Tag Archives: price
The Economics of Biofuels: Three Drivers
Jim Lane They’re known as the three E’s: emissions, energy security and economic development. But how do they contribute to the economics of biofuels? And how do those economics compare to the economics of crude? The financing of biofuels is founded, to put it as simply as possible, upon the economics of substitution. On the one hand, there’s the price of energy currently locked inside biomass; on the other hand, the price of energy currently locked inside crude oil. The monetary rationale for biofuels is a version of vive la difference. To give a simple example, if renewable sugars are trading at 15 cents per pound, and crude oil is trading at 35 cents a pound — there’s an opportunity for converting sugar to fuels if the refining cost leaves a profit margin worth the agricultural and market risks. Oh, there are enough complicating factors left over to keep a hive of economists busy for a year. There’s the differential in the energy value of, say, ethanol, compared to gasoline or diesel. The impact of losing mass when you blow off the oxygen to turn a sugar into a hydrocarbon. The impact of bioenergy demand on raw biomass prices. The value of co-products from biomass or oil refining. And so on, practically ad infinitum. It takes an advanced degree and a whole bunch of Tylenol to figure it all out. But at the end of the day, the point where substitution makes economic sense is going to correlate back to the price of crude. No matter what the hoped-for margins are, or the opex of a biorefinery, or the capex — it all starts with the barrel. The oil price: 54.40 or fight In looking at the world of cost — an obscuring factor is that oil is generally quoted in a cost per barrel (42 US gallons), while biomass is generally quoted in a price per metric or US ton. To simplify, we have converted everything to US cents per pound. Plus, we’ve used constant dollars, so that you don’t have to constantly factor out inflation. Today, the cost of Brent Crude oil is 35.88 cents per pound, and the IEA forecasts that price will increase to 54.40 cents by 2040. So, here’s the good news or the bad news. If your biomass refining process at scale can beat that price — fully loaded for the raw inputs, capex, opex and margins — you’re going to find a lot of friends in the fuel markets. Barriers? Even if your technology pencils out, there are the “3 Bewares “. 1. Beware ! The technology has not yet reached scale. It may well not have fully de-risked itself, either – being somewhere in the path between concept and scale. 2. Beware ! Qualified investors have more attractive options. No matter how attractive 10 percent returns might be to many investors, they weren’t sufficiently attractive to Chevron in evaluating their own solvent liquefaction technology — compared to 17 percent average corporate returns on capital, primarily from oil & gas exploration. 3. Beware ! Policy and market risk frighten away investors. It could be that the requisite fuel requires a blending mandate to be assured of a market — mandates which may well be unstable. Or they may require flex-fuel vehicles, which may not be in wide supply. And so on. If those barriers are addressed either by your technology (for example, by reaching scale, or producing drop-in fuels that negate the infrastructure risk) — then you may well have the basic economics to compete dollar-for-dollar with crude oil, and win. It’s 54.40 or fight, though. Any technology that can’t compete with crude oil on price — must enter in to the more esoteric and unstable world of what is usually described as the 3 E’s of biofuels – emissions, energy security and economic development. The carbon price Whatever your take on the stability or wisdom of carbon prices, they have arrived in key markets such as Australia and the EU, and particularly in the EU there’s no reason to suppose they are going away any time soon. What’s the value of carbon today? Well, again, we have the problem of carbon credits being generally quoted in euros per metric ton of CO2 avoided. An 8 euro per tonne carbon price works out to 0.65 cents per pound of biofuel — if you assume that an advanced biofuel reduces carbon emissions by 50 percent in a complete lifecycle. That’s not much of an add-on or game-changer — one of the reasons why biofuels developers generally don’t take them into account when developing technology) the other reason is policy instability). But, according to the UK government, carbon prices will begin to bite much more sharply in the next few decades. In fact, by 2040, the UK is projecting a carbon price of 12.27 cents per pound. If you accept their projections — and many may be skeptical — that could raise your threshold “break-even” point with crude oil from 54.40 cents per pound to 66.67 cents, by 2040. That would be of material help. The energy security