Analysis of U.S. Renewable Fuels Policies Using Modified MARKAL and GTAP-Bio Models

1. Analysis of U.S. Renewable Fuels Policies Using Modified MARKAL and GTAP-Bio Models Kemal Sarica, Wallace E. Tyner Purdue University October 10, 2011 30th USAEE/IAEE North American Conference

2. Outline • Scope • Model and Modifications • Land in biomass supply chain • Biomass supply for corn and cellulose • Update in biochemical cellulosic ethanol tech. • Thermochemical process technology • Fuel dispenser infrastructure (differentiating E10 and other ethanol blends) • Scenarios • Results

3. Scope • Evaluate the impacts and costs of prospective US biofuels with • competitive energy system infrastructure, • a more realistic approach considering key factors of production, • alternative technologies for liquid fuel production

4. Model • Use of the US EPA MARKAL model version 2010. • Model is a bottom up partial equilibrium energy systems model that makes use of a detailed representation of energy technologies. • This paper concentrates on Renewable Fuel Standard (RFS), biofuel subsidies, and alternative technologies to reach the targets specified.

5. U.S. Renewable Fuel Standard

6. Model

7. Model Modifications - Biomass • Biomass is different from other energy sources in MARKAL. Use of land for biomass production is competitive with ongoing crop production for other demands (e.g., food). • It is not necessary to sacrifice production of oil to produce uranium or vice versa. • The current RES of US EPA MARKAL model or any national or international MARKAL model only crudely reflects the biomass competition for land.

8. Model Modifications • US EPA MARKAL has been modified • to introduce the complete supply chain of biomass production including land • We have added ethanol from corn, and ethanol and bio-gasoline from corn stover, miscanthus and switchgrass • Land data comes from the Agro Ecological Zone classification system used in GTAP-BIO (GTAP DB 2004).

9. Model Modifications

10. Model Modifications Corn and corn stover • Corn and corn stover production are coupled. • Model can decide the level of stover production in conjunction with corn grain production. • We assume constant yield for corn production in the current version as there is no additional corn demand in MARKAL.

11. Model Modifications – Land Supply for MARKAL • We have developed a stepped land supply function for land supply from GTAP simulations. • With higher commodity prices comes higher land rent, ceterus paribus. • Land rent is related to commodity prices, and commodity prices are related to the proportion of land used to supply biofuel plants.

12. Model Modifications – Cellulosic Ethanol • Updated MARKAL cellulosic biofuel production technologies. • Data from 2009 National Academies study • Two options based on time frame representing low and medium improvement. • Corn stover, miscanthus and switchgrass are the feedstocks

13. Model Modifications Descriptive parameters of the biochemical ethanol techs introduced to the model

14. Model Modifications - Hydrocarbons • Introduced two thermochemical technologies for processing of biomass into the US EPA MARKAL model. • First one is the use of coal with biomass with carbon sequestration and storage (CCS) technology, • Promising since it makes the use of cheap coal resources with biomass and removes the excess carbon emissions.

15. Model Modifications - Hydrocarbons • Second is the direct use of biomass throughout the thermochemical process without CCS. • Both designs offer zero carbon emissions using a lifecycle approach • Selected designs are competitive alternatives to the cellulosic ethanol production choices for RFS targets

16. Model Modifications Descriptive parameters of the thermochemical technologies introduced to the model

17. Model Modifications Fuel Dispensers • Ethanol blends up to 10% (E10) compatible with current infrastructure. • Higher blends, such as E85 require separate dispenser and storage. • US EPA MARKAL model modified to capture required investments for distributing the blends higher than E10.

18. Scenarios • No government intervention (no RFS & subsidy) • Biofuels with RFS targets. • Subsidy based on current legislation (volumetric). • Subsidy for the corn ethanol $0.45/gallon, • Cellulose biofuel (regardless of what biofuel) $1.01/gal.

19. Scenarios (cont’d) • Subsidy based on energy content. • Cellulosic ethanol has a subsidy of $0.67 • Cellulosic bio-gasoline is at $1.01/gal. Corn ethanol remains at $0.45/gal. 5. Combination of the RFS and the energy equivalent subsidy (2 and 4).

20. Results (Oil Price)

21. Results (Marginal Economic Cost to Achieve Corn Ethanol Targets)

22. Corn Ethanol Logistics • US corn ethanol consumption has reached what is called the “blend wall.” About 12.6 bil. gal. is all that can be blended at 10%, the US blend rate. • To go beyond that to 15 bil. gal. will require huge investments in flex fuel vehicles and fuel dispensers. • That is why the marginal economic cost of corn ethanol is so high. The average cost is much lower.

23. Results (Average Economic Cost to Achieve Corn Ethanol Targets)

24. Results(Needed subsidies to achieve cellulosic fuel targets)

25. Results(Total system cost increase per gallon of cellulosic fuel)

26. Results (Subsidies needed to achieve cellulosic fuel targets)Yield Comparison

27. Conclusions • Without subsidy or mandate: • Corn ethanol will be produced as long as blend wall permits. • Cellulosic ethanol will not be in biofuels mix if forecasted thermochemical technologies are realized. • Stover use up to 125 mil. tons is expected. Energy crops will follow stover afterwards. • Thermochemical “drop-in” fuel production seems to be an attractive option.

28. Conclusions • Under mandated RFS scenarios, • Cellulosic eth. production is not expected due to eth. prod. hitting blend wall and fierce competition with thermochemical cellulosic fuel production . • Due to blend wall, and cost effectiveness, thermochemical cellulosic fuel production dominates biochemical supply chain. • Energy crop production 220 – 230 mil. tons by 2025 is expected coupled with 126 mil. tons stover use starting by 2015. • Expected land needed is 10 – 12 mil. hectares depending on tech. used.(less w/ CBTL.) • Related average land rent may go up to $150/hectare.

29. Conclusions Under subsidy scenarios, • Under volumetric subsidy scenarios, • Corn ethanol production will be very close to reference case. • Cellulosic fuel production is not expected due to blend wall even if the subsidy regime is more favorable. • Thermochemical fuel production dominates market with 25 BG production.

30. Conclusions Under subsidy scenarios, • Under energy content subsidy scenarios, • Corn ethanol production is very similar to volumetric subsidy (13 BG). • Cellulosic ethanol production cannot enter the market due to lower subsidy. • Higher land rent values are observed because the per unit of energy subsidy is higher in this case and the thermochemical pathway becomes more attractive.

31. Conclusions • Land use pattern / area changes considerably based on subsidy regime and available technologies. • For the RFS cases, existence of coal/biomass thermochemical technology reduces land requirement for cellulosic fuel due to complimentary nature with corn ethanol. • Biochemical cellulosic ethanol technologies do not seem be to an economical choice due to • blend wall, and • low yield / high cost levels compared to thermochemical rivals.

32. Conclusions • The required subsidy costs on cellulosic fuels vary widely depending on whether or not the coal/biomass technology is enabled. • Coal combined thermochemical pathway does not need any subsidy to meet RFS targets with the assumed conversion yields and capital and operating costs. • Findings are very sensitive to yield levels of the technologies considered (thermochemical).

33. Thank you!Questions and Comments For more information: http://www.ces.purdue.edu/bioenergy http://www.agecon.purdue.edu/directory/details.asp?username=wtyner