Chapter 7 - Supply side responses - Alternative fuels - Biofuels
Introduction
7.1
In Australia, the two biofuels that are commonly discussed as
alternatives or supplements to conventional oil are ethanol and biodiesel.
While these two fuels are the most commonly discussed in Australia, it should
be noted that it is possible to produce a range of other possible fuels, for
example synthetic diesels, methanol and DME, and there are research and
demonstration projects in progress in a number of countries in relation to
these fuels. This section of the report concentrates principally on the two
mainstream biofuels, ethanol and biodiesel.
7.2
The report of the Biofuels Taskforce to the Prime Minister (August
2005), provides a reference point for all consideration of biofuels in the
Australian transport fuels mix.
7.3
The terms of reference for the taskforce asked it to:
... examine the latest scientific evidence on the impacts of
ethanol and other biofuel use on human health, environmental outcomes and
automotive operations; and
On this basis, and taking into account the most recent economic
analyses of fuel supply in Australia, assess the costs and benefits of biofuel
production.[1]
7.4
The Taskforce was asked to examine:
- the findings of the December 2003 desktop study by the Commonwealth
Scientific and Industrial Research Organisation (CSIRO), the Australian Bureau
of Agricultural and Resource Economics (ABARE) and the Bureau of Transport and
Regional Economics (BTRE) into the appropriateness of a 350 million litre
(megalitre, ML) biofuels target;
- the findings of the Department of the Environment and Heritage
study into the impacts of 10% ethanol (E10) and 20% ethanol (E20) on engine
operation;
- other international and Australian scientific research on the
health and environmental impacts of supplementing fossil fuels with oxygenates
such as ethanol and other biofuel blends; and
- the economic and scientific bases upon which decisions have been
made to support ethanol and other biofuel production in North America, Europe
and other countries.
7.5
The committee regards this report as the current benchmark for all
consideration of the possibilities of biofuels, and necessarily draws on it
heavily throughout this section of the report.
Government initiatives in relation
to developing a biofuels industry
7.6
The committee notes a number of government initiatives intended to
contribute to the development of a biofuels industry. These include:
- the payment of production grants of 38.143 cents per litre (cpl)
for fuel ethanol and biodiesel. These arrangements ensure that the effective
rate of excise for biofuels is zero until 1 July 2011;
- capital grants for projects that provide new or expanded biofuels
production capacity;
- a 50 per cent discount to alternative fuels entering the excise
net under the recent reforms to the fuel excise system; and
- the establishment of the Ethanol Distribution Program, to
commence from 1 October 2006. This program provides grants to encourage
the development of facilities at services stations to sell ethanol blended
petrol.[2]
Biofuels target
7.7
The committee notes that the Government has announced a Biofuels Target
of 350 ML per year by 2010. This is about 6,000 barrels per day, which
would be about 0.75 per cent of Australia's expected oil consumption by 2010 of
800,000 barrels per day.
7.8
Several submissions considered that this target was inadequate. CSR Ltd
agreed that it was 'a start' but submitted that it was 'but a drop in the
ocean', arguing that Australia needs to give serious consideration to how
future transport fuel requirements will be met under a peaking oil scenario.[3]
7.9
Similarly, the Queensland Government, which urges the expanded use of
alternative fuels in the Australian fuel market, including the range of fuels
discussed elsewhere in this report as well as biofuels, maintained that the
current target 'is not sufficient to stimulate large scale production and
guarantee the future of the biofuels industry'. The Queensland Government
submitted that planned ethanol production in Queensland alone would account for
the whole biofuels target.[4]
7.10
The Biofuels Taskforce considered that on current settings and consumer
demand that it was unlikely that the 350 ML biofuels target would be met. The
Taskforce held this view for a number of reasons, including an absence of
consumer demand for ethanol blends and a lack of consumer confidence in the
fuel; and commercial risk considerations for potential producers that are
difficult to overcome.[5]
7.11
A number of submissions confirmed the Biofuels Taskforce assessment of a
poor perception of ethanol by consumers. For example, the Australian Cane
Growers' Council (ACGC) attributed this poor perception to media reporting of
alleged vehicle damage caused by high percentage ethanol blends of up to 30 per
cent. The ACGC noted that none of these allegations were ever substantiated.[6]
Clearly however, overcoming this poor perception and indeed resistance to
ethanol as a fuel, is a major obstacle to its wider adoption.
Why biofuels?
7.12
The arguments that are put forward for developing a more extensive biofuels
industry that can make a significant contribution to Australia's transport fuel
requirements have much in common with those advanced in relation to other
alternative fuels. These include:
- energy security - biofuels are advanced as a means of supplementing
fuel supplies if and when conventional petroleum supplies become constrained,
and making Australia less dependent on imported oil;
- economic reasons, reducing the impact of oil imports on the
future balance of payments;
- adding value to low value products; and
- for environmental reasons, biofuels being claimed to result in
much lower greenhouse gas emissions as well as other atmospheric pollutants.
