Alcohol Production from Biomass Potential and Prospects in the Developing Countries

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No Alcohol Production from Biomass Potential and Prospects in the Developing Countries June 4, 1980 Industrial Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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3 FOR OFFICIAL USE ONLY PRINCIPAL ABBREVIATIONS AND ACRONYMS USED API - American Petroleum Institute CR - Compression Ratio c.i.f. - Cost, Insurance and Freight EEC - Europian Economic Community F.O.B. - Free on Board LDPE - Low Density Polyethylene MON - Motor Octane Number NER - Net Energy Ratio PVC - Polyvinyl Chloride RON - Research Octane Number SRI - Stanford Research Institute STI - Secretariate of Industrial Technology This document has a restricte distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 ALCOHOL PRODUCTION FROM BIOMASS POTENTIAL AND PROSPECTS IN THE DEVELOPING COUNTRIES Page No. SUMMARY AND CONCLUSIONS i-xi I. INTRODUCTION II. ETHANOL CHARACTERISTICS A. Physical/Chemical Properties B. Energy Content of Ethanol III. CURRENT AND POTENTIAL USES A. Ethanol Use as Boiler Fuel B. Ethanol Use as Gasoline Substitute C. Ethanol Use as Diesel Substitute D. Ethanol Use in Chemical Industry IV. HISTORIC PRODUCTION AND CONSUMPTION OF ETHANOL A. World Ethanol Production B. Historical Ethanol Consumption C. Recent Ethanol Prices V. BIOMASS RAW MATERIALS FOR ETHANOL PRODUCTION A. Sugars B. Starches C. Celluloses VI. ETHANOL PRODUCTION TECHNOLOGY A. Current Technology B. Technology Development C. Environmental Impact D. Surplus Bagasse E. Energy Balance for Ethanol Production This report was prepared by Messrs. Harinder Kohli, Donald Brown, Pierre Larroque, N.C. Krishnamurthy and Rakesh Bhan of the Industrial Projects Department, and T. James Goering of the Agriculture and Rural Development Department.

6 Page No. VII. CAPITAL COSTS OF ALCOHOL PLANTS A. Sugarcane-Based Plants B. Molasses-Based Plants C. Cassava/Corn-Based Plants D. Economies of Scale VIII. ECONOMICS OF ETHANOL PRODUCTION AND USE A. General Approach B. Economics of Ethanol as Gasoline Blend C. Economics of Ethanol for Chemical Applications D. Employment Impact IX. PROSPECTS FOR ALCOHOL PRODUCTION IN DEVELOPING COUNTRIES A. Agricultural/Energy Self-Sufficiency B. Economic Parameters C. Potential Countries X. POLICY ISSUES RELATED TO ALCOHOL PRODUCTION IN THE DEVELOPING COUNTRIES A. Competition between Food and Energy Crops B. Need for Integrated Alcohol Systems C. Need for National Alcohol Program Policies XI. PROPOSED BANK ROLE Annex Economics of Ethanol Production from Sugarcane, Molasses, Cassava and Corn

7 ALCOHOL PRODUCTION FROM BIOMASS POTENTIAL AND PROSPECTS IN THE DEVELOPING COUNTRIES SUMMARY AND CONCLUSIONS i. Biomass ethanol is the major renewable energy source which offers immediate prospects of providing a premium liquid fuel based on domestic resources to partially substitute for petroleum products in selected developing countries. Forestry products and hydroelectric power, the other renewable major energy sources, are most suited to produce other non-liquid forms of energy. Ethanol use as a substitute for the lighter petroleum products (such as gasoline, diesel and naphtha) would complement efforts to promote coal, wood and hydroelectric power as substitutes to heavier petroleum products (fuel oils) thus permitting the theoretical replacement of the major parts of the petroleum barrel. The basic technology for producing ethanol from a number of biomass raw materials is well known and is appropriate for easy transfer to most developing countries, even though many technical improvements are currently being developed to enhance its economics. Ethanol production requires medium scale industrial units located in rural areas and can become an important additional source of permanent rural employment at a relatively low cost. In addition, alcohol production can offer markets for surplus agricultural production, stabilize rural incomes, and help stem the migration of rural population to the urban centers. ii. Despite these attractions, biomass ethanol production cannot offer a general solution to the energy problems of the developing countries. In the immediate future, practical difficulties in creating successful agroindustry-energy systems would most likely limit the economic production of alcohol production on a large scale, except in a few countries such as Brazil and the US. More importantly, over the medium term, availability of sufficient agricultural land would be the constraint to any large substitution of petroleum on a worldwide scale. Even if the entire current world production of molasses, sugarcane, corn and sweet sorghum, for which commercially proven fermentation technology is available, were converted, the total ethanol production would substitute for only about 6-7% of the total current world oil consumption or about 20% of total gasoline consumption. These prospects would improve if the yields of energy crops are substantially increased and new technologies are developed for the economic conversion of cellulosic materials, but these developments are unlikely to have any major impact during the next 5-15 years. Still, ethanol production in individual countries, particularly those with a substantial agricultural base, could lead to significant savings in their petroleum imports. iii. Two different types of alcohol are of main interest, ethyl alcohol (ethanol) and methyl alcohol (methanol), both of which can be produced either from hydrocarbon (petroleum/gas) products or from biomass. Because of technological constraints concerning methanol production and use, and because the biomass raw material base of most petroleum-deficit developing countries is likely to be more suitable for ethanol (rather than methanol) production,

8 - ii - ethanol is considered as the alcohol of most immediate interest to the developing countries. This report, therefore, discusses primarily the potential and prospects of ethanol production from biomass in these countries. iv. Ethanol, an organic chemical, currently has three main applications: (a) as a potable alcoholic beverage; (b) as an intermediate chemical; and (c) as a feedstock for the production of other chemical materials. In the last two applications, fermentation (biomass) ethanol had been steadily losing ground to cheaper petroleum-based substitutes including synthetic ethanol. Until the beginning of this century, ethanol was also considered as an attractive automobile fuel. Chemical applications constitute still the largest use of ethanol worldwide. Ethanol is a versatile speciality chemical, which technically can be used for a wide variety of applications both as an intermediate chemical and as a raw material for the production of other chemical products. It is in this latter use that ethanol has, until recently, been steadily substituted by the cheaper petroleum-based derivatives, such as ethylene. For use as an intermediate chemical, ethanol has actually been also produced synthetically from petroleum derivatives (synthetic ethanol). The main direct use of ethanol (apart from beverage use) is as a solvent, in the production of toiletries and cosmetics, detergents and disinfectants, food and drugs processing, surface coating, and pharmaceuticals. Ethanol is also being, used for the production of many small volume chemical products. However, since ethylene is the basic building block in the petrochemical industry, any large-scale substitution of petroleum products in the industry by fermentation ethanol is dependent on ethanol-derived ethylene becoming competitive with naphtha or ethane derived ethylene. v. With the more than ten-fold increase in petroleum prices during the last decade, biomass-based ethanol is again being considered for a number of applications it had previously yielded to petroleum products. As a petroleum substitute, biomass-based ethanol has four possible major applications as: (a) boiler fuel to substitute for fuel oil or other fuels; (b) gasoline substitute; (c) diesel substitute; and (d) chemical product or feedstock. Basically, the use of ethanol as boiler fuel does not exploit its potential as a superior liquid fuel, while as a diesel substitute ethanol suffers from serious technical drawbacks. On the other hand, its unique physical/chemical properties increase ethanol's value, beyond its heating value, as gasoline substitute and as a chemical feedstock. vi. Ethanol use as a gasoline blend and/or substitute for gasoline has drawn the most attention both because it can directly substitute for a premium petroleum product used on a large scale worldwide and because this application can take advantage of its many physical/chemical characteristics. When used in an internal combustion engine as a gasoline blend or substitute, ethanol significantly changes combustion efficiency and also results in changes in octane rating and other engine performance characteristics such as starting, carburetion and emissions. Ethanol can be used as automobile fuel either as "gasohol," in which case anhydrous (99.8%) ethanol is mixed with gasoline up to a 20% ratio, or as hydrous or straight alcohol, in which case hydrated (94% purity) ethanol is used straight. The economic value of alcohol as gasoline additive is about 15-20% higher than as a straight gasoline substitute.

9 - iii - vii. Ethanol can be produced from three main types of biomass raw materials: (a) sugar bearing materials (such as sugarcane, molasses, sweet sorghum, etc.) which contain carbohydrates in sugar form; (b) starches (such as cassava, corn, babassu mesocarp, potatoes, etc.), which contain carbohydrates in starch form; and (c) celluloses (such as wood, agricultural residues, CLc.) whose carbohydrate form is more complex. Production of ethanol from these materials includes, except in the case of sugars, three stages: first, conversion of carbohydrates into water soluble sugars, then fermentation of these sugars into ethanol, and finally separation of ethanol from water and other fermentation products by distillation. viii. The main attractions of sugar bearing raw materials for alcohol production lie in the fact that their carbohydrate content is already in the fermentable, simpler sugar form and that they also produce their own source of fuel in the form of bagasse. Starches contain carbohydrates of greater molecular complexity, which have to be broken down to simpler sugars by a saccharification process, which adds another process step and increases the capital and operating costs. In addition, value of the carbohydrates in corn is higher than the carbohydrates of, for example, molasses, and both corn and cassava (the two starch materials of most interest) require an outside source of fuel. Carbohydrates in the cellulosic materials have an even greater molecular complexity and have to be converted to fermentable sugars by the more complex acid hydrolysis process, which also has a lower overall carbohydrate-to-alcohol conversion efficiency. ix. The table below shows ethanol yield per ton of the major potential biomass raw materials, as well as estimated ethanol yield per hectare of land for average developing country situations. Ethanol Yields of Main Biomass Raw Materials Biomass Ethanol Yield Biomass Yield Overall Raw Material Per Ton of Biomass Per Ha of Land Ethanol Yield (Liters/ton) (ton/ha) (Liters/ha/yr) Molasses 270 n.a. n.a. Sugarcane ,500 Cassava ,160 Sweet Sorghum ,010 Sweet Potatoes ,875 Babassu Corn ,220 Wood ,200 x. The basic technology for ethanol production from sugar and starch raw materials is well known. In sugarcane-based plants, which are simplest in design, the cane is washed and crushed, and filtered to separate the cellulose ("bagasse") from sugar juice. Bagasse is dried and burned to generate steam and power. The sugar juice is concentrated and sterilized and then fermented in a batch fermentation system with yeast. Ethanol is separated from the fermentation solids and the bulk of the water in the

10 - iv % alcohol solution by stripping and distillation by batch process. The waste stream, called stillage, contains about 1-2% fertilizer nutrients, which must be disposed of properly to avoid potential environmental problems. The basic process for other sugar materials is the same. Starch-based plants are similar in design, but have an extra processing step at the front end to break down the starch into fermentable sugar. Furthermore, since cassava roots and corn contain virtually no cellulose, there is no "bagasse" formed and the energy requirements for these plants, which are slightly higher than for a sugarcane-based plants because of the extra processing step, must be supplied from external sources. In general, processes involved in alcohol production from celluloses are more complex and larger scale than those from sugars and starches. There are also no demonstrated processes available yet for commercial scale plants in developing countries. However, considerable development work is underway in many countries and it is possible that during the next decade cellulosic materials can become an important biomass source of alcohol. xi. Until recently, alcohol production from biomass was based on old technology since the demand for ethanol for potable and chemical uses was not very sensitive to processing costs. Therefore, process and equipment design have not benefited from the recent advances in the design and engineering of other chemical plants. However, with the increasing interest in ethanol as a fuel, a large number of major engineering companies, equipment manufacturers and other parties have initiated efforts to improve the technology base and design of alcohol plants to improve their efficiency. Most of these efforts have focused on four major areas: (a) development of continuous fermentation technology to yield higher alcohol concentration (up to 12% alcohol content liquor instead of the 8-10% currently possible). Additional microbiological research and development work is underway on improving the yeast strains to yield still higher alcohol concentration in the fermentation step. This improved technology should ultimately result in substantial reductions in energy requirements for ethanol production; (b) improvement of the energy efficiency of ethanol production through more efficient distillation and heat recovery design, using engineering concepts commercially proven in other chemical industries; (c) utilization of agricultural wastes for feedstock and/or fuel purposes. A major constraint in cassava and corn utilizations is the need for an external fuel source. Agricultural waste products could be used for fuel in modified boiler designs; and (d) development of alternative energy crops to reduce reliance on sugar-based biomass. Typical crops would be sweet sorghum, wood, babassu and other crops which produce a high yield of starch or sugar per hectare and also produce a usable cellulose component for fuel.

11 xii. Practically all existing biomass-based alcohol plants based on sugarcane and molasses, are relatively small in size (60, ,000 liters/ day) and employ old plant designs which are not very efficient, particularly in their energy balance. Except in the case of Brazil, there is also lack of actual experience with the construction of a large number of plants of different sizes and at different locations. The uncertainty is even greater for other raw materials such as wood and cassava, since there is practically no industrial scale experience with such plants. In addition to considerable industrial development and demonstration work necessary to improve the processing efficiency, significant development effort is also needed in the agricultural area to improve crop yields, develop optimum crop rotation patterns and convert some existing subsistence crops (e.g., cassava, babassu) into commercial energy crops. xiii. Based on data submitted by a number of engineering firms, contractors and consultants for planned or potential projects in the US, Africa, Asia and Latin America, and the information collected by a recent Bank mission to Brazil, staff have developed a rough comparison of key parameters of alcohol production from different biomass materials shown in the table on the following page. xiv. The economics of biomass ethanol production and use depend on a number of complex factors, some of which are difficult to quantify. The specific factors that complicate the economic analysis include: (a) ethanol can potentially be produced by a large number of biomass materials, most of which have not yet been tried on a commercial scale; (b) economic cost of biomass materials is very country specific, depending on land availability and quality, agricultural productivity, labor costs, etc.; (c) existing ethanol production technology was developed for applications where cost of production and energy consumption were not important, and efforts to develop technology suitable for large-scale ethanol production have only recently started; (d) limited actual experience is available outside of Brazil on ethanol plant construction and operation; (e) ethanol production costs depend on the plant location, size and technology, all of which vary a great deal between countries; (f) economic value of ethanol varies substantially between various applications and only limited data is available on large-scale ethanol use; (g) economic price of gasoline and ethylene (the two major petroleum products ethanol can substitute) in individual countries would depend not only on the future petroleum prices, which are uncertain, but also on domestic refining and chemical industry characteristics; and (h) most countries consider substitution of imported petroleum energy by domestic resources of substantial strategic value, which while a legitimate factor, is difficult to quantify. Economics of ethanol production and use, therefore, are very country and project specific. xv. This report analyzes the economics of alcohol production in 'standardized' plants operating under parameters that simulate the conditions expected to prevail in different countries. While this analysis cannot substitute for the country (and project) specific analyses, which must be undertaken to determine merits of large-scale ethanol production in individual countries, it has identified broad parameters which can be used to select countries and situations where further in-depth reviews appear justified. The results of the analyses are illustrated in a series of charts included in the report and briefly summarized below.

