Biofuel producers are facing challenges due to the low oil price.
In addition, the low oil price is also slowing down innovation in the biofuels sector. Then there’s the competition from electric vehicle manufacturers….
1. Low oil prices undermine biofuels production
Oil prices have been hit hard and are slow to recover. But biofuel plants need much higher oil prices to be competitive. This has to do with the fact that hydrocarbons, and oil in particular, have a much higher energy return on investment (EROI), which means that it is more attractive to use oil instead of biofuels if we look only at the energy return on investment for a given fuel. Of course, this does not take into account other aspects such as the dioxin and sulfur content of a given fuel. Oil prices crashed in the first quarter of 2020, and after a long period where oil prices remained low, they are now starting to rise again. This should help biofuels remain competitive.
2. Significant progress and innovations in electric vehicles
We’ve seen tremendous innovation in the electric vehicle industry, which has also impacted investment in other sectors of the energy industry We have to keep in mind that energy fuels compete with each other. In the same way, different renewable energy technologies compete with each other.
Investors are looking for energy fuels that offer the greatest return on their investment. So far, biofuels have not always fared well compared to other renewable energy technologies. Of course, there are exceptions, such as sugarcane production in Brazil. Brazil, in particular, has chosen to increase sugarcane production to provide fuel for the transportation industry. This has led to economies of scale in ethanol production and fueled the growth of the biofuel sector in Brazil. We have not seen the same trend in other countries. This could be related to the fact that most developed countries are further away from the equator, which means that biofuels have a lower energy return in these locations.
Electric vehicles are not as dependent on climatic conditions and electricity can be generated from a variety of renewable energy sources. We assume that electric vehicles are powered by renewable energy, otherwise we would raise the question of why we do not use fossil fuels in the first place.
The electric vehicle industry is booming in Europe. Eastern Germany is establishing itself as a center for electric vehicle manufacturing and this has contributed to the recovery of the eastern German economy. While the recovery of the East German economy is taking place thanks to the growth of electric vehicle manufacturers and battery producers, we have seen a steep decline in the production of diesel engines in the south of Germany. This development is eerily reminiscent of developments in the Rust Belt, particularly Detroit.
German automakers are often heavily unionized, which contributes to overall costs. Eastern Germany has much lower labor costs and is more closely integrated with the Eastern European economy. As it is, the German government has a real incentive to promote the production of electric vehicles, at the expense of diesel engine manufacturers. Since biofuels and biodiesel can be used by diesel engines, this development will not bode well for biofuel production in the European market. In addition, hydrogen is actively promoted and supported by the government, which does not help biofuel producers in Europe either.
We also have to keep in mind that Europe has already initiated the energy transition and built up a whole infrastructure for renewable energies. It is not very likely that European countries will turn away from renewable energies. Renewables also account for a significant share of European electricity production, especially in countries like Germany, the Netherlands, Denmark and the UK.
3. Biofuels are recognized by all as carbon-negative energy solutions (CO2)
There is always a risk that biofuels will not be recognized as all-encompassing renewable energy sources. Some see it that way because renewable energy is only truly renewable if it removes CO2 from the atmosphere, but biofuels, as the saying goes, put CO2 back into the atmosphere. Biofuels are essentially carbon neutral.
Nevertheless, biofuels can be a suitable supplement to the existing fuel supply. Of course, we must keep in mind that biofuels, like any other energy source, have advantages and disadvantages.
4. Decreasing subsidies and incentives for biofuels and biofuel production
As more and more renewable energy options become available on the market, there are fewer and fewer incentives for governments to favor a particular renewable energy technology. This also means that competition between renewable energy producers and technology providers becomes more intense. This may have been the case for the biogas industry in Germany, which had a good run and received generous subsidies over a very long period. They received preferential treatment under the Renewable Energy Sources Act and fed electricity into the national grid. Biogas producers also fed biomethane into the natural gas grid. This ended abruptly, and hardly any new biogas plants have been built in Germany since then.
We see a similar trend with the flourishing solar industry in eastern Germany. Electric car manufacturers are growing by leaps and bounds in Europe and producing their cars in eastern Germany. But before the electric car revolution got off the ground, solar panel manufacturers had gained a foothold in eastern Germany and were trying to produce for the global market. The solar module manufacturers were producing excellent solar modules that were world class by any standards. But the European market opened up and they were overtaken by their international competitors from China, who often bought the technology and associated patents for a cheap price. A few years later, subsidies were cut and, as in the biogas sector, many of the solar module manufacturers had to close their factories.
Assuming that the biofuel sector achieves something similar, it is not certain that the biofuel industry can hold this position forever. It may be that a great many biofuels have a shot at the moon and then combine to form monopolies. Assuming that biofuel producers are able to produce some kind of superfuel or a really dense energy fuel that is also environmentally friendly and good for engines, that doesn’t mean that success is destined to last forever.
5. Not being able to commercialize biofuel quickly
An important consideration is that biofuel producers need to move quickly from the experimental phase to the commercialization phase to achieve economies of scale. One idea is to combine the strength of small innovative biofuel producers with the strength of the large oil companies that have the capital and industrial and administrative processes to move quickly and scale up.
Many biofuel sources are particularly difficult to scale and commercialize. Major efforts have been made to commercialize algae biofuels by oil companies, with limited success. Many oil companies have since withdrawn from algae biofuel production or reduced their involvement. But there are other, smaller and more nimble companies that have persevered. These niche players are hoping for a breakthrough that can lead to commercialization within the next 10 years. As soon as commercialization is possible, algae fuels should be used in sustainable transport. Due to the decent return on invested energy (EROI), environmentally friendly algae fuels could attract many.