The Economics of Fuel Ethanol COSTS AND BENEFITS OF A BIOMASSTOETHANOL PRODUCTION INDUSTRY IN CALIFO

1
The Economics of Fuel Ethanol -COSTS AND
BENEFITS OF ABIOMASS-TO-ETHANOL PRODUCTION
INDUSTRY IN CALIFORNIA

• Mike McCormack
• Transportation Technology Office
• California Energy Commission
• at the
• The Oregon Ethanol Forum A Closer Look At Fuel
  Ethanol
• Village River Inn - Eugene Oregon
• May 8, 2001

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Background- Why is California Interested in
Ethanol Production?

• Governors Executive Order in 1999 set a
  phase-out date for MTBE - Dec 31, 2002
• Ethanol - only approved alternate oxygenate for
  use in California gasoline
• 580 to 715 million gallons of ETOH per year
  needed
• Gasoline use growing in California- 300 million
  gpy projected(15.7 billion gpy in 2004)
• Gasoline prices are high - ethanol blending
  economics favorable
• Conditions and economics may be right for
  projects in California
• Why not reduce our dependence on imported
  ethanol?
• Job creation and economic growth potential

3
Background- So, what has happened in the last
two years?

• California Phase 3 gasoline regulations adopted
  in 1999
• California Environmental Policy Council approved
  ethanol as a environmentally acceptable
  alternative to MTBE
• CARB initiated studies (in progress) to deal with
  vehicle/ fuel commingling and permeation issues
• Energy Commission evaluated the feasibility of a
  waste-biomass to ethanol (cellulosic feedstocks)
  in 1999 (Report to Governor)
• potential energy, environmental and economic
  benefits
• favorable ethanol plant/project economics for a
  variety of feedstocks. under the right
  circumstances
• established costs of ethanol delivered to
  California
• challenges and uncertainties identified
• lingering issue - how soon can cellulosic
  technologies be ready?

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Background- Recommendations to Foster
Biomass-to-Ethanol Development in California
(1999 report to the Governor)

• Staff recommended actions in 4 categories
• Policy
• Research, Development, Demonstration
• Market Development and Commercialization
• Further study needs
• Market development recommendation
• Study the most appropriate forms of state
  financial and non-financial assistance to
  encourage technically sound and economically
  feasible biomass-to ethanol projects

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Background- Recommendations Continued (1999
report to the Governor)

• Further study needs recommendation
• Develop a method to determine the cost and public
  benefits associated with developing
  biomass-to-ethanol and biomass-to-other
  transportation fuels industry in California
• Policy Recommendations
• Develop and adopt a biomass-transportation fuels
  energy policy
• Adopt carbon reduction goals
• Adopt fuels diversity goals

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Background- Recommendations Continued (1999
report to the Governor)

• RD D Recommendations
• Pursue joint funding opportunities that support
  demonstrations of several biomass-to-ethanol
  projects in the state
• Develop program to improve collection,
  transportation and processing of cellulosic
  feedstocks
• Initiate advanced engine development projects
  which use biomass transportation fuels

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State Budget Directive FY 2000/01 (Chapter 52)

• Determine the economic costs and benefits of a
  biomass-based ethanol production industry
• Assess the impact on consumer fuel costs from an
  in-state ethanol production industry and from
  imports
• Evaluate the impact on rice straw burning
• Provide recommendations on future steps

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Ethanol Production Scenarios

• Study Assumptions

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Ethanol Production Scenarios

• Economic Assumptions and Inputs
• 20 cent per gallon producer payment
• 10 capital cost over 20 years
• 20 year plant life
• 26 years of ethanol production
• IMPLAN used to calculate impacts on the state
  economy
• 40, 20 and 10 million gpy plants assumed

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Ethanol Supply and Demand
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Biomass-Ethanol Production Scenarios
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California Biomass (Bone Dry Tons) Used in 200
Million Gallon Production
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Assumed Distribution of Biomass Feedstock Supply
Regions

• Cellulosic biomass regions

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Economic Costs and Benefit Impacts Over 20 Year
Plant Life (State Outlay 10 Capital, 0.20 Per
Gallon Producer Payment)
15
Annual Changes in Personal Income - 200 million
gpy Industry (Y2000)
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Major Findings - Economic Impacts
State Cost (Assumed)
Economic


Forest

Air
20 Capital,
0.40/gal
Base Case (10 Capital 0.20/gallon)
No State Cost,
High Ethanol
Price
(1,000)
0
1,000
Personal Income ( million NPV) over 20 years
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Major Findings - Price of Ethanol Delivered to
California
2.20
Near term price with US Ban on MTBE (45 U.S.
facilities)
2.00
1.80
Ethanol Price (/gal)
1.60
Long term price (75 production facilities)
1.40
1.20
1.00
400
600
800
1000
1200
1400
Ethanol Supply ( Million gal/year)
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Major Study Findings

• What are the economic impacts?
• 1 billion over 20-year period, assuming state
  government incentives totaling 500 million for a
  200 million gallon per year industry.
• What is the impact on rice straw burning?
• Rice straw burning in California will be
  curtailed in the near future under current air
  quality regulations.
• Ethanol production would provide rice growers
  with an option to plowing rice straw into the
  ground to meet air quality regulations.

