Biofuels is emerging as one of the world’s most important industries, with ethanol production in the US forecast to increase by almost 50% this year.
A number of countries, including the US, Brazil, China and India, are putting more emphasis on biofuels, as crude oil prices remain high worldwide. This has been reflected in an increase in commodity prices and the value of agricultural land globally.
According to the Organisation for Economic Co-operation and Development (OECD), US ethanol production is expected to double between 2006 and 2016. Total production in the US last year was 18.4 billion litres. Brazil, the world’s second largest producer of ethanol, expects its production to reach 44 billion litres by 2016, a rise of 145% on last year.
Energy consultancy Poyry estimates that the biofuels industry worldwide, including ethanol and biodiesel, will be worth $40.5bn this year against $13.6bn in 2002.
Mariano Gurfinkel, a researcher at the University of Texas’s Center for Energy Economics, says: “Total ethanol consumption could continue to expand to reach between 6% to 8% of total US gasoline demand by 2030. In some cases, ethanol will be used in high concentrations, up to 85% for use in flex-fuel vehicles (FFVs), or more likely as part of the normal gasoline blend.”
“If extremely aggressive carbon dioxide limits are established, the penetration of biofuels could rise to between 20% and 25% by 2030,” he continues. Currently, biofuels represent about 3% of fuels used in light-duty vehicles in the US.
Martin von Lampe, agricultural economist at the OECD, says: “Some 5% to 10% of all vehicles worldwide could be FFVs by 2030. Increasingly, we feel that the rise of biofuels is having an impact on commodity prices.
“At the moment, ethanol production is rising faster in the US than Brazil. It has very strong policy support in the US, because of concerns about oil prices and national security.”
Brazil was the pioneer in the use of FFVs and today some 84 per cent of all cars sold are FFVs. Largely thanks to ethanol use, last year the country became self-sufficient in energy. In late-June this year, Cosan, a Brazilian company and the world’s second biggest ethanol producer, announced an initial public offering in New York to raise $2bn for new ethanol production plants.
In a recent interview, Expedito Parente, the Brazilian engineer who invented biodiesel in the 1970s, said: “We have 80 million hectares of the Amazon that will be converted into the Saudi Arabia of biofuels.”
Brazilian officials say the ethanol industry would develop even faster if the US did not levy a tax of 15 cents a litre on all imports of Brazilian cane-based ethanol.
In March this year, the Royal Bank of Scotland, Société Générale and Calyon co-arranged the first project financing in the European biofuels sector, a £155m ($314m) package for the British group, Ensus. The European Investment Bank also recently completed its first project financing for £120m for Associated British Foods.
David Omom, senior consultant at Poyry, says: “Venture capital and investor interest in biofuels in Europe is still lukewarm compared to the US, where venture capital firms such as Khosla Ventures and Kleiner Perkins Caufield & Byers have been especially active. Most European venture capital firms don’t think the market is viable yet.”
Virgin Fuels, one of the few sector-focused firms, has in fact made all its investments in the US, he points out. Biofuels Corporation, one of the early listed firms, is in the process of a bank-led restructuring and delisting from the London Stock Exchange’s Alternative Investment Market.
Mr Omom says: “The investment climate is currently not highly conducive, but in the medium to long-term, Europe offers an attractive investment atmosphere for biofuels.”