Biomass Energy Development 1 Biofuels: Opportunities and Constraints To Community Energy Generation Briefing Paper Three of Black, Brown and Green 65 Broadway, Suite 1800, New York NY 10006 | (212) 248-2785 www.centerforsocialinclusion.org FOR IMMEDIATE RELEASE For more information, contact: Mr. Denis Rhoden Jr. M.B.A, AICP The Center for Social Inclusion New York, NY 10006 [email protected]646.442.1457 Ms. Jeanne Baron The Center for Social Inclusion New York, NY 10006 [email protected]646.442.1454 October 2009
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Biomass Energy Development 1
Biofuels:
Opportunities and Constraints
To Community Energy Generation Briefing Paper Three of
Black, Brown and Green
65 Broadway, Suite 1800, New York NY 10006 | (212) 248-2785 www.centerforsocialinclusion.org
FOR IMMEDIATE RELEASE
For more information, contact:
Mr. Denis Rhoden Jr. M.B.A, AICP The Center for Social Inclusion New York, NY 10006 [email protected] 646.442.1457
Ms. Jeanne Baron The Center for Social Inclusion New York, NY 10006 [email protected] 646.442.1454
Biodiesel production, especially using yellow and brown grease, represents the
greatest sustainable energy opportunity for community-level development within
the biofuel power segment.
Processed waste vegetable oil sells for approximately $1 per gallon.7 A community
could adapt existing infrastructure and relationships using private and public-private
approaches with solid waste agencies. Not only would the community benefit from
selling the grease, it would also reduce expenses associated with improper disposal of
grease.
Communities producing or purchasing biodiesel for municipal fleets will benefit from
increased demand for biofuels by this segment and lower transportation costs
because of the benefits of locally produced biodiesel. In addition, by replacing
conventional diesel fuel, the use of biodiesel can lower GHG emissions from the
transportation sector. Remember: the potential GHG reductions from switching to
biodiesel from petroleum-based diesel depend largely on the type of feedstock used
to produce the fuel (to date biodiesel provides greater GHG reduction potential
benefits than ethanol).
How Policy can Help Communities Communities do not just need technology but policies to give them a toehold in biofuels
generation. Businesses need reliable relationships to secure access to targeted raw materials.
Government can also provide long-term buying contracts and set price rates to provide
additional incentives for biofuel production. At the local level, land use, environmental and
zoning regulations will affect what kind of energy business will be viable. Communities will
need to work in partnership with environmental advocates and regulatory bodies.
Some opportunities created by existing polices are clear. At the local level, land use,
environmental and zoning regulations are an important consideration. In some localities, food
7 Feasibility Report: Small Scale Biodiesel Production; Illinois Waste Management and Research Center
Biofuel Energy Development 12
safety rules require quick disposal of waste feedstock. This important service can create
opportunities for allied businesses to supply a variety of feedstock to producers.
Suitability
The production of biodiesel from waste feedstock, such as grease from restaurants, is a fairly
mature and simple process that can reduce a community’s carbon footprint as well as reduce
the instances and expense of damage from improper disposal of waste grease. The greatest
opportunity in the biodiesel value chain is for the collection and refining of waste grease.
While biodiesel, especially produced from waste-feedstock, represents a real opportunity for
communities to reduce their carbon footprint, there are several factors that also need to be
considered before deciding to undertake such a project:
Economic issues–Incentives to produce biodiesel are directly linked to the price of oil.
In early 2009, several large biodiesel plants stopped producing fuel due to recent
decreases in the cost of oil. Some expect biodiesel production in 2009 to be lower
than production levels for 2008.
Land use–Biodiesel production directly and indirectly impacts land use. The clearing of
grassland or forests to plant biofuel crops is a direct land use change that can
adversely affect the GHG emissions due to the loss of a natural carbon sink. The
Rendering
•Collect from restuarants
•Central depositaries
Feedstock Transport
Biodiesel Production
Biodiesel Distribution
Customers
•Buying cooperatives
•B100: Mining, marine, national parks, sensitive environments
•B20: School buses, urban buses, government fleets
•B5-11: Incentive driven
•B2: Farm, state mandates, truck fleets, general use
Waste-Feedstock Biodiesel Value Chain
Biofuel Energy Development 13
practice of clearing peatland in Malaysia and Indonesia to produce palm oil for
biodiesel has particularly raised concerns. However, land use concerns are minimal for
waste-feedstock biodiesel production.