7.13
Regional development and employment benefits are also frequently
advanced as reasons for supporting the development of a biofuels industry. For
example, the ACGC submitted that:
An ethanol industry, adding to the range of value adding
opportunities for crops such as grains and sugar, would strengthen regional
economies and provide additional employment. Each plant could create around 30
new permanent jobs and generate investment spending of around $80 million and
operational spending of around $20 million a year.[7]
7.14
Similarly, the WA Farmers' Federation linked the establishment of
ethanol and biodiesel to the opening up of other regional industries:
The other side of a biofuels industry is that if you go to grain
alcohol—we produce plenty of grain—and use canola to produce biodiesel, that
opens up the ability for the agricultural areas to develop feed-lotting industries.
Western Australia does not have the amount of feed lotting you do on the
eastern seaboard. That would allow farmers an extra outlet for their grain. At
the moment, we are highly export dependent and, from a social impact
perspective, we would really appreciate some more inland industries. That is
another industry that could be positioned inland. That is value added.[8]
Ethanol
7.15
Ethanol is used extensively as a fuel in some countries. Brazil, which
mandates the use of 22-26 per cent ethanol - petrol blend, is the leading user
of fuel ethanol, and it is also reasonably widely used in the United States. In
Brazil, 70 per cent of new vehicle sales are 'flexi-fuel'.[9]
Ethanol is currently produced in Australia from either sugarcane, generally
using molasses as a feedstock, and from grain and grain residues.
7.16
Ethanol's use as a fuel in Australia is small scale. There is a
statutory limit of 10 per cent by volume, introduced in 2003. It is now
available in Australia as a petrol blend in some locations, most visibly
marketed by BP Australia. A number of independent petrol retailers also sell
ethanol blends, and Shell’s premium fuel (now marketed as Shell V-power Racing)
contains 5 per cent ethanol.
7.17
Several contributors to the inquiry questioned whether it is possible
for ethanol to make a significant contribution to the fuels mix, arguing that
the availability of competitively priced feedstocks which would allow ethanol
to be produced at a price competitive with conventional fuels is a major
limiting factor.
7.18
For example, Mr Brian Fleay submitted that:
... the energy content of anhydrous ethanol from sugar and wheat
would be a small fraction of the energy content of annual consumption of
petroleum-based fuels, especially in drought years. While anhydrous ethanol from
biomass is technically viable as a transport fuel it cannot be produced on a
scale that replaces current petroleum products. Similar limits would apply to
biodiesel. It is not remotely possible to divert much of these agricultural
products to fuel production at the expense of food supply.[10]
7.19
The Australian Cane Growers' Council (ACGC), which argues for the wider
use of this fuel, said that it was nonetheless possible to meet a relatively
modest target. The ACGC submitted that it would be possible to produce enough
ethanol using grains and molasses to meet a mandated target of 2 per cent
ethanol in petrol, and that a higher 10 per cent target could be met but would
require the diversion of higher value sugar products and grains.[11]
7.20
Similarly, CSR also suggested that it should be possible, but
acknowledged that some feedstocks are either too valuable in their own right or
impractical to use for ethanol production. CSR pointed to sorghum and wheat as
the most likely economic feedstocks, concluding that a higher target could be
met:
Overall it would not be unrealistic to foresee sufficient
bioethanol to satisfy a 10% national average blend from domestic production.[12]
7.21
The Biofuels Taskforce reported that proposed ethanol projects other
than those of the three current commercial producers (Manildra, CSR and Rocky
Point Sugar Mill) could theoretically increase ethanol production to 1,005ML by
2010.[13]
This falls short of the quantity required to meet a 10 per cent ethanol target.
7.22
However, whether these levels of production could be attained reliably
using grain or sugar by-products appears doubtful. The committee notes media
reports that Australia will, for the first time in ten years, import grain to
offset a national wheat shortage due to crop failure and will have to buy wheat
on the international market to honour export contracts.[14]
7.23
Questions were also raised during the inquiry about whether the energy
return on investment from ethanol was sufficient to justify the investment in
its production, at least using current technology. For example, according to
Emergent Futures, the most recent analysis of grain based ethanol has the farm
to tank process producing only 1.36 units of energy for every 1 unit of fossil
fuel energy used up.[15]
Others have claimed that the return can be even lower.
7.24
A submission from Drs Hongwei Wu and Mike Ewing said that an analysis
conducted by Dr Wu showed the return on corn-to-ethanol can be as little as
1.0.[16]
These figures are disputed by some commentators. For example, the ACGC said
that a review it had commissioned showed a return of up to 50 per cent (ie:
return of 1.5); and that Brazilian studies showed a return of 8 to 1.[17]
7.25
Production of ethanol from cellulose (or lignocellulose), while not yet
proven on a large commercial scale, offers the potential to greatly increase
ethanol production and improve the return on energy invested.