12 - vi - KEY PARAMETERS OF ETHANOL PRODUCTION FROM DIFFERENT BIOMASS MATERIALS Unit Molasses Sugarcane Cassava`/ Corn a A. YIELDS Ethanol Yield/ton of Biomass liters/ton Biomass Yield/ha of Land b/ tons/ha n.a Ethanol Yield/ha of Land liters/ha n.a. 3,500 2,160 2,220 B. PROCESSING PLANTS Economic Plant Size Range liters/day , , , ,000 Number of Operating Days days/year Annual Production in 120,000 liters/day Plant: - million liters/year million US gallons/year tons/year 17,100 17,100 26,100 26,100 Installed Cost of 120,000 liters/day Plant in: / - Low Cost Countries - / US$millions Medium Cost Countries c/ US$millions High Cost Countries c US$millions C. ECONOMICS AS GASOLINE ADDITIVE Ex-Plant Biomass Raw Material Cost for 10% ERR d/ - At US$31/bbl FOB Crude e/ US$/ton neg. - At US$35/bbl FOB Crude e/ USS/ton At US$43/bbl FOB Crude e/ US$/ton Ex-Plant Biomass Raw Material Cost for 8% ERR d/ - At US$31/bbl FOB Crude e US$/ton neg. - At US$35/bbl FOB Crude e/ US$/ton At US$43/bbl FOB Crude e/ US$/ton f a/ Based on current designs and fuel oil as fuel source. b/ Based on current average yields in Brazil, except for corn which is based on US average. c/ Low cost country data for sugarcane plants based on Brazil costs, others on data supplied by various sources and extrapolations by Bank staff. All costs in late-1979 Dollars. d/ For medium cost countries. e! Assuming ethanol value equal to that of gasoline in volume terms. Gasoline price assumed as 1.3 times that of ex-refinery light Arabian Crude price, by volume; this relationship assumed to go down with increased crude prices. Crude price assumed to increase at 3% p.a. in real terms, gasoline price at 2.5% p.a., and raw material cost at 1.0% p.a. f/ For corn US$/bushel. One bushel weighs 56 lbs. One ton equivalent to 39.4 bushels. Industrial Projects Department May 1980

13 - vii - xvi. In the "medium capital cost countries", 1/ sugarcane-based ethanol production is likely to be economic at the present oil price levels of about US$31/bbl f.o.b. Arabian Gulf (roughly equivalent to an ex-refinery gasoline price of about US$0.27/liter or US$1.00/US gallon) provided the economic cost of sugarcane at the factory gate is less than about US$14/ton. Sugarcane production costs in many relatively efficient sugar producing countries (such as Brazil, South Africa, and the Philippines) are considered to be below this level. Sugarcane opportunity value corresponding to the Bank's long-term sugar price projection of US$0.16/lb is about US$17/ton. The economic viability is most sensitive to the assumption about the economic price of gasoline and its future increases and to the cost of raw material. The economics of ethanol production from sugarcane are also sensitive to the capital cost of ethanol capacity, which is determined by (a) the installed plant costs of the alcohol distillery, (b) number of operating days per year, and (c) economies of scale. xvii. Regarding production from other biomass raw materials, ethanol production from molasses with bagasse as the fuel source (in a medium investment cost country) is likely to be economic at present petroleum prices in case the economic cost of molasses is less than about US$60/ton at the plant. However, in case fuel oil (or some other high value fuel) is used in the distillery instead of bagasse because of inefficiencies in plant operations, the economics of ethanol production become significantly less attractive. Cassava and corn-based ethanol plants are less attractive compared to sugarcane and molasses, due to their need to purchase an outside source of energy and their higher capital cost. To compensate for these drawbacks, these plants must obtain their raw materials at a relatively low cost; delivered cost of cassava would need to be below about US$13/ton and of corn less than about US$1/bushel for plants based on currently available technology and a petroleum fuel source. All these numbers must be treated as broad orders of magnitude, since as mentioned, the economics of ethanol production are very country and project specific. While over the long term, ethanol production from wood offers considerable promise, significant technology development efforts are required before wood becomes an economic source of liquid energy. xviii. The general prospects for alcohol production from biomass in the developing countries can tentatively be assessed by first identifying the countries which offer an agricultural/energy balance which would give impetus to the consideration of a biomass energy program, and then locating amongst them those countries that offer the economic parameters which are likely to make alcohol production economically attractive. The developing countries with surplus agricultural production but an energy deficit are likely to have the strongest will to develop large biomass energy programs to reduce their dependence on imported energy, and most of the countries with viable alcohol programs are likely to belong to this group. Many of the large developing countries, however, are net importers of both agricultural products and energy. The lack of adequate agricultural production is normally related to scarcity of agricultural resources and would be reflected in higher economic cost of biomass raw materials. In most of these countries, therefore, ethanol production is likely to be attractive only if based on surplus biomass material such as molasses and agricultural crop residues (or sugarcane during periods of world sugar surpluses.) 1/ See Item B in table on page vi.

14 - viii - xix. The relative economic merits of alcohol production in the potential countries will vary depending on the specific economic parameters of their agricultural, industry and energy sectors, the most critical of which are: (a) Cropping Pattern: Countries with existing large-scale and/or surplus production of sugarcane and molasses are more likely to have alcohol programs than countries where the agricultural production is oriented towards crops like wheat, corn, coffee, tea, or soybean. (b) Economic Cost of Biomass raw materials production. Countries with surplus and/or low cost biomass materials are attractive candidates for alcohol programs. Relatively cost efficient sugarcane and cassava producers are also likely to find ethanol production for gasoline blend use economic. (c) Plant Capital Costs: Countries with extensive experience in industrial plants, large domestic markets for equipment manufacturing and relatively low labor costs are likely to have much lower investment costs and therefore more economic alcohol production, than countries with infant industrial sectors that rely heavily on imported equipment and expatriate assistance in plant construction and operations; (d) Distribution Costs: Landlocked countries or remote regions with limited infrastructure, where the economic value of gasoline substitution is very high, may justify some ethanol production even when the raw materials and/or plant costs are high; and (e) Fuel Source: For ethanol production based on non-sugarcane biomass, availability of low cost, non-petroleum fuel source (e.g., wood, cheap coal) is important. xl. Biomass ethanol production can generate a large number of iobs, primarily in the rural areas, at a relatively low cost. For example, it is estimated that the additional direct employment to be created by Brazil's alcohol program between will total about 450,000 at an investment cost per job created of about US$10,000. While the actual number of new jobs that can be created by potential alcohol production in most other countries would be a fraction of this number and the cost per job would be different, biomass alcohol production does offer an attractive opportunity for increasing rural employment. xli. The possibility of large scale biomass alcohol production has posed the question of whether, and to what extent, such a development is likely to increase competition for land and other agricultural resources which would otherwise produce food or other products. The issue is complex and sometime emotional, involving as it does economic, political and social considerations.

15 - ix - It is most usefully discussed within the context of particular countries. Basic considerations in assessing the extent of future competition for agricultural resources are the relative price movements for energy and food. On a global basis, a sharper increase in energy prices than in food or most other agricultural products is plausible, at least over the next decade. Assuming this occurs, the potential land use conflict between food, export and energy crops will increase as economic forces increasingly tend to draw agricultural resources into energy production. Biomass energy production would require difficult choices and priorities cannot always be determined by strict economic criteria. Biomass energy policy also raises important questions of both income generation and distribution since it would frequently affect large numbers of low-income people. xlii. The potential land use conflict may be more imagined than real in countries where abundant agricultural resources exist and new land can be brought into production at reasonable cost. Elsewhere, proper government policies may reduce possible competition between energy cropping and production of food and other agricultural commodities. These policies should attempt to reduce the economic cost/value of the raw material used in biomass energy production. The soundest long-term approach to deal with the issue of potential conflict in land use between energy and food crops is likely to be to promote the use of raw materials, such as wood and cassava, which can be grown on lands not generally suitable for agricultural production. For example, in semi-arid areas with high production risk for most commercial crops, it may be possible to grow cassava as an energy crop. Such efforts will require a carefully focused and sustained research and development effort in individual countries. Support of this type of research, involving both biomass production and utilization, should be a part of all development programs for biomass energy. xliii. Alcohol production from biomass would require close coordination between the industry, agricultural, energy and transportation sectors. Generally, in most countries the petroleum, industry and agricultural sectors would have somewhat conflicting interests in the fuel alcohol question. The petroleum sector, responsible for alcohol blending and distribution, requires high quality alcohol, is reluctant to change the refinery mix, prefers equal and assured monthly supplies, and wants a low price for alcohol. The alcohol industry sector, on the other hand, would want a higher price for alcohol, low alcohol quality to reduce costs, assured alcohol markets and raw material supplies, and alcohol shipments that match its short production season to reduce inventory and investment costs. The agricultural sector would prefer high prices and guaranteed markets for its output, and, over the long term, the right to shift to other crops should changed circumstances make it more profitable to do so. Successful alcohol projects will involve a close association of agricultural systems, alcohol production and assured markets in the energy sector linked by a reliable raw material collection and alcohol distribution network. Alcohol plants, therefore, cannot be viewed in isolation and must be designed and appraised as part of an integrated alcohol system. This will not only minimize the risks associated with alcohol projects, but would also allow the projects to be designed after considering local or regional factors.

16 - x - xliv. While promoting alcohol production, strong and complementary government policies will be essential to accommodate the above mentioned different and often conflicting needs of various sectors of the economy involved. The main areas needing government policy actions would include: (a) active promotion of ethanol use for gasoline blend (or other economic applications), through demonstration projects and agreements with the automobile and chemical industry; (b) development of energy efficient ethanol plant designs, including through provision of government financing support; (c) promotion of alcohol production by guaranteeing offtake and facilitating assured raw material supplies; (d) encouraging production of biomass raw materials by offering appropriate incentives and providing necessary agricultural research, extension and credit facilities, and (e) designing a cohesive pricing system for the energy/industry/agricultural alcohol system to overcome typical large distortions in the agricultural and energy pricing, and to provide financial incentives to promote production of alcohol as a petroleum substitute. xlv. The most appropriate mechanism for arriving at appropriate policy decisions and extending the above incentives would be to develop a comprehensive national alcohol program, with adequate representation from all government and private sector bodies involved. It is essential that each national alcohol program be conceived and evaluated in the context of overall national development policy and objectives, and that the Bank Group appraise and support individual alcohol projects in the context of such overall policies. xlvi. The Bank can play an important role in assisting the developing countries in: (a) evaluating the potential, prospects and viability of alcohol production; (b) developing policies necessary to prudently exploit this potential where justified; (c) designing national alcohol programs; (d) transferring appropriate technology through financing of these programs; and (e) formulating and strengthening institutions and organizations responsible for this activity. Our initial work so far in a number of countries indicates that assistance from agencies such as the Bank is urgently needed in these crucial areas to allow the developing countries, either with surplus biomass raw materials or with large biomass production potential, to quickly and efficiently develop this renewable energy source. xlvii. A decision by the Bank at this time actively to support economically justified alcohol programs will help draw attention of policy makers in the developing countries to the potential (and limitations) of alcohol production from biomass. It also could be expected to have a catalytic effect on other financing sources; and even if active Bank support is limited to alcohol programs in a few selected countries, it may encourage exploitation of this potential in a larger number of countries. The Bank can also facilitate transfer of experience with alcohol programs among its member countries. Finally, Bank support of alcohol production programs based on biomass is consistent with its efforts to promote development of non-conventional and renewable sources of energy. This new area of activity will complement increased Bank lending for the development of conventional energy sources such as petroleum, gas, coal and hydro-power.

17 - xi - xlviii. Considering the complexity of factors that determine the economics of alcohol production in individual countries, the difficult economic and social trade-offs required and the lack of experience with large-scale alcohol programs outside of Brazil, a cautious, though constructive, approach is proposed for the Bank's involvement in this new area of activity. It is important that while the Bank encourages prudent development of this new energy source, it should not unduly raise expectations about the potential of alcohol production. Thus, in its work, the Bank must emphasize both the potential and limitations of alcohol production from biomass in helping to meet the liquid energy needs of the developing countries.

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19 ALCOHOL PRODUCTION FROM BIOMASS POTENTIAL AND PROSPECTS IN THE DEVELOPING COUNTRIES I. INTRODUCTION 1.01 Alcohol production from biomass has been undertaken by man for at least 2,000 years, when Egyptians produced it for potable purposes. At the time of introduction of automobiles on a commercial scale towards the end of the last century, alcohol was initially considered as an obvious fuel. Alcohol from biomass was also a key raw material source for chemical production well into this century. However, with the large discoveries of petroleum sources and the steady decline in the delivered cost of petroleum products until the beginning of last decade, biomass source alcohol lost markets to petroleum-based products such as gasoline, diesel, naphtha, fuel oil and ethylene. However, the ten-fold increase in petroleum prices during the last decade and the increasing concerns about the adequacy of future petroleum supplies have resulted in renewed interest in alcohol production from biomass sources. This renewed interest is based both on economic and strategic reasons Biomass-based alcohol is the major renewable energy source which offers immediate prospects of substituting at least partially petroleum products, by providing a premium, liquid fuel. By substituting lighter petroleum products (such as gasoline, diesel and naphtha), alcohol use would complement efforts to promote coal and hydroelectric power as substitutes to heavier petroleum products (fuel oils) thus permitting, at least theoretically, the replacement of the complete petroleum barrel. The basic technology for producing alcohol is well known and can be transferred easily to most developing countries, though technical improvements are desirable and feasible in many areas to further enhance its economics. Alcohol production involves medium-scale units which need to be located in rural areas and can become a major source of additional jobs in the rural sector at a relatively low cost. Under certain circumstances, alcohol production could offer markets for surplus agricultural production and help stabilize rural income. However, economics of alcohol production and consumption even at the current petroleum prices are heavily dependent on the specific situation of the agriculture, industry and energy sectors of individual countries. Large scale alcohol production would also involve difficult trade-offs between food and energy crop production in most countries Two different types of alcohol are of main interest, ethyl alcohol (ethanol) and methyl alcohol (methanol), both of which can be produced either from hydrocarbon (petroleum/gas) products or from biomass. Ethanol can be produced from a wide variety of biomass material (sugars, starches and celluloses), its production technology is proven, widely available and simple, it has a wide range of potential applications as a chemical feedstock, and its use as a gasoline blend or substitute poses no serious technical or environmental issues. The technical capability to produce methanol from wood, though demonstrated, is less developed, and from the gasification of other biomass materials not yet commercially demonstrated. Methanol also has a more limited

20 - 2 - application as a chemical raw material than ethanol, and it presents some technical and environmental problems as an automobile fuel since it is toxic. For these technical reasons and because the biomass raw material base of most petroleum-deficit developing countries is likely to be more suitable for ethanol production, ethanol is considered as the alcohol of most immediate interest to the developing countries. This paper, therefore, discusses primarily the potential and prospects of ethanol production from biomass in these countries The paper is based on the findings of Bank staff work on the subject during the past 18 months, which included a review of the Brazilian National Alcohol Program and a 12-country study carried out by outside consultants. The next six chapters (Chapters II-VII) of the report are of technical nature and discuss the physical and chemical characteristics of ethanol, its energy content, current and potential uses in the transportation, industry and energy sectors, historic production and consumption pattern, present and potential raw material sources, production technology and expected costs of alcohol plants. Chapter VIII discusses the economics of ethanol production and use, and identifies key variables which determine economics of ethanol production under plausible cost and price relationships. Chapter IX reviews the prospects of ethanol production in developing countries, and suggests a tentative profile of countries where economics of ethanol production appear to be promising enough to justify undertaking further in-depth reviews. The major issues which would need careful consideration while designing National Alcohol Programs in developing countries are briefly discussed in Chapter X. Finally, Chapter XI discusses the potential role of the Bank Group in promoting prudent development of this renewable energy source Because of the rapidly changing nature of the world petroleum situation, any analysis of the economics of alternative energy sources carries an element of uncertainty. The likelihood of major improvements in alcohol production technology also cannot be ruled out for the medium term. This paper must, therefore, be regarded as of indicative nature. The feasibility of any particular alcohol project at a given time can only be determined by a careful country and project specific appraisal. II. ETHANOL CHARACTERISTICS A. Physical/Chemical Properties 2.01 Ethanol is an organic chemical, with common uses as a solvent, in medicine and for drinking purposes. It can also be used as a fuel but is generally less efficient than hydrocarbon fuel sources (except as noted in para 3.05). Main physical and chemical properties of ethanol are compared with methanol, gasoline, diesel, and fuel oil in the table on the following page:

21 - 3 - Main Physical/Chemical Properties of Ethanol and Hydrocarbon Fuels Property Ethanol Methanol Gasoline Diesel Fuel Oil Formula CH3CH2OH CH30H C4 to C12 C14 to C9 C20+ Hydrocarbons Hydrocarbons Hydrocarbons Molecular weight avg. 240 avg. - Composition (weight percent) Carbon Hydrocarbon Oxygen Neg. Neg. Neg. Specific gravity Boiling temperature, C Flash point, C Autoignition temperature, C F Flammability limits (volume %) Lower Higher Octane Number (Research) NA (Motor) NA Cetane Number 0-5 NA NA Solubility in water Infinite Infinite NA - Not applicable. Source: American Petroleum Institute (API) Ethanol is completely soluble in gasoline, diesel or fuel oil, provided that no water is present in the system. If water is added, the alcohol preferentially absorbs the water and separates into two phases, which makes the mixture useless as automotive fuel. Although anhydrous (99.8% purity) ethanol is completely miscible with gasoline at normal temperatures, ethanol is extracted by contact with small amounts of water, separating into an upper gasoline-rich phase and a lower alcohol-rich phase. The alcohol-water phase would stall car engines and is corrosive to normal engine parts. Since gasoline storage systems normally contain some water, "gasohol" blending and distribution require strict quality control to minimize water introduction and blending as close to final consumer as possible to minimize water separation problems The properties affecting automotive combustion efficiency (calorific value, flash point, vapor pressure, autoignition, flammability limits, and octane rating) are substantially different for ethanol compared to hydrocarbon fuels. Analysis of this subject is complex and has been studied in detail by a number of researchers 1/. In general, ethanol mixes and combusts 1/ Typical references are: (a) API publication No. 4261, July 1976; (b) C. B. Pullman, University of Santa Clara, November 1979; (c) J. L. Keller, Union Oil Company, November 1979; and (d) Brinkman, et al, (vs) Society of Automotive Engineers, February 1975.

