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					    The Economics of Fuel Ethanol -
      “COSTS AND BENEFITS OF A
BIOMASS-TO-ETHANOL PRODUCTION
    INDUSTRY IN CALIFORNIA”

                   Mike McCormack
           Transportation Technology Office
            California Energy Commission
                         at the

The Oregon Ethanol Forum: A Closer Look At Fuel Ethanol
          Village River Inn - Eugene Oregon
                     May 8, 2001
                Background-
   Why is California Interested in Ethanol
                      Production?

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

 California Phase 3 gasoline regulations adopted in 1999
 California Environmental Policy Council approved ethanol as a
  environmentally acceptable alternative to MTBE
 CARB initiated studies (in progress) to deal with vehicle/ fuel commingling
  and permeation issues
 Energy Commission evaluated the feasibility of a waste-biomass to ethanol
  (cellulosic feedstocks) in 1999 (Report to Governor)
    potential energy, environmental and economic benefits

    favorable ethanol plant/project economics for a variety of feedstocks….
       under the right circumstances
    established costs of ethanol delivered to California

    challenges and uncertainties identified

    lingering issue - how soon can cellulosic technologies be ready?
                      Background-
    Recommendations to Foster Biomass-to-Ethanol
 Development in California (1999 report to the Governor)


Staff recommended actions in 4
 categories:
     Policy
     Research, Development, Demonstration
     Market Development and Commercialization
     Further study needs
Market development recommendation
     Study the most appropriate forms of state financial
      and non-financial assistance to encourage technically
      sound and economically feasible biomass-to ethanol
      projects
                   Background-
Recommendations Continued (1999 report to the Governor)

Further study needs recommendation
     Develop a method to determine the cost and public
      benefits associated with developing biomass-to-
      ethanol and biomass-to-other transportation fuels
      industry in California
Policy Recommendations
     Develop and adopt a biomass-transportation fuels
      energy policy
     Adopt carbon reduction goals
     Adopt fuels diversity goals
                   Background-
Recommendations Continued (1999 report to the Governor)



RD & D Recommendations
     Pursue joint funding opportunities that support
      demonstrations of several biomass-to-ethanol projects
      in the state
     Develop program to improve collection, transportation
      and processing of cellulosic feedstocks
     Initiate advanced engine development projects which
      use biomass transportation fuels
    State Budget Directive
   FY 2000/01 (Chapter 52)
Determine the economic costs and benefits
of a biomass-based ethanol production
industry
Assess the impact on consumer fuel costs
from an in-state ethanol production industry
and from imports
Evaluate the impact on rice straw burning
Provide recommendations on future steps
Ethanol Production Scenarios
           Study Assumptions
Ethanol Production Scenarios

Economic Assumptions and Inputs
     20 cent per gallon producer payment
     10% capital cost over 20 years
     20 year plant life
     26 years of ethanol production
     IMPLAN used to calculate impacts on the state
      economy
     40, 20 and 10 million gpy plants assumed
Ethanol Supply and Demand
Biomass-Ethanol Production Scenarios



                                  Plant Capacity    Total Capacity
   CA Ethanol Scenario   Plants    Million gallons/yr pure ethanol

  Forest Material          2           20                  80
                           1           40
  Agricultural Residue     2           40                  80
  Urban Waste              4           10                  40
  Totals                   9                              200
California Biomass (Bone Dry Tons)
Used in 200 Million Gallon Production

    Forest Materials (80 M Gal)
    Rice Straw + Prunings (80 M gal)
    Urban Waste (40 M Gal)             1,000,000


   400,000




                                       1,300,000
Assumed Distribution of Biomass
   Feedstock Supply Regions

          1
                           5
      6                                 Cellulosic biomass regions
          4                2
                               3
                       7

                   8

              17
              18
                                   10


                                         9



                                             12, 19    15
                                        14
                                                        11
                                                  13
                                                            16, 20
Economic Costs and Benefit Impacts Over 20 Year
Plant Life (State Outlay: 10% Capital, $0.20 Per
Gallon Producer Payment)

