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RenovaBio: A Paradigm Shift for Biofuels in Brazil By Brad Addington, Executive Editor, Biofuels & Refinery Feedstocks, OPIS
RenovaBio: A Paradigm Shift for Biofuels in Brazil © Oil Price Information Service (OPIS), an IHS Markit company
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Brazil’s sugarcane energy sector struggled for years, evidenced by the lack of investment in new mills, dozens of existing mills that have shut down or entered the process of judicial recovery and plummeting sales of hydrous ethanol, which in Brazil competes with gasoline at the pump.
The Brazilian government took several steps in recent years designed to help the sugarcane energy sector, such as boosting the anhydrous ethanol blend rate in Brazil’s gasoline and tethering gasoline prices to global oil prices instead of subsidizing gasoline for consumers, which had the effect of making hydrous ethanol less price competitive with gasoline. Still, this sector continued to struggle.
RenovaBio, a program launched by Brazil’s Ministry of Mines and Energy (MME) in December 2016, is poised to take a radically new approach to expanding the production and use of biofuels in Brazil and has the potential to lift the sugarcane energy sector out of its doldrums.
Many of the goals associated with the program tie into commitments Brazil made at the COP21 climate summit held in Paris in December 2015. Among other goals, established as part of its Intended Nationally Determined Contributions (INDC), Brazil by 2030 aims to:
• Reduce greenhouse gas emissions by 43% versus 2005 levels.
• Have renewable energy represent 45% of the country’s energy matrix, with biofuels representing 18% of the energy matrix.
For the first time ever, Brazil is poised to:
• Effectively assign Carbon Intensity (CI) ratings to transportation fuels, with the ratings based on each biofuel producer’s production processes and the extent to which they reduce greenhouse gas emissions.
• Require that fuel distributors meet certain greenhouse gas emission reduction targets based on the fuels that they are selling.
Bottom line: Rather than depending primarily on hydrous ethanol’s price relative to gasoline’s price as a motivation for drivers of flex-fuel vehicles to choose hydrous ethanol over gasoline, RenovaBio could incentivize fuel distributors to boost hydrous ethanol sales at the expense of gasoline sales in order to meet greenhouse gas reduction goals.
Furthermore, should RenovaBio incentivize investments in new sugar/ethanol mills, Brazil’s production of anhydrous ethanol – currently blended into gasoline at a blend rate of 27% – could take off. This would reduce Brazil’s reliance on ethanol imported from the United States.
A public comment period for RenovaBio ran from Feb. 15, 2017 through March 20, 2017.On June 8, Brazil’s National Energy Policy Council (CNPE) created a working group to formulate the basic tenets of RenovaBio. One of the next major steps could be for Brazil’s Congress to debate the proposal. The earliest that this could happen is in early August 2017, when Brazil’s Congress returns from recess.
The other possibility is that Brazilian President Michel Temer could issue a “Provisional Measure” implementing RenovaBio in early August, which would get the ball rolling on RenovaBio much more quickly than a bill that would require weeks or even months of debate in Congress.
The California Model and Implications for Brazilian Sugarcane Ethanol
Under RenovoBio, Brazil, essentially, would be embracing many aspects of California’s Low Carbon Fuel Standard (LCFS) program. That program itself assigns a lower Carbon Intensity (CI) rating to Brazilian sugarcane ethanol than to U.S.-produced corn ethanol.
Furthermore, the U.S. Environmental Protection Agency’s Renewable Fuel Standard recognizes sugarcane ethanol as an advanced biofuel, and advanced biofuel Renewable Identification Number (RIN) values historically have been pegged at a considerable premium to D6 (corn ethanol) RIN values.
As LCFS assigns Brazilian sugarcane ethanol a lower CI rating than corn ethanol, Plinio Nastari, president of sugar-ethanol consultancy Datagro, projected in late 2015 that Brazil could ship around
“Brazil made a number of commitments to reduce emissions. For this to happen, the government needs to offer the correct signals so that the sectors feel safe and resume investments. With RenovaBio, we are providing the initial kick to occupy a space on the national and global scene.” – Fernando Coelho Filho, Brazil Mines and Energy Minister, June 13, 2017, at the Brazilian Agribusiness Association
RenovaBio: A Paradigm Shift for Biofuels in Brazil © Oil Price Information Service (OPIS), an IHS Markit company
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240 million gal of ethanol to California in 2016. While that projection proved to be optimistic, it is true that all U.S. imports of Brazilian fuel ethanol in 2016 went to California. The premium that Brazilian sugarcane ethanol commanded to corn ethanol under LCFS helped to make that possible.
Brazil supplied just 31.8 million gal of fuel ethanol to the United States in 2016. The entire volume was delivered on three separate tankers into the San Francisco Bay Area over June, July and August of that year, with each tanker delivering approximately 10.6 million gal of fuel ethanol.
OPIS in mid-June 2017 assessed CI points ($/CI) under LCFS at a mean of $0.006315. Using a CI rating of 79.9 grams of CO2-equivalent/Megajoule for corn ethanol and a CI rating of 45.9 for Brazilian sugarcane ethanol, the $/CI assessment translated to a premium of 21.5cts/gal for Brazilian sugarcane ethanol versus corn ethanol. It is this kind of premium that helped make the Brazil-to-California ethanol arbitrage workable in June, July and August of 2016.
Should Brazil adopt a similar CI rating system under RenovaBio, it would incentivize fuel suppliers to boost their sales of sugarcane ethanol and potentially diminish the market share of U.S. corn ethanol in Brazil.
Expected Brazilian Model
In order to meet greenhouse gas reduction targets, distributors will have to purchase Emissions Reduction Certificates (CREs in Portuguese) from ethanol mills, biodiesel plants, etc. The number of CREs that each biofuel producer has to offer will depend on the biofuel itself and the efficiency of each producer’s production process when it comes to reducing greenhouse gas emissions.
