Current Status and Future Prospects of Fuel Ethanol

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-- Henan Tianguan Enterprise Group Co., Ltd. Authors: Du Guangfeng, Feng Wensheng. Ethanol is a clean renewable energy source. As awareness of the global energy crisis grew and environmental protection concerns intensified, industrial production of fuel ethanol from biomass resources began in the 1970s, marking the start of humanity’s search for alternatives to fossil resources. I. Current status of fuel ethanol development internationally. The industrial production of fuel ethanol began in Brazil. Brazil has developed fuel ethanol for two reasons: on the one hand, it lacks domestic oil resources, and on the other hand, it has abundant sugarcane and other agricultural resources. In order to effectively promote its economic development and reduce its dependence on foreign energy sources, Brazil has established through legislation a policy aimed at replacing gasoline with fuel ethanol. After more than two decades of development, Brazil has become the largest producer of fuel ethanol; in 2004, its production volume was 14.6 billion liters (approximately 11.52 million tons). At the same time, Brazil currently has the lowest production costs for fuel ethanol in the world, at around 0.2 dollars per liter, while the price of gasoline is between 0.6 and 0.7 dollars per liter. Fuel ethanol already possesses considerable market competitiveness; since 2001, Brazil has **abolished subsidies for fuel ethanol, allowing prices to be determined directly by market supply and demand. The economic policies in the United States to promote the use of fuel ethanol began with the federal Energy Tax Act of 1978; at that time, the U.S. **eliminated a consumption tax of 4 cents per gallon on ethanol-blended gasoline in order to encourage its use. Since then, the federal tax exemption on ethanol-blended gasoline has fluctuated between 4 and 6 cents per gallon. Currently, the fuel ethanol industry in the United States is showing strong growth, with demand for fuel ethanol rising sharply; in 2004, the production volume of fuel ethanol reached 3.4 billion gallons (approximately 10.14 million tons). The cost of producing fuel ethanol in the United States from corn is 0.33 dollars per liter. On August 8, 2005, the United States’ Renewable Energy Act came into effect. This act set a target of using 7.5 billion gallons of fuel ethanol or biofuels each year by 2012. It also stipulated that, in order to protect the environment, particularly groundwater resources, the use of methyl tert-butyl ether (MTBE) in gasoline would be banned after December 31, 2014; MTBE is currently used widely around the world as an additive in automobile fuels. These measures will further accelerate the rapid development of the fuel ethanol industry in the United States. The consumption of fuel ethanol in the EU in 2004 was 1.75 million tons. According to market research, demand for ethanol in the fuel market is expected to increase significantly in 2005, with the EU’s biofuel programs driving this demand. The plan requires that by 2005, traditional fuels such as gasoline should contain at least 2% ethanol or other biofuels; by 2010, this proportion is to be increased to 5.75%. In comparison, the EU has the highest production costs for fuel ethanol; the cost of producing it from wheat is 0.48 dollars per liter, while the cost when using sugar beets is 0.52 dollars per liter. II. Current Status of Fuel Ethanol Production and Application in China: In the 1960s, due to preparations for war and oil shortages, ethanol was used as a substitute for gasoline in some areas; however, organized research, development, and promotion of its use began at the end of the 20th century. In the mid-1990s, China shifted from being a net oil exporter to a net importer, with import volumes growing at a high rate; the shortage of oil resources and energy security issues have drawn **great attention. After the reform and opening up, agricultural production grew rapidly, leading to a relative surplus in grain production and increasing inventory levels. **The burden associated with grain production and storage grew ever greater, grain prices declined year by year, and the growth rate of farmers’ incomes slowed down. With the improvement of transportation infrastructure, China’s automobile industry has developed rapidly; the number of vehicles in use is increasing year by year, leading to more severe exhaust pollution and greater pressure on environmental