7.26
This technology, which is the subject of considerable research both in
this country and overseas, seeks to break down the cellulose portions of plants
into a form that can then be fermented to produce ethanol. It opens up the
possibility of a much larger feedstock becoming available, increasing potential
productive capacity. A submission from an Australian research company,
Microbiogen, argued that the sugar industry alone produces sufficient
quantities of lignocellulose in the form of bagasse to produce enough ethanol
to replace at least 10 per cent of the Australia’s oil consumption.[18]
7.27
Microbiogen specialises in the development of yeasts that can digest a
portion of plants that are currently impossible to ferment, hemicellulose
(xylose). Dr Bell, the Manager of Research and Development of Microbiogen, told
the committee that the company believed they were about 18 months from
achieving their alcohol yield goals. Like a number of others, Dr Bell said that
the lack of a market for ethanol, the inability to guarantee sales, is one of
the principal factors holding back development of ethanol as a transport fuel.[19]
7.28
On the possibilities offered by lignocellulose ethanol, the Biofuels Taskforce
had this to say:
A new generation of technology offers the prospect of producing
biofuels competitively and from more readily available lignocellulosic
feedstocks such as wheat straw, grasses and wood waste. Given these prospects,
and the International Energy Agency’s (IEA) forecasts for a significant and
continuing increase in global demand for biofuels, there would be value in a
closer examination of this technology as a platform for a potential new
industry for Australia.
In addition, the Taskforce suggests that, given the potential
for lignocellulosic ethanol to impact materially on the economics of the
biofuels industry in the coming decade, further policy interventions based on
current industry technologies and feedstocks should be limited, without a close
assessment of the potential impact of ethanol made from lignocellulose.
7.29
The Taskforce concluded:
The Taskforce notes the potential for lignocellulosic ethanol
technology to impact materially on the economics of the ethanol industry in the
coming decade. Policy interventions based on current industry technologies and
feedstocks should be limited without further assessment of the impact of
lignocellulosic technology.[20]
7.30
The Biofuels Taskforce appears to consider that ligncellulose technology
has the potential to make traditional ethanol technologies based on sugar
by-products and grain redundant, hence its warning to 'consider carefully' new
policy interventions to assist investment in production from current
technology. The committee shares the Taskforce's views on this issue.
7.31
Techniques for producing ethanol using cellulose[21]
are also claimed to achieve a much better energy return on energy invested than
grain based ethanol. For example, Emergent Futures submitted that such techniques
can produce up to 10 units of energy for every unit of fossil fuel energy used
up[22]
and the submission from Drs Hongwei Wu and Mike Ewing said that when based on
mallee, the return on a fifty year cycle was 41.7.[23]
7.32
The question arises then as to whether lignocellulose is 'five to ten
years away', or whether it is near-term. Microbiogen submitted that:
The two challenges to commercialization of the lignocellulose to
ethanol industry are being overcome and suggest the industry will be viable
within 2 - 3 years.[24]
7.33
The committee notes that a Canadian company, Iogen Corporation, has
signed an agreement with Petro‑Canada to build a demonstration cellulose
ethanol plant. This plant is expected to cost $C30 million and is
expected to produce 3-4ML annually.[25]
Iogen, Shell and Volkswagen have also signed a letter of intent to investigate
the feasibility of establishing a lignocellulose ethanol factory in Germany.[26]
7.34
In an article published in Australian Forest Grower, Mr Alan Cummine
claimed that an Australian company, Apace Research Ltd, had developed a version
of this technology to the pilot plant phase in the 1990s, and that the plant
was 'still awaiting adequate government and industry support' to demonstrate
the process.[27]
Environmental impacts of ethanol as
a transport fuel
7.35
There are two key criteria against which the environmental performance
of ethanol used as a transport fuel can be assessed. These are effects on air
quality; and greenhouse gas impacts. The Biofuels Taskforce report sums up the
state of knowledge on the effect on non-CO2 emissions that affect air quality
as follows:
- There is considerable uncertainty about effects of fuel ethanol
on air quality. Prima facie evidence exists that E10 may significantly reduce
fine particulate emissions.
- More smog-chamber research is needed to understand properly the
effect of adding ethanol to petrol on secondary organic aerosol formation.
- Emissions of CO are reduced under E10 compared with neat petrol,
there is little change in volatile organic compounds emissions, and NOx
emissions are increased.
- The impact on air toxic levels in the atmosphere from the use of
E10, relative to petrol, is difficult to assess. Combustion of E10 results in
lower tailpipe emissions of some toxic compounds (e.g. benzene and 1,3 butadiene),
but higher levels of others (e.g. the aldehydes).[28]
7.36
The Taskforce considered that a properly designed Australian in-service
vehicle emission (tailpipe and evaporative) study, combined with an air quality
monitoring programme and including health risk assessment, would be required to
assess the air quality impacts of biofuels more effectively. It also considered
that there is a need to carry out extensive experimental work to evaluate the
impact of E10 and E5 on particulate emissions from petrol vehicles under
Australian conditions. Further, the Taskforce considered that more smog-chamber
research is needed to understand properly the effect of adding ethanol to
petrol on secondary organic aerosol formation.[29]
7.37
The use of ethanol as a transport fuel is also claimed to have
significant greenhouse gas benefits. Whether this is the case will depend on
the source of the ethanol, whether its production processes result in a
positive or negative energy return on the energy invested in the production
process, and the proportion of ethanol used in the fuel mix.
