SUPPLY RISKS AND RESILIENCE OF BIOFUELS
Hamed Ghoddusi, Engineering Systems Division (ESD), Massachusetts Institute of Technology (MIT), Ghoddusi@mit.edu
Jessika Trancik, Engineering Systems Division (ESD), Massachusetts Institute of Technology (MIT), Trancik@mit.edu
Overview
Biofuels have been proposed as a candidate for fueling a sustainable transportation sector of the future (IEA (2004)).
A combination of government mandates and taxes on CO2 emissions are increasing the contribution of biofuels in
various regions. For example, the Renewable Fuel Standard (RFS) in the US requires the annual share of biofuels to
reach 35 billion gallons per year by 2025, which is expected to contribute approximately 12% (by volume) of all
transportation fuels consumed in the U.S. (Annual Energy Outlook 2011). Similar mandates have already been
implemented or are close to adoption in other countries as well.
The aggregate impacts of switching to biofuels have been discussed in the literature (e.g. McDonald et al. (2006),
Banse et al. (2008), Westhoff (2010)). In addition, three major factors limiting the scalability of biofuels have been
identified (e.g. Farrell et al. (2006), McKone et al. (2011), Peters and Thielmann (2008)). First, limits on the supply
of feedstock, as constrained by the availability of fertile land in a large-scale production scenario, is a potential
barrier, particularly for first-generation biofuels. Second, various studies have reported estimates of the life-cycle
emission (LCA) impacts of biofuels (e.g. Lardon et al. (2009), Gnansounou et al. (2009), Ewing and Msangi (2009),
Pimentel and Patzek (2005)). Some of these studies have published high emissions estimates that are comparable to
emissions from motor gasoline (see for example Havlik et al. (2011)). Third, although first-generation biofuels are
close to cost competitive, the cost of second-generation biofuels remains a concern.
We argue that in addition to these three key metrics, the resilience (or riskiness) of the biofuels supply-chain is a
potential fourth factor limiting the scalability of biofuels. We focus in particular on the riskiness of the supply of
biofuels feedstock. A number of historical cases provide examples of shocks that can influence the supply of biofuels
feedstock. These include shocks to feedstock production (e.g. due to disruptive weather events), supply chain
network effects (e.g. the loss of feedstock transportation infrastructure), and shifts in demand from competing sectors
(e.g. due to a surge in the demand for food).
Multiple compounding features of the biofuels supply chain underscore the importance of considering resilience as
an evaluation metric. These features include: 1) a potential for greater relative quantitative risk as compared to fossil
fuels supply (due to the riskier nature of production nodes and the presence of a competing demand source); 2) a
high consequence of disruption, due to the inelasticity of energy demand; 4) and a potentially higher cost of biofuels
supply-driven shocks as opposed to demand-driven petroleum price shocks. Furthermore these risks will increase as
production scale grows, due to the potential for greater consequence from disruption.
We first discuss the rationale for considering risks and then explain mechanisms which govern the risk exposure of
biofuels supply networks to negative shocks. This discussion includes the impact of scale and technology (first
versus second generation biofuels). A set of quantitative evidence is provided to support the claim that the feedstock
supply is risky and that impacts are costly. We then move to a conceptual model and introduce a set of metrics to
evaluate the riskiness of an energy technology supply chain. Based on this conceptual model, we discuss merits and
limitations of several risk mitigation strategies, including storage, diversification, risk-sharing with the fossil fuel
sector and firm-level risk management strategies.
Methods
In this research, we use a combination of representative firm-level production and risk-management modeling, macro
level welfare analysis, statistical and econometric analysis of historical data (using 50-year international data from
FAO as well as regional US data), and simulation techniques.
Results
Based on our review of the literature and an analysis of available data, we conclude the following:
1) Crops used for the production of first-generation biofuels show substantial annual yield variation. We find a
historical volatility of yields around the trend line in the range of 20% - 80%.
2) The price of feedstock shows episodes of substantial and sudden increase.
3) Based on historical data we estimate that a volatile feedstock supply can cost up to 6% of the total welfare.
4) First and second generation biofuels have substantially different risk profiles. In particular a changing
relationship between food and fuel (from competition to co-production) creates a qualitatively different risk
profile for biofuels feedstock.
5) The historical supply of biofuels feedstock is more risky than the supply of fossil fuels, based on several
metrics, particularly in recent years.
6) Crop diversification can reduce the aggregate risk of the global supply of biofuels substantially. We
estimate the costs and benefits of geographical diversification for US corn producers and crop/location
diversification using seven major energy crops in the US. The findings suggest that both geographical and
crop diversification reduce risks substantially. But they also affect the expected yields adversely.
7) Existence of a global supply network could substantially reduce the overall supply risks from an industry
perspective. However, this depends crucially on the location of biofuels production centers. We briefly
discuss potential locations of production centers.
8) Storage can reduce volatility in the supply of biofuels feedstock, but the capacity required to manage risks is
large.
9) The fossil fuels sector can provide a risk cushion by compensating for the reduced supply of biofuels.
However, as the share of biofuels increases, the ability of the fossil fuel sector to absorb these shocks
decreases.
Conclusions
We provide evidence to support the claim that the supply of biofuels can be risky and that these risks become more
important as biofuels’ contribution to the transportation sector increases. We also provide a list of metrics to evaluate
the riskiness of a supply chain in general and the biofuels supply chain in particular. Finally, we review a set of
possible risk reduction strategies and provide a detailed account of two major risk management strategies: storage
and diversification. Our results highlight the relevance of resilience-related measures for evaluating the attractiveness
and scalability potential of first and second-generation biofuels.
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