Risk Assessment and Economics of Forest Biorefinery Concepts USDA Forest Service Forest Products Laboratory Madison, Wisconsin

Visions of the Past & Future: The hydrocarbon economy... (... Oil Refinery)

The Carbohydrate Economy... (Cellulosic Biorefinery...)

Future economic impact depends on investment and enterprise development, which are largely determined by economic opportunity and risk. An opportunity may exist for biofuel production based on wood, but what are some key economic risks?

Some key economic risks* (or uncertainties) related to wood biofuel development... (1) Fuel price (peak oil or not?) (2) Corn supply (impact of future yield gains?) (3) Technical progress in reducing costs (?) (4) Wood cost (affordable feedstock source?) (5) Other feedstocks (is corn stover cheaper?) (6) Profits from competing wood uses (?) * Note: This list is not exhaustive – other risks could be added such as capital availability, interest rates, regulatory and tax framework, change in transportation infrastructure, etc.

(1) Fuel price (peak oil or not?) The future feasibility of biofuel production depends on fuel prices... The outlook for oil price remains volatile and risky amid speculation that global oil production may or may not be peaking. Biofuel markets also remain volatile and risky, as evidenced by ethanol prices.

The future feasibility of biofuel production depends on the outlook for fuel prices, but the 2006 DOE projections show a wide range... The “high” outlook is twice as high as the “low”: { The range between “high” and “low” oil may spell the range between feasibility and infeasibility for cellulosic biofuel development.

The 2006 DOE projections show that U.S. ethanol output based on corn grain peaks around 2015 in the “low” oil price scenario, but in the “high” oil price scenario ethanol output expands based on expansion of cellulosic ethanol output...

Not just oil... Ethanol is volatile too. In 6 weeks from June 20 to August 1 ethanol prices dropped by ~40%. Volatility was linked to mandated replacement of MBTE in reformulated gasoline... By contrast, gasoline blend-stock price (RBOB) was less volatile... Source: OPIS – Oil Price Information Service June 20 Aug. 1 Cents Per Gallon

In general the ethanol cash market has been more volatile than the ethanol futures market, which in turn has been more volatile than bulk gasoline price...

(2) Corn supply (impact of future yield gains?) Sources: Renewable Fuels Association (RFA), National Corn Growers Association U.S. ethanol output (4 billion gallons in 2005) is increasing, and it is based on corn grain. Consumption of corn grain for ethanol will likely exceed 1.5 billion bushels in 2006 (or ~15% of the total U.S. corn grain crop). Will corn yield gains sustain future expansion?

{ USDA projects fuel ethanol to be by far the fastest growing demand for corn grain to the year 2015 Fuel ethanol is the fastest growing element of corn demand. Other uses are large but relatively flat...

However, U.S. average corn yield per acre has been on the rise for decades, and corn yield is projected to continue rising with expansion of genetically modified corn (first introduced a decade ago). By 2015, average U.S. corn yield is projected to be around 170 bushels per acre (Sources: USDA ERS and Corn Grower Association estimates)

Corn grain output meets ethanol needs to 2015: Acres harvested (millions) (National Corn Growers Assoc.) (assumed constant) Average Yield (bushels/acre) Corn harvest (billion bushels) (+1.8) Corn Ethanol Output (billion gal.) Corn for Ethanol (billion bu.) (+1.8) With other uses of corn relatively flat, gains in corn yield may possibly meet U.S. ethanol needs to 2015 (Ethanol yield in 2005 at 2.8 gal./bu.; Estimated to be near 3 gal./bu. by 2015; Source: RFA)

Corn grain output may never “peak” because of continued yield gains, yet by 2015 the growth in corn grain use as a biofuel feedstock is expected to slow and be replaced by cellulosic materials... By 2015 U.S. grain ethanol production may reach 9.4 billion gallons. According to NREL cellulosic ethanol output will then expand beyond However, what are the risks of assuming that corn use for ethanol will level out beyond 2015? What about further yield gains, or corn stover?