7.38
According to the Biofuels Taskforce report, savings from E10 in
greenhouse gas emissions over neat petrol are generally from 1 per cent to 4
per cent , depending on feedstock. It noted that a recent life-cycle analysis
for a proposed ethanol plant has suggested that savings of between 7 per cent
and 11.5 per cent can be achieved with optimum use of non-ethanol co-products.
7.39
Other publications make more extensive claims in relation to the CO2
benefits. For example, the Iogen Corporation compares the CO2 emissions of a
Toyota Prius hybrid vehicle running on conventional petrol, and producing 115g
of CO2 per kilometre, with those of a Ford Focus (a 4 cylinder small car of
comparable size) flexible fuel vehicle operating on cellulose E-85. The Focus
produces less than half the CO2 of the Prius, 40g per kilometre. Iogen
concludes that:
Running any of the many flexible fuels vehicles on cellulose
ethanol e85 is one of the most cost effective ways to reduce greenhouse gas
emissions in transport.[30]
Economics of ethanol as a
transport fuel
7.40
The oil price at which ethanol is competitive with conventional petrol
will vary widely according to the level of government assistance by way of
producer grants and excise concessions, the exchange rate, the cost of
feedstocks, the efficiency of production processes and the technology employed.
7.41
Information provided by the ACGC indicated that ethanol could be
produced from conventional sources (grain, molasses) for between 60 and 70
cents per litre. This could rise to between 75 and 80 cents if higher value
feedstocks were used. The ACGC cautioned that these were indicative costs only.[31]
7.42
The ACGC provided the committee with useful information about the price
competitiveness of ethanol at different oil prices, and with the effect of
changing excise regimes built in. These showed that ethanol can compete with
petrol on price at $US50 per barrel of crude oil and at an exchange rate of $US0.75/$AUD.
However, this picture changes when the long-run oil price predictions are taken
into account and the Government's excise changes come into effect.
7.43
The ACGC said that at a long run oil price of $35 and exchange rate of
65 cents, the current excise regime 'may provide opportunities for ethanol
production from grains and molasses, but would make production from sugar
streams marginal.' When the excise changes come into effect, ethanol from grain
and molasses may be in a 'reasonably competitive position' but other feedstocks
would be uneconomic. The ACGC pointed out that domestic ethanol producers would
have to compete on equal terms with imports from 2011, which would make capital
investment in production facilities difficult.[32]
7.44
The ACGC's views corroborate reasonably well with the views of the Biofuels
Taskforce:
At a long-term exchange rate of US65c, the long-term world price
of oil (West Texas Intermediate) would need to average US$42-47/bbl in 2004
dollars (depending on the feedstock used) for new ethanol producers to be
viable post-2015 without assistance.[33]
7.45
In relation to lignocellulosic production, it is difficult to predict
the price at which a full size commercial plant could produce ethanol. Drs Wu
and Ewing cited an Enecon 2002 study which indicated that current cellulosic
ethanol production could produce ethanol for 82 cents per litre in a 200ML
plant, with a woody feedstock cost of $30/green tonne delivered.[34]
7.46
Consideration of the economics of ethanol production also requires
examination of the effects that such an industry, if adopted on a large scale,
would have on competing users of feedstocks, particularly grain.
7.47
The Livestock Feedgrain Users Group (LFUG) was amongst those who raised
serious concerns about a grains based ethanol industry and the impact it would
have on their industry:
We are opposed to the ongoing subsidisation of grain based
ethanol in Australia; this will disadvantage our grain dependent industries,
and result in the propping up of an essentially non viable industry at the
expense of successful industries.
...
Subsidised ethanol plants may, in the short term create regional
grain shortages, and force up local prices as grain has to be freighted in for
livestock customers. This instability would be accentuated in drought years,
and is at the heart of our opposition to ethanol subsidies.[35]
7.48
The fundamental objection of the LFUG to ethanol industry assistance is
that the livestock industry is required to compete for a limited amount of
grain against an industry that enjoys a subsidy. The LFUG submitted that they
did not object to an ethanol industry developing, but that after 2011, it
should be required to compete on its own merits, without subsidy:
... current ethanol subsidies, in particular the ethanol excise
concession, should run their course. If the ethanol industry has not responded
to this support by 2011, and cannot compete with imported product subsequently,
it is not a viable transport fuel option for Australia, at least on a large
scale basis.[36]
7.49
The Biofuels Taskforce also acknowledged the potential for adverse
effects on feed grain prices, and that there is the potential for costs to be
imposed on other parts of the economy.[37]
7.50
Even if the ethanol industry is able to become competitive against the
petrol price in its own right, and new technologies for producing it become
commercially viable, increasing its attractiveness both on environmental and
economic grounds, it appears that there are, nonetheless, quite significant
barriers to the growth of the industry. Without this necessary growth, it will
be difficult for it to make a significant contribution to the transport fuels
mix.
