Ethanol As A Renewable Fuel: Economic and Environmental

Considerations

Vernon R. Eidman

Department of Applied Economics

University of Minnesota

I plan to discuss:

• the development of the ethanol industry and where we seem to be headed,

• factors that will limit the expansion of grain ethanol, and

• the energy balance and green house gas impacts of ethanol use.

Ethanol

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Ethanol Production Has Been Growing Rapidly

Ethanol Production in Minnesota

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Omaha Rack Price for Ethanol and Regular Gasoline

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Ethanol

The U.S. Industry is Growing Very Rapidly

• Industry very profitable for the past 2.5 years

- Higher petroleum and wholesale gasoline prices

- Phase out of MTBE – need 6 billion gallons/year

- Ethanol production costs have been relatively constant.

• Industry is expanding very rapidly

- Will produce 4.8 billion gallons during 2006

- Plant capacity will reach

- 6 billion gallons 1/1/07

- 7 + billion gallons 1/1/08

Profitability of Ethanol Plants is Expected to Remain Strong For the Near Term

• Expect ethanol prices to decline to $.20 to .25 over the wholesale price of gasoline.

Refiners Acquisition Cost Wholesale Gasoline Price Ethanol Price

$/Barrel $/Gallon* $/Gallon**

40 1.20 1.65

50 1.49 1.74

60 1.78 2.03

70 2.07 2.32

80 2.46 2.61* Wholesale price of regular gasoline = $0.036 + $0.029(Price of crude oil/brl.)Source: McCollough, Robert and Daniel Etra. When Farmers Outperform Sheiks: Why Adding Ethanol to the U.S.Fuel Mix

Makes Sense. McCullough Research, Portland, Oregon, April 2005, 12pp.

** Wholesale price of Gasoline plus $0.25.

Our model to estimate the profitability of a dry mill ethanol plant suggests

• that without specific subsidies for the plant, the cost per gallon of denatured ethanol with corn at $2.00 per bushel and natural gas at $10.00 is $1.526 per gallon of denatured ethanol,

• the coproducts produced are 1 gallon of denatured ethanol, 6.4 pounds of DDGS and 6.4 pounds of CO2, and

• selling the DDGS at $.04 per pound gives a net cost of $1.27 per gallon of denatured ethanol.

The Grain Ethanol Industry Is Expected to Continue Expanding Until Profitability

Returns to Normal levels.• Net cost per gallon of ethanol depends on the price of corn and

fuel for the plant

Corn Price Net Cost/ Gallon

$2.00 $1.27

3.00 1.63

4.00 1.98

5.00 2.34• Each increase of $1.00 per mmbtu increases the cost per gallon

$0.034.• The profit opportunities will be reduced if the blenders credit of

$0.51/ gallon is reduced.

Other Developments in the Ethanol From Grain Industry

• Changes in Industry Structure- Larger firms are being formed to attract capital from

financial markets to own multi-plant firms.- developing much larger plants – 100 million gallons- New plants are more geographically dispersed – destination as well as origination plants

• Changes to increase plant efficiency- Alternative boiler fuels – DDGS, wood, corn stover, coal- Removing oil form thin stillage for biodiesel production- Fractionation

Our work on economies of scale and alternative processing plant fuels suggests

• economies in investment and operating costs of about $0.035 per gallon of ethanol for NG plants as plant size increases from 50 to 100 mmgpy. The larger plants are expected to obtain additional economies in marketing, transportation and risk management.

• investment and operating costs per gallon of ethanol for plants burning corn stover (@$50/ton) would be about $0.15 less than the cost with NG at $10 per mmbtu. The breakeven natural gas price is $5.60

• DDGS at $66 per ton and corn stover at $50 per ton have the same cost per gallon of ethanol.

• coal fired plants (w/coal at $2.65/mmbtu) have a cost advantage of $0.165 per gallon of ethanol compared to NG plants at $10/mmbtu. The breakeven natural gas price is $5.15.

