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Appendixes
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A—
Case Study of Lignocellulose Ethanol Processing
The U.S. Department of Energy (DOE) examined the economics of producing ethanol from wood chips in a 1993 report (Bozell and Landucci, 1993). The analysis below is based on that study but considers corn stover—corn stalks, leaves, and husks—as the potential feedstock. Examination of the feedstock supply and demand, and the costs of transportation and processing, suggests that 7.5 billion gallons of ethanol could be produced annually at a cost of about $0.58 per gallon. When corrected for fuel efficiency, the cost to replace a gallon of gasoline becomes roughly $0.58, potentially making ethanol cost competitive without subsidies. This projection critically hinges on new technologies and on low corn residue costs because these residues are coproduced with corn grain. An additional 4.5 billion gallons of ethanol may be produced at potentially higher costs due to higher prices for corn stover.
Feedstock Supply and Demand
Figure A-1 shows a supply curve for corn stover. Supply curves identify the amount of a resource available in the market at a given price as determined by its value in the best alternative use. The supply price for a new crop typically consists of production costs (planting, care, harvesting) plus an allowance for land rent, where land rent represents the value of the land when it is used to produce another crop. The cost of corn stover may be lower than new crops, at least for some levels of use; stover and corn grain are produced together, making recovery of land
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Figure A-1
Corn stover supply and demand curve.
costs for corn stover unnecessary because they have already been accounted for in grain profit calculations.
The present economic value of corn stover arises from two sources. First, erosion and fertilizer requirements are reduced when corn stover is left on the ground. Second, corn stover replaces low-grade hay when fed to cows. A first approximation of the stover supply curve facing ethanol processors is a step function (Figure A-1). It begins horizontal at net harvest cost (U). Processing plants in well-chosen locations in cash-grain areas could acquire stover that is not used by livestock producers at slightly above harvest cost. The second step of the curve is the higher value that livestock producers are willing to pay for stover used as feed (L). If processors are willing to pay slightly more than the livestock value, all stover supplies would be diverted to industrial uses. The supply curve is vertical where industry uses all available supplies, provided that the amount of land that is planted with corn is kept fixed.
If the new cellulose conversion technology develops successfully, energy products will create a new market for corn stover. The horizontal demand curve, De in Figure A-1, shows energy producers' returns for processing a unit of corn stover (the difference between energy product price and stover processing costs). The market determines corn stover use up to where processors' returns equal corn stover harvest costs—the
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intersection of supply and demand. If energy prices rise, the demand curve will shift upward, and progressively more corn stover (and other raw materials) will be available at progressively higher prices in a market economy. Estimates of corn stover use opportunity costs to determine the dollar per ton (height) steps of the corn supply curve.
Table A-1 gives net harvest cost estimates based on harvest expenses and fertilizer replacement costs for the midwestern United States. Harvest costs are estimated from hay harvesting costs (fixed machinery replacement costs and variable operating costs). The calculations use a harvested stover tonnage that includes an amount (30 percent) left on the field for soil conservation compliance. The fertilizer estimate is based on replacing phosphorus and potassium contained in the harvested corn stover. The stover net harvest cost is $16.50 per ton. Reported production costs for several energy feedstocks in a Midwest location are considerably higher than harvest cost for corn stover. The estimates range from $42.00 per ton for sweet sorghum to $95.00 per ton for canary grass in Ames, Iowa, where crop rents are relatively high. Costs were lower at Chariton, Iowa, due to reduced land costs, ranging from $36.00 for sweet sorghum to $93.00 per ton for alfalfa. The feed value of hay can be similarly calculated using some adjustments for total digestible nutrients and the protein deficiency of corn stover in comparison to hay. The value of corn stover as a feed is about $35.00 per ton based on the 1994 hay price.
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The volume of corn stover available to the processing industry can be approximated using estimates of available corn stover, cattle population and forage requirements, and the availability of hay for forage. Calculations (not shown) involved multiplying a state's corn area by a stover yield estimate that leaves an allowance for compliance with the Conservation Reserve Program. Similarly, the estimate of cattle feed demand is the product of cattle population and forage requirement per animal, less hay supply for each state. The industry supply is the supply less feed demand—in this case about 125 billion pounds (62.5 million tons) available at low prices near the harvest cost of $16.00 per ton. At prices above the feed cost of $35.00 per ton, the entire stover supply of about 200 billion pounds (100 million tons) would be available to the processing industry.