The relationship between the number of certificates that distributors need to purchase and the number of certificates available in a given year will determine the price of the CREs in the market. This supply/demand relationship will be controlled by the government and defined annually by Brazil’s National Economic Policy Council (CNPE). The buying and selling of CREs will take place directly between producers and distributors and also could possibly be negotiated on B3, created by the recent merger of the BM&FBovespa exchange and Brazil’s Cetip.
Say an ethanol mill receives a rating of 9, regarding its ability to reduce greenhouse gas emissions in its production process (out of a scale of 0 to 10). If the mill has the capacity to produce 100,000 cubic meters of ethanol a year, the mill would have 900,000 CREs to sell. Another mill with the same production capacity but with a rating of 5 would have 500,000 CREs to sell.
Based on the total number of CREs available, the CNPE will establish the total number of CREs that fuel distributors must purchase in a given year, with that number likely to be within +/-10% of the number of CREs available. If 1.6 million CREs are deemed available in a given year, a distributor with a 50% market share would be required to purchase 800,000 CREs, and a distributor with just a 1% market share would only be required to purchase 16,000 CREs. (Note: Some of these examples are from Brazilian business publication novaCana.)
RenovaBio: A Paradigm Shift for Biofuels in Brazil © Oil Price Information Service (OPIS), an IHS Markit company
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Signs of a Struggling Industry
The following charts and graphs help to illustrate how Brazil’s sugar-ethanol sector has struggled in recent years.
One telltale sign of the sector’s struggle is the lack of investment in new sugarcane mills. The following figures from the Brazilian Sugarcane Industry Association (UNICA) show how the opening of new mills peaked in the 2008/2009 sugarcane harvest season. The figures pertain to mills in Brazil’s South Central region, which is the country’s principal sugarcane-growing region.
0 1 0
7
15
22
29
21
10
42 2 0 2 1
0
5
10
15
20
25
30
35
2002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/132013/142014/152015/162016/17
NUMBEROFNEWMIL LSOPERATINGIN SOUTHCENTRALREGION
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Number of New Mills Operating in South Central Region
Source: UNICA
The lack of investment in new ethanol production facilities – together with the incentive to boost sugar production at the expense of ethanol production in 2016 in the face of strong global sugar prices – contributed to a surge in Brazil’s imports of U.S. ethanol.
U.S. Ethanol Exports to Brazil (undenatured fuel ethanol -- million gal)
U.S. Ethanol Exports to Brazil (undenatured fuel ethanol -- million gal)
Source: U.S. Department of Commerce
RenovaBio: A Paradigm Shift for Biofuels in Brazil © Oil Price Information Service (OPIS), an IHS Markit company
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While hydrous ethanol in Brazil competes with gasoline at the pump, anhydrous ethanol has a captive market in that anhydrous ethanol is currently blended into gasoline at a blend rate of 27%. However, even though distributors’ sales of “gasoline C” (gasoline blended with ethanol) has risen since February 2015, Brazil’s production of anhydrous ethanol is currently not on a growth path.
Brazilian Distributors' Gasoline Sales (billion liters)
Brazilian Distributors’ Gasoline Sales (billion liters)
Source: Brazil’s National Oil, Gas and Biofuels Agency (ANP)
In addition to Brazil’s anhydrous ethanol production having declined over the three prior seasons, UNICA in April projected that anhydrous ethanol production in the South Central region will total 10.84 billion liters during 2017/2018, which would represent only a modest 1.71% increase versus regional 2016/2017 production (the sugarcane harvest season starts on April 1). UNICA also projected that regional hydrous ethanol production would total 13.86 billion liters, down 7.57% versus 2016/2017.
Over the first two months of the current season (April 1 to May 31), regional anhydrous ethanol production totaled 1.69 billion liters (down 21.46% versus the same period in 2016), and regional hydrous ethanol production totaled 2.61 billion liters (down 29.41% year on year). The figures are from UNICA. It’s worth noting that South Central mills got off to an earlier start on the cane crush in 2016/2017 than they did in the current 2017/2018 season.
Brazil's Anhydrous Ethanol Production (billion liters)
Brazil’s Anhydrous Ethanol Production (billion liters)
Source: UNICA
RenovaBio: A Paradigm Shift for Biofuels in Brazil © Oil Price Information Service (OPIS), an IHS Markit company
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Initiative Gains Support
One sign of RenovaBio receiving multi-sector support in Brazil is a memorandum signed on June 27, 2017 by Elizabeth Farina, CEO of UNICA, and Pedro Mizutani, chairman and vice president of Anfavea, Brazil’s national association of automobile manufacturers.
The document is essentially a “memorandum of alignment” regarding the strategies of the sugar-energy and automotive sectors. While the sugar-energy sector has RenovaBio, the automotive sector has “Rota 2030,” which is being developed in conjunction with the Brazilian government to achieve efficiency gains in transportation. The aim is for RenovaBio and Rota 2030 to be aligned not only with each other but also with the greenhouse gas reduction goals that Brazil committed to at the COP21 climate summit in Paris in 2015.
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About the Author
Brad Addington, Executive Editor, Biofuels & Refinery Feedstocks, has been covering intermediate refinery feedstock markets since joining OPIS, and he started covering Brazilian ethanol in 2008. He also has extensive experience covering U.S. refined product spot markets and natural gas liquids. He has a strong background in Latin America, having earned a bachelor’s degree in Latin American Studies as well as a bachelor’s degree in Journalism from the University of Kansas in 1989. He has made several reporting trips to Latin America and has interviewed the heads of state oil companies, energy agencies, and biofuel producers in the region.
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