Ground Cover North : Ground Cover 065 November-December 2006 - North
Market economics to shape biofuels future Ground Cover continues its examination of the emerging biofuels sector BY GRAHAM LOVE, CLARA CUEVAS-CUBRIA and DAMIEN RIWOE Energy Projections and Analysis Section, Energy and Minerals Branch, ABARE n While government policies support the development of a biofuels industry in Australia, providing a potential new grains market, growers need to keep in mind that grains will be competing against fats and oils as the preferred feedstock for biofuel producers. Many of the plants being built to produce biodiesels will be capable of using a variety of feedstocks. Demand for particular sources will depend on the usual factors – price and availablility. The main biofuels currently in prospect are biodiesel and ethanol. Ethanol can be produced from the fermentation of biomass feedstocks typically obtained from agricultural sources such as waste starch, molasses, corn, sorghum and wheat. Future technology could also make use of cellulosic material such as crop waste, wood waste and grasses economically viable. Biodiesel is usually produced from a reaction of vegetable oil or animal fat with an alcohol, such as ethanol or methanol in the presence of a catalyst to yield mono-alkyl esters and glycerine. Potential feedstocks for biodiesel include cooking oils, tallow and oilseeds such as canola. Three main factors drive the economics of biofuels production: n world oil prices and the Australian exchange rate; n government policies; and n net costs of production. World oil prices and the Australian exchange rate Since biofuels compete with petrol and diesel, the price that biofuel manufacturers can obtain for their product depends on domestic prices for petrol and diesel, which are set by the world oil price, the Australian exchange rate, and levels of fuel tax. The world price of oil has doubled over the past two and a half years, increasing the price that biofuels producers can expect to obtain for their product in the market and increasing the incentive to invest in new production facilities. Government policies In 2001, the Australian Government set a target for biofuels to contribute at least 350 million litres to total fuel supply by 2010. In July 2003 it announced it would provide $37.6 million for one-off capital grants for new biofuels production facilities or expansions to capacity. Seven companies received these capital grants – four for biodiesel and three for ethanol projects. Currently, excise is levied on petrol and diesel at the rate of 38.143 cents a litre. Biofuels such as ethanol and biodiesel also incur this excise, but it is offset through production grants. Biofuels will remain effectively excise-free until 1 July 2011, when fuel tax will begin to be applied. The effective rates of tax will increase annually until rates of 12.5 cents a litre for ethanol and 19.1 cents a litre for biodiesel are reached on 1 July 2015. In energy content terms, these final rates allow for a 50 per cent discount on the rates levied on petrol and diesel. For biofuel producers, the main effect of continuing to provide some excise relief would be to allow them to operate viably at a higher cost of production than would have been available without it. As part of its program of fuel tax changes, the Government is replacing the energy grants credits scheme (EGCS) with fuel tax credits. Alternative fuels such as biodiesel and ethanol for heavy vehicles used on public roads will continue to be eligible for a fuel grant under the ECGS for fuel bought before 1 July 2010. However, the grant will be reduced to zero in five steps from 1 July 2006 until 30 June 2010. After this, alternative fuels will be eligible for a tax credit if the fuel tax exceeds the road user charge. Biofuels producers will be indirectly affected as business users will look at buying individual fuels based on relative after-tax prices. More information: Graham Love, 02 6272 2055, firstname.lastname@example.org Biofuels GROUND COVER NOVEMBER -- DECEMBER 2006 20 KEY POINTS: n Current government policies support the development of a biofuels industry in Australia to supplement traditional petroleum fuels such as petrol or diesel. n Over the next few years biofuels production is expected