Australia at the Crossroads – import or export aviation biofuels?

February 26, 2013 |

The following is adapted from remarks by Digest editor Jim Lane at the Low Carbon Fuels Conference — Avalon Air Show, Avalon, Australia

Distinguished delegates,

As journalists, at the Digest our job is to ask the 7 Questions. Who, What, Where, When, How Much, How and Why. In aviation biofuels the task is made easier because we can say with firm understanding that there is a 120 billion liter market available today, with willing buyers at fair prices.

By who and where it will be produced, and how will you all go about it? Those are the remaining questions — and many eyes are on the Prize.

To help us we have a guide and that is History, because technology change is an old story. What we know is that new technologies and their investors seem doomed to wander for years, even decades, in the wilderness, questioned every day, questioning themselves. You are there now.

But keep in mind that the Internet was demonstrated in 1969 but not commercialized until the 1990s. When you think of the transformative value of hat invention, it is easy to wonder why it took so long to move forward, and we learn again the value of patience.

When change comes to aviation fuel, as come it will, history tells us it will not be because carbon policy in the saddle. The history of technology change — real change — is a story of breakthroughs in cost or performance.

It is for that reason that I urge you to go beyond the discussion of production mandates and incentives and concentrates on opportunities in cost and performance.

For example — you may not have heard of the class of jet fuel known in the US as JP-10 — it is not well known because it is primarily used as missile fuel, in small quantities, because it is incredibly expensive to produce — $25 per gallon — from fossil petroleum. It looks as if there may be transformative opportunities to reduce that cost through biotechnology. Imagine everyday jets fuels becoming the super high-density JP-10. Just as an example of an opportunity to improve performance — and many of you are aiming to reduce aviation fuel costs.

Consider fracking. Nothing is so transformative as a breakthrough in feedstock and look at all the capital coming forward to take advantage of low-cost natural gas. I beleive that where history teaches us to focus is on feedstock.

In that, there is a place for policy. Why opt look at the power of zoning. In the Digest we have written about strategic feedstock reserves. Why? Because without reserves and zoning, who is going to make $2 food or $3 fuel when one can make $7 chemicals, $12 nutraceuticals, or convert land for even more to parking lots. It is inevitable that the market will embrace the higher-value opportunities — and these markets are so titanic that it is not as easy as you think to saturate them and move down the cost curve to other products. You can build an awful lot of biorefineries before you have run out of markets for adipic acid, or ethylene.

Land is a spectrum and scarce, isn’t it? Like broadcast media, absent a policy that fully regulates land as a spectrum and allocates bandwidth for each market, inevitably the public yearns for signal and gets only noise — the noise of converting land to making nutraceuticals or chemicals ·not that there is anything wrong with that) but perhaps never getting to low-cost items like biofuels or food.

Feedstock reserves have appeared before. Years ago, when the Navy first undertook the conversion from coal to oil, there were concerns about availability. Sure there was oil available — but would it be available for marine fuel when there were higher value uses and larger markets. So Congress created the Strategic Fuel Reserves.

Those reserves ensured that affordable fuel in sufficient quantity would be available. And the time for converting technologies – this time, from fossil-based to renewables – has returned. Feedstock reserves are one way of ensuring that affordable quantities of feedstock are available at scale.

Using land as a sovereign investment instrument for new technology is nothing new. Railroads in the US were first financed through land grants made to railroad companies — large grants of land were made to companies who made a commitment to put through a railroad. The land was monetized as a means of financing the railroad — and, as the railroad expanded, the value of the land rose because the railroad itself was adding value to land.

But for sure, the focus has to be on affordable feedstock. It is true that no market has so many willing buyers as aviation biofuels — but these are buyers at fair prices. To offer fair prices, one must first dial down the cost of the feedstock, and keep it there.

If feedstock costs are low, history teaches us that technologies will pour forward to match supply with the demand for finished fuels. Have no doubt about it – ingenuity is astounding given the right opportunity.

But absent low-cost feedstocks — you have only one way to scale up aviation biofuels and that is through mandates that drive up consumer costs and airfares — or come at the cost of corporate profits. And the company with a weak balance sheet is a company that has a high cost of capital — usually too high to robustly drive forward innovation.

Regulate feedstock as the spectrum of scarce bandwidth that it is — and there will be feedstock for all products demanded by the market, and at fair prices. In creating order in the feedstock markets, you will have taken the strongest possible step towards commercializing an industry that you can. With affordable feedstock, Australia can be self-sufficient in biofuels, even an exporter.

Conversely, if feedstock is unaffordable, fuels will be unaffordable when made here, and Australia will instead participate in the market only as an importer.

Residues or energy crops — there are many paths to glory in biofuels, but history suggests to us that if we get feedstocks right, and spectrum right, we can get biofuels right, and right soon.

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