Southeast Asia faces the same energy challenges as most other regions. With volatile crude oil prices, limited fossil resources and environmental sustainability issues, there is a huge demand for alternative energy sources. Political instability in key resource regions makes the crude oil supply even more uncertain.
On the verge of high growth with few specific hurdles to overcome, second-generation (2G) biofuels have the potential to bring dramatic energy relief to Southeast Asia. They address all the concerns posed by fossil fuels as well as 1G biofuels. There is no resource scarcity, for example. Feedstock used for 2G ethanol is mainly cellulosic material such as grass, corn stover, rice husk and wood fuel, implying practically unlimited resources. There is minimal food chain risk, as the feedstock is not part of the food chain, and emission levels are lower.
Economic viability has been an issue, but that can be overcome by recent technological advances that could help to jump-start significant production growth in Southeast Asia, with Malaysia, Indonesia, Thailand and the Philippines the main contributors.
What remains then are the five hurdles that stand between Southeast Asia and the promise of nearly unlimited fuel — technology availability and affordability, feedstock availability, regulatory support, vehicle technology and multiple stakeholder involvement. We examine those hurdles below and recommend ways to surmount them.
TECHNOLOGY AVAILABILITY, COST
2G versus 1G and 3G: An energy revolution is under way thanks in part to 2G biofuel technology entering the fray. Production costs have fallen to levels below crude oil, with commercial operations already active at the Beta Renewables plant in Crescentino, Italy. Players in Southeast Asia could capitalise on this development and look for potential licensing opportunities.
In comparison, 1G technology for both ethanol and biodiesel has limited long-term potential due to its dependence on volatile feedstock prices, which are driven by market dynamics and links to the food chain. Players are starting to look ahead to 3G technology as a game-changer as well. While its commercialisation remains distant, rapid progress in 2G has reduced costs leading to commercialisation and the next generation.
Biochemical technology: Multiple players including chemical and biochemical companies (such as the Mossi Ghisolfi Group, Novozymes and DSM), technology companies (including DuPont and UOP) and biofuel producers (such as POET) have spearheaded research that has led to significant improvements in 2G costs, primarily from yield improvements and the use of more efficient enzymes, cutting enzyme costs by 70-80%. These factors are expected to drive further cost reduction in the next 10-15 years.
The latest developments from companies such as Beta Renewables and Ineos Bio prove 2G biofuel can reach production costs as low as 60-70 US cents a litre, which are below the current production costs of petroleum and 1G ethanol. Production costs are expected to go as low as 55-60 cents a litre during the next decade.
Thermochemical technology: Costs with this technology have been achieved by Ineos Bio similar to that of biochemical technology. Yield improvements in syngas formation and use and subsequent conversion to ethanol have resulted in higher efficiency and lower costs. We expect these factors to drive down costs further, to 65 cents a litre by 2017.
FEEDSTOCK AVAILABILITY
Supply alternatives: One of the primary concerns about 1G biofuels has been the raging food versus fuel debate. Other concerns include soil erosion, pressure on water resources, loss of biodiversity and environmental imbalance caused by large-scale clear-cutting of forestland for biofuel production. 2G technology can potentially address these concerns. It uses non-food-based feedstock, namely lignocellulosic material, which is currently used primarily for self-consumption as fuel or fodder. Southeast Asia has abundant availability of 2G-specific feedstock.
Supply challenges: Supply chain costs can constitute up to half of feedstock costs. With no established supply chain, intense coordination is required across multiple stakeholders including farmers, collectors, logistics partners and producers. What's more, the feedstock is dispersed across vast areas, notably in Indonesia, magnifying the logistical problems.
Establishing an efficient feedstock supply chain will play a major role in determining the economic feasibility of G2 biofuel production. Defining an optimal network for biorefineries, the number and location of storage facilities and capacity planning is a good start. Refining the design of collection, storage and transport according to feedstock is another option. In addition, increasing the energy density of feedstock before transport may help to optimise costs. Finally, pipeline transport of feedstock, in slurry or liquid form, could be an answer.
REGULATORY SUPPORT
Biofuels can generate multiple benefits for governments including lower oil-import bills, answers to environmental concerns and economic development through job creation, and heightened agricultural activity.
Some Southeast Asian governments have issued biofuel mandates, but we believe incentives and policy mechanisms are still needed to support industry growth. Indonesia, for example, has biofuel-blending mandates, but its ethanol-blending targets have not been met, and industry growth has been stunted. This is due in part to a price cap on ethanol, which makes production unviable.
Governments therefore should consider not only blending targets to spur production but also 2G-specific tax and incentives, market-determined and optimal prices for viable production, and subsidies for producers, especially until 2G technology takes firm hold. Constructive policies also can drive financing for capital expenditure on biorefineries, R&D and supply chain development from harvest points to refineries.
VEHICLE TECHNOLOGY
As long as blending mandates remain low in most Southeast Asian countries, vehicle technology for handling biofuel blends will not be a major issue. However, increasing blends will challenge vehicle technology and deter biofuel growth, especially as blends reach 10-15% biofuel. The solution may lie in incentives for vehicle manufacturers that encourage them to develop technology that can handle higher blends and produce more models of alternative-fuel vehicles.
STAKEHOLDER INVOLVEMENT
Despite the hurdles, the biofuel revolution will succeed if stakeholders work together to make it happen. Major stakeholders along with their roles and potential influence include
International oil companies (IOCs): With 2G rates of return typically greater than 15%, biofuels are potentially very lucrative. Seeking partnerships with selected technology providers and investors as needed will help IOCs to keep pace with the industry. Since deploying 2G requires coordination across the entire supply chain, a joint-venture model may be the preferred mode of operation.
National oil companies (NOCs): As an arm of governments, NOCs can spearhead regulatory change and lead the drive toward environment sustainability. Lucrative returns further build the business rationale for NOCs as they start exploring 2G technology and scout for partners.
Technology providers: Companies such as Beta Renewables and Ineos Bio can leverage the opportunity to the maximum and actively pursue leads for licensors. Securing intellectual property rights can minimise the risk of increased exposure or loss of valuable technology secrets.
Investors: Investment can be in technology research or in biofuel projects led by established players. Investment in technology is a high-risk/high-return game, however, whereas investment in production projects generates a comparatively stable return.
Governments: In return for introducing biofuel mandates and providing tax incentives, subsidies and support for foreign investment, governments can decrease dependence on imported oil and advance their environmental and economic-development agendas.
Christian Prokscha is a principal in the energy and process industries practice in Southeast Asia with A.T. Kearney.