22 - 4 - well with gasoline in internal combustion (or otto-cycle) engines. The combustion properties of diesel are substantially different from gasoline or ethanol, and ethanol cannot be used as a diesel substitute without other additives (para 3.11). B. Energy Content of Ethanol 2.04 Heats of combustion of several common fuels are shown below: Calorific Values of Common Fuels Btu/lb kcal/kg kcal/l Gasoline 18,900 10,500 7,700 Diesel 18,500 10,280 8,738 Fuel Oil (No. 6) 17,200 9,560 8,795 Ethanol 11,500 6,390 5,048 Methanol 8,570 4,760 3,790 Coal (typical low ash) 8-10,000 4,440-5, The economic value of a fuel is a function of (i) the calorific value of that fuel; (ii) efficiency of combustion system; and (iii) various other properties, such as environmental impact and ease of use, that vary with application. The impact of these three factors on ethanol's economic value as fuel is different for different applications, as discussed in the next Chapter. III. CURRENT AND POTENTIAL USES 3.01 Ethanol currently has three main applications: (i) as a potable alcoholic beverage (e.g., vodka, gin); (ii) as an intermediate chemical (for use in toiletries, cosmetics, pharmaceuticals, etc.); and (iii) as a feedstock for the production of other chemical materials (e.g., acetaldehyde). In the last two applications, fermentation (biomass) ethanol had been steadily losing ground to cheaper petroleum-based substitutes including synthetic ethanol (Chapter IV). Until the beginning of this century, ethanol was also considered as an attractive automobile fuel. With the more than ten-fold increase in petroleum prices during the last decade, biomass-based ethanol is again being considered for a number of applications it previously yielded to petroleum products. As a petroleum substitute, biomass-based ethanol has four possible major applications as: (a) boiler fuel to substitute for fuel oil or other fuels; (b) gasoline substitute; (c) diesel substitute; and chemical product or feedstock. The technical aspects which determine the feasibility and merits of these applications are discussed below, while the economics of these applications, as noted previously, are reviewed in Chapter VIII. Basically, the use of ethanol as boiler fuel does not exploit its potential as a superior liquid fuel, while as a diesel substitute ethanol suffers from serious technical drawbacks. On the other hand, its unique physical/chemical properties increase ethanol's value, beyond its heating value, as a chemical feedstock and as gasoline substitute.

23 - 5- A. Ethanol Use as Boiler Fuel 3.02 Ethanol, in a direct combustion use such as boiler fuel, would substitute for fuel oil in a direct ratio of their calorific values. This application does not take advantage of its other chemical/physical characteristics. Thus, ethanol's energy value as a boiler fuel is about 66% of the fuel oil value by weight or 57% by volume. Boiler combustion efficiency is virtually 100% with overall thermal efficiency in the range of 75-85%. This application, while technically the easiest, is unlikely to prove economic in the near future as discussed later. B. Ethanol Use as Gasoline Substitute 3.03 Ethanol use as a gasoline blend and/or substitute has drawn the most attention both because it can directly substitute for a premium petroleum product used on a large scale worldwide and because this application can take advantage of ethanol's many physical/chemical characteristics. When used in an internal combustion engine as a gasoline blend or substitute, ethanol significantly improves combustion efficiency and octane rating, and also results in changes in other engine performance characteristics such as starting, carburetion and emissions. Ethanol can be used as automobile fuel either as "gasohol," in which case anhydrous (99.8%) ethanol is mixed with gasoline up to a 20% ratio, or as hydrous or straight alcohol, in which case (94% purity) ethanol is used straight. The economic value of alcohol as gasoline substitute is quite different in these two (anhydrous or hydrous) applications, as described below Establishing the economic value of ethanol relative to gasoline as an automobile engine fuel is a complex combination of the physical-chemical properties of ethanol compared to gasoline, combustion efficiency, detailed engineering specifications of the engine fleet, road conditions and emission standards. Actual mileage performance is difficult to measure for the various fuels since it is difficult to establish controlled test conditions that at the same time correspond to a wide variety of vehicles and road conditions in any country, and the large number of variables that need to be evaluated. The best compromise technique appears to be laboratory dynamometer tests that give relative but repeatable results The principal factors affecting fuel efficiency and therefore economic values are octane rating, engine compression ratio and carburetor fuel/air mixtures for combustion. A "normal" gasoline engine utilizing low octane gas (87-90 RON 1/) would have a compression ratio (CR) of about 7-8 to 1. Older models of this gasoline engine design had been adjusted to run with a fuel-rich mixture to yield quicker ignition and acceleration at the expense of fuel economy and higher exhaust emission. More recent engine carburetion specifications in the developed countries call for a lean fuel/air mix to improve fuel economy but at some loss of performance (e.g., acceleration and cold start characteristics). Mileage tests, principally in Brazil and the US, indicate that this "normal" engine gives approximately the same fuel economy with regular RON gasoline or a blend of "gasohol" up to a 20% ethanol concentration. Overall engine performance and fuel efficiency, can be substantially improved by increasing compression ratio to to 1. 1/ Research octane number.

24 -6- However, such a design change requires a much higher octane fuel (about RON) to avoid uneven combustion (or "pinging") in the cylinder of the engine. Such engine specifications were common in the high performance cars in the US during the 1960s and to some degree now in Europe Ethanol, which has a much higher octane number, when used in gasohol increases the octane number of the gasoline blend, depending on the base gasoline octane number (a 20% blend with 87 RON gasoline would increase the gasohol octane number to 94 RON). This octane boosting allows the elimination of the environmentally harmful lead additives from gasoline which are added to boost octane number by 3-5 points; alternatively it would allow substantial energy savings at the refinery operations to the extent less processing is needed to produce a lower octane number gasoline (unleaded gasoline costs 4-5% more than regular gasoline due to this extra processing). However, such savings are relevant mainly in the (developed) countries where (i) the octane rating of gasoline is high; (ii) use of lead additives is considered environmentally unacceptable; and/or (iii) gasoline demand as a proportion of total oil products demand is high, requiring extra refinery processing Existing internal combustion automobile engines do not require any modifications to run on gasohol of up to 20% ethanol blend. Tests conducted in many countries and practical experience in Brazil, show that cars obtain substantially the same mileage performance (e.g., fuel economy) whether they are run on alcohol or on regular gasoline; individual test result would depend on different factors (including octane rating, fuel value, car type, thermal efficiency, ambient conditions, etc.) which have an impact on mileage performance. Thus, the opportunity value of ethanol as gasohol is considered equivalent to the economic cost of gasoline 'Straight ethanol has significantly different combustion properties than straight gasoline. To maximize performance with straight ethanol, the engine design needs to be different (including a higher compression ratio) to take advantage of the higher octane rating (110 RON) and particular physical/ chemical characteristics of ethanol. Based on tests by the Brazilian auto industry, it is estimated that fuel economy of straight ethanol used in CR engines is 83-85% of that of gasoline used in CR engines (i.e., relative ethanol specific consumption of times). The tests, while not wholly representative of actual road conditions and not particularly designed to optimize gasoline tests while tending to optimize alcohol tests, are nevertheless indicative of the range possible with currently available engine designs with to 1 compression ratio. These values are significantly higher than anticipated from its calorific value shown in the table in para 2.04 because of the improvements in ethanol's combustion efficiency. The relative values should be used with caution, since some of the data are based on improved auto engine design for alcohol use, compared to an unimproved auto engine design for gasoline use Several modifications are required to adapt existing cars to run efficiently on straight hydrous ethanol. These modifications are due to (i) the necessity for a higher compression ratio of straight alcohol engines, to take advantage of ethanol's higher octane value and combustion characteristics (cylinder heads and carburetor have to be modified); (ii) ethanol's corrosive nature (the fuel tank has to be protected with anti-corrosive paint

25 - 7 - and different materials have to be used for parts of the carburetor, exhaust system and intake manifold); and (iii) the need to use gasoline to start the engine in cold weather (a small gasoline tank has to be added) The economic value of hydrous ethanol is derived from that of anhydrous ethanol after adjusting for the following factors: (i) increase in car costs; (ii) loss of fuel efficiency as indicated by lower mileage; (iii) increased ethanol production by volume (due to water volume) from the same raw materials; and (iv) savings in hydrous ethanol production costs. The Brazilian car industry estimates that straight (hydrous) alcohol cars will cost about 5% more than existing models. Regarding increased alcohol volume due to additional water content, a distillery will produce, from the same volume of raw materials inputs, about 6% more hydrous ethanol than anhydrous ethanol. Finally, the production costs of hydrous alcohol are lower than those of anhydrous alcohol, which due to its higher purity requires more processing. To produce hydrous ethanol in a conventional distillery, the last (third) distillation column is not used, steam consumption is lower by about 10-20% and no benzene is used. 1/ After considering the added cost of an alcohol car (5% cost penalty) the lower production costs of 94% alcohol (about 5% lower) and higher specific consumption compared with regular gasoline (1.2 times), the opportunity value of straight ethanol corresponds to 80-85% of regular gasoline's economic cost. In the developed countries, the relative valuation would be somewhat different, since the specific fuel consumption difference is greater (due to the more efficient gasoline engines) but the use of alcohol would allow substantial reduction in pollution control equipment and/or substitution of unleaded gasoline, as well as possible savings in refinery processing costs. C. Ethanol Use as Diesel Substitute 3.11 Efforts are also being made to use ethanol as a substitute for diesel, a middle petroleum distillate. Such a substitution, when complemented with gasoline substitution by ethanol and fuel oil substitution by coal or ethanol, would theoretically permit substitution of all major petroleum fractions. Diesel is used mainly as a fuel in compression ignition engines. The potential use of a fuel in compression ignition (diesel cycle) engines is conditioned by two major factors: (i) ignition characteristics (measured by its cetane number "or diesel index"); and (ii) miscibility with normal diesel oils especially in the presence of moisture The ability to auto-ignite and combust uniformly under conditions of pressures and temperatures developed in diesel engines is very poor in the case of ethanol fuel, since its cetane number is 0-5, compared to for normal diesel fuel. Alcohols disolve sparingly in non-aromatic hydrocarbons and the solubility decreases with temperature. Solubility increases with increase in aromatic content of the base diesel oil. Preliminary research in Brazil reports higher tolerance of ethanol in mixtures to which gasoline is added, probably due to increase in aromaticity by gasoline addition, but increase in aromaticity tends to reduce the diesel index. Addition of higher alcohols (amyl and octyl alcohol in concentration of %) increases ethanol solubility to 7-10%, but with an increase in specific fuel consumption. 1/ Benzene is normally added before the final distillation step to estimate the azeotrope or constant boiling mixture at 95% ethanol concentration.

26 -8- Solubility of ethanol in hydrocarbons decreases in presence of even traces of water. Straight ethanol is, therefore, unsuitable as fuel in diesel engines The initial cetane number and chemical composition of the base diesel oil, and ambient temperatures, determine the limits of blending of diesel fuel with ethanol (blends must have a minimum diesel index of 45). Such limit may be in the range of up to 5%, which could be improved to around 10% by addition of higher alcohols. Brazilian automobile industry and Government institutes have recently intensified their research efforts and report that mixtures of various vegetable oils and ethanol (with or without gasoline blends) can be used as fuel in diesel cycle engines. While they are confident of identifying technically satisfactory solutions in the near future, considerable doubts remain whether ethanol can economically replace diesel fuel in the immediate future, since most preliminary test results indicate specific ethanol consumption of between times that of diesel. D. Ethanol Use in Chemical Industry 3.14 Before the recent interest in ethanol as a gasoline substitute, the main use of ethanol was in the chemical industry; chemical applications are still the largest use of ethanol worldwide, except in the case of Brazil (Chapter IV). Ethanol is a versatile speciality chemical, which technically can be used for a wide variety of applications both as an intermediate chemical and as a raw materials for the production of other chemical products. It is in this latter use that ethanol has, until recently, been steadily substituted by the cheaper petroleum-based derivatives, such as ethylene. For the former use, ethanol has actually been also produced from petroleum derivatives (synthetic ethanol) Direct Uses: The main direct use of ethanol (apart from beverage use) is as a solvent. The major commercial applications of ethanol as a solvent are in the production of toiletries and cosmetics, detergents and disinfectants, food and drugs processing, surface coating, and pharmaceuticals. Fermentation ethanol is preferred over synthetic ethanol, particularly in Europe, for applications involving human consumption (or body use) such as in pharmaceuticals, toiletries and cosmetics. As a result, fermentation ethanol normally commands some price premium over synthetic ethanol Chemical Raw Material: Production of many small volume chemical products from petroleum products (e.g., naphtha, ethane gas) by conventional processes involves first production of ethylene, then its conversion into ethanol and finally production of the chemical product from ethanol either by dehydrogenation or by oxidation. Most of the current synthetic ethanol production is for its use as feedstock for the production of acetaldehyde and other acetyl derivatives, glycol ethers, glycol amines, acrylic and acetic esters, and other organic intermediates. Ethanol itself can also be converted into ethylene by the dehydration process. Since ethylene is the single most important intermediate product in the petrochemical industry, for the production of most large volume petrochemical products (such as polyethylenes, PVC, ethylene oxide, etc.) ethanol is technically a potential raw material for a large number of chemical products. The chart on the following page indicates the variety of chemical products which can be produced from ethanol by using one of the three major processes: (a) dehydration, (b) dehydrogenation, and (c) oxidation.

27 - 9 - ALCOHOL PRODUCTION FROM BIOMASS PRODUCTION OF CHEMICALS FROM ETHANOL BY MAJOR PROCESS ROUTES INTERMEDIATES END PRODUCTS BY DEHYDRATION PROCESS ETHANOL ETHYLENE _ ETHYLENE > OXIDE 1 I ~ ~~~~~ +H 20 I+ALCOHOL) ETHYLENE CLYCOLS SYNTHETIC FIBERS ANTI-FREEZE ETHANOL-AMINES SURFACTANTS GAS SCRUBBING GLYCOL ETHERS PAINTS VARNISHES TEXTI LES - FIPES AND TUBES SHOE SOLES ELECTRICAL + CHLORINE CHLORINATED - CLEANING SOLVENtS 7~ DEGREASING P E. Hd LP grodes BY DEHYDROGENATION PROCESS ETHANOL ACETALDEHYDE ALDOL BUTAMEDIOL POLYESTERS ' CROTOHALDEYOE FLASTICIZERS HYDROGEN -ETHANOL idieutyl PHTALATE) SOLVENTS BUTYRALDEHYDE BUTYLENE ~ DIOL \ BUTYRALDEHY F POLYESTERS FIBERS ETHYL HEXANAL A2ETHYL IDIBUTAL) PLASTICIZERS OCTYL ACETATE FPAINTS AND VARNISH) BY OXYDATION PROCESS ACETATES -AETHYL -BUTYL DEHYDE ACETIC ~~~~~~- OCTYL ACID -ETHYLGLYCOL (PAINT SOLVENTS KETENE COATINGS-.1 DIRECT I ACETIC CELLULOSE ACETATE OXIDATION ANHYDRIDE (TEXTILE YARNS. CIGARETTE FILTERSI 25%: L. ACETATE _ VINYL 75 MORESINS POLYVINYL ACETATES ~~~~~LATICES SOURCE: GIRA, RHONE POULENC lnd.smrial Projecrs Deparment Febroorv 1980 World Senk

28 In general, fermentation ethanol use would be economically relatively more attractive for products involving oxidation and dehydrogenation (since they do not involve ethanol conversion into ethylene and thus give ethanol a higher value than ethylene) than for those products involving production of ethylene by dehydration of ethanol first (since this would necessarily lead to ethanol having a value lower than ethylene as it would effectively replace naphtha or ethane gas as the feedstock for ethylene production). However, all three ethanol conversion processes are currently designed for small-scale production, compared to the modern ethylene-based processes which involve very large plant sizes to take full advantage of economies of scale. There may, therefore, be special circumstances (such as countries with small end-product markets where the economic price of imports is high) under which ethanol derivatives by dehydration process may be justified. Since ethylene is the basic building block in the petrochemical industry, any large-scale substitution of petroleum products in the industry by fermentation ethanol is dependent on ethanol derived ethylene becoming competitive with naphtha or ethane derived ethylene. The economics of such substitution are discussed in Chapter VIII. IV. HISTORIC PRODUCTION AND CONSUMPTION OF ETHANOL 4.01 Modern industrial processes for alcohol production have been developed during the last 150 years. Ethanol is now produced by two major routes, by fermentation of sugars by yeast (called fermentation ethanol), as discussed in detail in Chapter VI, and by synthesis of petroleum feedstocks, mainly ethylene (called synthetic ethanol). In most countries, fermentation ethanol has been used for beverage and speciality chemical uses, though in some countries such as Brazil and India fermentation ethanol continues to be used for industrial purposes also. Synthetic ethanol is used for large-scale industrial applications, due to the greater tolerance of these uses to small chemical impurities and the historic lower cost of production of synthetic alcohol compared to fermentation ethanol. Current production patterns of ethanol by raw material sources and countries, and consumption patterns by end-uses in major consuming countries are briefly discussed below. A. World Ethanol Production 4.02 World ethanol production in 1977 totalled 3 million tons (1.0 billion gallons), of which 1.4 million tons (48%) was synthetic ethanol and 1.6 million tons (52%) was fermentation ethanol. Production by major producing countries is shown below.

