Lignocellulosic ethanol: Is it economically and financially viable as a fuel source?

Environmental Quality Management / DOI 10.1002/tqem / Autumn 2008 / 23

© 2008 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI: 10.1002/tqem.20194

Recent concerns re-

lated to the environ-

mental impact and

uncertain future

supply of fossil fuels

have led to an in-

creased interest in

alternative fuels.

The objective of the

research discussed here was to determine the

business attractiveness of utilizing lignocellulosic

biomass resources, primarily woody biomass, to

produce ethanol in the United States. In addition,

we assessed the attractiveness of ethanol made

from corn grain in the United States and sugar-

cane in Brazil in order to provide a contrast be-

tween the emerging lignocellulosic and estab-

lished ethanol industries.

If lignocellulosic-based ethanol is to have the

potential to displace large amounts of fossil re-

sources, conversion of biomass to energy prod-

ucts must use processing technologies that are

feasible and economical. Given that the majority

of biomass available on the surface of the earth is

woody biomass, process technologies targeted to

this form of biomass are a priority.

As this article explains, lignocellulosic

ethanol production in the United States does not

appear to be a practical business venture at this

time based on

evaluation of the

relevant risks, un-

certainty, and as-

sumptions, and the

outcome of quanti-

tative analysis. As

technology ma-

tures, much of the

risk and uncertainty will diminish and the ligno-

cellulosic ethanol project will become more at-

tractive, as has occurred in the case of corn- and

sugarcane-based ethanol. This is especially likely

as the cost of oil continues to increase.

About This Article This article examines the business viability of

lignocellulosic ethanol from forestry sources in

the United States and contrasts it with ethanol

made from corn grain in the United States and

sugarcane in Brazil. We have collected and ana-

Robert E. Froese, Jillian R.

Waterstraut, Dana M. Johnson,

David R. Shonnard, James H.

Whitmarsh, and Chris A. Miller

Lignocellulosic Ethanol:Is It Economically andFinancially Viable as aFuel Source?

Ethanol from biomass is not yet

practical—but high oil prices

may change the equation

03TQEM18_1Froese 8/27/08 3:45 PM Page 23

Robert E. Froese, Jillian R. Waterstraut, Dana M. Johnson, David R. Shonnard, James H. Whitmarsh, and Chris A. Miller24 / Autumn 2008 / Environmental Quality Management / DOI 10.1002/tqem

lyzed data on economics, current and future mar-

ket trends, and environmental variables for each

country.

Two primary methods were used to draw con-

clusions regarding the feasibility of lignocellu-

losic ethanol. The first was to gather and utilize

relevant governmental data and other research

studies. The second involved ascertaining projec-

tions and predictions of economic and financial

feasibility based on forecasting and costing. Work

under this research project was limited to litera-

ture reviews, market

analysis, economic

evaluation, and finan-

cial analysis.

The main discus-

sion in this article is

divided into several

parts, as follows:

• general overview of the business and eco-

nomic factors considered;

• analysis of current and expected future mar-

ket conditions;

• description of the capital investment analysis

performed;

• explanation of how production costs were cal-

culated;

• exploration of how commercial lignocellu-

losic ethanol production could affect the ex-

isting market;

• discussion of some additional business con-

siderations;

• conclusions and observations;

• assessment of the overall outlook for lignocel-

lulosic ethanol; and

• identification of opportunities for future re-

search.

Background: NREL Study Several years ago, the National Renewable En-

ergy Laboratory (NREL) conducted an engineered

design study to approximate the cost of the lig-

nocellulosic ethanol production (Wooley, Ruth,

Sheehan, & Ibsen, 1999). The study, which was

reported in 1999, used wood chips as the biomass

material and based its calculations on 1997 U.S.

dollars.

The NREL study included aggressive cost tar-

gets and optimistic learning curves that would

not likely materialize within the project time-

frame. The study did, however, provide some use-

ful information regarding the estimated cost for

capital investments, as well as other cost infor-

mation, after relevant cost/price indices adjust-

ments.

General Business and EconomicConsiderations

Business and Economic IssuesSocial improvement and economic growth

are interrelated. Growth is sustainable only if

there is a reliable, uninterrupted supply of energy

in a form that does not threaten the environment

(International Energy Agency, 2002).

Energy is a strategic commodity. Ensuring its

availability is one important aspect of govern-

ment’s primary responsibility for national secu-

rity and economic growth. National circum-

stances and policies will determine the mix of

fuels needed to contribute collective energy secu-

rity, promote economic growth, and address the

challenge of achieving sustainable development

(International Energy Agency, 2002). In view of

these factors, renewable energy should play an in-

creasing role in the energy strategic planning of

governmental organizations.

Several key economic performance measure-

ments assisted us in evaluating the economic im-

pact from renewable energy products markets. A

summary of several economic indicators for

Brazil and the United States is shown in Exhibit1. In the discussion below, we explain how these

Energy is a strategic commodity.Ensuring its availability is oneimportant aspect of government’sprimary responsibility for nationalsecurity and economic growth.


Environmental Quality Management / DOI 10.1002/tqem / Autumn 2008 / 25Lignocellulosic Ethanol

capital investment analysis, based on the deter-

mined risk of investment.

Over the next decades, world population and

the economy will remain key drivers in the devel-

opment of the energy sector. It is expected that

measurements signify the effects of Brazil’s

ethanol program and how they may impact the

future success of lignocellulosic ethanol produc-

tion in the United States. This evaluation led to a

selection of appropriate discount rates for the

Exhibit 1. Summary of Economic Indicators in Brazil and the United States

Variables Units Brazil United States

Land Area5 1000 mi2 3,265.1 3,718.5

Total Population 1980 millions 1191 226.51

1990 - 248.72000 172.9 281.42004 184.1 293.72005 186.1 296.4

Population Growth Rate (2006 est.)3 % 1.04 0.91

Employment Rate 2000 % 55.52 64.42003 56.8 62.32004 56.7 62.7

Unemployment Rate 2000 % 7.13 432003 12.3 6.02004 11.5 5.1

GDP/Capita (2003 est.)5 $U.S. 7,600 37,800

Growth in GDP (Constant 1995 Prices) 2000 % 4.43 3.73

2003 –0.22 2.52004 5.1 3.2

Growth in Industrial Production 2000 % 6.93 5.63

(Excludes Construction) 2003 0.4 0.32004 6 0.4

GDP Composition by Sector5 Agric. % 10.2 1.4Industry % 38.7 26.2Services % 51.2 72.5

External Trade: Imports from World billion $U.S. $613 $1475.803

EU-25 $18.154 $234.106

Extra-EU-25 $42.856 $1241.706

USA $12.854 -

External Trade: Exports to World billion $U.S. $953 $1096.33

EU-25 $26.494 $158.356

Extra-EU-25 $68.516 $937.956

USA $22.74 -

Excise Tax on Energy Products Automotive Gas Oil none 18.4 cents/gal7

Heating Gas Oil none none

VAT Rates6 Standard Rate % N/A N/AElectricity N/A N/A

Natural Gas N/A N/A

Land Use3 Arable Land % 6.93 18.01Other % 92.18 81.78

Permanent Crops % 0.89 0.21

Sources:1. Central Intelligence Agency (2006).2. Instituto de Pequisa Economica Aplicada (2006).3. Index Mundi (2006).4. Banco Central do Brasil (2006).5. CountryFacts.com (2006).6. Calculated from existing data.7. Energy Information Administration.



the world population growth rate will continue to

decrease from 1.5 percent per year (its rate over the

past decade) to 1 percent per year through 2030.

This will result in a total population of 8.2 billion

in 2030, increasing from 6.1 billion in 2000 (Euro-

pean Commission, 2003). As the population

grows, the need for fuel will increase. Because of

uncertainties in the future oil supply, and the

detrimental effects of fossil-fuel burning on the en-

vironment, alternative fuels must be developed.

Brazil suffers from both a high unemployment

rate (11.5 percent) and a low employment rate

(56.7 percent) (Index

Mundi, 2006; Instituto

de Pequisa Economica

Aplicada, 2006). In

principle, it may be ex-

pected that biofuels

could have a positive

economic impact in

Brazil, as well as in

other developed and developing countries. There

are a number of employment opportunities associ-

ated with agricultural and forestry feedstocks that

can result from renewable energy markets. As world

demand for ethanol grows, Brazil’s expanding ex-

port industry will create more jobs for its citizens.

This same principle can be applied to a future

ethanol market in the United States. According to

a report from the Governors’ Ethanol Coalition,

growth of biomass industries can create new mar-

kets and employment for farmers and foresters,

many of whom currently face economic hardship

(Governors’ Ethanol Coalition, 2004).

