The main contentious problems of bioenergy provision relate to economics. The application of economic principles to biomass energy is difficult given its many socioeconomic ramifications and the diversity of types, production and use techniques in the overall energy production cycle. There is no such thing as “fixed” biomass production costs since the economics are quite site-specific. They depend on many varying factors, including agricultural costs, the type of raw material utilized, the location of the manufacturing plant, the design, type and degree of modernization of equipment, the relative labour costs represented, the scale of production, the total investment, market and institutional barriers, and continuously fluctuating international and local markets for petroleum, sugar, charcoal etc. Additionally, biomass is seldom grown only for energy but is a derived by-product of other forestry and agronomic practices and is, therefore, dependent on these management (or non-management) practices. The provision of biomass energy on an economic basis undoubtedly needs local entrepreneurs to make judgements and decisions.

The economics of biomass fall into various categories. Kleinhanss and Kogl (1989) divide it in three main sections:

 

(a) Biomass production: Biomass energy feedstocks for commercial use could be divided into two major categories: (a) those that have minimal or zero resource costs, e.g., on-site waste products; and (b) those that have a higher market value, e.g., plantation-based wood and high-value agricultural crops. As Gowen (1989, p. 462) stated: “The dominant economic characteristic of most financially competitive bioenergy systems is that they almost always depend on feedstocks that are free (or nearly) as valued by the private market.” If biomass energy can be obtained 'free', incentives to improve efficiency of production and use and to replace non-commercial by commercial sources will be limited. French (1984, p. 161) summarizes the problem well: “As long as there is 'free' indigenous wood, people will neither plant trees nor turn to alternative sources of energy”. When using feedstock with a market value, seasonal variations in price have to be considered, as well as other market fluctuations that are less predictable. An advantage of purchasing indigenous biomass fuels is that all expenditure is retained within the local economy.

(b) Biomass processing: Important economic considerations include the capital cost of the plant, conversion procedure, the number of process stages, seasonal utilization of the conversion plants, the size of the conversion plants, transport costs and use of the main products and by-products.

(c) Biomass use: The value of biomass can be derived from the benefit gained in the overall use system. The individual benefit of a specific product can, however, be very different and can be strongly influenced by socioeconomic factors, culture etc. The value of biomass also depends on the available quantity of the resource because the marginal benefit generally decreases with increasing use.

To obtain the maximum benefit from biomass energy requires simultaneous optimization of biomass production and use, taking into account progress in bioproductivity and conversion technologies. Renewable energy sources are currently not utilized to their full competitive potential and are introduced into the market considerably later than the optimum time of market introduction based on their overall cost situation (including social costs) (Hohmeyer, 1988). The future cost of biomass energy will depend on many varying factors such as the extent of technological advances in biomass-energy conversion and in feedstock productivity. These developments in turn will partly be determined by the general energy situation, especially the price and availability of commercial fuels. It will also depend on how developing countries address the overall energy problem, particularly with regard to bioenergy incentives and R&D investments compared with other energy sources (Holdren, 1990). The progress made in all areas of biomass-energy use has been much greater per unit of expenditure than has been achieved in the pursuit of nuclear fusion for example. Indeed, some believe that if half as much had been spent on the development of solar energy as spent on all forms of nuclear energy, the world would already have achieved a large, renewable source of energy.

1. Subsidies

A major criticism levied against renewable energy in general and biomass energy in particular is the need for large subsidies. However, it is forgotten that subsidies to promote energy and agricultural development are at the core of nearly all economic systems, and energy from renewable resources generally receives far less subsidies than do conventional sources. For example, the 24 countries of the OECD provide agricultural subsidies totalling about $299 billion per year (OECD, 1991), while United States Federal energy subsidies to all forms of energy are estimated at $100-300 billion per year. There are many other types of subsidies and hidden costs, for example, the United States Department of Defense spent at least $15 billion to safeguard oil supplies in the Persian Gulf. Chinese consumer subsidies for oil, electricity and coal amount to $19.4 billion per year, which is 7 per cent of China's GNP; and in Egypt petroleum subsidies totalled $4 billion in 1985, equal to 13 per cent of the GNP (Kosmo, 1987).

In the Pacific and Asia, “small-scale biofuel systems may receive substantial aid only for initial capital costs” also “it is common... for biomass system users to agree to charges that pay back the full system costs, whereas most industrial users of centralized fossil-fuel-based systems receive subsidized tariffs”. This makes the electricity produced from biomass more expensive than that produced from kerosene or diesel-based electricity (Gowen, 1989, p. 465). In India, where the electricity tariff is only one fifth of the real cost of providing electricity in rural areas, it could be argued that the high subsidies given to the electricity and diesel sectors are two of the main barriers to alternative energy technologies in India today (Bhatia, 1990).

