Peru Hydrocarbon Assistance Project
WBS Activity No. 142 Dirección General de Hidrocarburos
"Analizar la Aplicabilidad de los Biocombustibles en el Perú“
William G. Matthews Donald O’Connor
February 3, 2006
Table of Contents
1. INTRODUCTION...... 1 2. BIOFUELS OVERVIEW...... 3 2.1 Ethanol...... 3 2.1.1 Use as a Vehicular Fuel ...... 3 2.1.2 Production Processes ...... 4 2.1.3 Standards and Characteristics ...... 4 2.2 Biodiesel ...... 7 2.2.1 Use as a Vehicular Fuel ...... 7 2.2.2 Production Processes ...... 8 2.2.3 Standards and Characteristics ...... 8 3. PERU TRANSPORTATION FUELS SECTOR ...... 11 3.1 Gasoline...... 11 3.1.1 Supply, Consumption and International Trade...... 11 3.1.2 Refinery Production...... 11 3.1.3 Volume of Ethanol Required in Gasoline at Different Concentrations..13 3.2 Diesel...... 14 3.2.1 Supply, Consumption and International Trade...... 14 3.2.2 Refinery Production and Imports ...... 14 3.2.3 Volume of Biodesel Required in Diesel at Different Concentrations.....15 3.3 Storage & Dispatching Infrastructure and Ownership/Operation...... 16 3.4 Summary of Sector Organization ...... 17 3.4.1 Structure ...... 17 3.4.2 Attitudes to Introduction of Biofuels...... 18 3.5 Fuel Qualities and Specifications ...... 19 3.5.1 Gasoline...... 19 3.5.2 Diesel...... 20 3.6 Integration of Biofuels – Blending with Hydrocarbons...... 21 3.6.1 Gasoline...... 21 3.7 Fuel Pricing & Taxation ...... 25 4. ETHANOL IN PERU ...... 27 4.1 Current Situation...... 27 4.2 Ethanol Feedstocks ...... 27 4.2.1 Sugar Cane ...... 28 4.2.2 Molasses ...... 29 4.2.3 Bagasse ...... 29 4.3 Ethanol Production ...... 29
1 4.3.1 Molasses ...... 29 4.3.2 Sugar Cane ...... 29 4.4 Market Development ...... 33 4.5 Other Applications for Ethanol ...... 34 4.5.1 Ethanol-Diesel Blends (E-Diesel)...... 34 4.5.2 High Level Ethanol-Gasoline Blends and Hydrous Ethanol...... 40 5. BIODIESEL IN PERU ...... 42 5.1 Current Situation...... 42 5.2 Biodiesel Feedstocks...... 42 5.3 Biodiesel Production Costs ...... 44 5.4 Market Development ...... 45 5.5 Other Applications for Biodiesel ...... 46 6. ALTERNATIVE FUEL IMPLEMENTATION BARRIERS...... 47 6.1 Research and Development + Deployment...... 49 6.2 Market Barriers Perspective...... 52 6.3 Biofuel Development from a Market Barriers Perspective ...... 57 6.3.1 Normal Market Barriers...... 57 6.3.2 Market Failure Barriers ...... 61 6.3.3 Summary Market Barriers...... 63 6.3.4 Summary Market Development Barriers ...... 64 6.4 Market Transformation ...... 65 7. COMMENTS ON BIOFUELS LEGISLATION...... 68 8. SUMMARY - CONCLUSIONS AND RECOMMENDATIONS ...... 70 8.1 Conclusions...... 70 8.2 Recommendations ...... 73
Annexes 1. Biofuels Legislation 2. Persons Met 3. Fuel Ethanol Specifications 4. Biodiesel Specifications 5. Cartavio Sugar/Ethanol Plant Visit 6. Area Devoted to Oil Palm in Peru
2 1. INTRODUCTION In recent years for economic, social or environmental reasons, there has been increasing activity and interest in the production and consumption of vehicle fuels of biomass origin, or biofuels, worldwide. In the coast and forest regions of Peru, suitable areas exist, in terms of quality of the soil and climatic conditions, for the development of crops that provide the volumes of adequate raw material to produce both anhydrous ethanol and biodiesel, the two principal biofuels. Pursuant to the policy of stimulation of biofuels activity in Peru, legislation concerning the promotion of biofuels has been passed: Ley 28054 de Promoción del Mercado de Biocombustibles and its relevant regulation Decreto Supremo Nº 013-2005. The texts for these are attached as Annex 1. The goal of this policy action and attendant legislation is: • To promote investments in the activities of production and commercialization of these biofuels, • To propagate the environmental, social, and economic advantages of biofuels use through the protection of public health and the environment and the creation of new jobs • To contribute to the National Strategy of the Fight against the Drugs by means of the cultivation of alternative crops in the coca zones of the country. Following up on these objectives, the General Directorate of Hydrocarbons (DGH) of the Ministry of Energy and Mines (MEM) through the Peru Hydrocarbons Assistance Project (PHAP) developed the terms of reference for a study to examine the hydrocarbons and biofuels sectors in Peru and to evaluate the biofuels regulation within that sectoral framework. It is in this context that the Canadian Petroleum Institute (CPI) the Canadian Executing Agency (CEA) for PHAP subcontracted the consultants William Matthews and Donald O’Connor to carry out this study. Mr. Matthews arrived in Lima on October 18, 2005 and proceeded to visit with hydrocarbons and biofuels sector representatives in order to gather information and to apprise these stakeholders of the anticipated biofuels program. Mr. O’Connor arrived November 1, 2005 and the two consultants together completed the stakeholder data gathering and review work. Annex 2 provides a summary of the persons met during the assignment. On November 11, prior to their departure