Essentially, I am a big proponent of the use of alternative fuels, as I believe they are necessary for our environment. However, to convince others of the environmental benefits, we must also have economic benefits. The use of biofuels in power generation must be competitive with coal and natural gas, and using alternative fuels in transportation must be economically competitive with petroleum refining of crude oil. The following section provides methods to evaluate the economics of energy facilities.

There is a time value of money. The purchasing power of money is continuously declining, there is inflation, and investors want an increase in their investment beyond inflation. There are ways to track the time value of money, and this is done through the calculation of annual price indexes. The Consumer Price Index (CPI) is a measure of the overall cost of living, while the Producer Price Index (PPI) is a measure of the cost of goods and other expenditures needed to stay in business. The table below shows the CPI and PPI for the USA and the CPI for the United Kingdom from 1997-2010.

Indexed to Year 2000 = 100

Note: 2010 PPI value for US not available at time book went to press

Source for data as cited in Energy Systems Engineering: US Bureau of Labor Statistics (2011) for USA data; UK National Statistics (2011).

If energy projects are going to be funded, the costs and predicted earnings for these projects must be valued for a later date and compared to the option of keeping money in savings or investments. A method to include the actual cost of money in the future is discounting. In discounting, current funds are projected into the future, knowing that the money today is worth less in the future due to inflation. Other terms are also defined:

• Term of project: Planning horizon over which cash flow is assessed – typically the value of years N is divided over the project.
• Initial cost: One-time expense at the beginning of the first compounding period.
• Annuity: Annual increment of cash flow related to the project – can be positive or negative.
• Salvage value: One-time positive cash flow at the end of the planning horizon of the project – due to the sale of assets at the actual condition at the end.

Projects can be evaluated without discounting. We are not going to discuss discounting beyond this part because I don’t want to spend too much time on discounting – we can look at energy projects without it. Discounting is also ignored for projects with short lifetimes. These shorter projects are evaluated with what is called a simple payback, and this is the method we’ll focus on. The factors in the simple payback include:

• adding up all cash flows in and out of the project;
• this is known as net present value (NPV);
• if NPV is positive, the project is financially viable;
• breakeven point – the year in which total annuities from the project surpass the initial costs.

There is also terminology for energy projects. One such value is called the Capital Recovery Factor (CRF). This is applied to electricity generation. It is a measure used to evaluate the relationship between cash flow and investment cost. This can be applied to short-term investments (i.e., a project that takes place over 10 years or less).

Annual capital cost (ACC) can be determined from the following equation (1) and the CRF can be determined from ACC and NPV shown in equation (2):

(1) ACC = annuity – NPV/N, where NPV is the net present value and N is the number of years.

(2) CRF = ACC/NPV

The Electric Power Research Institute (EPRI) recommends a maximum CRF value of 12%.

So, how can energy projects be evaluated in order to determine their financial viability? There are multiple ways – the most common is the present worth method (PW). This method takes into account the discounting of money. For the present worth method, all the elements of the financial analysis are discounted back to the present worth. This takes into account the positive and negative elements of cash flow summed up. If the NPV is positive, it would be a financially attractive project. In this method, a minimum attractive rate of return (MARR) would be chosen (kind of like an interest rate). Example 10-2 first looks at a simple payback NPV. While I do not expect you to know how to discount, I expect you to know that it can affect the cost of a project, as suggested in the following example.

Another parameter that can be used is the called the benefit-cost ratio (B/C) method. This is a method that is a ratio of all the benefits of the project to all of the costs. If the B/C ratio is greater than 1, the project is acceptable. When the B/C ratio is less than 1, the project is unacceptable. If the B/C value is close to 1, it may be necessary to reevaluate the project to see if minor changes would make it acceptable. The conventional B/C ratio equation is shown in equation (3).

