Industrial biofuel use
Key economic characteristics that distinguish industrial biofuel from fossil fuel conversion systems are their general cost structures, scale economies, degree and type of subsidies, foreign exchange impacts, reliance on byproduct credits, and environmental externalities. To highlight major differences, the following discussion is organized around this set of economic and financial characteristics that differentiate the viability of biofuel from fossil fuel systems. Cost composition In Figure 2, a comparison of average costs for different sizes (20-50 MW) of conversion systems shows the relative importance of the major cost components - fuel, non-fuel and capital. Coal, oil-fired thermal and diesel-electric (at a high of $35.00/bbl and a low of $23.00/bbl oil prices) are compared to wood-electric and gasification (at a high of $20.00/ton and a low of $5.00/ton wood prices), zl As can be seen, the typical biofuel cost structure is characterized by low feedstock, variable oil-based conversion systems (but similar to coal-fired plants). The major exceptions are for plantation biofuels - agricultural or wood crops • that have high establishment and transport costs, as shown in the high-priced fuelwood scenarios in Figure 2. In contrast, the typical cost structure for most petroleum (and natural gas) systems, excluding refinery and extraction costs, is characterized by the highest proportion of total costs going to fuel expenditures, a moderate amount to maintenance, but a relatively low percentage to capital costs. Only medium to large coal plants, with similar front-end handling systems, have cost structures comparable to a wood-fired or biomass combustion system. When environmental or emission control technology costs are included, biomass systems are likely to enjoy a comparative advantage over coal systems. As is evident in Figure 2, the primary factor shaping the comparative advantages between these fuels is feedstock costs. Biofuel feedstocks fall into two main cost categories - those that have minimal or zero resource costs, such as captive, on-site waste products found at wood and agro-processing plants; and those that claim a higher market value, such as plantation-based wood and high-value agricultural crops. The dominant economic characteristic of financially competitive biofuel systems is that they almost always depend on feedstocks that are ‘free’ (or nearly so) as valued by the private market. Waste products are competitive with fossil fuels when used on-site, in areas away from a central grid, or densified to reduce unit transport costs in biofuel-scarce countries. 22 For instance, in the recent energy assessment for Thailand more than 91% of rural industrial energy was supplied by biofuels with 52% being byproduct wastes of the industries (Table 4). Sugarcane bagasse and field trash are used widely for thermal production and, more recently, for cogeneration in developing countries. 23 These fuels are particularly attractive when displacing oil for cogeneration. Reliance on animal and human wastes for biogas systems in India and China is another example of feedstocks having zero or negative costs; ie these wastes are free or in fact would impose some disposal or sanitation costs on society if not used for energy. 24 The effects of varying feedstock prices on comparative advantages is readily seen in Figure 2. Large-scale wood combustion or retrofit gasification units are the most financially attractive systems only if low feedstock costs are assumed, as might be the case with waste wood. Quadrupling wood fuel prices up to typical plantation costs of $20/ton (wet weight) results in wood conversion systems that are no longer competitive with oil or coal on a unit cost basis. 25 Given recent low oil prices, the comparative advantage for large-scale systems (over 75MW) may still favour fossil-fuel-based systems in the near term for many developing countries. 26 More will be said about scale economies later. Dependence on low feedstock costs can be both a blessing and curse for some biofuel systems. Low or zero feedstock costs depend upon (a) depressed primary commodity markets, such as those for wood and sugar, (b) few alternative byproduct uses, or (c) an unlimited or on-site resource supply. If alternative markets develop for these resources, their opportunity costs rise. Relative price changes for some biofuels resulted in previously viable systems becoming non-competitive. For example, recently in the Philippines a rapid escalation in charcoal prices due to increasing household and industrial demand caused industries to revert to diesel use from sma!l charcoal-powered gasifiersY In a generic model of dendrothermal plants, Terrado found feedstock prices to be the most sensitive variable affecting the economic viability of these biofuel systems. 28 Severe fuel supply shortages for dendrothermal plants in the Philippines, although primarily the result of poor tree-siting choices, partially led to massive cutbacks for this programme. 2’~ Given that biofuel prices will increase with higher biomass demand unless supplies are expanded, biofuel price volatility should be expected over the long run. Such price uncertainty leads to higher risk being assumed by energy producers. Future biofuel price variability, though, may not differ substantially from fossil fuel price volatility. However, many demand and supply analyses exist for fossil fuels; such financial risks are therefore better understood and more predictable. For large-scale biofuel plants without proven track records, as in the wood and sugar industry, many financial institutions have simply not been willing to carry such risk. For this reason, the public sector has often participated in minimizing the risks or has guaranteed biofuel programmes. Given these general cost relationships between the various fuel supplies, the wisest approach for undertaking industrial biofuel projects in developing countries is initially to harness a country’s under-utilized agro-processing or wood wastes. Such resources, although ultimately limited, should be tapped first for high-quality industrial thermal or cogeneration plants before other intensive biofuel production schemes, such as plantations, are encouraged.