3.1 The current costs of liquid biofuels and biomethane and the outlook to 2020

The production costs of conventional liquid biofuels derived from food or animal feed crops are dominated by the feedstock cost, both for ethanol and biodiesel (Figure 3.1). As a result, the cost of conventional biofuels from food-based feedstocks is very sensitive to changes in the prices of the feedstocks used. For ethanol, feedstock costs over the past three years have typically accounted for 60-80% of the total production cost, while high feedstock costs in 2012 mean that has averaged around 80% for corn ethanol in the United States.12 For biodiesel the situation is even more pronounced, with feedstock costs making up almost 90% of production costs. For biofuels using food-based feedstocks, this means production costs will be volatile, as global market prices for these foodstuffs experience significant variations over time due to changes in demand and supply. If income received for these conventional biofuels do not also move with these input costs, then the profitability and economic viability of their production may be adversely affected.

In 2012, conventional ethanol production from corn in the United States was estimated to have had production costs of between USD 0.94 to USD 1.0/litre of gasoline equivalent (lge), while Brazilian sugar cane ethanol was estimated to have had production costs of between USD 0.69 to USD 0.88/lge. This compares to average re-finery wholesale prices in the United States of between USD 0.72 and USD 0.84/litre in 2012.13

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

The initial deployment of advanced cellulosic biofuels is hampered by many of the same problems that face any new technology. Capital costs are currently two to six times higher than for corn ethanol plants and the production processes are only now being proven at commercial scale. This means there is currently no certainty or clarity over what pathways represent the most promising development options. However, data is beginning to emerge from the first operational plants, while some data for projects under construction or planned to be online by 2015 is also becoming available. The key challenge remains to prove the efficiency and reliability of these processes can be maintained while achieving continuous production at planned capacity levels.

One of the key advantages of advanced biofuels is that, in contrast to conventional biofuels, feedstock costs for advanced biofuels that use cellulosic feedstocks are expected to range between 30-45% of total production costs in the long term. Advanced biofuels will therefore be less sensitive to variations in feedstock prices. They will also be able to secure biomass feedstocks in long-term contracts that also significantly reduce the feedstock price volatility compared to conventional food-based feedstocks. However, the high capital costs for these early commercial-scale cellulosic biofuels plants are a significant barrier to their deployment. This is also true of the uncertainties concerning the ability of different process pathways to reliably, continuously and efficiently convert cellulosic feedstocks into biofuels.

Current production costs for ethanol via the enzymatic hydrolysis of lignocellulosic feedstocks may be in the range of USD 0.75 to USD 1.45/lge, based on the investment cost data for operating, under-construction and planned plants that should be online by 2015. These data are tentative, as the processes are yet to prove those plants' reliability and capability to and operate continuously and efficiently at design capacity. It also assumes "other" operating costs are a quarter higher than the long-term optimised level (Humbird, 2011) and that feedstock costs are USD 65/dry tonne for agricultural and forestry residues or for energy crops, while municipal solid wastes and sugar cane bagasse costs are half to a quarter of this. These assumptions are necessary, as the actual data on the other operating costs and feedstock costs are not yet clear. The cost estimates will remain indicative until further data is available.

Conventional liquid biofuel production costs are projected to rise to 2020 as the result of modest increases in feedstock prices. Although food price increases are expected to slow compared to that experienced since 2005, the OECD-FAO outlook for the agricultural sector to 2020 projects increases in corn prices of around 1% between 2012 and 2020, 11% for global wheat prices and 25% in the cost of sugar cane in Brazil (OECD-FAO, 2012). At the same time, the OECD-FAO outlook projects vegetable oil prices to increase by around 10%.

Figure 3.2: Cost of gasoline saved for PHEVs, 2012 and 2020

Sources: sections Seven and Eight.

This could see grain-based conventional biofuel production costs increase by between 6% and 9% compared to 2012 levels, while production costs for ethanol from sugar cane in Brazil could increase by between 20% and 22% between 2012 and 2020. The production costs of biodiesel from vegetable oils may increase by around 8% under these assumptions by 2020.

Biogas production using digesters is a relatively simple and mature technology, with little opportunity for cost reductions. Current production costs for biomethane vary depending on the feedstock, but range from a low of about USD 0.45/lge for wastes to as much as USD 0.93/lge for small-scale systems purchasing maize silage.

However, the upgrading process – whereby inert components such as CO2 and sometimes also N2 are removed for increased energy density and making the biomethane ready for injection into the gas network or for use in vehicles – is an area where relatively small- scale applications have modest deployment numbers. Accelerated deployment and increasing the scale of individual production plants, would result in a signifi-cantly larger market and better economies of scale for manufacturers. This might also allow increased process integration and "off the shelf" solutions with lower project costs (Nielsen and Oleskowicz-Popiel, 2008). However, even assuming a 10% to 20% cost reduction for upgrading units by 2020 would only reduce biom-ethane production costs for vehicles by between 1% and 5% in 2020.

12 The United States Agriculture Department forecasts that corn prices in 2013/2014 will average 30% less than in 2012. This would mean feedstock costs will be around 75% of total production costs (USDA, 2013)

13 This monthly average data data is from the U.S. EIA and provides a price benchmark against which ethanol producers' production costs can be compared.