29 WORLD: Estimated Ethanol Production in 1977 (in '000 tons) Proportion of Synthetic to Fermentation Country/Region Synthetic Fermentation Total Ethanol USA /7 Canada 168 Neg. 168 near 100 U.K /15 France /70 F.R. of Germany /45 Other EEC N.A N.A. (Total EEC) (411) (561) (972) (42/58) Japan /58 India /99 Brazil Neg near zero Eastern Europe 85 N.A. 85 N.A. Others 100 N.A. 100 N.A. Total 1,436 1,578 3,014 48/52 Source: SRI (U.S.A.), MITI (Japan) and EEC The actual production of fermentation ethanol is most likely much higher than indicated above, since considerable quantities of such production are not reported in international statistics. Historically, production of synthetic ethanol has been declining since the early s, though reported capacity increases, mainly in the EEC and Asia, would raise world synthetic ethanol capacity to about 2.5 million tons in 1983, compared to 1.9 millon tons in World production of fermentation ethanol is expected to increase sharply between 1977 and 1985, mainly due to the renewed interest in fuel alcohol worldwide and in particular as a result of the five-fold increase planned in Brazil and large increases expected in the US during this period. B. Historical Ethanol Consumption 4.04 It is difficult to reconstruct the world ethanol consumption pattern due to lack of consistent data for non-oecd countries, particularly for fermentation ethanol. This section, therefore, briefly discusses historic ethanol consumption pattern in five major markets--us, EEC, Japan, Brazil and India--which in 1977 accounted for almost 90% of estimated world ethanol production US. In 1978, the US denatured alcohol consumption totalled 613,000 tons (205 million gallons), of which 335,000 tons (55%) were used as a solvent and 260,000 tons as a chemical raw material. Total ethanol consumption peaked in 1965 at 912,000 tons and thereafter steadily declined until 1975 when it reached 600,000 tons. This absolute decline was due to the sharp decrease in its use as a chemical raw material, which declined from 623,000 tons in 1965 to 292,000 tons in 1975 (and 260,000 tons in 1978). Ethanol

30 use as a solvent has at the same time increased both in absolute and relative terms, as shown below: USA: Ethanol Consumption (in '000 tons) Solvent Chemical Raw Material Others Total (proj.) Source: Stanford Research Institute (SRI) Use of ethanol as chemical feedstock has been declining in the US due, until recently, to the competition from lower cost petroleum-derived feedstocks. No major chemical end-use had developed during the period to compensate for losses in ethanol usage in the acetyl-derivatives sector, but the limits of substitution by hydrocarbon feedstocks now appear to have been reached. In the US, the negative growth rate of 4.2% per year during the period is expected to be reversed and future total ethanol consumption is expected to grow at the rate of 3% per year from about 613,000 tons (205 million gallons) in 1978 to 688,000 tons (230 million gallons) in EEC. The consumption of industrial ethanol in Western Europe was around 868,000 tons (290 million gallons) in The primary end-use of ethanol is as a solvent and only 126,000 tons (42 million gallons) accounted for use in chemicals. Ethanol consumption by country and end-uses is summarized below: EEC: Malor Ethanol Uses in 1977 (in '000 tons) Beverage Consumption Vinegar Pharmaceuticals Toiletries Others Total Belgium Denmark Germany France Italy Netherlands UK Others Total EEC Compared to the US, the relative share of fermentation ethanol in total ethanol production and consumption is much higher in Western Europe.

31 In 1977, total EEC consumption of fermentation ethanol was 468,000 tons or 55% of total; of this 264,000 tons (56%) were for beverage consumption, 20,000 tons (4%) for vinegar, 30,000 tons (7%) for pharmaceuticals, 53,000 tons (11%) for toiletries and the remaining 103,000 tons (22%) for other uses. Total EEC consumption of synthetic ethanol, in the same year, was 397,000 tons or 45% of total. Of this, only 29,000 tons (7%) was for vinegar, pharmaceuticals and toiletries production, while the remaining 368,000 tons (93%) was used for industrial purposes Japan. Ethyl alcohol consumption in Japan between is presented in the table below. During this period, consumption grew at an annual rate of 7.1%, from 83,000 tons in 1974 to 109,000 tons in This growth has been particularly significant for the vinegar and food preservatives market, which has grown at 14.9% a year. The solvent and chemical markets grew at 6.3% and 1.8%, respectively, during the same period. Japan: Ethanol Consumption Pattern (in '000 tons) Solvent Vinegar and Other Chemical Raw Material Total India. About one-third of India's 1978 production of ethanol of 340,000 tons was used for potable purposes, and the bulk of the remainder (about 87%) for manufacture of organic chemicals. The entire Indian production of acetaldehyde, acetic acid, acetic anhydride, DDT, a large part of production of organic acetates, butanol acetone and a small but significant portion of the total production of LDPE, PVC, acetone and styrene are based on ethanol. Since the discontinuation of use of fuel alcohol in automobile engines from mid-1950s, there has been no deliberate move towards reintroduction of alcohol usage as motive power fuel Brazil. So far production of ethanol is intended essentially for use as fuel and only a small fraction is being used as chemical feedstock. Of the total production of 525,000 tons in 1977, only 63,000 tons were used in the chemical sector, and of the estimated 1979 production of 2 million tons (2.5 billion liters), ethanol consumption for chemical production is estimated at 76,200 tons only. Products derived from ethanol are acetaldehyde, acetic acid, butanol, octanol, chlorinated ethylenes, glycols and polyethylene. However, a 230,000 tons/year LDPE plant and a 50,000 tons/year vinyl acetate/ acetic acid unit, which discontinued operations in 1971, are now being reopened. Also, a 33,000 tons/year synthetic rubber plant, which also discontinued operation some years ago, is being converted to produce ethylene. Furthermore, new units for manufacture of styrene and vinyl acetate have been slated for production in On the basis of established ethanol-based chemical plant capacities, those under revival and those slated for operations in 1982, ethanol requirements as chemical feedstock are estimated to increase to 450, ,000 tons/year With regard to the use of ethanol as fuel, only Brazil has so far undertaken the development thereof as a national policy, though significant

32 efforts have recently been made in the US to promote the use of ethanol as a blend with gasoline (gasohol) for automobile fuel. In 1979, Brazil achieved a nationwide average of about 19% alcohol in mixture with gasoline for use in unconverted engines. Current efforts in Brazil are directed towards conversion of part of the existing fleet of automobiles to use straight-ethanol fuel and commencing in 1980 to produce automobiles specially designed to use ethanol as the optimal fuel. Retro-fitting and conversion of existing vehicles to use all-ethanol fuel has commenced in government and public fleets. The objective of the national efforts is to maintain future consumption of gasoline at the same level as in As noted earlier, substitution of diesel fuel by ethanol is also being investigated. By 1985, Brazil plans to expand its ethanol production to 10.5 billion liters or 8.4 million tons/year, equivalent to about half of its projected gasoline demand in that year. If achieved, this would make the Brazilian alcohol program, which is expected to require investments totalling US$5.0 billion between , by far the largest program of its kind anywhere. C. Recent Ethanol Prices 4.13 Since neither synthetic ethanol nor fermentation ethanol are traded internationally in any significant amounts, their prices depend more on domestic production cost and market factors than on international trade factors. As a result, prices of ethanol vary substantially amongst the major consuming countries. Anhydrous ethanol prices (mid-1979) in Western Europe, the US and Japan are given below: Anhydrous Ethanol Prices in mid-1979 USi/ton US$/gallon Western Europe United States a/ Japan b/ a/ For hydrated ethanol. Price for anhydrous ethanol is not available. b/ For hydrated fermentation alcohol, the price was US$294/ton, or US$0.88/gallon. It is, thus, difficult to establish a single international price for ethanol, though in general it appears that both in the US and Western Europe, ethanol prices were 30-50% higher than the retail price of regular gasoline and about 60% higher than the ethylene price. 1/ V. BIOMASS RAW MATERIALS FOR ETHANOL PRODUCTION 5.01 Ethanol can be produced from three main types of biomass raw materials: (a) sugar bearing materials (such as sugarcane, molasses, sweetsorghum, etc.) which contain carbohydrates in sugar form; (b) starches (such as cassava, corn, babassu mesocarp, potatoes, etc.), which contain carbohydrates in starch form; and (c) celluloses (such as wood, agricultural 1/ In mid-1980, ethylene price in Europe was about US$700/ton and in the US US$540/ton.

33 residues, etc.) for which the carbohydrate molecular form is more complex. Production of ethanol from these materials includes first (except in the case of sugars) conversion of carbohydrates into water soluble sugars (since yeast can ferment only simpler - 6 or 12 carbon - sugars), then fermentation of these sugars into ethanol, and finally separation of ethanol from water and other fermentation products by distillation (Chapter VI) The main attraction of sugar-bearing raw materials for alcohol production lies in the fact that their carbohydrate content is already in the fermentable, simpler sugar form such as glucose or fructose. Starches contain carbohydrates of greater molecular complexity, which have to be broken down to simpler sugars by a saccharification process, which adds another process step and increases capital and operating costs. Carbohydrates in the cellulosic materials have an even greater molecular complexity and have to be converted to fermentable sugars by acid hydrolysis. However, some of the sugars so produced are not fermentable to alcohol by yeast, reducing the overall carbohydrate-to-alcohol conversion efficiency. 1/ 5.03 The table below shows ethanol yield per ton of the major potential biomass raw materials, as well as estimated ethanol yield per hectare of land for average developing country situation. Ethanol Yields of Main Biomass Raw Materials a! Ethanol Yield Raw Material Yield-/ Ethanol Yield Raw Material (liters/ton) (ton/ha ) (Liters/ha/yr.) Sugarcane ,500 Molasses 280 N.A. N.A. Cassava ,160 (20.0) b/ (3,600) b/ Sweet Sorghum c/ 3,010 c/ Sweet Potatoes ,875 Babassu Corn ,220 Wood ,200 Source: STI, Brasilia; Bank staff. a/ Based on current average yields in Brazil, except for corn which is based on the US average. b/ Potential with improved production technology. c/ Tons of stalks/ha/crop. Two crops per year may be possible in some locations. A. Sugars 5.04 Sugarcane is technically among the most attractive biomass raw materials, since it not only involves the simplest conversion process but also generates its own fuel source, bagasse, which provides more than adequate energy for generating the steam and power needed for crushing, fermentation and the distillation process. A ton of sugarcane, with an average sugar 1/ This description is partly based on the US Department of Agriculture Publication, "Industrial Alcohol."

34 content of 12.5%, gives about 70 liters of ethanol through direct fermentation of the juice. As shown above, sugarcane gives one of the highest ethanol yields per hectare of crop land. It is also an established crop on which considerable agriculture research work has been conducted and which is grown in a large number of countries on a commercial scale. However, sugarcane production is currently devoted largely to sugar production for domestic and export markets and is mostly undertaken on rich agricultural land which is also ideally suited for food production. Thus, any future large-scale production of alcohol from this attractive biomass raw material would, in the case of most countries: (a) require a choice between export of sugar and conversion of the cane to substitute for (imported) petroleum products; and (b) raise serious questions about competition for land between food and energy crops; perhaps only the use of grains for alcohol production raises more serious concerns in this respect. (This issue concerning competition for land is discussed further in Chapter X.) It is, therefore, considered unlikely that, except in the case of a few countries such as Brazil with considerable amount of underutilized agriculturally rich land, many developing countries can allocate substantial land areas to sugarcane production for alcohol production Cane molasses, also known as blackstrap molasses, has been the most common biomass raw material for ethanol production. Molasses is a by-product obtained during sugar production from cane; every ton of sugar produced gives approximately 190 liters of molasses. It contains between 50-55% fermentable sugar (mainly sucrose, glucose and fructose) and yields about 280 liters of ethanol per ton of molasses Molasses is mainly used as animal feed and for ethanol production, but it also has some industrial applications and in some developing countries is used for human consumption. However, most of the molasses production is in developing countries, often in remote locations, while the animal feed markets are primarily in the developed countries (mainly the US and Western Europe). Due to the remote location of many sugar mills and the lack of adequate transport infrastructure to economically ship the bulky, relatively low value by-product molasses to ports for export, substantial quantities of molasses remain unutilized and in fact often cause disposal problems It is estimated that in 1978/9 total world production of (cane and beet) molasses was 33.5 million tons, of which about 22 million tons were consumed in the countries of origin and another 6.6 million tons entered world trade mainly for use as animal feed. This leaves 5 million tons (15% of total) unaccounted for, most of which was most probably disposed of as valueless waste. To the extent this quantity currently has no alternative use, has negligible (or even negative) economic value, and is produced at sugar mills with a readily available surplus plant energy source (para 6.15), it could provide an economically attractive source for producing ethanol. This attraction is enhanced further if the surplus molasses is available in an area where the economic cost of gasoline is high due to high distribution costs (e.g., land locked countries with small gasoline markets) World molasses production is directly related to the world sugar output, which is projected to grow only at a moderate (2-4%) rate in the future. The estimated current world surplus molasses of 5 million tons if converted, would yield 1.35 billion liters of ethanol. And, if the total molasses production of 33.5 million tons were diverted to ethanol production,

35 it would be equivalent to 9 billion liters or 1% of 1978 world and 9% developing countries gasoline demand. Thus, while molasses conversion to ethanol is likely to lead to only marginal substitution of gasoline on a worldwide basis, it may lead to significant savings in petroleum product imports of individual countries Sweet sorghum, which contains a mixture of sucrose and glucose, is increasingly considered as another attractive biomass material for alcohol production. Its stalk not only contains substantial quantities of easily fermentable sugar but also provides "bagasse" needed for alcohol plant energy needs. Sweet sorghum has a short growing season of 3-4 months, and therefore might be grown on sugarcane land when the land remains fallow between the last harvest and the next planting. Additional sweet sorghum harvests can be raised as rotation crops on adjacent land. The availability of another sugar material during the period when cane is not available would allow extension of the alcohol production season and reduce the capital charges per unit of alcohol produced. A hectare of land devoted to sweet sorghum can annually yield as much as 4,000 liters of alcohol (assuming two crops per year), giving one of the higher alcohol yields of any crop. However, sweet sorghum is a new crop for most developing countries and considerable further agricultural research and extension effort is required before this crop can be considered as a major energy source Other sugar materials, from which ethanol production is technically feasible, include sugar beets, citrus molasses and fruits. In Europe, particularly France, sugar beet has been an important source of ethanol production; one ton of sugar beet yields about 86 liters of ethanol. However, considering the small quantity of production of these materials in developing countries and their relatively high economic cost, these materials are not likely to be an important and economic source of fuel alcohol production in most member countries. 1. Starches 5.11 The main starch materials of interest as ethanol source are cassava (mandioca) and corn. Other starch materials, which have been used for alcohol production, include wheat, barley, grain sorghum, rye, oats, rice, and Irish and sweet potatoes. However, the use of the latter group is restricted to beverage-alcohol production due to the relatively high cost of these raw materials as foodstuff Cassava is a root crop grown extensively as a subsistence crop in a large number of developing countries 1/. Its main attractions as an ethanol source are: (i) it is one of the most efficient convertors of solar energy into biomass, and offers the potential of yielding a high volume of alcohol per hectare of land; (ii) cassava can be grown on marginal land, is a sturdy plant which can withstand adverse weather conditions, and requires labor intensive (and relatively low commercial energy input) agricultural practices; and (iii) it is mostly grown by low-income farmers, thereby offering distributional benefits from expanded production. Provided appropriate plant varieties and agricultural practices are utilized, annual cassava yield can exceed 20 ton/hectare. One ton of cassava yields about 180 liters of ethanol. Cassava can also be harvested throughout most of the year, and alcohol plants based on 1/ For a detailed discussion of the development potential of cassava and other root crops, see Staff Working Paper No. 324 entitled "Tropical Root Crops and Rural Development" dated April 1979.

36 it could operate days/year, reducing their capital costs per annual liter capacity below those of sugarcane-based plants. A major drawback of cassava is that it produces no residual energy source for use in distillation However, despite its importance in the diet of a large number of the poor in developing countries, until recently cassava had been a relatively neglected crop as far as agricultural research is concerned. Efforts are now underway to develop higher yield and more disease-resistant varieties of cassava. Before cassava can be considered a major source of energy, these efforts would have to be further intensified. If sharply higher yields were realized, this subsistence crop could be converted into an important source of energy on a commercial scale, without any significant adverse impact on its current role as a major source of calories for the rural poor Corn was a small source of industrial alcohol earlier in the US. Historically, its principal fermentation use was in the production of whisky. In the last few years, there has been an increasing interest in the US in the production of ethanol from corn for use as a gasoline blend. The US Department of Energy is currently actively promoting this use, partly to prevent a drop in corn prices One bushel of corn yields approximately 9.8 liters of ethanol and the US national average corn yields are in the range of 225 bushels/ha (6 tons/ha). Unlike sugarcane and sweet sorghum, corn does not produce its own source of fuel (bagasse), and corn-based alcohol plants require outside commercial fuel purchases. As discussed in para 6.23, this results in a negative energy balance in corn-based alcohol plants and diminishes their economic attractiveness compared to plants based on molasses, sugarcane or sweet sorghum. Ethanol from corn is likely to be economically attractive only when its economic value is low and/or costs of processing fuel are low. Corn is a basic animal feed in the developed countries and an important food in many developing countries. It requires fertile, well-watered land. Any major diversion of corn fit for human or livestock consumption to alcohol production would directly reduce food supplies. Thus, from the technical, economic and social point of view, alcohol production from corn is not likely to be very attractive, unless based on substandard (or temporarily surplus) corn without alternative uses and on a low-cost (non-petroleum) energy source. C. Celluloses 5.16 The cellulosic materials of main interest for ethanol production are wood and agricultural crop residues. In general, processes involved in alcohol production from them are more complex and larger scale than those from sugars and starches. There are also no demonstrated processes available yet for commercial scale plants in developing countries. However, considerable development work is underway in many countries and it is possible that during the next decade cellulosic materials can become an important biomass source of alcohol. Continued R & D in this area is required to realize this potential Wood. The production of ethanol from wood involves two main steps: (a) hydrolysis of the cellulose to simpler sugars, and (b) the fermentation of these sugars to alcohol by yeast as in the case of other materials.l/ There are 1/ Methanol, also known as wood alcohol, can also be derived from wood through known technology. The economics of large-scale biomass methanol productions have yet to be demonstrated.

