1. Overview of Major Biofuels Issues, and the Potential for Aviation Biofuels Wallace E. Tyner Purdue University July 11, 2016

2. Biofuels History Early leader was Brazil with sugarcane ethanol US began corn ethanol production in the early 1980s Early biofuels production in the US, Brazil, and EU was subsidized Subsequently, all three have moved from subsidies to mandates.

3. Global Shares of Biofuels Production (energy equivalent basis)

4. Share of biofuels in US energy consumption (2010) 4

5. Most economists would argue that markets do an efficient job in allocating resources. If that is true, then under what circumstances can government intervention be justified? –When markets fail Externalities Public goods Common pool resources Monopoly –When the income distribution resulting from the market solution is not the one desired by society Making Policy

6. Market Failures and Policy Pathways Both energy security and GHG emissions are examples of situations when markets alone cannot deliver an optimal solution. Economists call these externalities, and suggest using taxes, subsidies, or some form of regulation to correct the market failure In the U.S., we do not generally use taxes in this situation, so I will focus on subsidies and renewable fuel standards

7. Energy Security U.S. imports about 24% of our oil, the lowest share since 1970. Half of our imports come from sources that many consider to be unreliable, unstable, or unfriendly Recent estimates put the cost to our nation of our high dependence on oil at around $3/gal. of liquid fuels – however, a reliable estimate is difficult, but it is not likely zero Consumers do not pay this security cost at the pump

8. Global Warming The U.S. now recognizes that global warming is real and is caused by human intervention Renewable fuels may lead to a reduction in greenhouse gas (GHG) emissions Cellulosic based fuels especially contribute to reduced greenhouse gas emissions These emissions reductions cannot be captured in a pure market system Congress requires that biofuels used to meet the RFS decrease GHG.

9. Demand and Supply Side Options On the demand side, the major options are a fuel or carbon tax and stronger fuel economy standards –Fuel economy standards will go to 54.5 MPG by 2025. On the supply side, government support of domestic alternatives to oil can take many forms –Congress has passed alternative fuel mandates If Congress and society want more alternative energy supply, the key is risk reduction for private investments

10. Policy History for Ethanol in the US The US has subsidized ethanol since 1978 with a subsidy ranging between 40 and 60 cents per gallon. The ethanol subsidy ended in 2011, but there is still a subsidy for biodiesel and cellulosics. The price of crude oil ranged between $10 and $30/bbl. between 1982 and 2003 With these crude prices, the ethanol subsidy did not put undue pressure on corn prices. However, once crude oil prices rose, so did ethanol production.

11. The Renewable Fuel Standard (RFS) provides for 36 billion gallons (ethanol equivalent) by 2022. There are four categories –Biodiesel –cellulosic advanced –other advanced –conventional. It is a nested structure, so only corn ethanol counts for conventional, but biodiesel, other advanced, or cellulosic can fill the conventional as well. RFS Definition

12. Nested RFS Structure Biodiesel – 1 BG+ Cellulosic-16 BG Alt. Jet Fuel Other advanced-4 BG Conventional – 15 BG Corn Ethanol Sugarcane Ethanol

14. Biodiesel The original maximum mandate for biodiesel was 1 BG, but EPA has now increased that level to 2 BG. Must reduce greenhouse gas (GHG) emissions by at least 50% It can be transportation fuel, transportation fuel additive, heating oil, or jet fuel. It can be ester based diesel (e.g., from soybean oil), or non- ester renewable diesel (e.g., from cellulosic feedstocks). Biodiesel (as defined here) is required for the biodiesel part of the RFS.

15. Cellulosic Advanced Only biofuels produced from cellulosic feedstocks such as corn stover, miscanthus, switchgrass, forest residues, or short rotation woody crops can count in this category. Cellulosic biofuels must be shown to reduce GHG emissions by 60%. EPA has waived most of the RFS for this category and will continue to do so.

16. Other Advanced This category can be a wide range of biofuels that reduce GHG emissions at least 50%. Sugarcane ethanol that meets the GHG reduction standards qualifies. Biodiesel qualifies. Cellulosic biofuels can be used. EPA has also approved sorghum ethanol produced under certain conditions.

17. Conventional Biofuels This category is the only one that permits corn based ethanol. It requires a reduction in GHG emissions of at least 20%. However, ethanol plants that were in operation or under construction as of December 2007 are grandfathered. The RFS legislated level is 15 BG in 2015 and after, but EPA set the 2016 level at 14.5 BG.

18. RFS Enforcement - RINs The RFS is enforced by creating obligations for each type of biofuel. –Obligated parties generally are refiners (only the product for the domestic market) and importers. –For example, if you are a refiner, and you have 10% of the total domestic market (domestic plus imported) for gasoline, for 2016 with a 14.5 BG total obligation for corn ethanol, you would incur obligations for 1.45 BG. –The traded fraction is 15-25% of total RINs.

19. The Blend Wall The blend wall refers to a physical limit on blending of ethanol. –It is derived from the U.S. practice of blending gasoline at 10%. 2016 U.S. consumption of gasoline type fuel will be about 142 BG per year, highest since 2007. –With ethanol being blended at 10%, the max ethanol that can be blended is 14.2 BG. –There are small amounts of ethanol blended as E85 and as E15, but they are really too small to matter for this purpose.

20. Blend wall Market uncertainty Technology uncertainty Feedstock supply Interaction among all these factors Second Generation Economic and Policy Issues

21. Second Generation Conversion Processes A wide variety of conversion processes are being investigated for second generation biofuels In our economic modeling to date, we have a biochemical process producing ethanol and a thermochemical process producing bio- gasoline directly. Our data is from public sources (ARS, NREL, etc.), so it does not include proprietary advances.

