Ethanol As A Renewable Fuel: Economic and Environmental Considerations

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Ethanol As A Renewable Fuel Economic and
Environmental Considerations

• Vernon R. Eidman
• Department of Applied Economics
• University of Minnesota

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I plan to discuss

• the development of the ethanol industry and where
  we seem to be headed,
• factors that will limit the expansion of grain
  ethanol, and
• the energy balance and green house gas impacts of
  ethanol use.

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Ethanol
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Ethanol Production Has Been Growing Rapidly
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Ethanol Production in Minnesota
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The U.S. Industry is Growing Very Rapidly

• Industry very profitable for the past 2.5 years
• - Higher petroleum and wholesale gasoline prices
• - Phase out of MTBE need 6 billion
  gallons/year
• - Ethanol production costs have been relatively
  constant.
• Industry is expanding very rapidly
• - Will produce 4.8 billion gallons during 2006
• - Plant capacity will reach
• - 6 billion gallons 1/1/07
• - 7 billion gallons 1/1/08

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Profitability of Ethanol Plants is Expected to
Remain Strong For the Near Term

• Expect ethanol prices to decline to .20 to .25
  over the wholesale price of gasoline.
• Refiners Acquisition Cost Wholesale Gasoline
  Price Ethanol Price
• /Barrel /Gallon
  /Gallon
• 40 1.20 1.65
• 50 1.49 1.74
• 60 1.78 2.03
• 70 2.07 2.32
• 80 2.46 2.61
• Wholesale price of regular gasoline 0.036
  0.029(Price of crude oil/brl.)
• Source McCollough, Robert and Daniel Etra. When
  Farmers Outperform Sheiks Why Adding Ethanol to
  the U.S.Fuel Mix Makes Sense. McCullough
  Research, Portland, Oregon, April 2005, 12pp.
• Wholesale price of Gasoline plus 0.25.

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Our model to estimate the profitability of a dry
mill ethanol plant suggests

• that without specific subsidies for the plant,
  the cost per gallon of denatured ethanol with
  corn at 2.00 per bushel and natural gas at
  10.00 is 1.526 per gallon of denatured ethanol,
• the coproducts produced are 1 gallon of denatured
  ethanol, 6.4 pounds of DDGS and 6.4 pounds of
  CO2, and
• selling the DDGS at .04 per pound gives a net
  cost of 1.27 per gallon of denatured ethanol.

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The Grain Ethanol Industry Is Expected to
Continue Expanding Until Profitability Returns to
Normal levels.

• Net cost per gallon of ethanol depends on the
  price of corn and fuel for the plant
• Corn Price Net Cost/ Gallon
• 2.00 1.27
• 3.00 1.63
• 4.00 1.98
• 5.00 2.34
• Each increase of 1.00 per mmbtu increases the
  cost per gallon 0.034.
• The profit opportunities will be reduced if the
  blenders credit of 0.51/ gallon is reduced.

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Other Developments in the Ethanol From Grain
Industry

• Changes in Industry Structure
• - Larger firms are being formed to attract
  capital from financial markets to own
  multi-plant firms.
• - developing much larger plants 100 million
  gallons
• - New plants are more geographically dispersed
  destination as well as origination plants
• Changes to increase plant efficiency
• - Alternative boiler fuels DDGS, wood, corn
  stover, coal
• - Removing oil form thin stillage for biodiesel
  production
• - Fractionation

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Our work on economies of scale and alternative
processing plant fuels suggests

• economies in investment and operating costs of
  about 0.035 per gallon of ethanol for NG plants
  as plant size increases from 50 to 100 mmgpy. The
  larger plants are expected to obtain additional
  economies in marketing, transportation and risk
  management.
• investment and operating costs per gallon of
  ethanol for plants burning corn stover (_at_50/ton)
  would be about 0.15 less than the cost with NG
  at 10 per mmbtu. The breakeven natural gas price
  is 5.60
• DDGS at 66 per ton and corn stover at 50 per
  ton have the same cost per gallon of ethanol.
• coal fired plants (w/coal at 2.65/mmbtu) have a
  cost advantage of 0.165 per gallon of ethanol
  compared to NG plants at 10/mmbtu. The breakeven
  natural gas price is 5.15.

