2
Context for Biomass-Derived Fuels

HISTORICAL BACKGROUND AND PUBLIC POLICY

International and domestic experience with the manufacture of fuels from biomass feedstocks (biofuels) is long and varied. In the days of early automotive development, ethanol was one of the candidate fuels. When fears about the stability of petroleum supplies briefly surfaced around 1920 and again after the 1973 Arab oil embargo, investments in biomass-derived ethanol (bioethanol) flourished (Sperling, 1988). Scattered investments in bioethanol were also made in many other countries around the world.

Soon after 1973, oil-poor Brazil expanded its efforts to convert sugarcane to bioethanol and blend it into gasoline with roughly 22 percent ethanol and 78 percent gasoline (22:78 proportions). In 1979, Brazil began manufacturing vehicles that could run on hydrous ethanol (95 percent ethanol, 5 percent water). By the mid-1980s, almost all new cars in Brazil were designed to run exclusively on ethanol. In the past decade, however, the Brazilian government has tried to reverse the program because of the financial subsidy required. Because of the large percentage of vehicles on the road that require ethanol, however, ethanol fuel manufacture has continued, although very few new cars are designed for ethanol.

Until the 1980s, the motivation for developing bioethanol and other alternative fuels in the United States and almost everywhere else was energy security and domestic economic development. Since the mid-1980s, the primary motivation has gradually shifted to meeting environmental objectives, primarily the improvement of air quality. Growing interest in the past few years in addressing climate change by reducing emissions of greenhouse gases to the atmosphere has given a new impetus to the development of biomass fuels. The primary U.S. policy sustaining investments in ethanol has been tax subsidies in the form of federal and state gasoline tax exemptions.1

In addition, ethanol and other oxygenates, such as methyl tertiary-butyl ether (MTBE), displace aromatics, especially benzene, from gasoline. The advantages and disadvantages of biofuels that will influence their marketability are described in the following sections.

ADVANTAGES AND DISADVANTAGES OF BIOFUELS

Air Quality

The Clean Air Act Amendments of 1990 included the implementation of Environmental Protection Agency (EPA) regulations for reformulated gasoline to mitigate near-ground ozone pollution, a principal component of smog in the United States. Requirements were established for reformulated gasoline to be used in gasoline-fueled vehicles in specified nonattainment areas (areas that fail to meet EPA air quality standards). Although the introduction and improvement of vehicle emission control devices contributed to a decline in ambient atmospheric concentrations of carbon monoxide and tropospheric ozone in virtually all urban areas, many areas continued to exceed the National Ambient Air Quality Standards (NAAQS) (NSTC, 1997). The Clean Air Act Amendments also stipulated that nonattainment areas were required to adopt programs to add an oxygenated organic compound to gasoline to shift the air-to-fuel ratio and lower emissions of carbon monoxide. The oxygenated gasoline was required to contain an oxygen level of at least 2.7 percent by weight and lower the fuel-to-air ratio.

The Clean Air Act Amendments of 1990 require the use of reformulated gasoline with oxygen in areas of the United States that have substantial ozone pollution, particularly in the summer months when near-ground ozone is most

1  

The ethanol tax credit is currently $0.54 per gallon and applies to ethanol and the ethanol portion of the gasoline additive ethyl tertiary-butyl ether. The Transportation Equity Act for the 21st Century (TEA 21), H.R. 2400, extends the tax credit through 2007 but specifies the following reductions in tax credits: $0.01 reduction in credit in 2001-2002; $0.02 reduction in 2003-2004; and $0.03 reduction in 2005-2007.



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Review of the Research Strategy for Biomass-Derived Transportation Fuels 2 Context for Biomass-Derived Fuels HISTORICAL BACKGROUND AND PUBLIC POLICY International and domestic experience with the manufacture of fuels from biomass feedstocks (biofuels) is long and varied. In the days of early automotive development, ethanol was one of the candidate fuels. When fears about the stability of petroleum supplies briefly surfaced around 1920 and again after the 1973 Arab oil embargo, investments in biomass-derived ethanol (bioethanol) flourished (Sperling, 1988). Scattered investments in bioethanol were also made in many other countries around the world. Soon after 1973, oil-poor Brazil expanded its efforts to convert sugarcane to bioethanol and blend it into gasoline with roughly 22 percent ethanol and 78 percent gasoline (22:78 proportions). In 1979, Brazil began manufacturing vehicles that could run on hydrous ethanol (95 percent ethanol, 5 percent water). By the mid-1980s, almost all new cars in Brazil were designed to run exclusively on ethanol. In the past decade, however, the Brazilian government has tried to reverse the program because of the financial subsidy required. Because of the large percentage of vehicles on the road that require ethanol, however, ethanol fuel manufacture has continued, although very few new cars are designed for ethanol. Until the 1980s, the motivation for developing bioethanol and other alternative fuels in the United States and almost everywhere else was energy security and domestic economic development. Since the mid-1980s, the primary motivation has gradually shifted to meeting environmental objectives, primarily the improvement of air quality. Growing interest in the past few years in addressing climate change by reducing emissions of greenhouse gases to the atmosphere has given a new impetus to the development of biomass fuels. The primary U.S. policy sustaining investments in ethanol has been tax subsidies in the form of federal and state gasoline tax exemptions.1 In addition, ethanol and other oxygenates, such as methyl tertiary-butyl ether (MTBE), displace aromatics, especially benzene, from gasoline. The advantages and disadvantages of biofuels that will influence their marketability are described in the following sections. ADVANTAGES AND DISADVANTAGES OF BIOFUELS Air Quality The Clean Air Act Amendments of 1990 included the implementation of Environmental Protection Agency (EPA) regulations for reformulated gasoline to mitigate near-ground ozone pollution, a principal component of smog in the United States. Requirements were established for reformulated gasoline to be used in gasoline-fueled vehicles in specified nonattainment areas (areas that fail to meet EPA air quality standards). Although the introduction and improvement of vehicle emission control devices contributed to a decline in ambient atmospheric concentrations of carbon monoxide and tropospheric ozone in virtually all urban areas, many areas continued to exceed the National Ambient Air Quality Standards (NAAQS) (NSTC, 1997). The Clean Air Act Amendments also stipulated that nonattainment areas were required to adopt programs to add an oxygenated organic compound to gasoline to shift the air-to-fuel ratio and lower emissions of carbon monoxide. The oxygenated gasoline was required to contain an oxygen level of at least 2.7 percent by weight and lower the fuel-to-air ratio. The Clean Air Act Amendments of 1990 require the use of reformulated gasoline with oxygen in areas of the United States that have substantial ozone pollution, particularly in the summer months when near-ground ozone is most 1   The ethanol tax credit is currently $0.54 per gallon and applies to ethanol and the ethanol portion of the gasoline additive ethyl tertiary-butyl ether. The Transportation Equity Act for the 21st Century (TEA 21), H.R. 2400, extends the tax credit through 2007 but specifies the following reductions in tax credits: $0.01 reduction in credit in 2001-2002; $0.02 reduction in 2003-2004; and $0.03 reduction in 2005-2007.