GDP, Trade Balances, and Excise TaxesGross domestic product (GDP) is a leading in-

dicator of economic health. Rates of GDP growth

suggest that, over the next decades, developing

countries will progressively become more domi-

nant in both overall economic production and en-

ergy consumption (European Commission, 2003).

In China, recent figures show GDP growth of

9.5 percent. In India, the growth rate is 7.3 per-

cent (Index Mundi, 2006). The demand for en-

ergy in these countries is increasing at an un-

precedented rate; this demand must be met by

importing or producing fuel. Both countries have

been involved in discussions with Brazil concern-

ing ethanol imports (Luhnow & Samor, 2006).

GDP numbers by sector provide more detail

on the percentages associated with agricultural,

industrial (manufacturing), and services. A rela-

tively high proportion of Brazil’s GDP derives

from agriculture—10.2 percent, compared to 1.4

percent in the United States (Index Mundi, 2006).

This is in large part attributable to the success of

Brazil’s ethanol industry and recent increases in

exports of the fuel. Growth in the industrial sec-

tors fluctuated from 2000 to 2004, impacting the

economies of both Brazil and the United States.

Trade balances are determined by imports and

exports between countries. The trade balance (or

net exports) is the value of a country’s exports

less the value of its imports for a given year. A sur-

plus exists when exports exceed imports.

The United States imports more transporta-

tion fuel than it produces, causing a trade deficit.

Producing lignocellulosic ethanol would slightly

reduce the trade deficit for the United States.

Brazil currently has a trade surplus, in large part

because the country is virtually energy independ-

ent (Luhnow & Samor, 2006).

Excise taxes affect the economics of fuel pro-

duction and consumption. As an Internal Rev-

enue Service publication explains:

Excise taxes are taxes paid when pur-

chases are made on a specific good, such

as gasoline. Excise taxes are often in-

cluded in the price of the product. There

are also excise taxes on activities, such as

on wagering or on highway usage by

trucks. . . . One of the major components

Rates of GDP growth suggest that,over the next decades, developingcountries will progressivelybecome more dominant in bothoverall economic production andenergy consumption.



The data show that ethanol has had a beneficial im-

pact on the economy of Brazil. A similar effect may

be experienced by the United States if the country

pursues ethanol production on a nationwide scale.

Economic Indices UsedIn our research, we used several indices to ad-

just monetary units to the appropriate year, trans-

late exchange rates, and forecast future costs.

These indices (along with some brief descriptive

material) are shown in the following exhibits:

• currency exchange rates (Exhibit 2)

• consumer price index and inflation (Exhibit 3)

• producer/consumer price indices (Exhibit 4)

of the excise program is motor fuel. (In-

ternal Revenue Service, 2006b)

Consumers in the United States currently pay

a tax of 18.4 cents per gallon on motor gasoline,

while ethanol purchases are subsidized at the rate

of 51 cents per gallon (U.S. Environmental Pro-

tection Agency, 2005). As ethanol prices decrease,

this tax structure will enhance ethanol’s ability to

compete with gasoline.

Overall Economic Performance ImpactThe economic performance measures shown in

Exhibit 1 offer some insight into the potential suc-

cess of an ethanol program in the United States.

Exhibit 2. Currency Exchange Rates

Historical currency exchange rates for Brazil and the United States are shown in the following table, expressed in termsof U.S. dollars (USD). Thus, for example, in 2005 one Brazilian Real (BRL) was equal to $0.41 U.S. In August 2006 (notshown on the table), one Brazilian Real was worth $0.46 U.S.

Currency Exchange Rates (United States and Brazil), 1996–2005Currency 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005USD 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00BRL 1.00 0.93 0.86 0.55 0.55 0.42 0.34 0.32 0.34 0.41

Source: Oanda.com

For the financial analysis used in our research, it was assumed that the currency exchange rates would level off at $0.50 for theBrazilian Real.

Exhibit 3. Consumer Price Index and Inflation

Harmonized consumer price indices for Brazil and the United States are shown in the table below. These values repre-sent the average purchase price of all consumer commodities and can be used to measure yearly inflation.

Consumer Price Indices (United States and Brazil), 1996–20051996 1997 1998 1999 2000 2001 2002 2003 2004 2005

U.S.1 100.0 102.3 103.9 106.2 109.8 112.9 114.7 117.3 120.4 124.5% change 2.29% 1.56% 2.21% 3.36% 2.85% 1.58% 2.28% 2.66% 3.39%

Brazil2 100.0 63.6 14.6 80.4 54.8 70.0 107.4 78.7 55.3 43.5% change - 4.82% -1.79% 8.64% 4.38% 7.13% 9.92% 8.17% 6.57% 4.53%

Sources:1. Bureau of Labor Statistics (2006).2. Banco Central do Brasil (2006).

The percent change represents the increase or decrease in prices from the previous year. Inflation rates can be calculated by averagingyearly increases or by fitting a linear trend line to the data points to get the slope of the line. These estimates were close to the percent-age changes for the year 2005 in the table above.

For Brazil, the percent changes were not calculated as described above. They were taken from the country’s Central Bank database.The table shows that Brazil’s economy is significantly more volatile than that of other, more developed countries.



Exhibit 4. Producer/Consumer Price Indices

The tables below show price indices for a range of inputs required for production of lignocellulosic ethanol.

The chemical engineering purchased–equipment index shown below was used to adjust the cost of processing equipment for purposes offinancial analysis. The index for 2005 was not available, so it was estimated based on the average yearly increase from previous years,which was approximately 2 percent.

Chemical Engineering Purchased–Equipment IndexYear 1997 1998 1999 2000 2001 2002 2003 2004 2005*Index 100.0 100.8 101.1 102.0 102.0 102.4 104.0 114.9 117.2

Source: Chemical Engineering (2006).

The producer price index (PPI) for logs, bolts, timber, and pulpwood shown below was used to adjust the price of forest residues to 2005US dollars.

PPI for Logs, Bolts, Timber, and Pulpwood, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 97.0 94.2 91.6 85.2 84.0 84.8 90.2 92.0

Source: Bureau of Labor Statistics (2006).

The PPI for farm products shown below was used to adjust the farmgate prices for switchgrass since a specific index could not be found.

PPI for Farm Products, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 92.6 87.2 88.1 91.9 87.7 98.8 109.2 105.0


The PPI for industrial commodities (less fuels) shown below was used to adjust several costs for which specific indices could not be found.These items included urban wood waste, water, and waste disposal. Future costs were adjusted 1.5 percent per year based on the averageyearly increases shown in the historical data.

PPI for Industrial Commodities Less Fuels, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 99.9 100.2 102.4 102.8 102.7 104.2 108.8 113.7


The consumer price index (CPI) for transportation shown below was used to adjust the delivery-cost component of feedstock prices. Infla-tion adjustments of 2.2 percent were used based on the average yearly increase from 1997–2005.

CPI for Transportation, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 98.1 100.1 106.2 106.9 106.0 109.2 113.0 120.5


The PPI for corn shown below was used to adjust the prices for corn steep liquor and corn oil, which are both by-products of corn. A spe-cific index could not be found for these material inputs. The average yearly percentage change in the ten-year index is negative, but themost recent seven-year index is positive. Since the cost of these materials is not likely to decrease in the future, they were adjusted 1.5 per-cent per year based on the seven-year average yearly increase.

PPI for Corn, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 83.2 65.5 69.4 71.5 81.2 85.2 88.6 69.0


The inorganic chemicals index shown below was used to adjust the price of inorganic chemicals used. Future prices were adjusted 1.25percent per year based on the average yearly increase reflected in this index.

Inorganic Chemicals Index, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 101.5 102.9 104.4 105.5 106.7 107.9 109.1 110.3


The PPIs for diesel and gasoline shown below were intended to be used to adjust the cost of fuel required. However, the average yearly in-crease reflected by the indices was 15 percent for diesel and 12 percent for gasoline. Such large increases did not seem reasonable, espe-cially when making adjustments over a period of ten years into the future. Therefore, an adjustment of 3 percent per year was used for each.

PPI for Diesel, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 73.5 88.8 144.7 129.3 120.8 155.8 198.8 293.2

Source: Bureau of Labor Statistics (2006).(continued)



Exhibit 4. Producer/Consumer Price Indices (continued)

PPI for Gasoline, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 74.3 90.0 131.6 125.9 115.9 142.8 178.2 234.5


The labor index shown below was used to adjust wages and salaries for purposes of financial analysis. Future wages were adjusted 3 per-cent based on the average yearly increase reflected in the historical data.

