mandatory national targets for biofuels in last summer’s Energy Bill, the main driver has been concern about the security of oil supplies and rising prices, says Kirstine Andersen, an associate specialising in biofuels at boutique London bank Climate Change Capital.

In Europe, however, environmental issues are equally, if not more, important. With emissions of greenhouse gases from transport ballooning, biofuels are being touted as a possible solution – at least until the hydrogen economy materialises.

Brazil has also seen a wholesale return to ethanol. More than a fifth of new cars and vans sold there in 2004 were ‘flex fuel’ – able to run on petrol or ethanol – according to the Săo Paulo Sugar Cane Agroindustry Union (UNICA), and the proportion is expected to rise to three-quarters by 2010. The country currently produces around 14 billion litres of bioethanol a year, and is the world’s main exporter.

However, there are major variations in the economics of biofuels and, while the cost of producing sugar cane-based ethanol in Brazil is close to that for petroleum-based fuels, in non-tropical countries it can be up to three times higher, the IEA says in Biofuels for transport: An international perspective, a report it published in 2004.

As a result, the biofuels industry in Europe and North America is largely reliant on government incentives and targets, generally met by small amounts of biofuel being blended into conventional fuels. This does not require adaptations to be made to vehicles or separate pumps to be set up as fuel standards – and car manufacturers’ warranties – allow for a certain percentage of biofuel to be mixed into standard petrol and diesel without labelling.

In the US, some states have had biofuels legislation in place for years, and there are tax credits available to bioethanol blenders and retailers. Nonetheless, the impact on the market of the new ‘renewable fuels standard’ has been dramatic, says Douglas Durante, executive director of US trade organisation the Clean Fuels Development Coalition. Signed by President Bush in August 2005, the standard requires transport fuel sold in the country in 2006 to include 4 billion gallons of biofuel, increasing to 7.5 billion gallons in 2012.

Approximately 3.7 billion gallons were produced in 2005, says Durante, but plants are coming on line so quickly that the total production capacity has already reached 4 billion gallons, meaning that next year’s target – which will equate to around 3% of total fuel sales – should be met easily.

“It’s going crazy – it’s like a gold rush,” he says. Most new plants used to have a capacity of 20 million to 40 million gallons, but those being developed now have between 40 million and 100 million gallons’ capacity, he adds.

Wall Street, too, is getting involved, with investment banks Morgan Stanley and Merrill Lynch joining the entrepreneurs and traditional lenders to the agricultural sector that have thus far provided most biofuels financing. In Morgan Stanley’s case, it owns two ethanol plants through a wholly owned subsidiary called Aventine, one of which has a capacity of 100 million gallons/year, says Durante.

The Energy Bill also provides for a trading scheme so that fuel suppliers that sell more ethanol than their requirement (calculated as a percentage of their total sales) can sell credits to firms that have not reached theirs. However, this scheme is still under discussion, says Durante, and will not be in place this year.

In Europe, two important pieces of legislation have kick-started the market, says Marc Timmer, director of the European Forum for Renewable Energy Sources (Eurofores), a non-profit organisation that promotes renewable energy. The first, a 2003 amendment to the EU’s energy taxation framework, allows for tax breaks to be introduced for biofuels to make them more competitive. Eleven member states, including France, Italy, Sweden and the UK, have received approval for such schemes under state aid rules, according to the European Commission.

The second piece of legislation, the 2003 Biofuels Directive, set an indicative target for EU-wide biofuel use of 2% by December 2005 and 5.75% by December 2010, and calls on member states to do the same.

Many countries, however, set themselves targets for 2005 that were below the recommended level. Finland, for instance, was aiming for 0.1% biofuel use and the UK, 0.3%. The strongest performer was Sweden, where biofuels accounted for 3% of fuel consumed, followed by Austria (2.5%) and Germany (2%).

However, even if all these national targets were met, biofuels would only have accounted for 1.4% of transport fuel consumption across the EU in 2005, the Commission has calculated, although this would be an increase from 2004 when the percentage was 0.8.

These figures are for consumption rather than production, and production capacity varies considerably between countries and the two fuel types. While 90% of the biofuel consumed in Europe is home grown, Sweden imports most of its ethanol from Brazil. By contrast Spain, the other major user of bioethanol in Europe, relies mainly on domestic production, and is home to Europe’s first bioethanol producer, Abengoa, which started generating biofuels in 1999. It now has three plants in Spain producing more than 500 million litres/year, alongside operations in France and the US.

