3. Ethanol
3.1 Background
We have chosen ethanol/petrol blends as the only alternative biofuel that could be used in mandatory transport fuel blends. Ethanol has a substantial pedigree as a biofuel, having been used in the United States, Europe, and Brazil for many years. Moreover, the global supply is growing rapidly.
That said, vehicle manufacturers in New Zealand and the Motor Industry Association have indicated an unwillingness to support ethanol blends over 3% (Duncan and Copeland, 2004). However, internationally, car manufacturers have expressed a willingness to accept blends up to 10%. This is the case in the United States and in Australia.2 In general, vehicle manufacturers accept that "nearly all recent model conventional gasoline vehicles are fully compatible with 10% ethanol blends" (IEA 2004).This suggests that while there appears to be a reluctance to accept E5 or E10 in New Zealand, acceptance is far from out of the question.
Ethanol can also be blended with diesel to produce a fuel known as diesohol. We have not directly considered diesohol because of the inordinate cost difference between ethanol based biofuels and tallow based biodiesel. It is unlikely that ethanol prices will ever be small enough, relative to tallow/biodiesel prices for diesohol to be economically viable over biodiesel.
Ethanol in petrol blends is known to have a number of both positive and negative effects on vehicle performance - though the precise effects vary by make of vehicle and through the life of the vehicle.
Ethanol, or more precisely anhydrous ethanol which is used in transport fuel blends, is more volatile than petrol and as a consequence in most countries where ethanol is blended with petrol the blend is limited to either 5% or 10% blends. The additional volatility of ethanol over petrol can have a negative impact on vehicle performance.
Ethanol can also damage engine components, particularly seals and rubber fuel lines. Also, ethanol is more corrosive than fossil fuels and as the ethanol level in fuel increases engine wear can increase as a result.
However, ethanol has a high oxygen content relative to petrol and as a result burns more cleanly than petrol, potentially leading to a reduction in engine deposits. This higher oxygen content also leads to more efficient energy use, with more kilometres able to be travelled per petajoule of ethanol than per petajoule of petrol.3
3.2 Unit Costs of Ethanol Blends
The cost of ethanol blend fuels is primarily related to feedstock costs. However, instituting a mandatory bio-fuels target will impart additional costs, impacting on the price of transport fuels, associated with the cost of importing, transporting, storing, blending and distributing ethanol petrol blends.
The non-feed-stock costs associated with ethanol petrol blends have been estimated by Duncan and Copeland (2004) to be 1.1 New Zealand cents per litre of ethanol. In the following analysis we have assumed that this cost remains constant through time. The cost is added to the production of ethanol blended petrol before the imposition of an observed retail premium (the average difference between crude prices and pump prices).
Figure 4: Ethanol, Sugar, and Crude Oil Prices: Rolling Annual Average US Dollar Spot Market Price
Source: Datastream
Indeed our analysis of the price of ethanol suggests that in the past ten years the price of ethanol has been negatively correlated with the price of oil, suggesting that as oil gets more expensive ethanol is becoming a more economically viable substitute for oil.
Figure 4 shows that ethanol prices are in fact more closely correlated with the price of sugar than the price of crude oil. This relationship is not surprising in so far as the bulk of world ethanol supply is from sugar production.
The fact that ethanol prices do not track crude oil prices is important because it means that the relative cost of ethanol is likely to be inversely related to the price of oil and as the price of oil rises ethanol use becomes increasingly less costly. The downward track of ethanol prices over time suggests that the use of ethanol may be increasingly less costly in the future, particularly as crude oil prices are rising on the back of strong world demand growth and uncertainties surrounding world supply.
Figure 5 shows the path of our forecast for ethanol prices versus crude oil prices.
Figure 5: Ethanol and Crude Price Forecast
Source: Datastream, NZIER
In addition to the cost of ethanol per litre and costs of distribution, storage, and blending, ethanol is also more costly than petrol as a transport fuel because it is less fuel efficient. The precise loss in fuel efficiency from ethanol/petrol blends depends upon the type of vehicle, the feedstock used to produce the ethanol, and the age of the vehicle. In general, ethanol has lower energy content than petrol (per litre of fuel) and so more ethanol is required per kilometre of travel than petrol. The impact of fuel efficiency has been modelled as a price effect in our study, with ethanol raising the price of fuel by the percentage increase in fuel consumption estimated in Duncan and Copeland (2004) of 2.6% for every 10% of ethanol in an ethanol/petrol blend.4
3.3 Ethanol Blend Pump Prices
In Figure 6 two paths are provided for the price of an ethanol blend at the pump. One is the price of the ethanol blend assuming that the ethanol input provides for equivalent fuel efficiency of petrol. The second is adjusted for a 1.3% efficiency difference whereby the E5 blend leads to a 1.3% increase in fuel consumption which we have modelled as a price impact or additional tax.
Figure 6: Petrol and 5% Ethanol Blend Pump Prices: New Zealand Dollars per Litre
Source: NZIER
Table 2 provides the path of likely pump prices of various ethanol/petrol blends relative to petrol pump prices. The pump prices have been standardised using a retail premium as per the case for our biodiesel forecasts and our reference prices for both petrol and ethanol/petrol blends are the average annual price as was the case for biodiesel. For petrol prices, where the price varies depending on whether the fuel is premium or regular, we have used the premium fuel price as an upper bound for our forecasts. Thus the prices forecast for ethanol/petrol blends are those for ethanol blended with premium petrol.