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Review of the Research Strategy for Biomass-Derived Transportation Fuels prevalent. Reformulated gasolines are designed to lower the emissions of pollutants that contribute to near-ground ozone formation. Overall emissions of ozone precursors from gasoline-fueled motor vehicles have substantially decreased in recent decades, largely as a result of government mandates and industry's development and use of new emission controls on motor vehicles. The contribution of on-road vehicles to the total inventory of ozone precursor emissions is expected to continue to decline in the future (NRC, 1999b). If it does, the impact of using oxygenates in reformulated gasoline to mitigate near-ground ozone concentrations would also decline. Thus, the magnitude of the effect of reformulated gasoline on the downward trend is uncertain. A recent NRC report addresses this subject in detail (NRC, 1999b). Vehicle emissions of carbon monoxide are major contributors to air pollution. A key factor influencing vehicle emissions is the air-to-fuel ratio.2 Additional oxygen in the combustion mixture of fuel and air in the engine decreases the amount of carbon monoxide emitted from the tailpipe. In older vehicles with open loop controls, the addition of ethanol to the fuel is necessary to increase the oxygen level in the combustion chamber and lower carbon monoxide emissions. In newer vehicles, regardless of whether there is oxygen in the fuel, new technologies have contributed to decreases in tailpipe emissions. Onboard diagnostic systems are now in place that can detect malfunctioning emission control systems. In addition, older high-emitting vehicles are disappearing with fleet turnover. Hence, as new vehicles with onboard diagnostic systems become dominant in the vehicle fleet, the benefit of oxygenates is expected to decline. Although ethanol can lower exhaust emissions somewhat, problems can occur with high evaporative emissions. The Reid vapor pressure of the mixture increases with ethanolgasoline blends, making evaporative emissions more difficult to control. This may be partially offset by the lower reactivity of the alcohol after release into the atmosphere, which creates less ozone. Nevertheless, high-level blends of ethanol (e.g., E85) have lower evaporative emissions than vehicles fueled with low-level ethanol blends (e.g., E10), making this less of an issue for dedicated ethanol vehicles. Because of the low vapor pressure, however, dedicated ethanol vehicles have a difficult cold start-up, which can result in an increase of emissions of hydrocarbon and aldehyde at start-up. In summary, the benefit in terms of air quality from reduced vehicle emissions from ethanol-gasoline blends relative to petroleum-based fuels may not be substantial enough to be a significant market driver. The use of ethanol-gasoline blends as a transportation fuel is more likely to be influenced by economic, regulatory, and political factors. Greenhouse Gases Many scientists believe that the full fuel-cycle impacts of growing, harvesting, processing, and consuming biofuels could add very little carbon dioxide (a greenhouse gas) to the atmosphere. The carbon dioxide released by the consumption of biofuels in vehicles would be offset by the uptake of carbon dioxide by the plants (e.g., grasses or trees) used as feedstock to manufacture the fuel. Because some of the plant biomass would be used for running the biofuel processing plant, some would be left over and could be converted to electricity (thus reducing carbon dioxide from other generators of electricity). The latest and most detailed estimates indicate that the net reduction in greenhouse gases, relative to a gasoline-consuming vehicle, could range from 60 to 90 percent (Brown et al., 1998; Delucchi, 1991; Wang et al., 1998). Only solar hydrogen has shown as much potential for reducing net additions of carbon dioxide to the atmosphere. There is considerable debate, however, on the magnitude of the net carbon dioxide reductions of biofuels. The entire life cycle of the fuel, including feedstock production, combustion, and transportation stages, has been considered in analyses of greenhouse gas emissions for bioethanol manufactured from corn starch, woody crops, and herbaceous crops (Wang et al., 1998). More studies are needed, however, to estimate potential greenhouse benefits, if any, from the production of bioethanol from corn residues. Ecological Effects The systemic effects on the ecosystem of a cellulosic biomass industry might be beneficial to the environment, depending on the ecological factors and the intensity and mode of biomass removal (see Tolbert and Wright, 1998). The collection of forest residues, for example, could reduce the accumulation of kindling that feeds forest fires. Crown fires remove large amounts of carbon from forest ecosystems and make them susceptible to extensive nutrient loss through soil erosion. Therefore, the removal of forest residues, in conjunction with stand-thinning, could substantially improve the health of trees by reducing competition for resources, especially in arid areas, and usually increases the pest resistance and growth of remaining trees. Thinning also reduces habitat for insect and disease populations, such as bark beetles, major forest pests that often develop epidemic populations in dense, stressed stands of trees. Harvesting agricultural crop residues could also potentially reduce the breeding habitat and create less amenable conditions for the reproduction for 2   Controls of air-to-fuel ratio can be divided into two classifications: open-loop and closed-loop controls. Generally, with open-loop control, air-to-fuel ratios are predetermined (typically stoichiometric or richer) but changed by ambient and operating conditions. With closed-loop control, the air-to-fuel ratio is automatically adjusted to achieve a given goal, in this case maintaining the stoichiometric mixture necessary to destroy carbon monoxide, oxides of nitrogen, and volatile organic compounds (NRC, 1996).