on November 12, a Preliminary Report of findings and issues to date was presented to officials of DGH. This report constitutes a draft of the final report for this activity. The intention is to circulate copies of this report to various stakeholders prior to a seminar/workshop to be held in February, 2006 with all the interested parties in attendance. The objective is to present all the issues relevant to biofuels production and commercialization in an open forum of all the stakeholders pursuant to finalizing the report for this activity. Chapter 2.0 herein provides an overview of biofuels to put in perspective the nature, extent of use and characteristics of ethanol and biodiesel. Chapter 3.0 covers the existing hydrocarbons sector, including certain issues relating to the integration of biofuels with the conventional fuels supply/distribution chain. Chapter 4.0 covers the
1 existing and prospective ethanol situation in Peru – raw materials, production methods, technology, costs and pricing. Chapter 5.0 covers the existing and prospective biodiesel situation in Peru - raw materials, production methods, technology, costs and pricing. Chapter 6.0 discusses the typical barriers which exist to the development of biofuels markets, while Chapter 7.0 discusses issues related to the existing biofuels legislation which result from the consultants’ analysis of the sector and discussions with stakeholders. Chapter 8.0 wraps up with a summary of conclusions and recommendations deriving from the consultants’ review and analysis. The consultants would like to acknowledge the support and advice of DGH officials in the execution of their tasks during this assignment, in particular, Ing. Luis Zavaleta Vargas and Sra Angie Garrido Ponce and the kind co-operation of all the government and industry sectoral officials who contributed to the consultants’ understanding of the issues related to the application and promotion of biofuels in Peru.
2 2. BIOFUELS OVERVIEW Broadly defined a biofuel is any fuel that derives from biomass — recently living organisms or their metabolic byproducts, such as manure from cows. It is a renewable energy source, unlike other natural resources such as petroleum, coal and nuclear fuels. The carbon in biofuels was recently extracted from atmospheric carbon dioxide by growing plants, so burning it does not result in a net increase of carbon dioxide in the Earth's atmosphere. As a result, biofuels are seen by many as a way to reduce the amount of carbon dioxide released into the atmosphere by using them to replace non renewable sources of energy. Within the context of this study biofuels are more narrowly classified as the two principal vehicular fuels derived from agricultural crops: Ethanol and Biodiesel: 2.1 Ethanol Ethanol or ethyl alcohol, is a primary alcohol containing two carbon groups (CH3CH2OH) which may be produced in a petrochemical process from ethylene or biochemically by fermentation of various sugars from carbohydrates found in agricultural crops and cellulosic residues from crops or wood. 2.1.1 Use as a Vehicular Fuel Ethanol derived from agricultural crops has been used as a motor fuel in North America since the early 1900s. In 1908 Henry Ford designed his Model T to run on ethanol. Ethanol gasoline blends were used in parts of the United States prior to the Second World War but through the 1950’s and 1960’s there was no ethanol used in gasoline in North America. Peru’s neighbour, Brazil, is the most important fuel ethanol producer in the world, is the largest exporter of ethanol and has the most comprehensive domestic consumption program. Brazil has used ethanol as a transportation fuel since the 1920’s. Brazil’s current program was started in 1975 driven by a combination of mitigation of the first oil shock of 1973 and a desire to stabilize revenues to its large sugar industry. Production in 2004 was some 15 billion litres. All Brazilian ethanol is produced either directly from sugar cane or indirectly from molasses, a byproduct of the sugar industry. In the 1970’s Brazil mandated the use of ethanol in gasoline (gasohol) and focused on fully dedicated hydrous ethanol vehicles. The latest trend, initiated in 2003, is towards “flex-fuel” vehicles which are capable of using a complete range of ethanol/gasoline fuels containing from 0 to 100% ethanol. The consumption of fuel ethanol in Brazil now represents roughly 30% of the total energy consumed by spark ignition engines. In 1979 the US Congress established the federal ethanol program to stimulate the rural economy and reduce the dependence on imported oil. The production and use of ethanol as a motor fuel in the United States and in Canada has increased continuously since that time. There are now over 13 billion litres of ethanol used in gasoline in the United States and Canada each year. This represents about 2.4 % of the gasoline volume or 1.6 % of the energy in the gasoline pool. Most of the ethanol is used in low- level blends of 5-10% ethanol in gasoline. In North America fuel ethanol is currently produced mostly from starch containing crops such as corn, wheat and milo.
