The Long-term Prospects of Biofuels in EU-Countries

The Long-term Prospects of Biofuels in EU-Countries Amela Ajanovic Energy economics Group Vienna University of Technology, Austria email: Ajanovic@eeg.tuwien.ac.at Gerfried Jungmeier, Martin Beermann Joanneum Research Graz, Austria Reinhard Haas Energy economics Group Vienna University of Technology, Austria ABSTRACT The core objective of this paper is to analyse the economic, ecological and energetic perspectives of biofuels second generation compared to biofuels of first generation and fossil fuels in a dynamic framework up to 2050. The most important result of this analysis is that in Europe second generation biofuels might become economically competitive between 2020 and 2030. Yet, this will only be achieved if the following conditions apply: (i) achievement of significant learning effects leading to considerable lower plant costs; (ii) improvement of conversion efficiency from feedstock to fuel leading to lower feedstock prices and better ecological performance; (iii) increases in conventional diesel and gasoline prices, e.g. due to CO 2 based taxes. INTRODUCTION Currently used biofuels of 1st generation (BF-1) e.g. biodiesel from rape seed, bioethanol from wheat and maize, biomethane from manure, grass and green maize are associated with ecological problems, high costs, low net energy yields, limited potentials, unfavourable land-use changes and competition to food production. As an alternative biofuels second generation (BF-2) BTL (biomass to liquid), FT-Diesel, ethanol from lignocellulose, synthetic natural gas from wood are considered as a promising option for clean energy carriers for the future. Major advantages expected are better ecological performance: low life-cycle carbon emissions; no associated land-use changes; due to the fact that they are produced from lignocellulose also huge potential for feedstocks required are expected. These primary lignocellulose resources encompass: straw, corn stover, forest wood residues, wood industry residues, waste wood and short rotation copies; if produced on large scale also economic competiveness is expected. The core objective of this paper is to investigate the energetic, ecological and economic development perspectives of BF-2 compared to BF-1 in Europe in a dynamic framework till 2050 and how this might impact market prospects. Our method of approach is based on scenarios for development of conversion efficiencies, corresponding life-cycle CO 2_equ balances, scenarios of oil price and CO 2 -cost development and international learning rates for the corresponding conversions technologies. This work extends the analysis conducted in Ajanovic et al [1],

Ajanovic et al [2], and Ajanovic et al [3]. With respect to the literature the most important analyses are summarized by Panoutsou [4]. We focus on the following categories of biofuels, 1 st generation biofuels: BD-1: biodiesel from rape seed and other oil seeds; BE-1: bioethanol from wheat and maize; BM: biomethane from manure, grass and green maize; 2 nd generation biofuels: BD-2: biodiesel from biomass-to liquids (BTL) with Fischer-Tropsch process; BE-2: bioethanol from lignocellulose; SNG: biogas from synthetic gas from biomass. These biofuels are analysed with regard to the environmental impacts, costs, market prospects and potentials. This analysis is based on: possible developments of fossil energy price levels and energy demand; technological learning effects (based on global developments); environment, energy and transport policies on EU level. DYNAMIC ENVIRONMENTAL PERFORMANCE Biofuels are expected in many policy directives and scientific papers to have the potential to contribute significantly to replacing fossil fuel consumption and corresponding CO 2 emissions. Indeed, in recent years biofuels first generation BD-1, BE-1, BM have entered the fuel market in significant amounts, see e.g. [5] and [6]. CALCULATION OF WTT- FUEL NET BALANCE SNG BE-2 BD-2 BM BD-1 BE-1 WTT -Fuel Net WTT-Plus WTT - Minus CNG Diesel Gasoline -80-60 -40-20 0 20 40 60 80 gco2_equ/mj Figure 1: Calculation of WTT-net CO 2 emission balances (Source: Joanneum Research calculations) Yet, BF-1 are still under discussion mainly because of their currently poor ecological and energetic performance. In this context it is very important to consider the whole fuel chain by means of a so-called Well-to-Wheel (WTW) assessment for the ecological assessment. The net WTT emissions as depicted in Fig. 1 are calculated as follows:

WTT = WTT-minus + WTT-plus (1) With WTT-plus.. CO 2 fixation due to biomass planting WTT-minus CO 2 emissions during fuel production The WTW-balance adds Well-to-Tank (WTT) and Tank-to-Wheel (TTW), see Fig. 2. WTT-, TTW- AND WTW-NET EMISSIONS 2010 SNG BE-2 BD-2 BM BD-1 BE-1 CNG Diesel Gasoline -60-40 -20 0 20 40 60 80 100 WTT-Fuel Net TTW-Fuel WTW-Fuel gco2_equ/mj Figure. 2. WTT-, TTW- and WTW net CO 2 emissions of fossil vs biofuels in 2010 for the average of EU countries on a WTW (Source: Joanneum Research calculations) We can see from Fig. 2 that in 2010 BF-1 had overall only about 40% lower CO 2 emissions (on a WTW basis) than fossil fuels see Fig. 2. Fig. 3 depicts the expected development of CO 2 emissions of fossil fuels versus biofuels in 2010 and 2020 for the average of EU countries on a WTW basis. For the ecological and economic analysis it is important to note that for all fuels byproducts were considered in all cases as they may have a positive influence on costs and emissions performance.

