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Overview: Developing New Energy Sources from AgricultureJames A. Duffield, Guest Editor

JEL Classification: Q3

In the early 1900s, energy sources around the world weremostly agriculturally derived and industrial products wereprimarily made from plant matter. Early motor fuels alsocame from agriculture — Henry Ford used ethanol in hisoriginal engine and Rudolf Diesel's engine could run onpeanut oil. By 1920, petroleum emerged as the dominantenergy source for transportation fuels and industrial prod-ucts. For over 80 years, the United States and other indus-trialized countries have relied on petroleum as an econom-ical and dependable source of energy. However, thisreliance on petroleum is becoming a major issue as ourdomestic oil supplies shrink and our dependence on oilimports grow.

Since the energy crisis in the 1970s, policymakers havebeen looking to agriculture as a source of energy supplyand legislation has been passed to encourage renewableenergy production and fund research on developing etha-nol, biodiesel, solar and wind power, and bioproducts.More recently, the security risks of imported oil andenvironmental concerns have intensified the interest indeveloping renewable energy sources and replacingpetroleum products with more environmentally friendlybioproducts. The U.S. Congress responded to the recentenergy situation by passing two major bills providingincentives for renewable energy production; the 2002 farmbill contained the first energy title in farm bill history andthe Energy Policy Act of 2005 was the first Federal energylaw passed since 1992.

Projections indicate that worldwide energy use couldgrow by more than half in the next two decades, and U.S.energy use is expected to increase by one-third during thistime. Heavy reliance on fossil fuels could continue, withrelated concerns about air pollution, greenhouse gases, andincreasing dependence on oil from unstable countries. Inhis State of the Union Address, President Bush outlined

The Advanced Energy Initiative that promises to breakAmerica’s dependence on foreign energy by replacing morethan 75 percent of our oil imports from the Middle Eastby 2025. In 2005, about 25 percent of our crude oil camefrom the Middle East, mostly from Saudi Arabia. Canadaand Mexico are currently the leading oil importing coun-tries, followed by Saudi Arabia.

The President’s goal is ambitious, but realisticallyachievable through the development of biofuels, biopower,bioproducts, and other alternative energy sources. Renew-able energy is abundant, diverse, and widely distributedthroughout the United States. Commercial technologiesare currently available that are harnessing energy fromagricultural crops, animal fats, and waste materials. More-over, research may currently be on the verge of providing anumber of technological breakthroughs leading to a signif-icant expansion in our renewable energy resource base.

The majority of U.S. oil imports are used for transpor-tation, so achieving energy independence will requiredomestic energy resources to produce biofuels for motorvehicles. The most common biofuel used today is ethanol,which is made mostly from corn. Although ethanol is agasoline substitute, it has been primarily used in theUnited States as a gasoline additive to reduce harmful airemissions or to boost octane. Although ethanol growth has

Articles in this Theme:Overview: Developing New Energy Sources from Agriculture . 5

Evolution of Renewable Energy Policy . . . . . . . . . . . . . . . . . . . . 9

Renewable Liquid Fuels: Current Situation and Prospects. . . 15

Energy Production with Biomass: What Are the Prospects? . 21

Renewable Energy in Agriculture: Back to the Future? . . . . . 27

Bioproducts: Developing a Federal Strategy for Success . . . . 33

6 CHOICES 1st Quarter 2006 • 21(1)

been impressive in recent years, it stillis less than 3 percent of total annualgasoline consumption. About 14 per-cent of the U.S. corn crop was uti-lized for ethanol in 2005 and USDApredicts the annual corn productionused for ethanol will rise to 23 per-cent by 2016. Clearly, the supply ofcorn is relatively small compared togasoline demand, so other domesticsources of transportation fuel areneeded to achieve our energy goals.

Biodiesel, which is just beginningto establish a market in the UnitedStates, is a biofuel substitute forpetroleum diesel. Similarly to etha-nol, it is rarely used in neat form andis most commonly blended with die-sel fuel at levels of 20 percent orlower. The majority of the 91 milliongallons of biodiesel produced in 2005came from soybean oil, but, it canalso be made from other oilseedcrops, animal fats, and grease.Biodiesel can extend diesel fuel sup-ply, but it too is limited compared tototal petroleum diesel demand. Amuch larger quantity of energy feed-stocks is needed to allow biofuelsproduction to reach a larger scale.

The desire to replace a significantamount of imported oil beyond ourcurrent capabilities has created muchinterest in producing biofuels fromfeedstocks other than row crops.These feedstocks, called biomass,include agricultural forestry and cropresidues, wood waste, municipal solidwaste, trees, and grasses. There arebasically two technologies for con-verting biomass into a biofuel. Thefirst is a process developed in the1940s that uses a gasificationmethod. With the gasification pro-cess, biomass is gasified at high tem-peratures to produce synthetic gascalled syngas. The syngas then goesthrough a process that synthesizes thegas into a transportation fuel (e.g.,diesel fuel). The second process con-

verts biomass into ethanol, oftenreferred to in the literature as cellulo-sic ethanol. This process uses geneti-cally engineered bacteria to breakdown the more complex sugarsfound in the woody material of bio-mass. The sugar extracted from thebiomass can then be used to producechemicals, ethanol, and other biofu-els. However, the technology forproducing cellulosic ethanol is notfully developed.

Developing domestic renewablesources of energy for generatingpower and producing heat is anotherimportant component of the Presi-dent’s plan to increase domesticenergy supplies. As recently as 1999,North American natural gas reserveswere considered plentiful and growthof the U.S. utility industry wasdependent on natural gas. However,recent supply disruptions and majorprice shocks have transformed natu-ral gas from a fuel of choice to a fuelof risk. Estimates of natural gasreserves in North America wereadjusted downward during the firsthalf of 2004 and industry analystsdoubled their price projections forthe next several years.

Currently, both large- and small-scale technologies are being devel-oped to generate solar and windpower. Some small-scale solar appli-cations are already commerciallyavailable that provide electricity forlighting, battery charging, smallmotors, water pumping, and electricfences. There is also an emergence ofsolar technology that is being used inhomes and in the industrial sector toprovide hot water and space heating.

Wind is another abundantrenewable energy source, and wind-mills do not produce harmful envi-ronmental emissions. Wind power isalready making a small contributionto the U.S. electricity system. Utility-scale turbines have been increasing in

number, due to government supportand advances in technology that havesubstantially reduced productioncosts, especially in areas with consis-tently high wind speeds. Small windsystems are also being developed thatin the future may allow farmers toeconomically generate electricity inremote areas to avoid paying forexpensive transmission wires.

Biomass can also be used to gen-erate electric power by direct burn-ing, using gasification systems, ormixing biomass with coal in coal-fired electrical generation facilities.Currently, biomass supplies overthree percent of U.S. energy con-sumption. The primary feedstocksinclude wood waste used by the pulpand paper industry for industrial heatand steam production. In addition,forest residues and municipal solidwaste are used to generate electricity.

Another potentially large sourceof renewable energy is animal wastethat can be turned into methane gasthrough anaerobic digestion. Anaero-bic digestion has been used for yearsby municipal wastewater treatmentplants in the United States to convertwaste solids to methane gas, whichcan be converted into heat or elec-tricity. More recently, research anddemonstration projects have focusedon producing methane gas from con-fined livestock operations. Currentlythere are only about 40 anaerobicdigesters located throughout theUnited States on swine, dairy, andpoultry operations. However, anaero-bic digesters are growing in popular-ity to help dairy farmers and otherlivestock producers meet new stateand Federal regulations for control-ling animal waste. Anaerobic digest-ers can help control water pollutionand odor from animal waste, as wellas provide electrical and thermalenergy. In addition, methane, apotent greenhouse gas, is not emitted


into the atmosphere when animalwastes are converted into energy.

Obviously, it is going to take avariety of alternative energy sourcesto solve our energy supply problems.Biofuels can replace a significantamount of oil imports; however,increases in energy efficiency andother technological advancementswill also have to play an importantrole in gaining our energy indepen-dence.

There is much uncertainty overthe future potential of renewableenergy. However, there is no doubtthat the world demand for oil isincreasing rapidly and competitionover the world’s remaining oilreserves will intensify. Thus, it seemsreasonable to suggest that future gen-erations will eventually replace petro-leum with alternative sources ofenergy. One long-run vision is theemergence of a biorefinery industry,designed after oil refineries, with thecapability of converting large quanti-ties of biomass into a number ofenergy and biobased products. Biore-fineries have the potential to replacenearly all petroleum-based products,including transportation fuels, elec-

tricity, natural gas, and petrochemi-cals.

In the shorter term, we should beable to produce enough biofuel toreplace a significant portion of ouroil imports. Just reducing our depen-dence on our most unstable tradingpartners could prevent future energysupply disruptions and severe priceshocks. Adding biofuels and otherdiverse sources of energy to ourNation’s energy portfolio will signifi-cantly reduce economic and nationalsecurity risks.

The selection of papers for thistheme will look at agriculture's cur-rent role as an energy producer andexplore opportunities to enlarge itscontribution to domestic energy sup-ply. The first article, by Duffield andCollins, reviews U.S. renewableenergy policy, which has been criticalin advancing the development ofrenewable fuels.

The article by Eidman examinesthe economic and environmentalaspects of ethanol and biodiesel. Italso discusses the drivers behind therecent rapid growth of these two bio-fuels, evaluates current feedstock sup-ply, and looks at the prospects forcontinued growth in the future.

The third article, by Gallagher,goes beyond traditional feedstocksand examines the existing supply ofbiomass in the United States and esti-mates the amount that can be eco-nomically harvested from U.S. farm-land. It also provides a review ofcurrent and potential processingtechnologies for converting biomassto biofuels.

The fourth article, by Fischer,Finnell, and Lavoie, focuses on cur-rent and future technologies for gen-erating renewable energy from solar,wind, and geothermal power.

In the final article, Conway andDuncan discuss the development ofbioproducts made from agriculturalmaterials, such as hydraulic fluids,lubricants, and biopharmaceuticals.They outline the necessary steps tobring these products to themarketplace through public policy,research, and market development.

Choices Guest Editor James Duffield([email protected]) isSenior Agricultural Economist at theU.S. Department of Agriculture,Office of Energy Policy and NewUses, Washington, DC.





1st Quarter 2006 • 21(1)


Evolution of Renewable Energy PolicyJames A. Duffield and Keith Collins


Historically, renewable energy policies were first adoptedto establish domestic fuel reserves during emergencies,such as wartime, when imported and regional fuel suppliescould be interrupted (Yergin, 1991). As U.S. dependenceon foreign oil increased, energy policies began to focus onencouraging new domestic energy production, includingrenewable energy. For example, in response to the energycrisis of the 1970s the U.S. Congress funded the Alaskanpipeline and created the strategic petroleum reserve. Poli-cymakers began to look to agriculture as a source of energysupply, and Federal and State legislation was passed toencourage renewable fuel production and fund research ondeveloping ethanol, biodiesel, solar, and wind power.More recently, President George W. Bush’s NationalEnergy Policy Group advocated the use of Federal pro-grams to promote alternative fuels, including ethanol andbiodiesel, to help reduce U.S. reliance on petroleum-basedfuels.

The energy crisis also motivated the Government andprivate sectors to adopt a number of polices aimed at con-serving energy. American households became more conser-vation-minded and industries increased their energy effi-ciency. U.S. farmers also decreased their energy usesignificantly. Between 1978 and 1993, energy (excludingelectricity) used by agriculture declined 25% (USDA,1997; USDA, 1980-94). The U.S. Congress set fuel effi-ciency standards for the automobile industry. The U.S.government adopted building energy-efficiency standardsand required government motor fleets to purchase alterna-tive fueled vehicles. Supply and demand adjustmentshelped reverse the trend of rising oil prices of the 1970sand 1980s.

However, by the end of the 1990s, increasing worldenergy demand began to exert upward pressure on oilprices and supply disruptions in the natural gas industrycaused major price shocks in the U.S. energy sector.Uncertain energy supplies and homeland security concerns

triggered by the terrorist attacks on September 11, 2001have caused policymakers to intensify their efforts tosecure our long-term energy sources. The purpose of thispaper is to review U.S. renewable energy policy anddescribe its effectiveness in advancing the use of renewablefuels.