3 The 2004 world production of fuel ethanol in was 40,711 million litres, of which: Million litres Brazil 15,078 USA 13,362 China 3,644 Europe 3,300 As noted Brazil and USA combined account for some 71% of total world production. 2.1.2 Production Processes Ethanol my be produced from naturally-occurring sugars in sugar cane or sugar beet crops, or from starchy crops such as corn and wheat. There is also a route to ethanol production through the conversion of cellulose to sugar compounds. The fundamental biochemical production process is the fermentation of biomass- sourced sugars via yeast. In the case of sugar cane juice and byproduct molasses the sugar is naturally occurring and fermented directly. In the case of starchy crops such as grains and corn the starch must be enzymatically converted to sugar followed by the yeast-induced fermentation process. In the case of lignocellulosic residues such as straw or wood the cellulose must be chemically or enzymatically converted to sugar and then fermented. The fermentation process produces a liquid of low ethanol concentration (“beer”), which must then be concentrated through distillation and molecular sieving. Conventional distillation will produce a maximum 95% ethanol controlled by the formation of an ethanol-water azeotrope at that 95-5 concentration. Since water interferes with gasoline combustion and prevents the ethanol from being miscible with the gasoline, the hydrous 95% alcohol cannot be used in gasohol blends for conventional unmodified spark ignition engine systems. The azeotropic limit is overcome and anhydrous 99% ethanol is produced, either through extractive distillation (old technology) or molecular sieves (latest technology) Figure 1 is a flowsheet of a typical production scheme for ethanol from sugar cane – either directly from cane juice or indirectly from byproduct molasses. 2.1.3 Standards and Characteristics Fuel ethanol is now used in several types of blends and formulations in spark ignition engines. In all countries other than Brazil the most common blend is up to 10% - known as E10 Gasohol or E10 gasoline. The 10% maximum blend amount was established based on the advice from automobile manufacturers who will not warranty their vehicles for gasolines with higher than 10% ethanol content. Brazil, with a high degree of self- sufficiency in vehicle production, has used up to 25% (anhydrous) ethanol as gasohol blends and 100% hydrous (in dedicated vehicles) and most recently has introduced “flex-fuel” vehicles, which can use a complete range of ethanol content fuels from 0 to 100%.
4 Raw Sugar
s e s Molecular s la Sugar Processing o M
Cane Juice
Sugar Cane Pressing Cane Juice
Bagasse
Evaporation
Figure 1: Ethanol from Sugar Cane
Standards for fuel ethanol are well developed in all the major producing countries and are evolving as gasoline specifications change and become more restrictive. In the US ASTM D4806-04a is the “Standard Specification for Denatured Fuel Ethanol for Blending with Gasolines for Use as Automotive Spark-Ignition Engine Fuel” and CAN/CGSB-3.511 is roughly equivalent, as is draft norm for Peru. Brazil’s standard, Technical Regulation DNC - 01/91 covers both hydrous and anhydrous fuel ethanol The specifications for Brazil, USA and Canada are included as Annex 3. An excellent Website with the specifications for all types of ethanol, including fuel ethanol for some thirty-six countries is: http://www.distill.com/specs/ For excise reasons fuel ethanol must be blended with an additive or “denatured”. The denaturant is usually unleaded gasoline in concentrations of 1% to 5%. In the establishment of fuel ethanol specifications the main focus is on controlling the range of denaturant content, guaranteeing a minimum of ethanol content and ensuring that impurities are at a minimum level that will not render the final blended gasohols off- specification vis-à-vis finished gasoline standards. Some of the notable characteristics of fuel ethanol are:
5 • Octane: Although the octane (RON) of pure ethanol is only 112, ethanol exhibits a much higher effective octane in blending with gasoline – in the range of 130- 132 RON.
• Vapour Pressure: Although the Reid vapour pressure (RVP) of pure ethanol is not particularly high – about 2.4 psi, the effective blending RVP is much higher – about 18 to 22 RVP, depending on the ethanol concentration. For example the addition of 10% ethanol to gasoline usually increases the RVP by roughly 1.3 psi.
• High Oxygen Content: Ethanol contains some 35 weight % of oxygen, which enables the oxygenation of compounds such as carbon monoxide and volatile organics (VOCs) in the combustion process, resulting in lower emissions of these compounds.
• Fuel Economy: Although ethanol has 35% lower energy content per litre than gasoline, the more complete combustion of abovementioned compounds combined with an increase in the volume of combustion products and the effect of greater charge-air cooling results in a much lower reduction in fuel efficiency than anticipated by the differential in energy content; this lower reduction in fuel efficiency has been observed to be more pronounced in older vehicles
• Material Compatibility: Some materials used in fuel systems tend to degrade over time, such as elastomers used to make hoses and valves. Other fuel system components are made of metals and plastics and must be compatible with the expected range of fuel composition. Some older elastomers were found to deteriorate more rapidly in the presence of aromatics (found in higher concentrations in unleaded gasolines) and alcohols. However, since the mid- 1980s, all vehicles have used fluoroelastomers, which are specifically designed to handle all modern gasolines, including ethanol/gasoline blends. The experience of using ethanol blends in areas covered by the oxygenated gasoline program in the U.S. has not registered higher rates of materials degradation or failure than areas using conventional gasolines
• Emissions: Ethanol/gasoline reduce CO, and VOC emissions; although Nitrogen oxide compounds (NOx) emissions may increase actual tests have shown that the effect of blends on NOx emissions was mixed, the response ranged from an increase of 0.47 grams per mile to a reduction of 0.43 grams per mile. Ethanol reduces particulate emissions, especially fine particulates that pose a health threat to children, senior citizens and individuals suffering from respiratory ailments
• Greenhouse Gas (GHG): Considering the full crop production and fuel consumption cycle there is a net reduction in carbon dioxide in the ecosystem. Ethanol reduces GHG emissions because the sugar cane, grain or other biomass used to make the ethanol absorbs carbon dioxide as it grows. Although the conversion of the biomass to ethanol and the burning of the ethanol produce emissions, the net effect is a large reduction in GHG emissions compared to fossil fuels such as gasoline.