37 several known processes for carrying out the hydrolysis either with low concentration acids at high temperature, or with concentrated acids at low temperature. Alcohol production from wood wastes was practiced in Europe, before Wiorld War II, since wood waste was more economically available than grain or molasses. However, all West European plants have either been dismantled or closed. Only in Russia a few wood-based ethanol plants are reportedly in production, although their major objective appears to be the production of protein feed for livestock rather than alcohol The relative value of wood as a source of alcohol depends on the raw material and processing costs, and on the potential for economic utilization of the lignin and other byproducts. Some of the sugars (principally pentoses) formed in the hydrolysis, but not decomposed into alcohol by the yeast, can be utilized for the production of chemicals, food yeast or animal food ingredients Crop residues could be used in lieu of wood for alcohol production, since such residues consist essentially of cellulose, pentosans and lignin. The total carbohydrate content of crop residues is about the same as that of wood (65-70%), but crop residues contain relatively less cellulose but considerably more pentosans. Consequently, the yield of alcohol-yielding sugar (dextrose) from these residues is less than from wood. The relatively low cellulose and high pentosan content of agricultural residues may not be a liability, since several useful products can be provided alternatively from these pentosans (e.g. butyl alcohol, acetone and fodder yeast) The major difficulty in the utilization of agricultural crop residues for ethanol production is likely to be their high cost of collection and transportation to alcohol plants. The most attractive use of agricultural residues as an energy source may be in the production of biogas in small generators located on individual farms. However, before agricultural residues are utilized on a large scale for energy production, the impact of their removal from the fields on the agriculture crop yields must be carefully considered. VI. ETHANOL PRODUCTION TECHNOLOGY A. Current Technology 6.01 Flow diagram for ethanol production from cassava (manioc), which is one of the more common agricultural raw materials for conversion to ethanol, is shown on the following page. Any sugar or starch, respectively, would be processed in a similar way. Ethanol production from cellulose (wood), which is not commercially proven and is not discussed here, is also a potential source. Material and utility balances for sugarcane (based on existing plants) and cassava (based on design parameters) are shown on page 21.

38 ALCOHOL PRODUCTION FROM BIOMASS PROCESS FLOW DIAGRAM FOR CASSAVA BASED PLANT CASSAVA RECEPTION i r PASTE PREPARATION 1 MASH PREPARATION 1 AND STORAGE I WATER v ENZYMES I ENZYMESr _ r "s" /-\ A vafor LiGUEFACTION AND o o / T \K o FLASH SACHARIZATIF I SOURCE PETROBRAS ERAZIPL INns;nsIril Frolects DeoartrneoC Fehr>ars 1980 WorIo Banrk 21344

39 Material Balance Material and Utility Balance for Ethanol Production From Sugarcane and Cassava (for 1,000 liter anhydrous alcohol) a! b Sugarcane Cassava- Unit Quantity Unit Quantity Sugarcane tons 15 Cassava - - tons 6.8 Chemicals kg 46 kg 55 Enzymes - - kg 5 Fusel Oil kg 5 kg 5 Stillage tons 12.5 tons 10.5 Co 2 kg 760 kg 760 Bagasse tons Waste Fibers - - tons 0.4 Utility Balance Steam tons 6.5 tons 6.2 Electricity - c/ kfh 450 Water M 200 M 43 Fuel - c/ tons 1.7 d/ a/ Data based on existing plants in Brazil. b/ Data based on design parameters developed by an engineering company, but no plants are yet constructed on this basis. c/ Generated internally from bagasse. d/ On basis of wood. Source: Centro de Tecnologia Promon, Brazil. 1. Sugar-Based Plants 6.02 Sugarcane, now the most common raw material for fermentation ethanol worldwide, contains cellulose fiber intermixed with sugar in the sugarcane stalk. The cane is washed and crushed, and filtered to separate the cellulose ("bagasse") from sugar juice. Bagasse is dried and burned to generate steam and power to supply all the plant's utility requirements. The sugar juice is concentrated and sterilized and then fermented in a batch fermentation system with yeast. The yeast is removed by centrifuging, treated (to grow additional yeast) and recycled to the fermentation step. Conventional alcohol technology uses batch fermentation with common strains of yeast to produce an 8-10% alcohol solution, after hours of fermenting. The yeast is gradually rendered ineffective (due to the increasing alcohol concentration) and 8-10% ethanol is the maximum practical concentration attainable in batch systems. The fermented mash is sent to a stripping column to separate ethanol (plus some water) from the fermentation solids and the bulk of the water in the 8-10% alcohol solution. The waste stream, called stillage, contains about 10% solids, including 1-2% fertilizer nutrients, which must be disposed of

40 properly to avoid potential environmental problems (para 6.11). The stream containing ethanol is then distilled in a multistage distillation column to a concentration of about 94% ethanol. (Water and ethanol form on azeotrope or constant boiling mixture, at 95% ethanol.) Anhydrous ethanol is produced in a third distillation column by adding benzene 1/ (which eliminates the constant boiling mix at 95% ethanol) and then further distillation permits production of anhydrous alcohol (99.8% purity). Benzene is separated from anhydrous alcohol and is recycled. Anhydrous alcohol is sent to storage and subsequently blended with gasoline or to other end-uses. When all of the stillage is returned to the sugarcane land, the need for chemical fertilizer is reduced though not eliminated and the sugarcane alcohol production offers a more balanced ecosystem If hydrous or straight alcohol (94% ethanol) is the desired product, processing simply eliminates the third distillation column with a resultant reduction in steam requirements and elimination of benzene requirements; lower steam requirements may also allow economies in the boiler costs The basic process for other sugar materials would be the same, though the sizing of the fermentation and distillation units may be somewhat different depending on material balances and the raw material. Fermentation of molasses to 8-10% alcohol solution normally takes 4-5 times longer than in the case of sugarcane. Thus, to produce the same volume of alcohol, molassesbased plants require a much larger number of fermentation tanks. This difference does not, however, lead to any significant increase in the plant costs since such tanks represent a relatively small proportion of total costs. 2. Starch-Based Plants 6.05 Starch based plants are similar in design. Cassava roots, which contain 25-30% starch, are washed, peeled and liquefied in a cooker. The liquefied starch is broken down into fermentable sugar by addition of enzymes, -amalyse, and gluco-amalyse. Once the fermentable sugar is formed, processing is identical to the above described steps for sugarcane beginning with fermentation. Since cassava roots contain virtually no cellulose, there is no "bagasse" formed and the energy requirements of a cassava-based alcohol plant, which are slightly higher than for a sugarcane-based plant, must be supplied from external sources; the utility and material balance table in para 6.01, shows less steam requirements for the cassava-based plant data which is assumed to be based on a more efficient heat recovery design than the sugarcane design. Other starch bearing materials require essentially the same processing equipment, although the plant front-end facilities must be designed to meet requirements of particular crops. B. Technology Development 6.06 Until recently, alcohol production from biomass (mainly molasses and some sugarcane and corn) was based on old technology since the demand for ethanol for potable and chemical uses was not very sensitive to processing costs. Therefore, process and equipment design have not benefited from the recent advances in the design and engineering of other chemical plants. However, with the increasing interest in ethanol as a fuel, a large number of major engineering companies, equipment manufacturers and other parties have initiated efforts to improve the technology base and design of alcohol plants 1/ Other chemicals can also be used to eliminate the azeotrope.

41 to improve their efficiency. Most of these efforts have focused on four major areas Recent technical work has developed continuous fermentation technology (although not fully commercially demonstrated) to yield up to 12% alcohol content liquor. Additional microbiological research and development work is underway on improving the yeast strains to yield even higher alcohol concentration in the fermentation step. This improved technology should ultimately result in substantial reductions in energy requirements for ethanol production, since it could yield up to 50% saving in the energy used in distillation and at the same time decrease stillage volume by half at substantially the same (or lower) capital costs than for conventional plants. Another area being investigated is vacuum fermentation which, by mutation of temperature-insensitive organisms, will allow continuous withdrawal of alcohol in vapor form thereby reducing equipment and energy requirements It is also possible to improve the energy efficiency of ethanol production through more efficient distillation and heat recovery design, using engineering concepts commercially proven in other chemical engineering industries. In addition, ethanol concentration could be increased through absorption, vapor recompression, and/or multiple effect evaporators, but these techniques would require considerably more R&D efforts to develop into commercial practice. These latter improvements would be generally at the expense of added capital costs. Other methods of separation being investigated include crystallization, use of molecular sieves and reverse osmosis all of which will have advantages of reduced energy requirements A third area of future technology development would be utilization of agricultural wastes for feedstock and/or fuel purposes, and development of additional (and/or improved) crops as raw material. A major constraint in cassava and corn utilizations is the need for an external fuel source. Agricultural waste products could be used for fuel in modified boiler designs. The boiler modifications would be relatively simple (the steam system itself is simple with low pressure, low capacity) but gathering and drying of most agricultural wastes, which will be labor intensive, would require low cost labor and an organization system similar to sugarcane harvesting. Presumably air drying would be required in most cases (as is often done for cassava) Alternative energy crops is a promising area for future developments of alcohol production from biomass. Typical crops would be sweet sorghum, wood, babassu and other crops which produce a high yield of starch or sugar per hectare and also produce a usable cellulose component for fuel. In addition to considerable industrial development and demonstration work necessary, significant technology development effort is also needed in the agricultural area to improve yields of both food and energy crops, develop optimum crop rotation patterns and convert some existing subsistence crops (e.g., cassava, babassu) into commercial energy crops. C. Environmental Impact 6.11 During the fermentation and distillation of ethanol, a number of by-products are produced. These are (i) carbon dioxide, which is produced during fermentation; (ii) fusel oils, which are collected in the rectification column and consist mainly of amyl and isoamyl alcohols and glycerol, and (iii) stillage. Due to high recuperation costs, carbon dioxide is usually

42 not collected for sale and is normally discharged into the atmosphere. Fusel oils (about 5 kg/1,000 liters of ethanol) can be collected for sale or blended into ethanol as fuel denaturant. 1/ 6.12 Stillage is the liquid effluent from the distillation system and its disposal can be a major problem. As mentioned, it is produced in large quantities, about times the volume of the alcohol produced. Stillage contains about 10% of solid material, including 2-3% of fertilizer nutrients. The two main potential uses for stillage are: (i) animal feed, and (ii) fertilizer. Stillage can be evaporated to about 50% solids and mixed with feed concentrates, but the evaporation costs are relatively high and the attractiveness of stillage as animal feed depends on the relative cost of alternative feeds. In those developing countries where the market for animal feed is small, this end-use is not likely to be attractive in most situations. In the US, Europe and developing countries, where a strong animal feed demand exists, the reverse is likely to be true Stillage as fertilizer can be applied directly on the soil by trucks or through an irrigation system. Since stillage is very dilute (1% nitrogen, 0.2% phosphate and 1.5% potash) the volume to be transported is large and use as fertilizer is likely to be viable only in agricultural fields close to the distillery. During field visits in Brazil, a number of distilleries indicated that stillage disposal as fertilizer is not an unsurmountable problem. In many plantations, stillage is pumped to the top of neighboring hills and gravity fed to irrigation systems for surrounding fields. Surplus steam from bagasse is used to power the pumps. Plant operators believe that it is economical to use such a system in a radius of about 3 km around the distillery. Excess stillage was trucked to fields further away and sprayed on the ground. Apart from the trucks, this system did not require any supplementary equipment. Cane yields appear to be increased substantially on this land, due to both the fertilizing and irrigation effects. There has been no conclusive study of the long-term effect, on soils and cane fields, of recycling stillage as fertilizer Neither of the above two approaches is likely to be a universal solution and additional technical development is necessary to arrive at an optimum disposal technique in each case to minimize environmental problems. D. Surplus Bagasse 6.15 Steam and power for conventional sugarcane-base distilleries are generated from bagasse (typically containing about 50% moisture). Independent conventional distilleries (unattached to sugar mills) based on sugarcane require only about 70% of the available bagasse; conventional distilleries attached to sugar mills only have 10% excess bagasse. 2/ The 1/ Denaturant is an additive to alcohol which is difficult to separate and makes the mixture unfit for human consumption. 2/ The actual quantity of bagasse required is a function of the energy efficiency of the alcohol plant and moisture content of the bagasse. The above rates are based on typical Brazilian data, but wide variations are possible in other alcohol plants. Supplementary drying of the bagasse, using boiler heat ordinarily vented to the atmosphere would increase significantly the energy content of this material.

43 surplus bagasse could generate electric power for outside users. While this use may be viable in some rural areas, the small amounts involved and the seasonal nature of availability (5-7 months per year) may preclude development of surplus bagasse as a stable source of power. Bagasse may also be used as fiber for paper production and in some cases this use could be further developed. One of the most promising uses of bagasse, however, appears to be as a fuel resource to expand alcohol production by increasing operating days per year through the addition of multiple agricultural crops which do not generate their own fuel source (e.g., cassava conversion along with sugarcane). This development could increase operating days from about to more than 250 days per year, with minimal increases in capital cost for the industrial plant, thus reducing the capital charges per unit of alcohol produced. Use of multiple crops is being explored in Brazil and Thailand, but has not been commercially demonstrated as yet. E. Energy Balance for Ethanol Production 6.16 The principal rationale for ethanol from biomass is to substitute for imported petroleum. Thus the type, cost and amount of energy inputs to produce the alcohol are critical to fuel ethanol's economic viability. This viability depends not only on the physical energy balance (in engineering terms commonly referred to as the net energy balance) but also on the relative economic values of various forms of energy inputs and outputs. Thus, while in general plant designs and raw materials which offer better energy balances (efficiency) are more desirable, some cases where energy balances are either marginal or even negative may be economically acceptable if a relatively low cost form of energy input is converted into a premium energy form The engineering analysis is based on the net energy consumption ratio or net energy consumed (NER) as follows: 1/ NER = Total energy consumed less by-product energy credit energy in ethanol The energy balance is positive if the NER is below 1.0 and vice-versa. Energy is defined as energy component (direct and indirect) of all priced inputs and outputs; thus solar energy to produce a crop is excluded. The energy value of a crop used for ethanol production is the energy content of fuel plus chemicals (farm inputs) consumed in growing the crop, not the heat of combustion of that crop. The energy content of ethanol is its heat of combustion. Alcohol as a motor fuel has a higher value due to higher combustion efficiency when using alcohol or alcohol/gasoline blend, but this value changes with alcohol end use and is not counted in the NER. The energy value of a by-product is, likewise, the energy consumed to produce an equivalent amount of alternative by-product--either animal feed or recycled fertilizer nutrient. Such NER analysis is made purely on calorific value considerations and does not necessarily correlate with overall combustion efficiency or economic viability Four crops are currently of main interest for conversion to fuel ethanol: (i) sugarcane (or molasses); (ii) sweet sorghum, both of which are sugars; (iii) corn; and (iv) cassava, both of the latter being starches. 1/ This approach is also taken by: (1) American Petroleum Institute (API Publication No. 4312, November 1979) and (2) Centro de Tecnologia Promon, a Brazilian engineering company.

