SUPPLY RISKS OF BIOFUELS

Transcription

1 SUPPLY RISKS OF BIOFUELS Hamed Ghoddusi, Jessika Trancik Trancik Lab, Engineering Systems Division (ESD) Massachusetts Institute of Technology (MIT) 11/6/212 USAEE/IAEE, North American Conference

2 Agenda Biofuels scalability metric why important? How risky is the supply of biofuels? Risk mitigation strategies Closer look at diversification strategies

3 Motivation: Biofuels Scalability Scalability metrics: to evaluate the performance of a system or technology as a function of scale Existing metrics: Cost competiveness Environmental impacts Resource constraints (food/fuel competition) Our proposed (fourth) metric: risk of supply (energy security concerns)

4 Example: Brazil 21/211 Doubled sugar prices in international markets (15 to 3, cents per pound) Lower growth rate of sugarcane yield Lower investment in refining capacity Lowered blending mandate: from 25% to 2% Reduced import tariff: by 2% Imported biofuels from US: 1.1 billion liters

5 How Risky is the Supply of Biofuels?

6 Country-Crop Yield Residuals (around trend line) Brazil Sugarcane China Soybeans Yield Residual (%) US Corn EU Rapeseed Yield Residual (%)

7 Feedstock Price Risks: Annual Volatility of Corn Price Changes Monthly Price Variation (%) Year

8 Aggregate Fuels Market Risks Status quo: volatile fuel market Despite a less risky supply of crude oil (Killian, 29) Welfare analysis: Oil prices high in good times and low in bad times Higher social costs of biofuels shocks compared to (demanddriven) fossil fuel shocks

9 Expected Future: Higher Volatility of Fuel Market Price equation: P = Xq γ, γ [5,12] Expected future volatility range Share of biofuels = 25% of total fuels Baseline (crop) risk = 3% Smoothed by storage, trade Biofuels shocks absorbed by the oil sector (Upper-bound) final supply side risk = 5% P : price q : supply γ : elasticity parameter Rough estimate: a range of [25%-6%] annual price volatility (read with caution)

10 Dynamics of Biofuels Feedstock Risks Long-term trend of yield risks: Climate change Crop engineering Production scale: Larger and more connected network Lower capacity of alternative supply channels Technology generation First generation: Food/fuel competition Second generation: Food/fuel complementarity

11 Closer Look at Diversification Strategies

12 Diversification: Distance and Yield Correlations 1.8 Yield Correlation Distance (miles)

13 Diversification and Corn Portfolio Risks 16 Yield Yield / Risk 1 Expected Yield (Bushels / Acre) 14 8 Ratio of Yield / S.D Number of States

14 Optimal Crop/State Portfolio Seven major energy crops: corn, sugar beet, sugarcane, wheat, soybeans, sunflower, sorghum Limited production capacity per state Optimal portfolio as a function of demand scale Land price not included

15 Profile of Major Energy Crops Crop Total Energy Capacity (PJ/Y) Energy Yield Intensity (GJ/Ha) S.D of Yields Corn Soybeans Wheat Sorghum Sugarcane Sugar beet Sunflowers * Current US transportation final energy consumption = 284 PJ * PJ = 1 e6 GJ

16 Optimization Model T Max E t (U(c t )) = E t ( c1 γ q s,c 1 y ) s.t. E crops t=1 states q s,c T t=1 = Total energy needs γ : risk-aversion parameter c : total consumption of fuel q s,c :supply of type (c) from state (s) T: time horizon of existing data q s,c < Local production capacity

17 Optimal Crop Portfolios Corn Sugarcane Sugar beet Soybeans Sorghum Wheat Sunflower Yield Riskiness Total Share of Crops Energy Yield (GJ/Ha) MGJ / Year Measure of Risk Aversion Measure of Risk Aversion MGJ / Year Measure of Risk Aversion 1 Standard Deviation

18 Optimal Crop Portfolios Corn Sugarcane Sugar beet Soybeans Sorghum Wheat Sunflower Yield Riskiness Total Share of Crops Energy Yield (GJ/Ha) PJ / Year Measure of Risk Aversion Measure of Risk Aversion PJ / Year Measure of Risk Aversion Standard Deviation

19 Conclusion

20 Summary: Biofuels and Energy Security Risky supply of biofuels feedstock Feedstock supply shocks: Orthogonal to the state of the economy Competing demand shocks: Correlated with the state of the economy Quantitative measures of feedstock supply risks Risk mitigation strategies Diversification strategy: effective but costly Next steps: Further results on optimal diversification Storage

21 - We Appreciate Financial Support by BP

22 Risk-Mitigation Solutions Storage Diversification Cost of storage Decay Feedstock Fuel Limits to smoothing by storage

23 Real Price of Crude Oil ( ) $ / Barrel

24 From Yield Shocks to Feedstock Price : Annual Corn Prices Yields Storage Demand shocks International trade shocks Prices Inflation Adjusted Corn Price (211 $ / Bu) Year

25 Energy Conversation Calculations Energy content Barrel of crude oil = Litter of ethanol = Total US transportation fuels Oil equivalent per day Total energy per year (GJ / Y)

26 Real World Example: Brazil 21/211 High sugar prices in international markets Lower growth rate of sugarcane yield Lower investment in refining capacity 19% lower production (5.1 b lit / year) US Cents per Pound 1 (Hg/Ha) Sugar Prices Oct-2 Apr-3 Oct-3 Apr-4 Oct-4 Apr-5 Oct-5 Apr-6 Oct-6 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11 Apr-12 Sugarcane Yields

27 Optimal Crop Portfolios (using mean-variance framework) 1 1MGJ / Year 1 5MGJ / Year Total Share of Crops 1.5 1MGJ / Year Measure of Risk Aversion 1.5 4MGJ / Year Corn Sorghum Soybean Sugar Beet Sugarcane Sunflower Wheat