Executive Summary

The costs of advanced biofuels, electric vehicles, and bi-omethane for transport could be competitive with fossil fuel options by 2020 in an increasing number of market segments, as long as support policies are enhanced and expanded.

Although the current climate for renewables in transport is challenging, the analysis in this report highlights that the outlook for the future is increasingly positive. If support policies are expanded and enhanced, advanced biofuel technologies to produce biodiesel and ethanol could be competitive with fossil fuels by 2020, while plug-in hybrid electric vehicles (PHEVs) and pure electric vehicles (EVs) could provide mobility at comparable overall costs to internal combustion engine (ICE) powered vehicles by 2020 in an increasing range of market segments. Biomethane expands the renewable options for transport and when produced from wastes can provide a very competitive transport fuel.

These recent developments are welcome, as the transport sector currently lags other sectors in terms of the penetration of renewables.

In 2010, renewables accounted for just 2.5% of total transport and 3.3% of road transport energy consumption. This is the lowest penetration of renewables of any end-use sector. Significant policy efforts across a wide-range of countries to boost the use of renewables have resulted in rapid growth in the use of conventional biofuels since 2000, although the rate of growth in conventional biofuel use, worryingly, has slowed to very low levels in the last two years.

With ethanol production of around 80 billion litres and biodiesel production of around 24 billion litres in 2012, conventional biofuels dominate total biofuels production, as well as the overall contribution of renewables to road transport.

However, new renewable solutions are emerging as advanced biofuel plants have started to be built at commercial scales, PHEVs and EVs are now being mass produced, and biogas can provide a low-cost fuel from wastes. Question marks remain about which advanced biofuels pathways will offer the least cost fuels and how fast battery costs for PHEVs and EVs will come down. Even so, the fact that today we can measure progress on these two issues in the market place, with actual prices, represents significant progress from a year or two ago.

Conventional biofuels, derived essentially from food-based feedstocks, have seen their production costs increase in recent years due to high food prices. The outlook to 2020 for conventional biofuels is mixed, as food prices are projected to remain high.

Total production costs for conventional ethanol and biodiesel plants are dominated by feedstock costs. This makes the economics of production heavily dependent on movements in the local and global markets for the feedstock used. Between 2005 and 2012, global corn prices rose by around 120%, while between 2007 and 2012, the sugarcane prices paid by ethanol producers in Brazil increased by two thirds. The feedstock costs of biodiesel also increased between 2005 and 2012; by 87% for soybean oil and 49% for rapeseed oil.

In 2012, conventional ethanol produced from corn in the United States was therefore estimated to have cost between USD 0.9 and USD 1.1 per litre of gasoline equivalent (lge) to produce, while Brazilian sugar cane ethanol was estimated to have cost between USD 0.7/ lge and USD 0.9/lge (Figure ES.1). The cost of ethanol from other grains (e.g. wheat) was higher. This compares to average refinery wholesale prices in the United States, with monthly averages between USD 0.72/litre and USD 0.84/litre in 2012 for gasoline.

Conventional biodiesel production costs from soybean and rapeseed oils in 2012 were estimated to have averaged around USD 1.3/litre of diesel equivalent produced. Biodiesel produced from palm oil in Malaysia and Indonesia was estimated to have lower production costs, around USD 1/litre.

Current projections of global food prices to 2020 – and hence also the main production costs for conventional biofuels – are for prices to remain high and even increase for some food crops. The outlook for 2013 is slightly better than this long-term view, with expectations that prices for corn and some other food crops will ease from 2012 levels on the back of higher production in 2013. The outlook for conventional biofuels to 2020 is therefore for modest growth in production costs, albeit with some reductions in costs from 2012 levels anticipated within the next few years.

Figure ES.1: Summary of conventional and advanced biofuel production costs, 2012 and 2020

Advanced biofuels from lignocellulosic feedstocks are just beginning to be produced at first-of-a-kind plants at commercial production scales. The capital costs of these plants are, as would be expected, higher than for mature conventional plants. However, with around 15 plants planned to be online within the next few years, emerging cost data suggest a positive outlook. If current support policies can be enhanced and accelerated, advanced biofuels could become cost competitive with fossil fuels by 2020, assuming some of the technology pathways now being explored will prove to be reliable at commercial scales.

Policy support for advanced biofuels – from lignocel-lulosic feedstocks based on biomass, such as wood and agricultural residues – has stimulated the construction of the first commercial-scale advanced biofuels plants, notably in Europe and the United States. Although production is in its infancy, the outlook to 2020 and beyond for commercially viable advanced biofuels is increasingly positive.

Advanced biofuels offer some clear advantages over conventional biofuels derived from food crops. Advanced biofuel feedstocks do not have to be grown on pasture or arable land. They do not, therefore, compete with food supplies. Advanced biofuels also have the potential for much higher levels of production, very low greenhouse gas (GHG) emissions and reduced production-cost volatility.