price Now, what about energy security? What’s the price of avoiding the unrest that being short on fuels brings? Well, there are estimates all over the map. One line of thinking assigns the cost of the US Firth Fleet to the cost of oil — since the Fifth Fleet generally guards the Straits of Hormuz and is dedicated to assuring a flow of oil out of the Gulf. Another, more conservative approach is to assign the cost of fossil energy subsidies as a cost of energy security. Generally, the subsidies are paid out to keep national populations content in a world of unstable and high energy prices — and to keep national economies producing. Those can be thought of as costs associated with being short on energy, or energy insecure. Fortunately, the IEA has been tracking fossil energy subsidies — and it comes out to 3.70 cents per pound, if you assume that half of fossil energy subsidies go to fuel (the IEA says that it is “more than half” and leaves it at that), and that about 80 percent of the barrel goes to fuels (as opposed to chemicals and other co-products). So, if you like to factor in energy security, you might start there, which brings your 2040 target price up to 70.37 cents per pound. Economic development The University of Wisconsin estimates that a biofuels refinery generates $1.82 in statewide economic activity for every $1 in sales. Now, “economic multipliers” can be all over the map — but this is a conservative estimate, on the whole — we’ve seen multipliers well north of 2.0 used in biofuels economics. So, what does that mean? It means that a local biorefinery is going to be worth far more in overall economic impact than just the fuel it sells — and, accordingly, a nation, state, county or town has benefits that range above the direct profits, wages and equipment sales that go into our cents per pound calculation. Making that refinery valuable to the community in terms of economic impact even if it doesn’t generate a profit. Now, that’s a controversial benefit to work into the fuel price equation — because biorefineries are not going to be running at a loss simply because they generate overall benefit to the community. That is, unless they are owned by the community — in the same way that the NFL’s Green Bay Packers are owned by local investors, who have been able to maintain a competitive football team in a relatively small market and in 2011 sold $64 million in stock to local investors who know that “the redemption price is minimal, no dividends are ever paid, [and] the stock cannot appreciate in value.” If you assign all that value into the enterprise — you get some pretty high “break-even” points — 73.22 cents per pound this year, and 128.07 cents per pound in 2040 (in constant dollars). Economic activity is not the same as margin — but it wouldn’t be unfair to assign some 10 percent of that impact as a value-add. We’ve done that in our chart below. But individual investors, policymakers and technology developers will make their own choices on what to count. The bottom line For sure, it’s 54.40 or fight. Above the strict break-even with crude oil prices — that is, if your capex, opex, raw inputs and margin add up to more than 35.88 cents per pound today, or 54.40 cents per pound in 2040 — you’ll have a dogfight on your hands getting traction in the fuel markets. How much you want — or need to — lean on the impacts of emissions, energy security and economic development — well, it’s a tough call. In the case of economic development — what’s good for Iowa may not make you popular in Texas. What is good for the plant employee may not translate into a desire for In the case of carbon pricing — fickle friends you will find. Nevertheless there is value in avoiding emissions, generating energy security and stimulating local economic impact. Especially the latter — though it is felt most intensely quite close to the plant, and your offtake contracting would be most successful if it also was kept local. It may push you out to the higher-margin, lower-volume worlds of chemicals, fragrances, flavors, feed, lubricants and nutraceuticals. That’s where a lot of ventures working with algae and corn and cane sugars are generally heading now — though not all. There’s good reason to do so. Today, the price of cane sugar is running in the 15 cents per pound range, and corn starch is running in that region as well. But other forms of biomass look for more affordable — KiOR projects wood biomass in the 3 cent per pound range, as do POET-DSM and other makers of cellulosic ethanol from wheat straw and corn stover. The conversion rates are lower, the capex can be daunting, and there are limits to the ethanol market that are being tested now that pertain to the lack of flex-fuel vehicles — but you can see where the fuel arguments apply. Disclosure: None. Continue reading
Australian Carbon Tax To Go – What Lessons Can Be Learned?