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Review of the Research Strategy for Biomass-Derived Transportation Fuels certain crop pests. For example, most fungi are less able to sporulate and spread disease in less dense, drier, better aerated crop residues. Saprotrophic root diseases are also less likely to develop in these conditions. However, the removal of residues also has some significant ecological risks. If crop residues are overharvested, exposed bare soil will be more susceptible to soil and wind erosion. The removal of residues may also reduce populations of beneficial microorganisms that retard disease. Most important, the continued removal of residues may substantially reduce the carbon and nutrient content of soils and reduce the water and nutrient retention of soils. In woody crops, these problems could be ameliorated by the selective removal of nutrient-poor wood, leaving branches, bark, and foliage on site. The ecological effects of dedicated energy crops can also have considerable ecological benefits or risks, depending on cropping intensity and the systems to which they are compared (Ranney and Mann, 1994; Tolbert and Schiller, 1996). Growing perennial crops in agricultural areas in place of traditional annual crops is expected to greatly reduce soil erosion, agrochemical usage, and soil and nutrient runoff. The extensive, long-standing, deep root systems of perennial crops is expected to present an efficient biofilter for surface water and near-surface groundwater during the growing season, reducing the movement of dissolved nutrients and agrochemicals into streams, lakes, and deep groundwater. However, converting natural habitat to the production of biomass crops may reduce habitat quality and have an adverse environmental impact, depending on the extent of specific habitats and the species that depend on it. These factors would have to be considered on a larger regional context when planning regional feedstock programs (Christian et al., 1994). However, the diversity of seral stages over a landscape by woody biomass crops at different stages of development (harvest, site preparation, planting, and the different stages of crown closure and stand development) may provide a variable array of habitats and thus support more diverse wildlife populations than any single natural or agronomic habitat. For example, many ungulate, bird, and carnivore species are known to utilize short-rotation, hybrid poplar plantations. International Market The development of a cellulosic bioconversion industry would create domestic industrial expertise in both processing and feedstock production that could be transferred to other countries and would benefit the U.S. economy. In its May 1999 report, the Panel on International Cooperation in Energy Research, Development, Demonstration and Deployment of the President's Committee of Advisors on Science and Technology recommended that the United States promote collaborative international energy research, development, demonstration, and deployment on industrial-scale biomass energy conversion technologies, emphasizing the technologies that would provide both electricity and one or more coproducts (e.g., heat, fluid fuels, chemicals, as well as food/feed/fiber). The panel also recommended collaborative research on the restoration of degraded lands that could be used for growing crops optimized to provide the feedstocks for multiple product strategies. The U.S. Agency for International Development and USDA would generally have the lead role for these collaborative efforts. The feedstock development and biomass processing technologies under development by DOE could meet these criteria. However, the economics and environmental effects associated with the production and use of biomass-derived transportation fuels depend strongly on site-specific characteristics and the particular national economy and will have to be evaluated on a case-by-case basis. In a presentation to the committee by an industrial firm, Arkenol, Inc., on its efforts to develop international business prospects in China, Russia, Brazil, and Europe, the limits on market opportunities for biomass-derived transportation fuels were apparent (Miller, 1999). Based on this presentation, as well as Brazil's past experiences with ethanol as a motor vehicle fuel, the committee concluded that markets throughout the world for bioethanol are less influenced by currently available technologies than by tax incentives, availability, and the cost of petroleum fuels, as well as a significant market share of vehicles that can effectively use the alternate fuel. Many of these issues, however, go beyond the scope and concerns of DOE's biomass-derived transportation fuels R&D program. Land Resources The introduction of biofuels could increase competition for land resources. By diverting agricultural land to energy crop production, less land may be devoted to food production. This concern could be mitigated if cellulosic feedstock were grown on marginally productive land that is less desirable for food production. Approximately 35 million acres of less-productive land has been set aside in the USDA Conservation Reserve Program as incentives to producers to take land prone to environmental degradation out of production; this land may be suitable for growing perennial grasses and trees for biomass conversion to coproducts (e.g., biobased chemicals) along with ethanol fuel. Large-scale displacement of conventional transportation fuels with cellulosic ethanol will require significant production from dedicated energy crops. In addition, advances in biotechnology may lead to genetically modified crop plants with traits that could be used for both energy and food production. The manufacture of biofuel based on agricultural residues left on the field probably would not interfere with food production. Biorefineries that produce multiple products could greatly reduce the competition for land resources. The existing prototype biorefineries (corn wet mills) produce food and feed products in addition to fuel. Some of the most likely

