26 Apr 2007
Another feature that proponents of biodiesel put forward is that the fuel can be used without modification in engines currently in use.
The European Union has arguably been the global leader in biodiesel production. However, as shown in Figure 1, the
The rapid growth in the industry has been fueled by a series of government-provided financial incentives combined with historically high energy prices. As shown in Figure 1, despite these economic incentives, the industry carries a significant (though decreasing) idle capacity. A review of the main policy incentives contributing to the rapid increase in
Policy Drivers
The rapid expansion of biodiesel production observed between 2000 and 2006 was triggered by a 1998 amendment to the 1992 Energy Policy Act and cash support from the USDA Commodity Credit Corporation's (CCC) Bioenergy Program. Further support was created through the American Jobs Creation Act (the Jobs Act) of 2004 and the Energy Policy Act of 2005.
The 1992 Energy Policy Act requires that a portion of the new vehicle purchases by certain fleets (mostly owned by federal and state governments and alternative fuel providers) be alternative fuel vehicles. Originally, biodiesel was excluded as an alternative fuel, but the 1998 amendment allowed fleet managers to comply with part of their alternative fuel usage requirement by using biodiesel, as long as it was used by heavy-duty vehicles in blends, including at least a 20 percent blend (B20).
The CCC Bioenergy Program provided payments to producers to encourage biodiesel production. Plants with capacity under 65 million gallons per year were reimbursed 1 bushel of feedstock for every 2.5 bushels used for increased production (those over 65 million gallons were reimbursed 1 bushel for every 3.5 bushels used for increased production). Although initially only biodiesel made from oil crops was eligible for payments, the 2002 farm bill extended the list of allowed feedstocks to include animal by-products, fats, and recycled oils of an agricultural origin. The program ended in June of 2006.
The Jobs Act provided incentives for the biofuels industry again on the demand side. Under the act, blenders can claim $1.00 per gallon of biodiesel made from virgin vegetable oils or animal fats and $0.50 per gallon made from recycled oils and fats mixed with diesel. To receive the tax credit, the blender needs to use biodiesel registered as fuel with the Environmental Protection Agency and meeting the ASTM D6751 standard, as certified by its supplier.
The Energy Policy Act of 2005 provided incentives on both the supply and demand sides. On the supply side, the act sought to lower production costs by providing tax credits at a rate of 10¢ per gallon to small producers of biodiesel. The credit is available for the first 15 million gallons produced by a plant with annual production capacity of less than 60 million gallons. This tax credit is set to expire at the end of 2008.
On the demand side, the 2005 act mandated a renewable fuels phase-in (the Renewable Fuels Standard, RFS), requiring fuel producers to include a minimum amount of biofuels, and extended the excise credit to blenders until the end of 2008. Under the RFS, fuel producers were required to include 4 billion gallons of renewable fuels by 2006, increasing the amount to a minimum of 7.5 billion gallons by 2012.
Lobbying efforts are intensifying to extend the tax incentives beyond 2008. There are also state-specific incentives for the use of biodiesel, ranging from requirements to blend biofuels with petrofuels (for example, the requirement for the use of B2 in effect in
The Environmental Protection Agency's diesel regulations, requiring the introduction of Ultra Low Sulfur Diesel (ULSD) for 80 percent of the on-road diesel by mid-2006 (and off-road for mid-2007), are also expected to increase demand for biodiesel as a lubricant additive. ULSD has low lubricity, which can damage diesel engines. Research has shown that blending it with biodiesel to produce B2 could restore the lubricity of diesel fuel to adequate levels.
Industry Margins and Prospects
Since feedstock expenses account for about 80 percent of a biodiesel plant's operating cost, margins are highly sensitive to the prices of oils and fats. Between 75 and 90 percent of
To calculate the net operating returns of a representative plant in the industry, we constructed a simple economic model of a 60 million gallon biodiesel plant. The plant modeled has an operating cost (excluding feedstocks) of 42¢ per gallon and uses 7.48 pounds of feedstock to produce a gallon of biodiesel. We assume that the glycerin that is co-produced is sold (raw), as are other co-products (fatty acids and filter cake), at 5¢ per pound. Net operating returns, calculated as revenues minus operating costs (excluding capital and other fixed costs) for the modeled plant are presented in Table 1.
The table shows that as feedstock prices exceed 30¢ per pound, the price of biodiesel needs to be above $3 per gallon for the plant to make a profit. Operating returns are positive at $2.80 per gallon, but outlays to cover capital and other fixed costs and returns to investors are likely to be more than 21¢ per gallon. The Food and Agricultural Policy Research Institute projects that the price of soybean oil will be 30.7¢ per pound for the 2007/08 crop year and will surpass 34¢ per gallon by the 2009/10 crop year.
As highlighted in the table, the current viability of the biodiesel industry depends on financial support by the government, as the wholesale #2 diesel price has been below $2 per gallon since September of 2006.
Near-Term Outlook
As evidenced by the amount of idle capacity, supply of biodiesel has outpaced demand for the biofuel, and consumption has not picked up until recently. A partial explanation may be found in the relative prices of biodiesel versus diesel fuels and the reluctance of engine manufacturers to approve usage of the fuel until recently. However, quality standards for biodiesel are developing and quality certification systems have started to emerge, prompting engine manufacturers to extend their warranties. More manufacturers are approving the use of B20 in some or all of their engines. This may improve the acceptance of biodiesel. Additionally, mandates for the use of blends combined with the fuel's use as an additive to improve the lubricity of ULSD may create additional demand for the product. However, the economics of today's diesel prices and the prices of potential feedstock sources do not seem promising without continued government support and technological improvements. Projected increases in vegetable oil prices, especially soybean oil, will continue to squeeze margins for biodiesel producers.
Source: cattlenetwork.com
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