(3) B/C = Total benefits / (Initial cost + Operating costs)

The last factor we will look at is the Levelized Cost of Energy. This is a method that incorporates the role of both the initial capital costs and ongoing costs. The levelized cost is determined per unit of energy output. Therefore, all the cost factors are combined into a cost-per-unit measure. We need a predicted average output of electricity in kWh and a sum of all the costs on an annual basis, divided by the annual output (see equation 4):

(4) Levelized cost = (Total annual cost)/(annual output)

Total annual cost = annualized capital cost + operating cost + return on investment (ROI)

Annual output is in kWh

Another aspect that needs to be considered is the direct costs versus external costs and benefits. Direct costs include capital repayment costs and operating costs. Operating costs include energy supply, labor, and maintenance costs. However, there are also external costs that are sometimes called overhead. These costs include health care and lost productivity due to pollution. Direct benefits include revenues from selling the product and services. External benefits include benefits to the local environment or the use of unusual energy technology, which could encourage visitors to the company.

Costs are important, but by using biofuels, we also expect a benefit to the environment. So, there have been interventions in energy investments for social aims. We expect the alternative form of energy to be “clean” energy. This means that there may be intervention in the marketplace because of the potential social benefit, which is typically done by government. Intervention by government can be on the local, state, and federal levels. Why do this? It is because we can’t put a “value” on the social benefit, and it gives fledgling technologies a chance to grow in sales volume to allow for competition in the marketplace. For example, government subsidies were given to the production of ethanol from corn for many years, and now ethanol from corn in the US is the most viable method of ethanol production (data will be presented on this in the following section).

There is more than one method of intervention. One support mechanism is to support research and development (R&D). The support usually comes from the government, but industry may also participate so that they are not supporting the funding all on their own. Government can also support commercial installation and operating systems. This can be in the form of direct costs, tax credits, and interest rate buydown. 

Most of our discussion so far has been on electricity systems. But how do we evaluate the production of biofuels and economic viability? There are two metrics that are used: 1) net energy balance ratio and 2) life cycle assessment. The net energy balance ratio is a metric to compare bioenergy systems. It is a ratio to compare energy available for consumption to the energy used to produce the fuel. So, for example, how might we look at ethanol? The energy carrier itself is ethanol. However, energy was consumed in order to grow, harvest, and process the corn in order to produce ethanol. This is known as energy to produce. The ratio would look like this:

(5) NEB = Energy from fuel/ Energy to produce

If the NEB ratio is greater than 1, there is more energy available for consumption than is used to produce the biofuel. If the NEB ratio is less than 1, then more energy is required to produce the fuel than is available in the fuel for consumption – which makes for an unattractive project. This is a good metric for debate, but it is not a parameter that can stand alone.

The other metric is life cycle assessment (LCA). It is a method of product assessment that considers all aspects of the product’s life cycle. One way to express this is a cradle-to-grave analysis. For biofuels in transportation, it could be plant/harvest-to-wheels. In the petroleum industry, it’s known as well-to-wheels.

We also want to determine the fuel productivity per unit of cropland per year. This should be done before choosing a regional crop. Keep in mind that, depending on location, sunlight provides 100-250 W/m² – however, less than 1% is available in starches and oils as a raw material for conversion to fuel. Research has focused on the conversion of lignocellulosic biomass (whole biomass) and utilization of the entire plant in order to produce fuel and/or value-added products – the economics improve under these conditions. Data on changes to the land must also be incorporated, especially if the land is being changed to sustain a large-scale biofuels program. For example, if a rainforest or peatland is removed to make space, the material from the land is typically burned, adding CO₂ to the atmosphere before even getting the system started.

So, what is the NEB ratio of ethanol? Early on in the conversion of corn to ethanol, the ratio was positive, but not a very high ratio – 1.25. However, recent assessments show an improved NEB of 1.9-2.3. And if the fuel used to run the plant that produces the ethanol is 50% biomass, the NEB is 2.8, almost 3. As you will see in the economics, the production of ethanol is economical. The problem comes up when petroleum prices go down, such as in recent months; ethanol production is less economical.

So, what about the NEB ratio of biodiesel? When compared to the NEB of ethanol, in the early stages of biofuel production, the NEB ratio of biodiesel was 1.9 when co-products were included. It is higher because biodiesel production requires reduced energy requirements during processing, mainly because less distillation is required. The one drawback to biodiesel production is that GHG contains N₂O, so the use of biodiesel has ~60% of petrodiesel emissions instead of being neutral. Another issue for biodiesel is soybeans suffer as a crop due to lower yields per land area compared to corn. Example 10-6 shows the NEB ratio calculation of soybeans to biodiesel.