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Review of the Research Strategy for Biomass-Derived Transportation Fuels scenarios for cellulosic biomass conversion to bioethanol could actually increase food and animal feed reserves. Here there are at least two possible scenarios. First, the herbaceous feedstocks for bioethanol manufacture, such as switchgrass, can contain 5 to 12 percent protein depending on the growth conditions and time of harvest. Protein cannot readily be converted to a fuel and, if burned, will emit nitrogen oxides. Therefore, some biomass protein is likely to become animal feed or even human food (Dale, 1983; de la Rosa et al., 1994). In the second scenario, an economical pretreatment of cellulosic biomass that makes lignocellulosic sugars available for fermentation would also make these sugars available for digestion in animal feed. Therefore, with a vigorous cellulose bioethanol industry, world supplies of digestible energy could be increased. The conflict over land use is based on concerns for protection of soil quality, preservation of natural habitats, and maintenance of biodiversity. Because land use decisions are complex, future uses of land cannot be predicted with certainty. The resolution of these issues will depend on many factors, including the pressures of human population and consequent demands for food, fiber, fuel, and human settlements, land and environmental policies, and the state of future economies. Renewable Fuels Biomass-based fuels are renewable energy sources that could contribute to a domestic source of liquid transportation fuels, and cellulosic bioethanol could help reduce U.S. dependence on foreign sources of oil. An NRC report (1999c) estimates that cellulosic bioethanol manufactured from by-products of agriculture could supply up to 10 percent of liquid transportation fuels. Reliance on oil from the Persian Gulf today has forced the United States to maintain a military presence there, leaving the country vulnerable to price shocks because petroleum reserves are in a geopolitically unstable part of the world (Lugar and Woolsey, 1999). In the long term, as petroleum and natural gas reserves dwindle, the value of renewable energy sources may increase. The contribution of cellulosic biomass-derived fuels will depend on several factors: the cost of conversion to ethanol, the depletion of competing sources (e.g., fossil fuels), the impact of environmental regulations, and the global demand for liquid transportation fuels. ALTERNATIVE FUELS AND VEHICLE TECHNOLOGIES The Alternative Motor Fuels Act (AMFA) passed in 1988 created a federal program of financial support for R&D and demonstration of alternative motor vehicles and alternative fuels (methanol, ethanol, and natural gas). As an incentive for automakers to produce alternative-fuel vehicles, the AMFA provided fuel-economy credits for meeting corporate average fuel economy (CAFE) standards.3 The AMFA changes the way an alcohol or natural-gas vehicle is treated in the calculation of the CAFE standard. Because only the gasoline portion of the fuel is considered in the CAFE calculation, manufacturers of vehicles operating on alcohol or natural gas can earn credits that can be used to offset shortfalls in fuel economy in previous years. As a result of this legislation, automakers began to manufacture vehicles that could operate on both nonpetroleum and petroleum-based fuels (so-called flexible-fuel vehicles). In 1993, the flexible-fuel vehicle was introduced as a bridge to the dedicated-alcohol vehicle. (In general, vehicles will be more efficient if optimized for a single fuel [e.g., gasoline or ethanol].) A flexible-fuel vehicle can run on any blend of gasoline and alcohol and is produced in both methanol and ethanol versions. The first year of manufacture, 3,000 flexible-fuel vehicles were sold. In 1998, 250,000 were sold (Lambert, 1999). Under AMFA, CAFE credits are also available for flexible-fuel vehicles, although the credits are substantially less than for dedicated-fuel vehicles. Automakers are opting for the lesser credits, however, because there are only about 50 ethanol refueling stations, mostly in the Midwest, and 50 methanol stations in California. Therefore, the opportunity for these vehicles to operate on alcohol, at least in the foreseeable future, is small. Ethanol is only one of many alternative fuels under consideration. The future energy needs of the world are not likely to be filled by any one fuel because alternative fuels will vary from region to region, depending on the availability and economics of resources, In general, however, liquid fuels are most compatible with existing distribution systems and engines (i.e., they require the least departure from the technologies in place today both for vehicles and for the refueling infrastructure). A critical issue for introducing any alternative fuel vehicle will be an adequate refueling infrastructure. If refueling stations are available, consumers will be more likely to consider purchasing vehicles with new technology. In addition, the alternative fuels must be competitive in price with the commonly available fuel (i.e., gasoline). MARKETS FOR BIOMASS-DERIVED ETHANOL In a free market economy, new businesses and industries are generally developed based on demand in the marketplace (so-called ''market pull"). OFD's success in launching a new 3   The Energy Policy and Conservation Act of 1975 established corporate average fuel economy (CAFE) standards as a means of increasing fuel efficiency and decreasing reliance on imported oil. Compliance with these standards is based on a calculation of fuel efficiency (measured in miles per gallon) for a car manufacturer's new model passenger cars and lightduty trucks.

