A new era of the bioenergy industry

Sustainability criteria shaping the market

While the bioenergy business is growing rapidly towards large industrial scales, and trading of biofuels and biomass pellets have become an international activity, newly adopted sustainability regulations in the EU and in the US are deeply shaping the global bioenergy market. New regulation challenges biofuel companies to large GHG emissions reductions and to trace feedstock provenance from the farm to the fuel blender. A mushrooming of certification standards leads to market confusion and further development of indicators is still needed. Companies able to adopt fully the sustainability principles will stay in the market while others will most likely disappear.

Bioenergy: its value as renewable source to meet future demands

Slowing down or reversing global warming while ensuring the world’s energy security without compromising on biodiversity or on available food and water supplies is a major challenge for next decades. Between the set of available options, bioenergy is currently the most important renewable energy source and its use is expected to increase strongly in the coming decades with expectations for equaling in 2050 the current amount of fossil fuel use (390 EJ). Bioenergy has a substantial growth potential when sustainable practices are in place, such as the use of biomass from forest residues, high yielding short rotation crops or saline tolerant grasses; as extra benefit, it creates employment and economic benefits in rural, underdeveloped areas. Biomass is a versatile source: it can be used for a wide array of end-uses (heat, power, fuels, and chemical products). Large utilities such as Electrabel, Dong, Essent and Vattenfal are using more than 3 million tons/year of pellets for power production. The price fluctuations of the international pellet price index -between 80 and 160 €/ton- indicates early signs of becoming a commodity. Large oil companies have increasing interest in the bioenergy business; many joining R&D efforts for the second generation of biofuels. We therewith can say that multiple market players (e.g. energy, chemical and aviation industry, transportation or agricultural sector) may profit from bioenergy, when sustainably produced.

The need to ensure the sustainability of bioenergy

A number of crucial requirements exist to realize the expected demands of bioenergy in the coming decades. This includes the availability of sufficient biomass resources, a well-functioning biomass market and logistics that can ensure reliable, affordable, and sustainable biomass supplies. First-generation biofuels have been strongly debated because of their in some cases doubtful potential to reduce GHG emissions and its possible negative impacts on biodiversity or food prices. Worst-case examples have shown that production and consumption of biomass is not necessarily sustainable. These examples include palm oil or soybean production for biodiesel, which have destroyed tropical rainforests in Indonesia and Brazil. Most actors now agree that it is essential to ensure the sustainability of biomass energy production and trade in fast-growing markets. Strategies that have been worked on in recent years include the development of sustainability principles, legislation and biomass certification schemes.

Regulation under development in Europe: Shaping the market

The European Directive on renewable energy sets ambitious targets for all Member States: a 20% share of energy from renewable sources by 2020 and a 10% share of renewable energy in the transport sector. This month, the Commission decided to encourage industry, governments and NGOs to set up voluntary certification schemes for all types of biofuels, including those imported into the EU. This will help to implement the EU's requirements that biofuels must deliver substantial reductions in greenhouse gas emissions and should not come from forests, wetlands and nature protection areas. A recent overview made by Jinke van Dam for IEA Bioenergy Task 40 indicated 37 initiatives (including regulation). This excludes standards that already exist for the agricultural and forestry sector such as FSC or the Roundtable initiatives. Examples of company initiatives that developed sustainability principles for bioenergy are Greenergy (biofuels from Brazil), Drax or the Green Gold Label - the last two focused on biomass for electricity generation. The Sustainable Biodiesel Alliance (NGO) and the National Biodiesel Board (Association) both aim to develop sustainability principles for biodiesel in the US. Other examples are international initiatives such as GBEP, the Roundtable on Sustainable Biofuels (RSB) and the ongoing developments in ISO.

EU regulation will probably go further in ensuring real reduction of emissions when the complex debate on indirect land use change has finished in the coming months. Key underlying idea is that these sustainability requirements will shape the future European biofuel market: Industries that are not able to adapt will disappear and opportunities are created for those industries and countries that do take the initiative and place themselves in forefront positions. The Energy Directive and its guidelines will come into effect in December 2010. Various individual European countries (e.g. Netherlands, UK, and Germany) have already introduced sustainability standards – also for solid biomass - on a national level.