Barriers to growth
7.51
Several of the barriers to growth of the ethanol industry have already
been covered in part in this section of the report. The most significant
barrier appears to be commercial risk for organisations contemplating
establishing ethanol production facilities and for retailers. This risk arises
at least in part out of a lack of a ready market for the product. Unlike some
other countries, there is a limited market for ethanol as a fuel in Australia,
and consumer resistance to using it. This is despite widespread assurances that
almost all cars can use E10 without modification.
7.52
The Biofuels Taskforce addressed this issue comprehensively, explaining
the nature of the 'chicken and the egg' dilemma the development of the industry
faces:
A key barrier cited by stakeholders is the high level of
commercial risk associated with market entry, particularly for ethanol. Low
consumer confidence in ethanol means low demand, especially with no significant
price advantage to the consumer. Consequently, the oil majors are reluctant to
enter off-take contracts with ethanol suppliers. Without such contracts,
prospective producers cannot get investment backing. The majors also have first
mover concerns—the first company making a significant commitment to E10 could
be seriously disadvantaged if confidence issues are not resolved.
...
The Taskforce considers there are real and significant
commercial risks associated with market entry, facing both fuel suppliers and biofuel
producers.
For the oil majors, the Taskforce considers that, at present,
there is little commercial incentive for them to develop a mainstream bulk
market for ethanol blend fuel and, in the absence of some form of intervention
designed to improve confidence and reduce commercial risks, there will be at
best, continuation of small, trial-based marketing of fuel ethanol by the oil
majors.[38]
7.53
Evidence received by the committee illustrated some of the costs and
risks to fuel companies introducing ethanol into their fuel blends. For
example, BP explained that getting a supply of anhydrous ethanol[39]
suitable for blending required some quite counter-intuitive logistics:
At this stage it is not cheap for us. It is low volume and the
actual logistics are quite difficult. We get virtually all our product from CSR
in Mackay and it has to be shipped down to Melbourne for drying and then
shipped back to Brisbane. It is trucked out into sites in Brisbane and, I
think, up to Mackay. A lot of it ends up about 20 miles from where it started.
As you can appreciate, that is not exactly an ideal way of doing it...[40]
7.54
Similarly, Shell explained that uncertainty of price trends for both
petrol and ethanol represented a risk:
Of these, the price fluctuations of the commodities ethanol and
petrol are the most difficult to manage. Future scenarios where companies are
committed to ethanol blends and the ethanol price becomes more expensive than
petrol represent a significant risk.
7.55
Shell also described the additional costs of selling ethanol blends:
There are significant costs associated with the blending,
distribution and sale of biofuels – particularly ethanol. Terminal costs depend
on the size of installation and cover storage tanks, modified firefighting
equipment, linework, pumps and gantry loading arms. Retail site costs
incorporate additional tank testing (due to ethanol’s propensity for water),
filters and branding and signage.[41]
Committee comments on ethanol
7.56
The committee is supportive of the development of an ethanol industry in
Australia, but notes the very significant barriers that need to be overcome
before it becomes a mainstream fuel.
7.57
Lignocellulose ethanol production is the only realistic way that the
industry can become more than a niche player. If large scale production of
ethanol using a feedstock that is available in volume becomes commercially
feasible in the medium term, and the fuel proves to have the environmental
benefits claimed for it, it could make a worthwhile and sizeable contribution
to Australia's transport fuel requirements.
7.58
The committee notes and agrees with the Biofuels Taskforce comment to
'consider carefully' new policy interventions to assist investment in
production from current technology.
7.59
The committee does not consider that there is any point at this time in
mandating a minimum percentage of ethanol in petrol. Unless lignocellulose
technology becomes viable with unexpected speed, supply will not be sufficient
to produce the necessary quantities of fuel.
7.60
While the Committee notes that several of the oil companies,
(particularly BP and to a lesser extent, Shell) have taken some measures to
introduce ethanol into some of their fuels, the committee is unconvinced that
all of the companies take the biofuels target set by the government seriously.
7.61
The committee also notes the relevant comments of the Biofuels Taskforce
in relation to what is stopping progress towards attaining the biofuels target:
- Oil companies in a highly competitive market, with no
forcing regulation or long term economic incentive, have no commercial reason
to surrender market share to others – whether to other oil or biofuels
suppliers.
and
- Under current market conditions, and with no consumer
demand, oil majors have little commercial incentive to promote ethanol blends
as a bulk fuel. But without contracts for sales to oil majors, new ethanol
producers cannot invest in bulk fuel ethanol production.[42]
7.62
The Committee considers that there is a need to increase transparency in
relation to whether or not these targets are being met, and by whom.