protection. In order to address comprehensively the aforementioned issues in China’s economic and social development, China has drawn on the successful experiences of developed countries such as those in Europe and the United States, and has organized research and application efforts related to fuel ethanol and ethanol-based gasoline for use in vehicles. As requested by the leaders of the State Council, departments such as the former **Planning Commission and **Economic and Trade Commission formed a leadership team for the promotion of ethanol gasoline for use in vehicles. A joint office meeting system was established, with eight ministries and commissions—including those responsible for planning, economy and trade, finance, public security, industry and commerce, taxation, technical supervision, and environmental protection—as well as the petroleum sector, working together to advance the research, development, and application of ethanol gasoline in vehicles in China. The former **Planning Commission was in charge of formulating plans for the promotion of fuel ethanol and ethanol-based gasoline for use in vehicles, as well as overseeing the construction of related facilities; the former **Economic and Trade Commission was responsible for carrying out pilot projects related to ethanol-based gasoline for vehicle use and promoting its wider adoption. In accordance with the requirement of conducting pilot projects first before rolling out the solution on a larger scale, fuel ethanol projects were launched in Henan, Jilin, Anhui, and Heilongjiang. Pilot programs for the use of ethanol-based gasoline in vehicles were carried out in five cities: Zhengzhou, Luoyang, and Nanyang in Henan Province, as well as Harbin and Zhaodong in Heilongjiang Province. Once successful experiences were gained from these pilots, the approach was promoted across the country. Starting in 2001, after a year of pilot testing, it was proven that ethanol-blended gasoline for vehicles is feasible both technically and in terms of management, has favorable environmental effects, and brings significant social and economic benefits. In order to coordinate the development, promotion, and application of fuel ethanol and ethanol-based gasoline for use in vehicles, the **Development and Reform Commission has formulated the ‘10th Five-Year Plan’ for ethanol-based gasoline in vehicles, as well as the ‘10th Five-Year Plan’ for the development of fuel ethanol and ethanol-based gasoline for vehicle use, and has begun the corresponding legislative work. 1. **Policies regarding fuel ethanol: At the beginning of 2004,** departments such as the National Development and Reform Commission, the Ministry of Public Security, the Ministry of Finance, the Ministry of Commerce, the State Taxation Administration, the State Environmental Protection Administration, the State Administration for Industry and Commerce, and the General Administration of Quality Supervision, Inspection and Quarantine jointly issued the \"Plan for Expanding Pilots of Ethanol-blended Gasoline for Vehicles\" and the \"Detailed Rules for Implementing the Expansion of Ethanol-use in Vehicle Fuel Pilots\" in the form of a document titled Fa Gai Gong Ye [2004] No. 230. This is the main policy basis for the promotion and application of fuel ethanol at present. Due to the high production costs of fuel ethanol in our country at present, companies cannot generate profits solely from its production; instead, they rely heavily on **subsidies at various stages. To encourage the promotion of fuel ethanol, **the following incentives are provided to enterprises approved to produce fuel ethanol: a 5% exemption from consumption tax on modified fuel ethanol used in formulating ethanol-based gasoline for vehicles** ； For the value-added tax on denatured fuel ethanol used in the production of ethanol gasoline for vehicles by enterprises, the tax is collected first and then refunded ； The aged grain used by enterprises in the production of modified fuel ethanol for vehicle ethanol gasoline is eligible for subsidies under the aged grain subsidy policy ； A fixed subsidy is provided for the production of denatured fuel ethanol, as well as for the losses incurred during its blending and distribution. In February 2005, the Renewable Energy Law was enacted **to encourage, through legislation, the development of biomass liquid fuels including fuel ethanol. 