While ethanol currently benefits from an exemption from petrol excise duty, this exemption is due to expire in two years. Given our brief not to consider subsidies or other incentives, we have modelled the price of ethanol without the exemption from excise tax.5
In the table and hereafter ethanol petrol blends are referred to by the acronym E[percentage blend of ethanol].
Table 2: Petrol vs. Ethanol Blend Pump Prices: New Zealand Cents per Litre, Assuming no Fuel Efficiency Loss from Using an Ethanol/Petrol Blend| Year | Petrol price | E3 price and price difference | E5 price and price difference | E10 price and price difference |
|---|
| 2004 | 114.39 | 115.68 | 1.29 | 116.55 | 2.16 | 118.71 | 4.32 |
|---|
| 2005 | 131.69 | 132.45 | 0.76 | 132.96 | 1.27 | 134.23 | 2.55 |
|---|
| 2006 | 126.10 | 127.57 | 1.48 | 128.56 | 2.47 | 131.03 | 4.93 |
|---|
| 2007 | 124.78 | 126.20 | 1.43 | 127.16 | 2.38 | 129.53 | 4.75 |
|---|
| 2008 | 123.32 | 125.29 | 1.96 | 126.6 | 3.27 | 129.87 | 6.55 |
|---|
| 2009 | 125.54 | 127.77 | 2.23 | 129.27 | 3.73 | 132.99 | 7.45 |
|---|
| 2010 | 127.80 | 129.58 | 1.77 | 130.76 | 2.96 | 133.71 | 5.91 |
|---|
| 2011 | 127.23 | 128.25 | 1.01 | 128.93 | 1.70 | 130.62 | 3.39 |
|---|
| 2012 | 126.66 | 127.34 | 0.68 | 127.79 | 1.13 | 128.92 | 2.26 |
|---|
Source: NZIER
3.4 Effects of Ethanol on Vehicle Emissions
Tailpipe emissions from ethanol powered vehicles are less than for petrol powered vehicles, largely because ethanol is cleaner burning than petrol. Precise reductions in emissions from ethanol blended fuels depend on the feed-stock used to create the ethanol. For example, ethanol from sugar cane produces the least emissions compared with ethanol produced from other biomass such as wood pulp. However, a typical E10 is estimated to significantly reduce tailpipe emissions relative to emissions from unleaded petrol. Typical reductions are as follows:
- 26.9% reduction in carbon monoxide.6
- 14.4% reduction in non-methane volatile organic compounds (NMVOC)
- 0.1% reduction in particulate matter.
- 1.0% reduction in CO2 emissions.
Ethanol has been linked with increases in emissions of nitrogen oxides (around 5%), but these are considered to be minimal costs given the reduction in other emissions. Notably, ethanol does not confer the same benefits in terms of reduced emissions of particulate matter compared with that of biodiesel largely because emissions of particulate matter from petrol are significantly less than those from diesel fuel. Consequently the estimated health benefits from ethanol use are insignificant.
CO2 emissions are assumed to reduce by 1.0% for every 10% of ethanol in an ethanol/petrol blend. In addition to this, for each 1% of ethanol used in an ethanol/petrol blend, 0.667% of emissions are assumed to be due to ethanol and therefore from a renewable source which does not increase the stock of CO2 in the ecosystem. The net effect being that, based on CO2 emissions alone, a 10% blend of ethanol in petrol would result in an approximate 8% reduction in the amount of greenhouse gas emissions produced as a result of unleaded petrol consumption (disregarding for the moment any impact from increased fuel consumption as a result of ethanol/petrol blends).
The benefits of reductions in CO2 emissions have been modelled using an assumed $15 per tonne value of CO2 as outlined above for biodiesel.
3.5 Ethanol Supply Issues
New Zealand's dairy industry produces ethanol as a by-product of dairying and research suggests that around 11 million litres of ethanol (0.3 PJ) per annum may be available for blending with petrol (Duncan, 2003). This is a small amount, and the most likely scenario is that a bio-fuel blend of ethanol in New Zealand would require the importation of ethanol.
We do not see any major problems in accessing sufficient supply of ethanol through importing. While only about 10% of world production of ethanol goes onto the world market, this proportion is expected to increase in the future, with the IEA expecting that worldwide fuel grade ethanol should reach about 80 billion litres by 2012 from around 22 billion in 2002 (IEA, 2004). Moreover, production is becoming increasingly efficient with the introduction of new fuel production technologies and as a result the cost ethanol is likely to fall in the future increasing its viability as a mineral fuel alternative.
That said, if the amount of ethanol traded on world markets continues to be only around 10% of world production, this would result in only $8 billion litres available for purchase on the world market. As such, net importing countries of ethanol (of which New Zealand would be one if an ethanol/petrol blend requirement was instituted) could well face higher prices, particularly if the trend towards ethanol/petrol blends continues the world over. This would have the effect of raising world prices for ethanol above our forecasts.
An additional element that needs also to be considered is that ethanol production is subsidised in Europe and the United States. If these subsidies are removed in the future then the price of ethanol will rise. In addition to this, export quotas and subsidies exist for sugar producers which lower the cost of sugar on world markets. International trade liberalisation through the WTO could well lead to increases in sugar prices and subsequent increases in the price of ethanol. Thus there are non-trivial risks to our forecasts of ethanol prices.
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