Subsidies conceal real commercial energy costs. This badly allocates scarce capital and disrupts fair competition between energy sources. Heavy subsidies to conventional energy sources retard commercialization of renewable energy technologies even further. As Kosmo (1987, p. 37) points out:

 

“Low energy prices are often justified by governments in developing countries on the grounds that they favourably affect the poorest strata of the population, who spend larger portions of their income on energy. This is not necessarily the case since the poor people (either rural or urban) use little commercial energy and rely disproportionately on biomass, and therefore commercial energy subsidies actually do little to better their standard of living.”

The amount and impact of subsidies with biomass systems varies widely from country to country and with different biofuels and it is difficult to compare energy costs on a level basis given the inherent internal and external costs of fossil fuels. Many successful commercial biofuel systems have not relied upon subsidies - the Zimbabwe alcohol project is an excellent example of a commercial development with rapid payback (although it may well need financial support after the recent devastating drought).

2. Internalizing the externalities

One of the principal barriers to the commercialization of renewable energy technologies is that current energy markets mostly ignore the social and environmental costs and risks associated with fossil-fuel use. In effect, relatively harmful energy sources, e.g., high-sulphur coal and oil, are given an unfair market advantage over relatively benign sources such as biomass, solar and wind (Weinberg and Williams, 1990). Since competing conventional energy technologies are able to pass on to society a substantial part of their costs (such as environmental degradation and health-care expenditures) renewable energy sources, which produce very few or no external costs and may even cause positive external effects (such as job creation, rural regeneration and foreign-exchange earnings), are systematically put at a disadvantage. Internalizing all these costs therefore must become a priority if a “level playing field” is to be created.

While it is extremely difficult to quantify the external costs of such pollution, and some simply cannot be quantified, several studies show them to be substantial (Brower, 1990). For example, a German study (Hohmeyer, 1988) concluded that the external costs (excluding global warming) of electricity generated from fossil-fuel plants are in the range of 2.4-5.5 c/kWh, while those from nuclear power plants are 6.1-3.1 c/kWh. Had external economic effects been included in the market allocation process, renewable energy technologies would be in a far better (“the level playing field”) position to compete with fossil fuels, and there might already have been a substantial shift to the penetration of renewable energy in the market.

Biomass energy systems should also be perceived as providing substantial foreign-exchange savings if they replace imported petroleum products, although the issue is not always clear-cut since it depends on import substitution and export earnings. In countries like Brazil, with a long historical experience of bioethanol production and use, there are substantial savings in oil imports and also foreign-exchange earnings from alcohol-related technology exports. Zimbabwe similarly saves foreign exchange on petroleum imports while developing a technical infrastructure which leads to import substitution. One needs, however, to consider the net benefit to a country if local resources which were used for domestic energy production could have earned more foreign exchange through exports; it can be a complex calculation, especially if it incorporates (as it should) factors such as employment, energy security and so on.

3. Bioethanol cost

Cost estimates for producing bioethanol vary considerably and are not without controversy. These vary from $26 to $60 per barrel of oil-equivalent from sugarcane in Brazil, and $60 from maize in the United States, to $65 from grain in the EC (Rosillo-Calle et al, 1991). Prices drop rapidly with improvements in biomass production and conversion. In Brazil, the cost of production declined 4 per cent annually between 1979 and 1988, and analyses indicate that the prospects for reducing production costs by another 23 per cent over the next several years are good (Goldemberg et al, 1992). Free-market micro-economics of bioethanol are still unfavourable relative to heavily subsidized oil-derived fuels. The cost of bioethanol in the absence of direct or indirect subsidies still remains a serious obstacle to its widespread use. In the United States, highly variable maize and by-product prices and the wide variations in final ethanol costs among existing plants over time have caused doubts as to the future direction of this industry (Dinneen, 1990). In the short term, some kind of economic and financial incentives would be needed in many cases to allow bioethanol projects to succeed. There are, however, a number of other factors that, if pursued further, could significantly reduce production costs.

The use of by-products can have a major impact on ethanol production, depending on the choice of feedstock. Higher-value by-products include other fermentation products, fermented animal feed or developed food products, energy, and fertilizers. Ethanol can therefore be produced as one of a number of co-products among which the raw materials and capital costs are shared. Thus environmentally-related problems can be eliminated while maximum advantage can be taken of the feedstock. In Brazil, a multi-product industry is emerging based on “sugarcane-alcohol-bagasse” products, that is having a major impact on ethanol costs. By using biomass-integrated gasifier/gas-turbine cogeneration systems to produce electricity from residues, alcohol could be competitive with gasoline at 1991 oil prices and the excess electricity would be competitive with that from new hydroelectric power plants (Goldemberg et al, 1992).