The Role of Energy PolicyThere have been several approaches used to adopt renew-able energy policies, including Federal energy legislationadopted to increase the use of renewable energy throughmandates and tax incentives. Federal environmentalpolices, which indirectly affect renewable energy use, havebeen passed by Congress in recent years with a major effecton renewable energy development. In addition, State legis-lation has been used as an effective tool to stimulaterenewable energy demand. Finally, agricultural legislationhas recently been used to create renewable energy policiesand programs.

Federal Energy LegislationOne of the earliest energy policies aimed at increasing thedomestic energy supply and addressing energy securityconcerns was the National Energy Act of 1978 (NEA).The NEA established the Public Utility Regulatory Poli-cies Act of 1978 (PURPA), a regulatory mandate thatencouraged facilities to generate electricity from renewableenergy sources (Gielecki, Mayes, & Prete, 2001). A majorgoal of PURPA was to foster the development of biopowerby requiring utilities to buy electricity generated fromsmall power plants using renewable energy sources (EnergyInformation Administration, 1996).

Much of the success of corn ethanol can be attributedto government incentive programs starting in the 1970s.The motor fuel excise tax exemption was originally passedby the Energy Tax Act of 1978, giving ethanol blends of atleast 10% by volume a $0.40/gallon exemption on the


Federal motor fuels tax. Enacted in1980, the Energy Security Actoffered insured loans to small ethanolplants, producing less than one mil-lion gallons per year. Also in 1980,the Crude Oil Windfall Tax Actextended the ethanol motor fuelexcise tax exemption and providedblenders the option of receiving thesame tax benefit by using an incometax credit instead of the fuel taxexemption. Since 1980, various taxlaws have been adopted changing thelevel of the tax credit that currentlystands at $0.51/gallon through 2010.

The Energy Policy Act of 1992(EPACT) extended the fuel taxexemption and the blender’s incometax credit to two additional blendrates containing less than 10% etha-nol. The two additional blend rateswere for gasoline with at least 7.7%ethanol and for gasoline with 5.7%ethanol. The EPACT also establisheda number of alternative-fueled vehi-cle (AFV) requirements for govern-ment and state motor fleets that haveencouraged biofuel use. The EnergyConservation Reauthorization Act of1998 amended EPACT to includebiodiesel fuel use credits. Under thislaw, fleet operators are allowed onealternative-fueled vehicle credit forusing 450 gallons of biodiesel.

The use of AFVs is also increas-ing in the private sector, primarilydue to the Alternative Motor FuelsAct that was passed in 1988 toencourage auto manufacturers toproduce cars that are fueled by alter-native fuels, including an ethanol/gasoline blend containing 85% etha-nol called E85. The law providescredits to automakers towards meet-ing their corporate average fuel effi-ciency (CAFE) standards. Automak-ers can lower their average fueleconomy requirements by receivingcredits for producing alternative-fueled vehicles that meet government

requirements. Several auto manufac-turers offer various models that runon both E85 and gasoline. About 3.5million of these vehicles, called flexi-ble fuel vehicles (FFVs), were on theroad in 2004 (National EthanolVehicle Coalition, 2004). This pro-gram, however, has been criticizedbecause most FFV owners usually usegasoline instead of ethanol, becauseE85 fueling stations are few in num-ber.

Biodiesel received a fuel taxcredit, similar to that of ethanol, withthe American Jobs Creation Act of2004, called the Jobs Bill. Starting in2005, biodiesel blenders can receive acredit of $1.00 per gallon of biodieselmade from oil crops and animal fatsand a $0.50 per gallon credit forbiodiesel made from recycled fats andoils. The tax credit was initially set toexpire on December 31, 2006; how-ever, it was extended through 2008by the Energy Policy Act of 2005. Inaddition, the jobs act extended theethanol tax credit to 2010.

The the biodiesel tax credit hasalready had a major impact on theemerging biodiesel industry. Largelydue to this tax credit, biodiesel pro-duction increased from about 25 mil-lion gallons in 2004 to over 90 mil-lion gallons in 2005. According tothe National Biodiesel Board, thereare currently 53 plants producingbiodiesel in the United States, withanother 40 plants expected to comeonline soon.

Production tax credits have alsobeen used to encourage electricitygenerated by qualified energyresources, including biomass, andsome animal wastes (Gielecki, Mayes,& Prete, 2001). The EPACT estab-lished a 10-year $0.018 per kilowatt-hour (kWh) production tax credit forbiomass plants, wind energy, andother renewable energy production.This program has been especially

important to growth in the windindustry that depends on the taxcredit to encourage investment.When the tax credit expired in 2003,financing of new wind power instal-lations came to a halt. Fortunately forwind-energy advocates, the produc-tion tax credit was extended to theend of 2005 by the Jobs Bill, and theEnergy Policy Act of 2005 extendedit through 2007.

Environmental Policies Stimulate Renewable Energy DemandPolicymakers have recognized thatthere is a significant opportunity toreduce pollutants and greenhouse gas(GHG) emissions by replacing fossilenergy with renewable energy andbioproducts derived from agriculture.Ethanol and biodiesel are primeexamples. Ethanol, which is 35%oxygen, improves combustion, andreduces carbon monoxide emissions,particulate matter, and other harmfulair pollutants (Environmental Protec-tion Agency, 2002). Likewise, biodie-sel has many desirable environmentalproperties. It is nontoxic, biodegrad-able, and biodiesel exhaust emits lesstoxic air emissions, carbon monox-ide, and particulate matter thanpetroleum diesel (Graboski &McCormick, 1998). Biodiesel alsocontains no sulfur.

GHG emissions can be reducedusing ethanol and biodiesel com-pared with gasoline and diesel. Biofu-els have the advantage that the plantsgrown each year to produce the fuelsequester carbon, which offsets thecarbon released during fuel combus-tion (National Renewable EnergyLaboratory, 1998; Wang, Saricks, &Santini, 1999; Levelton EngineeringLtd., (S&T)2 Consulting Inc., & J.E.& Associates, 1999). Another poten-tially large source of renewableenergy is livestock waste that can beturned into electricity through anaer-


obic digestion, which also reducesmethane emissions from manure.

The first environmental policy tohave a major effect on renewableenergy was the Clean Air ActAmendments of 1990 (CAA). Provi-sions of the CAA established theOxygenated Fuels Program and theReformulated Gasoline (RFG) Pro-gram to control carbon monoxideand ozone problems. Both programfuels required 2% oxygen, and blend-ing ethanol became a popularmethod for gasoline producers tomeet the new oxygen requirementsmandated by the CAA. The CAAalso has provisions for controllingstationary sources of air pollution,such as the Acid Rain Program, thatset tighter restrictions on sulfur diox-ide and nitrogen oxides. Under thisprogram, utilities may apply forbonus emission allowances as areward for undertaking energy effi-ciency or renewable energy measures.Qualified renewable energy sourcesinclude wind, solar, geothermal, andbiomass energy (U.S. EnvironmentalProtection Agency, 2004); however,these energy sources are not widelyused in the program.

Recent EPA diesel fuel regula-tions could have a major effect on thedemand for biodiesel as a lubricityadditive. EPA’s low sulfur highwaydiesel fuel regulations begin July2006 and the nonroad diesel fuel reg-ulations begin June 2010. Loweringthe sulfur in diesel fuel also lowersthe fuel’s lubricity. As a result, thedemand for diesel fuel lubricity addi-tives is expected to increase signifi-cantly. Research suggests that biodie-sel is an excellent fuel lubricity agent(Schumacher, 2004). Only a smallamount of biodiesel (1% to 2%) isneeded to restore the lubricity level ofultra-low-sulfur diesel fuel. Thelubricity additive market could pro-vide a much larger market than the

niche markets that currently exist forbiodiesel.

State Renewable Energy ProgramsThere are also many U.S. state pro-grams designed to encourage thegrowth in renewable energy use.States encourage renewable energyuse through tax credits, productionincentives, and renewable energymandates. For example, over 20states have “Renewable Energy Port-folio Standards” that require utilitiesto generate a certain percentage oftheir power from renewable energysources (North Carolina Solar Cen-ter, 2005). The most aggressive statein promoting renewable fuels is Min-nesota, which has consumption man-dates for ethanol and biodiesel.

Farm Policy Directed at EnergyFarm policies have only recently beendirected at energy, becoming anexplicit policy goal in farm programsin the late 1990s, with a provision inthe USDA’s FY 2000 AppropriationsAct. This provision authorized theestablishment of pilot projects forharvesting biomass on lands set asidefrom crop production under theConservation Reserve Program(CRP).

In 2000, USDA initiated theCommodity Credit Corporation(CCC) Bioenergy Program to stimu-late demand and alleviate crop sur-pluses, which were contributing tolow crop prices and farm income,and to encourage new production ofbiofuels. Since ethanol dominates therenewable fuels market in the UnitedStates, most of the funds went to eth-anol plants. However, the few biodie-sel plants that were in operation in2000 took advantage of the CCCpayments and the Program spurrednew investment in biodiesel facilities.

Major agricultural disaster andcrop insurance legislation, the Agri-

cultural Risk Protection Act of 2000(ARPA), was signed into law in June2000. Title III of ARPA, the BiomassResearch and Development Act of2000, directed the agriculture andenergy secretaries to cooperate andcoordinate polices to promoteresearch and development leading tothe production of bioproducts. Inparticular, Title III established a bio-mass research and development ini-tiative that authorized financial assis-tance for public and private sectorentities to carry out research on bio-products. The objectives of the initia-tive include enhancing the productiv-ity and sustainability of biomassproduction and decreasing its cost.While the Department of Energy(DOE) initially undertook researchactivities under the statute, USDAdid not receive funding for the initia-tive until enactment of the FarmSecurity and Rural Investment Act of2002 (2002 Farm Bill).

The 2002 Farm Bill containedthe first energy title in Farm Bill his-tory. The energy title, Title IX, cre-ated a range of programs through2007 to promote bioenergy and bio-product production and consump-tion. Key provisions include Section9002, which mandates the FederalBiobased Product Procurement Pref-erence Program (FB4P). Modeled onthe existing program for purchase ofrecycled materials, the FB4P requiresall Federal agencies to prefer bioprod-ucts in their procurements.

Another program, the BiodieselFuel Education Program created bySection 9004, awards competitivegrants to educate governmental andprivate entities with vehicle fleets andthe public about the benefits ofbiodiesel fuel use. Section 9006 cre-ated the Renewable Energy Systemsand Energy Efficiency Improve-ments Program, a loan, loan guaran-tee, and grant program to assist eligi-


ble farmers, ranchers, and rural smallbusinesses in purchasing renewableenergy systems and making energyefficiency improvements. Anotherprogram aimed at encouragingrenewable energy investment in ruralareas is the Value Added Grant Pro-gram (VAGP). The VAGP makesfunds available to farm families andrural businesses to help them developnew value-added products, such asethanol and biodiesel. The VAGPwas created by the Agricultural RiskProtection Act of 2000 and amendedby Section 6401 of the 2002 FarmBill.

The energy title of the 2002Farm Bill also amended the BiomassResearch and Development Act of2000 by extending its terminationdate to September 30, 2006, and byproviding funding to USDA for theresearch initiative. A wide range ofprojects have been funded, fromaddressing biomass production issuesto improvements in biorefinery pro-duction processes.

Section 9010 of the bill codifiedthe CCC Bioenergy Program andbroadened it to allow biodiesel madefrom animal byproducts and fat, oils,and greases (including recycled fats,oils, and greases). Initially, onlybiodiesel made from oil cropsreceived payments. This programexpires in 2006.