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Review of the Research Strategy for Biomass-Derived Transportation Fuels TABLE 2-1 Markets for Cellulosic Biomass-Derived Fuels   Advantage Disadvantage Market sizea Time Period Ethanol-gasoline blend agent (subsidized) Oxygenateb and octane enhancement; lower carbon monoxide emissions in older vehicles Cost offset by subsidy, therefore, not a current market disadvantagec 1.8 billion gal/yrd Present to 2007e Gasoline-ethanol blend alternative (unsubsidized) Octane enhancement Lower energy content than gasoline; high blend vapor pressure and water affinity More than 10 billion gal/yr After 2007 Ethanol neat fuel in internal combustion engine Lower greenhouse emissions for dedicated energy crops Lack of infrastructure and distribution system; lower energy content than gasoline More than 120 billion gal/yr Long term Ethanol for fuel cells Lower greenhouse gas emissionsf Lack of infrastructure and distribution system; lower energy content than gasoline More than 120 billion gal/yr Long term Diesel and biodiesel Lower emissions of sulfur and aromatic compounds; no requirements to modify engineg Cost of feedstock very high Fraction of 33 billion gal/yrh Long term a Maximum potential for each market without quantifying the realistic percentage that could be achieved. b Oxygenate advantage to meet EPA regulations for ozone reductions will probably be discontinued. c Current fuel markets do not recognize that ethanol has 20 percent energy debit compared to hydrocarbon fuels. d Based on current cornstarch-based ethanol market. e Subsidy for ethanol may not end in 2007. f Reformer cells under development must meet emissions criteria. g Benefits proportional to the blend level of biodiesel. h Based on 4.64 quadrillion BTU per year of distillate (low-sulfur diesel) fuel. Source: RFA, 1999; EIA, 1998. biofuels industry based on cellulose conversion will be limited by the absence of market pull and the reliance on "technology push." Many key market factors are beyond OFD's control, including the low price and easy availability of raw material for hydrocarbon fuel and the extent to which policies developed to implement global climate change treaties pull renewable fuels into the marketplace. For these reasons, the effectiveness of the OFD program should not be measured solely by near-term commercial success. Technological improvements and cost reductions achieved by the program may be very important in the midterm and long term. If competitive costs can be achieved, fuel ethanol produced from cellulose could potentially compete in the following auto fuel markets (see Table 2-1): the current subsidized market, in which bioethanol is blended with gasoline generally at about 10 percent concentration to satisfy oxygenate and octane requirements a future unsubsidized market, in which bioethanol is blended with gasoline to satisfy octane requirements a long-term market, in which bioethanol is used as an

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Review of the Research Strategy for Biomass-Derived Transportation Fuels essentially neat fuel in concentrations of 85 to 95 percent a market that may develop over the long term, in which bioethanol could be used to generate hydrogen for vehicles powered by fuel cells Generally, the value of cellulosic fuel ethanol in these markets will be determined by the price of competing materials, as well as differences in performance between ethanol and other fuels. In estimating the market value of bioethanol (the net wholesale price received by the manufacturer when the retail price of bioethanol is comparable to the price of competitive fuel) the committee did not consider credit for reduction in greenhouse gases because the basis for this credit has not been established. This situation could change in the future as nations establish implementation programs to support international agreements to control climate change. The price of gasoline components differs somewhat among individual refiners and blenders depending on the crude oil processed, the degree of crude oil self-sufficiency, refinery configuration, available excess refining capacity, and market niche. Typical industry practice includes the determination of company-specific values for gasoline components using sophisticated optimization models. An average value for ethanol in these markets can be estimated using historical overall-market average prices for gasoline and octane premium as related to the price of crude oil. The ethanol values determined for internal combustion engines are based on the assumption that no significant changes in market fundamentals would impact the price differential between crude oil and gasoline, the relative octane value, and the gasoline vapor pressure specifications. Actual market prices vary over time depending on supply and demand. The values estimated here are based on expected average prices over several years. Ethanol as a blend agent for gasoline has some disadvantages because of its higher affinity for water and its high blend vapor pressure. Refiners have been reluctant to transport ethanol blends by pipeline because of potential contact with water. For this reason, ethanol is often splash-blended at a storage terminal instead of as part of the normal blending procedure at the refinery. When ethanol is blended with gasoline at the terminal, the blend generally has a higher octane number than the octane number required for regular gasoline, often referred to as "octane giveaway." Blenders located at terminals with proprietary pipelines can avoid this problem by blending ethanol with gasoline that has lower octane. Ethanol's high blend vapor pressure can entail significant processing costs because other materials with high vapor pressures traditionally found in gasoline have to be removed and used elsewhere to make room for ethanol. Octane giveaway and other performance debits are discussed more fully in Appendix D. Current Subsidized Market The blended ethanol market, which satisfies some oxygenate and octane requirements, is currently subsidized. In addition to the federal excise tax exemption, 16 states offer additional incentives of up to $0.40 per gallon (e.g., in North Dakota and Wyoming) (DOE, 1996, 1997; DOT, 1998). The current size of this subsidized market is about 1.8 billion gallons per year of ethanol, primarily ethanol derived from corn grain. To compete in this market, ethanol from cellulosics would have to be cost competitive with ethanol from corn grain. Ethanol is only one of several products made from corn in a wet milling operation; other products include food and industrial starches, dextrose, high-fructose corn sweetener, and milling coproducts, such as corn gluten feed, gluten meal, and corn oil. Therefore, estimates of manufacturing cornbased ethanol must allocate portions of the raw material, plant capital, and operating costs among the various products, which leaves room for differences of opinion in the processing costs of ethanol from a wet milling operation. A cost estimate was first made in 1980 (Keim, 1980) and updated using generally accepted engineering methods. This estimate compares favorably with the cost estimate of committee members and peers. The cost for both is about $1 per gallon. Fuel ethanol from a wet mill plant without major coproducts would cost about $1.50 per gallon (in 1999 dollars cost updated). The cost of ethanol from a dry mill plant would be $1.40 per gallon (Katzen et al., 1994), reflecting the lower value of coproduct credits.4 Future Markets for Gasoline-Ethanol Blends Even though the federal ethanol tax credit is currently scheduled to expire in 2007, ethanol proponents have obtained extensions of the credit several times in the past, although at reduced levels. Although it is not clear when tax incentives for blending bioethanol into gasoline will end, an unsubsidized market for fuel ethanol blends may eventually develop. The ultimate potential for ethanol as a source of octane in this market is more than 10 billion gallons per year. By the time this market develops, however, oxygenated fuels 4   In a wet mill corn ethanol plant, the corn is steeped for 24 to 48 hours then fractionated into germ (from which oil is extracted), starch, fiber, and gluten (corn protein). The starch is then converted into dextrose and fermented to alcohol. Normally, the corn refinery makes several products, such as food and industrial starches, dextrose, fructose, corn oil, gluten meal, and corn gluten feed. In a dry mill, the corn is "mashed" (i.e., ground), slurried in water, cooked with enzymes to convert the starch to glucose, and fermented. The two products from a dry mill are ethanol and distiller's dried grains (an animal feed).