Labor Index, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 103.0 106.1 109.3 112.6 115.9 119.4 123.0 126.7


The PPI for maintenance repairs shown below was used to adjust maintenance costs for each relevant technology. Future maintenancecosts were adjusted 2.75 percent per year based on the average yearly increase reflected in the historical data.

PPI for Maintenance Repairs, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 99.8 101.4 104.3 104.6 104.2 106.2 115.1 125.0


The PPIs for residual fuel oil and natural gas shown below were not used to adjust future prices for analysis of biomass co-firing becausethe average yearly increases reflected by the indices were 11 and 25 percent, respectively. It did not seem reasonable to adjust futureprices based on such high percentages. Instead, the prices were adjusted 3 percent per year.

PPI for Residual Fuel Oil, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 86.8 88.7 134.1 129.1 114.5 138.1 162.3 219.0


PPI for Natural Gas, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 82.5 89.7 152.9 168.9 120.5 210.9 241.8 329.8


The PPI for electric power shown below was used to adjust electricity revenue prices for the business cases. Future prices were adjusted2.4 percent per year based on the average yearly increases reflected in the index.

PPI for Electric Power, 1997–2005Year 1997 1998 1999 2000 2001 2002 2003 2004 2005Index 100.0 99.4 98.5 100.5 107.9 106.9 111.5 112.5 119.4


Brazil’s producer price index (IPA) for alcohol production (shown below) was used to adjust costs for miscellaneous items in the sugarcaneethanol case. Many inputs to the calculations in the sugarcane case were very broad.

IPA for Alcohol Production, 1994–2001Year 1994 1995 1996 1997 1998 1999 2000 2001Index 100.0 155.0 159.2 164.1 167.2 196.9 238.0 268.0

Source: Instituto Brasileiro de Geografia e Estatistica (2006).

The IPA for other chemicals shown below was used to adjust for chemical inputs in the sugarcane case since available production data didnot provide information on specific chemicals.

IPA for Other Chemicals, 1994–2001Year 1994 1995 1996 1997 1998 1999 2000 2001Index 100.0 157.1 159.5 173.5 177.1 182.7 202.6 190.5


The IPA for electrical machinery, equipment, and supplies shown below was used to adjust for all supply and equipment costs in the sugar-cane case.

IPA for Electrical Machinery, Equipment, and Supplies, 1994–2001Year 1994 1995 1996 1997 1998 1999 2000 2001Index 100.0 166.3 172.7 181.5 184.0 217.3 263.3 293.9




• interest rates (Exhibit 5)

• corporate income tax rates (Exhibit 6)

Market Analysis and ConsiderationsNumerous market considerations must be

taken into account when evaluating the potential

of renewable energy products. Market considera-

tions include a number of variables that must be

analyzed and evaluated to provide a comprehen-

sive view of potential business opportunities. The

most relevant of these variables are:

• government policies and incentives for the

biofuel market;

• the degree to which the alternative fuel can

displace petroleum; and

• market views of renewable energy.

These variables, and their relevance to the po-

tential for a lignocellulosic ethanol industry in

the United States, are discussed below.

Government Policies and Incentives for theBiofuel Market

Private industry can be expected to invest in

alternative energy technologies as they are shown

to be commercially feasible. To hasten expansion

of biofuel technologies, however, it is important

for government to play a role in the initial stages

of development (preferably through incentives

that are phased out over time as private invest-

ment grows). The Worldwatch Institute has

noted:

Policy actions that governments can take

right away, at no- or low-cost, to help de-

velop the market include:

• Enact tax incentives

• Establish mandates and enforcement

mechanisms

• Use government purchasing power

• Collaborate to set international fuel qual-

ity standards

• Account for externalities (i.e., local and re-

gional pollution, climate change, other

environmental costs, etc.)

• Facilitate public-private partnerships

• Increase public awareness

Mandates paired with subsidies have also

proven to be an effective combination for

biofuels industry promotion; however,

subsidies should be phased-out once a do-

mestic industry has been established.

(Worldwatch Institute, 2006)

Government involvement has proven to be

an effectual strategy in Brazil, which began its Na-

tional Ethanol Program (PROALCOÓL) in the late

1970s. The Brazilian government encouraged

growth of the ethanol industry through tax in-

centives and low-interest loans totaling over $2

billion. In less than 20 years, the country had a

well-established ethanol program.

Brazil still imposes a 20-percent tariff ad val-

orem on other fuels in order to support ethanol,

Exhibit 5. Interest Rates

Interest rates for financing capital on a start-up plant vary depending upon several factors, including the maturity of thetechnology. For start-ups that have already been commercialized and proven, interest rates for financing typically rangefrom 10 to 20 percent.

However, financing a start-up that has not been commercialized or proven is a riskier venture and may require mone-tary resources from venture capital firms. According to a study conducted by the Joint Economic Committee, venturecapital firms expect a minimum rate of return of 30 percent on their investments (Schilit, 1994).



willing to make simple life changes, but more ex-

tensive modifications may meet with resistance.

Overall, the market tends to view renewable fuels

as less dependable, more awkward, and more ex-

pensive than conventional sources of energy

(Brown & Yuen, 1994).

The reliability of biomass resources can be af-

fected by a range of factors. For example, as

Brown and Yuen (1994) have noted, contracts

for wood supply tend to be short-term. Major

cultural shifts would be needed to ensure that

biomass resource supplies are adequate to pro-

vide for consumers’ renewable energy demands

and needs.

Existing and Future Energy MarketsAs part of our research, we collected and ana-

lyzed energy statistics for Brazil and the United

States. The data included information on petro-

leum, natural gas, coal, electricity generation,

and renewable energy used for heat and electric-

ity generation and transportation. We also re-

viewed forecasted energy markets for both coun-

tries for 2006–2016. The data were gathered from

Energy Information Administration Annual En-

ergy Outlook reports.

Capital Investment AnalysisOur capital investment analysis was based on

the technical report published by the National

but many other parts of the government support

program were phased out as ethanol became able

to compete with gasoline on its own (Renewable

Fuels Association, 2006).

Displacement of PetroleumSources vary widely in their estimates of the

degree to which biofuels can displace petroleum

in transport. Between 2000 and 2020, transporta-

tion fuel demand is expected to grow by approxi-

mately 32 percent in the United States and 28 per-

cent in the European Union (combined gasoline

and diesel use). These large increases in demand

will likely make it more difficult to displace higher

percentage shares of petroleum transport fuel in

the future (International Energy Agency, 2002).

Petroleum displacement can offer numerous

benefits. Sims (2003) points out that these bene-

fits include positive contributions to a country’s

balance of trade and domestic economic activity.

The full benefits are difficult to measure, how-

ever, requiring general equilibrium modeling and

assumptions regarding the costs and risks of oil

dependence, such as risks from supply disruption

or sudden spikes in prices (Sims, 2003).

Market Views of Renewable EnergyWhen determining the potential market for

renewable fuels, consumer views about factors

such as reliability are critical. Most individuals are

Exhibit 6. Corporate Income Tax Rates

Corporate income tax rates for the United States are shown below. For simplicity, a flat rate of 35 percent was used forall cases.

U.S. Corporate Tax Rate ScheduleOver--- But not over--- Tax is: Of the amount over---

$0 $50,000 15% $0$50,000 $75,000 $7,500 + 25% $50,000$75,000 $100,000 $13,750 + 34% $75,000

$100,000 $335,000 $22,250 + 39% $100,000$335,000 $10,000,000 $113,900 + 34% $335,000

$10,000,000 $15,000,000 $3,400,000 + 35% $10,000,000$15,000,000 $18,333,333 $5,150,000 + 38% $15,000,000$18,333,333 - 35% $18,333,333

Source: Internal Revenue Service (2006a).



Renewable Energy Laboratory in 1999 (Wooley et

al., 1999). The costing figures in that report

(which used 1997 U.S. dollars) were updated to

2005 U.S. dollars in our analysis in order to reflect

inflation trends.

Our analysis was performed for five different

states based on several location criteria. The as-

sumptions we used for purposes of capital invest-

ment analysis are described in Exhibit 7.

Initial Capital InvestmentThe initial capital investment reflected in the

1999 NREL report (Wooley et al., 1999) was

$233.8 million, which includes equipment costs

plus an installation factor and other added costs.

A breakdown of the initial investment costs

under our analysis is shown in Exhibit 8. We

calculated the total project investment cost at

$224,261,881.

Exhibit 7. Assumptions for Capital Investment Analysis

The following assumptions were made for capital investment analysis of cellulosic ethanol production from woody bio-mass, based on the 1999 NREL report (Wooley, Ruth, Sheehan, & Ibsen, 1999):

• Capital costs would decrease by 2005 as a result of advancement in process technology. Capital costs were updatedin our analysis to reflect inflation and some of the percentages for cost components were reduced.