Recommendation 3
7.63
The Committee recommends that the Government publish the results
of its review of progress made towards meeting the biofuels target of 350ML per
year, including which companies are meeting the target.
Recommendation 4
7.64
The committee recommends that the Government examine the adequacy
of funding for lignocellulose ethanol research and demonstration facilities in Australia,
and increase funding, where appropriate.
7.65
The committee suggests that the Government establish a high level
interdepartmental committee consisting of representatives from the Departments
of Prime Minister and Cabinet, the Treasury and the Department of Industry,
Tourism and Resources and other relevant agencies to closely monitor the
development of this technology in Australia and overseas, and to develop both
options to facilitate research in Australia into this technology, and a range
of programs that could be rapidly deployed to ensure a market for the fuel
develops when it is appropriate.
Biodiesel
7.66
Biodiesel is a diesel-like fuel produced by chemically modifying
vegetable oils or animal fats. It may be manufactured from a range of
feedstocks including waste cooking oils, oil seed oils such as canola, from
palm oil and from many other oil producing plants, some suitable for human and
animal consumption, and some that are unsuitable but which may be grown because
of the high yield of oils that can be extracted from them.
7.67
Biodiesel may also be produced by more advanced biomass gasification
processes, using the same Fischer Tropsch process used to produce synthetic
diesel from gas or coal, but as far as the committee is aware, this process is
not under consideration in this country at this stage (with the possible
exception of using biomass mixed with coal).
7.68
A limited amount of biodiesel is produced in Australia but it is not
available at the retail level, except in a small number of locations. BP plans
to market a diesel blend that is formulated in part (5 per cent) from a hydrogenated
tallow product. According to Gardner-Smith holdings, production has increased
from 4ML in 2003-04 to 14ML in 2004-05, and was projected to be more than 150ML
in 2005-06.[43]
7.69
Biodiesel can be readily blended with conventional diesel, in which case
it is sold using a classification that describes the proportion of biodiesel
(eg: B20), or it may be used straight (B100). Blends of 5 per cent or less are
classified in Australia as diesel.
7.70
Biodiesel proponents commonly claim that it is compatible with most
diesel engines, although many manufacturers will not honour engine warranties
if the proportion of biodiesel exceeds B5, and some will not allow it at all.
The only exception to this in the light vehicle market is Peugeot, which will
permit the use of up to B30, subject to the appropriate fuel standard being
met.[44]
7.71
The committee notes that a useful examination of the use of biodiesel in
cars and trucks is contained in Bureau of Transport and Communications
Economics, Alternative Fuels in Australian Transport, Information Paper
No. 39, 1994, Chapter 6. Biodiesel was also discussed comprehensively in the
Report of the Biofuels Taskforce.
7.72
As in the case of ethanol, the Government has provided support to assist
the new industry to develop. The support provided is described above in
paragraph 7.6. A key part of this support is the payment of production grants
of 38.143 cents per litre, which ensure that the effective rate of excise for
biodiesel is zero until 1 July 2011. The future viability of the industry appears
to be heavily dependant on continued Government support. The Biofuels Taskforce
considered that between 2010 and 2015, biodiesel is likely to become
commercially unviable.[45]
Gardner Smith acknowledges the need for continuing Government support for the
industry to survive in its submission:
In order for the bio diesel industry to develop Gardner Smith
(Holdings) Pty Limited believes it is essential for the government to play a
significant role. Factors that need to be considered when assessing the viability
of biofuels, ... include:
• government support for the industry to ensure the price of bio
diesel remains competitive with more traditional petroleum and diesel; ...[46]
7.73
The Queensland Farmers Federation, a biofuels proponent, comprehensively
summed up the economic challenges faced by the biodiesel industry if there is
no on-going support from Government:
However, the production costs of biodiesel are such that is even
further away from being economically viable than ethanol without substantial
continuing subsidies or mandates. ABARE estimates that without subsidies, the
estimated cost of producing biodiesel in new facilities using used cooking oil
is 18c/L above, and using tallow is 24c/L above, the long-term energy
equivalent benchmark price for biodiesel against petrol. To be commercially
viable (and achieve a 7% return on capital) over the longer term, ABARE has
identified that biodiesel produced from used cooking oil would require a fuel
tax subsidy of 21c/L and tallow-based biodiesel would require a fuel tax
subsidy of 32c/L in nominal terms over the longer term. These estimates compare
with the current fuel tax subsidy of 19.1c/L.[47]
Effect of fuel tax changes
7.74
Recent changes to the fuel taxation system included in the Fuel Tax
Act 2006 have reportedly had an adverse impact on the prospects for the
future development of the industry. These changes do not appear to have been
foreseen by the industry, despite the report of the Biofuels Taskforce warning
of their impact.[48]
The effects of the changes were explained in evidence at a public hearing by Mr
Lake of the Biodiesel Association of Australia:
The changes to the treatment of biodiesel under the new tax
excise regime mean that from 1 July 2006 there will be a severe impediment to
biodiesel production. This has the effect of making biodiesel more expensive
than diesel.[49]
...