                                   $1,200
     Economic Impact ($ million)



                                   $1,000

                                    $800               Plant       State Outlays
                                                       Operation
                                    $600

                                    $400

                                    $200
                                                       Capital
                                     $-
                                            Benefits               Costs
Annual Changes in Personal Income - 200 million
gpy Industry (Y2000$)

                                $160
                                $140                                                                          Ethanol Production
  Personal Income ($ million)




                                $120                                                                          Construction
                                $100                                                                          State Outlays
                                 $80
                                 $60
                                 $40
                                 $20
                                $-
                                $(20)
                                $(40)
                                $(60)
                                $(80)
                                        2001

                                               2003

                                                      2005

                                                             2007

                                                                    2009

                                                                           2011

                                                                                  2013

                                                                                         2015

                                                                                                2017

                                                                                                       2019

                                                                                                               2021

                                                                                                                      2023

                                                                                                                             2025

                                                                                                                                    2027
Major Findings - Economic Impacts
                           State Cost
                           (Assumed)         Economic     Forest Air


     20% Capital,
       $0.40/gal


     Base Case
     (10% Capital
     $0.20/gallon)

   No State Cost,
    High Ethanol
       Price

               ($1,000)                 $0              $1,000

                          Personal Income ($ million NPV) over 20 years
Major Findings - Price of Ethanol Delivered
to California
                           2.20   Near term price with US Ban on MTBE (45 U.S. facilities)
   Ethanol Price ($/gal)



                           2.00
                           1.80

                           1.60
                                          Long term price (75 production facilities)
                           1.40
                           1.20

                           1.00
                               400       600        800        1000       1200         1400
                                      Ethanol Supply ( Million gal/year)
Major Study Findings
What are the economic impacts?
  • $1 billion over 20-year period, assuming state
    government incentives totaling $500 million for a 200
    million gallon per year industry.
What is the impact on rice straw
 burning?
  • Rice straw burning in California will be curtailed in the
    near future under current air quality regulations.
  • Ethanol production would provide rice growers with an
    option to plowing rice straw into the ground to meet air
    quality regulations.
Major Study Findings
What are the potential impacts on
 consumer fuel prices?
  • Near-term: Uncertainty in securing adequate supplies
    of ethanol to meet needs could lead to escalating
    ethanol market prices with resultant increase in the
    cost of gasoline to consumers.
What are the potential forest and
 emission impacts?
  • Reduction in the frequency and intensity of forest fires
    and improved forest health.
  • Reduced emissions from wildfires and agricultural
    burning.
              Recommendations
              State Investment in Cellulosic Ethanol

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

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

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

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

Due to the potential for price increases in
 ethanol imported into California with MTBE
 phase-out in California by December 31, 2002,
 actions are appropriate to reduce impacts on
 consumer’s fuel costs:
     The legislature should direct the Energy Commission
      to explore means to increase the state’s ethanol
      import options, balance ethanol demand growth with
      available supplies, and limit ethanol price fluctuations.
               Recommendations
             Examining Other Renewable Fuel Options



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

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

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

 Consumer fuel cost
      A 50 cent per gallon ethanol cost swing would add about $0.03
       per gallon to the cost of gasoline(@ 5.7 volume %)


 Timeline - First cellulosic plant no sooner than 2004-
  2005
      opportunity exists for conventional ethanol from agricultural
       commodities (corn, wheat, sugar cane) 2002 -2003?
For More Information about
Biomass-to-Ethanol Activities...

Biomass-Ethanol Project Team
Pat Perez, Fuels Resource Office
Mike McCormack, Transportation Technology Office

  (916) 654-4527(Pat) or (916) 654-4652(Mike)
  (916) 653-4470 FAX
pperez@energy.state.ca.us
 mmccorma@energy.state.ca.us
     or visit our web site at:
 www.energy.ca.gov/mtbe/ethanol/

				
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posted:9/17/2011
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