Cellulosic Biofuel Potential with Heterogeneous Biomass Suppliers: An Application to

Switchgrass-based Ethanol

John MiranowskiProfessor of Economics, Iowa State University

with

Alicia Rosburg, Assistant Professor, University of Northern Iowa

Keri Jacobs, Assistant Professor, Iowa State University

Motivation

• Biofuel expansion

• U.S. RFS2 – 16 billion gallons of cellulosic biofuel by 2022

• Economics of cellulosic biofuel differs from conventional fuel and first-generation biofuel

• Non-commoditized feedstock

• Location-specific economic trade-offs

Research Objectives

1. Develop a long run cost model of cellulosic biofuel production with local biomass suppliers and biofuel processors.

2. Identify marginal costs and biorefinery scales and locations of meeting biofuel targets (RFS2).

3. Evaluate policy and biofuel costs of meeting RFS2 with location differences in biomass production and processing costs.

Features of conceptual model

• Consider only long run costs prior to capital investment

• Account for economic tradeoff

• Economies in processing

• Diseconomies in feedstock procurement (e.g., transportation)

• Biomass supplies differ within and between local markets which dictate economies of biofuel processing

• Breakeven aggregate production is driven by the long run price of crude oil or gasoline

Application to switchgrass

• Biorefinery conversion

• Biochemical conversion of biomass to ethanol – Kazi et al. (2010)

• Conversion scale factor

• Assume processing plant runs at annual capacity

• Biomass production

• Potential land available for SG – CRD land use data (USDA)

• SG production costs and yields – Khanna et al. (2011)

• Storage and transportation cost assumptions – Rosburg & Miranowski (2011)

• Marginal opportunity cost of biomass cropland – CRP offers

Minimum ATC of SG ethanol by CRD

ATC($/gallon ethanol)

3.19 - 3.25

3.26 - 3.50

3.51 - 3.75

3.76 - 4.00

4.01 - 4.60

31

5

10 96

2

7

84

Trends in cost minimizing decisions

As aggregate biofuel production expands, MC increases.

1. Processing plant capacity decreases

2. Biomass transportation distance and costs increase

3. Landowner participation rate decreases because

• Biomass yields decrease • Suitable land for SG production decreases• Land opportunity costs increase

Estimated ethanol supply curve from switchgrass

0 1 2 3 4 5 6 7 8 9 103

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

Billion gallons per year

$/ga

llon

etha

nol

Market conditions to support biofuel production from SG

• 2016 RFS2 cellulosic biofuel mandate of 4.25 bgy

• EIA 2012 oil price forecasts for 2022 and 2035: $129 and $145 per barrel

Note: Wholesale prices

Production (bgy)

Gasoline price ($/gallon) 5.05 5.25 5.46 5.88

Oil price ($/barrel) 147 153 158 171

Gasoline price with tax credit ($/gallon) 3.54 3.74 3.95 3.47

Oil price with tax credit ($/barrel) 103 109 114 127

Conclusions

• Local production environments play an important role in aggregate cost of cellulosic biofuel production.

• Biofuel production costs vary significantly across locations.

• Given SG land use assumptions, the cost of satisfying 2016 cellulosic biofuel mandate (4.25 bgy) is $5.25/gge.

Thank you!

Comments or questions?

Extra slides

Empirical approach

1. Establish least-cost SG biofuel supply for each CRD and market supply curve based on aggregation of CRD least cost biofuel supplies.

2. Determine aggregate MC, along with biorefinery scales and locations, to meet RFS2 production goals.

Spatial variation in cost-minimizing decisions

Heterogeneity between and within local biomass markets creates significant variation in the cost-minimizing decisions

(mgy) (miles)

($/dt)

($/gal)

% of Total Production

All biorefineries

Average 52 35 18.6 3.73

Range 9 – 117 22 – 51 4 – 58 3.19 – 4.57

Top 25% of biorefineries 86 31 12 3.38 41%

Bottom 25% of biorefineries 31 38 31 4.17 15%

Supply curve sensitivity

Switchgrass Yield Available biomass cropland

0 2 4 6 8 10 122.5

3

3.5

4

4.5

5

5.5

Billion gallons per year

$/ga

llon

Low switchgrass yield

Baseline switchgrass yieldHigh switchgrass yield

0 2 4 6 8 10 12 143

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

4.8

Billion gallons per year

$/g

allo

n

Low dA

BaselineHigh d

A

Supply curve sensitivity

Variable transportation cost Economies of scale

0 2 4 6 8 10 12 143

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

4.8

Billion gallons per year

$/g

allo

n

Low (t = 0.50)

Baseline (t = 0.70)High (t = 1.00)

0 2 4 6 8 10 12 143

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

4.8

Billion gallons per year

$/ga

llon

High economies (k = 0.60)

Baseline (k = 0.75)Low economies (k = 0.90)

Supply curve sensitivity

Alternative transportation models

0 2 4 6 8 10 123

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

Billion gallons per year

$/ga

llon

Baseline

Diminishing participationAverage hauling distance