• Ethanol yield per ton of feedstock would also increase due to technology improvements. However, yield was held con-stant at 68 gallons per dry ton of feedstock for a total output of 54.81 million gallons of denatured ethanol per year.

• Instead of a two-year build-time, this analysis assumed the project would be completed in one year.

• Process electricity requirements will be met by combusting the waste lignin from the process and excess electricitywill be sold as a by-product credit.

• Some of the variable operating costs were kept the same for each region, although in reality they will vary dependingon location.

Exhibit 8. Breakdown of Initial Project Investment Costs

Equipment Description Cost in 2005 US $Feed Handling $5,740,702Pretreatment/Detox $30,823,074SSCF1 $15,704,532Cellulase $18,165,690Distillation $15,235,740WWT2 $12,188,592Storage $2,109,564Boiler/Turbogen $52,153,110Utilities $6,094,296Total Equipment Cost $158,215,300

Warehouse $2,373,230Total Installed Cost (TIC) $160,588,530

Indirect Costs Cost in 2005 US $Prorateable Costs (10% of TIC) $16,058,853Field Expenses (10% of TIC) $16,058,853Home Office and Construction (10% of TIC) $16,058,853Project Contingency (3% of TIC) $4,817,656

Total Capital Investment (TCI) $213,582,744Other Costs (5% of TCI) $10,679,137

Total Project Investment $224,261,8811SSCF = simultaneous saccharification and cofermentation.2WWT = wastewater treatment.



Our production cost estimates for lignocellu-

losic-based ethanol reflect engineered costs be-

cause there currently are no commercial opera-

tions for this type of ethanol production. The

production costs for corn-based and sugarcane-

based ethanol reflect commercial operating costs.

Exhibit 13 shows production costs for

ethanol from sugarcane, corn, and lignocellulose

in various locations. Ethanol produced from sug-

arcane in Brazil is by far the least expensive be-

cause of low feedstock prices and the maturity of

the technology used. Conversely, these same fac-

tors make lignocellulosic ethanol production in

the United States the most expensive.

For purposes of

this comparison, the

costs of producing

ethanol from sugar-

cane in Brazil were

converted to 2005

U.S. dollars. It should

be noted, however,

that these estimates

would not accurately

reflect the costs of producing ethanol from sug-

arcane in the United States. There are many fac-

tors that would cause such production costs to

rise considerably in the United States, including

land availability and climate.

Market Impact of Lignocellulosic Ethanol

Feedstock ConsumptionFeedstock consumption for each ethanol pro-

duction technology (lignocellulosic, sugarcane,

and corn) is summarized in Exhibit 14. The type

of feedstock used for each technology is shown,

along with the quantity of feedstock available in

each location.

The consumption of feedstock as a percentage

of total available is based on a production volume

that uses approximately 770,000 dry tons per year.

Operating and Maintenance CostsThe assumptions we used for operating and

maintenance costs are shown in Exhibit 9. A

summary of operating and maintenance costs by

location is shown in Exhibit 10.

Discount Rate AssumptionsIn the early inception of commercialization,

the discount rates will be higher than the typical

15 percent used for industrial capital investment

analysis. Even when technology risk is removed,

there is still a risk associated with feedstock avail-

ability. For this reason, a more conservative dis-

count rate would be 20 percent.

At a discount rate of 20 percent, most loca-

tions in the United States (except for Min-

nesota), become economically feasible for ligno-

cellulosic ethanol, but with long payback

periods. The 20-percent discount rate was used

for comparison purposes. It is not likely to be re-

alistic at this time given the feedstock supply

constraints and lack of technological commer-

cialization.

A summary of net present values by location

for ethanol production is shown in Exhibit 11.

A summary of payback periods is shown in Ex-hibit 12.

Production CostsAnother important aspect of the analysis in-

volves determining production costs. Under-

standing these expenses allows us to see how the

cost of lignocellulosic ethanol compares to that

of ethanol produced using other feedstocks. It

also assists in determining the business viability

of lignocellulosic ethanol.

In our analysis, production costs per unit in

gallons or Btu’s were based on the assumptions

associated with all cost inputs. Lignocellulosic-

based ethanol production costs were compared

to corn-based and sugarcane-based ethanol pro-

duction costs.

Our production cost estimates forlignocellulosic-based ethanol

reflect engineered costs becausethere currently are no commercialoperations for this type of ethanol

production.



Exhibit 9. Assumptions for Operating and Maintenance Costs

The following assumptions were used for operating and maintenance costs based on plant capacity:

• Useful equipment life, as stated in the 1999 NREL report (Wooley, Ruth, Sheehan, & Ibsen, 1999), is 20 years.

• For purposes of capital investment analysis, tax depreciation was applied according to the seven-year double-declining balancemethod. However, for purposes of production cost analysis, the capital recovery factor was applied based on the duration of the analy-sis, which is ten years. This method was used so that production costs would not be overestimated in the early years and underesti-mated in later years.

• Variable operating costs include feedstock, processing chemicals, make-up water, fuels, and waste disposal.

• Variable operating costs for chemicals, water, and waste disposal were assumed to be the same for all locations.

• Delivered feedstock costs by location are shown below.

Delivered Feedstock Cost by Location ($ per dry ton)Avg. Delivery

Location Distance (mi) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016California 45 $43.62 $43.92 $44.22 $44.53 $44.84 $45.16 $45.49 $45.83 $46.17 $46.52Minnesota 35 $38.86 $39.10 $39.33 $39.57 $39.82 $40.07 $40.33 $40.59 $40.86 $41.13Montana 4 $29.07 $29.10 $29.12 $29.15 $29.18 $29.21 $29.24 $29.26 $29.29 $29.33New York 52 $45.80 $46.14 $46.49 $46.84 $47.20 $47.57 $47.95 $48.33 $48.73 $49.13Texas 37 $41.61 $41.86 $42.11 $42.37 $42.63 $42.89 $43.17 $43.45 $43.73 $44.02

• The processing materials required for cellulosic ethanol production include corn steep liquor (CSL), antifoam (corn oil), several inorganicchemicals, and make-up water. CSL and corn oil are by-products of corn.

• Diesel fuel is required to run bulldozers. Based on the 1999 NREL report (Wooley et al., 1999), diesel consumption is estimated at 1.1million gallons per year. It was assumed that diesel fuel will be purchased at wholesale cost, which was estimated (based on data fromthe Energy Information Administration) at $1.71 per gallon in 2005.

• Gasoline is used as a denaturant to render ethanol undrinkable; it is added in a 5-percent mixture by volume before ethanol is shipped tothe distributor. It was assumed that gasoline will also be purchased at wholesale cost, which was estimated (based on data from the En-ergy Information Administration) at $1.62 per gallon in 2005.

• Waste disposal includes ash and gypsum totaling 61 million pounds per year.

• Fixed operating costs include labor, overhead, maintenance, insurance, and taxes.

• Employee positions and number of employees required for each position are shown below in the “salaries and wages” table.

Salaries and Wages by Location, 2005Position Number California Minnesota Montana New York TexasPlant Manager 1 $88,250 $83,310 $59,340 $90,450 $90,140Plant Engineer 1 $86,700 $68,820 $41,640 $75,330 $84,420Maintenance Supervisor 1 $59,470 $53,090 $47,710 $60,070 $51,310Lab Manager 1 $63,350 $63,350 $63,350 $63,350 $63,350Shift Supervisor 5 $54,570 $41,100 $33,950 $45,490 $42,480Lab Technician 2 $37,370 $34,040 $33,950 $40,300 $48,850Maintenance Technician 8 $46,260 $41,990 $49,260 $44,760 $53,210Shift Operators 20 $37,370 $34,040 $33,950 $40,300 $48,850Yard Employees 8 $20,960 $23,960 $22,510 $20,710 $18,370General Manager 1 $122,590 $104,430 $72,180 $116,720 $110,030Clerks & Secretaries 5 $24,330 $24,350 $17,460 $25,480 $22,900Total Wages & Salaries $2,834,820 $2,586,600 $1,884,380 $2,788,460 $2,846,220


• Other overhead costs were estimated, based on the 1999 NREL report (Wooley et al., 1999), to amount to 60 percent of annual laborcosts.

• Maintenance costs for the first year were estimated, based on the 1999 NREL report (Wooley et al., 1999), at 2 percent of the initial capi-tal investment.

• Insurance costs and taxes were estimated, based on the 1999 NREL report (Wooley et al., 1999), at 1.5 percent of the total installed costof the project, and were then adjusted 3 percent per year for inflation.



from selected regions and its percentage contri-

bution to overall ethanol production. A summary

of the energy output as a contribution to the en-

ergy market forecast for cellulosic and corn

ethanol is shown in Exhibit 15.

