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BIO International Convention
Washington DC, June 29, 2010
Sustainable Biofuels Growth:
Hurdles and Outcomes
Raoul Oberman
This report contains information that is confidential and proprietary to McKinsey & Company, Inc., and is solely for the use of McKinsey & Company, Inc., personnel. No part of it may be used, circulated, quoted,
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prohibited and may be unlawful.
Biofuels consumption is expected to more than double propelled by
regulatory support
Top drivers for biofuels growth
Percent
Regulatory
65
10-15
25
31%
31
Mandate
2nd Gen
Improved energy
security
50-55
2020
2%
5%
20%
20
1st Gen
Penetration in
liquid fuel
SOURCE: 2010 McKinsey BIO survey; McKinsey analysis
Development of
affordable fuels
19%
19
Need for sustainable fuels
19%
19
Other
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2010
Working Draft - Last Modified 6/29/2010 9:38:54 AM
Global biofuels consumption
Billion gallons per year
11%
12
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An expanding global biofuels market will create distinct opportunities and
challenges for different countries and regions
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+
US
+
Help reduce
dependency on oil;
Remain 2nd
Generation
technology innovator
E
U
Africa
South East Asia
Brazil
Emulate
Brazilian sugarcane success
+
Huge potential
for feedstock
cultivation; Less oil
dependent growth
+
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Exploit land
and water
resources to
support domestic
demand and
exports
+
Convert fields
into energy crops
in Eastern Europe
- Short on
biomass to fulfil
expectation
Growth will not happen if industry wide hurdles are not overcome
Broader feedstock mobilization
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Steady-state economics reached
Blend wall overcome
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Sustainability standards set
Investor confidence restored
68
%
Industry would benefit from more
coordination
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
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Biofuels must mobilize broader biomass sources
Mandated primary
energy demand
Supply mobilization potential
7.0
2.4
Power
2.7
Biofuels
1.9
Other land
4.8
Forestry
Agricul.
residues
Cropland
80%
Overcoming
collection issues
70%
Incentives for
residues use
50%
Farmer long-term
contracts
40%
9.4
3.9
3.9
0.7
1.8
Low
mobiliza
tion of
farmers
SOURCE: 2010 McKinsey BIO survey, McKinsey BioMass model
2.8
1.8
Technical
potential
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Heat
Waste
12
0.7
Cost competitive
technology
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19
0.7
‘000 TWh, 2020
Mobilizing agricultural residues
will require
Cellulosic ethanol commercialization will require coordinated
investments throughout the chain…
Storage
Truck and
rail fleet
mobilized
Processing
Distribution
LC plants
built within
required
crop circle
Existing
ethanol infrastructure
leveraged
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Collection
Silos
equipment
constructed
bought by
farmers or
aggregators
Transportation
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Collection
Farmers will only mobilize for
a minimum of $70-100/ton (US)
or $45-55/ton (China)
83%
Value chain must be backwards integrated to feedstock with
clear alliances throughout the value chain
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
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… and technology maturation to ensure an economic proposition
for cellulosic biomass providers
Break-even economics between
corn and LC ethanol
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Affordable cost of biomass
USD per ton
1st
Version LC
Cost of LC tax
corn
exemption
ethanol
65%
LC
conversion
cost
90-120
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Nth
Version LC
60-90
Affordable cost
of
biomass
Cellulosic based technology will not reach maturity until 2020
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
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Blend wall can be overcome with E85 or Bio-butanol but stakeholders
are not aligned on the best option
Best option to overcome blend wall
Options
Stakeholder E85
Bio-butanol
Production
and distribution
EPC
Refiner/
blender
Distributor
36
%
Butanol
26
%
E85
27
%
E15: decide later
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Ethanol plant
owners
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Technology LC-ethanol
companies
Butanol
E85
Auto OEMs
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
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Sustainability standards can help overcome important perceptions
but should not restrict growth
Sustainability standards faces the following challenge
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Key challenges facing
biofuels sustainability
1 Demonstration of
acceptable GHG footprint
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2 Acceptable burden
on water supply
3 Minimal impact
on food supply
Too few criteria
will restrict growth
Too many criteria
could restrict growth
Should sustainability standards be changed?
Sustainability
80% standards are
critical to growth
6%
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
No – they are good as they are today
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Biofuels will need to position itself against other solutions within
the energy matrix
Land use Efficiency
kMiles per acre crop, US example
1
Biofuels
30
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▪
Tight value proposition
given
– Sensitivity to type of
2
crop, process and
car efficiency
Electric
vehicles
37
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– Other non-land use
related advantages
By the year 2025, what will be the dominant fossil fuel alternative?
60% Bio-substitutes for gasoline
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
19% Bio-diesel
16% Electric vehicles
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Private sector is still investing but may need to overcome anxiety to
support significant investments required
“Shares in publicly owned ethanol companies have mostly
been slumping all year. [Some] have lost more than 80
percent of their value since the beginning of the year “
– The New York Times, 2010
200
"Very few investors in any cleantech sector are going to be
investing the amounts of capital we saw at the height in
2008,"
– CleanTech Group, 2010
Insufficient
55% capital to support
our growth
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Next 10
years
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Biofuels investments
needed to support
2020 growth
USD billions
Potential actions to strengthen investor confidence
Governments create long-term regulatory
76% frameworks and offer incentives
Science offers clear evidence of biofuel
60% efficiency and carbon impact
SOURCE: 2010 McKinsey BIO survey, McKinsey analysis
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Industry must coordinate to overcome these critical hurdles
Availability of broader biomass feedstocks
at affordable prices
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Nth version economics can be quickly
achieved for new biofuels
Agreement to blend wall solution
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Establishment of robust yet practical
sustainability standards
Restoration of investor confidence
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Shape of the future depends on how these issues are tackled by the
industry
Future state
▪
▪
▪
▪
▪
Electric vehicles
wins over biofuels
▪
Large players resolve many of the
issues on their own
Smaller players unable to solve issues
to support their own growth
Uncoordinated answer to biofuels
resulting in unanswered challenges
Investors not confident in biofuels
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Players pursuing their
own growth with few
winning
Industry coordinates to overcome major
hurdles to drive growth
Investor confidence restored
Working Draft - Last Modified 6/29/2010 9:38:54 AM
All players in the industry
drive the growth with
many winning
Becomes reality if…
WORKING DRAFT
Last Modified 6/29/2010 9:38:54 AM Eastern Standard Time
Printed 6/27/2010 1:05:39 AM Korea Standard Time
McKinsey & Company contacts
Working Draft - Last Modified 6/29/2010 9:38:54 AM
Raoul Oberman
Senior Partner
[email protected]
+31 (6) 22383359
Printed 6/27/2010 1:05:39 AM
Nicolas Denis
Partner
[email protected]
+32 (477) 480355
McKinsey & Company
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