October 2019

Sustainability

Diversifying the future: Incentives for worldwide adoption of renewable fuels and chemicals—Part 1

Bio-based, renewable fuels and chemicals can reduce the environmental footprint of maintaining global transportation and product demands, while also supplementing traditional fossil fuels in a global environment with increasing energy demand.

Bio-based, renewable fuels and chemicals can reduce the environmental footprint of maintaining global transportation and product demands, while also supplementing traditional fossil fuels in a global environment with increasing energy demand. The renewable energy sector is large and growing rapidly. This article focuses primarily on the production of fuels and chemicals from non-fossil feedstocks, such as lipids and non-food biomass.

Recent regulatory incentives, technology advances and increased renewable product demand have driven significant investment and growth in the renewable energy industry, and have been driven by the following differences to the established petroleum-derived products:

  • Reduced carbon-intensity pathways and the associated greenhouse gas (GHG) emissions for producing equivalent or better fuels and chemicals when compared to traditional pathways
  • Renewably sourced feedstocks with replenishment cycles on the order of months and years, which, in many cases, are derived from existing waste materials
  • Low-contaminant fuels with superior combustion properties
    to reduce engine particulate emissions
  • Increased reliance on locally sourced feedstocks, supporting rural-sector development and reduced dependence on imported crude oils.

Associated capital benefits also include the opportunity to create new jobs; shift fuels and chemicals production to new, local communities; and generate additional revenues for states and governments disadvantaged for petroleum-based production.

The potential feedstocks covered in this article include agricultural and food wastes and residues, food crops, co-products and non-food crops. They can be primarily grouped as the following:

  • Waste/residue from industries, forest and agriculture:
    • Wood chips from the timber and wood processing industry
    • Residues from forests and crop harvesting, plantations and short-rotation crops
    • Tall oil waste from the pulp and paper industry
    • Residual animal fats from the meat processing industry
  • Food crops, non-food crops and cooking waste:
    • Grains, sugars and vegetable oils
    • Non-food-based vegetable oils, such as jatropha and camelina
    • Used cooking oils
    • Energy crops.

While the concept of feedstock diversification has been widely discussed and implemented for decades, recent technology developments, coupled with well-defined regulatory programs, have reduced risk for meaningful investment into renewable energy, an industry primed for significant growth. Several biomass processes have been fully embraced—including power production from wood and agricultural residues; production of ethanol from corn, grains and sugarcane; and biodiesel and renewable diesel from oil crops and animal fats. Recent investments have indicated a shift toward second-generation technologies—those producing fuels and chemicals from non-food sources.1 Examples include cellulosic ethanol, biomass gasification, industrial offgas capture and conversion, and the expansion of the renewable product chain from fuels to chemicals.

Global renewable fuel programs are either in place, in the final stages of implementation, or in various stages of development aiming to incentivize and regulate the use of biofuels, with the U.S., Europe and Brazil leading the efforts, among others. While the structure of each program differs, the programs generally either require or incentivize varying percentages of traditional fuels to be composed of renewably sourced products. To date, these programs focus on transportation fuels, and consider recent technological advancements and the worldwide forecasted increase in demand for chemicals. Chemicals can be the next opportunity for feedstock diversification.

The concept of the biorefinery is around the corner. As the industry matures, well-integrated sites will be able to profitably produce a diversity of products from renewable feedstocks. This product slate will encompass clean transportation fuels—ethanol, gasoline, diesel and jet fuel, as well as a complete range of chemical products and precursors to be used to produce renewable plastics, fibers and rubbers.

Part 1 will detail the regulatory environment for biofuels and the renewable fuels market. Part 2, to be published in the November issue of Hydrocarbon Processing, will focus on major feedstocks and production pathways and the concept of an integrated biorefinery.

Regulatory overview

The primary worldwide driver for biofuel production investment has been regulatory. Despite partial market acceptance and demand for biofuels, first-generation biofuel feedstock costs have struggled to compete with readily available petroleum fuels without a subsidy, tax credits or other incentive programs.

The three most significant incentive programs include the U.S. Renewable Fuel Standard (RFS), the California Low Carbon Fuel Standard (LCFS), and the EU’s Renewable Energy Directive (RED). Approximately 60 other national governments have developed some form of biofuel programs, such as those in Argentina, Scandinavia, Indonesia, Brazil, Colombia, China and the Canadian provinces of British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. These programs—along with Canada’s proposed Clean Fuel Standard (CFS), the EU’s RED II program update, India’s new national target, Brazil’s RenovaBio program, and increasing state-by-state programs in the U.S., such as those in Oregon and Washington—represent a significant global effort to reduce GHG emissions by either mandating or incentivizing blending of renewably sourced transportation fuels. Recent announcements promoting biofuel blending by the world’s other large energy consumers, including India and China, have bolstered the message that public policy will support biofuels growth in the short and medium term.