So, are ethanol and biodiesel being consumed in our current fuel supply? Yes, they are, but partially because of an Environmental Protection Agency (EPA) mandate to use oxygenated fuel in a blend with gasoline and diesel fuel. Approximately 10% of the gasoline supply is ethanol, while in diesel, it’s estimated that diesel sold contains ~5-6% biodiesel.

The major feedstock for ethanol has been coarse grains (i.e., corn). Second-generation ethanol (from cellulosic biomass) is around ~7% of the total ethanol production. The figure below shows the global ethanol production by feedstock from 2007-2019.

In 2013, world ethanol production came primarily from the US (corn), Brazil (sugarcane), and Europe (sugar beets, wheat). The figure below shows ethanol production contributions, in millions of gallons, from all over the world. In addition to Brazil, ethanol production from sugarcane is also being done in Australia, Columbia, India, Peru, Cuba, Ethiopia, Vietnam, and Zimbabwe. In the US, ethanol from corn accounts for ~97% of the total ethanol production in the US.

The table below shows a comparison of costs for first-generation ethanol feedstock along with their production costs. The data in this table is from 2006, but it gives you an idea of why ethanol is made from corn in the US: because it is less expensive and more profitable. However, as seen in the other charts, the use of sugar-based materials like sugarcane and sugar beets is growing, as well as the use of cellulosic materials.

a Excludes capital costs

b Feedstock costs for US corn wet and dry milling are net feedstock costs; feedstock for US sugarcane and sugar beets are gross feedstock costs

c Excludes transportation costs

d Average of published estimates

Credit: rd.usda.gov

The figure below shows the overall process of making ethanol from corn. It also shows the additional products made from corn. If you recall from Lesson 7, DDGS is a grain that can be used to feed cattle. Corn oil is also produced for use. Typical yields of each product per bushel of corn are shown (2.8 gal of ethanol, 17 lbs. of CO₂, and 17 lbs. of DDGS).

So, what are the ethanol revenue streams? The figure below shows that the revenue streams are ethanol, DDGS, and CO₂. The revenue streams are market-driven; ethanol is the plant’s most valuable product and typically generates 80% of the total revenue. The DDGS represents 15-20% of the revenue, and CO₂ represents a small amount of revenue. The revenue margins are tight, however, and the sale of DDGS and CO₂ is probably essential for the plant to be profitable.

The figure below shows the volatility of the price of corn, the price of ethanol, and the price of gasoline. Notice the price of gasoline and the price of ethanol are highly correlated, at least since 2009. For example, in 2010, the price of gasoline and the price of ethanol were ~$2.00 per gal. However, in recent months, with the price of oil going down significantly, expect that the profitability of ethanol will be less.

The major cost of producing ethanol from corn is the cost of the feedstock itself. The figure below shows the cost of feedstock is 55% of the expenses for the production of ethanol from corn, while energy is 21%, materials are 11%, and maintenance and personnel are 13%. If a bushel of corn sells for $4/bu or more, then the percentage for the feedstock price goes to 65-75% of the expenses.

Another issue with the production of ethanol is that water is used, and water is becoming less available. Water is used for gasoline production as well, but water use is a little higher for ethanol production (for gasoline, 2.5 gallons of water per gallon of gasoline is used, while for ethanol it is 3 gallons of water per gallon of ethanol). The extra water use is due to growing the plants for harvest.

Just as ethanol can be produced from corn, so, too, can butanol. The main disadvantage to butanol production is that yields are significantly lower. But recall that the advantages include a better interaction of butanol with gasoline than ethanol, as well as the higher energy content of butanol. If all of the available residues of the corn along with the corn are converted to acetone-butanol (AB), the result would be the production of 22.1 x 10⁹ gallons of AB biofuel – this is a yearly amount. In 2009, 10.6 x 10⁹ gallons of ethanol were produced from corn – this would be equivalent to 7.42 x 10⁹ gallons of butanol on an equal energy basis. Recall that butanol production is accomplished in a similar fashion to ethanol production; it uses different enzymes. The figure below shows the schematic of wheat straw processing that was shown in Lesson 7. A description of the process and some information on production using wheat straw and other feedstocks can be found at the end of Lesson 7.