Projected Ethanol Production From Grain By Marketing Year (FAPRI July2006 Update)

Marketing Year 9/1-8/31 2005/06 2006/07 2010/2011

Ethanol Produced

Bill. Gal. 4.6 5.9 9.7

Corn required Bill. Bu. 1.645 2.110 3.455

CoProduct Feeds

Mill. Tons 13.705 17.580 28.787

Corn Crop Bill. Bu. 11.112 10.740 12.498

% Corn Crop % 14.8 19.6 27.6

Acres Planted Mill. Ac. 81.8 79.4 87.0

Yield per Acre Bu./Ac. 147.9 149.0 156.4

Ethanol from Cellulosic Biomass

• Analysis based on Aden, et.al. Lignocellulosic Biomass to Ethanol Process Design and Economics Utilizing Co-Current Dilute Acid Prehydrolysis for Corn Stover. NREL/TP-510-32438. 2002.

• Plant designed to process 2,205 tons per day (2000 metric tons).

• Estimated costs are for the nth plant.- start up after 2010- project investment ($2005) of $250,797,000.- Operating costs of $81,200,800 including buying the biomass at $30

per ton.

• Production- Initial conversion rate of 67.8 gallons per ton.- Later conversion rate of 89.7 gallons per ton- Also produce 3.7 kWH per gallon of anhydrous ethanol, use 1.42 in the

plant and sell 2.28 @ $.041

Costs and Development of Cellulosic Ethanol Industry

• The cost per gallon of ethanol with the Aden et. al plant (with a conversion rate of 67.8 gallons per ton, enzyme cost of $0.20 per gallon and corn stover cost of $50 per ton) is $1.91 per gallon.

• Commercial cellulosic plants are being built.

- 50 mmgpy plant in Georgia using forest product wastes as the feedstock. Production to begin summer 2007.

- Idaho plant to produce ethanol from 400,000 tons of barley straw. Construction to begin summer 2007 to be online in 2009.

- Broin to build a 125 mmgpy corn stover-based ethanol plant in Iowa.

Construction to begin early in 2007 to be online in 2009.

• Don’t anticipate much commercial production before 2015.

• Much of the crop residue and bioenergy crops may be processed using other technologies, such as combustion, gasification, etc.

Energy Balance and Greenhouse Gas Impacts of Ethanol and Biodiesel

Energy

Out/Fossil

Energy Input

%GHG Reduction

vs.

Gasoline/Diesel

Gasoline 0.81 -

Ethanol from corn grain 1.25 – 1.35 12 - 26

Ethanol from cellulose 5 - 6 82 - 85

Diesel 0.83 -

Biodiesel from soybean oil 1.93 – 3.21 41 - 78Sources: Michael Wang, “Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol” Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005.

John Sheehan, et. al. “An Overview of Biodiesel and Petroleum Diesel Life Cycles,”NREL/TP-580-24772, Golden CO, May 1998.

Jason Hill, et. al. “Environmental, Economic and Energetic Costs and Benefits of Biodiesel and Ethanol Fuels,” PNAS 103:11206-10, July 25, 2006.

% Reduction in GHG Per Mile Relative to Gasoline/Diesel

E – 10 (Corn) 2

E – 10 (Cellulose) 6

E – 85 (Corn) 23

E – 85 (Cellulose) 64

B - 2 1.6

B - 20 16

B - 100 78Source: Michael Wang, Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol, Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005.

John Sheehan, et. al. An Overview of Biodiesel and Petroleum Diesel Life Cycles,NREL/TP-580-24772, Golden CO, May, 1998.

Summary

• It appears periods of favorable profits are ahead, but not at the levels of the past year. Future profits are highly dependent on petroleum and corn prices.

• Major efforts to substitute biomass for natural gas in ethanol plants are underway, but development problems remain.

• Dry-mill technologies are evolving that will increase efficiency of the plants and produce a wider range of coproducts over the next several years- oil recovery from thin stillage- fractionation

• It appears the U.S. will produce 10 billion gallons of ethanol from grain within 4 years and coproduct utilization in livestock production will become more common.

• Cellulosic conversion becomes more competitive with higher priced corn.

Thank You!