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Biofuels are under pressure as the food versus fuel debate heats up in Europe and second generation biofuels using non-food crops struggle to live up to expectations.
A Rabobank report into renewables by analyst Justin Sherrard points to new regulations in Europe that narrow the definition of feedstocks able to sustainably produce biofuel and bio-electricity. The UK has narrowed the definition of energy crops so that fewer will be able to apply for renewable obligations certificates.
Sherrard says investors must be careful not to support developments based on feedstocks that will be adversely affected. Australian investors have limited ASX-listed options to invest in biofuels but for a broad exposure there are exchange traded funds including the Elements MLCX Biofuels Index Total Return ETN or the Teucrium Corn ETF, which gives an exposure to a main ingredient, corn.
In the Netherlands, support for biofuels utilising used cooking oils is waning as the product has economic value in other industries, while Germany has cut support for the use of animal fats for similar reasons.
Rabo analyst Susan Hansen expects biofuels to play a large role in de-carbonising the transport sector over the coming decade but large-scale commercialisation of second generation technologies such as algae-based bio-diesel and cellulosic ethanol produced from wood, grasses or non-edible parts of plants, will struggle for financing.
When second generation technologies started to show promise in the middle of last decade, forecasts were for US cellulosic production to reach 500 million gallons this year. Only 8.65 million gallons is now likely.
Funding to date has come from subsidies and grants on the government side and private equity, venture capital and public share raisings from investors.
Banks had bad experiences funding the first round of food-based biofuels, due to the reliance of the industry on shifting political support and policies.
“Risks and uncertainties are not restricted to first generation biofuel,” ssays Hansen. “Commercialising next generation biofuels is a new exercise involving new supply chains around feedstocks (like agricultural waste, grasses, algae and sorghum) and new technologies.
“To get these crops and technologies rolled out on a large scale requires farmers to be convinced about the advantages of producing new energy crops, all the handling and transport systems need to be put in place and it must be organised in a more sustainable way than is happening with current biofuels,”