W T W - NET EMISSIONS 2010 VS. 2050 100 90 80 2010 2050 70 gco2_equ/mj 60 50 40 30 20 10 0 Gasoline Diesel CNG BE-1 BD-1 BM BD-2 BE-2 SNG Figure 3. CO 2 emissions of fossil vs biofuels in 2010 and 2050 on a WTW basis (Source: Joanneum Research calculations) DYNAMIC ENERGETIC ASSESSMENT Next from energetic point-of-view it is of course of interest how this performance looks like currently and what will be the range of possible development and under which condition which development will take place. kwh_in/kwh_out 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 BD-1 Rape seed BE-1 Wheat BG-1 Green Maize BD-2 FT-Diesel (Wood) BE-2 Straw BG-2 SNG (Wood) fossil renewable BD-1 Rape seed BE-1 Wheat BG-1 Green Maize BD-2 FT-Diesel (Wood) BE-2 Straw BG-2 SNG (Wood) 2010 2050 Figure 4. Energetic assessment of the considered biofuels for 2010 and 2050 (Source: Joanneum Research calculations) The starting point is depicted in Fig. 4 on the left-hand side. It provides an energetic assessment of the considered biofuels for 2010. We can see that a major problem of BF-1 is the relatively high share of fossil energy higher than those of BF-2 while for BF-2 the low conversion

efficiency and the corresponding high input of renewable feedstocks is the major problem. However, we can also see that up to 2050 it is expected that this problem will be relieved but only slightly. DYNAMIC ECONOMIC ASSESSMENT The method of approach for our economic analysis consists of the following major steps: Assumptions Major assumptions for the modelling analysis are: Increases in fossil fuel prices are based on IEA (2010) [7] and are 1.5%/year starting in 2011; The development of capital costs of biofuels is based on international learning rates of 25% and national learning rates of 15% regarding the investment costs of theses technologies; International learning corresponds to world-wide quantity developments in the Alternative Policy Scenario (AS) in IEA (2009) [8] up to 2030 and in IEA (2008) [13] up to 2050; All cost figures are in prices of 2008; No explicit carbon costs are included. Yet for a comparison of market prospects see Fig. 8 a CO 2 -based tax is applied; Regarding the future land use we have assumed that maximal 30% of arable land, 10% of pasture land, 10% of meadows and 3% of wood and forest wood residues could be used for feedstock production for biofuels by 2050. Additional 5% of wood industry residues could be used for biofuels production. Calculation of biofuel costs Next the biofuel production costs are calculated. We consider the following components are considered to calculate the costs of biofuels (see also Ajanovic et al, 2010 [1]): Net feedstock costs (C FS ) Gross conversion costs (GCC) Distribution and retail costs (DC) Subsidies for biofuels (Sub BF ) Firstly, the feedstock costs are calculated as follows: C FS P FS ftc CTR R (2) by fcon With P FS.feedstock costs f CON.conversion factor f TC..factor for transaction costs C TR.feedstock transport costs R by.revenues from by-products Total biofuel production costs (C BF ) for year t are calculated as follows 1 : 1 Note, that in these analyses no explicit carbon costs are included!

C BF C C C Sub (3) FS GC D BF With C D.distribution and marketing costs Sub BF.subsidies for biofuels C GC.gross conversion costs of biofuels plant C GC IC CRF T (4) where: IC.investment costs CRF capital recovery factor T operating hours per year Fig. 5 shows the production costs of fossil vs biofuels excl. taxes in 2010 for the average of EU countries compared to fossil fuels. We can see that biofuels are still considerably more expensive than fossil fuels. So it is clear that their economic performance has to be improved. CNG SNG BM PRODUCTION COSTS FOSSIL VS BIOFUELS 2010 Gasoline BE-2 BE-1 Diesel BD-2 BD-1-5 0 5 10 15 20 cent/kwh fuel Feedstock Capital Other inputs Energy costs Other O&M By-Product Credit Marketing & Distr. Market price Figure 5. Production costs of fossil vs biofuels excl. taxes in 2010 for the average of EU countries Considering technological learning and scaling effects Future biofuel production costs will be reduced through technological learning. Technological learning is illustrated for many technologies by so-called experience or learning curves. In our model we split up specific investment costs IC t (x) into a part that reflect the costs of conventional mature technology components IC Con_t (x) and a part for the new technology components IC New_t (x).