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Review of the Research Strategy for Biomass-Derived Transportation Fuels may not be significant contributors to decreases in carbon monoxide tailpipe emissions. The committee considers octane enhancement as a primary source of value for bioethanol in an unsubsidized fuel ethanol blend market. The market for fuel ethanol blends could be limited to premium grades, which have the highest octane. The average value for ethanol blended in premium gasoline in this market would depend on average prices for gasoline and incremental octane, which in turn will depend on the price of crude oil. For example, if crude oil costs $15 per barrel, the ethanol value would be about $0.64 per gallon; if crude oil costs $25 per barrel, the ethanol value would be about $0.99 per gallon. 5 If ethanol is blended with a midgrade fuel, the market value of bioethanol would decrease by 20 percent; if ethanol is blended with a regular grade fuel (regular grade fuel is characterized by a lower relative value of octane), the value would decrease by 30 percent. Because of its oxygen content, a gallon of ethanol contains about 33 percent less energy than a gallon of hydrocarbon gasoline. However, ethanol blends have been shown to be more energy efficient than gasoline. Therefore, the net energy debit is only about 20 percent per gallon of ethanol in a gasoline blend (Miller et al., 1996). This amounts to a 2 percent energy debit for a typical 10 percent ethanol blend. There is no energy debit for ethanol in reformulated gasoline that has a specified oxygen content. The energy debit only occurs when the addition of ethanol increases the oxygen content of gasoline. Neat Fuel Markets Internal Combustion Engines The internal combustion engine, the primary automotive technology used in vehicles today, consumes about 120 billion gallons of fuel per year in the United States (EIA, 1998). Future scenarios that include neat ethanol (85 to 95 percent ethanol blended with gasoline) as a replacement for some of this fuel must be based on the properties of the fuel, the introduction of new technologies, and required fuel infrastructure changes. Although ethanol has higher octane than premium gasoline, higher octane is expected to add little additional value in the marketplace, at least in the midterm. The manufacture of high-compression engines that would derive the full benefit of ethanol octane cannot be justified as long as ethanol sales volumes are relatively low. The only practical vehicles for neat ethanol in the foreseeable future are flexible-fuel vehicles, which are designed to use either gasoline or ethanol. The compression ratio of flexible-fuel vehicles is set by the lower gasoline requirement. Neat ethanol fuel will have to compete with gasoline on an energy equivalent basis, which lowers the value for neat ethanol because ethanol has 33 percent less energy per gallon than gasoline. This lower energy content may be somewhat offset by higher efficiency. A limited evaluation by the EPA found that neat ethanol was about 5 percent more efficient than gasoline in the one flexible-fuel vehicle model tested to date (Adler, 1999). Further testing will be necessary to determine fuel efficiencies in a wide variety of vehicle models. Today there is no significant infrastructure for transporting and distributing neat ethanol to the motor fuel marketplace. The investment for a new supply infrastructure will have to be made before ethanol sales begin, which presents a major hurdle for fuel ethanol, or any new fuel. The amortized cost of the new infrastructure has been estimated to be on the order of $0.08 to $0.11 per gallon when the system is operated to capacity (Sperling, 1988; Wang et al., 1998). For the purposes of estimating the value of ethanol in this market, the committee assumed the amortized cost of the new supply infrastructure would be $0.10 per gallon. On this basis, ethanol values would be $0.34 per gallon for a crude oil price of $15 per barrel and $0.53 per gallon for crude oil at $25 per barrel when used as a premium-grade, highoctane fuel. Fuel Cells Fuel cells, which generate energy through electrochemical reaction of hydrogen and oxygen, are under development as a potential alternative to internal combustion engines. Although fuel cells have the potential to increase efficiency significantly, the initial motivation for fuel-cell development has been the reduction in emissions of criteria pollutants. A number of hydrogen-rich fuels, such as gasoline, methanol, and ethanol, could be used with fuel cells. Gasoline used for fuel cells may be a new low-cost grade that may require additional pumps and storage tanks at service stations or may simply replace an existing grade of gasoline. If ethanol or methanol is used, then a new fuel distribution system will be required. 5   These ethanol values are based on the following assumptions: no significant changes in market fundamentals that would impact the differential between crude oil and gasoline, average fuel octane value and gasoline vapor pressure specifications; estimated values would provide a reasonable return on investment; and industry would make the necessary investments in pipeline infrastructure to permit transporting ethanol-gasoline blends from refineries. The correlation of gasoline price to crude oil price is based on recent historical U.S. refining margins (Ting, 1999). The market value relationships between various grades of gasoline fuels is based on published data and personal communication with William Piel (1999). Changes in availability of MTBE were not reviewed for this study or considered in these calculations.