2. Costs, raw materials, and food security: Raw materials are the main factor determining the cost of fuel ethanol. In the corn-producing regions of Heilongjiang, Jilin, and Anhui, corn is the primary raw material used for producing fuel ethanol, while in Henan Province, wheat – mainly older stockpiles – is used for this purpose. The fuel ethanol projects planned in regions such as Guangdong and Guangxi mainly use sugarcane and cassava as raw materials. According to statistics, the production cost of fuel ethanol using corn and aged wheat as raw materials is 4,400–4,500 yuan per ton; the cost using sugarcane and fresh cassava is around 3,300 yuan per ton, while the production cost using sweet sorghum is approximately 2,600 yuan per ton. Producing fuel ethanol from wheat and corn is the most costly, but the value of its by-products is correspondingly high. Using corn as a raw material allows for the production of by-products such as corn oil and DDGS (a term referring to both soluble and insoluble dry distillers’ grains), while using wheat as a raw material yields by-products such as bran, gluten, and DDGS. Through by-product extraction and comprehensive deep processing, the fuel ethanol industry based on various raw materials possesses corresponding development advantages. At present, the production of fuel ethanol does not pose a significant threat to China’s food supply. According to statistics, China’s gasoline consumption in 2004 was 47 million tons. Assuming 10% ethanol is added to it, 4.7 million tons of fuel ethanol would be required, which would entail the use of approximately 11.7 million tons of corn and 4 million tons of wheat. Corn production in 2004 was 132 million tons, and the production in 2005 is expected to be between 127 million and 128 million tons. Wheat production in 2005 exceeded 90 million tons. In this way, the consumption required for producing 4.7 million tons of fuel ethanol accounts for only 7.1% of the output of corn and wheat, so it will not have a significant impact on annual grain consumption. Furthermore, the production process of fuel ethanol is the same as that used to produce high-quality, high-protein feed. Taking the traditional use of corn as a raw material for alcohol production as an example, about 3.3 tons of corn are required to produce 1 ton of alcohol, and at the same time 1 ton of DDGS protein feed can be produced. DDGS feed is recognized in the international market as a high-quality protein feed, with a protein content of around 30%; it is rich in amino acids, vitamins, and minerals, making it an excellent raw material for formulated feeds. 4.7 million tons of fuel ethanol are produced, with approximately 4.7 million tons of DDGS generated as a by-product. Furthermore, the production of fuel ethanol is becoming increasingly diversified, which prevents excessive reliance on any single raw material. Moreover, with advances in technology and the successful development of fiber ethanol, the production of fuel ethanol will not pose a threat to food security. 3. Market: Since the adoption of fuel ethanol in China is still in its initial stages, various aspects of production and distribution are highly influenced by subjective factors, and there is still a long way to go before true marketization is achieved. To make rational use of resources, **the approval and implementation of projects related to fuel ethanol are handled with great caution, under strict control by the National Development and Reform Commission. Currently, there are four production enterprises in China that have been approved and recognized: Henan Tianguan Fuel Ethanol Co., Ltd., Jilin Fuel Ethanol Co., Ltd., Anhui Fengyuan Biochemical Co., Ltd., and Heilongjiang China Resources Alcohol Co., Ltd. In accordance with the requirements of the \"Implementation Rules for Expanding the Pilot Program for Ethanol-blended Gasoline for Vehicles,\" the provinces of Heilongjiang, Jilin, Henan, and Anhui will first promote the use of ethanol-blended gasoline for vehicles across their entire territories. Of this, the 100,000 tons of modified fuel ethanol produced by Heilongjiang China Resources Alcohol Co., Ltd. is all used within the province ； Out of the 300,000 tons of modified fuel ethanol produced in Jilin, 100,000 tons are sold within the province, while the remaining 200,000 tons are sent to Liaoning for sale ； Of the 300,000 tons of modified fuel ethanol produced in Henan, 130,000 tons are sold within the province, while the remaining 170,000 tons are sent to 13 cities including Xiangfan, Jingmen, Suizhou, Xiaogan, Shiyan, Wuhan, Yichang, Huangshi, Ezhou in Hubei, as well as Shijiazhuang, Baoding, Xingtai, and