(3) Technical progress in reducing costs The future feasibility of biofuel production from cellulosic feedstock also depends on some fairly optimistic assumptions about technological progress, including more than 50% cost reductions relative to the current estimated cost for cellulosic ethanol of around $2.25 per gallon based on corn stover (National Renewable Energy Laboratory - NREL).

Cellulosic ethanol R&D efforts are needed to compete with corn grain (at break-even costs of around $1/gallon) Goals: Cellulosic ethanol at $1.07/gallon by 2012, and feedstock at $30/dry ton! These goals are challenging!

(4) Wood cost (affordable feedstock source?) Assuming that cellulosic ethanol production becomes more economically efficient, will wood be an affordable feedstock? It depends on the size-class of trees (larger trees are much more valuable), the source (e.g. clean pulpwood versus waste wood), and other market factors.

$ per Dry Ton on the stump $40 $0 $80 $ Peter Ruschmeier, 2006 PIMA Conference Larger trees (>10”) are too valuable to use as biofuel feedstock. Only smaller trees (6-8 ” ) are affordable as feedstock.

$ per Dry Ton on the stump $40 $80 $120 $0 Price is much lower and less volatile (less risky) for small diameter trees, used mainly as pulpwood. -- Peter Ruschmeier, 2006 PIMA Conference

How much wood biomass (small trees & wood residues) might be available as feedstock for biofuels, and at what cost? Sources: Quantity estimates from “Billion-Ton Biomass Report”. DOE, USDA; Cost estimates from Timber Mart-South and Fuel Treatment Evaluator $0 $20 $40 $60 $80 $ Available Quantity (millions of dry tons annually) Avg. Delivered Cost ($ per dry ton) $0 $20 $40 $60 $80 $ Available Quantity (millions of dry tons annually) Avg. Delivered Cost ($ per dry ton) Sustainable U.S. Wood Biofuel Feedstock Supply (current) $120 Mill Residues Logging Residues Forest Thinning (Western U.S.) About 137 million dry tons of wood biomass is available annually, sufficient for about 8 billion gallons of ethanol (double U.S. output in 2005), but costs vary by feedstock and pose profitability risks. 137

(5) Other cellulosic feedstocks (corn stover?) Sources: Quantity estimates from “Billion-Ton Biomass Report”. DOE, USDA; Cost estimates from NREL (future corn stover) and other sources $0 $20 $40 $60 $80 $ Available Quantity (millions of dry tons annually) Avg. Delivered Cost ($ per dry ton) ?? $0 $20 $40 $60 $80 $ Available Quantity (millions of dry tons annually) Avg. Delivered Cost ($ per dry ton) Sustainable U.S. Corn Stove Feedstock Supply (current) $120 Corn stover dried and baled (est.) Corn stover future NREL cost (est.) 75 About 75 million dry tons of corn stover is available annually, sufficient for about 4.5 billion gallons of ethanol output, but costs of this competing feedstock vary depending on material specifications. Lower-cost corn stover may pose a competitive risk to wood.

(6) Profits from competing wood uses Lastly, there is risk that other competing wood uses may be more profitable in relation to utilization of smaller-diameter wood or biomass in biofuel production. Product values and approximated costs provide a basis for comparing economic returns among different products on a dollars-per-ton-of-feedstock basis...

= Range of net returns given product price range since mid-90s Approximate returns for competing wood uses at current product prices & historic range of prices (ethanol currently less profitable per ton than pulp or OSB) September ‘06 prices: $750/ton $210/MSF $2.50/gal Costs approximated from following sources: NLK (kraft pulp), Spelter-FPL (OSB), NREL (ethanol), Timber Mart-South (feedstock)

SUMMARY The future economic impact of wood biorefining is probabilistic, with future development influenced by some key economic risks or uncertainties. Leading risks that need to be monitored and evaluated include risks that (1) oil or biofuel prices may subside, (2) corn grain yield may expand, (3) technical R&D may not deliver anticipated cost savings, (4) wood cost may be unaffordable, (5) competing cellulosic feedstocks may be cheaper, (6) competing wood uses may be more profitable.