Modelling Production Cost Scenarios for Biofuels and Fossil Fuels in Europe

Competitive production costs compared to conventional fuels are imperative for biofuels to gain market shares, as current tax advantages for biofuels are only temporary. Comparing production costs of different biofuels with fossil fuels is a challenge due to the complexity of influencing factors. The objective of this research paper is threefold: 1) to project future biofuel feedstock prices based on the crude oil price development, the price index for agricultural products, growth in world population, growth in wealth per capita income, and change in energy consumption per capita, 2) to simulate production costs under consideration of likely economies of scale from scaling-up production size and technological learning and 3) to compare different biofuels and fossil fuels by scenario analysis.

A calculation model for biofuel production is used to analyse projected production costs for different types of biofuels in Europe for 2015 and 2020. Unlike engineering oriented bottomup approaches that are often used in other biofuel studies, the macro-economic top-down approach applied in this study enables an economic comparison and discussion of various fuel types based on reference scenarios of crude oil prices of €50, €100, €150 and €200 per barrel. Depending on the specific raw material prices as well as the conversion costs, the analysis delivered a differentiated view on the production costs and thus on the competitiveness of each individual type of fuel.

The results show that 2nd generation biofuels are most likely to achieve competitive production costs mid- to long-term when taking into account the effects from technological learning and production scale size as well as crude oil price scenarios between €50 and €200 per barrel for both reference years. In all crude oil price scenarios, bioethanol from lignocellulosic raw materials as well as biodiesel from waste oil are associated with high cost saving potentials which enable them to outperform fossil fuels and 1st generation biofuels.

Festel, Gunter, Martin Würmseher, Christian Rammer, Eckhard Boles and Martin Bellof (2013), Modelling Production Cost Scenarios for Biofuels and Fossil Fuels in Europe, ZEW Discussion Paper No. 13-075, Mannheim.