Additional Business ConsiderationsThe economic, capital investment, and pro-

duction cost analysis described above provided

useful information regarding the business feasi-

bility of pursuing lignocellulosic ethanol produc-

tion, as well as insight into potential markets. To

Additional feedstock is available beyond the U.S. re-

gions studied but is not included here. The amount

of feedstock consumed is based on the capacity of

the selected technology and the percentage of con-

sumption for the selected U.S. regions. In regions

where there is more feedstock available, there is a

likelihood that more than a single location would

refine lignocellulosic materials for ethanol.

Energy OutputBased on prescribed capacity and feedstock

consumption, we determined the energy output

Exhibit 10. Operating and Maintenance Costs by Location, 2007

California Minnesota Montana New York TexasVariable Costs

Feedstock $33,485,538 $29,839,224 $22,312,174 $35,168,067 $31,948,378Inorganic Chemicals $6,206,670 $6,206,670 $6,206,670 $6,206,670 $6,206,670Corn Steep Liquor $1,871,253 $1,871,253 $1,871,253 $1,871,253 $1,871,253Antifoam(corn oil) $719,774 $719,774 $719,774 $719,774 $719,774Make-up Water $527,115 $527,115 $527,115 $527,115 $527,115Fuels $6,388,716 $6,388,716 $6,388,716 $6,388,716 $6,388,716Waste Disposal $717,047 $717,047 $717,047 $717,047 $717,047

Total Variable Costs $49,916,112 $46,269,798 $38,742,748 $51,598,641 $48,378,952Fixed Costs

Labor $2,307,203 $2,097,113 $1,975,746 $2,303,352 $2,518,036Overhead/Maintenance $1,384,322 $1,258,268 $1,185,448 $1,382,011 $1,510,821Maintenance $2,997,417 $2,997,417 $2,997,417 $2,997,417 $2,997,417Insurance & Taxes $3,217,674 $3,217,674 $3,217,674 $3,217,674 $3,217,674

Total Fixed Costs $9,906,616 $9,570,472 $9,376,284 $9,900,454 $10,243,948Total O&M Costs $59,822,728 $55,840,270 $48,119,032 $61,499,095 $58,622,900

Exhibit 11. Ethanol Production Net Present Value (NPV) Summaries by Location

2007 Wholesale Ethanol NPV @ 20% NPV @ 30% Location Price ($ per Gallon) Discount Rate Discount RateCalifornia $2.27 $42,683,142 ($29,074,587)Minnesota $1.92 ($6,615,209) ($64,450,418)Montana $2.08 $43,681,329 ($28,022,974)New York $2.04 $2,667,075 ($58,323,092)Texas $2.01 $2,123,878 ($58,274,117)

Exhibit 12. Ethanol Production Payback Period Summary

20% Discounted 30% Discounted Location Payback (Years) Payback (Years) Payback (Years)California 3.65 6.83 N/AMinnesota N/A N/A N/AMontana 3.63 6.76 N/ANew York 4.29 9.72 N/ATexas 4.27 9.77 N/A



round out the analysis, it is necessary to discuss

several additional business considerations:

• critical success factors;

• market barriers and business risk factors; and

• benefits of biofuel production and use.

These considerations are discussed in detail in

the sections that follow.

Critical Success FactorsA number of variables can contribute to the

success of new products or processes. STCI and

MNP (2004) identified the following “success fac-

tors” as requirements for expansion of the

ethanol industry:

• adequate feedstock supply and land avail-

ability;

Exhibit 13. Production Costs of Ethanol from Sugarcane, Corn, and Lignocellulose in VariousLocations ($ per Gallon of Ethanol)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Ethanol from sugarcane in Brazil $0.43 $0.44 $0.45 $0.46 $0.47 $0.48 $0.50 $0.51 $0.53 $0.55

Ethanol from corn in United States $1.15 $1.17 $1.18 $1.19 $1.20 $1.22 $1.23 $1.25 $1.26 $1.28

Lignocellulosic Ethanol in California $1.50 $1.52 $1.53 $1.55 $1.56 $1.58 $1.60 $1.62 $1.64 $1.65

Lignocellulosic Ethanol in Minnesota $1.43 $1.44 $1.46 $1.47 $1.49 $1.50 $1.52 $1.54 $1.55 $1.57

Lignocellulosic Ethanol in Montana $1.29 $1.30 $1.31 $1.32 $1.33 $1.35 $1.36 $1.37 $1.39 $1.40

Lignocellulosic Ethanol in New York $1.53 $1.55 $1.56 $1.58 $1.60 $1.62 $1.63 $1.65 $1.67 $1.69

Lignocellulosic Ethanol in Texas $1.48 $1.49 $1.51 $1.52 $1.54 $1.56 $1.57 $1.59 $1.61 $1.63

Exhibit 14. Summary of Feedstock Consumption

Feedstock Available Consumption as a Consumed Feedstock % of the

(dt/yr)1 (dt/yr)1 Total AvailableCellulosic Ethanol (mill waste and forest residues)

California 767,680 6,790,000 11.31%Minnesota 767,680 5,200,000 14.76%Montana 767,680 3,120,000 24.61%New York 767,680 3,730,000 20.58%Texas 767,680 3,460,000 22.19%

Total 6,276,250 408,160,000 1.54%

Corn Ethanol (2005)United States Total 48,882,909 311,138,800 15.71%

Iowa 11,637,818 62,843,200 18.52%Illinois 11,678,545 58,464,000 19.98%Nebraska 6,129,455 36,951,600 16.59%Minnesota 5,498,182 31,388,000 17.52%Indiana 1,221,818 26,012,000 4.70%

Sugarcane Ethanol (2004/2005)Brazil Total 313,532,287 425,619,977 73.66%

South-Central 276,393,528 362,355,943 76.28%Northeast 37,138,759 63,264,034 58.70%

1dt/year = dry tons per year.



■ Feedstock Supply and AvailabilityFeedstock supply and availability are major

factors that influence the extent to which biofu-

els will contribute to the energy future of the

United States (Houghton et al., 2006; Perlack et

al., 2005).

North America is hardly the ideal spot for lig-

nocellulosic ethanol production. Fluctuating

weather conditions in most regions of the coun-

try create uncertainty with respect to biomass

feedstock supply. Shorter growing seasons, higher

agricultural labor costs, and competing uses for

land mean that the feedstock supply cannot read-

ily reach its maximum yields every year (Jenkins,

2006).

Brazil, on the other hand, is ideal for ethanol

production. It has low-cost labor, millions of

acres of unused arable land, and a climate that

provides a year-round growing season. All these

factors contribute to the success of sugarcane pro-

duction.

In general, production of biofuels (such as

ethanol and biodiesel) from crops provides an ad-

ditional product market for farmers and brings

economic benefits to rural communities (Interna-

tional Energy Agency, 2004).

■ Land AvailabilityFeedstock supply will depend on the

amount of land available for cultivation of ded-

icated energy crops, the amount of forestry

• favorable oil-versus-feedstock prices;

• feedstock and ethanol markets in close prox-

imity to each other for lower operational

costs;

• markets for primary and co-products;

• producers with substantial equity (low debt-

to-equity ratios);

• public awareness; and

• successful development of cellulosic ethanol

technology.

In addition to the above, other critical success

factors that need to be evaluated include:

• technical expertise and operational efficiency;

• professional management; and

• marketing.

Market Barriers and Business Risk FactorsMany potential market barriers and business

risk factors are associated with lignocellulosic

ethanol (as well as other renewable energy prod-

ucts and services): Is there enough land available

to provide the large-scale supply of biomass

needed for ethanol production? Is the use of bio-

fuels sustainable agriculturally? Can biofuels be

cost-competitive with gasoline? Is cellulosic-bio-

fuel production technically feasible for energy

(Houghton, Weatherwax, & Ferrell, 2006)? Sev-

eral key barriers and business risks are discussed

below.

Exhibit 15. U.S. Contribution of Energy Outputs to the Energy Forecast

Energy Output % of Forecasted Consumption(Quadrillion Btu) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Cellulosic Ethanol Forecast 0 0 0 0.0083 0.0125 0.0208 0.0208 0.0208 0.0208 0.0208Total Output 0.0198 N/A N/A N/A 238% 159% 95% 95% 95% 95% 95%

Corn Ethanol Forecast 0.4194 0.4833 0.5472 0.6098 0.6736 0.7298 0.7674 0.7814 0.7955 0.8096 Total Output 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%



residues produced, and the ability to capture

biomass entering the domestic waste stream

(Houghton et al., 2006).