However, the inconsistent structures of each program, and the focus primarily on the transportation sector, have resulted in wide variability in both the direction of biofuel investment capital, and in the overall effectiveness of achieving initial program objectives. Furthermore, determining which parties should bear the cost of compliance has become a politically driven, heavily lobbied debate.

U.S.’s RFS program. When enacted in 2005, the U.S. RFS2 program was pioneering legislation in that it mandated consumption of bio-based liquid fuels on a fixed renewable volume obligation (RVO) basis. Volumetric requirements were—and continue to be—based on U.S. Energy Information Administration (EIA) fuel consumption data; these are fixed each year by the U.S. Environmental Protection Agency (EPA), and the obligation for compliance rests primarily on fuel producers and importers. The program primarily functions by creating assigned renewable identification numbers (RINs) to volumes of produced renewable fuels, each falling into five separate categories based on their GHG emissions reductions compared to petroleum-derived fuels. Obligated parties must either produce compliant fuel volumes, purchase the corresponding volumes, or purchase RINs generated by others on the open RIN market. The categorized system was intended to promote investment in the various biofuel families, including first-generation ethanol and biodiesel, renewable diesel and advanced fuels, such as cellulose-based fuels.

The program’s objective is to achieve blending of 36 Bgal of renewable fuels by 2022 (FIG. 1). However, many industry professionals agree that there is room for significant policy improvement, primarily resulting from the program’s year-to-year volume uncertainties, significant variations in RIN market pricing, the uncertain extensions of per-gallon credits and obligated party hardship waivers.2,3 In addition, the program has generally failed to incentivize attaining the ambitious targets for second-generation, cellulosic-based biofuels; such “2G” production goals have never been achieved, requiring the development of a complicated credit waiver system. In 2017, U.S. facilities produced just 10 MMgal of cellulosic-based fuels.4 The targets are still high. Of the 36 Bgal of renewable fuels targeted for 2022, 44% (16 Bgal) are required to be derived from 2G cellulosic feedstocks.

 Fig. 1. Volume targets for renewable fuels under the revised RFS2 program, as originally enacted in 2007. Source: International Energy Agency (IEA) Bioenergy.
Fig. 1. Volume targets for renewable fuels under the revised RFS2 program, as originally enacted in 2007. Source: International Energy Agency (IEA) Bioenergy.

California’s LCFS program. The LCFS program, enacted in 2011 by the California Air Resources Board (CARB), targets a 20% reduction in carbon intensity (CI) of the transportation fuel pool from baseline 2010 levels by 2030. In contrast to the RFS, the LCFS does not rely on year-over-year (y-o-y) volume requirements, but rather a CI-based system utilizing a lifecycle analysis of each producer to reward credits to fuels that produce the least carbon dioxide (CO2) per energy output. Credits can be banked or traded, and do not expire.

Fig. 2. The LCFS program has incentivized biofuel blending of approximately 2 BGGE.  Source: LCFS Data Dashboard.
Fig. 2. The LCFS program has incentivized biofuel blending of approximately 2 BGGE. Source: LCFS Data Dashboard.

As of 2018, the program has incentivized biofuel blending of approximately 2 Bgal gasoline equivalent (GGE), primarily via biodiesel (300 MMGGE), renewable diesel (600 MMGE) and ethanol (1 BGGE), as shown in FIG. 2. Other unique program features include credits for petroleum refiners that decrease their energy consumptions via capital investment or that switch to renewably-generated utilities, with provisions for renewable propane, compressed natural gas and hydrogen.

EU’s RED program. The initial RED program was issued in 2009, and was updated in 2018 to achieve a goal of increasing renewably sourced transportation sector energy consumption to 14% by 2030. For reference, in 2017, the EU’s consumption of renewable energy for transportation was 7.6%.5 The present plan is to have member states adopt individual legislation under the updated RED II program by 2021. Each member state can modify its specific programs under the agreed framework. Generally, compliant fuels produced by new plants starting at January 2021 must reduce GHG emissions by at least 65% compared to their petroleum-derived counterparts.6

The RED II program includes distinct features meant to diversify the biofuel pool, including:

  1. A cap on 1G biofuels sourced from food and feed crops
  2. Incentives designed to increase the use of advanced 2G biofuels to 1% of all transportation energy demand by 2025 and 3.5% by 2030
  3. Specific provisions to reduce the demand for fuels with a high risk of indirect land use change (ILUC); ILUC provisions are proposed to reduce indirect deforestation for the specific purpose of farming biofuel feed crops.