Impact on commodity prices and environmental resources–Biodiesel produced from
soy, palm, rapeseed, or sunflower oil competes with other agriculture uses for those
products, including food, feed, and timber. Increased demand for fuel production
leads to increased prices for the crop. This results in more land being diverted for
biofuel crop production. In addition to impacts on land use and agricultural prices,
biodiesel production can also affect water supply, habitat and ecosystems, and soil,
air, and water quality.
It is estimated that approximately 390 million gallons of biodiesel could be made from waste
feedstocks in the US: 150 million gallons from yellow grease and 240 million gallons from
animal fats. Of the 700 million gallons of biodiesel produced in 2008 in the United States,
about 60 percent was derived from soybean oil.8 Biodiesel production is currently centered in
the East and Mid-West regions. However production, especially using recycled oils, can be
located anywhere in the country. Waste-feedstock production would likely be easiest in urban
areas where centralized disposal locations would be convenient to access.
Entry Risks
Supplies of Raw Materials–Feedstock prices are often volatile, making the economics to
produce biofuels far from stable. Transmission and distribution activities add costs that may
make biofuels economically infeasible for some market participants. There’s some
speculation large commercial plants will see limited opportunity in the biofuel segment in its
present form. (Nevertheless, some big companies have begun making investments to collect,
transport and refine waste feedstock.) Volatility will deter large-scale centralized operations
from controlling supply until technology and consumption patterns alter these conditions. For
8 Weber, J. Alan. Feedstock Supplies for U.S. Biodiesel Production. MARC-IV Consulting, Inc., 2008.
Biofuel Energy Development 14
community-level entrants, these market dynamics provide a favorable shield from most forms
of entry by large scale competitors and offers several entry points into the growing biofuels
supply chain: collection, transport and small scale refining to name a few.
Infrastructure Investment–Unlike wind and solar power generation, producing biofuels has
higher ongoing generation costs such as physical asset maintenance, feedstock (grease, etc),
licensing expenses and the chemicals used to produce the fuel. Operating expenses include
the cost of feedstock, methanol, catalyst, labor, transportation, insurance, etc. The processing
cost per gallon of biodiesel, including the cost of materials, labor, energy, plant depreciation,
and interest is about $0.50 per gallon for a 5 million gallon per year plan. Working capital,
credit lines and debt financing for small scale biodiesel refining is generally limited during
normal economic cycles.
Adjacent industry entry–The infrastructure and cost structure required to produce biofuels is
quite similar to the existing fossil fuels industry and require scale to be commercially viable.
Large concerns such as ExxonMobil and British Petroleum have cautiously entered the
segment.
Recent Deal Activity by large scale adjacent threats9:
Exxon Mobil partners with Synthetic Genomics, in a deal estimated at $600 million for
research into photosynthetic methods of biofuel production
In 2008, Dow Chemical and Algenol Biofuels joined forces to study how algae can be
used to turn carbon dioxide into ethanol.
British Petroleum and Martek Biosciences, a company that converts algae into
microbial oils and biofuels, entered a partnership agreement valued at $10 million to
jointly develop fermentation technology.
9 Ricketts, Camille “BP gives nod to algae biofuels with $10M to Markek” VentureBeat October 22, 2009.
Biofuel Energy Development 15
Build Out Costs Biodiesel can be produced from soybean oil for $1.80 to $2.40 per gallon and from yellow
grease for $0.90 to $1.10 per gallon.10 The cost of producing biodiesel depends on a number
of factors, including the following:
Feedstock–The overall cost of biodiesel production depends mainly on the feedstock
used and its price. The prices of most feedstocks are subject to market fluctuations,
which can also make biodiesel production costs vary over time. Although the price of
conventional diesel is not a direct result of production costs, it provides a baseline to
compare the cost of biodiesel production. The appetite for biodiesel production is low
if the price of petroleum diesel is low.
o Feedstock accounts for seventy-five percent of operating expenses of biodiesel
produced from soybean oil.
o Waste feedstock biodiesel production (e.g., yellow or brown grease) expense
depends on the source and procurement method. In some places, feedstock
suppliers pay biodiesel processors to collect the waste, in others, the
processors pay the suppliers. In either case, biodiesel produced from waste
feedstocks is cheaper, although the overall supply of these feedstocks is
limited. Biodiesel from animal fat is currently the cheapest option for
producing biodiesel. It is also highly regulated and requires rapid disposal,
which puts downward pressure on overall supply (and higher prices) if
sufficient transport and processing is not in place.