Handan in Hebei for sale ； Of the 320,000 tons of modified fuel ethanol produced in Anhui, 100,000 tons are sold within the province, while the remaining 220,000 tons are sent to 15 cities including Jinan, Heze, Zaozhuang, Laiwu, Linyi, Liaocheng, Jining, Tai’an, Rizhao, Dongying, Binzhou, Dezhou, Zibo in Shandong Province, as well as Cangzhou and Hengshui in Hebei Province for sale. By the end of 2005, ethanol-blended gasoline for vehicles was sold throughout the aforementioned provinces and cities. By August 2005, Henan Tianguan Enterprise Group had sold a total of 200,000 tons of fuel ethanol, while Jilin Province had sold a total of 300,000 tons of fuel ethanol. 4. Pricing and Economic Analysis of Fuel Ethanol: Since 2005, due to the continuous rise in oil prices, the profit margin for fuel ethanol has also shown an upward trend (the initial estimate was a profit of around 100 yuan per ton of fuel ethanol). The profit analysis is shown in Table 1. Table 1 Profit Analysis for the Production and Sale of Fuel Ethanol
Raw material | Cost (yuan/ton) | Subsidy (yuan/ton) | Selling price (yuan/ton) | Profit (yuan/ton)
Corn | 4400 | 1300–2000 | (Factory price of 90# gasoline: 3900) × 0.9111 = 3553 | Approximately 500
Wheat | 4500 | 1100–2000 | (Factory price of 90# gasoline: 3900) × 0.9111 = 3553 | Approximately 300
The retail price of ethanol gasoline is set in accordance with the standard retail price for regular gasoline announced by the National Development and Reform Commission, and it adjusts accordingly as the price of regular gasoline changes. Currently, the benchmark retail price for 90# gasoline is around 5,000 yuan per ton. Selling ethanol-blended gasoline offers greater profit margins for petrochemical suppliers, and consumers will also benefit from this. At present, the production cost of fuel ethanol is high (higher than the current pricing for fuel ethanol: 0.9111 times the retail reference price of gasoline). Fuels containing ethanol, such as ethanol gasoline, are sold in the market at the same price as regular gasoline; therefore, **financial subsidies or tax incentives are needed to support ethanol production. However, such subsidies do not indicate that ethanol production is economically unviable. Firstly, **subsidies for fuel ethanol are a ‘win-win’ measure that serves as a form of regulation based on the principle of giving first before expecting anything in return.** Fuel ethanol represents an emerging industry in our country. In order to establish a stable and controllable approach to the conversion of grain into useful products, this industry is supported in the initial stages, thereby helping to stabilize grain prices, boosting grain production and increasing farmers’ incomes. It also creates numerous job opportunities, stimulates domestic demand and related supply chain activities, and ultimately generates revenue for the **government. Based on China’s annual production of 4 million tons of fuel ethanol, this can drive direct consumption worth over 16 billion yuan, and it can create approximately 500,000 jobs, both directly and indirectly. It can **generate income** in various areas such as production, distribution, and employment. Furthermore, **the financial subsidies provided for the production of fuel ethanol should not be regarded as additional subsidies within fiscal expenditures; they represent a legitimate substitute and replacement for the grain export subsidies that China used before joining the WTO. Before joining the WTO, to encourage exports, **direct subsidies were provided for grain exports in order to stimulate grain production and exports. After joining the WTO, WTO rules stipulate that food-producing countries must not provide subsidies for food exports, and our country has also made a commitment in this regard. Following the practices of developed Western countries, by subsidizing food processing enterprises, it is possible to legally bypass certain rules and achieve the same effects as existing subsidy policies. Taking the original corn exports as an example, for each ton of corn exported, there is a direct financial subsidy of 368 yuan, with local subsidies ranging from 30 to 50 yuan. Approximately 3.5 tons of grain are required to produce one ton of fuel ethanol. The current subsidy for fuel ethanol is set at 1,200 yuan per ton; based on this subsidy amount, compared to direct grain subsidies, an additional savings of around 60 yuan per ton can be achieved in terms of financial costs. III. Outlook 1. Opportunities As fossil resources become increasingly depleted and oil prices continue to rise, international crude oil prices have remained above $60 per barrel since July 2005, with a tendency to keep rising. This creates room for an increase in the price of fuel ethanol, while also presenting historic opportunities for its development. Furthermore, as domestic oil demand continues to rise, a strategy of diversifying energy supplies, represented by alternative fuels such as ethanol, has become one of the directions of energy policy. 