Canada’s CFS program. Canadian provincial biofuel programs are resulting in between 5 vol% and 8 vol% of the gasoline, and 2 vol%–4 vol% of diesel consumption originating from renewable sources; however, no national program is in place. In December 2017, the Canadian government released the framework for its proposed CFS program, which will target a 30-MMt reduction in carbon emissions from all fuels by 2030.7 The proposed framework will utilize a carbon-intensity-based system like the LCFS, with a target of finalizing regulations by 2020 for enactment in 2022 on liquid fuels.

Opportunities for broader implementation: The biofuel tipping point. 

Establishing a cost-effective feed and product supply chain is critical to bringing new products to market, especially when supplementing a mature and efficient petroleum industry. Expressions such as “field-to-wheel,” “farm-to-fuel” and “carbon intensity” have been used extensively in the industry, and aim to provide comprehensive comparison to traditional products. These calculations quantify the opportunities for increased efficiency in biomass production, collection and harvesting, conversion, product storage and distribution, and are vital to unlock the full potential of a project. In addition to feed and product supply chain considerations, supplementing traditional fuels also links renewable product prices to established market conditions, such as crude oil price. Thus, the primary factors that influence the implementation of bio projects are:

  • Policy and regulations—economic risk mitigation
  • Technology maturity—technology risk mitigation
  • Feedstock availability—volume, logistics and supply chain
  • Market conditions—the price of oil and competitiveness vs. fossil fuels.

Policy and regulations. As previously discussed, regulatory mandates and incentives are vital to the early adoption of renewable fuels. As with any fuels or chemicals facility, renewable facilities require meaningful capital investment, and capital markets demand favorable returns with quantifiable risk. An excellent example of the importance of risk mitigation has been the contrast between the effectiveness of the U.S. RFS and California LCFS programs. Both programs set out to supplement the fuels markets with renewably sourced products; however, y-o-y changes and perceived political influence in the national RFS led to slow adoption of biofuel production, outside of traditional corn ethanol and first-generation biodiesel. The adoption of the LCFS, which has established long-term commitments and a transparent credit system less reliant on election-cycle decision-making, has resulted in second-generation bioproject investment.

The underlying structure of this example will likely apply to local policies and national regulations in a global market aiming to expand the use of diverse fuels. To successfully manage low-carbon fuel production, authorities must be able to strike a balance between achieving program objectives and respecting established markets when distributing compliance burdens.

Successful programs must aim to supplement the well-established and efficient petroleum industry by establishing reasonable blending volumes in current scenarios, as being overly ambitious may lead to confusion, loss of optimism and an increase in competitive market forces.

To date, public policy has primarily focused on renewable energy and fuel production. Consensus market forecasters predict sustained growth for chemical demand driven primarily by polymers and plastics. With viable technologies entering the marketplace to produce renewable chemicals and polymer building-block molecules such as ethylene, incentivizing the chemicals industry to adopt diverse feedstocks is a reasonable next step toward energy source diversification. Individual fuel market initiatives include the International Civil Aviation Organization’s (ICAO’s) commitment to supplementing the aviation pool with renewable jet fuel.8

Technology maturity. Technologies available in the market to produce conventional biofuels, such as biodiesel and corn or sugar ethanol, are mature and widely employed. Processes that further reduce the CI of producing fuels—such as renewable diesel (or hydrotreated vegetable oil) and cellulosic ethanol—have seen a step-change improvement in maturity in recent years, driven by years of worldwide research and development (R&D) investment. Synthesis gas (syngas) technologies, although well demonstrated independently, are gaining market interest as technology development and licensing organizations have showcased integrated, demonstration-scale plants.

 

TABLE 1 provides a high-level overview of the various routes for producing transportation fuels from renewable feedstocks. Technology maturity and a dedication to systematic, multi-step technology scale-up during the commercialization process are critical for the following reasons:

  • As the majority of projects are financed through banks and financial institutions, lenders need proof certainty that the technology works and that product quality and nameplate capacity can be achieved. Without multiple operating plants, comprehensive (R&D) programs de-risk project development.
  • Project cost certainty is very important for lenders, as project economics are based on a fixed total installed cost (TIC). If cost overruns or other project delays happen due to new equipment or process-related issues, then the project will be under tremendous pressure, as offtake and financial commitments will not be met. Again, stepwise scale-up by mature technology licensing organizations, coupled with wraps and guarantees from experienced engineering contractors, help de-risk projects for lending and underwriting institutions.

