The Economics of Biofuel

Production and Use

Guy Hitchcock

Biofuel production

Cost elements of biofuel production

By product sales

Feedstock

Conversion
process

Conversion inputs

Fuel distribution
and retail

Liquid biofuel feedstocks

Biodiesel oil bearing crops
Rape seed, sunflower, soya oil, palm oil

Waste vegetable oils

Bioethanol starch and sugar crops

Cereals, sugar beet, sugar cane

All feedstocks are traded on the food

commodity markets
Typically feedstock accounts for 80-90% of
biofuel cost

Rape seed, wheat and crude oil

prices, 1997-2007

Biomethane feedstocks
Commercial or domestic waste may
provide a revenue for AD as a waste
treatment option
Agricultural manures are used in
partnership with farmers, with digestate
spread back to land
Energy crops have a cost of lost food
production

Second generation fuels

Wide range of input feedstocks
Woody biomass, waste, etc

Generally lower cost feedstocks

Non-food crops so less competition with
food
Can use whole crops so get better land
use and energy balance

Conversion costs
Capital cost of conversion plant
Operating cost of plant such as labour,
energy costs and other input materials
Revenue from by products
Biodiesel: crush cake, glycerine
Wheat ethanol: distillers grains
Biomethane: bio-fertilisers

Conversion estimates for biodiesel

from rape seed
Conversion costs in /litre

SAC
IEA
Concawe
Small Large Small Large Large
Plant cap ex 0.425 0.227
0.046
Plant op ex
0.076
By-product
0.265 0.184
0.145
income
Total
0.160 0.043
0.20
0.05
-0.023

Conversion estimates for ethanol

from wheat
Conversion costs in /litre
IEA
Small
Plant Cap Ex 0.10
Plant Op Ex 0.24
By-product 0.07
income
Total
0.27

Concawe BTG

Large
0.06 0.072
0.22 0.148
0.07 0.084
0.21

0.136

0.28

ITPS

0.15

0.012
0.210
0.114

0.13

0.108

Biomethane and 2nd generation

conversion costs
Biomethane
Less data on costs
Swedish experience suggests 0.65-0.75 /kg

2nd generation
Not yet commercially available
Study estimates for cellulosic ethanol 0.16 to
0.26 /litre

Fuel tax incentives

VAT fixed for all fuels
Fuel duty
100% reduction for all biofuel
100% reduction for a limited amount
Partial reduction

Obligations
UK RTFO provides revenue from tradable
certificates

UK

Sweden

Germany

Italy

Finland

Slovakia

Denmark

Netherlands

Czech Republic

France

Ireland

Austria

Portugal

Hungary

Belgium

Poland

Greece

Estonia

Spain

Luxembourg

Latvia

Lithuania

Bulgaria

Slovenia

Romania

Malta

Cyprus

pence (p/litre)

Diesel pump prices across Europe

including duty and VAT
110

100

Tax and Duty

90

Excluding Tax and Duty

80

70

60

50

40

30

20

10

Cost of RME VS EU diesel excluding

taxes

Price of RME vs UK diesel including

taxes

Cost of wheat ethanol vs EU

gasoline excluding taxes

Price of wheat ethanol vs UK

gasoline including taxes

Summary of production
economics
Feedstock cost accounts for 80-90% of
cost of liquid biofuels
Feedstocks are traded on food markets
and so affected by food demand
Taxes are next biggest impact with duty
reductions generally needed to make
biofuels cost competitive

Biofuel use

Cost elements of biofuel use

Vehicle costs
Capital cost of vehicles
Additional maintenance and servicing costs

Fuel costs
Base cost of fuel
Fuel consumption and mileage

Taxes and financial incentives

Vehicle costs - 1
Biodiesel
No additional capital
Possible additional service costs
Additional fuel filter changes
Possible shorter service intervals

Bioethanol
0-1,500 additional capital for FFV
Conversion kits approx 500
No additional servicing costs

Ford Focus FFV

Vehicle costs 2
Biomethane capital costs
cars and vans: 2,500 - 5,000
dual-fuel diesel heavy duty vehicles: 25,000
- 40,000
spark ignition heavy duty vehicles: 35,000 50,000

Biomethane servicing possibly 0.01/km

more than diesel

Fuel costs
Fuel

Fuel cost

MPG

Biodiesel

Similar to diesel

1-5% less than diesel

Bioethanol

Similar to gasoline

25% less than gasoline

Biomethane bi-fuel or
dedicated

30-50% less than

diesel

Same as gasoline,
15-20% less than
diesel

Biomethane dual
fuel

30-50% less than

diesel

Similar to diesel

Taxes and financial incentives

Vehicle grants
Company car tax reductions as are
available for example in the UK and
Sweden
Reduction on congestion charges or road
tolls
Reduced parking charges for biofuel cars

Full life costing

Capital cost of the vehicle, amortised over its
life

Fuel cost over the life of the vehicle accounting

for fuel consumption and annual mileage
Servicing and maintenance costs

National and local incentives such as vehicle

tax reductions, congestion charge reductions
and parking benefits

Full life costing: EU average gasoline

and diesel, biofuels with no duty

Full life costing: UK tax and duty rates

for all fuels

Summary of use economics

Cost effectiveness of biofuel use depends on:
vehicle costs and how these are amortised over the
life of the vehicle;
service and maintenance costs;
fuel costs and fuel consumption for the vehicle;
vehicle mileages;
national and local taxes and incentives

These factors will vary from use to use, and

between countries, regions and even cities.