Shifts in cropland from traditional to energy

crops typically result in higher prices for tradi-

tional crops (Walsh, Torre Ugarte, Shapouri, &

Slinsky, 2003). Land availability will limit the

supply—and impact the price—of both tradi-

tional and energy crops.

Improvements in plant breeding and biotech-

nology have the po-

tential to substantially

increase the productiv-

ity of dedicated energy

crops and the effi-

ciency of biological

ethanol conversion,

thus reducing pres-

sures on cropland cur-

rently dedicated to

other uses (Houghton et al., 2006).

■ Technology RisksAlthough cellulose-based ethanol can in the-

ory be cheaper to produce than other forms of

ethanol, the technology has not yet been demon-

strated on an industrial scale.

In general, development of newer, higher-ef-

ficiency technologies may be relatively complex,

may entail scale-up of smaller systems, and may

be unproven for commercial use (Wimberly,

2005). Even the integration of existing tech-

nologies (e.g., biomass co-firing) into a new sys-

tem design may present performance uncer-

tainty. Extra efforts may be required to secure

project financing in such cases (Wimberly,

2005).

■ Financial RiskWe have not yet begun to deploy commercial-

scale farming and cellulosic bioenergy opera-

tions. Commercial availability of cellulosic

ethanol is stalled because of the costs and finan-

cial risks associated with the new technology. The

U.S. Department of Energy notes:

Although cellulosic feedstocks such as

agricultural and forestry residues would be

far cheaper than corn grain—the main

cost in current ethanol production—the

added cost of capital equipment and pro-

cessing needed to break down and then

ferment the cellulosic materials is cur-

rently more than the savings. Investors are

reluctant to commit to unproven tech-

nologies—and much of the cost of ad-

vanced bioethanol technology is for the

capital equipment—so financing con-

struction is a major challenge for the “pi-

oneer” cellulosic ethanol plants. (U.S. De-

partment of Energy, 2006)

■ New-Business RiskSuccessful new businesses must raise equity

and debt financing, have plants designed and

built, put the new facilities into operation, and

adapt to changing market conditions. This is par-

ticularly difficult to do in a commercially

untested industry such as lignocellulosic ethanol

production. The process will become easier, how-

ever, with each additional successful operation

(STCI & MNP, 2004).

■ Market Infrastructure The availability of adequate market infra-

structure is important to the commercial viabil-

ity of lignocellulosic ethanol as a fuel source.

Current market organization may be inefficient

because the major petroleum companies pro-

vide the distribution system by which ethanol-

based fuel reaches the end consumer (STCI &

Although cellulose-based ethanolcan in theory be cheaper to producethan other forms of ethanol, thetechnology has not yet beendemonstrated on an industrial scale.



■ Trade BarriersPoor countries could benefit from a profitable

opportunity to become producers of energy-related

crops, including those used as feedstock in manu-

facturing lignocellulosic ethanol. Instead, however,

“rich countries have been busy erecting trade barri-

ers to kill off the incipient competition to their own

farmers. The U.S. imposes a 54-cent-a-gallon tariff

on Brazilian ethanol, to discourage competition

with domestic ethanol, which receives a 54-cent

subsidy from taxpayers” (Jenkins, 2006).

■ Negative Economic ImpactsThere will inevitably be negative economic

impacts associated with producing biofuels, in-

cluding increased government budgets and poten-

tially slower eco-

nomic growth. Such

effects should be con-

sidered when analyz-

ing the macroeco-

nomic benefits that

may be gained from

biofuel production.

■ Price DistortionMarket prices often do not reflect the full im-

pact (either positive or negative) of products.

Such “price distortion” is particularly relevant in

the case of environmental impacts. STCI and

MNP (2004) wrote, “The marketplace does not

place a monetary value on . . . environmental im-

pacts. Fuels that reduce greenhouse gases or ex-

haust emissions sell for the same price as fuels

that don’t impact emissions.” In order to offset

this distortion, tax incentives may be required.

■ Biofuel Production CapacityBiofuel production capacity generally is lower

volume and more decentralized than petroleum

refining capacity. As a result, biofuel production

MNP, 2004). Some oil companies have made

commitments to ethanol use, but others are still

resisting.

As the International Energy Agency has

noted, “Energy markets are very often interac-

tions in which the choices available to consumers

and the preferences they have in regard to these

choices are very much influenced by product dif-

ferentiation strategies and other marketing activ-

ities of suppliers” (International Energy Agency,

2003, p. 72).

■ Government Involvement in Key Areas(Such as Transportation Infrastructure)Although the economy of the United States is

largely driven by private business sources, gov-

ernment involvement would likely play a role in

developing the lignocellulosic ethanol industry.

As the Worldwatch Institute has noted with re-

spect to biofuel development, “Since investment

in large new technologies is inherently risky, gov-

ernments will need to play a key role in helping

to reduce some of the risk involved, including as-

suring that the infrastructure is in place for trans-

porting biofuels and integrating them into the

transportation fuel market” (Worldwatch Insti-

tute, 2006).

■ RegulationExcessive or inefficient regulation can ad-

versely affect the business climate. It has been

noted that the regulations currently governing

ethanol in fuels are not always appropriate. STCI

and MNP (2004) wrote, “Ethanol has some

unique physical properties when blended with

gasoline. The regulations for ethanol gasoline

blends are mostly the same as the gasoline regu-

lations without fully considering the impact of

the different properties. In many cases, this in-

creases the costs associated with blending and

handling ethanol blends.”

Although the economy of the UnitedStates is largely driven by private

business sources, governmentinvolvement would likely play a role

in developing the lignocellulosicethanol industry.



facilities tend to be more dispersed (Worldwatch

Institute, 2006).

Benefits of Biofuel Production and UseThere are a number of potential benefits asso-

ciated with the production and use of biofuels

such as lignocellulosic ethanol. These are sum-

marized in the discussion below.

■ Improved Energy SecurityMore than half of the world’s remaining con-

ventional oil reserves are concentrated in the

Middle East. In addition, half of global natural

gas reserves are found in only two countries, Rus-

sia and Iran (Interna-

tional Energy Agency,

2002). These regions

have experienced on-

going economic and

social volatility.

By contrast, biofuel

imports would likely

come from regions

other than those that produce petroleum, creat-

ing a much broader global diversification of sup-

ply sources (International Energy Agency, 2004).

Development of renewable energy sources such

as lignocellulosic ethanol would lessen depend-

ence on a limited number of nations and improve

energy security worldwide.

Brazil has achieved nearly complete energy in-

dependence, in part because of ethanol produc-

tion. (Brazil also has made recent oil reserve dis-

coveries and has developed a strong hydroelectric

market.) This autonomy gives Brazil a significant

energy security advantage compared to the United

States, which is heavily dependent on foreign oil.

■ Reduced Emissions of Greenhouse Gasesand Other PollutantsThe transport sector is a major source of

greenhouse gases and other pollutant emissions.

Reducing emissions from this sector is also par-

ticularly challenging. Biomass currently offers the

only option for supplying liquid carbon-neutral

hydrocarbons (Faaij, 2006).

■ Improved Vehicle PerformanceThe performance of ethanol is similar to that

of gasoline in vehicles with spark ignition-indi-

rect injection and compression ignition-direct in-

jection engines. However, ethanol does show a

significant improvement in efficiency for vehicles

with spark ignition-direct ignition systems. The

improvement is in the range of 13 to 28 percent

over conventional gasoline (Lave, MacLean, Hen-

drickson, & Lankey, 2000).

■ Cellulosic Biomass-to-Ethanol BenefitsSeveral specific benefits have been noted for

ethanol made from cellulosic biomass (Interna-

tional Energy Agency, 2004):

• access to a wider array of potential feedstocks,

allowing for much greater ethanol production

levels;

• greater avoidance of conflicts with land use

for food and feed production;

• greater displacement of fossil energy per liter

of fuel with a majority biomass-powered sys-

tem; and

• lower net “well to wheels” greenhouse gas

emissions than with grain-to-ethanol

processes powered primarily by fossil energy.

Conclusions and ObservationsAs the foregoing discussion makes clear, a

range of factors must be considered when making

a decision on whether to proceed with develop-

ment of commercial-scale lignocellulosic ethanol

production. Based on the research discussed in

this article, we offer the following conclusions

and observations on several key factors, along

with our overall assessment of the economic and

The transport sector is a majorsource of greenhouse gases andother pollutant emissions. Reducingemissions from this sector is alsoparticularly challenging.



operations. Since it is unproven at a commer-

cial scale, this technology represents a con-

siderable risk.

