An Introduction to Economics of Bio-Fuels in Alabama:

Capacity, Cost, Yield, Efficiency and Impact

M. Keivan Deravi & Carel LigeonOctober 24, 2006

Introduction

• With only 5% of the world’s population and 2% of the world’s reserves of oil, the U.S. consumes 25% of the world’s oil.

• Transportation sector uses 70% of overall annual oil consumption.

• Within the transportation sector we get 97% of our energy from oil.

• Passenger vehicles account for 40% share of total oil consumption.

Introduction

• Our continued and impressive economic success and high standard of living are achieved in part by using large amounts of fossil fuels per capita.

• Continuing at our current consumption rate, by 2050 we could be using more than 30 million barrels of oil per day – a 50% over the current consumption of 20 million barrels per day.

Introduction

• Given the finite supply of oil and rapidly increasing demand due to global growth, we will ultimately be forced to explore resources other than fossil fuel.

• The transition can be facilitated through demand-side solutions and supply-side alternatives.

Introduction

• One promising supply-side alternative to fossil fuel is biomass.

• However, biomass will not be sufficient by itself.

• Indeed, many of the available supply solutions will not work unless energy conservation education becomes a priority and “smart growth” becomes an acceptable norm.

• In other words, dependency on oil can only be effectively addressed if we combine the efficient production and processing of sustainable and renewable energy sources with greater emphasis on fuel efficiency and “smart growth”.

Introduction

Biomass-SwitchgrassBiomass-Switchgrass• Switchgrass, while just one potential cellulosic biomass crop,

has received more attention than other energy feedstocks.

• Switchgrass is a native prairie grass with expected great potential for increased annual yield, and very high energy-conversion efficiency potential.

• According to existing literature, switchgrass can be planted in marginal land, its maintenance cost is low, it can adapt to drought conditions and it is effective in reducing soil erosion.

Introduction

Biomass-SwitchgrassBiomass-Switchgrass• According to some of the leading literature, in field trials in

the Southern Plain region switchgrass averaged about 4.3 dry tons/acre/year. In the Corn Belt region, yield averaged about 6.0 dry tons/acre/year.

• An aggressive breeding program can likely increase the average yield of switchgrass to more than 8 dry tons/acre/year by 2025.

• Question:- Can switchgrass be the answer to our search for “green gold”?

Introduction

Biomass-SwitchgrassBiomass-Switchgrass• Currently, our cars and trucks use about 137 billion gallons of

gasoline (62% of our transportation-sector petroleum) per year.

• In order to produce an equivalent amount of alternative gasoline from switchgrass - - using current yield and fuel conversion efficiency - - we need to utilize 830 million acres of land.

Introduction

Biomass-SwitchgrassBiomass-Switchgrass• More specifically: - Yield = 5 dry tons/acre/year - Cellulose-to-ethanol conversion efficiency of 1:50 gallons

(currently achievable) - BTU equivalency between ethanol and fossil-based

gasoline of 0.67 - (137 x 109) ÷ (1 x 5 x 50 x 0.67) = 830 million acres

• Note: U.S. cropland and rangeland area is estimated at 700 million acres.

Introduction

Biomass-SwitchgrassBiomass-Switchgrass• The conclusion:

- If we are serious about the task at hand, we have to innovate, conserve, sacrifice and change not only the production of alternative fuel but also our consumption of energy.

• Examples

- The grain required to fill a 25-gallon SUV gas tank with ethanol could feed one person for a year.

- A typical city of 100,000 people using biomass from sustainable forests for electricity would require 770 square miles of forest (10 times the area of Washington, D.C.)

Analysis of FeasibilityMethodology

Premises:Premises: - Switchgrass is native to Alabama

- It can be grown on marginal land

- It grows well with relatively moderate inputs

- It can effectively protect soil against erosion

Analysis of Feasibility

Caveats and Obvious Disclaimers:Caveats and Obvious Disclaimers:• Cost associated with and income realized from planting switchgrass

vary considerably among farmers, situations and stage of production (establishment years versus production year) •Examples: - The time of year in which switchgrass is planted affects the production costs through seeds used, the success rate of the seeding and the need to reseed.