6
2.2 Biodiesel Biodiesel is an ester produced by chemically reacting vegetable or animal fat with an alcohol, usually methanol. Chemically, it is a fuel comprised of a mix of mono-alkyl esters of long chain fatty acids. A lipid transesterification production process is used to convert the base oil to the desired esters and remove free fatty acids. As the name implies it has properties similar to diesel fuel except it is made from renewable resources. 2.2.1 Use as a Vehicular Fuel Biodiesel can be used in conventional diesel engines in its neat form or blended with conventional diesel fuel. One common blend in the United States is 20% biodiesel and 80% petroleum diesel (B20). It can also be used as an additive to enhance the lubrication properties of petroleum diesel fuel. In neighbouring Brazil there have been initiatives since the 1920’s to promote use of vegetable oils. Following the limited success in the 1980s of the “Pró-óleo” and “OVEG” Programs in 2002 the Brazilian Ministry of Science & Technology implemented the Research & Technology Development “PROBIODIESEL” National Network. In 2003 an Interministerial Commission evaluated feasibility of Biodiesel in Brazil and set recommendations for a program. In the same year a Brazilian Biodiesel specification (ANP 255/03) was developed and in 2004 permission was promulgated to use 2% biodiesel + 98% diesel blends (B2). In December 2004: a National Biodiesel Program was announced. Under this program, 2 percent of the country's diesel fuel must be mixed with biodiesel in 2008 and 5 percent by 2013. Given estimated Brazilian diesel consumption of 40 billion litres annually, 800 million litres of biodiesel is needed by 2008. Although Brazil currently produces only around 20 million litres of biodiesel annually there are projects to produce an extra 250 million litres within the next two years. One of the government's main objectives is to aid small farmers in impoverished northern and northeastern Brazil. As a means of testing supply and market price and encourage more production a first biodiesel auction was organized recently (mid-November, 2005 by the Brazilian National Petroleum Agency (ANP) at which a total of 92 million litres of biodiesel was offered. Estimated total world production of biodiesel in 2004 was 2000 million litres. Important users of biodiesel worldwide, with approximate 2004 volumes are: Millions litres Germany 1,000 France 350 USA 100
7 2.2.2 Production Processes Biodiesel is made through the transesterification of vegetable and animal oils. The process scheme is shown in Figure 2. The raw oil is reacted with methanol or ethanol1 in the presence of sodium hydroxide or potassium hydroxide as a catalyst. The Biodiesel is separated from the byproduct glycerine and water washed to produce specification biodiesel product. Typical vegetable oil sources are soy, canola, tempate, castor bean and palm. Another source of raw oil is waste vegetable oils from industrial food processing or restaurants. This waste oil is known as “yellow grease”. Animal oils such as tallow from meat processing or fish oils may also be used.
Transesterification Process
Figure 2: Biodiesel Production Scheme
2.2.3 Standards and Characteristics Specifications for biodiesel have been developed in the major producing/consuming countries. The US biodiesel specification is ASTM D 6751 for all biodiesel fuel bought and sold in the US. D 6751 covers the incorporation of pure biodiesel (B100) into conventional diesel fuel up to 20% by volume (B20). Higher blend levels may be acceptable, depending on the experience of the engine company. Biodiesel is also registered with the Environmental Protection Agency (EPA) as a fuel and fuel additive.
1 The use of ethanol as a reagent in Biodiesel production has not been studied as extensively as has the use of methanol but research is proceeding apace since it has the advantage of being sourced from biomass and being more readily available in many settings; it is also less toxic than methanol.
8 In Europe there are three existing specification standards for diesel & Biodiesel fuels (EN590, DIN 51606 & EN14214). EN590 (actually EN590:2000) describes the physical properties that all diesel fuel must meet if it is to be sold in the EU, Czech Republic, Iceland, Norway or Switzerland. It allows the blending of up to 5% Biodiesel with 'normal' DERV - a 95/5 mix. In some countries such as Germany, much of the diesel sold routinely contains this 95/5 mix. DIN 51606 is a German standard for Biodiesel, is considered to be the highest standard currently existing, and is regarded by almost all vehicle manufacturers as evidence of compliance with the strictest standards for diesel fuels. The vast majority of Biodiesel produced commercially meets or exceeds this standard. EN14214 is the standard for biodiesel now, having recently been finalized by the European Standards organisation CEN. It is broadly based on DIN 51606. Brazil established its biodiesel specification, ANP 255, in 2003. . The US, European and Brazilian biodiesel specifications are included as Annex 4. Some of the notable characteristics of biodiesel are: Positives:
• Energy trade balance: Biodiesel is produced domestically, which helps reduce a country’s' dependence on imported petroleum. • Rural Economy: The development of a biodiesel industry strengthens the domestic, and particularly the rural, agricultural economy. • Renewable Resource: It is a renewable fuel that can be made from agricultural crops and/or other feedstocks that are considered waste, such as cooking oil and trap grease. This helps conserve non-renewable resources and makes the best possible use of materials which may be perceived as having little or negative value. • Safe, Environmentally Benign: Biodiesel is readily biodegradable and non-toxic. Continued testing indicates that biodiesel degrades as fast as and is as safe as sugar in the environment, and when blended with petrodiesel accelerates the diesel's degradation in the environment. • Tailpipe Emissions: Biodiesel and biodiesel blends significantly reduce harmful tail pipe emissions. Exhaust emission improvements include substantial reductions in carbon monoxide, hydrocarbons, carcinogenic compounds and particulates. Pure biodiesel has zero sulphur – hence SOX emissions are eliminated. • Net Negative GHG: Biodiesel produces less GHG from the tailpipe and, considering the crop production cycle, biodiesel sourced from vegetable crops is a significant net negative GHG generator. • High Lubricity: Diesel fuel blends with biodiesel have superior lubricity, which reduces wear and tear on engines and makes the engine components last longer.