The 2002 Farm Bill was alsonotable for greatly expanding naturalresource conservation and environ-mental programs, such as the Envi-ronmental Quality Incentives Pro-gram (EQIP), which was created bythe Federal Agriculture Improvementand Reform Act of 1996 (1996 FarmBill), and reauthorized in the 2002Farm Bill. EQIP offers incentive andcost-share payments to implementconservation practices, including theuse of electric generators that run offof methane gas produced from ani-

mal waste. The CRP was continuedand a new program, the Conserva-tion Security Program (CSP) wasauthorized. The CSP was conceivedas a way to reward producers whohave been good stewards in the pastand those who can improve theirconservation performance in thefuture. The program provides finan-cial and technical assistance to pro-ducers for conservation and improve-ment of soil, water, air, energy, plant,and animal life on cropland, grass-land, prairie land, improved pasture,and range land, as well as forestedland that is an incidental part of anagriculture operation.

Energy Policy Act of 2005 – H.R. 6With recent record oil and naturalgas prices and increasing energy sup-ply uncertainty, there has been muchinterest in passing new energy legisla-tion. In early 2001, President Bush’sNational Energy Policy DevelopmentGroup laid out a proposal for a long-term, comprehensive strategy tolessen the impact of energy price vol-atility and supply uncertainty(NEPDG, 2001). The U.S. Congressresponded to the energy situationand President Bush’s energy strategyby enacting the Energy Policy Act of2005. The 2005 Act reflects Presi-dent Bush’s general approach by cre-ating programs and policy aimed atincreasing and diversifying domesticenergy production. It includes keyprovisions to help diversify domesticenergy production through the devel-opment of renewable fuels. The 2005Act mandates a renewable fuel phase-in called the renewable fuels standard(RFS), requiring U.S. fuel produc-tion to include a minimum amountof renewable fuel each year, startingat 4 billion gallons in 2006 andreaching 7.5 billion gallons in 2012.After 2012, renewable fuel produc-

tion must grow at least the same rateas gasoline production. The RFS pro-vision also eliminates the require-ment for reformulated gasoline tocontain 2% oxygen and establishes acredit trading system. This gives gas-oline suppliers the flexibility to useless renewable fuel than required bythe RFS and still meet the standardby purchasing credits from supplierswho choose to use more renewablefuel than required. The RFS isexpected to be satisfied by ethanoland biodiesel, but ethanol will likelyprovide the bulk of the mandatedfuel.

The 2005 Act creates a CellulosicBiomass Program to encourage theproduction of cellulosic ethanol.Under this provision, every one gal-lon of ethanol made from biomass,such as switchgrass, crop residues,and tree crops, counts as 2.5 gallonstowards satisfying the RFS. Begin-ning in 2013, the applicable volumeof renewable fuel required by theRFS must include a minimum of 250million gallons of fuel derived fromcellulosic biomass. However, thetechnology for converting biomassinto “cellulosic” ethanol has not beenfully developed, so a number of otherprovisions were adopted to stimulateresearch and development on biom-ass conversion technologies thatcould take advantage of less expen-sive energy crops and significantlyexpand the resource base for ethanolproduction. The Cellulosic BiomassProgram also has the authority toprovide loan guarantees for up to$250 million per production facility.A $650 million grant program wasauthorized to fund research on cellu-losic ethanol production, and $550million is authorized for the DOE tocreate an Advanced Biofuels Technol-ogies Program.

The biodiesel fuel excise taxcredit was extended to 2008. In addi-


tion, a small biodiesel producer creditwas created that grants biodiesel pro-ducers a $0.10 per gallon income taxcredit. Only biodiesel plants thathave an annual capacity of 60 milliongallons or less are eligible for the pro-ducer tax credit. This provision alsomodified the small producer taxcredit received by ethanol producers.Under previous legislation, small eth-anol producers were already eligiblefor a $0.10 per gallon productionincome tax credit if their capacity was30 million gallons or less. The 2005Energy Bill increased the small pro-ducer capacity limit for ethanolplants to 60 million gallons per yearor less. The tax credit can only betaken on the first 15 million gallonsof production for both ethanol andbiodiesel producers and it is cappedat $1.5 million gallons per year. Thebill also provides a 30% tax credit forthe cost of installing fueling facilitiesfor alternative-fueled vehicles thatrun on 85% ethanol, natural gas, liq-uid natural gas, propane, hydrogen,and any blend of diesel fuel andbiodiesel containing at least 20%biodiesel.

The 2005 Energy Act updates theBiomass Research and DevelopmentAct of 2000 (as modified under sec-tion 9008 of the 2002 Farm Bill).Originally a competitive grant pro-gram aimed at achieving scientificbreak-through leading to the devel-opment of biofuels, biopower, andbioproducts, the 2005 Act refines theprogram's objectives and redirectsresearch emphasis.

The Sugarcane Ethanol Programwas established to create a programto study the conversion of sugarcane,bagasse, and other sugarcane byprod-ucts to ethanol in Hawaii, Florida,Louisiana, and Texas. The Sugar Eth-anol Loan Guarantee Program wasauthorized to help finance commer-cial demonstration projects for etha-

nol derived from sugarcane, bagasse,or other sugarcane byproducts.

A USDA grants program wasestablished by the 2005 Act to assistsmall biobased businesses, encouragebio-economy development in ruralareas, and support energy feedstockproduction demonstration projectsby farmer-owned enterprises. Inaddition, USDA was authorized toestablish an education and outreachprogram to provide training andtechnical assistance to feedstock pro-ducers and encourage investment inprocessing facilities. Funds were alsoauthorized for public education andoutreach to familiarize consumerswith biofuels and bioproducts.

For More InformationEnergy Information Administration.

(1996). Changing structure of the electric power industry: An update. DOE/EIA-0562. Washington, DC: U.S. Department of Energy, Energy Information Administra-tion.

Gielecki, M., Mayes, F., & Prete, L. (2001). Incentives, mandates, and government programs for promot-ing renewable energy. U.S. Department of Energy, Energy Information Administration. Available online: http://www.eia.doe.gov/cneaf/solar.renewables/rea_issues/incent.html (Accessed 2004).

Graboski, M., & McCormick, R. (1998). Combustion of fat and vegetable oil derived fuels in die-sel engines. Progressive Energy Production Science 24, 125-164.

Levelton Engineering Ltd., (S&T)2

Consulting Inc., & J.E. & Asso-ciates. (1999). Assessment of net emissions of greenhouse gases from ethanol-gasoline blends in Southern Ontario. Prepared for Agriculture and Agri-Food Canada. British

Columbia: Levelton Engineering Ltd..

National Energy Policy Development Group (NEPDG). (2001). National energy policy. Superin-tendent of Documents, Washing-ton, DC: U.S. Governement Printing Office.

National Ethanol Vehicle Coalition. (2004). For all the right reasons. Available online: http://www.E85Fuel.com.

North Carolina Solar Center. (2005). Database of state incentives for renewable energy. A project of the North Carolina Solar Center and the Interstate Renewable Energy Council. Available online: http://www.dsireusa.org (Accessed 2005).

National Renewable Energy Labora-tory. (1998) Life cycle inventory of biodiesel and petroleum diesel for use in an urban bus. NREL/SR-580-24089. U.S. Department of Energy, National Renewable Energy Laboratory, Golden, Col-orado and U.S. Department of Agriculture, Office of Energy.

Schumacher, L. (2004). Biodiesel lubricity. Biodiesel Utilization Workshop, September 9-10, Boise, ID: University of Idaho.

U.S. Department of Agriculture (USDA), National Agricultural Statistics Service. (1980-94). Farm production expenditures, 1980-94 summaries. Washing-ton, DC.

U.S. Department of Agriculture (USDA), Economic Research Service. (July 1997). Agricultural resources and environmental indi-cators, 1996-97. Washington DC..

U.S. Environmental Protection Agency, Transportation and Regional Program Division. (March 2002). Clean alternative fuels: Ethanol. One in a Series of


Fact Sheets. EPA420-F-00-035. Available online: http://www.epa.gov/otaq/consumer/fuels/altfuels/420f00035.pdf.

U.S. Environmental Protection Agency. (2004). Clean air mar-kets – programs and regulations. Conservation and Renewable Energy Incentives. Availableon-line: http://www.epa.gov/airmar-kets/arp/crer/index.html (Accessed 2004).

Wang, M., Saricks, C., & Santini, D. (1999). Effects of fuel ethanol use on fuel-cycle energy and greenhouse gas emissions. ANL-38. Argonne, IL: U.S. Department of Energy, Argonne National Laboratory, Center for Transportation Research.

Yergin, D. (1991). The price. New York: Simon & Schuster.

Keith Collins ([email protected]) is the Chief Economistof the U.S. Department of Agricul-ture, Office of the Chief Economist,Washington D.C. James A. Duffield([email protected]) is aSenior Agricultural Economist at theU.S. Department of Agriculture,Office of Energy Policy and NewUses, Washington D.C.




1st Quarter 2006 • 21(1)


Renewable Liquid Fuels: Current Situation and ProspectsVernon R. Eidman


Ethanol produced from grain and biodiesel producedfrom vegetable oils and animal fats are the major renew-able liquid fuels being produced in the United States. Cel-lulosic ethanol and Fischer-Tropsch diesel are also renew-able liquid fuels of considerable interest, but additionaldevelopment is needed before they become significantparts of the renewable liquid fuels market. Thus, the dis-cussion in this article will focus on ethanol from grain andbiodiesel.

The production and use of both fuels has been favoredby state and federal government programs. The rationalefor this encouragement is not only to improve the air andwater quality and reduce dependence on foreign oil, butalso to shore up farm prices, save on farm program expen-ditures, and promote economic growth in rural areas. Bothfuels have increased in consumer acceptance as the quanti-ties consumed have increased in recent years, and therecent increases in petroleum prices have stimulated inter-est in the possibility of producing both fuels as extendersof the gasoline and diesel fuel supplies. This paper dis-cusses the drivers behind the rapid growth in ethanol andbiodiesel production and use, and the prospects for con-tinued growth in the future. It briefly notes the economicsof production under current price conditions and U.S.capacity to produce larger amounts of these fuels fromagricultural products.

Ethanol Ethanol is typically sold in the United States in variousethanol-gasoline blends. Blends of 10 percent or less etha-nol are consumed with almost no reported incompatibilitywith vehicles and equipment. Nearly all recent-model con-ventional gasoline vehicles produced for international saleare fully operable with such blends.

Ethanol is also sold as E85, a blend of 85 percent etha-nol and 15 percent gasoline. High ethanol fuels are morecorrosive and have a lower vapor pressure than gasoline.The flexible fuel vehicles (FFVs) sold in the U.S. to con-sume E85 include compatible components for rubber fuellines and o-rings, and stainless steel for parts subject tocorrosion. The FFVs typically have an engine control andsensor system that recognizes the combination of fuelbeing used. The engine can run on gasoline, E85, or anymixture of the two. A computer calibrates the fuel flowand injection system to provide smooth performance.

Industry StructureThe ethanol industry experienced a rapid rate of growthover the past 15 years, with production increasing to 4 bil-lion gallons in 2005. The industry is composed of a com-bination of wet mills (producing ethanol, corn glutenmeal, corn gluten feed, corn oil, and CO2) and dry mills(producing ethanol, dried distillers grains and solubles,and CO2). Approximately 25 percent of the productionduring 2005 was from wet mills and the remainder fromdry mills. Most of the new plants built during the pastdecade are dry mill plants because they have lower invest-ment costs. The industry continues to add new capacity ata rapid rate. Production is expected to reach 5.0 billiongallons in 2006.

Growth during the past decade was composed prima-rily of the entry of a number of new companies buildingmedium-sized dry mill facilities. Many of the companiesthat initially built plants of 15 to 25 million gallonsannual capacity (mmgpy) expanded them to 40 to 50mmgpy within the past five years. With the addition ofmore small to medium plants, ownership of the industrycapacity became more fragmented over time. In 1990, 13


companies operated 17 facilities with1.11 billion gallons of annual capac-ity. One firm owned 55 percent ofthe capacity. In mid 2005, 71 organi-zations operated 84 facilities with 3.7billion gallons of annual capacity.The largest firm owned 29 percent ofthe capacity.

Much of the procurement of cornand natural gas, and marketing of theethanol and byproducts, as well asrisk management, is being handledby a few firms that specialize in thisarea. Thus, the industry structurethat has evolved is ownership of theproduction facilities by a large num-ber of relatively small firms, with themarketing concentrated in the handsof a much smaller number of firms.