Generally, as the sizes of bio projects are much smaller compared to fossil-fuel refineries and petrochemical facilities, often due to feedstock availability limitations, the benefits of economies of scale are generally at a disadvantage for biofuel producers.

Feedstock availability. In a competitive market, having an uninterrupted supply of feedstock and high onstream times are two of the major requirements for any profitable operating facility. Sustainability and availability of biomass are important, as bio-feedstocks are not measured in terms of proven reserves, nor traded as a global commodity as in the case of crude oil. Local feedstock pricing dynamics, transportation logistics and long-term availability are important to the sustainability of a planned project.

Feedstock agreements ensure required volumes at negotiated prices. Factors such as seasonality, harvesting periods and replacement crops should be considered to de-risk feedstock supply, as biofeedstocks are usually sourced locally within a close radius. Transport of biomass to far distances is usually uneconomical, since solids transportation is costly and mature delivery systems are still under development in a growing marketplace.

The supply chains for the major biofuel feedstocks are in various stages of maturity. Conventional biofuels have been around for at least two decades and supply chains for corn, grains and sugarcane are well established. Similarly, feedstocks for renewable diesel, vegetable oils and animal fats have been traded resources for the food and first-generation biofuels industries for decades. For some feedstocks, such as wood chips, mature networks are in place from existing industries, such as lumber and paper. For others, such as agricultural and animal waste processing, the supply chains are less mature and must be studied on a case-by-case basis.

Some of the main market considerations are as follows:

  • The “economic radius” for wood as a feedstock before transportation costs/logistics outweigh feed
    cost benefits
  • Vegetable oils available as a commodity, with the main synergy being soy and corn oils available directly from co-located processing plants
  • Used cooking oil is a readily produced (yet very localized) feed, requiring high population density to provide economical quantities
  • Animal fat trading is a mature market, with efficiencies available by reducing transportation costs
  • The Pacific Northwest, California and Southeast portions of the U.S. are flush with logging supply
  • The U.S. Midwest has an abundant supply of corn stover and other cellulosic agricultural waste.

Opportunities for increased national and international efficiency include the development of more capital-efficient, regional, large-scale collection systems and centralized feedstock pretreatment to produce biofeedstocks that more closely resemble traded commodities. The logistics of collection, storage and transportation of biomass require careful consideration.

Market conditions. Biofuels are unique to fossil fuels in that their feedstocks generally compete with non-energy-based markets, while the products—namely transportation fuels and chemicals—compete directly with petroleum-derived products in the marketplace. That disconnect between feedstock and product market pricing introduces an inherent risk or opportunity to producing biofuels, depending on the prevailing market forces. Certainly, the price of crude oil plays an important role in determining the attractiveness of biofuels and bioplastics. In short, downward pressure on fossil product pricing reduces the returns of producing biofuels. The alternative is also true. As biofeedstocks are not linked to crude pricing, higher fossil fuel product pricing greatly increases profitability for biofuel producers. Underwriting and quantifying these risks are important for developing projects.

The comprehensive capital costs of producing some biofuels are above their unsubsidized market value, when compared to their fossil fuel counterparts. This is not surprising, considering the early stages of development of several technologies, the cross-industry competition for feedstock, ongoing R&D and small plant sizes. The recent surge in project development and implementation has primarily resulted from:

  • Efficiencies realized as biotechnologies continue to mature
  • Predictable commitments from regulatory policy-makers.

As the cost of production and competitiveness will always be a major barrier to widespread biotechnology deployment, significant policy support will continue to be a catalyst to make the projects commercially viable. Even considering these protectionary steps, low oil prices make the investment climate less conducive to investment.

The tipping point. Recently, the combination of regulatory frameworks, step-change developments in technology maturity, the development of feedstock supply networks and moderate crude pricing has resulted in moderate biofuel investment growth. If these factors continue to have consistent positive trends, the energy sector is poised to reach a tipping point, where both petroleum and renewable fuels are economically balanced to meet society’s energy needs.

Renewable energy market summary.
The energy sector continues to undergo a considerable shift toward renewably sourced and lower CI supply, with the most impactful changes resulting from three main factors:

  1. Technical advances in solar and wind power generation
  2. The development and adoption of biofuels by the transportation sector
  3. A shift from coal to natural gas power generation by the world’s largest consumers.

However, despite continual growth of alternative energy sources, fossil fuels remain the dominant source driving the world’s energy needs. In 2017, approximately 85% of worldwide demand was supplied by oil, natural gas and coal, according to BP’s Statistical Review of World Energy 2017.

