EcoNuz

Production costs are a major component in the market viability of a fuel because if they are too high, and subsidies are not enough to reduce the market price, then the fuel will not sell.  The two major components of the total price are the cost of the raw materials and the cost of processing.  The raw materials, or the oils used, can account for up to 75% of the total cost.3  The cost of raw materials includes the price of the source material (soy, algae, etc), plus the cost to process the source material into the oil.  Because market prices and the processes to convert them into oil can vary for each production method, total cost also varies by source material.

There are multiple methods for producing BD from plant oils, but the primary method used in industry is transesterification because it has consistently been the cheapest because it is the least energy intensive.3  Transesterification is the process of reacting alcohol with oil to form esters and glycerol.

The esters produced in the reactions are the components used as BD.  Because the process and reactions involved are very similar for different plant oils, the processing cost is essentially the same.  To keep the processing costs down, the remaining components can be recovered and reused.

The 4% alcohol can be reused in additional reactions, the 1% fertilizer used in growing the source material, and the 9% glycerin can be sold for a number of purposes including pharmaceuticals, food additives, and cosmetics.  With all recovery taken into account, some calculations place the total production cost of soy based BD to be as low as $2 per gallon.  In 2006, when PD was $2 per gallon, the price of a barrel of oil was approximately $60.  ASP conclusions put the optimistic production cost of algae based BD to be competitive at $59 per barrel of oil, meaning the final selling price would also need to be $2 per gallon to be cost competitive.

Life Cycle Inventory of Soy Based Biodiesel

In 1998, the US Department of Energy and the US Department of Agriculture did a joint study on the Life Cycle Inventory (LCI) of Biodiesel and Petroleum Diesel for Use in an Urban Bus. The study took into account all known measurable factors to determine the overall environmental impact of each product.  The study LCI of soy based BD included the impact of agriculture, transportation to production facilities, processing, distribution, and tailpipe emissions.  The LCI of petroleum diesel included mining, transportation to refineries, refining, distribution, and tailpipe emissions.  The LCI study concluded that the total impact of B100 is 95% less than that of petroleum based diesel.

US Department of Energy Aquatic Species Program

The most relevant previous studies were done in the US DOE Aquatic Species Program (ASP).  The program was started in 1978 and concluded in 1996.  During its years of operation, the ASP studied production BD methods from algae species with high lipid content, utilizing waste CO2 from coal fired power plants.  During the studies, advances were made in manipulating the metabolism of various algae species to increase the lipid content, as well as production methods to increase output.

By investigating the physiology and biochemistry of upwards of 3000 algae species, the ASP was able to determine the necessary conditions to maximize the lipid content of algae, thus maximizing the production of BD.  At the conclusion, the ASP had narrowed the list to 300 species that had the greatest potential for high yield BD production.  While the conclusion was that algae based BD production was technically feasible, the ASP concluded that the production costs were too high to be viable at 1996 oil prices.

The basic economic concept of substitute goods concludes that when one good raises in price, the demand for its substitute goods goes up.  Since BD is a substitute good for petroleum based diesel, demand for BD goes up as the price of PD increases.  Since 64% of the retail price of PD is crude oil, increases in the price of a barrel of oil directly lead to increased prices at the pump.  Because the price of PD increases with oil, the demand for BD also increase.   Alternatively, if the price of BD increases then the demand for PD also goes up.  To remain cost competitive in the market, BD must remain at or below the price of PD.

Existing infrastructure is important to the market viability of biodiesel because biofuels are not purchased for vehicles that cannot run on them.  Existing diesel engines can run on biodiesel blends of up to 20% (B20) without any modification.  The ability of existing engines to use B20 will allow biodiesel to be added directly to petrodiesel for distribution, which drastically reduces the necessary up front capital investment.  End consumers of biodiesel do not need to purchase new engine components, and distributors do not need to replace infrastructure components like storage tanks or fuel pumps. While current infrastructure can use B20 without problems, the chemistry of B100 does differ from PD.  Biodiesel in high concentrations is a solvent, so some rubber components do need to be replaced or phased in with increased blend percentages.

A major factor in determining the market viability of a biofuel is the production cost. The more expensive the production, the higher the price of the end product. In 1995 the US Department of Energy Aquatic Species Program (ASP) concluded that algae based biodiesel could potentially be cost competitive at three times the current price of oil, or $20/barrel.1 The optimistic cost of production for a barrel of oil equivalent, which would require improvements over 1995 production methods, was $59.1 Since 1995, production methods have improved, there are additional technologies available to generate revenue from byproducts, and additional government subsidies are available. Because production costs have decreased, additional subsidies have been introduced, and the price of oil is higher, biodiesel can now be sold at a price that is more cost competitive with petrodiesel.

The scope of this series and its recommendations is limited to the US transportation industry for a few reasons. Historical price and consumption data for petroleum products is readily available from the Energy Information Administration, so the size of the market is well known. Many aspects of the industry are regulated and enforced, such as emissions standards, and sales infrastructure. Because of the regulation, recommendations incorporated into legislation have greater potential for implementation, like the required B2 blend in Minnesota, as well as the Ultra Low Sulfur Diesel (ULSD) national requirements mandated and enforced by the EPA.

Switching from petrodiesel to biodiesel in the US can also have a large impact because the market is one of the largest in the world7, and the transportation industry consumption accounts for 18% of total refined petroleum products and 82% of petroleum distillate in the United States. (EIA)

To determine if biofuels are a viable option to displace petroleum based fuels for the transportation industry in the United States, many variables must be taken into account, including environmental impact, production costs, ability of existing infrastructure to use them, available subsidies, legislation, and the cost of oil.

Each biofuel technology has benefits and drawbacks that can alter the total cost to market and net effect on the environment.  Since market conditions can vary by geography, and historical market data for competing petroleum based diesel (PD) is available, the following posts will focus on the economic viability of biodiesel (BD) production in the United States.  Each of the immediately following posts will provide a brief explanation of why the particular aspect is important to the market viability.  Further posts will discuss additional details of BD production using soy beans as a source because there is already market data and information from real world use.

Because of the market price variability of soybeans, and the fact that production output of BD from soybeans is inherently limited by the amount of arable land available, market viability of BD from algae will also be discussed.

In order to displace petroleum based diesel, biodiesel must be sold at a final a cost to consumers that is competitive with existing fuels. There are current biodiesel production methods, such as using soybeans, that can be profitably produced and distributed as an additive at current oil prices. Previous study by the US Department of Energy Aquatic Species Program concluded that algae based biodiesel had the potential for high production capacity, but high production costs meant it would only be cost competitive at higher prices of oil.

The necessary price of oil stated in the ASP research was reached in 2006, and current legislation and newly available cost reduction measures make profitable production of algae based biodiesel feasible today. While having less of a direct impact to the environment than petroleum based diesel frequently motivates the use of biodiesel by end consumers, it has limited impact on the overall market. Legislation and subsidies in the US have a greater impact on production volume than any other factor.

This series discusses some of the factors involved in determining the market viability of biodiesel in the US transportation industry.  It is composed of sections from one of my semester long grad research papers.  As I add sections, I will eventually go back and add the sources.