Economics of Ethanol PlantsProducing ethanol is a commoditybusiness with wide swings in profit-ability, dependent largely on the priceof the feedstock (primarily corn, withsome grain sorghum), the price of

ethanol, and the price of natural gas.The sensitivity of the plant’s net mar-gin to these factors is illustrated inFigure 1. Given the price of ethanoland natural gas, all four lines in Fig-ure 1 indicate that raising the price ofcorn reduces profitability of theplant. The figure also illustrates thatfor any price of corn and natural gas,increasing the price of ethanol greatlyincreases the net margin. Finally, thefigure shows that raising the price ofnatural gas for given corn and etha-nol prices reduces the net margin.The figure illustrates that an increasein the price of natural gas from $6.50per million British Thermal Units(Btu) to $10.50 reduces the annualnet margin of a 48 mmgpy plant byapproximately $6.6 million.

The net margins presented heredo not include any subsidies paid tothe plant by the state and federal gov-ernments. Receipt of subsidies wouldobviously increase the profitability ofa plant, other things being equal.

Two types of production subsidieshave been available in recent yearsfrom the federal government. Bothapply to small plants. New plants andthose expanding production havebeen eligible for the CommodityCredit Corporation Bioenergy Pro-gram. This program, scheduled toend in 2006, provides incentive cashpayments to U.S. ethanol and biodie-sel producers that increase their pur-chases of agricultural commoditiesand convert that commodity intoincreased bioenergy production. Asecond program provides a 10-centper gallon production income taxcredit on up to 15 million gallons ofproduction annually. Originally, thesize of the plant eligible for theincome tax credit was limited to 30million gallons per year. Under theEnergy Policy Act of 2005, the sizelimitation on the production capacityfor small ethanol plants increasedfrom 30 million to 60 million gal-lons. The credit can be taken on the

Figure 1. Net margin for 48 MMGPY dry mill plant for selected corn, ethanol, and natural gas price combinations.

-30

-20

-10

0

10

20

30

1.55 1.75 1.95 2.15 2.35 2.55 2.75 2.95 3.15Corn price ($/bu)

Mill

ion

$NG $6.5 + Eth $1.15

NG $6.5 + Eth $1.45

NG $10.5 + Eth $1.15

NG $10.5 + Eth $1.45


first 15 million gallons of produc-tion. In addition to the federal pro-grams, many states offer incentivesfor ethanol plants built in their state.

Ethanol DemandThe domestic demand for fuel etha-nol has developed over time largely asa result of various federal and statepolicies. The recent boost in ethanoldemand is largely the result of severalstates banning the use of a gasolineadditive called MTBE because of itspropensity to contaminate drinkingwater. Ethanol is the only economicsubstitute for MTBE. Ethanol isexpected to receive another majorboost due to the renewable fuels stan-dard (RFS), a provision of the EnergyPolicy Act of 2005. The RFSrequires the U.S. fuel industry toproduce a minimum of 7.5 billiongallons of renewable fuel by 2012.(See Collins and Duffield in this setof papers for a complete discussion offederal policies).

Many in the U.S. ethanol indus-try feel the outlook is bright for anexpanding market, particularlybecause they feel the oil industry willreplace more MTBE with ethanoland use more ethanol as a fuelextender. Some argue that the RFScould expand demand more rapidlythan the domestic industry can sup-ply, significantly boosting opportuni-ties for the countries in the regionthat have preferential access to U.S.markets, such as through the Carib-bean Basin Initiative, and those withlow production costs that can pay the$0.54 per gallon import tax duty.

The recent increase in petroleumand gasoline prices seems to haveopened a new market for ethanol as afuel extender. This is potentially avery large market, and one thatshould absorb any amount of ethanolthe industry could produce in theforeseeable future. The U.S. con-

sumed 136 billion gallons of gasolineduring 2004. Compared to the 2005ethanol production level of 4.0 bil-lion gallons, ethanol was only 2.9percent of U.S. gasoline consump-tion. If the oil industry uses ethanolas a fuel extender, the price of gaso-line will effectively place a floor onthe price of ethanol (net of the taxcredit and blending costs).

Production PotentialWhat are the implications of theexpanding ethanol industry for theway we use the U.S. corn and sor-ghum supplies? Approximately 11.7percent of the corn supply and 11.3percent of the sorghum supply wereused to produce ethanol in 2004.Assuming that the proportion of eth-anol made from each crop remainsabout the same as ethanol productionincreases to 5.0 billion gallons in2006, more than 17 percent of bothcrops will be required. That is, the5.0 billion gallons will require 1,845million bushels of corn, more than17 percent of what is currently con-sidered to be a normal corn crop of10.8 billion bushels. Although largecarryover stocks are expected to pro-vide part of the increased cornneeded in 2006, when the stocks arereduced to more normal levels, con-tinuing to produce ethanol at thisand higher levels will require someadjustment in the way the U.S. cornsupply is used. Additional cornneeded for ethanol production couldbe diverted from the export marketor from feed usage. Increases in etha-nol demand could also lead to plant-ing more acres of corn.

Biodiesel Biodiesel can be used as an alterna-tive to petroleum diesel in its pureform (B100) or as a blend withpetroleum diesel at various ratios,

such as B20 (20 percent biodieseland 80 percent petroleum diesel).Engine performance with biodiesel isgenerally comparable to that ofpetroleum diesel, with some advan-tages and disadvantages concerningengine emissions.

Industry StructureThe biodiesel industry in the UnitedStates began to organize much laterthan ethanol, and is in an earlierstage of industry development. Pro-duction of biodiesel increased from0.5 million gallons in 1999 to 91million gallons in 2005. Productioncapacity, however, is much larger andgrowing rapidly. The NationalBiodiesel Board reports 53 commer-cial biodiesel plants in early 2006with listed production capacity of354 million gallons. The average sizeis about 6.7 million gallons, withsome larger plants in the 30 milliongallon range. The National BiodieselBoard reports an additional 40 plantsand 4 plant expansions under con-struction that will add 329 milliongallons of annual capacity. Thus theindustry has the processing capacityto increase production rapidly asdemand increases.

Economics of Biodiesel PlantsHaas et al. (2005) estimate the capi-tal and operating costs of a 10 mil-lion gallon annual capacity industrialbiodiesel production facility. Theyassume current production practices,equipment and supply costs, andmodel a continuous-process vegeta-ble oil transesterification plant withester and glycerol recovery. The anal-ysis is based on purchasingdegummed soybean oil as the feed-stock.

With the plant operating atcapacity, the estimated cost per gal-lon ranges from $1.48 withdegummed soybean oil costing $.15


per pound to $2.96 with degummedsoybean oil costing $0.35 per pound.The analysis assumes 7.4 pounds ofvirgin degummed soybean oil arerequired per gallon.

The feedstock cost is the largestsingle component of the biodieselproduction costs. Recycled fats andoils are less expensive than virgin oilsand can also be used to producebiodiesel. Yellow grease and trapgrease are the most common types.Yellow grease is produced from usedcooking oil collected from large-scalefood service operations. Renders col-lect used cooking oil and trap greaseand remove the solids and water tomeet industry standards. These prod-ucts are limited in supply, and theyhave other uses. For example, yellowgrease is used in animal feed and alsoto produce soaps and detergents.Assuming a yellow grease price of 49percent of soybean oil prices (the his-toric relationship) and that theamount required to produce a gallonof biodiesel is somewhat greater, 7.65pounds, the cost per gallon rangesfrom $0.94 to $1.68 per gallon. Thelower cost of biodiesel from yellowgrease suggests that the market forbiodiesel will bid up the price of yel-low grease relative to soybean oil.

Biodiesel DemandThe amount of biodiesel demandedhas remained relatively low becauseuntil recently, the cost of biodieselhas been well above the wholesaleprice of petroleum diesel. However,as was the case for ethanol, severalpieces of federal legislation, includinga new tax credit and the RenewableFuels Standard (RFS), are expected toenhance the demand for biodiesel. Inaddition, new diesel fuel standardsthat require refiners to produce ultra-low-sulfur diesel fuel beginning inJuly 2006 could create a new marketfor biodiesel as a lubricity additive

(again these are discussed in Collinsand Duffield in this issue).

At the state level, many statespassed legislation favorable to biodie-sel in recent years ranging from taxexemptions to infrastructure incen-tives. Minnesota enacted a statewidelaw requiring the state’s diesel fuel tobe comprised of 2 percent biodiesel.The law became effective in Septem-ber 2005 when the state’s biodieselproduction capacity moved above 8million gallons per year.

An important source of currentbiodiesel demand is for specializeduses where the air emission character-istics of biodiesel are a major advan-tage. These uses include marine craftand diesel engines operating inenclosed areas, such as mines. Inaddition, the National BiodieselBoard reports that in May 2004,more than 400 fleets associated withschool districts, city governments,state governments, and federal agen-cies were using biodiesel. Much ofthis growth can be attributed to theEnergy Policy Act of 1992 (EPACT)that requires government entities topurchase alternative-fueled vehicles.These uses are expected to grow asgovernment policies continue to con-tribute to this demand in the future.The Energy Information Agency esti-mates the EPACT use will increase to6.5 million gallons of biodiesel peryear by 2010. The 2 percent Minne-sota mandate will add about 17 mil-lion gallons of demand per year. Theultra-low-sulfur diesel rule couldexpand the biodiesel market signifi-cantly. EIA notes that if refiners use 1percent biodiesel to improve thelubricity of diesel fuel, this will add470 million gallons to demand by2010.

The current use of 91 million gal-lons per year, plus the potential mar-kets, total more than 500 million gal-lons per year. With the excise tax

credit in place, biodiesel would alsobe competitive as a fuel extender, buthow much can the United States pro-duce from the available feedstocks?

Production PotentialThe feedstock used for biodiesel pro-duction depends largely on the avail-able supply and its price. Potentialfeedstocks for biodiesel are the vege-table oils, yellow grease and othergrease, lard, and edible and inedibletallow. Over the 2000-2004 period,soybean oil made up 57 percent ofthe total U.S. annual feedstock sup-ply, while yellow grease and othergrease made up 8 percent. Other veg-etable oils made up smaller percent-ages of the total supply and hadhigher prices during the past fiveyears than soybean oil and yellowgrease. Among animal sources, inedi-ble and edible tallow made up 11 and6 percent, respectively. Large propor-tions of the inedible tallow areexported, suggesting these oils maybe candidates for biodiesel produc-tion. However, the animal fats areless uniform than the processed vege-table oils and require more process-ing to produce a uniform biodieselproduct. Considering price, unifor-mity of product, and supply, yellowgrease and soybean oil are consideredto be the preferred feedstocks forbiodiesel production.

Yellow grease and other greasehave alternative uses in livestock feedand the production of soaps. There isalso the difficulty of collecting andtransporting the yellow grease to abiodiesel plant that is processing thismaterial. Considering the alternativeuses and the logistical problems, per-haps one-half to two-thirds of thetotal yellow grease and other greasecould be processed into biodiesel.This total would provide 172 to 228million gallons per year.


A recent U.S. Department ofAgriculture (2002) study estimatedthe effect of increasing the amount ofbiodiesel produced from current lev-els to 124 million gallons in 2012.This study, conducted to analyze theeffect of a RFS for motor vehicle fuel,assumed all of the biodiesel was pro-duced from soybean oil. The pro-jected increase in the demand forsoybean oil required to produce thebiodiesel leads to an increase in thedomestic price of soybean oil. Thedomestic price of soybean oil is pro-jected to increase 17 percent over thebaseline as a result of a RFS. Higherprices reduce other domestic uses ofsoybean oil and exports. Processingadditional soybeans puts downwardpressure on soybean meal prices andleaves the price of soybeans about 1percent above the baseline. Thechange in protein prices results inminor changes in livestock produc-tion and profitability over thedecade.

These data suggest the U.S. couldproduce 300 to 350 million gallonsof biodiesel from yellow grease andsoybean oil without major disruptionof soybean oil markets. It appears theUnited States would need to utilizeother feedstocks or import other oilsto expand biodiesel production muchbeyond this level.