By Phil Covington | July 23rd, 2013 There are three things governments can do in order to address carbon emissions. Firstly, they can do nothing, which is the position the U.S. Federal government has taken, since the U.S. Congress has no appetite for pricing carbon. Secondly, governments can create a carbon marketplace, such as the European Emissions Trading Scheme (ETS), and California’s cap and trade program; providing an opportunity for businesses to make money from carbon allowances and for market forces to set the price. Or thirdly, they can impose a carbon tax; the choice the Australian government opted for, and which has been causing quite a bit of disquiet within the business community over there in recent months. Soon business leaders won’t have to worry. Australia’s new Prime Minister, Kevin Rudd, a former PM who returned to power in June by virtue of a leadership change within the incumbent Labor Party, has announced the government will end what has become the unpopular carbon tax and instead, bring forward an emissions trading scheme a year earlier than planned. There are of course many pros and cons in the debate as to whether a carbon tax or an emissions trading scheme is the better way to control CO2 – and while the point of this piece is not to go into these, there is perhaps a lesson here for any countries out there trying to decide between them. Here is a very simplified perspective that may be drawn from Australia’s experience. Australia’s carbon tax at 23.09 (AUD) per tonne, was introduced to curb emissions from a country that is one of the world’s worst per-capita greenhouse gas emitters . The tax makes the biggest polluters pay, but that cost is passed on to small businesses and consumers by way of higher energy prices. This is why it has become so unpopular. By comparison, businesses and consumers in Europe, while also having to pay more to accommodate the price of carbon under their cap and trade system are, however, less burdened than Australians. Given that Europe’s price on carbon floats subject to market forces, in April the price per tonne of carbon effectively collapsed down to just 2.75 Euros – the equivalent, at the time of writing – of less than 4.00 Australian dollars per tonne. While this was generally considered to be way too low, EU countries were not prepared to prop up the price , largely because under their ongoing economic doldrums, there wasn’t much will to raise costs. Europe’s free falling carbon price even prompted The Economist to wonder if it might even spell the end of the ETS altogether. Under such circumstances, however, with Europe’s carbon price so low, Australia’s flat tax very easily became a competitive disadvantage for its businesses operating within the global economy. The disparity in price between Australia and Europe – with Australia paying almost six times as much per tonne of carbon as Europeans – makes it easy to see why even if a sensible carbon tax rate were originally set, it can start to look unfair when carbon markets elsewhere in the world set the price much lower. Furthermore, despite being designed as a disincentive for carbon emissions, carbon taxes still don’t impose a carbon cap, so their ability to mitigate carbon is still not certain. Australia’s Rudd suggests that moving to an emissions trading scheme – which will be linked to the European carbon market – will save households 349 Australian dollars a year. So despite a carbon tax being a simple way to price carbon, and despite Europe’s ETS being far from perfect, the lesson from Australia is that their carbon tax has proved to be unpalatable, uncompetitive and ultimately abandoned. Image by Quinn Dombrowski Continue reading
Carbon Folly Comes At A Price
HENRY ERGAS From: The Australian July 08, 2013 Illustration: Eric Lobbecke Source: The Australian GOOD on the Clean Energy Finance Corporation, the $10 billion fund established by Labor’s climate change package. Other government efforts at picking winners end up shafting taxpayers. The CEFC is doing so from the start. Not that the CEFC has released much information about its maiden “clean” energy project: the refinancing, announced last week, of Victoria’s $1bn Macarthur Wind Farm. But what is known makes intriguing reading. In theory, the CEFC is intended to address “barriers to funding cleaner energy projects”. But there is no evidence Macarthur couldn’t access capital. On the contrary, private investors offered the final tranche of finance the venture required, albeit at a slightly higher interest rate, reflecting the loan’s risk. Faced with that offer, the parties involved in Macarthur turned to the CEFC which, despite the government’s competitive neutrality obligations, undercut the private bid. That largesse was doubtless welcome; yet the beneficiaries, who fall into four groups, hardly seem natural recipients of Australian taxpayers’ generosity. The