Biofuels could transform the energy landscape – and your portfolio

Everyone understands what wind turbines are – and everyone knows what solar panels do (though few of us know exactly how photovoltaic cells convert sunlight into electricity). Biofuels, however, remain the Cinderella of the renewables sector. Can you really grow bio-kerosene in a field to power a commercial aircraft?

Yes, you can. Biofuels are emerging as both an important source of energy and a method of carbon capture and storage (CCS). Biofuels will have a role to play in the battle against run-away global warming. But they are not without controversy. Most importantly for investors, some players in this emerging sector are already making money.

The basic science

Regular readers will know that I have been taking an interest of late in the massive issue of climate change and the resulting rise of renewable energy (electricity) production. Hitherto, I did not have space to explore an interesting and often overlooked sub-sector of the renewables industry: biofuels. The name of the game is to reduce the amount of carbon dioxide (CO2) that we release into the atmosphere which contributes to the greenhouse effect and thus to global warming.

Biomass is an industry term for producing energy by burning wood – which is how our ancestors kept warm in winter and cooked their food over many thousands of years. But the term can be applied to burning any other type of organic matter.


Burning biomass (be it wood, peat (used in Scotland and Ireland) or cow dung (as in India) – whatever) releases CO2 emissions. In fact, burning wood emits around a quarter more CO2 than burning coal. Nonetheless, the scientific establishment has categorised biomass as a renewable energy source under the EU and UN legal frameworks because wood and other plant fuels can be regrown (unlike coal).

Remember that so long as a plant is growing it is absorbing CO2 – actually taking CO2 out of the atmosphere. The basic idea is that for every new crop you absorb the CO2 released by burning the last crop so that, over time, using biofuels is carbon neutral. As a result, many coal-powered power stations have been converted from coal to biomass in our attempt to reduce carbon emissions.

The term biomass usually refers to any plants or plant-based materials that are not used for food production or animal feed. Such material is technically called lignocellulosic biomass. As an energy source, biomass can either be used directly via combustion to produce heat, or indirectly after converting it to various forms of biofuel (of which bioethanol is the most common).

Some players in this emerging sector are already making money.

Biomass can be converted into biofuels by three different methods which are broadly classified as thermal, chemical, and biochemical.

Thermal conversion means that you heat the biomass up, but in so doing you obviously use energy and produce carbon emissions.

Chemical conversion means that chemical reactions are induced to break down the biomass. The most common of these is gasification. This is achieved by treating the biomass at high temperatures of up to 700C without combustion using a controlled amount of oxygen and or steam.

Biochemical conversion makes use of the enzymes of bacteria and other microorganisms to break down biomass into gaseous or liquid fuels, such as biogas or bioethanol. In most cases, microorganisms are used to perform the conversion process by means of anaerobic digestion, fermentation, or composting. Anyone who regularly puts their vegetable waste into a composter will know that Mother Nature has a wonderful knack of converting potato peelings and so forth back into soil with no human help at all!

Veggie power

Quite a few different species of vegetation can be used to produce biofuels from well-known and familiar crops to exotics.

In the UK the most promising candidate is oilseed rape. This is the crop with the lovely yellow flower that is ubiquitous if you drive around London’s orbital M25 motorway in early summer. The Americans, and the French, call it by a much more appealing name – colza. Currently, about 450,000 hectares of oilseed rape are cultivated in the UK each year, mostly to produce cooking oil. But this crop can be used to create biodiesel.

Sugar beet, the roots of which contain a high concentration of sucrose, is widely cultivated to produce sugar, but is also ideal for biofuels. In 2013, Russia, France, the United States, Germany, and Turkey were the five largest sugar beet producers in the world. UK producers are able to achieve a high crop yield with sugar beet of about 53 tonnes per hectare. One tonne of sugar beet can make 108 litres of bioethanol, a fuel with a high energy density. To be precise, according to Professor David MacKay, bioethanol has an energy density of 6 kWh per litre[i].

Sugar cane, which is actually a type of grass, can produce even higher yields of bioethanol but can only be cultivated in warm temperate or tropical climates such as those of Brazil and Malaysia.


