The Energy Opportunity – Biofuels

Biofuel has long been the proverbial red-headed stepchild of the energy industry. Though it has been part of the social consciousness for decades, it possesses the stigma of being long on promises and short on profits. After years of eking out a subsistence on energy subsidies and fears of a world in which we eventually run out of fossil fuels, it’s fair to say that biofuel’s reputation has been well earned.

However, as any investment professional could (and would be obligated to) tell you, past performance is not necessarily an indicator of future results. While the phrase is usually used to dampen expectations of repeat success, perhaps in the case of biofuels it could be used to both quell fears of repeating past failures and herald a possible turning point in the world of alternative energies.

Biofuels’ History

In the past, there have been two basic types of biofuels and ways that they’re produced. First, there’s ethanol, which is primarily produced by the United States and Brazil by converting plant-based sugar into alcohol that can then be used as fuel. Corn, sugarcane, and sugar beets are some of the more common sources of plant sugar. The downside to ethanol is that it provides around two-thirds of the energy that an equivalent amount of gasoline or petrol provides. This, coupled with high production costs in comparison to oil, has hindered the adoption of ethanol. It has, however, managed to carve out a niche as an additive to traditional fuels. When mixed with gasoline or petrol, it improves combustion performance and lowers emissions.

There’s also biodiesel, the production and use of which is mostly limited to the European Union. Biodiesels are made by combining vegetable or animal fats with alcohol. While biodiesel has more power than ethanol, it still falls short compared to the output of traditional energy sources, with around 90 percent of the energy of traditional diesel. Like ethanol, biodiesel can be blended with traditional diesel fuel, and compression ignition engines can utilize biodiesel in its pure form.

Biofuels’ Future

Traditional ethanol and biodiesel are known in the industry as first-generation biofuels. However, technology advances have opened new frontiers in the renewable energy industry, providing applications for previously unusable byproducts. With second-generation biofuel technologies, ethanol can be produced from the cellulose, hemicellulose, and lignin found in agricultural and forestry waste byproducts as well as grass and municipal/residential waste. Developing this technology and applying it on a commercial scale would enable the agriculture and energy industries to work together and profitably harness previously undesirable agricultural byproducts to create fuel.

Lest excitement about the potential future of biofuel override common sense, it’s important to remember that market share of biofuel is still small, at less than 1 percent of total global energy use. Moreover, the profitability of biofuels in general, and the development of second-generation biofuels on a commercial scale, is directly tied to the cost of traditional energies.

With today’s low oil prices, it’s difficult to get too excited about biofuel in the immediate future, but in the long term, it’s certainly worth watching. An increase in oil prices and further development of second-generation biofuels would bode well for investors in both the energy and agribusiness industries.