The Economics of Biomass Utilization

Biomass to Biofuels: An Overview

The Economics of Biomass Utilization

Alison F Davis PhDDepartment of

Agricultural Economics

August 14-15, 2008


Outline of Presentation

• The Costs of Biomass Utilization• Ethanol Profitability• Kentucky’s 25 x ‘25 initiative• The Potential Economic Impact from

Renewable Energy• Carbon Credits• Subsidies

August 14-15, 2008


INPUT PRICES

Two hot topics:Corn

Transportation


Corn Prices


Corn Acres Planted and Harvested


The Need for Transportation


Rail and Truck Ethanol Distribution System


The Need for Rail


Transportation Issues

• Ethanol demand has increased corn prices and led to expanded corn production, which is affecting grain transportation as corn use shifts from exports and feed use to ethanol production.

• Most ethanol is currently produced in the Nation’s heartland, but 80 percent of the U.S. population (and therefore implied ethanol demand) lives along its coastlines.

• Rail and barge demand could decrease if corn exports decrease, but in the short-term increased ethanol and DDGS shipments could offset decreases in rail grain shipments.

• Truck demand increases• In 2005, rail was the primary transportation mode for ethanol, shipping 60%

of ethanol production or approximately 2.9 billion gallons of ethanol. Trucks shipped 30% and barges 10%


Ethanol Production and Profitability


Ethanol prices and profits


Gas Prices


Break Even Corn Prices

• The first break-even price is the price that would allow the ethanol producer to just recover variable costs of production. As long as corn can be purchased below this price, existing ethanol plants will find it economically advantageous to produce ethanol.

• The second break-even corn price is the price that would allow the ethanol producer to just recover all economic costs of production. As long as corn can be purchased below this price, there would be incentive to expand ethanol production capacities.




Kentucky’s 25 by ’25 Initiative


Kentucky’s 25 x 25 Initiative

• Use renewable energy and energy efficiency as a means to get at least 25% of energy from improved technology and renewable resources, such as solar, biomass and biofuels, by the year 2025


Potential Benefits

• The obvious: Reduce dependence of foreign oil

• Stimulate economic growth• Enhance rural development and profitability• Increase manufacturing capability• New industries that offer good-paying jobs• Retain a large share of energy payments in

Kentucky


How do we reach the goal?

• Biopower – direct firing, co-firing, gasification

• Demand Reduction– residential, industrial construction, solar and

wind power• Biofuels

– Transportation fuels made from grains, oil seeds, timber, etc.


Analysis of the Economic Impact and Feasibility of Kentucky Energy Initiative

• Separated Kentucky into three regions and determined the amount of inputs/crops that would be available for biofuel production

• Forecasted prices given sensitivity of demand for corn, hay, soybeans, and switchgrass


Kentucky Regions


Sources of Cellulosic Ethanol

• Assume 20% of the other hay acreage converted to switchgrass plus an additional 5% increase in acreage

• Collection of crop residues (1 ton/ac of corn stover and 1.25 ton/ac of wheat straw)


Effect of Switchgrass on Hay Price

• Looked at elasticity's due to increased demand

• Hay price of $50/ton with no switchgrass• Switchgrass would

cause price of hay and switchgrass to increase to $63/ton


Potential Gasoline Replacement with Cellulosic EthanolRegion Material

Consumed (ton/yr)

KY Gasoline Displaced (%)

West 2,750,000 6.6Central 2,868,000 6.9Eastern 395,000 1.0Total for State

6,014,000 14.5

KY used 2.32 billion gallons of gasoline in 2004Assuming 25% of hay acreage as switchgrass with a yield of 8 ton/ac


Potential Economic Impact from Producing Ethanol in Kentucky

Economic Impact # Jobs Cellulosic Residues(entire state) Construction Operation State Taxes

$113 Million$272 Million/yr$2.1 Million/yr

1,9121,110

Corn(Western) Construction Operation State Taxes

$1.03 Million$44.6 Million/yr$308,000

204444


Biodiesel Production Potential• Kentucky used 1.32 bill gal

diesel in 2004

• 25% of wheat acreage and soybean acreage converted to winter canola/double crop sunflower rotation could produce 8.1% of diesel fuel

• Difficult to achieve 25% of diesel fuel


Future Developments

• No commercial plants using cellulose to ethanol• Capital cost of plant significant• Conversion process not fully developed• Collection and transportation costs still significant

• Are people willing to see additional truck traffic?• Impact on feed prices and negative impact on

livestock industry not included


Overall Limitations

• Larger ethanol plants, around 100 mgy, are corporate owned, so the additional income will not necessarily stay locally

• Local inputs are not available currently – Buy local initiative


Tax Credits and Subsidies for Renewable Energy Sources



Wind Power

• Legislation extending the PTC provides a one-year extension (through December 31, 2008) of the 1.5-cent/kWh credit for wind, solar, geothermal, and "closed-loop" bioenergy facilities (Adjusted for inflation, the 1.5 cent/kWh tax credit is currently valued at 1.9 cents/kWh).


Solar Power• The state has offered very few

incentives to encourage utilization of solar power, particularly for the benefit of homeowners.

• September 2007 – Sales tax exemption for large scale renewable energy projects. Provides the commercial sector an exemption for 100% of sales and use taxes up to a maximum of 50% of the capital investment, and applies to solar energy systems producing at least 50kw.