With commercial-scale plants coming online, real cost data for advanced biofuels has started to emerge and will continue to grow. As competition spurs innovation, advanced biofuel developers are exploring various technology pathways to demonstrate the efficiency, reliability and potential for up-scaling plants. The capital costs for such first-of-a-kind plants, at relatively small commercial scales, are still relatively high. The key challenge remains to prove that the efficiency and reliability of production processes can be maintained while achieving continuous output at planned capacity levels.

Although advanced biofuels are only just at the early stage of commercialisation, and estimated production costs are still high, the cost reduction potential is good, and higher than for conventional biofuels. The key challenge is proving which technology pathways will work reliably at commercial production scales, with the significant technical and commercial risks these first-of-a-kind plants incur.

The first-of-a-kind commercial plants currently being deployed, sometimes at relatively small-scale, can require high investment costs, although some plants appear much cheaper than others. Advanced biofuel plants that recently became operational, are under construction or are planned to be online by 2015 have capital costs in the range USD 1.5 to USD 4.6 per litre per year of capacity (Figure ES.2).

Current production costs for ethanol via the enzymatic hydrolysis of lignocellulosic feedstocks may be in the range of USD 0.75/lge to USD 1.45/lge, based on the investment-cost data emerging for operating, under-construction and planned plants that should be online by 2015 (Figure ES.1). This cost estimate is tentative, as data gaps remain and the plants are yet to prove their reliability and capability to operate continuously and efficiently at design capacity. Solid data will start to emerge in the next 18 months and will be incorporated into future analysis by IRENA.

Figure ES.2: Capital costs for current or near future commercial-scale advanced ethanol plants

Advanced biodiesel productions costs could fall from between USD 0.8 to USD 1.3/litre of diesel equivalent to between USD 0.6 to USD 1.1/litre of diesel equivalent by 2020. However, these pathways are generally less advanced than those for ethanol.

Ongoing investment in research and development, funded by both public and private sources, is still essential to perfect different pathways and identify promising new production methods. However, the key immediate challenge is to gain experience with commercial-scale projects in each of the most promising pathways, now that commercialisation is beginning. This will require more risk sharing between public and private sector partners and enhanced deployment policies.

Biomethane is an oft overlooked transport fuel that can play an important part in the global road fuel mix. Biomethane produced from wastes (e.g. sewage, animal effluent, etc.) using the process of anaerobic digestion can provide low-cost renewable transport fuels today.

Biogas is composed mostly of methane and carbon dioxide produced from organic material. Like natural gas, it is a versatile fuel and can be used directly to generate electricity, to provide low- or high-temperature heat, or to power vehicles. For transportation, it can be upgraded, compressed and used in a dedicated or flex-fuel vehicle.

The key challenges for biogas are to grow the market and reduce costs. The use of biogas requires natural or biogas-based fuelling infrastructure and flex-fuel or dedicated natural/biogas vehicles.

Biomethane upgraded for use in vehicles can be produced for between USD 0.45/lge and USD 0.55/lge from wastes, but this range increases to USD 0.65-0.75/ lge when maize silage is also purchased.

The commercialisation of mass-produced PHEVs and EVs is only just beginning, with a handful of vehicles available from selected manufacturers. The key challenge for electrifying transport is to reduce the cost of battery packs, from around USD 650/kilowatt hour (kWh) in 2012, and improve the performance of batteries. However, despite high incremental costs and the early stage of development, some PHEV and EV offerings are already close to competitiveness. Costs will have to continue to fall and ranges increase, but the outllook for 2020 is that EVs and PHEVs could be close to, or already will be, cost-competitive with conventional ICE vehicles powered by fossil fuels.

The average cost of gasoline saved with the first-of-a-kind mass production PHEVs now being offered for sale varies depending on incremental costs by manufacturer, retail gasoline prices, driving patterns and a range of other factors. However, with average retail gasoline prices of around USD 2/litre in 2012 in Europe and Japan, the cost of the gasoline saved is close to or less than the retail price for a number of PHEV offerings (Figure ES.3).

Figure ES.3: PHEV cost of gasoline saved, 2012 and 2020

For EVs, the total cost of ownership, rather than cost of gasoline saved, is examined and compared to conventional ICE vehicles. Where the base ICE model is not the most fuel-efficient in its class, EVs look particularly attractive, even with the low production volumes of today's models. However, the economics are much more challenging when the base ICE model is more efficient (Figure ES.4). Improving battery performance will reduce costs and help increase the range of EVs, a key concern for many consumers.

Cost reductions for PHEV and EV batteries by 2020 could also be significant. The consensus from multiple sources puts future battery-pack costs in the range of USD 300-400/kWh for EVs by 2020, although more optimistic projections also exist. Assuming battery costs decline to USD 350/kWh for EVs and USD 500/kWh for PHEVs by 2020, then the cost of battery packs could fall by USD 5 500 per vehicle (for a 23 kWh pack) or more for larger batteries. At the same time, improvements in battery performance should see vehicle ranges increase.

Figure ES.4: Total ownership costs for electric vehicles, 2012 and 2020