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Review of the Research Strategy for Biomass-Derived Transportation Fuels TABLE 2-2 Cost Estimates for Bioethanol Manufacturing   Cost per Gallon (in 1995 dollars) ($25 per ton of feedstock) Cost per Gallon (in 1995 dollars) ($42 per ton of feedstock) DOE and best of industry (1991) 1.28 DOE program (1999) 1.36 1.61 Near-term best of industry (2002) 1.10 1.32 Iogen (unsubstantiated claim) 0.90 DOE and best of industry (2005) 0.87 1.08 DOE and best of industry (2010) 0.78 0.95 DOE and best of industry (2015) 0.70 0.86   Sources: Schell et al., 1991; Hinman et al., 1992; Wooley et al., 1999; Foody, 1999. The technology for fuel cells is not developed sufficiently to permit this study committee to develop an estimate for relative value of fuel ethanol in this market. Controlling factors will be the cost of delivery and the performance of hydrogen. A critical step will be processing of fuels other than hydrogen onboard the vehicle. The NRC Standing Committee to Review the Research Program of the Partnership for a New Generation of Vehicles (NRC, 1999a) noted that an integrated systems analysis to assess cost and performance issues of onboard processing has not been done and that the major efforts to date have focused on gasoline. Although the design phase of the fuel cell is in the very early stages, R&D engineers are working on multiple-fuel fuel-cell systems. MANUFACTURING BIOMASS-DERIVED ETHANOL A primary goal of the OFD bioethanol R&D program is to reduce the cost of manufacturing ethanol from cellulosic biomass through improvements in technology. The OFD periodically assesses the technical and economic status of the biomass-to-ethanol process to establish goals and directions for future R&D strategies. Prior Estimate In June 1991, an assessment of ethanol manufacturing costs based on the best available technology was made by the Fuels and Chemicals Research and Engineering Division of the Solar Energy Research Institute (SERI, the predecessor of NREL). A plant size of 58 million gallons of ethanol per year (1,920 dry tons of feedstock per day) was used for the analysis (Schell et al., 1991; Hinman et al., 1992). Based on the equipment list generated from the process flow diagrams, the total capital cost of the plant in 1990 dollars was estimated to be $141.24 million. The annual capital charge rate was 20 percent. The feedstock used for the analysis was whole-tree wood chips delivered to the plant site for $42 per dry ton. The results of this economic assessment are summarized in Table 2-2. To determine the five-year adjustment to 1995 dollars, the committee applied the Chemical Engineering Purchased Equipment Index to capital-cost and fixed-cost items factored from the plant cost, applied the Inorganic Chemical Index to adjust the cost of chemicals and nutrients, and applied the Labor Index to adjust the cost of labor. No adjustment was made in the cost of feedstock and the by-product electricity credit (Wooley et al., 1999). The manufacturing costs adjusted to 1995 dollars of $1.28 per gallon are shown for comparison with more recent economic analyses. Current Estimates Recently, NREL, in conjunction with Delta-T Corporation, prepared a series of economic assessments for ethanol manufacturing costs based on the most recent understanding of the technology from the NREL R&D program and NREL's understanding of related industrial technology (Wooley et al., 1999). The plant size used was 52.2 million gallons of ethanol per year (2,204 dry tons of feedstock per day). Projections of cost reductions expected by years 2005, 2010, and 2015 were also calculated to guide the program direction and prioritization for R&D. ASPEN Plus material and energy balances were used as a basis for equipment sizing, and ICARUS cost estimation software was used to determine capital costs in conjunction with vendor quotes for most of the major equipment (Wooley et al., 1999). All costs were in 1995 dollars. Using current NREL technology, the total capital cost of the plant was estimated to be $204 million, with a total project cost of $212 million. A capital charge rate of 17.7 percent was used to estimate manufacturing cost per gallon. The feedstock was poplar hardwood chips delivered to the plant at a cost of $25 per bone-dry ton. The total manufacturing cost for NREL of $1.36 per gallon is shown in Table 2-2. The relatively low feedstock cost is assumed to correspond to the first few commercial plants where niche opportunities for low-cost residue feedstock will probably he available. OFD recognizes that other available technologies may be more cost efficient and desirable than the ones under