44 As mentioned, the process flowsheets for the four materials are basically similar. The two starch materials require one more processing step (to convert starch into fermentable sugar) which requires slightly more energy. The major difference among the four is the source of energy consumed primarily in distillation. Sugarcane and sweet sorghum, offer a byproduct--bagasse that is separated while extracting the sugar juice and can be burned as a fuel to provide all steam and electricity required for ethanol production. Corn and cassava also generate a cellulose material (stalks and leaves) that is normally separated from the product in the field. Collecting and drying costs have generally been considered prohibitive (but this conclusion may well change with rising petroleum prices). The typical fuel choices would be fast growing tree plantations for cassava in most tropical countries 1/. The choice for corn (principally in the U.S.) would typically be coal or possibly corn stalks A second major variable in determining the energy balance is disposal of the liquid effluent (stillage). In Brazil, a growing practice for sugarcane is to recycle the stillage for fertilizer/irrigation purposes, to nearby cultivated sugarcane fields. The system works reasonably well with highly organized plantations in close proximity to the alcohol plant but is obviously not a universal solution. There has been no actual experience on recycling cassava stillage. In the Brazil case in the table on the following page, stillage is assumed to be treated as recycled fertilizer. 2/ The alternative is to convert stillage, by drying, into animal feed, which requires additional energy. In the U.S., most studies indicate conversion to animal feed as the preferred choice. Thus, in the U.S. case below, the energy balance is based on stillage as animal feed. The two cases (U.S. and Brazil) show the possible range of solutions. Applying the analysis to specific systems in other countries could result in any combination of the two alternatives. The wide variation in energy efficiency shown in the table is also a function of the assumptions regarding best recovery technique, in addition to the sources of raw materials The comparison of agricultural systems shows that the US agricultural system is considerably more energy intensive than that of Brazil due to higher rates of fertilization and higher degree of mechanization. The Brazil situation is probably more representative of most developing countries, but since the energy consumed in the farm system is practically all petroleum related, it warrants further study in developing a comprehensive biomass energy program Sugar cane (or sweet sorghum) shows a net positive energy balance (ratio less than one), generating 3-8 times as much energy as it consumes. This positive impact is derived wholly from the availability of bagasse. Converting stillage to animal feed causes the better (lower) ratio, so from an energy point of view animal feed generally is not efficient, if recycling as fertilizer is feasible. Overall, converting sugar cane to fuel ethanol is an effective means to reduce a country's petroleum requirements. 1/ Combination of cassava with sugar cane, to take advantage of excess bagasse, holds promise in several situations. This combination would result in a substantial improvement in the net energy ratio and emphasizes the need for further improvements in sugarcane technology regarding energy efficiency. 2/ Promon, Brazil has developed systems for further treatment of stillage, but detailed data is not available.

45 Net Energy Analysis for Ethanol (keal/kcal in ethanol) MOLASSES U. S. CASEA/ BRAZIL CASEb-/ CASE Corn Energy Cassava Cassava Sugar Tradi- Conser- Sugard Without with Cane tional vation Cane-l Tree Farm 'Tree Farm FARM SYSTEM Fuel Fert./Chemicals Sub-Total ALCOHOL PLANT Coal Wood Electricity Bagasse 1.93_/ d/ C/ Chemicals N.C. N.C. N.C Stillage Disposal N.C. N.C. N.C. N.C. Sub-Total Alcohol Plant ,56 Total Energy Consumed R ,64 BY-PRODUCT ENERGY Bagasse /Wood Fertilizer Recycle N.C. N.C. N.C. N.C Animal Feed [0.041 N.C. N.C. N.C. NET ENERGY RATIO Animal Feed Option [0.42] Recycle Fert.Option [0.12] [1.84] [1.08] a/ Taken largely from API data. b/ Taken largely from Promon data. c/ Bagasse consumption based on bagasse boiler efficiency of 0.8 times wood boiler efficiency in cassava system. Based on data from a U.S. Engineering Co. d/ Assumptions and bases of calculations are not the same for the two cases, so comparative numbers between the cases should be taken as indicative only.

46 The conventional sugarcane design consumes more energy per unit of product (1.93 ratio in the preceding table) than a traditional corn based plant (1.39 ratio), since in case of sugarcane plants bagasse was free and design was concentrated on achieving least capital costs. There is little incentive to improve the energy balance for sugarcane alcohol until an alternative economic use for excess bagasse is found (such as external power generation and/or use of multiple feedstocks in the alcohol plant). With rising energy costs, these options, which could increase somewhat the alcohol plant's capital costs, are becoming increasingly more viable. The data for molasses in the table in para 6.01, which were derived from an energyefficient design, illustrate that substantial reductions in energy requirements can be achieved The conclusion for cassava and corn is less clear and would depend more on specific circumstances. The Brazil case shows that ethanol from cassava has a modest positive energy balance (ratio is slightly less than 1.0), based on recycling stillage as fertilizer, and assuming purchased wood (or coal). If a wood plantation is included in the agricultural system, the net energy ratio improves substantially, to produce about eight times the amount of energy consumed. Most U.S. data shows that ethanol from corn has a negative energy balance (ratio greater than 1.0) even if an "energy conservation" design is employed. Under U.S. conditions, coal is assumed to be the most probable fuel. Although not as attractive a proposition as in the case of sugarcane, corn could still be viable as a means of reducing petroleum requirements, since virtually all of the energy consumed can be coal 1/ and if the energy conservation design is employed. The NER ratio for corn or cassava would improve substantially if waste agricultural products were used as fuel sources From an energy conservation viewpoint, ethanol production is desirable only if the fuel source is also biomass (or low value coal). Energy balance considerations are only important however to the extent that the biomass energy source and feedstock are available at economic costs necessary to make the overall alcohol investment program economically viable. The economics of ethanol production from various biomass materials are discussed in the Chapter VIII. VII. CAPITAL COSTS OF ALCOHOL PLANTS 7.01 Practically all existing biomass-based alcohol plants are relatively small in size (60-120,000 liters/day) and are based on old plant designs which are not very efficient, particularly in their energy balance. Except in the case of Brazil, there is also lack of actual experience with the construction of a large number of plants of different sizes and at different locations. As a result, there is more than usual variation in the cost estimates prepared by different sources outside of Brazil. The uncertainty is even greater in 1/ In actuality, most existing fermentation alcohol plants in the US use natural gas or fuel oil. Thus the data indicate that, currently, ethanol production for gasohol production in the U.S. has actually increased petroleum imports. The "gasohol" policy for the U.S. (e.g. production incentives through sales tax relief) should equally address the alcohol plant fuel source and net energy ratio as well as feedstock source.

47 the cost of plants based on raw materials other than sugarcane, since there is practically no industrial scale experience with such plants anywhere. Bank staff have reviewed data submitted by a number of engineering firms, contractors and consultants for planned or potential projects in the US, Africa, Asia and Latin America. However, the analysis presented in this Chapter relies heavily on the information collected by a recent Bank mission to Brazil; data collected from other sources and Bank staff experience in the chemical projects were used to make extrapolations. Considering the uncertainties involved in the preparation of estimates on such a basis, the data presented in this Chapter should be used as indicative only. A. Sugarcane-Based Plants 7.02 Capital costs (excluding taxes, price escalation, working capital, and interest during construction) for sugarcane-based alcohol distilleries in Brazil are shown below for a capacity range of 20, ,000 liters/day: Brazil - Capital Costs of Alcohol Plants (late 1979 prices, in '000 US$) Capacity Capacity liters/day 20, , ,000 Capacity US gallons/day 5,300 31,700 63,400 Engineering Process Equipment 950 3,950 6,800 Utilities ,620 Freight Civil Works and Land ,250 Erection Sub-Total 1,770 6,650 11,150 Contingency ,350 Installed Cost ,600 12,500 These cost figures are for a conventional design (in which little attention is being paid to energy efficiency) developed for producing alcohol for potable and chemical purposes and are based on detailed data obtained from Brazilian equipment suppliers and a spot-check of the actual prices paid by some recent buyers The Brazilian alcohol industry, which has built over 300 distilleries, has developed into an efficient, competitive supplier of conventional sugarcane alcohol technology. While no exact comparative data are available, indications are that the Brazilian industry is very competitive with European and US suppliers. However, only a few developing countries with a well developed, efficient domestic manufacturing sector are likely to build plants at the cost levels achieved in Brazil. Most other developing countries, without the benefit of Brazil's extensive experience, could expect costs of % higher than those in the above tables. Factors, such as availability of local equipment and engineering, local construction and implementation capabilities, need for expatriate assistance, and location will have an appreciable effect on capital costs of plants in individual countries. We have, therefore, estimated capital costs for three general groups of countries: (i) low cost countries, which would match plant costs in Brazil; (ii) medium cost countries, such as Thailand, which would have costs about 25% higher than Brazil; and (iii) high cost countries, such as Sudan where costs could be 50% higher than the medium cost countries or about 1.9 times those in Brazil.

48 - 30- Based on these assumptions, installed cost of a 'standard' 120,000 liters/day sugarcane-based alcohol plant, in late 1979 prices, is estimated as below: Estimated Installed Cost of Sugarcane-Based 120,000 Liters/Day Plant (in late 1979 US$ million) Country Grouping Low Cost Medium Cost High Cost Installed Cost In addition to the above installed plant costs, alcohol projects would also have substantial working capital requirements. The two major components of the working capital for an alcohol distillery are the finished product inventory and accounts receivables. Since sugarcane distilleries normally operate between 160 and 180 days per year, ethanol will have to be stored for deliveries in the off-season. It can be assumed then that on a yearly basis finished product inventory will average around 90 days of production and accounts receivables about one month of sales. Sugarcane and other raw material inventories are very small and approximately offset by accounts payables. At an ethanol prices of US$1.0/gallon (US$0.27/liter), working capital requirements of a 120,000 liters/day plant are estimated at about US$1.7 million. B. Molasses-Based Plants 7.05 Alcohol plants based on molasses would normally be adjacent to sugar mills, and would take advantage of existing steam and power generation facilities as well as administrative buildings. The use of molasses as raw material also eliminates the cane crushing and separation steps with a resultant capital cost savings. Overall, molasses-based alcohol plants should cost at least 20% less than sugarcane-based alcohol plants; working capital requirements can be assumed to be similar to sugarcane plants as long as the distillery operates only during the sugar production season. Accordingly, installed costs of a 120,000 liters/day molasses-based distillery, in late 1979 prices, are estimated as below: Estimated Installed Cost of Molasses-Based 120,000 Liters/Day Plant (in late 1979 US$ million) Country Grouping Low Cost Medium Cost High Cost Installed Cost C. Cassava/Corn-Based Plants 7.06 Cassava or other starch-based alcohol plants are similar to sugarcane-based plants, except that at the front-end they would require additional equipment for the saccharification of the starches into sugar. It is roughly estimated that due to these physical additions cassava/corn-based alcohol plants will cost between 10-20% more than similar sugarcane-based plants (no actual cost data is available, since the only existing large scale cassava plant in Brazil is an experimental/demonstration plant and needs further design changes). To the extent future plants based on such starchy raw materials should also incorporate more energy efficient designs (these

49 plants would use purchased energy inputs for steam and power generation), it is roughly estimated that they would cost about 20% more than what is required for the conventional sugarcane design 1/. The estimated installed cost of cassava (or corn) plants in which better heat recovery and energy efficiency has been incorporated are shown below: Estimated Installed Cost of Cassava/Corn-Based 120,000 Liters/Day Plant (in late 1979 US$ million) Country Grouping Low Cost Medium Cost High Cost Installed Cost D. Economies of Scale 7.07 Based on information supplied by the Brazilian Government institutes and equipment manufacturers, cost estimates have been developed for sugarcanebased alcohol plants up to a capacity of about 360,000 liters/day. In the range of 20, ,000 liters/day there are significant economies of scale. Additional data, also from Brazilian sources (not shown), indicate that the economies of scale diminish rapidly above 300,000 liters/day; this conclusion is consistent with the work done for the US Department of Energy. There are no reliable cost data for plants below 20,000 liters/day. The cost data indicate that, from the production cost viewpont, in any given situation the largest practical unit should be built, after consideration of market size, raw material/ fuel availability, transport circumstances and local technology availability. Other factors, such as operational efficiency, yields, energy efficiency, all of which require highly skilled technical management, would tend to promote a larger size operation to afford reasonable salary levels and higher capital costs required for improved energy efficiency However, examination of the overall economic viability of alcohol production shows that capital costs are relatively less critical than raw material and fuel consumption, and operating days per year (which indirectly corresponds to capital costs). These factors, which are more dependent on the agricultural system than on the industrial unit, will tend to control the optimum size distillery for a particular situation. Considering all factors, the optimum size range for most developing countries is likely to be 60, ,000 liters/day for cassava and 120, ,000 liters/day for sugarcane/ molasses-based alcohol plants. In some circumstances where isolation and high transport costs result in very high-cost petroleum products, smaller scale alcohol plants may be viable. The Brazilian government through its national agricultural research program is doing R&D on this matter. The graph on the following page shows the installed costs of alcohol plants of different sizes, based on the four raw materials of major interest. 1/ Energy efficiency is relative. The data applies to improved distillation and better heat exchange design. Multiple effect evaporators and/or use of vapor recompression designs would further improve heat recovery, but at additional capital costs.

50 ALCOHOL PRODUCTION FROM BIOMASS ESTIMATED CAPITAL COSTS OF ETHANOL PLANTS (IN LATE 1979 PRICES) ~~~~~~~~~~~~~~ 0~~~~~~~~~~~~~~ 0~~~~~~~~~~~~~~~~~~N -i 15 A <J 0.* o 0 PLAT '00 LITERSPERDAY, APAI Y A SE Iur Po4 - February, c~~~~~~~~~~~~~~~~~~~) 1980 ~ ~ ~ ~ ~ I-~~~~~~~~~~~~~~~~~~~~~~~~~~00 00,~~~so World Bank ~~~~~~~ ' ~~ 12 10I Febuay,190 PLNCPCIY(00LIESPRDA,AHRUSEHNL Vord an 234

51 VIII. ECONOMICS OF ETHANOL PRODUCTION AND USE A. General Approach 8.01 The economic analysis of fermentation ethanol production and use, as is normal with most new products and technologies, involves consideration of a number of complex factors, some of which are difficult to quantify. These factors include: (a) ethanol can potentially be produced by a large number of biomass materials, most of which have not yet been tried on a commercial scale for ethanol production; (b) economic cost of biomass materials is very country specific, depending on their supply/demand balance, land availability and quality, agricultural practices and productivity, labor costs, etc.; (c) existing ethanol production technology was developed for applications where cost of production and energy consumption were less important than today, and efforts to develop technology particularly suitable for large scale ethanol production have only recently started; (d) limited practical experience is available outside of Brazil on ethanol plant construction and operation; (e) ethanol production costs depend on the specific plant location, size and technology, all of which are country specific; (f) economic value of ethanol varies substantialy between various applications and only limited data is available on large scale ethanol use; (g) future economic prices of gasoline and ethylene (the two major petroleum products ethanol can substitute) in individual countries will depend not only on future petroleum prices, which are uncertain, but also on domestic refining and chemical industry chracteristics; and (h) most countries consider substitution of imported petroleum energy by domestic resources to have substantial strategic value, which while a legitimate factor, is difficult to quantify in economic terms Economics of ethanol production and use, therefore, are to a large extent country and project specific. Conceptually, the economic analysis of a potential Alcohol Program of a country should be done on an aggregate level, by comparing the economic cost of alcohol production (raw material production, processing, distribution and consumption) with its economic benefits (as a substitute for gasoline, diesel and other petroleum derivatives). For such an analysis, detailed information is necessary on (i) the exact mix of size, location, raw material base, etc. of the alcohol plants that would be needed for the program; (ii) the location, likely productivity and other factors that affect the cost of raw material production at the plantations associated with the Program, (iii) exact infrastructure needs; and (iv) specific end uses for which ethanol would be employed. Such information however, can not be available without a detailed country by country analysis of these aspects. This report therefore analyzes the economics of alcohol production in 'standardized' plants operating under parameters that simulate the conditions expected to prevail in different countries. While this analysis can not substitute for the country (and project) specific analyses, which must be undertaken to determine merits of ethanol production in individual countries, it has identified broad parameters which can be used to identify countries and situations where further in-depth reviews appear justified As discussed in Chapter II, the two potential ethanol applications of most interest are its use as gasoline blend in "gasohol" and in the chemical industry. Ethanol use as boiler fuel and diesel substitute is likely to be economically and technically less attractive than these two applications (paras 3.13 and 3.17). While straight ethanol use as automobile fuel is feasible, it is not discussed in detail because this application is

52 unlikely to be of major interest to most developing countries and because in economic terms ethanol value in gasohol use is 15-20% greater than when used straight (para 3.10). In the chemical industry, the most attractive use of ethanol is as a solvent or for the production of chemicals by oxidation and dehydrogenation processes; however, any large scale ethanol use in the industry will involve its conversion into ethylene (para 3.17). Therefore, the analysis covers the use of ethanol as a gasoline blend, as a solvent and in the production of ethylene. Since its use as a gasoline blend is economically more attractive, this is the reference point in any subsequent discussion of ethanol economics in this report The analysis concerns production of ethanol from the four biomass materials of immediate interest (sugarcane, molasses, cassava and corn) by using fuel sources considered most likely for each biomass material. Reliable data on wood ethanol is not available yet to permit meaningful analysis. The staff is preparing a study to review the wood alcohol potential. B. Economics of Ethanol as Gasoline Blend 8.05 The base case analysis concerns a 120,000 liters per day distillery, based on sugarcane and operating for 180 days per year, to yield 21.6 million liters or about 17,000 tons ethanol per year. This size is considered,standard' in Brazil and many ethanol plants planned in the developing countries have a size close to this In calculating economic revenues, it is assumed that anhydrous (99.8% purity) ethanol would substitute regular gasoline on a 1:1 ratio basis (by volume), when used as a gasoline blend (para 3.07). The ex-distillery price of ethanol would be equal to the ex-refinery cost of regular gasoline in countries like Brazil which have large domestic refineries and where average distribution distance (and hence cost) for ethanol and gasoline is about the same. However, for countries with relatively small gasoline markets spread over a large area gasoline distribution costs, particularly for remote areas, may be very high. In such cases if ethanol is produced close to the consumption area, the distribution costs of ethanol may be much lower than those of gasoline, making the economic ex-distillery value of ethanol substantially higher than the ex-refinery or CIF import cost of gasoline. Smaller scale distilleries may be economically attractive in these circumstances It is also difficult to arrive at a universal relationship between a reference crude-oil price and gasoline price, since ex-refinery gasoline costs also vary with a number of country specific factors, including the crude quality and source, refinery size and configuration, domestic petroleum products demand pattern, gasoline quality, etc. The economic analysis presented here, therefore, calculates the economics of ethanol production at different regular gasoline prices, which are assumed to prevail around the ethanol distillery location. These gasoline prices can be related to international crude oil prices after the domestic refinery (or gasoline import) and gasoline distribution costs are determined for each individual country and region. A rough indication of gasoline value/oil price relationships is, however, presented below but it should be treated with caution.

