Biofuels Industry

27 May 2013 04:44 PM | #Market Research

The term ‘biofuel’ is used to describe fossil fuel substitutes manufactured from biomass material such as plant material or other organic matter. Biofuels are a partial substitute to fossil fuels that can potentially offer substantial CO2 savings, reduced tailpipe emissions and a greater diversity in energy supply.

In addition to being burnt directly, biomass can be used to produce a wide array of fuels including, biodiesel, bioethanol, synthetic gasoline and hydrogen. Types of biomass that can be used to produce biofuels include algae, fungi and crop plants such as corn and woodchips. The specific benefits and drawbacks of biofuels depend greatly upon the type of biomass used, the type of fuel produced and techniques of production at every stage of the production chain. 

The current market in biofuels has developed upon the sale of biodiesel and bioethanol, which can be used as substitutes for diesel and petrol respectively. Bioethanol and biodiesel are extensively used in several countries including the US, Germany, Brazil and France, mainly as mixed fuel blends with their respective fossil fuel equivalents. The market for these products has grown internationally as a direct result of the need to address air quality and energy security with the added incentive of economically supporting agricultural sectors.

Investing in Biofuels

The biofuels market has recently been plagued by controversy, pitting food against fuel. Increasing proportions of food crops such as corn which are being diverted to produce biofuels have been linked to rising food prices. Some experts, however, suggest that the biofuel versus food problem has been embellished. For example, 90% of the biofuels market consists of ethanol, of which 90% is derived either from sugar cane or corn. Although food prices recently rose, corn prices increased the least in relation to other more important grains such as rice, which saw the highest increase in prices. This suggests that biofuels represent just one factor of many that are responsible for recent rises in food prices.

Controversy also surrounds the process of producing biofuels from food crops and the sustainability of such production. Studies have shown that biofuels, when all stages of production are considered (e.g. growth of biomass, processing, transport, production of biofuels and use), can generate more carbon emissions than their fossil fuel counterparts assuming land is specifically cleared for the purpose in the process. However, differing research has shown that biofuels can offer significant reductions in CO2 emissions if the biomass supply chain is managed efficiently.

Experts suggest that second generation biofuels, which are biofuels derived from non-food biomass, may be an attractive solution. Second generation biofuels are developed from a variety of sources of biomass such as waste, which reduces pressure on land requirements as well as diverting waste from greenhouse gas emitting landfills.

Regardless of these concerns, biofuels continue to receive much attention despite a slight decrease in investor interest in 2007, compared with 2006. Experts predict that European biodiesel production is set to grow from 3.89 million tonnes with revenues of €2.93 billion in 2006, to 9.75 million tonnes and revenues of €7.46 billion in 2013. Considering that a number of biofuel production plants are either being planned or constructed in the UK, which will extend the UK’s current production capacity by 800 million litres, it is clear that investors are not deterred by biofuels and that an optimistic outlook exists.

Global investment in biofuels fell for the second consecutive year in 2008, with UNEP reporting total investment of $16.9 billion, a 9% reduction. When that investment is split it is clear that next-generation technologies are favoured, overtaking first-generation biofuels for the first time. This is mainly due to controversy over the food-vs-fuel debate and lower oil prices.

Industry Drivers

Although biofuels have been the subject of intense debate, there is recognition that they could make a meaningful contribution to climate change abatement. Several key drivers within the UK are catalysing growth in biofuels whilst simultaneously creating a positive investment climate. The overarching driver of the UK’s climate change mitigation strategy, the Climate Change Act 2008, will also play an important role in driving the biofuels industry forward. The Act requires an 80% reduction in the UK’s greenhouse gas emissions by 2050, through actions undertaken nationally and abroad. Additionally, the Act mandates national CO2 emissions to be reduced by 26% by 2020.

UK Regulatory Drivers

Research and Development