Biofuels – a viable option for NZ’s motorists

Biofuels – a viable option for New Zealand’s motorists?

Will New Zealand’s cars be running on tallow, whey or oilseed in the coming years? Last week the government released a discussion paper outlining a proposed policy aimed at introducing biofuels to our petrol tanks.

Rabobank, the world’s leading specialist food and agribusiness bank, has also released a report on biofuels. The Global Focus report on Biofuels says that the buzz surrounding biofuels has changed from a murmur to a roar as the price of crude oil has continued its upward climb during 2005 and 2006.

The report focuses on the development of biofuel industries in the European Union, United States, and Brazil. It also examines Australian government initiatives to encourage an emerging industry across the Tasman, where there is a non-mandatory target of 350 million litres or 1.1 percent of total fuel usage to come from biofuels by 2010. There are no penalties if the target is not met and biofuel uptake will be encouraged by tax and other incentives.

Report author, Rabobank analyst Ingrid Richardson, says the international experience has shown that strong, long-term government support has been integral in enabling emerging biofuel industries to become established.

“It is clear from the experience in the EU, the US, Brazil and a number of other countries that a biofuels industry is unlikely to emerge without strong government support over many years,” she says.

Ms Richardson says mandates or targets that impose minimum biofuel levels to be used in fuel have proved particularly popular in a number of countries as a means of ensuring a market for biofuels through the creation of compulsory demand.

This is the mechanism outlined in the Ministry of Transport’s “Biofuels Sales Obligation” where oil companies will be required to ensure that 0.25 percent of total sales volume is biofuel by 2008, increasing to 2.25 percent by 2012. It is proposed that financial penalties will be imposed for falling below this target.

A critical issue in determining the suitability of the proposed policy is considering where the biofuel is sourced. It does not presume that the full needs can be met from production within New Zealand and the report discusses locally produced and imported product.

Ms Richardson identifies two options for biofuel production in her report:

1. 1st generation biofuels from grains, oilseeds, sugar and tallow
2.
3. 2nd generation biofuels made by producing ethanol from cellulose waste products such as plant stalks, grass and woodchips. Research is continuing as the current processes are expensive and not commercially viable.
4.
New Zealand lacks the large-scale grain industries that are providing raw materials in regions such as the United States and the European Union. Biofuel production would have to focus on tallow, whey or second generation technology as it becomes commercially available.

“Even Australia may struggle. Feed stocks for ethanol production in Australia include wheat, sorghum, feed barley, sugar or molasses. Biodiesel plants are being developed based on tallow, recycled oils, imported palm oil and canola. Feed stocks are the most expensive input in production – around 60-75 percent of costs in the case of ethanol and 80-90 percent of biodiesel. Agricultural commodity prices are historically volatile, which would not fit well with a developing biofuels industry,” says Ms Richardson.

The Australian grain industry focuses on production of high-quality, and often high protein, grains for food markets that can pay appropriate prices. Grain suited for ethanol production needs to be higher in starch/sugar content in order to maximise ethanol yields. Weather is the most difficult aspect of Australia’s grain industry. Biofuel production requires a constant supply of grain at “reasonable prices.” With lack of rainfall reducing Australian winter grain production by almost 40 per cent this year it is unlikely that the industry can guarantee supply.

Ultimately, long-term government support – in terms of policy to encourage both consumption and production increases - is a critical issue, which must be addressed between proponents of the industry and government, Ms Richardson says.

“From a consumer perspective, price will be the most important driver of acceptance. Biofuels can cost more to produce than petroleum fuels. A complex mix of factors such as the price of oil, exchange rates, volatile feedstock prices and government taxes determine the price at the pump,” says Ms Richardson.

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked one of the world’s safest banks by Global Finance magazine. Rabobank operates in 38 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

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