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Don't Count It Out: Biofuels Industry Holds Much Promise

The verdict on biofuels is in, and the catchphrase seems to be over-promised and under-delivered. Biofuels have been in public use in some form or the other for a long time (remember the Ford Model T that ran on hemp-derived fuel?). However, in reality, innovation in biofuels for widespread use is much more recent. First generation biofuels made out of sugar, starch and edible oils still occupy a major share of the total market.

All the same, the biofuel industry has come a long way. The market for biofuels is expected to reach $99 billion by 2014. The demand for biofuels is on the rise and will continue to grow rapidly through 2020. This rapid expansion is changing the dynamics of the food, agricultural and the energy markets in a big way. The U.S., Brazil (ethanol) and EU (biodiesel) are currently driving most of the demand for biofuels. Government energy policies have contributed greatly to this rapid rise in demand and have coaxed producers to find ways to increase production.

The U.S., for instance, has seen a rapid increase in production in the last decade, thanks to the Energy Policy Act of 2005 that provided tax incentives and loan guarantees for energy production of various types. EISA followed in 2007 with a bigger goal of moving the U.S. towards energy security and independence. The EU renewable energy directive of 2009 and the Federal Law 12,249/10 in Brazil have had a similar effect on the respective regional biofuel markets.

In 2011, global biofuels production stood at 1,897,000 barrels per day, up from 1,635,000 barrels per day in 2009 — a 16 percent rise in just two years. Production levels are expected to reach 2,500,000 barrels per day by 2020.

Source: Mordor Intelligence Estimates

Increasing biofuels production in the current format has its challenges. For one, first generation biofuels (notably ethanol, biodiesel and biogas) are made from sugar, starch and edible oils, and constitute a majority of all biofuel production. This has reduced the amount of arable land available for growing food for human and livestock consumption. Over the past 10 years, many countries like Brazil, and Indonesia have noticed a considerable decrease in arable land for food production, as a result. According to UNEP, 35.7 million ha were used for biofuel production in 2008 and an estimated 80 million ha are to be used by 2020 at the current rate — a 124 percent increase.

Source: Mordor Intelligence Estimates

Second-generation biofuels, on the other hand, are produced using inedible plant parts. Unlike first-generation biofuels, they do not compete with the use of raw materials as food. The fuel over food issue has been a cause for concern even with second-generation biofuels. Although Jatropha is a cost-effective feedstock plant for bio diesel production, large swathes of land expressly used for Jatropha cultivation has decreased arable land for food production, significantly in Tanzania and Kenya.

Many companies are eyeing the next generation of biofuels to overcome such challenges. Third generation biofuels from algal biomass and fourth generation biofuels from specially engineered plants and biomass (with higher energy yields or with lower barriers to cellulosic breakdown) are currently in various stages of testing and production. The key challenge with next-generation biofuel technologies currently, as seen in the case of KiOR, is one of reaching production economies of scale.

Comparison of Biofuel Value Chains

Source: IFPRI

The race for finding sustainable and economical biofuels is on. Major companies like ADM, Cargill, Butamax and Abengoa are partnering with new startups to help deliver innovative bio fuels technologies as part of their long-term strategies. The ADM-Virent Energy partnership for better bio refinery solutions, the POET-DSM partnership for producing cellulosic bio-ethanol and the Genesis Biofuel – Abundant Energy Solutions joint venture are just some of the many bets placed by private and government players.

Striking the right balance between energy freedom and food security with efficiency and price parity remains a challenge for biofuels today, but it won't be a problem for very long.

Lead image: Biofuel tanks via Shutterstock

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Shankar Rampalli has co-authored many research reports on developments in Energy & Power. He currently analyses renewable and conventional energies at Mordor Intelligence.

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