IC t ( Con_ t New_ t where: x) IC ( x) IC ( x) (5) IC Con_t (x) specific investment cost of conventional mature technology components ( /kw) x..cumulative capacity up to year t (kw) For IC Con_t (x) no more learning is expected. For IC New_t (x) we have to consider a national and an international learning effect: IC New_t (x) = IC New_t (x nat_t ) + IC New_t (x int_t ) (6) where: IC New_t (x nat_t )..specific national part of IC New_t (x) of new technology components ( /kw) IC New_t (x int_t )..specific international part of IC New_t (x) of new technology components ( /kw) For both components of IC New_t (x) we use the following formula to express an experience curve by using an exponential regression: IC b New_ t ( x) a xt (7) where: IC New_t (x).. specific investment cost of new technology components ( /kw) b learning index a specific investment cost of the first unit ( /kw) With respect to the future development of the costs of BF-2 the optimistic expectations raised some years ago has been calmed down. As e.g. reported by Trechow [9] neither the expected magnitude of investments in biorefineries for BTL in Europe nor the promised technological progress took place since 2005. Moreover, we have to admit that only rough estimates for current investment costs are possible. Reported investment costs of biorefineries in e.g. Toro et al [10] vary strongly and are of course only available from pilot projects. From practical figures it is not always clear, whether they are influenced by subsidies and R&D expenses and to what extent. Fig. 6 documents the possible range of scenarios for the development of costs of biofuels up to 2050 in a stylised way. In an optimistic scenario BF-2 could become cheaper than BF-1 and could become competitive sometimes between 2020 and 2050 with conventional fuels.

BF-2_pess BF-1_pess Uncertainty: current costs of BF-2 Foss_high BF-2_opt BF-1_opt EUR/kWh Foss_low 2010 2050 Figure 6. Possible range of scenarios for the development of costs of fossil fuels and biofuels up to 2050 This would also encompass a scaling effect in addition to learning, see Fig. 7. Small scale EUR/kWh Large scale 2010 Figure 7. Possible range for the development of the capital costs of BF-2 due to scaling effects up to 2050 An important impact on the future economic competitiveness will taxes play. The major reason for the increases of biofuels consumption in the EU in the last years was that they were exempted from excise taxes. In this context it is important to identify the shares of cost categories. As can be seen clearly from Fig. 5 the by far largest cost share of BD-1 and BE-1 are feedstock costs. 2050

Fig. 8 depicts the costs of fossil versus biofuels including and excluding taxes resulting from our scenarios in 2010 vs 2050 for the average of EU countries (prices of fossil fuels excl. tax increase by 1.5%/yr up to 2050). We can see that due to the introduction of a CO 2 tax based on the equivalent of today s average excise tax on gasoline (0.68 EUR/litre gasoline in 2010) and increasing yearly by 3.6 cent/litre gasoline (=1.5 cent/kg CO 2 ) up to 2030 and remaining constant until 2050 afterwards (all prices of 2010) and the CO 2 taxes of the other fuels develop equivalently to their CO 2 content relative to gasoline the economic attractiveness of all biofuels fractions increases. The major results of this analysis are: (i) BF-2 will become competitive when including CO 2 tax schemes between 2025 and 2040; (ii) BE-2 would become earlier competitive than BD-2 mainly because lower feedstock costs. Note, that for biomethane the costs are a mix of biogas from grass, green maize and manure; (iii) Yet, if no taxes are considered neither BF-1 nor BF- 2 will be cheaper then fossil fuels before 2050. 35 COSTS OF FOSSIL & BIOFUELS INCL. AND EXCL. TAXES 2010 VS 2050 30 cent/kwh 25 20 15 10 5 0 Diesel BD-1 BD-2 Gasoline BE-1 BE-2 CNG BM SNG Diesel BD-1 BD-2 Gasoline BE-1 BE-2 2010 2050 Costs 2010 Excise tax 2010 VAT Costs 2050 CO2-tax 2050 VAT 2020 CNG BM SNG Figure 8. Cost of fossil fuels vs biofuels incl. and excl. taxes in 2010 vs 2050 for the average of EU-countries in prices of 2010 (Source: IEA(2011), own investigations) POTENTIALS FOR BIOFUELS Regarding exploration of potentials we start with using historical data (FAO, EUROSTAT) for feedstock yields, production and areas of agricultural and forestry feedstocks as well as meadows/pastures and fallow land. Furtheron, we vary yields in future scenarios depending on production costs and market prices. Potentials are achieved in practice if the production costs are lower than the market prices of conventional diesel and gasoline prices, incl. taxes.

