Biofuels' Technology and Performance Issues Could Slow Acceptance

Ari Axelrod is a corporate f ellow at the Center for Emerging Market Enterprises, Fletcher School of Law and Diplomacy.

Biofuels are a conundrum.

Their potential advantages are undeniable: reduction of greenhouse gas emissions, lessening of our dependency on imported oil, support of domestic agriculture. And they certainly have their supporters. The Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 aggressively mandate biofuels to replace 20 percent of the U.S. petroleum gasoline consumption, or 36 billion gallons. More recently, the Obama administration repeatedly affirmed its backing of rapid development of alternative energy sources, including biofuels.

Still, the hurdles are high.

The first is feedstock. In 2008, about 20 percent of the U.S. corn acreage was used for bioethanol feedstock production. It is clear that an even moderate increase of this allocation, let alone three- or four-fold increase required to achieve production of 36 billion gallons, would have profound negative impacts on the availability and cost of food. Meeting the mandate using existing commercially available corn starch technology is simply not feasible.

One possible answer is the so-called cellulosic ethanol technology, which, according to the mandate, is supposed to produce almost as much ethanol as the corn-based one by 2022. Its primary appeal is in the ability of cellulosic conversion to use practically any organic matter as feedstock, be it agricultural refuse, forestry byproducts, or rapidly growing switchgrass, cultivated on lands otherwise not usable for agriculture. Recently, cellulosic technology has been a primary target of the venture capital investment. As a result, several pilot plants are already either in operation or under construction. While their commercial viability remains to be proven, it is likely, given the large amount of capital and talent directed into cellulosic R&D, that the workable conversion technology will be successfully developed, possibly soon.

Ethanol, however, faces two more challenges, each of them by far more formidable.

The first is consumer acceptance. Meeting the government mandate requires implementation of high-blend (ethanol concentration of up to 85 percent) fuels. Yet in concentrations above 10-15 percent, ethanol is corrosive and can cause cold-start problems. So called flexible-fuel vehicles overcome these issues, but at the cost of additional equipment, some added weight, etc. While several auto companies, including GM, do manufacture them in increasing numbers as part of their "green" programs, their fraction in the overall U.S. fleet is quite small. Additionally, FFVs are predominantly SUVs and light trucks with large engines and relatively low fuel efficiency. It is, thus, unclear whether promoting such vehicles contributes to or, in fact, impedes our quest for emission reduction and energy independence. What's even more problematic is that ethanol contains approximately 25 percent less energy than the same volume of regular gasoline. At low blends (up to 10 percent), the less than 3 percent reduction of fuel efficiency is virtually unnoticeable to a common driver. As ethanol concentration increases, however, the need for more frequent refueling stops becomes a bother.

The second issue is the absence of ethanol transportation and retail infrastructure. Because of its corrosiveness, pure ethanol and high-blend ethanol fuels must be transported by specially equipped tankers, stored in dedicated tanks, and dispensed by separate pumps. The cost of such infrastructure upgrades is staggering. With razor-thin margins in gasoline retailing, any private company will, understandably, find such investment difficult to justify—particularly in light of questionable demand. The government does provide some support in the form of investment tax credits, but the benefits have proven to be too small to make a real difference. With the exception of certain areas in the Midwest, the number of high-blend refueling stations remains extremely limited, effectively undermining the attractiveness of driving a flexible-fuel vehicle.

With oil prices on the rise again, the interest in alternative fuels is bound to increase. What can be done to speed up development of biofuels? One possibility would be a massive, government-sponsored ethanol infrastructure buildup, paid for, for instance, by imposing additional levies and incentives (taxes, caps, credits, permits, etc.) on petroleum companies and/or consumers. The benefits of this approach are, indeed, debatable, but at least it would resolve the chicken-and-egg (ethanol demand/ethanol infrastructure) scenario. Another strategy would be to discourage development of ethanol-based fuels (as well as flexible-fuel vehicles) and direct public support toward "drop-in" fuels, e.g., butanol, and "designer fuels" that can be added to regular gasoline in any proportion without engine or retail infrastructure modifications. There is, of course, a possibility of abandoning a national biofuels policy altogether, leaving it to individual markets, e.g., the Midwest, where biofuels already have a noticeable presence.

Each of these strategies has advantages and drawbacks. Each will have profound impacts on the industry. There will be winners and losers. The worst alternative, however, is having a national biofuels policy that is internally inconsistent.

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