However, biodiesel accounts for the majority of the biofuel used in Europe and here Germany dominates, with production capacity of 2 million tonnes, equivalent to 4% of all diesel sales in the country, according to German biodiesel producers’ association VDB. Unlike most other EU countries, it is pure biodiesel rather than blended versions which have led the market, raising public awareness of the fuel, it says.

The growth in Germany’s production capacity currently shows no signs of slowing, with US agricultural giant Cargill hoping to complete a €25 million ($30.8 million) 200,000-tonne plant by the end of the year, fellow US firm Archer Daniels Midland building its third biodiesel plant in the country, with a capacity of 275,000 tonnes, and EOP Biodiesel, which floated on the Frankfurt Stock Exchange in the autumn, building a 132,500-tonne plant to be ready at the start of 2007.

Growth is also being seen outside Germany. In the UK, for instance, Greenergy, D1 Oils and Biofuels Corporation are all in the process of developing biodiesel plants, while British Sugar is moving into the ethanol market. Among other planned plants are a bioethanol facility in France to be constructed by agricultural firm Groupe Soufflet and Neste Oil of Finland’s 170,000-tonne plant, which is under construction.

Figures from the VDB indicate that such projects are sorely needed if the EU is to meet its 2010 target: it estimates that production capacity across the region will have to increase from the current 4.1 million tonnes to 13.45 million tonnes over the next five years.

Timmer at Eurofores predicts that, despite recent growth, this figure will be hard to reach. “There is a large production chain including agricultural policies, environmental policies, land availability, technology and end use of the product,” he says. “But on the other hand, it is possible – you can see clearly that some countries have made progress. It’s really a question of political will.”

He would like to see the EU’s targets made mandatory. “It’s not clarified how these indicative targets are to be evaluated,” he says. “Binding targets would clarify it and would be better in terms of putting pressure on member states.”

France, Austria and Slovenia have already introduced mandatory biofuel ‘obligations’ requiring fuel suppliers to sell a certain percentage of biofuel. Further schemes will come into force in the Czech Republic and the Netherlands next year, says the European Commission, and the UK and Germany have announced similar plans.

In a ‘Biomass Action Plan’, released in December, the Commission welcomed this approach and said that it would look at the potential of obligations more closely in a review, to take place this year, of the implementation of the Biofuels Directive.

One issue of concern to the Commission is the balance between domestic production and imported biofuels. While it calculates that the EU could, in theory, spare enough land to meet its 2010 target, this would push up the cost of producing food crops and would do nothing to create a global biofuel market that could help developing countries as well as “exercising a downward pressure on the oil price,” it says.

However, as the Action Plan and environmentalists have pointed out, excessive biofuel production in developing countries can have adverse environmental effects. WWF, for instance, has pointed out that increasing Malaysia’s production of biodiesel from palm oil would involve further destruction of its rainforest, contributing to climate change and threatening endangered species such as the orangutan.

For this, and other reasons such as security of supply, the Commission recommends a balanced approach, with an upper and lower limit for imports, and says that this is something else that it will try to address in 2006.

There is, however, another environmental concern: not all biofuels have equal merit when it comes to reducing greenhouse gas emissions, as the figure below shows. This is because of the amount of energy that has to be expended in production varies between different types of biofuel.

These figures indicate that, although some way off being commercially viable, widespread cellulose-based production of bioethanol would be attractive in non-tropical countries. Indeed, one of the advantages of mandatory obligation systems is that they can be weighted to favour more environmentally-friendly forms of biofuel production, experts say. The US Energy Bill’s fuel standard allows for just this: suggesting that two-and-a-half credits be awarded for every gallon of cellulose-based ethanol against one credit for corn-based ethanol. The European Commission is also planning to address the differing environmental benefits of different types of biofuel, but for the moment is simply looking at creating a certification system.

Seeing the potential of this form of ethanol production, energy giant Shell took a stake in Canadian firm Iogen, which produces ethanol from straw, in 2002. The company currently has a prototype facility capable of producing 3 million–4 million litres of ethanol a year, and is looking to build a 170 million-litre commercial plant in the US. In January, it announced that it is also to investigate the feasibility of building a cellulose-ethanol plant in Germany in partnership with Volkswagen.

However, Durante warns that there are any number of ways of making ethanol from cellulose and “it’s not going to be a magic bullet … There’s interest in looking beyond corn but the reality is that corn is just so cheap that for now it is the easiest way to make ethanol.”

Such debate is likely to continue around the best way to produce biofuels, and their environmental impact will remain contested. But with apparently consistent growth in regulatory support for the fuel, analysts predict a strong future for the sector.