Approximately 7.5 billion gallons of ethanol could be produced at about $0.46 per gallon from corn stover. An additional 4.5 billion gallons of ethanol may be produced at higher costs due to a potentially higher price for corn stover above the feed cost of $35.00 per ton. The calculations below assume maximum theoretical yields for conversion of pentose and glucose sugars:
When correction is made for the relative fuel efficiency of ethanol and gasoline, the 12 billion gallons of ethanol from corn stover translates to the equivalent of 9.6 billion gallons of gasoline or about 9 percent of annual U.S. gasoline consumption (about 110 billion gallons).
Transportation Costs
A large processing plant could exploit economies of scale but would also require vast amounts of corn stover (about 2.9 million tons for a 350 million gallons per year ethanol plant). Given the average corn density in Iowa, for example, all the corn stover available in a 50 mile radius would be required. Since the delivered cost of the stover increases with distance, the transportation component of input cost could become large and offset economies of scale when such a bulky material is used as a feedstock. The firm's average input costs (AICs) can be approximated by the formula AICs = P0 + 2tr/3, where P0 is the harvest cost, r is the radial distance from the plant (in miles), and t is the transportation cost (in dollars per ton per
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mile). Based on quotations from Iowa trucking firms, the 1994 transportation rate is between $0.10 and $0.15 per ton-mile (for shorter distances). Hence, the average total cost of all stover drawn from within 50 miles is $20.00 to $21.50 per ton.
The lower stover estimate was used to calculate processing cost (below) because the routine of a large plant could reduce the short-haul rate and because the average corn stover density may understate availability at the local level. Some offsetting bias may exist in these calculations; distance is measured ''as the crow flies" instead of on a particular road network and therefore may be understated. Also, the average corn density may understate availability at the substate level because it combines low-density crop production from cattle grazing areas of the south with high-density corn production in cash-grain areas of the north. Well-chosen plant locations would be in the cash-grain areas, where stover could be acquired at near harvest costs. Overall, the calculations do suggest that transportation costs are not a major barrier to operation of a large-scale plant, at least in the Corn Belt.
Processing Costs
Revised material flows and cost estimates are shown in Table A-2. This analysis adjusts reported cost data on bioprocessing for uniformity and for comparisons that indicate tradeoffs by decisionmakers. The cost data also conform to the procedures of Donaldson and Culberson (1983) that facilitate comparison to petrochemical processes. Variable costs include materials and utilities. Labor costs are included where available. Fixed costs are limited to capital costs, calculated as the annual payment on a 15-year, 10 percent interest, fixed annual payment mortgage on the entire plant cost. Other expenditures are excluded from fixed costs, including overhead (because there is no opportunity cost) and insurance (in order to offset risks of the profit stream, which should be considered elsewhere). Expenses such as labor for plant maintenance or taxes on the plant could be included, but individual situations vary, and data were not uniformly available. Cost data for some petrochemical processes (styrene, ethylene, ethanol) were developed using Donaldson and Culberson's estimates of input requirements, yields, and plant costs—combining input requirements with recent price data to estimate material and utility expenditures, updating capital expenditure data with a price index for plant and equipment, and giving annual payment for a 15-year mortgage. These calculations assume that stover is available at near its harvest cost of $16 per ton and includes a transportation cost. It is also assumed that technology for fermentation of pentose sugars is fully implemented.
Other cost adjustments were required for conversion to corn stover
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from wood chips. In particular, the lignin content of corn stover is only one-half of that for wood chips, so the one-half of electrical plant capacity that was sold as a byproduct credit is removed. Also, the 10 percent gasoline mixing operation was eliminated, so estimates now refer to a pure ethanol basis. Input prices and capital outlays were indexed to a 1993 basis. Finally, the feedstock cost is corn stover harvest cost adjusted for transportation as discussed above. The overall production cost for ethanol is estimated at $0.46 per gallon (refer to Table A-2).
Fuel Efficiency
Miller and colleagues (1996) reported that ethanol reduces fuel efficiency in automobiles by 2 percent when used in the standard 10 percent blending proportions with gasoline. Hence, a gallon of ethanol is worth only 80 percent of a gallon of gasoline to an automobile engine. Thus, for $0.46 per gallon of ethanol, it will cost $0.46 (0.80 = $0.58) to produce the ethanol equivalent to a gallon of gasoline.
