Ethanol Overview

What is Ethanol?

Fuel ethanol is a product from chemical process almost as old as humanity. The fermentation and distillation of sugars to produce alcohol has been refined so that a wide range of plant material can be used as feedstock. In Canada the sugar is usually sourced through a process called the hydrolysis of grain starch. This process involves an enzymatic action to convert starch to sugars before using yeast to ferment the sugars to ethanol. The weak ethanol solution known as beer is then distilled and dried to produce anhydrous ethanol. In the future it may be possible to use straw, grass and wood as a feedstock for the sugar sources. As a result of research the use of enzymes as a pretreatment process on lignocellulosic materials may open up new markets for straw and waste wood products. in the traditional alcohol process there are a number of production possibilities, including dry or wet milling and either batch or continuous fermentation depending on the facility capacity.

Ethanol has been used as a motor fuel in North America since the early 1900s. Ethanol gas blends were used in parts of the United States prior to the Second World War but through the 1950s and 1960s there was no ethanol used in gasoline in North America. In 1979, the US Congress established the federal ethanol program to address air quality concerns. The production and use of ethanol as a motor fuel additive in the United States has increased since that time. As of 2006 in the US, there are over 100 ethanol plants operating with annual capacity of 4.5B US gallons (17B litres) with an additional 35 plants under construction or in the planning stages adding 2.2B gallons of capacity. Currently, 15% of the corn produced in the US is used for ethanol production and this is forecast to increase to 20% in 2007. ADM is the largest ethanol producer representing approximately 25% of US ethanol capacity.

Canada has a target for ethanol use: 35% of gasoline should contain E10 (10% ethanol) by 2010. Since this level of use would be almost six times current processing capacity, a significant processing expansion is required. Total Canadian transportation gasoline market in 2002 was 39 billion litres. In 2002 around 250 million litres of fuel ethanol were produced and blended into gasoline, which means less that 1% of the transportation gasoline contains blended ethanol. where ethanol blends are available in Canada they vary between E5 to E10 (5% to 10% ethanol respectively). Ethanol blends are sold in Yukon, British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec. Ontario accounted for more than 75% of Canada's fuel ethanol consumption in 2002, with increased production and demand in Manitoba and Saskatchewan due to provincial policy and increased production capacity. Canadian retailers comprise of Sunoco, Husky/Mohawk, Sonic and several independents. Vehicles built in the last 20 years can use these low-level blends of ethanol and gasoline interchangeably with gasoline without modification.

A new blended product is E85 (85% ethanol; 15% gasoline). This blend and flex fuel vehicles (which can operate using E85 or gasoline or a combination of both) are available in the US. In Canada the vehicles are available but there are no retail outlets for E85. Lack of E85 retail pumps is the principal barrier to ethanol as a replacement or direct competitor to petroleum gasoline. Chrysler, Ford Motor Company and General Motors collectively have about 4.5 million cars and trucks with E85 compatibility in North America.

Benefits of Ethanol

Increased use of ethanol-blended fuel has a number of advantages while providing new business opportunities.

• high-octane, oxygenate additive to transportation gasoline improves engine performance (acceleration) and reduces tailpipe emissions (E10 reduce GHG emissions by 3 - 4% if grain-based and by 6 - 8% if cellulose-based)
• new market opportunities for feedstock producers. In the US dry mill plants using corn have impacted the local spot market by up to $0.10/bushel while also providing a source of protein supplement (distillers grains) to local livestock feeders
• achievement of national sustainable development objectives as expressed in Climate Change Action Plan
• could create trade opportunities for lignocellulose technology as commercialization proves economically viable

1. Capital Costs
   
   This study uses a base ethanol facility of 150 million litres. The cost of building an ethanol facility has been revised to reflect current estimates of actual facilities in western Canada. The study assumes that a 150 million litre ethanol facility costs $130 million.
2. Operating cost assumptions
   
   - 1 tonne of wheat yields 379 litres of ethanol
   - 150 million litre facility @ 100% capacity
   - 50% equity, 50% debt financing
   - Ethanol freight to blender is $0.01/litre
   - Natural Gas @ $7.51/GJ
   - Electricity @ $0.08/kWh
   - Labour $45,000 per employee
3. Revenue assumptions
   
   - Gasoline rack price of $0.55/litre in Calgary or Edmonton
   - Distillers Dried Grain (DDG) price of $150/tonne (approximately 38% protein)
   - $0.10/litre federal tax exemption and $0.09/litre provincial tax exemption
   - ethanol is priced at a $0.03/litre discount relative to gasoline
4. Price for wheat
   
   Feedstocks are the single most important cost to producing ethanol, representing 57% of total costs including amortization and interest expense (or 68% of production costs).
   a. Breakeven
   A 150 million litre facility would be able to pay up to $224/tonne ($6.09/bu) for wheat before it started to lose money. This price would provide a 0% rate of return for investors.
   b. 15% return on equity
   The maximum price that a 150 million litre ethanol facility would be able to pay for wheat and still earn a 15% rate of return is $182/tonne ($4.95/bu).

• Canada - Federal (regulations and standards) and Provincial (regulations, programs, taxes)
• US - Federal (regulations) and State (mandates, programs, incentives)
• Others (including Europe, Brazil, China)

• Price risk reflects the variability in supply and demand, as driven by geopolitics, business cycles and other factors. Until there is a significant supply of the ethanol in the marketplace for an objective transparent determination of value, negotiated contractual arrangements will be the standard method for determining product price.
• Gasoline and diesel fuel define the market for transportation fuels, and ethanol prices will follow this market closely since biofuels are additives to petroleum-based fuels.
• Wheat and corn prices are determined by supply and demand in the global food and livestock sectors. Use of these commodities in ethanol production adds another sector to this already variable and complex market. Agricultural raw materials account for a large proportion (about 70%) of the cost of ethanol production.