• Business risk: Start-up risk is a factor with any

new business. The general start-up risk, when

combined with other factors specific to ligno-

cellulosic ethanol, must weigh heavily in the

decision on whether to proceed.

• Market infrastructure: The market infrastruc-

ture for lignocellulosic ethanol-based trans-

portation fuel does not currently exist. The

market infrastructure is dependent on petro-

leum-product distributors selling ethanol along

with gasoline and diesel. Distribution for corn-

based ethanol is still

in its early stages.

Out of 168,000

service stations op-

erating in the

United States in

2006, only around

800 offered E85

(which contains ap-

proximately 85-per-

cent corn-based ethanol, mixed with gasoline).

Some 380 more outlets were projected to go on-

line by the end of that year, with the addition

of Wal-Mart stations at Sam’s Clubs (Gunther,

2006).

• Transportation infrastructure: A transporta-

tion infrastructure for lignocellulosic

ethanol distribution does not currently exist.

It would be possible to co-locate corn and

lignocellulosic ethanol operations. Corn-

based ethanol operations have typically been

located near feedstock sources. It is likely

that lignocellulosic feedstocks may require

longer transportation distances for co-loca-

tion with corn-based ethanol production.

Lignocellulosic ethanol may not be able to

take advantage of the transportation infra-

structure currently under expansion for dis-

financial viability of lignocellulosic ethanol as a

fuel source.

• Oil versus feedstock prices: As the cost of oil

continues to escalate, it is not anticipated that

farmgate feedstock prices will increase at the

same rate. However, since feedstock will be

transported to ethanol processing facilities by

vehicles that likely will run on gasoline or

diesel, the delivery cost will be impacted by

the price of oil.

• Feedstock and land availability: As the de-

mand for feedstock grows and more land is

used for energy crops, the farmgate price

could increase because of price elasticity. With

increased demand, feedstock suppliers may

demand a higher price than studies currently

forecast. There is a significant level of uncer-

tainty associated not only with the quantity

of feedstock, but also with the price.

• Proximity of feedstock: If ethanol processing

plants must be located within a 50- or even

75-mile radius of feedstock sources, the ca-

pacity of the processing operation will be

constrained; such operations may not real-

ize economies of scale sufficient to allow for

profitability and/or competition with oil re-

fineries.

• Equity and funding: High levels of private

investment will be required for start-up of

lignocellulosic ethanol production facilities.

Because the technology has not yet been

commercialized or proven on a large scale,

traditional commercial investment banks al-

most certainly would not be willing to take

on the risk. Venture capitalists may be will-

ing to assume the risk, at a cost of financing

around 25 to 30 percent annually (Schilit,

1994).

• Technology risk: The technology for produc-

ing lignocellulosic ethanol has been devel-

oped through engineered studies and small

High levels of private investmentwill be required for start-up of

lignocellulosic ethanol productionfacilities.



tributing corn-based ethanol to retail outlets.

This study did not evaluate the retail distri-

bution channel.

• Wholesale prices for ethanol: The wholesale

price for lignocellulosic ethanol was esti-

mated from the approximate wholesale price

of corn-based ethanol. It is assumed that con-

sumers will not be willing to pay more for lig-

nocellulosic ethanol than for corn-based

ethanol. State and federal excise tax exclu-

sions currently affect the price of corn-based

ethanol. As subsidies are phased out over

time, the wholesale price for ethanol will be

higher. The wholesale price of ethanol (either

corn-based or lignocel-

lulosic) cannot be di-

rectly compared to

that of gasoline be-

cause ethanol gener-

ally offers lower fuel

efficiency than gaso-

line. The assumptions

we used for calculating

ethanol wholesale

prices are shown in Exhibit 16.

Overall, our research indicates that, with cap-

ital investment analysis at a 30-percent discount

rate, lignocellulosic ethanol production does not

represent a financially feasible alternative. As the

price of gasoline continues to rise, however, the

ability to charge a higher price for ethanol will

make this bio-based energy product a more feasi-

ble possibility.

A Mixed Outlook for Lignocellulosic Ethanol Our analysis does not suggest a promising

outcome for lignocellulosic ethanol production

at this time. But as some of the risks and uncer-

tainties are reduced in the future, the outlook

may become more favorable, especially as the

cost of oil continues to grow.

Before a lignocellulosic ethanol market can be

developed, large investments will be required for

processing technologies, operating facilities, and

transportation infrastructure. Integrating re-

search and development with efforts to overcome

market barriers and effect market transformation

will be critical to eventual success.

Opportunities for Future ResearchEthanol produced from cellulosic biomass has

the potential to replace up to 30 percent of an-

nual petroleum consumption in the United States

while significantly reducing greenhouse gas emis-

sions on a global scale (Perlack et al., 2005). Sig-

nificant technological barriers to commercial pro-

duction still remain, however, due to biomass

recalcitrance and the complex set of sugars ob-

tained from enzymatic hydrolysis.

Future research is needed to reduce produc-

tion costs through the application of a systems

biology approach to developing improved, more

active, and less costly cellulase enzymes. A similar

research approach will likely lead to more robust

fermentative microorganisms that can not only

convert the 5- and 6-carbon sugars from woody

biomass to ethanol, but also produce cellulase en-

zymes as well (Houghton et al., 2006). Integrated

experiments using laboratory-scale or pilot-scale

bioprocessing equipment will be needed to test

and optimize process control models and process

intensification strategies in order to further re-

duce costs and energy consumption for process-

ing.

AcknowledgmentThe research discussed here was conducted

under the auspices of the Sustainable Futures In-

stitute at Michigan Technological University. The

authors wish to recognize other members of the

research team from Michigan Tech, including Dr.

John Sutherland (along with graduate students

Timothy Jenkins and Greg Wright) and Dr. Abra-

Future research is needed to reduceproduction costs through theapplication of a systems biologyapproach to developing improved,more active, and less costlycellulase enzymes.



Brown, M. H., & Yuen, M. (1994). Changing a historical per-spective. Independent Energy, 24(7), 64–67.

Bureau of Labor Statistics. (2006). Consumer price indexes.Available online at http://www.bls.gov/cpi/home.htm

California State Board of Equalization. (2006). Fuel taxes divi-sion tax rates. Available online at http://www.boe.ca.gov/sptaxprog/spftdrates.htm

Central Intelligence Agency. (2006). The 2006 world fact book.Available online at https://www.cia.gov/cia/publications/factbook/index.html

ham Martin Garcia, for their collaboration on

this project.

SourcesAmerican Petroleum Institute. (2006). State motor fuel excisetax rates. Available online at http://www.api.org/policy/tax/stateexcise/index.cfm

Banco Central do Brasil. (2006). Economic indicators. Avail-able online at http://www.bcb.gov.br/?INDICATORS

Exhibit 16. Assumptions for Calculating Wholesale Ethanol Prices

For purposes of our analysis, the wholesale price of ethanol was estimated based on retail prices for motor gasoline and E85. Assump-tions made to arrive at the wholesale price for ethanol include the following:

• Energy content per gallon of gasoline is 114,000 Btu.

• Energy content per gallon of ethanol is 76,000 Btu.

• The yearly average ethanol content of E85 is actually 74 percent because of the need to address cold-starting issues in winter months.

• 2006 retail gasoline and E85 prices were used as a baseline for adjusting prices in future years. Future prices were adjusted 3 percentper year.

• Current retail E85 prices were used when available. Since E85 is not available in all areas, pricing was estimated based on the price ofretail gasoline in some areas.

• The federal excise tax rate of $0.184 per gallon and the individual state excise tax rates shown in the table below remained constant forthis analysis.

Total Fuel Excise Tax Rates by State ($ per Gallon)Fuel California Minnesota Montana New York TexasGasoline1 $0.180 $0.200 $0.270 $0.080 $0.200Alcohol Fuels2,3,4 $0.090 $0.142 $0.236 N/A N/ATotal Gasoline Tax1 $0.631 $0.404 $0.462 $0.439 $0.384Total Alcohol Fuel Tax $0.541 $0.346 $0.428 $0.439 $0.384

Sources:1. American Petroleum Institute (2006).2. California State Board of Equalization (2006).3. Minnesota Department of Revenue (2006).4. Montana Department of Transportation (2006).

• Distribution and marketing account for 12 percent of the retail price for gasoline and E85. This is consistent with current rates for gaso-line.

• The calculated forecast for wholesale ethanol prices is shown in the following table.