9 Negatives
• Low Temperature Flow characteristics: Biodiesel has a relatively high pour point compared with most petrodiesels; special precautions have to be taken in cold weather to avoid gelling in the fuel system. The extent to which pour point is higher than typical petrodiesels depends on the precursor raw oil source. Virgin vegetable oil precursors tend to produce biodiesel esters with lower pour points than those from waste oils or animal fats.
• Solvent Effect: Biodiesel is a fairly strong solvent affecting natural rubber hoses and gaskets in the fuel system and some paints at blends greater than 20%.
• Fuel Filter Clogging: The abovementioned solvent effect results in a cleansing effect on a diesel fuel system, removing accumulated deposits; this can result in fuel filter clogging during the first two or three uses of biodiesel.
• Feedstock Availability And Cost: Competition with high priced food uses for oils results in an expensive feedstock to biodiesel production. The high cost of production that results remains the greatest obstacle to market penetration for biodiesel in blends or as a pure fuel. Although recycled waste oils can be used to reduce costs, these sources are limited and present problems in production and usage. For example, waste frying oil is often hydrogenated which increases its pour point significantly.
• T90: The maximum temperature at which 90% of the material boils off in standard distillation test is an important standard for finished diesel. A high T90 usually results in higher tailpipe emissions of particulates. Depending on the precursor source of biodiesel it usually has a higher T90 point than petrodiesel. Tests have shown, however, that this higher boiling point does not correlate with higher particulate emissions or affect vehicle/engine performance adversely in any way.
10 3. PERU TRANSPORTATION FUELS SECTOR Although the principal concern of this study is the production and distribution of biofuels in Peru, it is essential to analyze and understand the size, structure and configuration of the conventional hydrocarbons fuels sector, since both fuel ethanol and biodiesel cannot be economically distributed and sold as neat fuels outside of the existing transportation fuels distribution system and must be integrated within it. 3.1 Gasoline 3.1.1 Supply, Consumption and International Trade Table 1 provides a summary of the supply, demand and international trade in gasoline in Peru for the year 2004. Total supply available, mostly from local refining and a small import of high octane blendstock (HOBS) was some 11.4 million barrels (1,809 million litres). Of this total supply of gasoline stocks, the domestic market only required 8.0 million barrels (1,266 million litres) accounting for 70% of total refinery naphtha/gasoline stocks. Some 3.4 million barrels, or 30% of total refined products, was surplus to domestic requirements and had to be exported.
Table 1 PERU Gasoline Supply/Demand Balance, 2004 000s barrels Supply Imports finished 25 Imports HOBS 326 Refinery (From Crude) 11,025 TOTAL 11,376 Demand/Consumption Exports 3,416 Consumption 7,960 TOTAL 11,376
3.1.2 Refinery Production Figure 3 illustrates the location and ownership of the Peruvian refineries and their share of gasoline production in 2004. The largest refinery RELAPASA at la Pampilla near Lima is owned by Repsol/YPF and produces 41% of the national gasoline requirement. The Talara refinery of PETROPERU produces 36% of the requirement followed by its Conchan refinery just south of Lima, which produces 15%. The remaining 8% is accounted for by the minirefineries - Iquitos and El Milagro plants owned and operated by PETROPERU and the Pucallpa facility owned by PETROPERU but operated by Maple Corporation.
11 IQUITOS EL MILAGRO 4% PETROPERU PETROPERU TALARA PETROPERU 1% 36% REPÚBLICA DEL PERÚ PUCALLPA PETROPERU/ MAPLE 3%
LA PAMPILLA 41% REPSOL YPF CONCHAN 15% PETROPERU
Refinery
% of Total Mogas Supply --%
PERU GASOLINES - SCHEMATIC OF SUPPLY SOURCES, 2004
Figure 3
The bar chart, Figure 4, shows the production at each facility in 2004 by octane grade and the weighted average octane of each refinery’s gasoline pool. The most important octane grades are 84 and 90 RON accounting for 49% and 37%, respectively of national consumption. The average octane for the entire country is 87.9 RON. The inland minirefineries produce the 84 octane grade exclusively, with the exception of a small amount of 90 RON blended at Iquitos.
12 Peru - Gasoline Production for Domestic Market 2004, by Grade and Average Octane Mbbls 9,000 8,203 8,000 97 9% 95 6% 7,000 37% 6,000 90 5,000 84
4,000 3,394 49% 2,932 10% 3,000 7% 12% 43% 30%4% 2,000 1,244 53% 1,000 40% 10%1% 53% 338 205 87 0 35% 96%4%0% 100% 0% 100% 0% Talara La Pampilla Conchan Iquitos Pucallpa El Milagro T0TAL Average RON 87.9 88.7 88.5 84.3 84.084.0 87.9 Figure 4
3.1.3 Volume of Ethanol Required in Gasoline at Different Concentrations Based on the 2004 national sales volumes of gasoline Table 2 summarizes the volumes of fuel ethanol required to blend with gasoline at concentrations of 5.0%, 7.8% and 10.0%. The amount required for the concentration of 7.8%, corresponding to the Peruvian legislation, is 102 million litres, if applied throughout the country.
