Ernst & Young: U.S. ideal for biofuels investments

By Nicholas Zeman | November 01, 2007
Despite hardships in the U.S. biodiesel production industry, a recent index compiled by Ernst & Young Global Ltd. concluded that the United States is the No. 1 country for biofuels investment.

The quarterly report, called "Biofuels Country Attractiveness Indices," ranked the attractiveness of the top 15 countries for investment in renewable fuels. It compiled one index for biodiesel, one for ethanol and one combining the two. In the second quarter of 2007, France, Brazil, Germany and Spain rounded out the top five in the biodiesel index. In the first quarter 2007 report, Germany was ranked No. 1, while the United States and France were tied for second.

Jonathan Johns, head of renewable energy at Ernst & Young, said the number of biodiesel projects under development was one reason the United States scored so high. "[The United States] has the world's largest project pipeline for biodiesel, which should produce 450 million gallons by 2008, compared with 136.5 million gallons in 2006," he said.

Legislation also was taken into account. "Recently proposed legislation would require U.S. refineries to blend a mandatory minimum of 1.25 billion gallons of biodiesel per year by 2012, and although it's not passed, it sends a very positive message to investors about future demand for biofuels in the United States," Johns said.

In contrast, Ernst & Young said Germany's biodiesel industry is struggling and its production plants are operating at 50 percent capacity. "Germany was once the shining light for investors, buoyed by its exemption on excise duty for all biofuels," Johns said. "However, stepped tax increases on biofuels rising [feedstock] prices and cheaper imports are reducing the commercial viability of biofuels."

Lurgi PSI Inc., a Memphis-based biodiesel construction firm that conducts business in the United States and Germany, has seen several factors affect the industry in both countries. Vaughan Farrie, Lurgi sales and marketing director, and his German associate Christian Faber told Biodiesel Magazine those factors include the food-versus-fuel debate, the increase cost of feedstocks and the increase in construction costs.

U.S. biodiesel producers and those developing new projects may disagree with the positive angle that Ernst & Young's indices offer compared with what is actually occurring in the U.S. biodiesel industry. However, Farrie said the smaller, newer start-up companies will struggle most with financial support for their projects. "There will be another period of significant expansion and growth, but it will come from a fewer number of companies building more plants," Farrie said.

Faber said the situation is similar in Germany. "The smaller plants of 3 MMgy or less are dying off," he said. As for plants running at 50 percent capacity, he said fixing that situation will be complicated because biofuels regulations and subsidies have to be generalized for the entire European Union. "There are two different types of markets for producers," Faber said. "There's the B5 blend market and the B100 market. The tax benefits for B100 have been reduced, and the production facilities can't jump right into the B5 market, partly because of long-term sales contracts."

Pursuing "second-generation" biodiesel projects will drive investments in the future, Farrie said. "There will be a period of incremental changes where plants are squeezing the very most out of conversion methods today, and then they will start to step into new technologies." These new technologies, which include feedstocks such as algae, may be risky and expensive, but some may take the risks and foot the bill to realize the next era of biofuels, which could keep the investment atmosphere in America fertile.

For a copy of the Ernst & Young Biofuels Country Attractiveness Indices, visit www.ey.com/global/content.nsf/International/Oil_Gas_Renewable_Energy.
 
 
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