The economics of ethanol as a biofuel

with some useful figures on comparative feedstocks

Extracting grain of truth on ethanol - Business - Business - theage.com.au


A LOT of nonsense has appeared in the media in the past few days about fast-tracking the subsidising of ethanol so we can reduce petrol prices. If we look at the cold, hard facts, it is obvious this will not bring down the price of petrol for the general consumer.
The first of these facts is that if ethanol is included in petrol as an E10 blend — which is what is being promoted — the price reduction will be minimal. E10 is 90 per cent petrol and 10 per cent ethanol. The current price of petrol at the refinery gate is about $1.10 a litre before GST. Let's assume ethanol is sold at 50¢ less a litre. If you substitute 100 millilitres of petrol at 11¢ with 100ml of ethanol at 6¢, the price of E10 would be 5.5¢ a litre less at the pump once GST is added.
The energy value of ethanol is only 67 per cent that of petrol. This means motorists will get poorer mileage out of E10 than out of standard unleaded petrol. Now, ethanol also improves the octane value of petrol, which makes the petrol more efficient. However, this does not make up for the energy loss; so the 5.5¢-a-litre gain in the above scenario will not all end up in the pocket of the consumer due to the poorer mileage of their vehicle.
As most of the price difference between petrol and ethanol is due to the fact that ethanol does not have the excise on it that petrol pays, it would be much simpler to reduce the excise on petrol to get the same result, and achieve it much more quickly. Either way the reduction to the consumer would not be large.
Recent estimates of ethanol production from sugar, presented at the recent Australian Ethanol 2006 conference, had a price of 70¢ a litre for ethanol with sugar at $300 a tonne. With raw sugar now at $405 a tonne on the New York Coffee, Sugar and Cocoa Exchange, the price of ethanol would have to be much higher before you could get people to build a sugar-based ethanol plant. At these raw sugar prices, it is unlikely that significant levels of sugar-based ethanol would be produced, although ethanol can be produced from C molasses at a cheaper price.
Ethanol from grain can be produced at prices below 70¢ a litre, with estimates varying from 38¢ to 54¢ a litre depending on the assumptions used. However, increased ethanol production from grain would be likely to increase grain prices by creating more demand for grain and, therefore, the cost of ethanol production would be likely to rise. In times of drought, prices of grain can double, consequently greatly increasing the price of ethanol production from grain.

However, even if ethanol can be produced much cheaper than petrol, it is economically naive to suggest that the ethanol producers would sell it at a low price. Products are priced at a level that is competitive in the market, which takes into account competing products, their prices and their usability. Why would someone who produced ethanol at 45¢ a litre sell it for 55¢ if they could sell it for 80-85¢ a litre?
The only situation in which ethanol would be sold for significantly less than petrol would be if the supply were close to or higher than demand; but it would take years to ramp up ethanol production. A typical plant takes 12-18 months to complete and has to go through development applications and environmental processes, as well as raising the capital. We use about 19 billion litres of petrol a year in Australia. To supply just half of that as E10, five to 10 major plants would need to be built to produce 9.5 billion litres of ethanol, with no guarantee to investors that petrol prices would still be high when they finished construction.
Even if that happened, it would reduce petrol consumption in Australia by just 5 per cent; which would have absolutely no effect on world oil demand and petrol pricing in Australia.
The only way to get a true value proposition to consumers in Australia is to increase the number of flex-fuel vehicles in the market. These are vehicles that will run on anything from 100 per cent petrol and no ethanol to 15 per cent petrol and 85 per cent ethanol. If ethanol were 50¢ a litre and petrol $1.10 a litre at the refinery gate, then E85 would be about 87¢ a litre and petrol $1.44 a litre. Despite the energy differences, that is a proposition that motorists would leap at.
Ethanol production has already been subsidised by capital grants from state and federal governments and by being free of any excise until 2011, and only at half excise levels after 2015. To subsidise the production of ethanol further with no guarantee that it will be passed on to consumers is to pass public money into the hands of private investors for no public benefit. If a product that can be produced at half the price of a competing product cannot get a value proposition that means something to consumers, then the people promoting it need to rethink their approach to the market. That is the major failure of the ethanol industry; and the only way they can think to get around it is by further public subsidy. The industry has to get more innovative in its approach to the consumer rather than trying to get the Government to force people to take their product or further subsidise them. I am a strong believer in biofuels as a solution to balance of payments problems, the strengthening of regional economies and reducing greenhouse gas emissions. What the industry needs is a sophisticated, innovative approach to the market, not more time at the public teat.
Paul Higgins is a futurist with Emergent Futures. He and his partners are writing a book on Australia's oil future. He has made presentations at several biofuels conferences and workshops in the past year.