Under the current system with the combination of the producer
grant and the effect of the offset of excise, and also the energy grants
credits and other schemes available for biodiesel and all other alternate
fuels, the new bills which are to be enacted as of 1 July effectively
reduce and wipe out the energy grants credit offset in a very short time frame.
The way the tax system is evaluated effectively puts an additional 38c for all
on-road and off-road applications for biodiesel. I have with me a copy of a
paper... which shows the change in [balance], where biodiesel in an establishing
market can be a cost benefit at the moment and, as of next month, there will be
a cost penalty to adopt it. For the case of on-road applications that penalty
is anywhere from about 10c. By 2015 it goes up considerably. For off-road
applications it is effectively the full excise rate.[50]
7.75
Mr Humphreys of the Biodiesel Association elaborated:
Let me give you, if I may, two examples of the impact of the
changes that you rightly refer to. Let us do an on-road with a trucking company
and off-road with a farming situation. Today, if a farmer buys biodiesel, he
can claim the excise for that biodiesel back providing he or she does not blend
greater than 49 per cent. So providing you have a fuel mix that does
not exceed B49—that means 51 per cent fossil and
49 per cent biodiesel—they can claim back the full 38c on that fuel
blend, as if it were classed as a diesel. As of 1 July with the
legislation before parliament as currently written that disappears. They cannot
claim anything back on the biodiesel as of 1 July because of an
interpretation that says as of 1 July you can only have a user grant—that
is, the refund of the excise—on the net tax paid. The net tax paid is actually
the killer statement...[51]
7.76
The key issue for the biodiesel industry in the Fuel Tax Act changes
appears to be that the payment of a producer grant under the Energy Grants
(Cleaner Fuels Scheme) Act 2004 is taken to have extinguished the fuel tax
liability. This means that the purchaser of biodiesel whose producer has
received a grant cannot claim a fuel tax credit.
7.77
The committee notes evidence tendered to the Senate Economics
Legislation Committee during its inquiry into the then bill in the form of a
quotation from a letter written by the former Assistant Treasurer, the Hon. Mal
Brough MP, to Dr Humphreys of the Australian Biodiesel Group:
The cleaner fuels grant was not intended as a stimulus package
for the biodiesel industry.[52]
7.78
While sympathetic to the dilemma in which the industry finds itself as a
result of the fuel tax changes, the committee notes that the benefit previously
enjoyed by the industry is considered by the Government to have been a
loophole. Nonetheless, it serves to illustrate the relatively precarious
economics of biodiesel production in Australia.
Biodiesel production in Australia
7.79
Biodiesel is currently produced in Australia from used cooking oils and
animal fats (tallow). Some plants are also being built that will use imported
feedstocks, mainly palm oil. Natural Fuels Australia (NFA) is currently
constructing a plant in Darwin with the capability of producing 147ML of
biodiesel per year.[53]
7.80
Like conventionally produced ethanol, future biodiesel production will
be limited by the availability of affordable feedstocks. Unlike ethanol, for
which production from cellulose looks to be on the near horizon, biodiesel does
not appear to have a cost competitive alternative method of making the fuel in
development.[54]
It is thus dependent on oil bearing vegetable matter like seeds and palm.
7.81
Biodiesel proponents acknowledge that one of the major challenges facing
the industry is obtaining enough of the right source of fats and oils. However,
the Biodiesel Association (BDA) maintains that there is 'more than enough
available in Australia to well exceed the current goal of 350ML...'[55]
7.82
The BDA told the committee that biodiesel production facilities planned
for construction over the next two years would have a production capacity of
more than 700ML/year, and that this capacity would use all of the used cooking
oil collected and a large proportion of the tallow available. The BDA said that
if the industry is to grow further, new sources of supply are needed.[56]
7.83
The BDA maintained that there are large areas of Australia that receive
high rainfall, but which are unsuitable for conventional agriculture. The BDA
maintains that if an area equivalent to canola currently planted could be used
for producing non-food crops, up to 15 per cent of Australia's diesel
requirements could be met, with a multi-billion dollar improvement in the
balance of payments.