- The type of machinery used for the seeding (airflow, drill and no-till drill) - Opportunity cost of the land (or land charge)

Analysis of Feasibility

General Assumptions:General Assumptions:• Switchgrass has a normal life span of 10 years• The crop is not harvested in the establishment (seeding) year• Harvest activities start in the 2nd year of the stand life• Reseeding probability is to be determined (25% is an initial

estimate)• Amortization of land charge, establishment costs, and reseeding

are to be taken into consideration. • In this phase, we concentrate on farm gate costs (we ignore, at

least for now, lengthy farm storage or transportation to final refinery facilities) - Note: transportation cost is a major concern especially for distances exceeding 50-75 miles

Analysis of Feasibility

Major Production Cost Categories are described as:Major Production Cost Categories are described as:• A. Establishment costs

• B. Operation costs

• C. Reseeding costs

• D. Harvesting and storage costs

Analysis of Feasibility

Summary of Production Cost by Major Categories:Summary of Production Cost by Major Categories:

• A. Establishment costs (annualized basis)– A. 1. Pre-planting machinery operations (mowing, spraying,

airflow spreader, etc.)– A. 2. Operating expenses (seeds, fertilizer, lime, herbicide, etc.)– A. 3. Land cost

• B. Operation costs– B. 1. Pre-harvest machinery operations (application of

fertilizers and chemicals.)– B. 2. Operating expenses (fertilizers and chemicals.)

Analysis of Feasibility

Summary of Production Cost by Major Categories:Summary of Production Cost by Major Categories:

• C. Reseeding costs– C. 1. Machinery cost– C. 2. Operating cost

• D. Harvesting costs– D. 1. Mowing– D. 2. Raking– D. 3. Baling– D. 4. Staging

Analysis of Feasibility

• Total cost (farm gate) = – Establishment cost +– Operation cost +– Reseeding cost +– Harvesting cost

• Farm income (ton/acre/year) =– Yield (ton/acre/year) x Price (per ton)

• Farm profit (ton/acre/year) =– Price (ton) - Cost (ton/acre/year)

Analysis of Feasibility

ExampleExample• Assume:

– Switchgrass-to-ethanol conversion = 1 (ton) : 50 gallons– Price of ethanol - $2.00 / gallon– Market value of 1 ton of switchgrass in terms of ethanol =

$100 - (1 ton → 50 gallons of ethanol → at $2 per gallon → $100)

– Market price of ethanol = input price + processing and production value added (net of indirect business taxes)

– Also assume: - Transportation cost $10 - Profit margin $10

Analysis of Feasibility

ExampleExample• Production and processing costs (ton): • $100 - ($10+$10) = $80 • Is it economically feasible to harvest, stage, dry, direct pellet

and bag switchgrass and further process it to produce ethanol for a total of $80 per ton?

• As we look for that answer, we should also pay special attention to :

– Differences in soil quality and land fertility – Risks of mono-culturing – Feasibility of planting bunch versus lawn grass

Final Words

• Economic feasibility of switchgrass (or any other biomass) depends on:

– Availability of resources and capacity to produce– Price of the crop– The costs of conversion– The price of gasoline (non-renewable)

• Challenges with regard to using switchgrass in particular are:– Development of high tonnage of switchgrass– Economical processing costs of cellulose on a commercial

scale

Final Words

• Based on a cursory examination of the production cost (studies in other states), we believe that the key to production feasibility of switchgrass is to lower the cost of production through sustainable and substantial increase in yield per acre of land.

• This, more than anything else, highlights the need for large-scale field experimentation, at least in closed-loop settings.

• Equally important is to lower the processing cost through production subsidies that should help advancement of the technology and streamlining of the process.

• This necessitates simultaneous increase in funding for:– Graduate programs in bio-commodity, biotechnology, process

engineering– Support for university and private sector R & D

Final Words

Next Phase in Our Work:Next Phase in Our Work:• Feasibility of production

• Feasibility of processing

• Feasibility of distribution (including)

– Utilization efficiency

– Economic efficiency