Table 2 PERU Gasoline 2004 Volumes ETHANOL REQUIRED IN BLENDS Concentration 000 bbls million litres 5.0% 410 65 7.8% 640 102 10.0% 820 130
13
3.2 Diesel 3.2.1 Supply, Consumption and International Trade Table 3 provides a summary of the supply, demand and international trade in diesel in Peru for the year 2004. Total supply available, from local refining and import sources was some 23.7 million barrels (3,776 million litres). Peru has a major deficit in diesel and some 9 million barrels or 38% of total supply was imported. Table 3 PERU Diesel Supply/Demand Balance 2004 000s barrels Supply Imports finished 9,062 Refinery (From Crude) 14,687 TOTAL 23,749 Demand/Consumption Exports 419 Consumption 23,330 TOTAL 23,749
3.2.2 Refinery Production and Imports Figure 5 illustrates the location and ownership of the Peruvian refineries and their share of diesel production in 2004 as well as the share represented by imports. The import share of total requirements is 38% while the RELAPASA/Repsol YPF refinery at la Pampilla produces 30 % of the national diesel requirement. The Talara refinery of PETROPERU produces 24% of the requirement. Imports plus La Pampilla and Talara refineries accounts for 92% and the remaining 8% is accounted for by Conchan and the inland minirefineries - Iquitos and El Milagro plants owned and operated by PETROPERU and the Pucallpa facility operated by Maple Corporation.
14 IQUITOS EL MILAGRO 4% PETROPERU PETROPERU TALARA PETROPERU 1% 24 % REPÚBLICA DEL PERÚ PUCALLPA PETROPERU/ MAPLE 1% 38 %
LA PAMPILLA 30 % REPSOL YPF CONCHAN 3 % PETROPERU
Refinery
Imports
% of Total Diesel Supply --%
PERU DIESEL - SCHEMATIC OF SUPPLY SOURCES, 2004
Figure 5
3.2.3 Volume of Biodiesel Required in Diesel at Different Concentrations Based on the 2004 national sales figures for diesel, the amount of biodiesel required at 2%, 5% and 10% blend concentrations is shown in Table 4. The amount required for the concentration of 5%, corresponding to the Peruvian legislation, is 189 million litres, if applied throughout the country.
Table 4__ PERU Diesel 2004 Volumes Biodiesel REQUIRED IN BLENDS Concentration 000 bbls million litres 2.0% 475 76 5.0% 1187 189 10.0% 2375 378
15 3.3 Storage & Dispatching Infrastructure and Ownership/Operation Gasoline and diesel are distributed to service stations and large, direct consumers through a network of storage terminals. The extent and location of these is illustrated in the map, Figure 5. The major bulk of the volume is moved through the coastal terminals, which are supplied by tanker from local refineries and import sources; the onward shipping is by road tanker to service stations and large clients. A smaller
IQUITOS
TALARA EL MILAGRO
Piura Yurimaguas
Eten Tarapoto
PUCALLPA Salaverry
Chimbote Supe Pasco
LIMA/CALLAO
Marine Terminals CONCHAN Consorcio Terminales Cusco PETR0PERU Pisco Repsol/YPF Vopak/Serlipsa Juliaca GN Trading Inland Terminals Mollendo Ilo
PERU STORAGE AND DISPATCHING TERMINALS FOR OIL PRODUCTS
Figure 5 proportion of the volume is moved through the secondary inland terminals which are supplied by road and rail from the coastal terminals. The most important terminal operators are: A. Independent, Unintegrated: • Consorcio Terminales is a joint venture of the Peruvian holding company Graña y Montero and Oiltanking a large Dutch independent terminal operator.
16 It operates seven marine terminals under concession from owner PetroPeru as well as two small inland terminals. • Vopak Serlipsa is a joint venture between. Serlipsa Corporación S.A, a Peruvian company involved logistics and other services and the Dutch company Royal Vopak N.V the number one storage company in the world for petroleum products and chemicals. It operates, under concession from PetroPeru, the large terminal in Callao, near Lima as well as a small inland terminal at Cerro de Pasco. B. Integrated with Refining and Distribution in Supply Chain • PetroPeru owns and operates two marine terminals associated with its refineries at Talara and Conchan, a terminal at each of its inland refineries El Milagro and Iquitos and three additional small inland terminals. • Repsol/YPF owns and operates a large terminal at La Pampilla associated with the RELAPASA refinery and its import receiving facilities. 3.4 Summary of Sector Organization 3.4.1 Structure Table 5 illustrates in summary form the structure of the Peruvian petroleum products sector. There are two vertically integrated companies: the Peruvian subsidiary of the multi- national Repsol/YPF, and the state-owned PetroPeru who are involved in refining, storage and dispatching, wholesale and retail distribution, are active throughout Peru and, combined, have a dominant position in the market. In the Peruvian context these two companies could be classified as “majors”. The company Maple Corporation2 operates under long term lease the small PetroPeru- owned Pucallpa refinery in the jungle (“selva”) area of eastern Peru. In its jungle region it is fully integrated into storage and dispatching and wholesale and retail distribution of petroleum products.