In the following we present the results of corresponding quantities produced for BF-1 and BF- 2 in EU-15 up to 2050. These alternative energy carriers are based on bioenergy resources. An increasing use of biomass in the future in Europe could raise basically two questions: (i) the use of biomass requires large amounts of land which otherwise could be used for other purposes (e.g. food production); (ii) increasing biomass production might be in contradiction with sustainable issues. The conventional biofuels are based on the feedstocks grown on arable land, which is very limited in EU-15, 71 Mill. hectares. In this analysis we assume that a maximum of 30% of all arable land, about 21 Mill. hectares, can be used for growing biofuels. Of this area a maximum of 20%, about 4 Mill. hectares, can be used for growing oil seeds. However, with the second generation of biofuels, other land areas such as meadows, pastures and forest area could also be used for biofuels production, so that total land potential for alternative energy carriers could be significantly higher. For BF-2 mainly non- crop area dependent resources will be used. These are: straw, waste wood and wood residues from the industry. As depicted in Fig. 9 in about 2024 BE-2 becomes economically competitive and about 2023 BD-2. Moreover, by about 2038 BE-2 is more economically and produces more biofuel on crop areas than BE-1. Also SNG will be competitive before 2030. Note, in Fig. 9 after 2010 no imports are included. TOTAL ENERGY FROM BIOFUELS 1000 900 800 700 600 TWh 500 400 300 200 100 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 BD-1 BE-1 BM BD-2 BE-2 SNG Figure 9. Total area for biofuels by biofuels category Total energy from biomass in 2050 could be more few times higher than now, about 900 TWh. After about 2030 a significant and continuously increasing share of BE-2 could be achieved, see Fig. 9. CONCLUSIONS The major conclusions of this analysis are: The major problems of BF-1 are limited availability of feedstocks and the modest ecological performance due to relatively high share of fossil fuel inputs. The largest expectations are currently put into advanced BF-2. The new technologies for the production

of biofuels could enable the use of wide range of new feedstocks such as straw, waste cellulosic materials, wood residues, whole plants, short rotation copies and other lingocellulosic materials. Yet, currently the costs of BF-2 are still rather high, mainly because of high investment costs and still rather low conversion efficiencies of feedstocks into biofuels. The most important result of this analysis is that for the EU-27 BF-2 might become economically competitive by 2050. Yet, this can only be achieved if the following aspects are reached: (i) achievement of significant learning effects leading to considerable lower plant costs; (ii) significant improvement of conversion efficiency from feedstock to fuel leading to lower feedstock prices and better ecological performance; (see also EU [12]); (iii) increases in conventional diesel and gasoline prices, e.g. due to CO 2 based taxes. In general it can be stated that no significant cost reduction can be expected for BF-1 and BF-2 in Europe by 2050. However, proper tax policies and continuous increases of fossil fuel prices could make biofuels (BF-1 and/or BF-2) competitive in the market. NOMENCLATURE BD-1 biodiesel from rape seed and other oil seeds BD-2 biodiesel from biomass-to liquids (BTL) with Fischer-Tropsch process BE-1 bioethanol from wheat and maize BE-2 bioethanol from lignocellulose BF-1 1 st generation biofuels BF-2 2 nd generation biofuels BM biomethane from manure, grass and green maize SNG biogas from synthetic gas from biomass TTW Tank-to-Wheel WTW Well-to-Wheel WTT Well-to-Tank REFERENCES 1. Ajanovic A., Haas R., Economic Challenges for the Future Relevance of Biofuels in Transport in EU-Countries. Energy 35 (2010) 3340-3348 2. Ajanovic A., Haas R., The future relevance of alternative energy carriers in Austria. IEESE-5, June 2010, Denizli, Turkey 3. Ajanovic A., On the Future Relevance of Biofuels for Transport in EU-15 Countries, Energy&Sustainability 2011. 4. Panoutsou C., Eleftheriadis J., Nikolaou A., Biomass supply in EU27 from 2010 to 2030, Energy Policy 37 (2009) 5675 5686 5. Ajanovic A. et al, 2011: ALTER-MOTIVE. Final Report. www.alter-motive.org 6. European biofuels technology platform, www.biofuelstp.eu 7. IEA.World Energy Outlook 2010. IEA, 2010 8. IEA.World Energy Outlook 2009. IEA, 2009 9. Trechow P.: Sputtering start for premium fuel, New Energy 6/2009, pp. 86-88 10. Toro F., Jain S., Reitze F., Ajanovic A., Haas R., Furlan S., Wilde H., 2010: State of the art for alternative fuels and alternative automotive technologies, ALTER-MOTIVE, D8 11. IEA: Energy Prices & Taxes (2011) 12. EC, 2009c. DIRECTIVE 2009/30/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 April 2009, amending Directive 98/70/EC as regards the

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