The Future of Biofuels

What does the future of transport tell us about what might happen for biofuels and agriculture?

The week before last I presented the opening address for the Australian Sugarcane Futures Forum in Mackay, Queensland. That address was about setting the scene for the forum on some of the big global trends, the customer of the future, and some of the big product areas for the sugarcane industry. You can see the presentation and an overall summary at Emergent Futures but here I would like to specifically concentrate on biofuel, and ethanol in particular.

Biofuels have been seen as one of the saviours of agriculture. Around the world plant crops have been turned into biofuels. In the USA ethanol production from corn has been a huge political issue in the mid-west and has featured in the West Wing drama as an example of corrupt politics. In Brazil large parts of sugarcane production have been turned into ethanol and the switch between putting sugar into ethanol or selling it as a commodity is used as a balancing process for the industry. This is shown in the following graph from the ABARE quarterly commodity report March 2018.

If we look at the possible medium to long term future for ethanol it is tied to the future of road transport. The best markets to be in are growing markets and if you are gaining an increasing share of a growing market you are right in the sweet spot (sic). This is the story for road transport within the oil industry as a whole. Biofuel has been a part of that story. The following graphic from the IEA shows that road transport has increased its share of oil use by almost 2/3 while the total consumption of oil has grown 70%

However there is a cloud on the horizon and that cloud is electrification of the road transport fleet. Most forecasts have the purchase cost of an electric car moving the the same cost as the equivalent fossil fuel car by about 2025 as shown in this graphic from Bloomberg New Energy Finance

These predictions are mainly based on the falling costs of battery production as we move down the learning curve as manufacturing volumes increase. While parity pricing is still 6–8 years away it is causing action in the real world right now. Volkswagen announced in March that it was signing huge battery contracts and would have 16 plants making electric cars by 2022.

Part of the reason for this is that electric cars are cheaper to run than fossil fuel cars so smart buyers will be buying them well before price parity is reached. I have estimated that a Chevy Bolt charged from our home solar panels will run at less than 1.8 cents (Australian) per kilometre compared to my current Toyota hatchback at about 9.5 cents for petrol. That is based on our current feed in tariff rate which is likely to fall as solar volumes increase. Maintenance costs will be about 50% lower as well.

So what does this mean for road transport fuel demand and the consequent effects on biofuels. BP’s Energy Outlook 2018 has modelled this and has predicted that demand for liquid fuels in transport will start to fall in the second half of the thirties. Once that starts the fall will accelerate quite rapidly

BP states in the forecast that it is modelled on the blue line scenario in the following graphic and that faster scenarios are possible. A faster scenario obviously has a much greater impact on road fuel demand.

My view is that demand for electric car kilometres travelled will grow faster than BP has predicted in their blue line scenario, and that it will not take a fossil fuel ban to create that result.

This is based on:

1/ Most people do no travel large distances on a daily basis. This means that range anxiety where people do not buy electric cars because they are worried they will not be able to charge them will not be that important. Increasing battery energy density will give us even better ranges over time.

2/ Many people have two or more cars in their family. If there are concerns about range then many people will keep one fossil fuel car they can use for longer trips and buy an electric car for regular use. Because the costs of running that electric car will be much lower it will become their “go to vehicle”. Therefore the total kilometres travelled by electric cars will rise faster than the rise in new electric car purchases.

3/ Once the majority of the public realises that electric cars can be much cheaper to run and they do not have to worry about charging then demand for electric cars will skyrocket. Demand will outstrip production so manufacturers and dealers will be able to charge higher margins for electric cars. This will be a short term phenomenon but will push the manufacturers to produce more and more electric cars in order to get more of those high margins. Of course once production rises enough then the margins will fall but that will happen anyway so individual car manufacturers will pursue the strategy anyway.

If this analysis is correct then demand for liquid transport fuel will fall faster than the main BP scenario and future biofuel demand will fall with it. An electric car that can be run on solar at and energy cost at 20% the cost of fossil fuels knocks any fossil fuel or biofuel proposition out of the park.

This does not mean there will not be niche opportunities in areas like aviation where energy density matters much more. It just means that the bulk market volumes will disappear. So agriculture in general, and the sugarcane industry in particular will have to adapt over the medium term

Paul Higgins

Side note:

Electric car adoption is likely to happen more slowly in Australia than in other countries. We have lost our car manufacturing capacity and if demand in other markets is higher than manufacturing production in the short term why would anyone ship electric cars to Australia unless the customer is prepared to pay a very high price?