The most important factor in determining the market viability of BD is the profitability of production. The environmental benefits of BD have been known for years, but production of PD increased because of market factors, not direct environmental factors. Even with the environmental benefits of BD known for years, production did not increase until legislation was enacted which made production profitable, even at prices higher than competing PD.
Of the factors involved in the retail price, the two most important factors have been the cost of producing plant oil as a source material, and the legislation surrounding BD. The two are tightly coupled because the source material for producing the plant oils is directly affected by legislation that directly subsidizes agriculture. On the opposite end of the BD product cycle are the tax credits given to biofuel producers, which directly reduce the retail price. Legislation for mandated inclusion and emissions regulations allow for a higher sales price because of increased demand that cannot be met by pure PD. Minnesota’s mandated B2 blend meant that PD producers were required to purchase BD for mixing, even if it did cost more. The EPA federal regulations for ULSD for reducing SOx emissions led to PD producers blending with BD, which also increases the demand and the subsequent production.
Ramping up production requires additional plant oil, in turn requiring the purchase of source plant materials. In the case of soy, the added demand can drive up market prices, resulting in higher costs. Because soy is also a food crop, and is in demand for reasons other than BD production, soy prices can also increase independently of what is caused by BD production. Increased costs without increased production requires retail prices to go up to preserve profitability.
In order for BD production to increase while still remaining profitable, source materials without external market demand can be used for plant oil. Because there is not currently market demand and the marginal costs after up front capital investment are low, algae has the potential to be a major source of BD in the future. Even though algae agriculture is cheap, the processing facilities and production methods used to turn it into pure oil remain expensive. To keep overall algae based BD production costs down, additional subsidies will be required, whether direct or indirect.
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