Economic Effects from Solar Power


Solar Power Federal Incentives

(1) Residential Solar Tax Credit: Extends a 30-percent tax credit, created in the Energy Policy Act of 2005, for the purchase of residential solar water heating, photovoltaic equipment, and fuel cell property. Expires after December 31, 2008

(2) Business Solar Tax Credit and Fuel Cell Tax Credit; Extends a 30-percent business credit, established in the Energy Policy Act of 2005, for the purchase of fuel cell power plants, solar energy property, and fiber-optic property used to illuminate the inside of a structure. After December 31, 2008, the credit reverts to a permanent 10-percent level.

http://www.seia.org/SEIAManualversion1point2.pdf


Solar Power Incentives

• Kentucky solar partnership and MACED offer a Solar Water Heater Loan Program, available to both residential and commercial users. This is a monthly installment loan program with 5% down and a relatively low rate of interest for a fixed term of six years

• Tennessee Valley Authority – Solar or wind power produced by residential or small commercial generators can sell 100% of their output to TVA for 15 cents per kilowatt-hour. An additional $500 incentive to help offset start-up costs is also available


Federal Incentives

• Volumetric Ethanol Excise Tax Credit – provides ethanol blenders with 51 cents per pure gallon of ethanol blended or 0.51 cents per percentage point of ethanol blended. – The common 10 percent ethanol blend qualifies for 5.1

center per gallon– The 85 percent blend, E85, qualifies for 43.35 cents per

gallon– This $0.51 per gallon is about $1.35 per bushel of corn used.

• Continues until 2010• Tax credit for small ethanol plants that produce no

more than 60 gallons per year


Biodiesel Tax Credit

Biodiesel Blenders Tax CreditThis tax credit was extended through 2008 by the Energy Policy Act of 2005. For biodiesel created from virgin oil, producers receive a tax credit of $1.00 per gallon of biodiesel produced. The virgin oil can be obtained from animal fats or oilseeds. Producers of biodiesel from recycled cooking oil are granted a tax credit of $0.50 per gallon.


Small Producer Tax Credit

This tax credit was introduced in the Energy Policy Act of 2005 and is available to producers of biodiesel or ethanol with annual production of less than 60 million gallons. The tax credit is $0.10 per gallon for the first 15 million gallons of production (a maximum tax credit of $1.5 million per year). The credit is due to expire on December 31, 2008.


Alternative Fuel Infrastructure Tax Credit

This tax credit was created by section 1342 of the Energy Policy Act of 2005. The tax credit is equal to 30% of the cost of alternative refueling property, up to a maximum of $30,000 for businesses and $1,000 for individuals. Biodiesel blends of B20 or more and ethanol blends of E85 or greater qualify as alternative fuels.

The tax credit is effective for the period January 1, 2006 to December 31, 2009.


USDA Renewable Energy Systems and EnergyEfficiency Improvements Program

Offers grants and loan guarantees to eligible projects located in rural areas.

Projects that generate energy from renewable sources (including biodiesel and ethanol) are eligible for grants of up to $500,000 and loan guarantees of up to $10,000,000.

Grant requests are limited to 25% of the total project costs and loan guarantees are limited to 50% of the total project costs. Applicants must demonstrate financial need to be eligible for a grant from the program.


Federal Incentives continued

54 cent tariff on imported ethanol through 2009 (aimed at Brazilian sugar cane producers)


Incentives- State

• Incentives that could cover up to half the capital investment in a project that creates alternative fuel from biomass or that creates energy from renewable energy sources. – Qualifications

• Capital investment at least $25 million (biofuels) or $1 million (biopower)

• Incentives can include advances for labor costs, tax credit of 100% of income tax, 100% of sales and use taxes during construction

• Biodiesel tax credit of $1 per gallon is expanded to include renewable diesel, caps have been raised. Also a tax credit of $1 per gallon for biofuels.


Another incentive programs (indirect)

Carbon Credit Trading

August 14-15, 2008


Carbon Credit Trading

• The Chicago Climate Exchange (CCX) first traded 100 metric tons of carbon dioxide in 2003 and has grown considerably over the past five years. This is a private, voluntary trading program where there is financial value received for carbon credits.

August 14-15, 2008


Definition of Carbon Credits

• Carbon Credits are credits for the carbon that has been sequestered as a result of the efforts of farmers and/or landowners to minimize the release of Greenhouse Gas emissions into the atmosphere.

August 14-15, 2008


Carbon Credits Continued

• Soil Projects – Soil Projects earn Offsets for carbon stocks that are built in the soil through the photosynthetic process.

• For instance, for every year that a farmer uses conservation tillage practices, he is preventing the release of that carbon into the atmosphere.

• Through a Carbon Credit Program, the farmer is issued an offset for the carbon that he sequesters in the soil by the no-till practice.

• These credits are issued on a per acre basis and have financial value. The credits are traded as a commodity on an exchange that is modeled after the Chicago Board of Trade. In a similar fashion, offsets can be earned by farmers who establish acres into permanent grass cover.

August 14-15, 2008


Carbon Credits Continued

• Forestry Projects – Forestry Projects earn Offsets for carbon stocks that are built in forest biomass (not the soil). Forest Projects are typically allowed considerably higher sequestration rates than Soil Projects

August 14-15, 2008


Methane Capture

• Some new bills in 2007, such as the Low Carbon Economy Act of 2007, were introduced that discussed the reduction of all six greenhouse gases. These projects may include landfill methane reductions, animal waste or municipal wastewater methane reductions, and coal mine methane projects.

August 14-15, 2008

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The Economics of Biomass Utilization