first are our cousins across the Tasman, with the CEFC’s intervention allowing New Zealand’s government-owned Meridian Energy to more profitably dispose of its investment in Macarthur prior to its privatisation later this year. A second beneficiary is AGL, Meridian’s partner in the venture. The CEFC previously described AGL as exercising “significant market power” in the purchase of renewable energy, meaning it extracts “super profits”; in adding a public subsidy to those profits, perhaps the CEFC was simply abiding by Matthew 13:12, “For whosoever hath, to him shall be given.” The Matthew principle applies with even greater force to the third recipient of the CEFC’s philanthropy, the Malaysian billionaire Syed Mokhtar al-Bukhary, who bought Meridian’s share. Syed Mokhtar’s links to Malaysia’s ruling party have facilitated the construction of a corporate empire that is investing in renewable energy worldwide. Last but not least is Macquarie Bank, with Macquarie Capital advising on the sale to Syed Mokhtar and managing Meridian’s float. With that cast of characters, the CEFC might have been expected to lean over backwards in demonstrating its intervention’s merits, all the more so as the CEFC’s chief executive and two of its board members are former senior employees of Macquarie, which gained directly from the CEFC’s decision. In fact, the sum total of the CEFC’s public disclosure amounts to a two-page press release claiming its funding will facilitate investment in wind generation. If the CEFC relied on a proper cost-benefit analysis, it hasn’t disclosed it; nor is it difficult to understand why: any reasonable appraisal would disclose a large social loss. That can be seen by undertaking the analysis the CEFC should have carried out. Assume that without the CEFC’s intervention, investment in wind generation would decline an implausibly large 10 per cent. That capacity would be replaced by a gas-fired plant, causing greater carbon emissions. By preventing that shift, the CEFC can claim a social benefit; but even assuming the carbon price understates the social value of abatement by $3 per tonne, that benefit is no greater than $6.6 million a year. However, like all bailouts, the CEFC’s will weaken the incentives for wind projects to be selected and operated efficiently. Even if their efficiency only declines by a mere 5 per cent, the social loss would be nearly four times larger than the $6.6m benefit. And to that loss must be added the higher cost of wind generation per unit of power supplied, further offsetting the environmental gain. The aggregate result is that for each $1 of benefit, the CEFC’s intervention makes Australians $5 worse off. That outcome highlights the extent to which carbon policy has degenerated into a mechanism for redistributing income from taxpayers and electricity consumers to favoured constituencies, imposing steep economic costs along the way. And if the CEFC reflects that phenomenon in microcosm, the carbon tax embodies it on a vast scale. After all, prices in European carbon markets have been far below our initial $23 tax since it came into effect. Abatement could therefore have been purchased internationally at a fraction of the cost the carbon tax has imposed on Australian industry. And the consequences of forcing emissions reductions here that could have been done more cheaply elsewhere have been anything but trivial. Rather, Treasury’s own modelling, adjusted for the absence of an integrated world carbon market, suggests that had our tax been aligned with Europe from the outset, national income would be $3.5bn higher by the end of 2014-15. Moreover, over the same period, households would have paid $4.2bn less in electricity prices, saving $450 per household. Why then has the tax remained at such high levels? Because decreasing it to European prices would have slashed government revenues over the period to 2014-15 by $12bn. It would thus have limited the scope to curry favour through tax cuts and the allocation of free permits, cash handouts and exemptions. And it would have provided a far smaller implicit subsidy to the renewable energy industry, which has been the carbon policy’s most vocal supporter. All that points to a crucial lesson: despite the incessant chatter about “market mechanisms”, this policy is an entirely artificial government construct, lacking any anchor linking the burdens it imposes to any gains it creates. In contrast to normal markets, prices can therefore continue indefinitely at levels which do not balance benefits with costs. And in the penumbra of the cash flows it generates, questionable deals can be struck with private interests at taxpayers’ expense. These deficiencies are not minor flaws; they are integral to the system Labor has set up. Until a clean broom is brought to this area, expect decisions such as the CEFC’s to remain the order of the day. Continue reading