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Projected Ethanol Production From Grain By
Marketing Year (FAPRI July2006 Update)
Marketing Year 9/1-8/31 2005/06 2006/07 2010/2011
Ethanol Produced Bill. Gal. 4.6 5.9 9.7
Corn required Bill. Bu. 1.645 2.110 3.455
CoProduct Feeds Mill. Tons 13.705 17.580 28.787
Corn Crop Bill. Bu. 11.112 10.740 12.498
Corn Crop 14.8 19.6 27.6

Acres Planted Mill. Ac. 81.8 79.4 87.0
Yield per Acre Bu./Ac. 147.9 149.0 156.4
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Ethanol from Cellulosic Biomass

• Analysis based on Aden, et.al. Lignocellulosic
  Biomass to Ethanol Process Design and Economics
  Utilizing Co-Current Dilute Acid Prehydrolysis
  for Corn Stover. NREL/TP-510-32438. 2002.
• Plant designed to process 2,205 tons per day
  (2000 metric tons).
• Estimated costs are for the nth plant.
• - start up after 2010
• - project investment (2005) of 250,797,000.
• - Operating costs of 81,200,800 including
  buying the biomass at 30 per ton.
• Production
• - Initial conversion rate of 67.8 gallons per
  ton.
• - Later conversion rate of 89.7 gallons per ton
• - Also produce 3.7 kWH per gallon of anhydrous
  ethanol, use 1.42 in the plant and sell 2.28 _at_
  .041

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Costs and Development of Cellulosic Ethanol
Industry

• The cost per gallon of ethanol with the Aden et.
  al plant (with a conversion rate of 67.8 gallons
  per ton, enzyme cost of 0.20 per gallon and corn
  stover cost of 50 per ton) is 1.91 per gallon.
• Commercial cellulosic plants are being built.
• - 50 mmgpy plant in Georgia using forest
  product wastes as the feedstock. Production to
  begin summer 2007.
• - Idaho plant to produce ethanol from 400,000
  tons of barley straw. Construction to begin
  summer 2007 to be online in 2009.
• - Broin to build a 125 mmgpy corn stover-based
  ethanol plant in Iowa.
• Construction to begin early in 2007 to be
  online in 2009.
• Dont anticipate much commercial production
  before 2015.
• Much of the crop residue and bioenergy crops may
  be processed using other technologies, such as
  combustion, gasification, etc.

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Energy Balance and Greenhouse Gas Impacts of
Ethanol and Biodiesel
Energy Out/Fossil Energy Input GHG Reduction vs. Gasoline/Diesel
Gasoline 0.81 -
Ethanol from corn grain 1.25 1.35 12 - 26
Ethanol from cellulose 5 - 6 82 - 85
Diesel 0.83 -
Biodiesel from soybean oil 1.93 3.21 41 - 78
Sources Michael Wang, Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005. John Sheehan, et. al. An Overview of Biodiesel and Petroleum Diesel Life Cycles,NREL/TP-580-24772, Golden CO, May 1998. Jason Hill, et. al. Environmental, Economic and Energetic Costs and Benefits of Biodiesel and Ethanol Fuels, PNAS 10311206-10, July 25, 2006. Sources Michael Wang, Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005. John Sheehan, et. al. An Overview of Biodiesel and Petroleum Diesel Life Cycles,NREL/TP-580-24772, Golden CO, May 1998. Jason Hill, et. al. Environmental, Economic and Energetic Costs and Benefits of Biodiesel and Ethanol Fuels, PNAS 10311206-10, July 25, 2006. Sources Michael Wang, Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005. John Sheehan, et. al. An Overview of Biodiesel and Petroleum Diesel Life Cycles,NREL/TP-580-24772, Golden CO, May 1998. Jason Hill, et. al. Environmental, Economic and Energetic Costs and Benefits of Biodiesel and Ethanol Fuels, PNAS 10311206-10, July 25, 2006.
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Reduction in GHG Per Mile Relative to
Gasoline/Diesel
E 10 (Corn) 2
E 10 (Cellulose) 6
E 85 (Corn) 23
E 85 (Cellulose) 64
B - 2 1.6
B - 20 16
B - 100 78
Source Michael Wang, Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol, Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005. John Sheehan, et. al. An Overview of Biodiesel and Petroleum Diesel Life Cycles,NREL/TP-580-24772, Golden CO, May, 1998. Source Michael Wang, Energy and Greenhouse Gas Emissions Impacts of Fuel Ethanol, Center for Transportation Studies, Argonne National Laboratory, Aug. 23, 2005. John Sheehan, et. al. An Overview of Biodiesel and Petroleum Diesel Life Cycles,NREL/TP-580-24772, Golden CO, May, 1998.
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Summary

• It appears periods of favorable profits are
  ahead, but not at the levels of the past year.
  Future profits are highly dependent on petroleum
  and corn prices.
• Major efforts to substitute biomass for natural
  gas in ethanol plants are underway, but
  development problems remain.
• Dry-mill technologies are evolving that will
  increase efficiency of the plants and produce a
  wider range of coproducts over the next several
  years
• - oil recovery from thin stillage
• - fractionation
• It appears the U.S. will produce 10 billion
  gallons of ethanol from grain within 4 years and
  coproduct utilization in livestock production
  will become more common.
• Cellulosic conversion becomes more competitive
  with higher priced corn.

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Thank You!
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