The transportation sector consumes approximately 20% of worldwide energy and has experienced consistent growth of renewable contributions, averaging 11% annually from 2006 to 2016. Global biofuel output reached 84 MMt of oil equivalent in 2017, according to BP. The Americas have emerged as the dominant regional player, contributing more than 70% of 2017 production, primarily resulting from their market size, alternative feedstock availability and regulatory climate. More than 80% of production consisted of “first-generation” corn starch and sugar-derived ethanol by the U.S. (15.8 MMgal) and Brazil (7 MMgal), respectively.9 The renewable sector that is poised for the most significant growth in the mid-term is second-generation fuels derived from non-food sources.

Second-generation fuels. Traditionally, biofuels have been categorized as being either first- or second-generation by the source of their feedstocks. Most worldwide biofuels produced are first-generation (or 1G), primarily comprising ethanol (produced by the fermentation of sugar and corn) and biodiesel (produced by the transesterification of lipids, such as vegetable oils). In general, 1G fuel production is both commercially and technologically mature, with hundreds of viable facilities operating worldwide.

Fig. 3. Production growth for selected bulk materials and GDP. Source: IEA.
Fig. 3. Production growth for selected bulk materials and GDP. Source: IEA.

Second-generation, advanced or 2G biofuels are those that originate from non-food biomass or food production wastes. Feedstocks range from lignocellulosic materials like corn stover and wheat straw to wood chips and municipal solid waste.

Petrochemicals. According to the International Energy Agency (IEA), petrochemicals and their derivatives consume 14% of world crude oil demand and 8% of gas demand, and are projected to account for more than one-third of oil demand growth to 2030.10 Moreover, as petrochemical growth has historically been tied to gross domestic product (GDP), as shown in FIG. 3, the 10-yr demand for developing nations is likely to be significant. Those demand growth indicators, coupled with projections for reduced consumption of traditional transportation fuels, have led to major global project announcements that integrate traditional crude refining assets with petrochemical productions (e.g., crude-to-chemicals). Recent investments in chemical building-block production via traditional, world-scale steam crackers have also been significant.

The IEA estimates that approximately 18% of all industrial-sector CO2 emissions originate from petrochemical production, while less than 1% (or 2 tpy) is derived from renewable sources10, highlighting the opportunity for carbon-conscious consumers and policy-makers to expand the use of renewable feedstocks into the chemicals supply chain.

Many of the world’s advanced industrial regions—including the EU, China, India and Japan—have incentives for the reduction of energy consumption by chemical producers. This, coupled with outlined plans to increase public support of technology development for plastics recycling, are indicative of the actions being planned by countries that have pledged to honor the Paris Agreement on dealing with the impacts of climate change.

However, most of these public policies do not directly incentivize the use of renewable feedstocks in the petrochemical value chain. To date, technologies aiming to reduce the CI of petrochemical production must either compete on a commodity product price basis or supply to consumers willing to pay a premium for “bio-integrity” plastics (e.g., those produced by 100% renewable feedstocks).

Part 2 will be published in the November issue. HP

LITERATURE CITED

  1. International Energy Agency, “Biofuels for Transport,” online: https://www.iea.org/tcep/transport/biofuels/
  2. Bipartisan Policy Center, Options for Reforming the Renewable Fuel Standard, 2014, online: https://bipartisanpolicy.org/report/options-for-reforming-the-renewable-fuel-standard/
  3. Lane, J., “EPA can improve its implementation of the Renewable Fuel Standard in 6 ways: BIO,” Biofuels Digest, May 2017.
  4. U.S. EPA (2018), Public Data for the Renewable Fuel Standard: online: https://www.epa.gov/fuels-registration-reporting-and-compliance-help/public-datarenewable-fuel-standard
  5. Eurostat, SHARES, online: https://ec.europa.eu/eurostat/web/energy/data/shares
  6. Voegele, E., “European Parliament approves RED II,” Ethanol Producer Magazine, November 2018.
  7. Government of Canada, online: https://www.canada.ca/en/environment-climate-change/services/managing-pollution/energy-production/fuel-regulations/clean-fuel-standard/timelines-approach-next-steps.html
  8. International Civil Aviation Organization, 2017 Sustainable Aviation Fuels Guide, 2017.
  9. Renewable Fuel Association, 2018 Ethanol Industry Outlook, 2018.
  10. IEA (2018), The Future of Petrochemicals, online: https://www.iea.org/newsroom/news/2018/october/petrochemicals-set-to-be-the-largest-driver-of-world-oil-demand-latest-iea-analy.html (accessed October 2018).

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