Concluding CommentsEthanol and biodiesel appear to bemoving into a new market environ-ment brought on by a combinationof the increase in petroleum pricesand some new legislation and regula-

tions. The increase in petroleumprices moved the wholesale price ofregular gasoline and diesel fuel uprapidly during 2005, while the costof producing ethanol and biodieselhas not increased appreciably, exceptfor the cost of natural gas used in theprocessing plants.

For ethanol, the new energy billreplaces the mandated markets with aRenewable Fuels Standard (RFS).While the industry’s productioncapacity will exceed the RFS, thepetroleum industry is expected topurchase the additional ethanol toproduce reformulated gasoline andfor use as a fuel extender. This addi-tional demand is expected to keepthe ethanol markets reasonablystrong as long as petroleum pricesremain high, encouraging furthergrowth of the industry. As the indus-try expands beyond this level infuture years, the ethanol industry isexpected to place some pressure onthe market for corn and sorghum,reducing exports and/or increasingthe acreage planted to these twocrops.

With the new excise tax creditand current prices, biodiesel has anopportunity to compete in the dieselfuel market as a fuel extender and alubricity additive. However, thecountry's supply of feedstock fats andoils will limit biodiesel to a small partof this potential market.

For More InformationFortenbery, T.R. (2005) Biodiesel fea-

sibility study: An evaluation of biodiesel feasibility in Wisconsin.

Staff Paper No. 481, Department of Agricultural and Applied Eco-nomics, University of Wiscon-sin, Madison, WI.

Hass, M.J., McAloon, A.J., Yee, W.C., & Fogila, T.A. (2005). A process model to estimate biodie-sel production costs. Bioresource Technology. New York: Elsevier.

International Energy Agency. (2004). Biofuels for transport. Paris, France: Organization of Eco-nomic Co-operation and Devel-opment (OECD).

Radich, A. (2004). Biodiesel perfor-mance, costs, and use. Washing-ton, DC: Energy Information Agency, US Department of Energy.

Tiffany, D., & Eidman, V. (2003). Factors associated with success of fuel ethanol producers. Staff Paper P03-7, St. Paul, MN: Depart-ment of Applied Economics, University of Minnesota.

U.S. Department of Agricul-ture.(2002). Effects on the farm economy of a renewable fuels stan-dard for motor vehicle fuel. Wash-ington, DC: U.S. Department of Agriculture, Office of the Chief Economist, Office of Energy Pol-icy and New Uses.

Vernon R. Eidman ([email protected]) is Professor in the Department ofApplied Economics at the Universityof Minnesota, St. Paul, MN.





1st Quarter 2006 • 21(1)


Energy Production with Biomass: What Are the Prospects?Paul W. Gallagher


The advantages and limitations of the U.S. ethanolindustry have both become apparent during the currentperiod of high petroleum prices. One advantage is thatethanol is cost-reducing as a gasoline additive and as a gas-oline replacement using E85 (motor fuel blends of 85 per-cent ethanol and just 15 percent gasoline). However, cornsupply limits ethanol’s role in energy markets; ethanol-based corn demand will surpass exports when the 7.5 bil-lion gallon Renewable Fuel Standard is fully implemented;and even if the Midwest were to secede from The Union,the entire Midwestern corn crop could only supply two-thirds of regional gasoline demand with ethanol. Clearly, abroader resource base and other processing technologiesare needed if bioenergy is going to expand its role in thenational energy scene.

There are wide ranging assessments of biomass-energy’s potential role in expanding our national energysupplies. Those accustomed to pumping liquid petroleumscoff at the idea that an energy industry could be based onbulky crops or residues from farm land or forest. Or bio-technologists sometimes multiply laboratory processingyields times the physical intensity of biomass on landtimes land area, resulting in an enormous estimate for bio-mass energy potential. Somewhere in between zero and theenormous estimates we should find reality.

This paper examines the primary factors that limit thepotential size of a biomass-energy industry in the UnitedStates. First, the fraction of the existing biomass that canbe economically harvested from farmland is reviewed. Sec-ond, the current and potential processing technologies andpractices are discussed. And finally, the unknowns anduncertainties of bioenergy supply that could be shaped bypublic policy are also reviewed.

Recent Studies of Biomass SupplyCurrent thinking with regard to energy crops is that switchgrass, willow, and poplar hold the most potential. Switchgrass yields are highest in the southeastern United States,where sunshine and rainfall are ample. Poplar may be theenergy crop choice in the north-central states with exten-sive sunlight in summer. Willow yields appear highest inthe middle/east section of the U.S. where there is extensiverainfall. Most research evaluating the extent of economi-cally accessible biomass supply has looked at adding thesenew crops on the boundary of existing commercial agricul-ture.

Crop residues from existing crops, mainly corn andwheat, could also provide significant amounts of biomassbecause residue mass roughly equals the volume of thecrop. Crop residues intrigue industry because costs arelowest for this unused resource. Also, residue and foodcrop production are complementary, whereas growingcrops for energy use instead of food production can reducefood supply. Finally, our research suggests that harvestingresidue from crop production can be consistent with soilquality maintenance, when reduced tillage and otherappropriate conservation measures are taken (Gallagher etal., 2003b).

Energy crops on commercial cropland are a marginalenterprise, owing to values and yields that are moderate incomparison to food crops. Fortunately, the farmland thatcan contribute to bioenergy production extends beyondcommercial cropland. Many biomass crops are sustainableon land that is not suitable for annual crops; switch grass isestablished once and harvested for several years, and agro-forestry crops are planted and harvested on a 10-year rota-tion. Furthermore, willow is water-tolerant and eventhrives with wet feet. Hence, the land base for biomass


crops extends to farmland with steepslopes and to some wet lowland areasthat are generally not used for annualcrops. Caution should be used whenconsidering pastureland from theGreat Plains states because inade-quate rainfall could severely limitbiomass yield. Commercial forest-land should also be excluded becausethe infrastructure for harvest doesnot exist and other industries alreadycompete for the land.

Bringing together several recentstudies, my estimate of economicallyaccessible biomass supply is given inTable 1 at 330 to almost 750 milliontons. Initial supply prices range froma low of around $15/ton for corn res-idues to $35/ton for commercialcropland. Conversion of the first 330million tons from current land use tobiomass production might occurwithin five years, by harvesting resi-dues, switching crops, and returningsome CRP land to production. Theconversion of pasture and forestedfarmland may be a longer-run propo-sition; dominated by agro-forestrycrops, conversion could easily take 15or 20 years. Conversion of this landwould likely occur after a prolongedperiod of high energy and biomassprices. Complete use of marginallands for energy would also intensifyland competition with pasture forlivestock, increase land use values,

and significantly increase biomasscosts from marginal lands, accordingto my preliminary estimates. Other-wise, one-half to two-thirds of themarginal lands could be used for bio-mass production without significantincreases in land values. More biom-ass supply from commercial croplandcould also be obtained at moderateprice increases and without extensiveincreases in land values, but it wouldlikely get more expensive to maintainthe status of the CRP program.

Processing Technology SituationThere are five major crop-based pro-cesses for producing bioenergy prod-ucts. The characteristics of these pro-cesses are summarized in Table 2.Characteristics include pretreatmentand secondary processing, technicalstatus, product yield, and cost whenavailable. The processes are orderedaccording to market readiness. Pro-cesses (1) and (2) are operating today.Process (3a) has operated in a com-mercial setting with coal in SouthAfrica, but not with biomass. Theintegrated pretreatment and second-ary processes of (3b) and (4) areapparently technically feasible. Butonly a few batches have been madesuccessfully with process (4) in anon-laboratory setting. Process (5)has potential for the future.

In general terms, the presenttechnical challenge for biomass pro-cessing is to break down long andcomplex cellulose and hemi-cellulosemolecules into smaller componentsthat are more useful chemicals andenergy products. A complicated pre-treatment process is not required foragricultural crops because the wood-like component is not present. Oth-erwise, cellulose can be burned with-out pretreatment. But, conversion toliquid chemicals and fuels requires anextensive pretreatment process,which is difficult and expensive. This

fact helps explain the pattern of mar-ket readiness and costs found inTable 2.

Ethanol production from corn,process (1), is now widely adopted,but the development of this industrytook about 30 years. A subsidy wasinitiated in the mid 1970s to encour-age plant construction. This resultedin moderate improvements in fiberconversion yield, reductions in oper-ating costs due to lower energy use,and reduced enzyme cost. In addi-tion, the industry reached economiesof scale that lowered capital costs.Then the stage was set for the recentwave of adoption, which occurredvery quickly in response to profits,high energy prices, and the increaseddemand provided by the renewablefuel standard.

The production of electricity andbyproduct heat from burning biom-ass, process (2), is another processthat operates commercially today. InCalifornia, rice straw is the biomassinput and Denmark uses wheat straw.The biomass industries in both Cali-fornia and Denmark depend on gov-ernment subsidies to continue oper-ating. The reported electricityproduction costs from Californiacompare favorably to recent con-sumer prices of electricity.

Gasification with catalytic con-version to a set of chemicals thatincludes ethanol, process (3), wasdeveloped in Germany duringWWII. Gasification with a coalinput was also used in South Africawhile it faced an oil embargo. Opti-mizing yields with biomass inputcontinues to be an active area of engi-neering research.

Processes (4) and (5) are bothbased on the fermentation of sugars,including the 5-carbon and 6-carbonsugars that occur when the wood-likematerial in biomass crops is brokendown. The development of geneti-

Table 1. Biomass from agriculture: Potential supply and cost.

Source:Volume

(mil. ton)

Typical Farm Entry Price

($/ton)

Crop residues 142 15-25

Crops 188 35-45

Subtotal 330

Midwest/East pasture

261 30-40

Forested farmland

155 30-40

Total 746


cally engineered bacteria that can fer-ment all of these sugars with highyields is one of the most promisingtechnological developments in biom-ass processing. One view of the prob-lem in process (4) is that the pretreat-ment process used to break woodymaterials into sugars uses acid. Thegenetically engineered bacteria oryeast do not tolerate residual acid leftfrom the pretreatment process, inhib-iting ethanol yields. Process (5) repre-sents a potential solution to thisproblem, using pretreatments withnon-acidic solutions. Ideally, this pre-treatment will allow actual sugaryields to reach potential. If the exper-imental pretreatment in process (5)were to become technically feasible,

very high ethanol yields and low pro-duction costs could be obtained.

Technology Adoption: Barriers and ProspectsReferring to table 3, there are no full-scale biomass/biofuel plants operat-ing in North America, but there areplans to construct one facility inLouisiana. There are two demonstra-tion scale plants, a wheat straw fer-mentation plant operating in Can-ada, and a municipal solid wastegasification/fermentation plantplanned for Tennessee (Table 3).Looking at the cost estimates inTable 2, one can conclude that pro-ducing ethanol from processes otherthan crop fermentation have not

been adopted because the profit pic-ture has not been favorable.

Biomass processing could becomeprofitable in the future withimprovements in technology. TheU.S. Department of Energy (DOE)has emphasized research on fermen-tation ethanol for some time. Inaddition, DOE has recently devel-oped several projects that are aimedat reducing the high cost of pretreat-ment enzymes and fermentation bac-teria, an important barrier to adop-tion. One project aims at reducingenzyme costs from $.50/gallon toabout $.10/gallon. Some of themajor energy and chemical process-ing companies involved in thisproject anticipate that a few commer-cial processing plants based on

Table 2. Actual and anticipated bioenergy crop-based processes.

Raw Material

Pretreatment Secondary Treatment

Technical Status

YieldcProduction

CostdCapital

CostProcess Products Process Products Current Potential

(1)Commercial cropsa Mechanical Glucose Fermentation Ethanol Operating 106 106 $1.12/gal $1.10/gal

(2)Biomassb None Combustion Steam/Electricity

Operating $0.07/kw-hr

(3a)Biomassb Gasification Syngas:H2

CO

Catalysis:Fischer-Tropsch, Pearson

EthanolMethanolProponal

Commercially Feasible 63 137 expensive

(3b)Biomassb Gasification Syngas: Fermentation EthanolElectricity

Technically Feasible Unknown $2.40/gal

(4) Biomassb Hydrolysis with acid

GlucoseXylose

Fermentation Ethanol Technically Feasible 52 $1.80/gal $4.70/gal

(5) Biomassb Hydrolysis with base

Fermentation Ethanol May be available in future

---- 120 $0.75/gal $2.40/gal

aCorn, wheat, or sugar; bCrop residues, switchgrass, poplar, willow, or MSW (municipal solid waste); cIn gallons fuel per ton of biomass input; dIncludes annual allowance for capital repayment.

