54.40 or fight: the cost of biofuels, emissions, energy security and economic development

The economic development effect

The University of Wisconsin estimates that a biofuels refinery generates $1.82 in statewide economic activity for every $1 in sales. Now, “economic multipliers” can be all over the map — but this is a conservative estimate, on the whole — we’ve seen multipliers well north of 2.0 used in biofuels economics.

So, what does that mean? It means that a local biorefinery is going to be worth far more in overall economic impact than just the fuel it sells — and, accordingly, a nation, state, county or town has benefits that range above the direct profits, wages and equipment sales that go into our cents per pound calculation.

Making that refinery valuable to the community in terms of economic impact even if it doesn’t generate a profit.

Now, that’s a controversial benefit to work into the fuel price equation — because biorefineries are not going to be running at a loss simply because they generate overall benefit to the community. That is, unless they are owned by the community — in the same way that the NFL’s Green Bay Packers are owned by local investors, who have been able to maintain a competitive football team in a relatively small market and in 2011 sold $64 million in stock to local investors who know that “the redemption price is minimal, no dividends are ever paid, [and] the stock cannot appreciate in value.”

If you assign all that value into the enterprise — you get some pretty high “break-even” points — 73.22 cents per pound this year, and 128.07 cents per pound in 2040 (in constant dollars). Economic activity is not the same as margin — but it wouldn’t be unfair to assign some 10 percent of that impact as a value-add.

We’ve done that in our chart below. But individual investors, policymakers and technology developers will make their own choices on what to count.

The bottom line

For sure, it’s 54.40 or fight. Above the strict break-even with crude oil prices — that is, if your capex, opex, raw inputs and margin add up to more than 35.88 cents per pound today, or 54.40 cents per pound in 2040 — you’ll have a dogfight on your hands getting traction in the fuel markets.

How much you want — or need to — lean on the impacts of emissions, energy security and economic development — well, it’s a tough call. In the case of economic development — what’s good for Iowa may not make you popular in Texas. What is good for the plant employee may not translate into a desire for In the case of carbon pricing — fickle friends you will find.

Nevertheless there is value in avoiding emissions, generating energy security and stimulating local economic impact. Especially the latter — though it is felt most intensely quite close to the plant, and your offtake contracting would be most successful if it also was kept local.

It may push you out to the higher-margin, lower-volume worlds of chemicals, fragrances, flavors, feed, lubricants and nutraceuticals. That’s where a lot of ventures working with algae and corn and cane sugars are generally heading now — though not all.

There’s good reason to do so. Today, the price of cane sugar is running in the 15 cents per pound range, and corn starch is running in that region as well.

But other forms of biomass look for more affordable — KiOR projects wood biomass in the 3 cent per pound range, as do POET-DSM and other makers of cellulosic ethanol from wheat straw and corn stover. The conversion rates are lower, the capex can be daunting, and there are limits to the ethanol market that are being tested now that pertain to the lack of flex-fuel vehicles — but you can see where the fuel arguments apply.