Johansson et al (1992) predict that as production of petroleum declines in the next decade, biofuels will be competitive against those manufactured from coal and natural gas. Biofuels will be cheaper than fuels from coal, but unable to compete with methanol manufactured from natural gas at today's prices.

4. Biogas production

In assessing the economic viability of biogas programmes one should distinguish four major areas of applications: individual household units, community plants, large-scale commercial animal- rearing operations, and industrial plants. In each of these cases, the financial feasibility of the facility depends largely on whether outputs in the form of gas and slurry can substitute for costly fuels, fertilizers or feeds which were previously purchased, while at the same time abating pollution. According to Gunnerson and Stucky (1986), the economics of biogas technology rest on the following factors: (a) the useful energy content of different fuels, e.g., dung, fuel wood, kerosene and biogas; (b) the efficiencies with which these fuels are currently being used, or the possible equipment which could lead to higher efficiencies; (c) the NPK contents of different organic fertilizers, and the fertilizer-yield response under different agronomic conditions and crop rotations; and (d) behavioural aspects of the energy sources or organic fertilizers such as current use patterns etc.

The first comprehensive economic cost-benefit analysis of Indian biogas plants was written by Parikh (1963) and revised in 1976, in which it was concluded that family-sized biogas plants were highly profitable with a gross return of about 14-18 per cent purely in financial terms. Recently, Sinha and Kandpal (1990, p. 52) concluded from their study that the “use of incremental benefits from the biogas plants would indicate that biogas technology is a viable option for many end-uses in rural areas”. They note that: “(a) the viability of the 1 m³ plant without subsidy is conditional; and (b) lighting is the most profitable end-use of biogas, followed by cooking and motive power, at the prevailing prices for alternate energy sources.” The study of the Pura community-sized plant (Rajabapaiah et al, 1992) showed that the plant would pay for its operating costs once operating time exceeded 6 hrs/day, and that it would be competitive with grid electricity at 15.1 hrs/day. Daxiong et al (1990) found from their study of digesters in China that there is a high internal rate of return of 59-114 per cent, and a short pay-back time of 1-4 yrs.

The financial analysis of a 3-m³ biogas plant is summarized in table 20. The costs of installation are based on current market rates (1990) prevalent in the project villages and with different subsidy components. According to Saxena and Vasudevan (1991), in terms of market reasoning, these biogas plants are uneconomic since they give a negative rate of return, even with an 85-per cent subsidy. However, economic viability can be achieved if dung and labour are regarded as being free. The viability will further improve if other social costs are considered, e.g., employment, self-sufficiency etc. Thus, biogas plants, although technically feasible, still require a high degree of subsidy, particularly given the fact that other competing energy sources such as kerosene and diesel are highly subsidized.

5. Gasification

Gasification is already economic in some situations as was shown by Mahin's (1989) study in Mali. The unit cost of electricity for the gasifier was DM0.26/kWh which was only 54 per cent that of a diesel plant With new technology, gasification is becoming even more economic. Williams and Larson (1990) have estimated the cost of BIG/STIG cogeneration based on a hypothetical sugarcane factory modelled after the Monymusk factory in Jamaica processing 175 t/d of sugarcane. According to their calculations, the BIG/STIG could produce over 460 kWh per ton of cane, or more than 20 times current electricity production (20kWh/t). A 53 MW BIG/STIG plant (operating year-round on briquetted sugarcane residues at sugar factories in Sao Paulo State) would be able to provide exportable electricity at $0.041/kWh, a substantially lower cost for electricity than the coal-fired option (even with a low coal price), and in the mid-range of costs estimated for new hydroelectric supplies from the Amazon, estimated to cost $0.032 to $0.058 kWh. Also, a BIG/STIG plant could produce electricity at a total cost lower than the operating cost with oil, even with oil at $2.9/GJ ($19/bbl). The investment in a BIG/STIG plus steam-conserving retrofits would provide an estimated rate of return of 18 to 23 per cent. However, the environmental impacts of using so many cane residues need careful consideration.

Table 20. Financial analysis of 3 m³ in India

 

Notes:

a Receives no subsidies and includes the costs of cowdung and labour
b Includes an 85 per cent subsidy, and cowdung and labour are regarded as free.

Source: Saxena and Vasudevan, 1991