Table 3. Biomass-fuel processing plants: Commercial and quasi-commercial facilities in North America.

Location Process Fuel Capacity (mil. gal.) Primary Input Yield (gal/ton) Status

Ottawa, Canada Process (4): acid hydrolysis & fermentation

1 wheatstraw

72 occasional short operation periods

Lacassine, LA Process (4): acid hydrolysis & fermentation

woodchipsbagasse

under construction

Pollock, LA Process (3a): Gasification & catalysis

110 woodchips 58 planning

Knoxville, Tennessee Process (3b): gasification & fermentation

13 (& 14 Mega-Watts of electricity)

Municipal solid waste 59 planning


improved hydrolysis pretreatmentwill be built by 2010 and technologydevelopment will be complete by2015. However, some critics in thecorn processing industry challengethis conclusion, observing that biom-ass ethanol has been 5 years away forabout 20 years now. Further, it isimportant to realize that licenses forenzymes and genetically engineeredbacteria are the scarce fixed factorwhere rents to new technologiesreside. Based on experience in thecorn-ethanol industry, it could take20 years to get enzyme costs down.

Hence, it is going to take a num-ber of technical advances before bio-mass-fermentation adoption becomeseconomical. First, if we could get ayield improvement comparable to theone that occurred in the corn-ethanolindustry over the past 30 years, bio-mass yield would approach 90 gal/ton. Second, enzyme costs for biom-ass-ethanol must fall to the low levelsof the corn-ethanol industry. Withthese advances, biomass ethanolmight approach the breakeven pointwith the corn-ethanol process. Butbiomass-ethanol’s high capital costsrelative to corn processing would stillremain. It could take very cheap bio-mass, like corn residues, or high cornprices to offset the capital costs.

The biomass-energy processingsector could evolve in several direc-tions as the technological possibilitiesbecome known. Eventually, biomassfermentation (processes 4 and 5) willeither become commercially success-ful or be judged as an unsolvable puz-zle. A similar evaluation will occurfor producing transportation fuelusing the gasification process withbiomass feedstocks (process 3). If nei-ther fermentation nor gasificationlead to low cost production of trans-portation fuels, attention could shiftback to the existing biomass-electric-ity industry (process 2) and the bio-

mass energy industry would servelocal electricity needs for rural com-munities and rural processing plants.

Shaping the Role of Biomass-Based Fuel in the National Energy PictureThe eventual role of biomass-etha-nol in national energy supplydepends upon the success of fuel pro-cessing technologies and the extent ofprolonged energy price increases.Three scenarios indicate the qualita-tive range of outcomes. First, if thereare no further improvements in fueltechnology, biomass ethanol couldsupply about 10% of national gaso-line consumption using crop residuesand available cropland. Assumingsustained high energy prices underthis scenario, 20% of gasoline con-sumption could be replaced withlarge-scale conversion of suitable pas-ture and forested farmland. But, bio-mass-ethanol would still be on themargin even at currently high fuelprices. Second, if costs could bereduced about $0.25 per gallon withmoderate improvements in fuel tech-nology, then gasoline replacementcould be up to 15%, assuming nomajor land conversion and 30% withmajor land use conversion. Third, ifsomeone really solves the biomasspretreatment problem and furthercost reductions of $1.05 per gallonwere achieved, then biomass fuelcould replace 20% of gasoline with-out major land conversion and about45% with land conversion. In short,biomass fuel by itself won’t solveAmerica’s energy problems, but itcould be a significant part of thesolution.

In turn, the biomass-fuel industrythat we get in 30 years depends onour public investment today. Withincreased public research support, weincrease the odds of a moderate

improvement or a quantum leap inprocessing technology. Further,improving current processes deservesincreased emphasis; biomass powercould replace some natural gas usedfor electricity consumption and corn-ethanol production; and gasification/catalysis may be a very practical fueltechnology for biomass. If someonesolves the fermentation pretreatmentproblem, so much the better! Finally,the emerging demonstration plantsdeserve support because average pro-duction costs are inversely related toan industry’s cumulative output;learning-by-doing has been impor-tant for other processing industries; itwill be important for biomass energy,too.

This time, America’s energy prob-lem may be a prolonged state ofhigher petroleum prices instead of amarket disruption; oil price outlookreports do remain high beyond theintermediate term. Oil processors areinvesting in Canadian oil sands, aprocess with costs similar to E85.But, the private sector interest in bio-mass energy is still limited in com-parison. Perhaps biomass energy istoo distant for serious considerationby the commercial energy sector. Orperhaps the profit vision of a multi-national corporation with its resourcebase and human capital grounded inthe petroleum industry does not seethe critical role of biomass in Amer-ica’s energy future. Therein a justifi-cation for an oil profits tax may lie,especially if revenues are spent onbiomass energy for America’s future.

For More InformationBryan, T. (May 2004). Cellulose eth-

anol. Ethanol Producer Magazine, 56-59.

Gallagher, P., Schamel, G., Shapouri, H., & Brubaker, H. (2006). International competitiveness of


the U.S. corn-ethanol industry. Agribusiness: An International Journal, 22, 109-134.

Gallagher, P., Brubaker, H., & Shapouri, H. (May 2005). Plant size: Capital cost relationships in the dry mill ethanol industry. Biomass and Bioenergy, 28, 565-571.

Gallagher, P., Shapouri, H., Price, J., Schamel, G., & Brubaker, H. (Sept. 2003a). Some long-run effects of growing fuel markets, MTBE bans and renewable aver-aging policies on additives mar-kets and the ethanol industry. Journal of Policy Modeling, 25, 585-608.

Gallagher, P., Dikeman, M., Fritz, J., Wailes, E., Gauthier, W., & Shapouri, H. (April 2003b). Bio-mass from crop residues: Some social cost and supply estimates for U.S. crops. Environmental

and Resource Economics, 24, 335-358.

Gallagher, P., & Johnson, D. (April 1999). Some new ethanol tech-nology: Cost competition and adoption effects in the petro-leum market. The Energy Journal, 20, 89-120.

Gallagher, P., Shapouri, H., & Brubaker, H. (forthcoming). Scale, Organization and Profit-ability of Ethanol Processing. Canadian Journal of Agricultural Economics.

NRC Committee on Industrial Prod-ucts. (2000). Bio-based industrial products: Priorities for research and commercialization. Washington, D.C.: National Academy Press.

Staff. (2005). Q&A with Jeff Pass-more, Executive Vice President, Iogen Corporation. Biofuels Jour-nal, (Second Quarter), 22-24.

U.S. Department of Energy. Energy efficiency and renewable energy: Biomass program. Available online: http://www.eere.energy.gov/biomass/ (Accessed March 8, 2006).

U.S. Department of Energy. (2003). 25th Symposium on Biotechnol-ogy for Fuels and Chemicals. Brekenridge, CO. Available online: http://www.nrel.gov/biotechsymp25/.

Welsch, M., de la Torre Ugarte, D.G., Shapouri, H., & Slinsky, D. (April 2003). Bioenergy crop production in the United States. Environmental and Resource Eco-nomics, 24, 313-333.

Dr. Paul W. Gallagher ([email protected]) is Associate Professor inthe Department of Economics, IowaState University, Ames, IA.





1st Quarter 2006 • 21(1)


Renewable Energy in Agriculture: Back to the Future?James R. Fischer, Janine A. Finnell, and Brian D. Lavoie


There is significant potential for agricultural involvementin the production and consumption of solar, wind, geo-thermal, and biomass energy. Renewable resources areabundant and widely distributed throughout the UnitedStates. A number of commercial technologies are availableto harness these resources, and with appropriate support,additional technologies – some potentially paradigm-shift-ing – could be brought to market.

In many ways, this is a “back-to-the-future” scenario,including a movement toward more self-sufficient farmsand a central role for agriculture in the U.S. energy supply.Increased renewable energy in and from agriculture calls tomind Henry Ford envisioning automobiles fueled by alco-hol, and windmills powering water pumps. Renewabletechnologies are now supplying or supplementing manyon-farm energy requirements, from water pumping tospace heating. Increasingly, farmers and ranchers are sell-ing energy (e.g., electricity generated from wind turbines,biofuels, and products from biomass). This is contributingto greater energy security in agriculture through increaseddiversity of energy sources, more self-supply of energy, andreduced environmental impact.

The United States faces a choice of energy futures.Continuing the present course is one alternative. Fossilenergy for mechanized agriculture has been an importantdriver of the “Green Revolution” of increasing farm pro-ductivity. Today, three energy inputs (diesel fuel, fertilizer,and electricity) account for more than three-quarters offarm energy use. (Miranowski, 2004). At predicted levelsof oil production and consumption, America will beincreasingly dependent on foreign oil imports in the yearsahead, making the Nation even more vulnerable to oil dis-ruptions and price spikes (Figure 1). In agriculture, anenergy supply disruption of even a short duration couldmean a substantial reduction or the complete loss of an

entire growing season. As price-takers for their commodi-ties, farmers are generally unable to pass price increases forenergy or fertilizer on to the consumer, and thereforereceive a lower return for their products when prices rise(Costantini & Bracceva, 2004).

Renewable energy can address many concerns relatedto fossil energy use. It produces little or no environmentalemissions and does not rely on imported fuels. Renewableresources are not finite (as fossil fuels are) and many areavailable throughout the country. Price competitivenesshas been a concern, but costs have decreased significantlysince the initial wave of interest in renewable energy in the1970s. These technologies now provide 6.1 quadrillionBritish Thermal Units (Btu) for domestic energy con-sumption (Figure 2).

Different renewable technologies are at different pointsin their development. Some are commercially available ornearly so, and others have potential for the longer term.Unfortunately, many benefits that renewable energy canprovide are not monetized — they cannot be perceivedthrough price signals. Policies are needed to push or pullthese new technologies to full commercial development.This article examines the domestic status and opportuni-ties for a number of renewable energy technologies —solar, wind, geothermal, and biomass.

Solar Solar technologies produce electrical or thermal energy.Photovoltaic (PV) cells (or “solar cells”) that convert sun-light directly into electricity are made of semiconductorssuch as crystalline silicon or various thin-film materials.Solar thermal technologies collect heat from the sun andthen use it directly for space and water heating or convertit to electricity through conventional steam cycles, heatengines, or other generating technologies (concentrating


solar systems). In the future, solarenergy could produce hydrogen toprovide transportation fuels, chemi-cals, and electricity, and to serve asenergy storage at times when the sunis not shining.

As a result of technologicaladvances, the costs of these technolo-gies have been steadily decreasing,and high electricity costs can bridgethe gap further. Although solarresources are greatest in the South-

west (about 25 percent higher thanthe national average), solar electricitymay be more cost effective in stateswith high electricity costs. For exam-ple, New York electricity prices canbe 50 percent higher than in Arizona(U.S. Department of Energy, SolarEnergy Technologies Program,2003). In agriculture, PV can eco-nomically provide electricity wherethe distance is too great to justifynew power lines. Solar electric sys-

tems are used to provide electricityfor lighting, battery charging, smallmotors, water pumping, and electricfences.

Livestock and dairy operationsoften have substantial air and waterheating requirements. For example,commercial dairy farms use largeamounts of energy to heat water forcleaning equipment. Heating waterand cooling milk can account for upto 40 percent of the energy used on adairy farm. Solar water heating sys-tems may be used to supply all orpart of these hot water requirements.Other solar applications includegreenhouse heating and solar cropdrying (National Renewable EnergyLaboratory, n.d.).

The number of solar energyapplications is expected to grow asnew technologies increase solar cellefficiency and reduce costs. New“quantum dot” materials could theo-retically more than double efficiency,converting 65 percent of the sun’senergy into electricity, as comparedto the best commercially availablesolar cells today, which have conver-sion efficiencies of up to 30 percent.Research is also being conducted toreduce the cost of solar water heatingsystems through the use of materialslike plastics instead of metals andglass.

