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The past year has brought a welcome surge in investment and growth for the renewable energy industry — with one very large exception: biofuels.

The amount of money invested globally in the fuels, hailed as the answer to climate change and high oil prices, sank to $3bn in 2014, the lowest level in a decade. That was down from a 2007 high of nearly $30bn, according to Bloomberg New Energy Finance, a research company, and it was not the sector’s only gloomy piece of news.

Last year also saw the number of patent applications made globally for biofuels fall for the first time since 1999, according to the European Patent Office. Biofuel applications hovered below 1,000 a year until 2003, says the EPO, which holds data for countries around the world.

The number rose above 3,000 in 2009 and topped 4,000 in 2011. But in 2014, they fell back to 4,019 from more than 4,300 the year before.

The figures underline the divided nature of an industry that has achieved striking success in some countries, especially the US and Brazil, but is struggling in many other places.

Those two countries are the top producers of ethanol, one of the two commonest forms of biofuel. The US typically makes it from maize; Brazil from sugar cane. The other type is biodiesel, derived from vegetable oil, animal fat, or even recycled cooking grease. It is used more in Europe, where diesel vehicles are more common.

Biofuels may seem a very modern source of energy, but they were around more than a century ago when Rudolf Diesel, the German inventor, was developing the engine that carries his name. One early diesel engine ran on peanut oil and Henry Ford thought his Model T car would run on ethanol. But the rise of the oil industry provided such vast quantities of cheap, reliable gasoline that biofuels fell out of favour.

That started to change after the 1970s oil shock, when a spike in crude prices spurred interest in homegrown alternatives to imported oil, and climate change concerns began to drive the development of renewable energy sources.

At least 64 countries now have policies to encourage the use of biofuels. Although the fuels only account for about 3 per cent of the world’s transport fuel, the International Energy Agency has estimated that figure could rise to as much as 8 per cent by 2035.

In the US, ethanol accounts for 10 per cent of the gasoline supply and is blended in more than 97 per cent of the country’s gasoline, according to the US Renewable Fuels Association. Some types of ethanol were priced as much as $1 a gallon below gasoline for much of 2014, the association says.

But oil prices crashed from $115 a barrel last June to about $45 in January, sending a shiver through a biofuels industry already facing battles on other fronts.

The most notable is concern over whether biofuels derived from food crops drive up commodity prices and encourage poor countries to destroy their tropical forests. That worry helped push the EU to decide in April to limit the use of crop-based biofuels.

Many companies now pin their hopes on so-called second generation, or advanced, biofuels such as cellulosic ethanol, which is derived from materials such as corn husks or fast-growing grasses that do not compete with food.

Claire Curry of Bloomberg New Energy Finance says the biofuels sector is relatively stagnant

There are now six cellulosic ethanol plants operating around the world, says Peder Holk Nielsen, chief executive of Novozymes, a Danish supplier of the enzymes used in biofuel production. That is only a tiny fraction of the nearly 1,200 bioethanol plants Novozymes says are in operation and the newer industry faces logistical hurdles, such as obtaining large volumes of suitable feedstock.

“If you buy baled wheat straw in Europe, you get stones, old bicycles, all kinds of things that are a nightmare in the process,” he says.

Cost remains an issue too. But this will change as the industry develops, assuming more countries introduce the incentives needed to encourage it, he adds.

“I think it’s utterly wrong to depict this emerging industry as a fantasy fuel that’s always going to be incredibly more expensive than gasoline,” he says. “Corn ethanol has been cheaper than gasoline for the past 10 years. It’s given the Americans cheaper fuel than they would have had otherwise.”

“Had the Europeans done the same thing, we would have saved on our fuel bill. Cellulosic ethanol, if you just give it a chance, will soon prove it’s cheaper than gasoline.”

But the industry needs to start demonstrating it can work soon, says Claire Curry, an analyst at Bloomberg New Energy Finance. The first-generation biofuels sector is relatively stagnant, she says, and is yet to be replaced by a next-generation fuel industry that offers promise but is struggling to scale up.

“It is facing a challenging environment and only has another year or two to prove itself,” she says.

Copyright The Financial Times Limited 2017. All rights reserved.
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