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Major Study Findings

• What are the potential impacts on consumer fuel
  prices?
• Near-term Uncertainty in securing adequate
  supplies of ethanol to meet needs could lead to
  escalating ethanol market prices with resultant
  increase in the cost of gasoline to consumers.
• What are the potential forest and emission
  impacts?
• Reduction in the frequency and intensity of
  forest fires and improved forest health.
• Reduced emissions from wildfires and agricultural
  burning.

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RecommendationsState Investment in Cellulosic
Ethanol

• Because technologies for ethanol production from
  cellulose have not been commercially proven
• The state should co-fund activities to advance
  commercially unproven technologies towards market
  readiness on an accelerated schedule.
• The state should provide technical and financial
  support for one or more biomass-to-ethanol
  production projects to verify technical and
  economic performance of commercial scale
  demonstration facilities.

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RecommendationsState Investment in Cellulosic
Ethanol

• The cost and availability of cellulose feedstocks
  in California for ethanol production remains
  problematic
• The state should fund activities to enhance the
  availability and quality of cellulose resources
  for ethanol production.
• The form and duration of state financial support
  for emerging biomass-to-ethanol markets is
  crucial to the development of an industry capable
  of competing with conventional ethanol
  production
• The legislature should direct an appropriate
  state agency to develop and implement a market
  incentives program to increase the certainty of
  markets for California produced ethanol.

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RecommendationsOther Steps to Foster Cellulosic
Ethanol

• Besides direct financial assistance, California
  can assist the development progress of a
  biomass-to-ethanol industry in other ways.
  California state agencies with biomass-to energy
  related interests should be directed to pursue
  coordinated program activities in order to
  resolve issues and challenges
• Facilitate the communication among stakeholders
  for harvesting of forest materials for ethanol
  feedstock.
• Develop appropriate revisions to state laws
  affecting use of agricultural and municipal waste
  and residues for ethanol feedstocks.
• Siting, permitting and environmental impact
  assessment assistance to prospective biomass
  ethanol projects.

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RecommendationsExploring Opportunities for
Conventional Ethanol Production

• Since cellulosic waste-based ethanol production
  is a technology yet to be proven on a commercial
  scale, conventional ethanol production in
  California based on the use of agricultural
  commodities such as sugar cane, sugar beets, and
  grains/starch such as sorghum could contribute to
  the States ethanol supply needs sooner than a
  waste-based ethanol industry
• The legislature should direct the Energy
  Commission together with the California
  Department of Food and Agriculture to study the
  costs and benefits, assess state resources, and
  determine appropriate forms of state support (if
  needed) for this type of ethanol industry.

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RecommendationsMitigating Consumer Fuel Price
Impacts

• Due to the potential for price increases in
  ethanol imported into California with MTBE
  phase-out in California by December 31, 2002,
  actions are appropriate to reduce impacts on
  consumers fuel costs
• The legislature should direct the Energy
  Commission to explore means to increase the
  states ethanol import options, balance ethanol
  demand growth with available supplies, and limit
  ethanol price fluctuations.

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RecommendationsExamining Other Renewable Fuel
Options

• Californias potential biomass energy
  opportunities include a variety of other
  approaches to producing liquid fuels, other forms
  of energy and co-products from waste and residual
  materials and agricultural commodities
• The state should continue to actively explore
  other technological paths that offer attractive
  means of supplying portions of the states future
  energy needs from renewable biomass resources.

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Summary and Conclusions

• Supply - Hypothetical moderate and aggressive
  ethanol production scenarios fall short of
  ethanol needs for gasoline blending in California
  - even by 2010
• Economics - IMPLAN input/output model shows more
  than a 1 billion return to California over 20
  years (200 million gallons per year industry) and
  creates jobs
• 1600 jobs
• Benefits -Environmental benefits for cellulosic
  biomass are real but calculated benefit (500
  million) is soft

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Summary and Conclusions (continued)

• Cost of ethanol delivered to California
• long term price 1.53 to 1.80 by bidding away
  from other states(62 cent gasoline)
• MTBE ban nationwide moves price for any volume to
  over 2.00 per gallon in the short term
• California production would depress the cost of
  delivered ethanol by 10 cents per gallon(soft
  guess)
• With gasoline price at 1.00 per gallon, ethanol
  command 1.70 to 1.90 per gallon(low to high
  demand) in the long term
• results of the ESAI 1999 study need to be updated
  given plant expansion and new plant construction
  planned

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Summary and Conclusions (concluded)

• Consumer fuel cost
• A 50 cent per gallon ethanol cost swing would add
  about 0.03 per gallon to the cost of gasoline(_at_
  5.7 volume )
• Timeline - First cellulosic plant no sooner than
  2004-2005
• opportunity exists for conventional ethanol from
  agricultural commodities (corn, wheat, sugar
  cane) 2002 -2003?

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For More Information about Biomass-to-Ethanol
Activities...

• Biomass-Ethanol Project Team
• Pat Perez, Fuels Resource Office
• Mike McCormack, Transportation Technology Office
• [phone](Pat) or [phone](Mike)
• [phone] FAX
• pperez_at_energy.state.ca.us mmccorma_at_energy.state.ca
  .us
• or visit our web site at
• www.energy.ca.gov/mtbe/ethanol/