Wind Energy Wind technologies provide mechani-cal and electrical energy. Wind tur-bines operate on a simple principle:Wind turns rotor blades, which drivean electric generator, turning thekinetic energy of the wind into elec-trical energy. The wind is a renewableenergy source, and windmills do notproduce harmful environmentalemissions. Utility-scale turbinesrange in size from 750 kilowatts(kW) to 5 megawatts (MW), with

Figure 1. Total energy production and consumption: 1980-2030.Source: Energy Information Administration, Annual Energy Outlook 2005, http://www.eai.doe.gov/oiaf/aeo/overview.html.

Figure 2. The role of renewable energy consumption in the Nation’s energy supply, 2004.Source: Energy Information Administration, Renewable Energy Trends, 2004 edition, http://www.eai.doe.gov/cneaf/solar.renewables/page/trends/rentrends04.html.

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most turbines exceeding 1 MW. Tur-bines are often grouped into windfarms, which provide bulk power tothe electrical grid. Small wind tur-bines range in size from 0.4 to 1.5kW generators for small loads, suchas battery charging for sailboats andsmall cabins, to 3 to 15 kW systemsfor a home, to those that generate upto 100 kW of electricity for largerloads, such as small commercial oper-ations.

Wind power technology isalready in widespread use due to sub-stantial progress in reducing costs forareas with consistently high windspeeds. At the end of 2005, wind wasresponsible for 9,149 MW of electri-cal generating capacity in the UnitedStates. At an average capacity factorof 31 percent, this is equivalent toproducing the annual amount ofelectricity that is used by over 2 mil-lion average American households.There are commercial wind energyinstallations in 30 states (AmericanWind Energy Association, 2006).Today’s state-of-the-art wind tur-bines, operating in high-wind areas,can produce electricity for a few centsper kilowatt-hour (kWh), which iscompetitive with the cost of fossilfuel-fired plants.

Small wind systems can serveagriculture in traditional ways, suchas using mechanical energy to pumpwater or grind grain. As costsdecrease, small systems used to gener-ate electricity may also become eco-nomically efficient by avoiding theexpense of installing transmissionwires, especially in more remoteapplications. Where connected to theelectricity distribution grid, smallwindmills can generate revenuethrough electricity sales when genera-tion exceeds internal requirements.Decentralized wind systems can becombined with other energy sourcesto create a hybrid energy system,

where the low cost and intermittentwind resource is supplemented bymore expensive small generators suchas diesel generators or batteries, toprovide power that is both relativelyinexpensive and reliable (Bergey,2000). The small wind turbineindustry estimates that 60 percent ofthe United States has enough windresources for small turbine use, and24 percent of the population lives inrural areas where zoning and con-struction codes permit installation(National Renewable Energy Tech-nology, 2004). As technologicalimprovements continue to increasethe economic efficiency of windenergy, agricultural producers arelikely to increase their use of windpower to lower energy costs andbecome more energy self-sufficient.

Geothermal Geothermal technologies produceelectrical or thermal energy. Threetypes of geothermal power plants areoperating today: dry steam plants,flash steam plants, and binary-cycleplants. High-temperature geothermalresources (greater than 300ºF) areused for power generation.

Individual power plants can be assmall as 100 kW or as large as 100MW. The technology is suitable forrural electric mini-grids, as well asnational grid applications.

The heat from geothermal energycan also be utilized directly. Geother-mal fluids can be used for such pur-poses as heating buildings, growingplants in greenhouses, dehydratingonions and garlic, heating water forfish farming, and pasteurizing milk.Generally, low-to-medium tempera-ture resources (between 70ºF and300ºF) are used. Another technology,geothermal heat pumps, can providespace heating and cooling. This tech-nology does not require a hydrother-

mal (hot water) resource, but insteaduses the near-surface ground as a heatsource during the heating season andas a heat sink during the cooling sea-son.

While the costs of geothermalelectric plants are dependent on thecharacter of the resource and projectsize, the average cost of geothermal-generated power has been decreasing.In 1980, geothermal electricity costsranged from 10–14 cents per kWh.Due to improved technologies thathave reduced exploration, productionfield, and power plant costs, it nowranges from 4–7 cents per kWh.

Installed geothermal electricitycapacity provides over 2,500 MWe inthe United States at capacity factorsoften exceeding 90%. This is equiva-lent to providing the power needs foralmost 2 million households.

Direct or non-electric generationprovides over 10,000 thermal mega-watts (MWt), including geothermalheat pumps. The power from directuse systems is measured in megawattsof heat as opposed to power plantsthat measure power in megawatts ofelectricity (Lund, 2005). Some geo-thermal projects “cascade” geother-mal energy by using the sameresource for different purposes simul-taneously, such as heating and power.Cascading uses the resource moreefficiently and improves economics.

The geothermal resource base forlow-to-medium temperatures ismuch more plentiful and widespreadthan the high-temperature resourcebase. Low- and medium-tempera-ture geothermal resources existthroughout the western UnitedStates. The Geo-Heat Center in Ore-gon has identified more than 9,000thermal wells and springs, more than900 low-to-moderate temperaturegeothermal resource areas, and hun-dreds of sites using this energy fordirect use applications in 16 western


states. There are 404 resource sites inthese states that are within five milesof communities, with the potential toserve 9.2 million people (Geo-HeatCenter, n.d.).

Geothermal energy has manyagricultural applications. Vegetables,flowers, ornamentals, and tree seed-lings are raised in 43 greenhouseoperations heated by geothermalenergy. Forty-nine geothermal aquac-ulture operations raise catfish, tilapia,shrimp, alligators, tropical fish, andother aquatic species. Agri-industrialapplications include food dehydra-tion, grain drying, and mushroomculture. The drying of onions andgarlic is the largest industrial use ofgeothermal energy (Lund, 2005).

Ground source heat pumps canbe applied in most rural areas. It isestimated that 600,000 – 800,000ground source heat pumps are nowin use in the United States. Themajority of the geothermal heatpump installations in the UnitedStates are in the mid-west, mid-Atlantic, and southern states (fromNorth Dakota to Florida) (Lund,2005).

In the future, new technologiessuch as enhanced geothermal systems(EGS) promise to reduce the cost ofgeothermal power. These can bedeveloped by fracturing rock toincrease underground fluid flow andpermit heat extraction. Projectsunderway in Europe and Australiaare advancing knowledge on how touse EGS for power production

BiorefineriesDiscussion of renewable energy frombiomass centers on the concept of the“biorefinery,” where new technolo-gies are being used to extract energyand other valuable products frombiomass resources. Like oil refineries,biorefineries are envisioned as indus-

trial facilities that convert a stream ofraw material into a varied slate ofproducts, maximizing value by shift-ing the mix of output to matchdynamic market conditions. Poten-tial biorefinery products include liq-uid fuels, such as ethanol and biodie-sel, electricity, steam, and high-valuechemicals and materials. Many ofthese products have the potential toreplace petroleum, either as a vehiclefuel or as a chemical feedstock,resulting in increased energy securityand reduced environmental emis-sions.

In a sense, biorefineries alreadyexist. They process corn into ethanol,corn syrup, animal feed, and otherproducts, or transform trees into avariety of wood products, electricity,and heat, to name two examples. Forthe next generation of biorefineries,researchers are developing processesfor exploiting the large amount ofenergy contained in plant cellulose— a difficult but potentially reward-ing goal. In one biochemical process(referred to as the sugar platform),enzymes are used to break apart cel-lulose molecules, creating sugars thatcan be fermented into ethanol orprocessed further to create industrialand consumer products. A thermo-chemical process (the syngas plat-form) involves heating biomass toturn it into a gas composed of a fewbasic molecules, then processing thisraw material into fuels and productsthrough chemical or biological tech-niques. Researchers are also pursuingways of turning biomass resourcesinto useful products by usingadvances in plant genetics and bio-chemistry to develop crops designedfor specific biorefinery endproducts.

Bioproducts may be the key tobiorefinery development. They couldprovide higher economic value thanbulk energy production, andincreased diversification in the prod-

uct slate for these industrial facilitieswould provide flexibility in respond-ing to dynamic markets. An exampleof a product made with biorefinerytechnology is Toyota Motor Corpo-ration’s bioplastics, used to makeautomobile components. Alreadyused in the Toyota Raum (sold inJapan), this plastic is made fromsweet potatoes and other plants.Another example is DuPont’s Sorona,a family of polymers made from 1,3-propanediol (PDO) that can be usedin fabrics, plastics, and in other appli-cations. PDO can be made from sug-ars derived from corn.

The United States has significantbiomass resources. It has been esti-mated that the cellulose availablefrom just forestland and agriculturalland, the two largest potential biom-ass sources, could amount to 1.3 bil-lion dry tons per year. While thisquantity is six times greater than cur-rent production, researchers believethat it could be achieved with rela-tively modest changes in land use andagricultural and forestry practices(Perlack et al., 2005). Another biom-ass resource with significant potentialis municipal solid waste, a byproductof modern life.

Expanding the Potential of Renewable Energy Renewable energy technologies arebeing used in a variety of applicationson farms and ranches and there aremany opportunities to expand theiruse in the future. For example,renewable, farm-based biomass andother renewable energy sources maybe able to fuel hydrogen production;agricultural vehicles running onhydrogen could have the same effi-ciency and environmental benefitsplanned for light-duty cars andtrucks; and hydrogen fuel cell tech-


nology could provide power forremote locations and communities.

Where do we go from here toencourage renewable sources ofenergy that are important to agricul-ture, such as solar, wind, geothermal,and biomass? The development of anew energy future will requireresearch, development, demonstra-tion, deployment, and commercial-ization of new technologies. Each ofthese activities must function as partof a continuum flowing from theresearch bench to commercial appli-cation, with feedback loops amongthe various steps. Collaboration, edu-cation, and policy will all be impor-tant.

For More InformationAmerican Wind Energy Association.

(2006). U.S. wind industry ends most productive year, sustained growth expected for at least next two years. Available online: http://www.awea.org/news/US_Wind_Industry_Ends_Most_Productive_Year_012406.html.

Bergey, M. (2000). Small wind sys-tems for rural energy supply. Pre-sentation from Village Power 2000, Washington, DC, Decem-ber 4-8. Available online: http://www.rsvp.nrel.gov/vpconference/vp2000/vp2000_conference/technology_mike_bergey.pdf.

Costantini, V., & Bracceva, F. (2004). Social costs of energy disruptions. Center for Euro-pean Policy Studies. Available online: http://www.ceps.be.

Energy Information Administration. (2004). Annual energy outlook 2004: with projections to 2025. Available online: http://www.eia.doe.gov/oiaf/aeo/.

Geo-Heat Center. (n.d.) Located at the Oregon Institute of Technol-ogy, in Klamatch Falls, Oregon. Available online: http://geo-heat.oit.edu/.

Lund, J.W. (2005). The United States of America country update. Proceedings of the World Geothermal Congress 2005, Anta-lya, Turkey. April 24-29. Avail-able online: http://geoheat.oit.edu/pdf/tp121.pdf.

Miranowski, J.A. (2004). Energy consumption in U.S. agriculture. Proceedings from conference on “Agriculture as a Producer and Consumer of Energy,” Arlington, VA, June 24-25. Conference materials are available online: http://www.farmfoundation.org/projects/03-35AgAsEnergyProducerAndConsumer.htm.

National Renewable Energy Labora-tory. (n.d.). Renewable energy for farmers and ranchers. Available

online: http://www.nrel.gov/learning/farmers_ranchers.html.

National Renewable Energy Labora-tory. (2004). Wind power: Today and tomorrow. Available online: http://www.nrel.gov/docs/fy04osti/34915.pdf.

Perlack, R., et al. (2005). Biomass as feedstock for bioenergy and bio-products industry: The technical feasibility of a billion-ton annual supply. Available online: http://www.caprep.com/0405064.htm.