22. Biochemical Conversion End product is usually ethanol A process that is similar to that of producing corn ethanol Pretreatment –Separates the cellulose and hemicellulose from the lignin, which creates rigid plant cell walls Hydrolysis –Breaks down complex chains of sugar molecules into simple sugars (hexoses and pentoses) Fermentation –Turns simple sugars into liquid fuels using yeast strains Distillation –Concentrates ethanol Use of Lignin –Lignin can be recovered and used for plant heat, to created electricity to power the plant, or passed through thermochemical conversion to produce gasoline or chemicals.

23. Thermochemical Conversion End product is gasoline or diesel Uses heat to decompose the feedstock Gasification –Biomass is dried to less than 20% moisture –Partial combustion of biomass at 700°C in anaerobic conditions produces synthesis gas –Fischer-Tropsch process to produce gasoline and diesel –Requires more cleanup and conditioning to ensure that the gasoline is pure –This problem is made more severe when using biomass.

24. Thermochemical Conversion End product is gasoline or diesel Uses heat to decompose the feedstock Pyrolysis –Partial combustion of biomass at 450°C to 600°C in anaerobic conditions produces bio-oil, which is similar to crude oil. –Bio-oil is refined into gasoline and diesel

25. Technological Uncertainty All of the processes have a high degree of technical uncertainty. While in most cases, it is known that we can produce energy products using the technology, the question is at what cost.

26. Feedstock Supply Biomass supplies for 2 nd generation fuels can come from residues, annual crops, or perennials (switchgrass or miscanthus) Crop residues likely will be the cheapest resources starting around $70/dry ton, but generally higher. Perennials likely will cost $100/dry ton or more. They are produced over 10-15 year periods, so there will be contracting issues to be resolved.

27. Conclusions on Costs Corn Stover –Costs are lower because it is a secondary crop –Management decisions will change costs Switchgrass and miscanthus –As a primary crop, there are higher costs compared to corn stover due to more required inputs and activities Supply –Location! Location! Location! –Supplies must be local Individual producer characteristics and resources will drive decision to produce biomass –Uncertainty in production will lead to plants contracting supply Ways to reduce costs include equipment innovation, yield increases, and more efficient management

28. Cellulose RFS Issues In their February 2010 final ruling, the EPA effectively converted the US RFS from a volumetric to an energy basis. –They interpret the RFS as 36 billion gallons of ethanol equivalent. –This means that a gallon of bio-gasoline or ester biodiesel would count as 1.5 gallons, and a gallon of non ester bio-diesel counts as 1.7 gallons. –If the entire 36 billion gallons were met with bio-gasoline, it would amount to 24 billion physical gallons. The big remaining RFS issue is enforcement uncertainty.

29. Cellulose Biofuel Issues Oil price uncertainty – cellulose biofuels uneconomic below about $120 oil Technological uncertainty – both biochemical and thermochemical processes uncertain RFS implementation uncertainty – multiple off- ramps may render RFS less than iron-clad RFS is now energy based and technology neutral. Raw material supply and contracting

30. Conclusions The RFS is important to the biofuels sector. Because of the blend wall and other issues, the RFS has now come under increased attack. Eliminating the RFS would kill renewable fuel growth, but ethanol could hold its ground in the short run. Cellulosic biofuels and biodiesel are not economic and need the RFS to continue being produced and consumed.

31. Aviation Biofuels Real potential for advancement in this area. –The Navy and the Air Force are keenly interested in making use of biofuels. –On the ground there are other options (PHEVs, CNG, ethanol), but in the air, biofuels is the only fuel option to be greener.

32. Corn Stover  Corn stover is a cellulosic feedstock.  There is an abundance of supply.  Corn stover results in little to no induced land use change.  It is a relatively inexpensive feedstock.

33. Introduction – Fast Pyrolysis  It is a thermal process.  In comparison to other types of pyrolysis, it produces higher yields of liquids.  “Attractive due to versatility, improved efficiency, and environmental acceptability.”

34. Policy Options  Reverse Auction  Competitive Capital Subsidy  Carbon Tax

35. Techno-economic Analysis  Develop economic model with costs for production of corn stover, transport to plant, and conversion to aviation biofuel.  Use economic model to estimate uncertainty in reverse auction, competitive capital subsidy, and carbon tax.  Compare the results to see which policy reduces risk the most while at a lowest cost to the government.

36. ParameterMean Capital Cost ($/MT) 82.83 Feedstock Cost ($/MT) 446.83 Hydrogen Cost (%/Kg) 3.25 Final Yield (%Biomass) 22.97 Uncertainty

37. Sensitivity Analysis Techno-Economic Analysis

38. Bid Price at 25% Probability of Loss with Reverse Auction Case Steady Stochastic Fuel Price Length of Contract Mean Standard Deviation bid price Probability of Loss 5$125,009,046$180,494,175 5.21 25.0% 10$100,413,192$144,923,926 4.16 25.0% 15$84,241,107$121,718,449 3.85 25.0% Increasing Stochastic Fuel Price Length of Contract Mean Standard Deviation bid price Probability of Loss 5$133,611,460$193,509,692 4.31 25.0% 10$108,806,306$155,469,318 3.62 25.0% 15$90,414,961$130,158,226 3.41 25.0% For the steady price and capital subsidy case, the bid prices are 5.44, 4.44, and 4.15.

39. Conclusions Risk is a key determinant of the extent to which the private sector will invest in biofuels. For aviation biofuels, the reverse auction appears to do a much better job of reducing risk than a capital subsidy.

40. Thanks Questions and comments