So, how much investment might be necessary to build a plant for butanol production? An extensive computer simulation was done to determine costs, payback time and return on investment – we will not discuss the details of the computer simulation because it is beyond the scope of this course. However, I will provide a summary of the study to give you an idea of the related costs. An estimate was done for producing butanol from wheat straw (BEEMS Module B6). The estimate was based on a plant size of 150 x 10⁶ kg/year, or 48 x 10⁶ gallons of butanol per year, and the following costs were determined:

• Equipment purchase cost $27.66 x 10⁶
• Total plant direct cost (TPDC) $88.08 x 10⁶
• Total plant indirect cost (TPIC) $52.85 x 10⁶
• Total plant cost (TPC = TDPC + TPIC) $140.93 x 10⁶
• Contractor’s fee & contingency (CFC) $21.14 x 10⁶
• Direct fixed capital cost (DFC = TPC+CFC) $162.06 x 10⁶

It would take ~$162 million to build a butanol plant that produces 48 million gallons of butanol. Operating costs must also be taken into consideration, which would be more than $200,000,000. The major factors in the operating costs are utilities (59% of the costs) and raw materials (21%). With these costs in mind, it was estimated that for a grassroots plant, the butanol production cost would be $1.37/kg, or $4.28/gal. For an annexed plant, the cost of butanol production would be lower, or $0.82/kg, or $2.55/gal. The researchers doing this work have been successful at producing AB from lignocellulosic substrates, though there are some challenges ahead. In conclusion, these are the overall estimates:

• The cost of production of butanol from WS is $1.37/kg (distillative recovery)
• Return on investment is 19.87% and payback time is 5.03 years
• Expansion of an existing plant would result in a production cost of $1.07/kg (distillative recovery), and $0.82/kg (membrane recovery)
• Utilities affect butanol production costs most

This kind of information may convince a venture capitalist to contribute to the building of a butanol plant, especially if the payback is in 5 years and the return on investment is 19.87%. However, this was a computer simulation and would have to be updated for current prices. That could alter the numbers.

One of the major feedstocks for biodiesel is soy oil or any other vegetable oil. Animal fats can also be used, but as pointed out in a previous lesson, animal fats can produce more by-products that cause issues (i.e., free fatty acids which can cause soap formation). Jatropha is another oil used for biodiesel production. Second-generation biodiesel can be produced from algae, and use of algae for biodiesel production is a growing market. The feedstock is the primary cost involved in producing biofuel. Haas et al (2006) estimate that the cost of oil is ~ 85% of the production costs, while Duncan (2003) estimates it to be ~80% of the production costs.

The figures below show the challenges of the economics behind biodiesel production. The first figure shows the breakeven price of biodiesel plotted with the actual biodiesel price. Most years, the biodiesel price and breakeven price were the same. But in 2011 and 2013, the biodiesel sold at a higher price than the breakeven price, a good indicator of demand. In the second figure we can see that in most years, the ULSD price was lower than biodiesel, by ~$1 per gallon, but in late 2013 and 2014, the price was almost the same and the margin between the two was much closer. Again, this suggests a greater demand for biodiesel as well as the costs becoming closer to the processing of petrodiesel.

Most of the information we are looking at is based on soy oil production, but as we have discussed in Lessons 9 and 10, biodiesel can be produced in ways other than transesterification and can be produced from other sources, such as algae. The reason for producing biodiesel using other methods would be to reduce the oxygenates from the biodiesel, mainly so the biodiesel could be used as jet fuel, as jet fuel cannot have oxygenates in it. The reason behind using algae is because of the advantages of 1) using land areas that would not be able to grow terrestrial plants, 2) the ability of algae to produce much greater amounts of oil per landmass than plants like soy, and 3) algae plants take in much greater amounts of CO₂ and could be located near a power plant to utilize emissions from the flue gases. However, as you will see from data in the following tables, the costs of oil from algae are still fairly high. One of the useful aspects of growing algae is it can be grown in water sources that can contain salt or some sediment - even though water usage may be high, some of the water may be separated out and used again.