Facility Capital Expenditures–The cost of building a biodiesel plant depends upon
capacity, location, design, and equipment cost, which varies by type of feedstock. It
10
National Renewable Energy Laboratory, Biomass Oil Analysis: Research Needs and Recommendations, NREL/TP-510-34796 June 2004.
Biofuel Energy Development 16
costs an estimated $1.00 per gallon of annual capacity to build a biodiesel plant with
economies of scale starting at 5M gallon capacity.11
Operating costs–Operating expenses include the cost of feedstock, methanol, catalyst,
labor, transportation, insurance, etc. The processing cost per gallon of biodiesel,
including the cost of materials, labor, energy, plant depreciation, and interest is about
$0.50 per gallon for a 5 million gallon per year plant. 12
Disposal/Sale of byproducts–The major byproduct of the biodiesel production, crude
glycerin, can be sold to the pharmaceutical, food, and cosmetics industries. This can
offset the per-gallon cost of production.
Hurdles
Here are hurdles communities must consider as biofuel operations enter and grow locally:
Community financial support from external sources–Attracting capital to the segment
is becoming increasingly costly and larger scale is not enough to overcome these
hurdles. A greater diversity of financial products must be offered that allow
communities to absorb costs later and at reasonable terms. This is feasible when
buyers provide long-term contracts that can be leveraged against physical assets in
competitive markets. For instance, the government’s increasing economic role in the
renewable energy market is not accessible to all businesses. Not-for-profit structures
(such as cooperatives) are more likely to receive debt financing to build coal-fired
power plants, than to receive grant dollars to support renewable energy generations
because government support of biofuel development often comes in the form of tax
credits. Non-tax paying entities are ineligible. In the for-profit community, overall
investor appetite for these credits may be curbed due to the broad economic
slowdown. 11
Economic Issues Related to Biofuels, written testimony for Senate Committee on Appropriations Subcommittee on Agriculture, Rural Development, and Related Agencies, Keith Collins, Chief Economist, USDA, 2006 12
Ibid.
Biofuel Energy Development 17
Financing Community Biofuel–a large-scale biodiesel production plant will cost millions
of dollars, but the expense of setting up a grease collection initiative is relatively small
and could likely be funded through the community’s waste water department or a
local, state, or federal grant. Such an initiative reduces the expense of grease-related
sewage backups. Those savings mean the upfront investment will be recouped within
two years. Founding a cooperative requires even less capital investment, with the
major expense being a method of storing the fuel. Charging a one-time membership
fee would likely cover capital costs. Funding from local, state, and federal agencies
may also be available.
Step by Step Guide: Waste Grease Collection Initiative
1) Set up agreements–encourage restaurants, schools, and hotels to allow free pick up of
used cooking grease. Have them sign an agreement, similar to the one found on the
Piedmont Biofuel Cooperative’s website. Often this means less maintenance on their part
and participation is in their interest. Provide partners with a separate container to collect
the grease so that is considered “yellow grease” rather than taking the grease from the
grease traps (considered “brown grease”). It is important to note that a trustworthy
relationship with the restaurant must be forged because disposing of anything other than
waste oil in the receptacle will ruin a batch of biodiesel and may violate government
regulations in some places.
2) Establish a system to pick up grease–partner with waste management officials to
determine the most efficient way to collect grease from locations – how often, what
route, which kind of transport vehicle, etc
3) Build a processing facility–the collected cooking oil will need to be heated, filtered, and
settle for a few days before the usable feedstock can be distilled. Most likely a series of
storage tanks will need to be employed.
Biofuel Energy Development 18
4) Set up vendor contracts with biodiesel producers–locate nearby biodiesel producers and
negotiate contracts to sell collected grease.
Step by Step Guide: Biodiesel Cooperative
1) Form a cooperative–interested community members develop a mission and goals for a
proposed co-op. Establish the scale of the pooled fueling needs, and create a member
contract with a schedule of dues.
2) Permits and location siting–work with local authorities from the start to determine what
permits will be needed for refueling stations and where to best locate them.
3) Secure supply of fuel–negotiate with biodiesel suppliers based on the forecasted need for
fuel. Local producers will likely be less expensive due to lower transportation costs. A co-
op can further reduce the cost of fuel by having mobile storage containers that can be
brought to the producer for refilling.
4) Purchase storage and lease site–there are a variety of options for storage at refueling