Table 5 Regional, 2 Unintegrated 2 Vertically Integrated integrated Terminal Operators Wholesaler Unintegrated Maple Consorcio Vopak -Retailers Retailers Repsol/YPF PetroPeru Corp Terminales Serlipsa Refining Storage & Dispatching Wholesale Distribution Retail Distribution
2 Maple also is involved in oil and gas exploration and production and has plans for an ethanol-from sugar cane project in the northern coastal region of Peru.
17 In storage and dispatching, as summarized above (3.3), in addition to the integrated companies with their own facilities, there are the two independent unintegrated terminal operators, Consorcio Terminales and Vopak Serlipsa, operating solely in this segment of the sector. In wholesale and retail distribution, besides the integrated “majors” there are several companies who are involved in both wholesaling and retailing activities. Companies such as Ferush and PECSA, contrasted with Repsol/YPF and PetroPeru, could be called “independents”; they are engaged in wholesale trade as well as the operation of “tied” service stations bearing the company’s logo and colours but are not involved with refining or terminal activities. A significant number of the some 3,300 total service stations in Peru are owned and operated by individuals or companies who are independent of other sector activities – they are not tied to wholesalers. These types of unintegrated retailers are known as “bandera blanca” and generally operate under straight arm’s length supply arrangements with wholesalers. 3.4.2 Attitudes to Introduction of Biofuels The consultants’ interviews with industry stakeholders indicated the following attitudes towards the introduction of biofuels into the Peruvian hydrocarbon fuel products:
• The two vertically integrated “majors” Repsol/YPF and PetroPeru were opposed to the introduction of biofuels in general. Among other issues, they particularly opposed the introduction of ethanol on the grounds that it would result in a larger surplus of gasoline base stock for them to export at distress prices. PetroPeru indicated, however, that they could use ethanol as a high octane blendstock to replace the HOBS they are now importing into Talara, as well as possibly replacing the cracked stock they now ship around through the Panama Canal and up the Amazon to Iquitos refinery.
• The vertically integrated regional operator “Maple Corp” was not opposed to biofuels introduction. They have their own fuel ethanol project in the pre- feasibility stage, but it is on the northern Peruvian coast and intended primarily for export sales. Regarding ethanol for their refining and marketing operation in the Selva they indicated that there would be ethanol supply from an operation in nearby Tarapoto.
• The unintegrated terminal operators were neutral to the introduction of ethanol and biodiesel for the most part. They indicated that they would accommodate whatever modifications the industry needed to have in their depots in order to receive, store and blend fuel ethanol and biodiesel. One of them raised the point, however, that they operated the depots on a concession from the owner, PetroPeru, and any investments for additions and modifications would have to be approved by them since the mechanism for recovery of investments would be an effective reduction in concession rental fees.
18 • Two of the independent unintegrated marketers were enthusiastic supporters of biofuels based on the possibility of exploiting marketing opportunities. 3.5 Fuel Qualities and Specifications 3.5.1 Gasoline The key gasoline specifications which relate to ethanol blending are minimum octane number (RON) and maximum Reid Vapour Pressure (RVP) Octane: Peru has four grades of gasoline designated by minimum octane number (RON) of 84, 90, 95 and 97. Since ethanol has an effective gasoline/gasohol blending octane in the range of 130 to 132 RON, the addition of ethanol to existing gasoline grades would have the effect of providing octane in excess of minimum requirements for each grade. Table 6 provides a summary of the approximate RON of blends of ethanol of different concentrations with the existing gasoline grades in Peru.
Table 6 PERU Gasoline Grades Octane Number (RON) at Different Ethanol Concentrations Concentration (Nominal) Gasoline Grades of ethanol 84 90 95 97 5.0% 86.3 92.0 96.8 98.7 7.8% 87.6 93.1 97.7 99.7 10.0% 88.6 94.0 98.5 100.3
This approach is consistent with the configuration contemplated by the Peruvian legislation. A second approach, rather than simply adding ethanol to existing gasoline grades and “giving away” octane quality, would be to prepare unfinished blendstocks without ethanol added such that when anhydrous ethanol is added in the prescribed concentration the national octane standard is met. Table 7 illustrates roughly the required octane of the unfinished blendstocks corresponding to the finished octane standards at different ethanol concentrations.