U.S. Department of Energy. Solar Energy Technologies Program. (2003). Solar energy technology program – multiyear technical plan 2004-2007 and beyond. August 29(draft), DOE/GO-102003-1775.

U.S. Department of Energy. (2006). Office of Energy Efficiency and Renewable Energy. Available online: http://www.eere.energy.gov.

James R. Fischer ([email protected]) is Senior TechnicalAdvisor (Academe), Board of Direc-tors, Energy Efficiency and Renew-able Energy, U.S. Department ofEnergy, Washington, DC. Janine A.Finnell ([email protected]) isSenior Associate, and Brian D.Lavoie ([email protected]) isAssociate, respectively, Technology &Management Services, Inc., Gaithers-burg, Maryland.





1st Quarter 2006 • 21(1)


Bioproducts: Developing a Federal Strategy for SuccessRoger K. Conway and Marvin R. Duncan


Bioproducts are nonfeed or food industrial goods com-posed to a significant degree from biological products,renewable domestic agricultural materials, or forestrymaterials. Hydraulic fluids, lubricants, biopharmaceuti-cals, chemicals, and building materials all fall within theproduct range of bioproducts. There are a wide variety offeedstocks that can be used to make bioproducts, includ-ing grains, wood and plant oils, agricultural and forestryresidues, switchgrass, and hybrid poplar.

Agricultural and forestry groups have long beenintrigued by the potential of such a nonfood market fortheir feedstocks. In 1987, a report from the New Farm andForest Products Task Force to the Secretary of Agriculturerecommended diversification of agriculture as a way toimprove the economy through the production of biobasedproducts (New Farm and Forest Products Task Force,1987). The Task Force cited the development of a bio-products market as a way to address excess capacity, a lossof competitiveness in the international trade arena, andshrinking export markets. In addition, international tradein high value products was seen as increasing (New Farmand Forest Products Task Force, 1987) .

More recently, the cost and security risks of importedoil, environmental concerns, as well as advances in biolog-ical sciences have renewed policy interest in biobasedproducts. Biobased products often require less energy toproduce than the fossil and inorganic products theyreplace (Committee on Biobased Industrial Products,2000). Biobased products can improve air and water qual-ity, as well as reduce waste compared to their competitors.Also, biobased products can sequester large amounts ofcarbon while adding little if any net carbon emissions tothe atmosphere.

A Systems ApproachThe efforts of agricultural producers and processors todevelop and produce new biobased energy and coproductshave matched growing consumer interest in environmen-tally friendly products. Bioenergy and bioproducts werelargely driven first by government policy research initia-tives. Yet, despite substantial investment in research toimprove bioproduct production technology, widespreadmarket penetration for bioproducts has not been realized.This does not mean that money for research has been mis-spent, rather, it is likely that there has been underinvest-ment in other steps required to bring new biobased energyand coproducts to market.

In the past, the development of bioproducts wasfocused on basic research. There was a need to determinethe efficiency and economics of production from non-petroleum feedstocks to assess their viability and supply.While basic research provided the information to narrowthe focus on feedstock choice and the types of products toproduce, it has done little to apply the research to real-world conditions that would allow for investment fromthe business community.

A more “systematic” approach could result in greaterpenetration of commercial markets by bioproducts. Theprocess of bringing new products to market may be viewedas consisting of links in a casual chain extending from theresearch bench and its product prototypes to marketacceptance and penetration. Those links include research,testing, regulatory initiatives, product development andcommercialization, public sector incentives, and financ-ing, as well as education and outreach programs. We dis-cuss below the links in that casual chain and suggest waysto be more successful in creating a demand pull for bio-products.


Research

Basic ResearchBasic scientific research applied tobiological systems seeks to under-stand fundamental questions aboutplant and animal genetics, physiol-ogy, structure, chemical compositionand function of living plants animals,bacteria, and viruses. Basic research,an essential ingredient at the begin-ning of the causal chain, seeks to dis-cover and understand facts, developtheories about the fundamentalworkings of biological systems, andto revise those theories as new factsare discovered and understood. Thefocus of this research is on how cells,organisms, and entities work the waythey do, rather than on what prod-ucts are useful to mankind that canbe made from them.

Applied ResearchApplied biological research can bethought of as the second link in thecausal chain, and builds on the dis-coveries and understanding of basisresearch/science. It takes those find-ings, understanding of systems, andtheories about biological systems andasks how these can be used to createeffects that improve the lives of livingcreatures, enhance their performance,and better the circumstances inwhich humankind finds itself. Herethe focus is creating product proto-types that have potential to fill mar-ket needs.

The Biorefinery ConceptThe results from effective basic andapplied research can provide bio-based feedstocks that are of increasedproductivity, more uniform in thecharacteristics being sought, and canbe processed into a wider range ofend products at lower cost andgreater efficiency. A biorefinery iscapable of producing feedstocks into

primary components and reassem-bling those into a range of end-useproducts that includes productsspanning the value spectrum fromlower valued products in greaterquantity to more specialized andhigher value products, albeit in lim-ited quantity. In many respects, abiorefinery mirrors the refining ofpetroleum and creation of a widerange of products from that process.A number of biorefinery conceptshave been developed, including papermills, wet corn milling to produceethanol or high fructose corn syrup,and production of bio-plastics fromcorn.

TestingTesting of new bioproducts andproduct prototypes seems to be acritically important step in bringingthem to market. An important com-ponent of the attributes embedded inthese products (such as biodegrad-ability) relates to their affect on theenvironment; it is important to knowwhether these products have lowerlife-cycle costs and environmentalfootprints than the fossil energy-based products they will replace.Many products currently in use haveindustry-or user-determined perfor-mance standards that represent thethreshold performance levels theseproducts must meet.

RegulationRegulatory initiatives can play animportant role in encouraging firmsto try new technologies and newproducts. One example is the renew-able fuels standard from the EnergyPolicy Act of 2005 that creates a mar-ket for transporting biofuels. Regula-tory flexibility can encourage the useof best practices for environmentalmanagement, which often will incor-porate bioproducts. Regulatory initi-

atives also may include tax credits orincentives. Life cycle analysis of bio-based fuels from “cradle to grave”could ultimately provide carboncredits for industry trading, thus low-ering the net cost of biobased fuelproduction.

Product Development and CommercializationProduct development involves refine-ment and fine-tuning of product pro-totypes to address specific marketdemands as well as demonstrationprojects that test the product in useto determine how effectively it fills amarket need. Demonstration projectsare a critical step and will likely be aninteractive process with research andproduct testing steps, as the devel-oper seeks to create a product thatcost-effectively fills a market need.Product demonstration can also playan educational role as potential cus-tomers evaluate the usefulness of aproduct and learn how it might beused in their applications.

Another important step in com-mercialization of bioproductsinvolves procurement preferences forfederal, state, and other public sectorpurchasing. These preferences fill atleast three important functions incommercialization: First, they pro-vide a broader based and morediverse opportunity to demonstratethe product in use to potential cus-tomers: second, they provide a criti-cally important demand base largeenough for suppliers to scale up pro-duction, thereby achieving econom-ics of scale and decreasing productcost, and finally: public procurementpreferences can stimulate sufficientmarket demand to bring new suppli-ers and their competitive efficienciesinto the market.

Public sector incentives to sup-port new industries often extend


beyond procurement preferences. Taxcredits, such as investment andresearch tax credits, can be used todecrease both risk and cost to privatefirms that develop, manufacture, andcommercialize a new product, use anew and untried production process,or enter new markets. Insurance cov-erage can be created to support riskmanagement associated with the useof new and untried technology thatmight be used in producing a newproduction process, such as cellulosicconversion of plant lignin for use in anew biorefinery, or a new bioprod-uct.

A Policy FoundationMajor new industries in the UnitedStates typically have been supportedby a set of public policies. These pol-icies have signaled the support ofpublic policy makers for the newindustry and the willingness of thepublic sector to reduce, or at leastmake more quantifiable, the risksassociated with the new industry.This has been true for the automo-bile, radio and television, aircraft,computer, and oil industries. Publicpolicy makers have understood thisimperative for the bioeconomy andhave developed a support base ofpublic funding for basic and appliedresearch and for stimulating productdevelopment through grants, loans,and loan guarantees to start up firms.Other policy initiatives such asrenewable fuels targets and excise taxexemptions also have under-girdedthe growth in demand for these newproducts - as in the case of ethanoland biodiesel.

The policy role is particularlyimportant in the development of thebioeconomy because the benefits ofusing the products are widely sharedin society - the environmental sus-tainability, carbon cycle manage-

ment benefits, and public health ben-efits of biobased products arecaptured widely by society, not justby those who buy and use the prod-ucts.

FinancingFinancing is a large concern for firmsentering into new business venturesor offering new products to the mar-ketplace. The public sector can pro-vide important early stimulus todeveloping new products and cre-ation of new firms to advance thebioeconomy development. This sup-port typically has been in the form ofgrants and loans/loan guarantees.Grants are often made available tonew business ventures, or to venturesengaging in new product develop-ment and marketing. Acquiringequity capital has proven to be aneven larger challenge for rural basedstart-up firms. Equity capital is diffi-cult to acquire, and the tendency,especially with cooperatively orga-nized business firms, is to go forwardwith the minimal amount of equitycapital necessary to support the debtcapital used in the start-up. Thataction can add unnecessary risk tothe new business equity because itmeans there is little built-in financialresiliency to sustain business set-backs.

An array of private sector andpublic/private sector partnerships canfacilitate financing. It is almostalways preferable to own part of asuccessful venture than to own all ofa venture with a high risk of failure.Creating competitive access to ven-ture capital and “angel” capital (indi-vidual investors) for new businessstart up and expansion is a problemin rural America, and thus, creatinginvestment networks that focus onrural and biobased businesses may bepart of the solution.

Overcoming rate of return barri-ers on new investments in plants andequipment to support bioproductproduction is a particularly difficultissue for private sector firms enteringa new and inherently higher-riskmarket—one that usually has highentrance requirements in terms ofcapital and technology. Public sectorinvestment partnerships, tax creditplans, and grants can be particularlyhelpful in enabling the first genera-tion of new production and market-ing to gain a competitive foothold.

Access to specialized insurance orother risk-bearing strategies to pro-tect cash flow during periods of busi-ness interruptions could prove help-ful. Contracts that fix feedstock costsand facilitate market demand also areimportant for lowering financial riskto levels that business firms are will-ing to bear.

Education and OutreachFinally, educational and outreachprograms that provide science-basedinformation on biofuels and bioprod-ucts to policymakers, manufacturers,and consumers can be important inobtaining successful market penetra-tion. Understanding product envi-ronmental and performance charac-teristics is key to a product launch.Bioenergy products have to be morethan “green”; they also have to bepriced competitively and add morevalue than the competition.

A First StepUSDA is committed to developing amore holistic approach with its pro-grams. On December 7, 2005 Secre-tary Johanns created an EnergyCouncil under the leadership ofUnder Secretary for Rural Develop-ment, Tom Dorr. The newly formedCouncil was instructed by the Secre-tary to review USDA’s existing energy


and bioproduct related activities,authorities and resources, and recom-mend how, with other governmentand private sector entities, to maxi-mize the effectiveness of USDA’s cur-rent programs and resources “...sothat we have a comprehensive, inte-grated and intensified effort”(Johanns, 2005).

For More InformationCommittee on Biobased Industrial

Products. (2000). Biobased industrial products: Priorities for

research and commercialization. Washington, DC: National Acad-emy Press.

Johanns, M. (2005). Helping U.S. farmers and ranchers cope with ris-ing energy costs: USDA’s Energy Strategy. Washington, DC: USDA. Available online: http://www.usda.gov/wps/portal/usda-home.

New Farm and Forest Products Task Force. (1987). New arm and forest products: Responses to the chal-lenges and opportunities facing

American agriculture. Washing-ton, DC: USDA.

Roger Conway ([email protected]) is Director, Office of Energy Pol-icy and New Uses, Department ofAgriculture , Office of the ChiefEconomist, Washington, DC. Mar-vin R. Duncan ([email protected]) is aSenior Agricultural Economist at theU.S. Department of Agriculture,Office of Energy Policy and NewUses, Office of the Chief Economist,Washington D.C.