The situation in the US

The United States Congress revised the Renewable Fuel Standard (RFS2) in 2007 to require that 36 billion gallons of renewable fuel be blended into fuel sold in the US by 2022.  Since then, the US Environmental Protection Agency (EPA) has struggled to craft appropriate regulations to ensure that the sustainability criteria of the US RFS2 are complied with by fuel producers, refiners, and blenders. EPA recently released its final rule implementing RFS2. Two developments in particular are likely to have significant impacts on the renewable fuel market in the US. First, RFS2 requires all renewable fuels produced from new facilities to meet stringent GHG emission reduction targets compared to conventional fuel emission baselines. These emissions include both direct emissions and indirect emissions from land use change. EPA’s calculations limit some of the production processes and feedstock. Second, RFS2 requires all renewable fuels to source feedstock from “renewable biomass,” a term defined in the statute to mean feedstock coming from very specific land types, such as, for example, non-federal forest land placed into agricultural production no later than December 2007.  EPA requires, consequently, that fuel blenders must keep detailed records from feedstock and fuel producers to ensure that their sources comply with the law. Same as in Europe, the new regulation challenges companies to develop entirely new information pathways to trace feedstock provenance from the farm to the fuel blender and creates opportunities for sustainable biofuel production pathways as biofuels from perennial grasses, residues, and waste or forest materials.

Comparison EU – US regulation on biofuels sustainability

Europe:

• Sustainable production target: 55 Mio tones by 2020
• Scope: Biofuels and other bioliquids
• Legislation: Renewable Energy Directive (RED) and Fuel Quality Directive (FQD)
• Greenhouse gas emission reduction with respect to fossil fuels: 35% in 2010; 50% in 2017; 60% after 2017 for installations started from 2017 onwards; Temporary exemption for installations that were in operation in January 2008 until 2013
• Key factor for the market: Restriction of feedstock and type of land used. Preference for 2G technologies

USA:

• Sustainable production target: 110 Mio tones by 2022
• Scope: Renewable fuels
• Legislation: Renewable Fuel Standard (RFS2)
• Greenhouse gas emission reduction with respect to fossil fuels: Phase in pathway by 2022; 20% for “conventional biofuels” up to 15 billion gallons; 50% for regular “advanced biofuels” at least 5 billion gallons; 60% for “cellulosic biofuels” at least 16 billion gallons
• Key factor for the market: Restriction of feedstock and type of land used. Preference for 2G technologies

 A mushrooming of standards leads to market confusion

Different sustainability requirements and objectives between standards create unclarity for companies, which are at the starting point of developing long-term strategies to source sustainable biomass. Also, there is still an ongoing strong debate on how to solve methodologically some of the issues related to the sustainability of bioenergy, such as the role of indirect land use and the competition of food versus fuel. Main challenges include the operationalization of sustainability principles and further development of some of its criteria and indicators. Solutions may be provided by governments and international organizations that play a key role in stimulating international cooperation and policies that can remove current barriers and uncertainties in the market. They also play an important role in developing opportunities and benefits for smallholders that lack financial support or technical expertise. At the same time, companies have the opportunity to place themselves in front positions by establishing pilot projects (learning by doing) and developing sustainable value chains. The expected commercialization of second generation biofuels in the coming years will create additional opportunities. Niche markets can be created around the market chain of wood residues and municipal wastes. Companies in front positions and willing to take the challenge can largely influence on how legislation evolves; they can quickly anticipate ongoing developments, creating at the same time business opportunities.

Implications in the global biofuel market

The margins for biofuel producers have plunged from about 30 cents €/litre in 2008 to less than a tenth  since 2009. Fossil fuel prices with wide price swings in times of shortage or oversupply produce enormous instability in the current biofuel industry. This as 80% of their costs come from, still, mostly expensive feedstock. In the coming years, a reduction of feedstock costs is expected due to upscaling effects and efficiency and technology improvements. Assets finance investments in the biofuel industry were prominent until the third quarter of 2008. More than 5 billion US$ were invested worldwide in the third quarter of 2007. Since this blooming period, only few important investments have been made, such as Neste Oil’s hydrotreated vegetable oil plant for premium diesel production. The implementation of sustainability principles and certification in the production of biofuel has a double dividend effect. It provides a guarantee for the public that large biofuel use will reduce environmental impact of fuel consumption. And for European producers and traders it has the benefit of receiving national public support such as tax relief for biofuels sustainably produced within or outside the European Union. Managing the economics of sustainable production and its certification is then the key factor to succeed. Two types of players most likely can better adapt to the new European regulatory framework: large players that base their business in volume and large market share, and specialized companies in niche markets that are able to manage well their technology and consequently their margins in production costs. Vertical integration with the supply side is expected for the first type of players, while controlling supply chain and end-niche market for the second. Alliances between a large enzyme technology company like Novozymes and large biofuel producers like POET in the USA, top technology suppliers for sustainable biofuels like Solazyme, or global companies such as Abengoa Bioenergy which shows strong commitment to sustainability implementation in their global operations and currently investing in best 2G technologies and suitable energy crops are a clear example for the first type. Examples for the second type are e.g. small and medium sized companies producing from used cooking oil (UCO), yellow grease (YG) and animal fats.

This newsletter is based on recent work conducted by SQ Consult; more information on these studies is available at request. The author thanks Jinke van Dam and Adam L. Reed for their valuable contribution to writing this article.