53 Rough Relationships Between Ex-refinery Gasoline Values and Oil Prices Ex-refinery gasoline value (US$/liter) Ex-refinery gasoline value (US$/gln) Oil price delivered at refinery (US$/bbl) a/ Oil price fob Arabian Gulf (US$/bbl) a/ Including international freight, port handling, storage and local transport costs. In accordance with estimates of the Commodities and Export Projections Division, oil prices have been assumed to increase after 1980 at 3.0% p.a. in real terms for the foreseeable future. Since some components of gasoline cost should not directly increase with oil prices, gasoline value in real terms has been assumed to increase at 2.5% p.a. The analysis calculates the economics of ethanol production at the indicated gasoline values at the start of project implementation, i.e., about two years after the investment decision for an ethanol plant is made The economic cost of ethanol production is calculated by using capital costs given in Chapter VII for different plant sizes, country locations and raw materials. Based on the Brazilian experience, it is assumed that an ethanol plant would take two years to complete and operate at 60% of daily rated capacity in the first year after start-up, 90% in the second year and 100% thereafter. It is assumed that sugar and molasses based plants would operate 180 days/year. Plant life of 20 years is assumed, which is considered reasonable since the plants involve low temperatures and stationary equipment operating at atmospheric pressure. Operating cost estimates, excluding raw material costs, were derived at on the basis of actual operating data obtained from Brazilian sources and estimates prepared by a number of international engineering firms, consultants and contractors The economic viability of alcohol production is of course also sensitive to the economic (or opportunity) cost of biomass raw materials. If these raw materials can profitably be exported, their economic value will be determined by international prices. In cases where agricultural raw materials are primarily traded domestically, their economic value should be determined by the marginal cost of production taking into account the economic opportunity cost of the resources employed. The two main cases to analyze, therefore, are (i) where the agricultural feedstock is internationally traded and is diverted to ethanol production and (ii) where new crops can be grown for energy production Sizeable expenses on the agricultural side are incurred during the distilleries' construction period--land preparation, purchase of agricultural equipment, planting and fertilizing of the crops. These investment costs should be considered along with annual production costs to calculate the economic cost of supplying the agricultural feedstock to the distilleries. The total alcohol production system--agricultural and industrial--would then be analyzed on a discounted cash flow basis. Such an approach requires detailed information on future economic production costs for each particular country and each particular crop and would be employed in the analysis of specific projects. This report, based on less detailed information, analyzes

54 the economics of alcohol production for different assumed economic costs of biomass raw materials, to indicate conditions under which an Alcohol Program would be economically justified The results of the analysis are illustrated in some 15 charts. The base case charts for the standard sized (120,000 liters/day) distilleries for sugarcane, molasses, cassava and corn are shown on the following pages, while the charts illustrate sensitivity of their economics to different sizes, locations, operating days per year and fuel sources are included as Annex. The results for the individual raw materials are briefly discussed below. 1. Sugarcane 8.12 The economics of ethanol production, for gasohol application, under different gasoline and sugarcane prices, in the low, medium and high capital cost countries (as discussed in para. 7.03), are shown in the table below: Ethanol Production from Sugarcane Estimated Economic Rate of Return (%) Wholesale Gasoline Medium Cost Countries Low Cost Countries High Cost Countries Price: Cents/liter (Cents/US gallon) (95)(102)(113)(132) (95)(102)(113)(132) (95)(102) (113)(132) Base Case at Different Ex-Distillery Sugarcane Costs Sensitivity Analysis (Sugarcane at $12/ton) US$ 8/ton US$10/ton US$12/ton US$14/ton US$16/ton Future Oil Price Growth 5% p.a Future Oil Price Growth 0% p.a Annual Operating Days: Annual Operating Days: Plant Size: 20,000 (Lpd) Plant Size: 240,000 (Lpd) In the medium cost countries, sugarcane based ethanol production is likely to be economic at the present oil price levels of about US$30/bbl FOB Arabian Gulf (roughly equivalent to ex-refinery crude price of US$32/bbl and a gasoline price of about US$0.27/liter or US$1.02/US gallon) provided the economic cost of sugarcane at the factory gate is less than about US$14/ton. 1/ Sugarcane production costs in many relatively efficient sugar producing 1/ All prices and costs discussed in this Chapter, unless otherwise stated, are in late-1979 Dollars terms.

55 Economic Rate of Return (%) ETHANOL FROM SUGARCANE 120,000 LITER PER DAY DISTILLERY MIDDLE COST COUNTRY 180 DAYS OF OPERATION PER YEAR 60-_ f= C4 1 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sugarcane Cost (US $/on)

56 countries (such as Brazil, South Africa, and the Philippines) are considered to be below this level. In reasonably efficient sugar producing systems, an economic ex-factory cost of cane of US$17/ton is roughly equivalent to an FOB delivered price of about US$0.16/lb, which is the Bank's present long-term projection of world prices for sugar; at this sugarcane price ethanol production would have an economic return of 10% or more at gasoline value above US$0.32/liter, which is roughly 18% above the current level and is likely to be reached in the mid-1980s according to current Bank oil-price forecasts. In economic terms, for small sugar producers and/or countries which can export additional quantities of sugar without affecting prices the economic cost of sugarcane used for alcohol production would be equal to its net-back value from sugar exports. For countries such as Brazil, whose sugar exports already account for a significant part of world sugar markets and which can produce large additional quantities of sugarcane that cannot be exported as sugar economically, the economic value of sugarcane for alcohol would be the full economic cost of production The return is most sensitive to the assumptions about the economic price of gasoline and its future increases. A 10% increase in the gasoline value increases the return by almost 5 percentage points and at an economic gasoline price of US$0.30 liter (US$1.13/US gallon), the return would exceed 10% up to sugarcane cost of US$16/ton. In case the future increase in gasoline prices, in real terms, is assumed to be 5% p.a. then the economic return would be between 7-10 percentage points higher, compared to the returns calculated with the 2.5% p.a. gasoline price increase assumed in the base case. On the other hand, in case the gasoline prices do not increase in real terms after the startup of ethanol production, the economic return would be 7-10 points lower The economics of ethanol production from sugarcane are also sensitive to the capital cost of ethanol capacity, which is determined by (a) the installed plant costs, (b) number of operating days per year, and (c) economies of scale. Compared to the base medium cost countries, the economic returns are 4-6 percentage points higher for the low cost countries (assumed to have 25% lower capital costs), while they are 3-7 percentage points lower for the higher cost countries (with 50% higher capital costs). Similarly, the return changes by 3-5 percentage points in case the distillery annually operates 30 days extra (or less) than the 180 days assumed in the base case. While increasing the distillery size from 120,000 liters/day to 240,000 liters/day increases the return between 3-5 points, its reduction to 20,000 liters/day involves substantial cost penalties and reduces the return by as much as 7-11 points. Therefore, ethanol plants below about 120,000 liters/day should be considered only if the economic value of their output is also substantially higher due to locational reasons. 2. MIolasses 8.16 The economics of molasses-based ethanol production, with bagasse as the fuel source, are illustrated in the graph on the following page. It indicates that ethanol production in a medium cost country would be economic at the present petroleum prices in case the economic value of molasses is less than US$60/ton at the plant. This molasses price is substantially higher than the international molasses prices prevailing until early However, current molasses prices are around US$100/ton fob New Orleans, which after deducting ocean and domestic transportation charges would lead to an ex-sugarmill molasses price level slightly higher than US$60/ton (except for mills located

57 Economic Rate of Return (%) ETHANOL FROM MOLASSES 120,000 LITERS PER DAY DISTILLERY MIDDLE COST COUNTRY FUELED BY BAGASSE Molasses Cost (US $/ton)

58 in remote areas where it could be substantially lower or even approach zero if economic market outlets are not available). However, since molasses prices are expected to fall below the current high levels, ethanol production from molasses should be worth consideration in most countries. Considering that the economic value of molasses is very location specific, in the sensitivity analysis molasses prices are assumed to vary between zero and US$100/ton ex-plant However, in case fuel-oil (or some other high value fuel) is used in the distillery instead of bagasse, the economics of ethanol production for molasses become significantly less attractive. In such plants in medium cost countries, the economic return is calculated at less than 10% if the molasses value exceeds US$30/ton. In the case of high cost countries, such as Sudan, the ex-mill molasses value may have to be close to zero to justify ethanol production based on fuel-oil use (unless the economic cost of gasoline there is also very high). 3. Cassava 8.18 Compared to sugarcane, the economics of cassava-based ethanol plants are less attractive due to their need to purchase an outside source of energy and their slightly higher capital cost. To compensate for these drawbacks, these plants must obtain their raw materials at a relatively low economic cost. Even when assuming that new cassava plant designs would be more energy sufficient without a significant cost penalty (para 7.06) compared to the existing sugar-based plants, the economic return of cassava plants will exceed 10% at the current petroleum prices (US$30/bbl FOB) only if the delivered cost of cassava (fresh roots) is below US$13/ton; the market price of cassava in urban areas of Brazil in late-1979 was reported between US$25-30/ton though this price possibly included a significant transportation and wastage charge for the middle-men and also reflected relatively low yields of cassava in Brazil. However, if the energy cost of these plants can be cut in half for the same capital costs, which is conceivable, such plants would be able to pay up to US$25/ton of cassava at the present oil prices. It should also be possible to reduce cassava production and collection costs to reduce its factorygate price below the Brazilian level. Therefore, to be competitive, cassavabased ethanol plants would need (a) to have more energy efficient designs; (b) non-petroleum fuel sources, such as wood and coal, with low economic cost; and (c) substantial increases in cassava yields to reduce the cost of production. 4. Corn 8.19 Capital and operating costs of a corn-based plant are similar to those of a cassava-based plant. Compared to cassava, the economics of cornbased ethanol plants are however less attractive due to the high opportunity value of corn. At US$2.5/bushel (about US$100/ton) price of corn, a cornbased ethanol plant would not exhibit positive economic rates of return before gasoline value reaches US$0.50/liter. However, if the economic cost of corn were to drop to US$1.00/bushel, a corn-based ethanol plant would be economic at gasoline values of about US$0.30/liter. Even assuming that the energy cost of these plants can be cut to one fourth of the conventional plants, without any significant increase in capital cost, the economic return of corn plants would exceed 10% at current petroleum prices only if the delivered cost of corn is below US$1.80/bushel; the world market price of corn in late 1979 was US$3.0/ bushel. It thus appears that corn-based ethanol

59 plants would be competitive (i) when the factory gate economic value of corn is US$1.5/bushel or below, and oil prices reach US$35-40/bbl (in late 1979 prices), and (ii) they can obtain low cost non-petroleum fuel sources, such as wood and coal Overall, the analysis indicates that: (i) ethanol economics are most sensitive to the economic price of gasoline; (ii) agricultural feedstock cost is a major determinant of the economic viability of ethanol production and to analyze the economic viability of ethanol production, it is important to establish economic feedstock cost under local conditions; (iii) plant operating costs, excluding agricultural feedstock costs, are relatively less critical for sugarcane and molasses-based plants, which are energy self sufficient and use surplus bagasse to fuel boilers and generate power; (iv) for distilleries based on cassava and corn, which have to rely on external energy sources, production costs are substantially higher and fuel accounts for about 70% of variable production costs excluding feedstock. Energy efficient designs for distilleries are a significant factor in determining the economics of alcohol production from such biomass; and (v) while capital costs are less critical in determining ethanol economics than the gasoline price, cost of agricultural feedstock and fuel source, they still remain a significant factor. C. Economics of Ethanol for Chemical Applications 8.21 The difference between the economics of biomass ethanol use as gasoline blend and for chemical applications arises due to the differences in economic value of ethanol in these uses. To the extent fermentation (and synthetic) ethanol already commands a substantial premium over the ex-refinery price of regular gasoline in the European and the US markets, biomass ethanol use as solvent should be economic at petroleum prices substantially lower than those needed for gasoline substitution. Actually, since in mid-1979 ethanol prices on these markets ranged between US$ /US gallon or US$ /liter (para 4.16), biomass ethanol production for use as a solvent should already be economic in most countries. However, most of the current ethanol consumption for this application is in the developed countries and this application offers a limited scope for substitution of petroleum derivatives by biomass ethanol in the developing countries The economic value of ethanol use for the production of ethylene and its derivatives are very different, as discussed in paras While production of some chemical derivative which can be obtained directly from ethanol is likely to become economic at currently anticipated petroleum prices, production of ethylene from ethanol is not economic. At the technologies available currently, ethylene production from biomass ethanol is unlikely to be competitive with petroleum derivative ethylene until the crude-oil price reaches US$40-45/bbl (assuming economic cost of sugarcane at US$10-12/ton). It is therefore unlikely that large scale substitution of petroleum derivatives (e.g., naphtha or ethane) for the production of petrochemical products based on ethylene as an intermediate, can be justified on economic grounds in the immediate future. This conclusion could change in case petroleum prices rise much faster than now projected by Bank staff or new technologies and catalysts are developed to reduce the cost of ethylene production from ethanol. Many chemical engineering firms are working on the latter and it is possible that ethanol use in the chemical industry would become economic in the next 5-10 years.