The following data is from an overview review article on producing biodiesel from algae, from 2007. In the table below, Chisti compared the production of biodiesel from PBR and an open raceway pond, to show differences in production.

^a Based on facility area.

^b Based on actual pond area.

^c Based on the projected area of photobioreactor tubes.

^d Based on 70% by wt oil in biomass.

^e Based on 30% by wt oil in biomass.

Credit: Chisti, Y., Biotechnology Advances, 2007

As you can see, the PBR can produce more oil for a number of reasons, but the costs associated with the PBR are higher. Chisti estimates the cost to produce algae oil on a scale of 10,000 tons at $0.95 per pound. This particular article estimated that the cost of producing biodiesel from algae would range from $10.60 – $11.13 per gallon. The processing costs for palm oil would be ~$0.53 per gallon, and the processing costs for soybean oil would be $3.48 per gallon. A slightly more recent report, a project to estimate the price of biodiesel, indicates prices from $10.66 per gallon to as high as $19.16 depending on location and oil production. (Davis, R., et al., 2012) Yet another computer-simulated estimate provided by Richardson et al. shows a cost to produce algal oil at $0.25 - $1.61 per pound, not too far off of costs to produce soybean oil ($0.35 - $0.38 per pound) (Richardson et al., 2010). They also estimated the cost of biodiesel from algae oil to be $2.35 per gallon, less than a gallon of ULSD. However, they may not be including algae harvesting costs in this estimate.

So, you can see that biodiesel from microalgae is a long way off from being a reality, yet it probably has a future if the costs can be brought down due to benefits.

So, how does biodiesel compare to ethanol as a fuel? Ethanol from corn has become a big business here in the US. The first figure below shows the production by county and plant locations for ethanol production from corn. We saw earlier in the lesson that ethanol from corn has an NEB ratio greater than 1 and is improving, and that production of ethanol from corn is the least expensive here in the US. The amount of ethanol produced in 2014 was 13 billion gallons per year and is a $30 billion-a-year industry. It makes up 10% of the gasoline pool, although the government has mandated that the gasoline pool can utilize up to 10% ethanol, and companies get tax credits for using ethanol. Because of the high price of gasoline due to oil prices, demand for gasoline fell, and this has made it more difficult for ethanol producers to continue selling ethanol at the level that they had over the last several years. Recently, the EPA examined whether to raise the ethanol limit to 15%, but because of the drop in oil prices, the EPA has been reconsidering this and has not set levels for 2015. In the assignment section, you will read an article related to this so you can get a feel for what is facing the biofuels industry. Remember that by including ethanol in the gasoline pool, we reduce GHG emissions.

The second figure below shows the location of biodiesel facilities in the US from 2007. If you would like to view a more recent map and location of facilities (2015), go to Biodiesel Magazine. According to the most recent statistics, there are 145 biodiesel facilities in the US that provide more than 2.60 billion gallons of biodiesel per year (in 2010, the production of biodiesel was less than 0.4 billion gallons per year, which is an order of magnitude increase). Biodiesel makes up about 5-6% of the diesel fuel pool. Biodiesel plants tend to be smaller and more evenly distributed across the US than ethanol. You will also read an article related to biodiesel pricing. RIN means renewable identification number and RFS stands for renewable fuel standard.

Summary

The economics of biofuels depend on the overall economic health of the country as well as what is going on in the fuel industry for fossil fuels. Biofuels have come a long way in becoming a part of the U.S. industry, but issues with gasoline and diesel prices, as well as government involvement, will continue to dictate the use of biofuels.

Are you beginning to grasp the complexity of the issues surrounding how the biofuel production industry will survive going forward? If it reduces the carbon footprint, isn’t it worthwhile to continue to support biofuel production?

Lesson Objectives

By the end of this lesson, you should be able to:

• describe background information on energy economics;
• evaluate the supply and demand issues for ethanol, butanol, and biodiesel;
• utilize supply and demand information to understand economics;
• compare the amount of energy used to produce biofuel versus the amount of energy made available by the fuel.