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Review of the Research Strategy for Biomass-Derived Transportation Fuels development by NREL, especially pretreatment technologies that can produce higher conversions of hemicellulosic sugars and microorganisms that can produce enzyme more efficiently (Hettenhaus and Glassner, 1997; Wooley et al., 1999). Superior ethanologens that ferment hemicellulose sugars to ethanol are also available. When these technologies are incorporated into OFD's design and cost models, the estimated manufacturing cost is lowered by 19 percent. The following are NREL's estimates for best-of-industry technology for 2002 (Wooley et al., 1999): a yield increase of 12 percent to 76 gallons of ethanol per ton of feedstock resulting in a manufacturing increase of 12 percent to 58.7 million gallons of ethanol per year a capital-cost reduction of 18 percent to $173 million a manufacturing cost reduction from $1.36 per gallon to $1.10 per gallon of ethanol at $25 per ton of feedstock As the industry grows, the availability of niche, low-cost feedstock is expected to decline. As a result of cost increases for feedstock of $25 per ton to $42 per ton, manufacturing costs will increase from $1.10 per gallon to $1.32 per gallon of ethanol (Nguyen, 1999). Comparisons of the current cost estimate in Table 2-2 with the estimate done in 1991, adjusted for inflation, show that there has been little if any drop in the projected cost to manufacture ethanol. The capital estimate for the manufacturing plant in 1999 is 50 percent higher than for the plant in the earlier estimate. According to OFD, the costs increased in the 1999 estimate because of a more complete assessment of technology costs reflecting a level of operation at the pilotplant scale and more accurate material and energy-balance techniques in the ASPEN Plus modeling tools. The 1991 cost estimates may have been too optimistic because they were not as detailed and complete as the recent estimate. Improvements OFD anticipates that its R&D program will yield major reductions in the costs of cellulosic ethanol over the next 15 years by concentrating R&D on cellulase enzymes and fermentation organisms. By 2005, OFD estimates that improvements in the thermostability of enzymes should yield a threefold improvement in specific activity. Wooley and colleagues (1999) estimate the following improvements will be made in ethanol manufacturing for 2005 (1995 dollars): a yield increase of 7 percent to 81 gallons of ethanol per ton of feedstock resulting in a manufacturing increase of 7 percent to 62.2 million gallons of ethanol per year a capital-cost reduction of 17 percent to $143 million a manufacturing cost reduction from $1.10 to $0.87 per gallon of ethanol at $25 per ton of feedstock a manufacturing cost reduction from $1.32 to $1.08 per gallon at $42 per ton of feedstock By 2010, OFD projects that enhancements in the cellulose binding domain (i.e., improvement in interaction between the enzyme and the surface of biomass), improvements in enzyme activity (i.e., changes in amino acid sequence of the enzyme protein to improve enzyme catalytic activity), and reduced nonspecific binding (i.e., genetic modifications of enzyme to reduce losses through adsorption to lignin) will lead to a tenfold increase in enzyme performance. OFD plans to fund research in the enzyme area conducted by industrial researchers. The OFD projects that substantial improvements will occur through the development of microorganisms capable of producing 5 percent ethanol at temperatures higher than 50°C. Wooley et al. (1999) estimate the following improvements for 2010 (compared to 2005): a yield increase of 16 percent to 94 gallons of ethanol per ton of feedstock resulting in a manufacturing increase of 16 percent to 72.3 million gallons of ethanol per year a capital cost reduction of 10 percent to $129 million a manufacturing cost reduction from $0.87 to $0.76 of ethanol at $25 per ton of feedstock a manufacturing cost reduction from $1.08 to $0.95 per gallon of ethanol at $42 per ton of feedstock By 2015, genetic engineering will lead to higher levels of carbohydrates in crops grown for ethanol manufacture. The cellulose fraction in the feedstock is expected to increase from 42.7 percent in the base case to 51.2 percent in 2015. The following improvements are estimated for 2015 (compared to 2010) (Wooley et al., 1999): a yield increase of 21 percent to 112 gallons of ethanol per ton of feedstock resulting in a manufacturing increase of 21 percent to 87.5 million gallons of ethanol per year a capital-cost increase of 2 percent to $131 million a manufacturing cost reduction from $0.76 to $0.70 per gallon of ethanol at $25 per ton of feedstock a manufacturing cost reduction from $0.95 to $0.86 per gallon of ethanol at $42 per ton of feedstock OFD's cost estimates are based on potentially lower cost technologies that are being developed outside of its own program. Even lower cost technologies than these may become available. For example, Iogen, a Canadian enzyme company that has been involved in cellulosic ethanol research for more than 25 years, recently claimed it had developed a process capable of manufacturing ethanol from biomass crops for about $0.90 per gallon (Foody, 1999). Iogen recently joined with Petro-Canada, one of Canada's largest oil and gas

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Review of the Research Strategy for Biomass-Derived Transportation Fuels FIGURE 2-1 Estimated manufacturing costs and the market value of cellulosic biomass-derived ethanol. NOTE: These calculated ethanol values are based on the following assumptions: no significant changes occurred in market fundamentals that would affect the differential between crude oil and gasoline, average fuel octane value, and gasoline vapor pressure specifications; estimated values provide a reasonable return on investment; and industry makes the necessary investments in pipeline infrastructure to transport ethanol-gasoline blends from refineries. The correlation of gasoline price to crude oil price is based on recent historical U.S. refining margins (Ting, 1999). The market value relationships between various grades of gasoline fuels is based on published data and personal communications from William Piel (1999). Changes in the availability of MTBE were not reviewed for this study or considered in the calculations. producers, to build an ethanol demonstration unit for the purposes of scaling up Iogen process technology (McCoy, 1998). OFD manufacturing cost estimates are also shown graphically in Figure 2-1 and compared to the estimated value of bioethanol in potential markets. Although OFD has made significant improvements in planning and estimating, the lack of demonstrated cost reduction in the last decade is a cause for concern (see Figure 2-1). Major cost reductions will be essential for ethanol to compete in a nonsubsidized motor-fuel market. A comparison of the manufacturing cost for cellulosic ethanol using the core technology being researched by OFD with the value of fuel ethanol in the potential markets outlined earlier in this chapter shows a wide gap between bioethanol manufacturing cost and market value. CONCLUSIONS Conclusion. Because of the uncertainty of future government regulations and/or subsidies for biofuels, the Office of Fuels Development should not rely on subsidies as market drivers for biomass-based ethanol but should assume that biomass-based ethanol must become cost competitive with other transportation fuels when setting program goals and judging progress. Conclusion. Although cost estimates for the manufacture of bioethanol made in 1991 were not as complete or detailed as recent cost estimates, there has been apparently little if any drop in the projected cost of bioethanol based on technologies under development in the Office of Fuels Development program.

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Review of the Research Strategy for Biomass-Derived Transportation Fuels Conclusion. The international market for biofuels will depend on economic conditions and resource availability of individual countries. Conclusion. In the near term, the primary market for ethanol fuel will be as a gasoline blend agent. Major market penetration of ethanol transportation fuel is likely to occur only in the long term. Conclusions. The issue of an infrastructure must be addressed as part of the potential widespread use of bioethanol in the transportation sector.