A relatively new super biofuel is cellulosic ethanol which is derived from switchgrass (scientific name panicum virgatum). This is a perennial warm season bunchgrass native to North America, where it occurs naturally from about the 55^th parallel in Canada southwards into the United States and Mexico. Switchgrass is one of the dominant species of the central North American tall prairie grasses and can be found in remnant prairies, in native grass pastures and naturalised along American highways – so it does not require prime agricultural land.

Jatropha is an oil-bearing crop that grows best in dry tropical regions. It flourishes best in temperatures of 20-28C. This crop has a projected yield in hot countries with good soil quality of 1600 litres of biodiesel per hectare per year. That is impressive, but to put this into perspective Professor MacKay calculated that if the whole of Africa were covered with Jatropha plantations (which is self-evidently impossible) the energy produced would be equivalent to only about one third of world oil consumption!

Miscanthus (commonly known as Elephant Grass) is a high yielding energy crop that grows over three metres tall, resembles bamboo and produces a crop every year without the need for replanting. The rapid growth, low mineral content, and high biomass yield of miscanthus increasingly make it a favourite choice as a biofuel, outperforming maize (corn) and other alternatives. Until now miscanthus has predominantly been used for feedstock. But Drax Group PLC (LON:DRX) is already using miscanthus-based biofuels supplied by an agricultural cooperative called SEIL to generate electricity in the UK.

Other energy crops include willow and poplar. For all of these crops improved genetics and agronomics (i.e. farming methods) may further enhance biofuel yields in the future.

There’s money in slime

What about algae? After all, algae are plants, if slimy underwater ones. It turns out that algae are no better at photosynthesis than their terrestrial cousins. On the other hand, they photosynthesise better if grown in CO2 enriched water. So that, if we could collect carbon dioxide from burning fossil fuels and then store it in large algal ponds we could grow algae in large quantities which could then be used to produce biofuels. An experiment at Auburn University (Alabama, USA) found that the power output from a CO2 concentrated algal pond was equivalent to a Bavarian solar panel array.


Another option might be to use algae to produce hydrogen. An experiment by the National Renewable Energy Laboratory in Colorado predicted that a reactor filled with genetically-modified green algae covering 11 hectares of the Arizona desert could produce 300 kilograms of hydrogen per day. The hydrogen could then be combusted to generate electricity.

Power from incineration

Fans of BBC R4’s The Archers will know what an anaerobic digester is – because Brian had one built at Home Farm. Anaerobic digestion is a collection of processes by which microorganisms break down biodegradable material in the absence of oxygen. This is an extremely efficient and safe form of waste management but which gives rise to large emissions of CO2 and methane. The methane (CH4) produced can be captured and used directly for heating or indirectly by running gas turbines to generate electricity.

The idea of incinerating agricultural and household waste products to produce electricity has been around in one form or another since the 1870s. SELCHP (South East London Combined Heat and Power) in Bermondsey, South London, is a 35 MW power station that is designed to burn 420,000 tonnes of household (“black bag”) waste every year. After incineration, ferrous metals are removed from the debris for recycling, hazardous waste is removed and conveyed to special landfill sites and the remaining “ash” is reprocessed into material for road-building and other construction purposes. The thermal efficiency of the plant is 21 percent meaning that each kilogram of waste material produces 0.5 kWh of electricity. Of the 35 MW of power produced, about 4 MW is used by the plant itself.

At Ely in Cambridgeshire there is even a power station that runs entirely by burning straw. The plant is run by Melton Renewable Energy UK Ltd. MRE UK is a leading independent British generator of renewable energy with a portfolio of five biomass-only power stations which have a total capacity of 174 MW. Through their landfill gas business, they own and operate a fleet of methane-powered engines operating from 25 landfill sites across the UK, with a total capacity of 63.4 MW.

What about jet fuel?

The aviation industry is one of the world’s biggest emitters of CO2 – and it is emitted at high altitudes which is more harmful than emissions at sea level. The industry is keen to clean up its act, but aviation biofuels are only viable if they can be used by existing aero-engines. After a protracted technical review by aircraft makers, engine manufacturers and oil companies, biofuels were approved for commercial use in July 2011.