to increase significantly as the new ethanol and biodiesel projects come on stream. n These new facilities will provide a potential new source of demand for agricultural feedstocks. n At current prices sorghum and low-quality wheat could be in demand for ethanol production, but biodiesel producers are likely to find used cooking oil and tallow more economic to use as their primary feedstock than canola. TABLE 1 Biodiesel, 2006-07 (in 2005-06 dollars) Feedstock Used cooking oil Tallow Canola oil Canola seed World oil pricea US$/bblb 60.1 60.1 60.1 60.1 Australian exchange rate US$/$A 0.75 0.75 0.75 0.75 Feedstock price (at market or ex-works) A$/t 375 525 1,000 401 Rate of return on capital % 62 40 --56 --37 a West Texas Intermediate oil bbarrel TABLE 2 Ethanol, 2006-07 (in 2005-06 dollars) Feedstock Sorghuma C molasses World oil priceb US$/bbl 60.1 60.1 Australian exchange rate US$/$A 0.75 0.75 Feedstock price (at market or ex-works) A$/t 181 82 Rate of return on capital % 33 37 a Or low-quality wheat. b West Texas Intermediate oil TABLE 3 Biodiesel production capacity -- short-term outlooka Production facility/location Capacity ML/yr Startup Feedstocks Feedstock use at stated capacity kt/yr Biodiesel Industries Australia, Rutherford, NSW (Hunter Valley) 12.0b March 2003 Mostly used cooking oil, some canola oil 11.0 Australian Biodiesel Group, Berkeley Vale, NSW (Central Coast) 45.0 2002 Mostly used cooking oil, some tallow and canola oil 40.5 Australian Biodiesel Group, Narangba, Qld (Brisbane) 160.0 July 2006 Mostly tallow, some canola oil and cotton seed oil 146.7 Biodiesel Producers Australia, Albury, NSW 60.2 Mid 2007 Tallow, used cooking oil 55.0 Australian Renewable Fuels, Largs Bay, SA (Adelaide) 45.0 March 2006 Canola oil 40.0 Australian Renewable Fuels, Picton, WA (Bunbury) 45.0 July 2006 Canola oil 40.0 Axiom Energy, Geelong, Vic 150.0 Mid 2007 Used cooking oil, tallow, palm oil 135.0 Natural Fuels Australia, Darwin, NT 140.0 End 2006 Palm oil, soybean oil 130.0 South Australian Farmers Fuel, Millicent, SA 5.0 End 2006 Canola oil 4.4 Riverina Biofuels, Deniliquin, NSW 44.7 2007 Tallow 40.0 Eco-Tech Biodiesel, Narangba, Qld (Brisbane) 30.0c May 2006 Mainly tallow, some used cooking oil 28.0 a Based on a review of the projects listed in the Biofuels Taskforce Report and recent announcements. Not all proposed projects may be included. b Could be expanded to 40 ML. c Could be expanded to 75 ML. TABLE 4 Ethanol production capacity -- short-term outlooka Location Capacity ML/yr Startup Feedstocks Feedstock use at full capacity kt/yr Primary Energy, Kwinana, WA (Perth) 80 Early 2008 Wheat 200 Primary Energy, Gunnedah, NSW 120 Early 2007 Coarse grains (mostly sorghum), low-grade wheat 300 CSR Distilleries, Sarina, Qld (North Queensland) 32b After 2006 expansion Molasses 128 Dalby, Qld 80 Mid 2007 Sorghum, wheat 200 Australian Ethanol, Swan Hill, Vic 90c Early 2007 Wheat, some corn 220 Australian Ethanol, Coleambally, NSW (Riverina) 90 2009 Wheat 220 Australian Ethanol, Lake Grace, WA 90 2010 Wheat 220 Lemon Tree Ethanol, Millmerran, Qld 67d 2007 Sorghum 150 Manildra Group, Nowra, NSW 100 Existing Waste wheat starch, some low-grade grain na Rocky Point Sugar Mill, Woongoolba, Qld (Brisbane) 20e After 2007 expansion Molasses, cane juice 80 a Based on a review of the projects listed in the Biofuels Taskforce Report, and recent announcements. Not all proposed projects may be included. b Currently 22 ML. c Initially 45 ML. d Initially 37 ML e Currently 5 ML. Economics of production Tables 1 and 2 show estimated rates of return on capital based on forecast 2006-07 values (in 2005-06 dollars) for the world oil price, the Australian exchange rate and feedstock prices from ABARE's September 2006 forecasts. These results suggest ethanol producers are likely to find sorghum and low-quality wheat economic as feedstocks, but biodiesel producers are likely to find used cooking oil and tallow more economic as their primary feedstock than canola. Since biofuels compete with petrol and diesel, the price that biofuel manufacturers can obtain for their product depends on domestic prices for petrol and diesel, which are set by the world oil price, the Australian exchange rate, and levels of fuel tax.
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