60 Economic Rate of Return (%) ETHANOL FROM CORN 120,000 LITERS PER DAY DISTILLERY MIDDLE COST COUNTRY G~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~ol lo' 8ank Corn Cost (US $/Bu) da

61 D. Employment Impact 8.23 Biomass ethanol production can generate substantial rural employment, at a relatively low employment cost. For example, it is estimated that the additional number of direct jobs to be created by the Brazilian Nlational Program between would total about 450,000 at an investment cost per job created of about US$10,000. While the actual number of new jobs that can be created by potential alcohol production in most other countries would be a fraction of this number and the cost per job would be different, biomass alcohol production does offer an attractive opportunity for increasing rural employment. If the biomass originated in poorly endowed agricultural areas, important regional benefits may accrue as well. IX. PROSPECTS FOR ALCOHOL PRODUCTION IN DEVELOPING COUNTRIES 9.01 Biomass ethanol is the major renewable energy source which offers immediate prospects of providing a premium liquid fuel based on domestic resources to partially substitute for petroleum products. Forestry products and hydroelectric power, other renewable energy sources with immediate prospects, are most suited to produce other non-liquid forms of energy. Ethanol use as a substitute for the lighter petroleum products (such as gasoline, diesel and naphtha) would complement efforts to promote coal, wood and hydroelectric power as substitutes to heavier petroleum products (fuel oils) thus permitting the theoretical replacement of the major parts of the petroleum barrel. As discussed, the basic technology for producing ethanol from sugars and starches is well known and is appropriate for easy transfer to most developing countries, even though many technical improvements are currently being developed to enhance its economics. Ethanol production requires medium scale industrial units located in rural areas and can become an important additional source of permanent rural employment at a relatively low cost. In addition, alcohol production can offer markets for surplus agricultural production, stabilize rural incomes, and help stem the migration of rural population to the urban centers However, despite these attractions, biomass ethanol production cannot offer more than a very partial solution to the energy problems of the developing countries. In the immediate future, practical difficulties in creating successful agro-industry-energy systems are likely to limit the production of alcohol production on a large scale, to a few countries such as Brazil. More importantly, over the medium term the lack of sufficient fertile land would limit any large substitution of petroleum on a worldwide scale. Even if the entire world production of molasses, sugarcane, corn and sweet sorghum, for which commercially proven fermentation technology is available, were converted today, the total ethanol production would substitute for only about 20% of total gasoline consumption. These prospects would improve if the yields of energy crops are substantially increased and new technologies are developed for the economic conversion of cellulosic materials, but these developments are unlikely to have any major impact on the developing countries' situation during the next 5-15 years. Still, ethanol production in individual countries, particularly those with a substantial agricultural base, could lead to significant savings in their petroleum product imports The justification of biomass ethanol production in individual countries, even at current and forecast petroleum prices, is heavily dependent

62 on the circumstances of the agricultural, industry and energy sectors in the countries concerned. Large scale alcohol production would almost always require difficult economic, social and strategic tradeoffs. Although the choices involved are complex and most usefully discussed within the context of particular countries, a few generalizations are possible. The general economic prospects for alcohol production from biomass in the developing countries can tentatively be assessed by first identifying the countries which offer an agriculture/ energy balance that would favor a biomass energy program, and then determining among them those countries that offer the economic parameters which are likely to make alcohol production economically attractive. A. Agricultural/Energy Self-Sufficiency 9.04 The possibility of large-scale production of alcohol from biomass and the behavior of relative food and energy prices within particular countries will be determined in part by agricultural resource endowments and energy availability. On a global basis, a sharper increase in energy prices than in food or most other agricultural products is plausible, at least over the next decade. This implies growing competition among agricultural resources usable in producing fuel or other products (food or export crops). In those relatively rare circumstances where local energy supplies are readily available and agricultural resources scarce or poorly developed, domestic agricultural prices may rise more rapidly than prices for energy. As shown in the frame on the following page, which illustrates agricultural and energy trade balance of selected countries, several country situations can be envisaged: 1/ Situation 1. Countries characterized as having surplus agricultural production but being net importers of energy. Government policies there will tend to support domestic energy production and conservation. As energy prices rise relative to food, biomass energy production will be increasingly favored. Situation 2. Countries in this group are surplus producers of both agricultural products and energy. Biomass energy programs may be undertaken but would not normally be given high priority by government and would generally have to demonstrate strong economic viability. Situation 3. Countries in this group are in deficit, both in agricultural production and energy. These countries, including both developed and developing, would normally pursue policies to support agriculture and may encourage biomass energy programs, even if these programs must be subsidized. Biomass energy programs would tend to utilize raw materials with low economic value (molasses, processing wastes, etc.). Situation 4. These countries, relatively few in numbers, are characterized by agricultural deficits and energy surpluses. 1/ This discussion is based on a paper by Dr. Norman Rask, "Using Agricultural Resources to Produce Food or Fuel--Policy Intervention or Market Choice," presented to the First Inter-American Conference on Renewable Sources of Energy, New Orleans, LA., November 1979, mimeograph, 29 pp. The agricultural self-sufficiency is defined as the total value of agricultural production divided by the value of agricultural production consumed in the country.

63 ALCOHOL PRODUCTION FROM BIOMASS ENERGY AND AGRICULTURAL SELF SUFFICIENCY RATIOS FOR SELECTED COUNTRIES a/ I I I I III I ', I I, I, Australia S_ Brazil v) 1.6 Argentina a Thailand ~~~~~~~~~~~South - ~~~~~~~~~~Africa o Clmi Colombia 0 Philippines * United States 1.2 Sudan Canada Turkey 0 Burma co 1.0 France Pakistan Peru India Mexico 1.0 Pr -.8 Japan X ~~~ * ~Italy < Spain. Bangladesh Poland USSR SKorea 00 0 ~~~~~~~~~~Zaire Egypt Nigeria 4 Venezuela4 a West Germany United Kingdom.2 l l I I I, I, I Energy Deficit Energy Surplus Source: (Developed Energy Self Sufficiency by Dr. N. Rask from FAO and World Bank Data) Worl d Ba nk a/ These results indicate country situations where biomass energy programs may be feasible. The underlying analysis is being refined by taking into account averages for several years and focussing directly on food as compared to agricultural selfsufficiency measure used in this frame.

64 Government intervention is likely to take the form of food production incentives. Biomass energy production will be given low priority, except possibly when it utilizes waste products The developing countries in Situation 1 are likely to have the strongest will to develop large biomass energy programs to reduce their dependence on imported energy, and most of the countries with viable alcohol programs are likely to belong to this group. Using this criteria, countries with high potential for utilizing this renewable energy source may include Brazil, Thailand and the Philippines Some of the large and populous developing countries (e.g., Bangladesh, Pakistan), however, fall into Situation 3, since they are net importers of both agricultural products and energy. For countries such as these a basic question is how to make the best (economic and social) use of their agricultural resources for food needs as well as export and/or biomass energy programs; this critical land use issue is discussed further in paras to The lack of adequate agricultural production is normally related to scarcity of agricultural resources and would therefore be reflected in higher economic cost of biomass raw materials. In most of these countries, ethanol production is likely to be attractive only if based on surplus biomass material such as molasses and agricultural crop residues (or sugarcane during periods of world sugar surpluses). B. Economic Parameters 9.07 The relative merits of alcohol production in the potential countries identified in the above global analysis would vary depending on the specific economic parameters of their agricultural, industry and energy sectors. The most critical parameters include: (a) Cropping pattern: Countries with existing large scale and/or surplus production of sugarcane and molasses are more likely to have viable alcohol programs than countries where the positive agricultural balance is due to the export of crops like coffee, tea, soybean or wheat; (b) Economic Cost of biomass: Countries with surplus or low cost biomass materials (e.g., molasses in Sudan, cassava in Thailand, sugarcane in Brazil) are attractive candidates for alcohol programs. Relatively cost efficient sugarcane producers such as Brazil, the Philippines and South Africa, where sugarcane production costs are believed to be below US$10-16/ton are also likely to find ethanol production for gasoline blend use economic. But countries with higher cane production costs are less likely to find sugarcane ethanol production economic at crude oil prices projected for the near term; (c) Plant Capital Costs: Countries such as Brazil and India with extensive experience in industrial plants, large domestic markets for equipment manufacturing and relatively low labor costs are likely to have much lower investment costs and therefore more economic alcohol production, than countries such as Sudan and Mali with infant industrial sectors that rely heavily on imported equipment and expatriate assistance in plant construction and operations;

65 (d) Distribution Costs: Land locked countries (e.g., Mali) or remote regions with limited infrastructure where the economic value of gasoline substitution is very high (over US$ / liter or US$ /US gallon) may find some ethanol production economically justified even when the raw materials and/or plant costs are high; (e) Fuel Source: For ethanol production based on non-sugarcane biomass, availability of low cost, non-petroleum fuel source (e.g., wood, cheap coal) is important. C. Potential Countries 9.08 Based on the above criteria, two categories of countries can be considered as potential candidates for viable ethanol production programs. The first category would include countries which have surplus biomass, such as molasses, which can be converted into alcohol without any noticeable impact on the country's food balance. The analysis of alcohol production in these countries would be based primarily on economic parameters. The second category would include countries with a favorable agricultural resource base and a large biomass production potential, where it may be justified both on economic and social grounds to devote some agricultural resources to energy crop production. Further detailed review of ethanol production prospects appears justified in the following partial list of energy deficit developing countries in these two categories: CATEGORY I Countries with Surplus Biomass (e.g. Molasses) CATEGORY II Countries with Large Biomass Potential (e.g. Sugarcane, Cassava, Wood) Colombia Argentina Dominican Republic Brazil Ecuador Papua New Guinea Egypt Philippines Cuatemala Sudan India Thailand Ivory Coast Jamaica Kenya Mali Peru Sri Lanka Swaziland Other Central American and Caribbean Countries It must be emphasized, however, that further studies may lead to additions and/or deletions to this tentative list. X. POLICY ISSUES RELATED TO ALCOHOL PRODUCTION IN THE DEVELOPING COUNTRIES Apart from purely economic considerations, large-scale alcohol production from biomass in the developing countries raises some other social, financial and strategic issues.

66 A. Competition between Food and Energy Crops The possibility of large-scale biomass alcohol production has posed the question of whether, and to what extent, such a development is likely to compete for land and other agricultural resources which would otherwise produce food or other products. The issue is complex and sometimes emotional, involving as it does economic, political and social considerations. Basic considerations in assessing the extent of future competition for agricultural resources are the relative price movements for energy and food. As noted, on a global basis, a sharper increase in energy prices than in food or most other agricultural products is plausible, at least over the next decade. Assuming this occurs, the potential land use conflict between food, export and energy crops will increase as economic forces increasingly draw agricultural resources into energy production Biomass energy production will, thus, often require difficult choices and priorities can not always be determined by strict economic criteria. Biomass production also raises important questions of both income generation and distribution since it would frequently affect large numbers of low-income people. Economic criteria alone may not adequately recognize the distributional consequences of a particular policy action. In general, major direct users of a biomass energy program designed to produce liquid fuels to substitute for gasoline fuel for automobiles typically are the middle- and upper-income groups, though by substituting for imported energy it would release scarce foreign exchange for priority development projects, which can indirectly also help those lower income groups. Heavy taxation of automobile fuels, as practiced in Europe and many developing countries, can also generate substantial budgetary resources for development projects. In addition, significant benefits to the farmers and rural workers also result from production and processing raw materials. As noted the Brazilian alcohol production program, for example, is expected to provide in as many as 450,000 jobs in rural areas at per capita investment costs of about USS$10,000. Where the biomass energy program results in reduced food availability and higher food prices, the net distribution of benefits is likely to be unfavorable since increases in the price of basic foods impact much more adversely on the poor than on other consumers. Where potential competition in land use exists, the basic objective should be to pursue land use policies which maximize the per-hectare net benefits in "social" terms--taking into account traditional measures of opportunity costs of the raw materials and economic efficiency criteria -- as well as concerns with income distribution, impact on the environment, etc. These considerations should be part of all appraisal work for Bank Group supported biomass alcohol projects The potential land use conflict may be more imagined than real in those countries where abundant agricultural resources exist and new lands can be brought into production at reasonable cost. Elsewhere, proper government policies may reduce possible competition between energy cropping and production of food and other agricultural commodities, through appropriate price relationships between various food and energy crops, land crop allocations etc. The basic thrust of these policies should be to reduce the economic cost/value of the raw material used in bio-mass energy production. Several possibilities exist:

67 (i) Increased per-hectare yields of the traditional energy crops is usually possible, thereby reducing the overall land requirement for biomass energy. Research, technology and extension efforts in all of agriculture are needed to minimize the food price impact of an alcohol program. (ii) Energy crops other than sugarcane (e.g., sweet sorghum, wood) may increase alcohol production per hectare and thereby reduce the planted area for biomass production. Alcohol production per hectare per year from sweet sorghum, for example, may be as much as 50% greater than that from sugarcane; (iii) Production of raw materials which grow on lands marginal for agriculture should be encouraged. Cassava grows on lands generally not suited to sustained food or other annual crop production, but yield increases are required in most countries if cassava is to be an important energy crop. Forest products could become important sources of ethanol (and methanol) if cellulose conversion technology can be improved and utilized on a commercial scale. The global land area under timber on lands with limited agricultural potential greatly exceeds land available for sustained agricultural biomass production The soundest long-term approach to deal with the issue of potential conflict in land use between energy and food crops is likely to be to promote the use of raw materials such as cassava and wood which can be grown on lands not generally suitable for food production. This requires a carefully focused and sustained research and development effort in individual countries. Support of this type of research, involving both biomass production and utilization, should be a part of all development programs for biomass energy. B. Need for Integrated Alcohol Systems Generally, in most countries the petroleum, industry and agricultural sectors would have somewhat conflicting interests in the fuel alcohol question (even if the petroleum and sugar/alcohol industries are government-owned). The petroleum sector, responsible for alcohol blending and distribution requires high quality alcohol (higher operating cost), must adjust to a changing refinery mix (because of lower gasoline demand), must participate in the road-use demonstration program of alcohol/gasoline blend in cars, prefers equal and assured monthly supplies, and of course, wants a low price for alcohol (without disturbing the petroleum pricing/profit situation in the country). The industry sector, on the other hand, would want a higher price for alcohol, low alcohol quality (low production costs), assured alcohol markets and raw material supplies (to reduce long-term risks) and alcohol shipments that match its short production season (to reduce inventory and investment costs). The agricultural sector would prefer high prices and guaranteed markets for its output (but no penalties in case production fluctuates because of unforeseen circumstances), and, over the long term, the right to shift to other crops should changed circumstances make it more profitable to do so. Alcohol production from biomass would, therefore, require close coordination between the industry, agricultural, energy and transportation sectors.

68 Successful alcohol projects will involve a close association of agricultural systems, alcohol plants and assured markets in the energy sector linked by a reliable raw material collection and alcohol distribution network. Alcohol plants can not be viewed in isolation and must be designed and appraised as part of an integrated systems. This would not only minimize the risks associated with alcohol projects, but would also allow the projects to be designed after considering local or regional factors. The size of the ethanol plants may vary with the location after considering the volume of biomass raw material (or mix of raw materials) likely to be reliably available, the local alcohol market size and the cost of competing fuels. C. Need for National Alcohol Program Policies While promoting alcohol production, governments will need to accommodate the different and often conflicting needs of various sectors of the economy involved. For this purpose strong and complementary government policies in different sectors of the economy will be essential The main areas needing government policy actions would include: (a) active promotion of ethanol use for gasoline blend (or other economic applications), through demonstration projects and agreements with the automobile and chemical industry; (b) development of energy efficient ethanol plant designs, including through government financing of such research and development effort; (c) promotion of alcohol production by guaranteeing offtake and facilitating assured raw material supplies; (d) encouraging production of biomass raw materials by offering appropriate incentives and providing necessary agricultural research, extension and credit facilities, and (e) designing a cohesive pricing system for the energy/industry/ agricultural alcohol system to overcome typical large distortions in the agricultural and energy pricing and to provide financial incentives to promote production of alcohol as a petroleum substitute Perhaps the most appropriate mechanism for arriving at appropriate policy decisions and extending the above incentives would be to develop a comprehensive national alcohol program, with adequate representation from all government and private sector bodies involved. One model to follow, while developing and implementing such a program, might be the Brazilian National Alcohol Program. The overall objectives of the program have been set by the government, which is undertaking the necessary policy measures mentioned above and is also providing most of the financing required for the investments approved under the program. The actual implementation of the agro-industrial projects is primarily the responsibility of the private entrepreneurs, while alcohol distribution is being handled by the state-owned petroleum company. Whatever the actual mechanism chosen, it is essential that the national alcohol program be conceived and evaluated in the context of overall national development policy and objectives, and that the Bank Group appraise and support individual alcohol projects in the context of such overall policies. XI. PROPOSED BANK ROLE As discussed, alcohol produced from biomass is the major renewable energy source with immediate prospects of providing a liquid fuel substitute for petroleum products to selected developing countries. Biomass alcohol production can also create significant rural employment at a relatively low

69 investment cost per job, and at the same time stabilize farm incomes. While the basic alcohol production and use technology is available, and alcohol production on a small scale has been undertaken for centuries, little practical experience with large-scale alcohol production and use exists in the world, except in Brazil and to a lesser degree in the US, EEC and India. Considering the complexities involved in determining the economics of alcohol production and consumption, the merits of large-scale alcohol production in individual countries must be carefully appraised (Chapter VIII). The design of national alcohol programs must also take into account a number of important social, economic, human and strategic issues, including those mentioned in the previous chapter The Bank can play an important role in assisting the developing countries in: (a) evaluating the potential, prospects and viability of alcohol production; (b) developing policies necessary to prudently exploit this potential where justified; (c) designing national alcohol programs; (d) transferring appropriate technology through financing of these programs; and (e) formulating and strengthening institutions and organizations responsible for this activity. Our initial work so far in a number of countries indicates that assistance from agencies such as the Bank is urgently needed in these crucial areas to allow the developing countries, either with surplus biomass raw materials or with large biomass production potential, to develop this renewable energy source quickly and efficiently A decision by the Bank at this time actively to support economically justified alcohol programs will help draw attention of policy makers in the developing countries to the potential (and limitations) of alcohol production from biomass. It also could be expected to have a catalytic effect on other financing sources and even if active Bank support is limited to alcohol programs in a few selected countries, it may encourage exploitation of this potential in a larger number of countries. The Bank can also facilitate transfer of experience with alcohol programs between its member countries Finally, Bank support of alcohol production programs based on biomass is consistent with its efforts to support development of nonconventional and renewable sources of energy. This new area of activity will complement increased Bank lending for the development of conventional energy sources such as petroleum, gas, coal and hydro-power Given the topical nature of the subject and the increasing concerns about future energy supplies and prices, there is mounting interest to support alcohol production from biomass. Some of this interest is based on erroneous information and is misplaced. As pointed out throughout the report, while biomass alcohol production does offer potential in certain circumstances, it is neither a major solution to the current energy crisis nor is its economic viability usually clear cut. The justification of alcohol production will depend greatly on the specific circumstances of the agricultural, industry, energy and transportation sectors of each country. Therefore, Bank Group support for alcohol projects will be based on a careful evaluation of all factors (and these are complex) that influence their viability. In most cases, such evaluations can be made only after detailed country reviews. Industrial Projects Department June 4, 1980