The Economics of Biofuel
Production and Use
Guy Hitchcock
Biofuel production
Cost elements of biofuel production
By product sales
Feedstock
Conversion
process
Conversion inputs
Fuel distribution
and retail
Liquid biofuel feedstocks
 Biodiesel – oil bearing crops
– Rape seed, sunflower, soya oil, palm oil
– Waste vegetable oils
 Bioethanol – starch and sugar crops
– Cereals, sugar beet, sugar cane
 All feedstocks are traded on the food
commodity markets
 Typically feedstock accounts for 80-90% of
biofuel cost
Rape seed, wheat and crude oil
prices, 1997-2007
Biomethane feedstocks
 Commercial or domestic waste may
provide a revenue for AD as a waste
treatment option
 Agricultural manures are used in
partnership with farmers, with digestate
spread back to land
 Energy crops have a cost of lost food
production
Second generation fuels
 Wide range of input feedstocks
– Woody biomass, waste, etc
 Generally lower cost feedstocks
 Non-food crops so less competition with
food
 Can use whole crops so get better land
use and energy balance
Conversion costs
 Capital cost of conversion plant
 Operating cost of plant such as labour,
energy costs and other input materials
 Revenue from by products
– Biodiesel: crush cake, glycerine
– Wheat ethanol: distillers grains
– Biomethane: bio-fertilisers
Conversion estimates for biodiesel
from rape seed
Conversion costs in €/litre
SAC
IEA
Concawe
Small Large Small Large Large
Plant cap ex 0.425 0.227
0.046
Plant op ex
0.076
By-product
0.265 0.184
0.145
income
Total
0.160 0.043
0.20
0.05
-0.023
Conversion estimates for ethanol
from wheat
Conversion costs in €/litre
IEA
Small
Plant Cap Ex 0.10
Plant Op Ex 0.24
By-product 0.07
income
Total
0.27
Concawe BTG
Large
0.06 0.072
0.22 0.148
0.07 0.084
0.21
0.136
0.28
ITPS
0.15
0.012
0.210
0.114
0.13
0.108
Biomethane and 2nd generation
conversion costs
 Biomethane
– Less data on costs
– Swedish experience suggests 0.65-0.75 €/kg
 2nd generation
– Not yet commercially available
– Study estimates for cellulosic ethanol 0.16 to
0.26 €/litre
Fuel tax incentives
 VAT fixed for all fuels
 Fuel duty
– 100% reduction for all biofuel
– 100% reduction for a limited amount
– Partial reduction
 Obligations
– UK RTFO provides revenue from tradable
certificates
UK
Sweden
Germany
Italy
Finland
Slovakia
Denmark
Netherlands
Czech Republic
France
Ireland
Austria
Portugal
Hungary
Belgium
Poland
Greece
Estonia
Spain
Luxembourg
Latvia
Lithuania
Bulgaria
Slovenia
Romania
Malta
Cyprus
pence (p/litre)
Diesel pump prices across Europe
including duty and VAT
110
100
Tax and Duty
90
Excluding Tax and Duty
80
70
60
50
40
30
20
10
0
Cost of RME VS EU diesel excluding
taxes
Price of RME vs UK diesel including
taxes
Cost of wheat ethanol vs EU
gasoline excluding taxes
Price of wheat ethanol vs UK
gasoline including taxes
Summary of production
economics
 Feedstock cost accounts for 80-90% of
cost of liquid biofuels
 Feedstocks are traded on food markets
and so affected by food demand
 Taxes are next biggest impact with duty
reductions generally needed to make
biofuels cost competitive
Biofuel use
Cost elements of biofuel use
 Vehicle costs
– Capital cost of vehicles
– Additional maintenance and servicing costs
 Fuel costs
– Base cost of fuel
– Fuel consumption and mileage
 Taxes and financial incentives
Vehicle costs - 1
 Biodiesel
– No additional capital
– Possible additional service costs
• Additional fuel filter changes
• Possible shorter service intervals
 Bioethanol
– €0-1,500 additional capital for FFV
– Conversion kits approx €500
– No additional servicing costs
Ford Focus FFV
Vehicle costs 2
 Biomethane capital costs
– cars and vans: €2,500 - €5,000
– dual-fuel diesel heavy duty vehicles: €25,000
- €40,000
– spark ignition heavy duty vehicles: €35,000 €50,000
 Biomethane servicing – possibly 0.01€/km
more than diesel
Fuel costs
Fuel
Fuel cost
MPG
Biodiesel
Similar to diesel
1-5% less than diesel
Bioethanol
Similar to gasoline
25% less than gasoline
Biomethane bi-fuel or
dedicated
30-50% less than
diesel
Same as gasoline,
15-20% less than
diesel
Biomethane – dual
fuel
30-50% less than
diesel
Similar to diesel
Taxes and financial incentives
 Vehicle grants
 Company car tax reductions – as are
available for example in the UK and
Sweden
 Reduction on congestion charges or road
tolls
 Reduced parking charges for biofuel cars
Full life costing
 Capital cost of the vehicle, amortised over its
life
 Fuel cost over the life of the vehicle accounting
for fuel consumption and annual mileage
 Servicing and maintenance costs
 National and local incentives such as vehicle
tax reductions, congestion charge reductions
and parking benefits
Full life costing: EU average gasoline
and diesel, biofuels with no duty
Full life costing: UK tax and duty rates
for all fuels
Summary of use economics
 Cost effectiveness of biofuel use depends on:
– vehicle costs and how these are amortised over the
life of the vehicle;
– service and maintenance costs;
– fuel costs and fuel consumption for the vehicle;
– vehicle mileages;
– national and local taxes and incentives
 These factors will vary from use to use, and
between countries, regions and even cities.