Since then a number of airlines have experimented with using biofuels on commercial flights on selected routes. The focus of the industry has now turned to second generation biofuels that do not compete with food supplies and which do not require prime agricultural land or fresh water. NASA has determined that a 50 percent aviation biofuel mixture could cut air pollution caused by air traffic by 50-70 percent.

NASA has determined that a 50 percent aviation biofuel mixture could cut air pollution caused by air traffic by 50-70 percent.

Azul Airlines, Brazil’s third largest airline, has announced plans to test sugarcane-based jet fuel and more than 30 airlines are currently trialling biofuels. Thai Airways International (BKK:THAI) is already using biofuels selectively to power its aircraft. In December 2011 Thai Airways carried out Asia’s first passenger flight powered using aviation biofuel when a special flight of a Boeing 777 from Bangkok Airport carried an invited group of VIPs. In May this year Singapore Airlines (SGX:C6L) began a series of biofuel-powered flights using A350-900 aircraft on non-stop trans-Pacific flights between Singapore and San Francisco.

The country with the largest number of air passenger kilometres is the USA where 90 million litres of jet fuel are consumed each year. In March last year United Airlines ((owned by United Continental Holdings (NYSE:UAL)) became the first US airline to use commercial-scale volumes of aviation biofuel for regularly scheduled flights with the departures from Los Angeles International Airport[ii].

United has agreed to purchase up to 15 million gallons of sustainable biofuel from AltAir Paramount over a three-year period. (AltAir was acquired by Alon USA Energy Inc. (NYSE:ALJ) in March 2016). The airline has begun using the biofuel in its daily operations at LA airport, storing and delivering it in the same way as traditional fuel.

Arguments against biofuels

The drawback with biofuels is that largescale biofuel production will require valuable land (and precious water) that could otherwise be given over to food production or left to revert to woodland – the ultimate carbon sink. This is likely to be exacerbated if people are forced to move from coastal areas to higher ground due to rises in sea levels, as is already the case in certain islands of Polynesia.


Jonathan Foley, an influential agro-economist at the University of Minnesota has argued that we should abandon biofuels altogether and dedicate available land to food production in a world that will have a population of more than nine billion by 2045. Biofuels have the knock-on effect of raising the cost of food. According to Oxfam, for every one percent increase in the price of food, another 16 million people go hungry. As the left-wing environmentalist George Monbiot has written, somewhat melodramatically: “The poor will go hungry so that the rich can drive [and fly]”. In my view the economics behind this kind of thinking is questionable – but the argument does need to be addressed.

The French connection

I have been keeping a close eye on France and French markets this year. France has a massive agribusiness sector and President Macron has stated his objective of making France a world leader in green energy. I am impressed by a number of French players in the biofuels space.

Albioma (EPA:ABIO) is a global leader in the conversion of biomass into biofuels and generated solid earnings in 2016. Be aware of its leverage. The shares are up by over 30 percent this year and may have further to go. Global Bioenergies SA (EPA:ALGBE) uses proprietary patented technology to produce a biofuel called isobutene out of sugar. The company has recently opened an operation in Germany. The one–year and five-year share price charts are uninspiring but the company was tipped this month by Capital, a French business magazine.

Conclusion

We should view climate change as a challenge to achieve a quantum leap in the efficiency with which we generate and use energy. Biofuels will certainly have a place in that challenge – though the idea that we could rely on them for even a significant fraction of our total energy needs is fantasy. But I like the idea of trans-continental air travel powered by plants, and so do some investors. Once again, established energy companies that are diversifying into green product lines offer the safest way to get exposure to this sector. Check out Alon USA Energy Inc. (NYSE:ALJ). Its share price has nearly doubled in the last year.

[i] All yield data and energy equivalence values quoted in this section are taken from the appendices to Sustainable Energy without the Hot Air by Professor David JC MacKay, UIT Cambridge, 2009. See pages 283-288.

[ii] See: http://newsroom.united.com/2016-03-11-United-Airlines-Makes-History-with-Launch-of-Regularly-Scheduled-Flights-Using-Sustainable-Biofuel