U.S. Ethanol Wholesale Price Forecast, 2007–2016Location 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016California $2.27 $2.35 $2.44 $2.53 $2.62 $2.71 $2.81 $2.91 $3.01 $3.12Minnesota $1.92 $1.99 $2.06 $2.13 $2.20 $2.28 $2.36 $2.44 $2.52 $2.61Montana $2.08 $2.15 $2.23 $2.31 $2.39 $2.47 $2.56 $2.65 $2.74 $2.84New York $2.04 $2.12 $2.21 $2.29 $2.38 $2.47 $2.56 $2.66 $2.76 $2.86Texas $2.01 $2.08 $2.16 $2.23 $2.31 $2.39 $2.48 $2.56 $2.65 $2.74

• In accordance with the 1999 NREL report (Wooley, Ruth, Sheehan, & Ibsen, 1999), we assumed that electricity will be produced by com-busting waste lignin and that the excess electricity generated in the process will be sold to the grid at $.07 per gallon of ethanol.

• We assumed that the output volume of ethanol would remain constant at 52.2 million gallons per year. When gasoline is blended at 5percent by volume to denature the ethanol (2.61 million gallons), the total output is 54.81 million gallons per year.

• Ethanol yield remains constant at 68 gallons per ton of feedstock for an annual output of 52.2 million gallons per year.



Chemical Engineering. (2006). Cost of plant index. Availableonline at http://www.che.com/

CountryFacts.com. (2006). Available online at http://www.countryfacts.com/

Energy Information Administration. Annual Energy Outlookreports. Available online at http://www.eia.doe.gov/

European Commission (2003). World energy, technology, andclimate policy outlook. Available online at http://europa.eu.int

European Commission. (2006). Eurostat. Available online athttp://epp.eurostat.ec.europa.eu

Faaij, A. (2006). Modern biomass conversion technologies.Mitigation and Adaptation Strategies for Global Change, 11,335–367.

Governors’ Ethanol Coalition. (2004). Ethanol from biomass:America’s 21st century transportation fuel. Available online athttp://www.ethanol-gec.org/information/hewlettproposal.pdf

Gunther, M. (2006, August 9). Why Wal-Mart wants to sellethanol. Fortune. Available online at http://money.cnn.com/2006/08/08/news/companies/pluggedin_gunther.fortune/index.htm

Houghton, J., Weatherwax, S., & Ferrell, J. (2006). Breakingthe biological barriers to cellulosic ethanol: A joint researchagenda. Rockville, Maryland: Office of Science, Office of Bio-logical and Environmental Research, Genomics: GTL Pro-gram, and Office of Energy Efficiency and Renewable Energy,Office of the Biomass Program. DOE/SC-0095. Available on-line at http://genomicsgtl.energy.gov/biofuels/2005work-shop/2005low_intro.pdf

Index Mundi. (2006). Available online at http://www.index-mundi.com/

Instituto Brasileiro de Geografia e Estatistica. (2006). Annualsurvey of mining and manufacturing industries. Available on-line at http://www.ibge.gov.br/english/estatistica/economia/industria/pia/empresas/defaultempresa2002.shtm

Instituto de Pequisa Economica Aplicada. (2006). Economic andregional data. Available online at http://www.ipeadata.gov.br/ipeaweb.dll/ipeadata?76166265

Internal Revenue Service. (2006a). U.S. corporate tax rateschedule.

Internal Revenue Service. (2006b). Definition of excise tax.Available online at http://www.irs.gov/businesses/small/arti-cle/0,,id=99517,00.html

International Energy Agency. (2002). World energy outlook2002. Paris: OECD Publication Services.

International Energy Agency. (2003). Creating markets for en-ergy technologies. Paris: OECD Publication Services.

International Energy Agency. (2004). Biofuels for transport:An international perspective. Paris: OECD Publication Ser-vices.

Jenkins, H. W. (2006, February 22). Business world: What’s wrongwith free trade in biofuels? Wall Street Journal. Available onlineat http://online.wsj.com/article/SB114057549223979744.html

Lave, L., MacLean, H., Hendrickson, C., & Lankey, R. (2000).Life-cycle analysis of alternative automobile fuel/propulsion

technologies. Environmental Science & Technology, 34,3598–3605.

Luhnow, D., & Samor, G. (2006, January 9). As Brazil fills up on ethanol, it weans off energy imports. Wall Street Jour-nal. Available online at http://online.wsj.com/article/SB113676947533241219.html

Minnesota Department of Revenue. (2006). Minnesota’smotor fuels tax overview. Available online at http://www.taxes.state.mn.us/legal_policy/

Montana Department of Transportation. (2006). Fuel taxrules/legislation. Available online at http://www.mdt.mt.gov/business/fueltax/tax%5Frules.shtml

Oanda.com (2006). FXHistory: Historical currency ex-change rates. Available online at http://www.oanda.com/convert/fxhistory

Perlack, R. D., Wright, L. L., Turhollow, A. F., Graham, R. L.,Stokes, B. J., & Erbach, B. C. (2005). Biomass as feedstock fora bioenergy and bioproducts industry: The technical feasi-bility of a billion-ton annual supply. DOE/GO-102995-2135, ORNL/TM-2005/66. U.S. Department of Energy, Of-fice of Energy Efficiency and Renewable Energy, and U.S.Department of Agriculture. Available online at http://feed-stockreview.ornl.gov/pdf/billion_ton_vision.pdf

Renewable Fuels Association. (2006). Ethanol facts: Trade.Available online at http://www.ethanolrfa.org/resource/facts/trade

Schilit, W. K. (1994, September/October). Evaluating the per-formance of venture capital investments. Business Horizons.Available online at http://findarticles.com/p/articles/mi_m1038/is_n5_v37/ai_15859254

Sims, R. (2003). The triple bottom line benefits of bioenergyfor the community. Organisation for Economic Co-operationand Development. Workshop on Biomass and Agriculture. Vi-enna, June 10–13, 2003.

(S&T)2 Consultants Inc. (STCI) & Meyers Norris Penny LLP(MNP). (2004). Economic, financial, social analysis and publicpolicies for fuel ethanol. Ottawa: Natural Resources Canada, Of-fice of Energy Efficiency. Available online at http://www.green-fuels.org/ethanol/pdf/OConnor-Report-Ethanol-2004.pdf

U.S. Department of Energy. (2006). Office of Energy Efficiencyand Renewable Energy, Biomass Program: Biomass FAQs.Available online at http://www1.eere.energy.gov/biomass/bio-mass_basics_faqs.html

U.S. Environmental Protection Agency. (2005). LandfillMethane Outreach Program Summary — Energy Policy Act of2005. Available online at http://www.epa.gov/lmop/docs/engy_pol.pdf

Walsh, M. E., Torre Ugarte, D. G., Shapouri, H., & Slinsky, S. P.(2003). Bioenergy crop production in the United States: Po-tential quantities, land use changes, and economic impacts onthe agricultural sector. Environmental and Resource Econom-ics, 24, 313–333.

Wimberly, J. (2005, June). Pursuing realistic opportunities inhome-grown energy. BioCycle, 46(6), 53–57.

Wooley, R., Ruth, M., Sheehan, J., & Ibsen, K. (1999). Ligno-cellulosic biomass to ethanol process design and economics



Worldwatch Institute. (2006, June). Biofuels for transporta-tion: Global potential and implications for sustainable agri-culture and energy in the 21st century—Summary. Washing-ton, DC: Worldwatch Institute. Available online at http://www.worldwatch.org/system/files/EBF008_1.pdf

utilizing co-current dilute acid prehydrolysis and enzymatichydrolysis current and futuristic scenarios. Golden, CO: Na-tional Renewable Energy Laboratory, NREL/TP-580-26157.Available online at http://www.energy.ca.gov/pier/renewable/documents/lignocellulosic.pdf

Robert E. Froese is an assistant professor of biometrics at Michigan Technological University. His research interests in-clude forest management, forest simulation modeling, natural resources inventory, and applied spatial analysis.

Jillian R. Waterstraut is a law student at the University of Iowa. Her research interests include environmental sustainabil-ity, business aspects of renewable energy technologies, and the associated legal implications.

Dana M. Johnson is an associate professor of operations management in the School of Business and Economics at Michi-gan Technological University. Her research interests include the business feasibility of alternative energy technologies, in-frastructure integration, operational and business performance measurement, and service operations management.

David R. Shonnard is a professor of chemical engineering at Michigan Technological University. His research interestsfocus on life-cycle environmental impact assessment of renewable bio-based fuels and biochemical conversion processesfor biomass feedstocks.

James H. Whitmarsh is a production and shipping supervisor at Unimin Minnesota Corporation. His research interests in-clude the economic feasibility of new and existing renewable energy technologies.

Chris A. Miller is a graduate student at Michigan Technological University. His thesis research involves biomass feedstockproductivity, production and inventory, spatial analysis of land ownership, and resource values.


Documents

Lignocellulosic ethanol: Is it economically and financially viable as a fuel source?