Economic feasibility of second generation ethanol with and without indirect greenhouse gas reduction benefits : a simulation for Brazil

Abstract

The aim of this study is to determine the economic feasibility of second generation ethanol from sugar cane, whereby traditional ethanol production is combined with the use of lignocellulosic biomass for ethanol production. By applying cost-benefit analysis, this study evaluated the viability of the second generation ethanol technology as an alternative to conventional sugarcaneto- ethanol, both in terms of processing technology, and of land use impacts. Furthermore, an attempt is made to analyze impacts on CO2 mitigation and land use in economic. The research results indicate that: i) from an economic point of view, the first generation plant is clearly preferable. With IRR of 18.7%, Minimum selling price of US$0.31 per liter, and NPV of US$ 213.0 million, first generation ethanol production from sugar cane has a large economic advantage compared to the second generation plant (IRR of 13.5%, Minimum selling price of US$0.40 per liter and NPV of US$ 78.5 million). ii) from an environmental point of view, a second generation biofuel that makes use of lignocellulosic biomass plant is clearly preferable. The second generation plant uses 49.6% less land and avoids a CO2 debt average of 942,282 ton per year throughout the life of the project. iii) Productivity gains improve profitability (IRR) and reduce biofuel prices (Minimum selling prices). Increasing the yearlt Ethanol and sugar cane productivity’s growth rate from 0.5% to 4.0% leads to a range of IRR from 17.5% to 21.5%, and of price from 0.29 US$/l to 0.32 US$/l for first generation plant, and from 13.2% to 14.2% and of price from 0.39 US$/l to 0.40 US$/l for second generation plant. iv) Process improvement shows little economic impact but matters on environmental side because less land is needed. Up to 10% more land can be saved compared to least advanced technology. v) Energy conversion development can improve income of the plant, especially for the first generation plant. Each 5% improvement can lead to 0.6% change in IRR project, and a reduction of 1.1% in the Minimum selling price. vi) Equipment investment is the most sensitive parameter to alter biofuel prices and profitability. The conventional plant is more sensitive to equipment investment, land prices and trash costs in this order while second generation plant is sensitive to equipment investment and almost insensitive to land prices and trash costs changes. vii) Assuming an average payment of US$29.43 or higher per ton CO2 debt, the second generation plant may become a competing alternative to conventional, first generation plant. On average, the technology could be paid at reasonable cost (Revenue average of US$ 27.7 million). viii) Productivity gains reduce the repayment time of CO2 debt, with ethanol productivity having a stronger contribution. Besides, from a growth rate of ethanol and sugar cane productivity from 0.5% to 4.0% per year, the repayment time changes from 11.8 years to a range between 6.5 years and 5.5 years and 13 and 9.5, respectively. In conclusion, the appraisal model represents a useful tool for analyzing many issues related with the dilemmas involved in biofuel production