2. Technology (1) Innovation in production technology: With breakthroughs in the key technologies for producing ethanol from fibers and their successful industrial application, there will be an almost unlimited supply of raw materials for the production of fuel ethanol. According to statistics from relevant authorities, currently, the country generates about 700 million tons of crop straws each year, of which 200 million tons are used as fuel in rural areas. If the remaining 500 million tons are used to produce ethanol, 70 million tons of ethanol can be produced. Including waste materials from the timber industry, as well as waste from the sugar and paper industries and urban fiber waste, a total of 85 million tons of ethanol can be produced, which is more than the country’s total gasoline consumption. (2) Development of fuel ethanol application technologies. In terms of the consumption of fuel ethanol, countries such as the United States and Brazil have successfully developed Flexible Fuel Vehicles (FFVs) that can use either pure gasoline or pure ethanol, or a mixture of the two in any proportion. Currently, there are over 2 million such vehicles on the roads in Brazil. Developing FFV vehicles is one approach to applying fuel ethanol technology in automobiles. Furthermore, the use of fuel ethanol in diesel engines can further expand its application scope, and Henan Tianguan Group has already made valuable attempts in this regard. Technologies for the production of ethanol-diesel fuel and its application have been successfully developed, and the feasibility of this technology has been confirmed through bench tests and numerous road tests. This will provide a broader scope for the use of fuel ethanol. 3. Industrial transformation: As the oil supply situation becomes increasingly strained, the prices of petroleum-based chemical products rise further, thereby creating opportunities for the development of ethanol-based chemicals. Ethylene is the basis for many petrochemical products, and the technology for producing ethylene from ethanol is already well-developed. In the past, due to the relatively low prices of petrochemical products, using ethanol to produce such chemicals did not offer a competitive advantage; however, with changes in the market situation, the advantages of ethanol-based chemical production are now becoming increasingly apparent. Taking the production of ethylene from ethanol as an example, 1 ton of ethanol can yield 0.56 tons of ethylene. Currently, the cost of producing ethylene from ethanol derived from grain is around 7,100 yuan per ton; the international price of ethylene is 1,000 dollars per ton, while the domestic price ranges from 8,000 to 10,000 yuan per ton. The gross profit margin for producing ethylene from ethanol is approximately 20%. As oil prices rise and breakthroughs are made in the key technologies for producing ethanol from fibers, the cost advantage of using ethanol to produce ethylene will become even more significant. 4. Recommendations: Drawing on the relatively successful experiences of countries such as Brazil and the United States in the promotion of fuel ethanol, the following recommendations are put forward for the development of fuel ethanol in China: 1. Utilize legislative measures by the national parliament to ensure the smooth advancement of the promotion of fuel ethanol ； 2. **Policies such as subsidies and tax exemptions should be implemented promptly to create favorable conditions for the development of the fuel ethanol industry** ； 3. Actively promote the development of new technologies for fuel ethanol, including the cultivation of new energy crops, fiber-based ethanol production technologies, and technologies for using fuel ethanol in vehicles ； 4. Advance the use of fuel ethanol and expand its application scope; for example, the use of ethanol-diesel in diesel engines will yield even better results, and partnerships with the automotive industry should be established to develop flexible-fuel vehicles.