7.84
NFA also acknowledged the difficulty in obtaining feedstock, and the
difficulty of competing for oil seeds that are also required to meet domestic
food requirements:
Currently, Australia has a total edible oil requirement of
around 400,000 tonnes per year, which can barely be met from local seed
crushing capacity. A small proportion (28,000 tonnes) is exported. The climatic
and soil conditions, plus the lack of copious water supply in most parts of the
country, seem to work against the agronomy of high oil bearing seed crops. The
advent of new varieties and more research might change this in time, but for
the moment, biodiesel producers will have to look to imports to help satisfy
their needs.[57]
7.85
Gardner-Smith also submitted that it would be necessary to import fats
and oils to supplement the domestic supply, as an 'interim measure'. These
imports would be palm oil and soya oil. The use of such oils has been a cause
for concern by some commentators, because of the possibility of tropical
forests being turned into palm oil plantations, and the displacement of crops
otherwise intended for human and animal food. Both RFA and Gardner-Smith were
somewhat defensive about this, advising the committee that they are members for
the Roundtable for Sustainable Palm Oil, and the Roundtable on Responsible Soy.[58]
Environmental implications of
biodiesel use
7.86
Biodiesel is claimed to be an environmentally benign fuel, particularly
in relation to reduced greenhouse gas emissions. One of its major advantages is
that it is wholly biodegradable. According to Gardner-Smith, it has particular
applications in the marine industries, as spills have no environmental effects
because the fuel is wholly biodegradable.[59]
7.87
The fuel also results in significantly lower emissions of most
pollutants except NOx. The committee notes the conclusion of the Biofuels Taskforce
in relation to air pollutants:
Conclusion 18: The benefits of the 5% biodiesel blend
(B5) diminish against increasingly lower sulphur diesel, with PM [ie
particulate matter] emissions even increasing slightly over XLSD [extra low
sulphur diesel] (to be introduced in 2009). However, on life-cycle analysis,
pure biodiesel (B100) has significant benefits over XLSD for CO, VOC
[non-methane volatile organic compounds] and PM (especially with waste cooking
oil as the feedstock), but NOx emissions increase by between 16% and 30%.[60]
7.88
Biodiesel is also acknowledged as associated with lower greenhouse gas
emissions than conventional diesel. The extent of the benefit varies according
to the blend used, and also the feedstock. Some feedstocks (eg canola) are
associated with significant CO2 emissions during the production process, and a
full life cycle analysis is needed to give the true picture of these emission
levels. Nonetheless, the Biofuels Taskforce concluded that there were benefits:
Conclusion 19: On life-cycle analyses, B100 from waste
cooking oil produces 90% less greenhouse gas emissions than XLSD. Biodiesel
from tallow or canola reduces emissions by 23% and 29%, respectively. There are
negligible benefits for canola or tallow derived B5 against XLSD, though waste
cooking oil achieves a 3% reduction.[61]
Committee comments on biodiesel
7.89
The committee considers that biodiesel can make a small scale but
worthwhile contribution to Australia's fuel mix. In the absence of the
development of a biodiesel equivalent to lignocellulose technology, the
industry will be limited by the availability and price of feedstocks. There are
significant environmental benefits associated with its use, but the economics
of the industry are at best precarious, particularly if government assistance
is reduced, as is the current policy.
Committee comments on alternative fuels in general
7.90
If alternative transport fuels are to successfully replace or supplement
conventional oil to any significant degree, massive investment in large scale
production will be essential, regardless of whether these fuels are to be
derived from biomass or fossil sources.
7.91
This investment is seen as risky by corporations contemplating
development of alternative fuel industries, for a number of reasons. All are
more expensive than conventional oil, and thus the long term oil price
constitutes a source of risk. Some technologies face uncertainties about the
price of feedstocks and the price of carbon. (This will affect the economics of
processes such as CTL that create significant emissions in the conversion
process) Some such as fuel ethanol face difficulties associated with consumer
acceptance and marketing the product. In the absence of mandatory targets,
there is little incentive for the oil companies to sell these fuels, even if
available in quantity.
7.92
Additionally, all large scale projects involve long lead times before
they attain production. In the case of some projects which the committee has
discussed in the preceding chapters, these lead times can be ten years or more.
This adds to the risk profile for prospective investment.
7.93
Unless companies can control or quantify the nature of the investment
risks they face, investment will not be forthcoming. As has been seen in the
case of failed GTL projects in Western Australia, it is difficult to get
projects to a point where they are judged sufficiently commercially viable.
Equally, there are anecdotal reports of investment in ethanol production being
held up because of difficulties in finding a market.
7.94
The committee considers that there is a need for the Government to develop
strategies for addressing the risks that prospective investors in new fuel
technologies face, to ensure that timely investment occurs. As noted at
paragraph 6.136, there are serious questions about whether market forces will
operate in a way that will ensure the timely development of such projects.
7.95
The committee further considers that the issues of long term
sustainability of alternative fuels must be addressed, particularly from the
perspective of climate change.
Recommendation 5
7.96
The committee recommends that the Government commission a
research group within the Department of the Treasury to identify options for
addressing the financial risks faced by prospective investments in alternative
fuels projects that are currently preventing such projects from proceeding.
This group should determine how these risks might be best addressed in order to
create a favourable investment climate for the timely development of
alternative fuel industries, consistent with the principles of sustainability
and security of supply.
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