19
Table 7 PERU Gasoline Grades Minimum Octane Number (RON) of Required Blendstocks at Different Ethanol Concentrations Concentration Finished Gasoline Grades of ethanol 84 90 95 97 5.0% 81.6 87.9 93.2 95.3 7.8% 80.1 86.6 92.0 94.2 10.0% 78.9 85.6 91.1 93.3
Reid Vapour Pressure (RVP): RVP is a measure of the volatility of a gasoline. High volatility/high RVP correlates with high emissions of volatile organic compounds from the vehicle fuel system which are major contributors to formation of ground-level ozone (smog). A high RVP can also cause vapour lock in older vehicle fuel systems at elevated temperatures. The Peru National specification in force at the moment is maximum RVP of 84 kPa or 12.0 psi. The standards body, INDECOPI, has developed a more stringent maximum of 69 kPa or 10.0 psi which has not as yet been adopted as the National standard. It is understood that gasoline from local refineries is produced at about 9 to 10 psi RVP so that there is 2 to 3 psi of room below the maximum. The addition of ethanol in the concentration range of 5% to 10% would add roughly 1.3 psi RVP to the existing grades. Providing there is at least 1.3 psi of room (below maximum) in existing grades this should not pose a problem and the existing National standard of 12.0 psi would not be exceeded. 3.5.2 Diesel The key diesel specifications which relate to biodiesel blending are the maximum temperature at which 90 volume % recovery is achieved and the maximum pour point. This is known as the T90 point. The addition of biodiesel to petrodiesel tends to increase the T90 point. The impact of biodiesel blending component on both 90% point and pour point of the finished blend depends on the origin of the raw oil which is transesterified into biodiesel ester. In terms of diesel standards in general the maximum sulphur content and minimum cetane number are key specifications but are affected positively by the addition of biodiesel to petrodiesel stocks. Biodiesel has zero sulphur and a cetane number higher than the typical 45 to 50 which apply in finished diesel standards. The quality standards establishment body in Peru is INDECOPI “El Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual”. Although INDECOPI has recommended standards for both gasoline and diesel, these have not
20 been adopted into law and the existing National standards, which for the most part are not as stringent INDECOPI’s, are still being applied by the industry. Table 8 illustrates a few key specifications for diesel. As indicated the existing regulations call for a T90 of 360 oC, while INDECOPI has recommended a T95 of 360 oC. The maximum pour point of +4 oC in the National spec is replaced by a less defined spec governing low temperature flow or performance in the case of INDECOPI. The latter does not refer to pour point and simply states that the Cloud Point should be equal to or lower than the lowest ambient temperature anticipated.
Table 8: Peru Key Automotive Diesel Specifications
National INDECOPI
Maximum Temp 90 vol% recovered oC 360
Maximum Temp 95 vol% recovered oC 360
Maximum Pour Point oC +4 Nothing specified –only cloud point “according to ambient temp” but with no value specified
Maximum Sulphur Content weight % 0.50 0.035
Minimum Cetane Number 50 51
Minimum Cetane Index 45 46
In the case of sulphur content the National standard is still 0.5 weight % maximum while the INDECOPI recommended specification is 0.035%. This sulphur standard applies to domestically-produced diesel; imported diesel must be maximum 0.25 weight % sulphur. The Minimum Cetane Number and Index in effect as a National standard are 50 and 45 respectively while INDECOPI is recommending these to be increased slightly to 46 and 51 respectively. 3.6 Integration of Biofuels – Blending with Hydrocarbons 3.6.1 Gasoline Due to problems with water absorption and ethanol-water phase separation within logistics systems such as pipelines, marine tankers and storage systems it is customary
21 to blend the ethanol into gasoline blendstocks as close to the final consumer as possible. As discussed under 3.4.1 above the Peruvian legislation prescribes that the ethanol will be added to finished gasoline grades, already at their specification octanes of 84, 90, 95 and 97. The legislation also specifies that the ethanol blending will take place only in registered storage depots with the storage depot operator in charge of the blending operation. On this basis a schematic of the typical storage depot “Before” and “After” is provided in Figures 6 and 7. In both cases the existing gasoline tanks retain their same service since the anhydrous ethanol is simply being in-line blended into the finished gasoline grades as they now exist. The resulting rough octane values were estimated and shown in Table 6 above. The modifications as shown in Figure 7 are to add (or convert from spare) an anhydrous ethanol tank and install in-line blending facilities such that the blended gasohol “E8” corresponding to each grade can be loaded into road tankers for delivery to service stations. This approach where there is a “giveaway” of octane quality still exists to a degree in the US and Canada but was more prevalent in the US and Canada in the early days of ethanol use by unintegrated independent gasoline distributors who were voluntarily adding ethanol in order to achieve a “clean” or “green” gasoline” marketing publicity advantage over the larger integrated companies and had no means of purchasing lower octane pre-blendstocks. Although inconsistent with the Peru legislation the second approach, which is typical of the blending configuration in most countries where there is a compulsory ethanol content requirement would be to produce and utilize lower octane unfinished blendstocks to blend with anhydrous ethanol to arrive at finished octane quality as discussed under 3.4.1. Figure 8 is a schematic which illustrates the “After” case for the depot configuration when blendstocks are supplied with octanes estimated and shown in Table 7 above such that the finished gasoline grades correspond to the specification octanes without any quality giveaway. Since in-line blending is utilized, no extra tankage other than the anhydrous ethanol storage is required since the tanks previously in finished gasoline service can be used for the corresponding lower octane unfinished blendstocks. Another ethanol blending practice which does not conflict with the Peru legislation is the mixing of the anhydrous ethanol and gasoline blendstock sequentially in road tankers. This “splash blending” is still being done in the US and Canada, particularly by independents. Figure 9 illustrates this procedure. The requisite amount of anhydrous ethanol is added at a storage location separate from the gasoline blendstock storage depot and then it is “topped up” at the gasoline depot with the gasoline blendstock to meet the desired quality and volume.
22
Gasoline Terminal Configuration at Present
Delivery by Tanker, Road or Rail 84
90
95 Service Stations
97
Figure 6
Gasoline Terminal Configuration with Gasohol Tankage & Blending Additions in Red
E99 E99 Delivery by Tanker, Road or Rail 84
90
95 E8 Service Stations
97
+ Modifications and additions to safety / firefighting
Figure 7
23 Gasoline Terminal Configuration with Gasohol Tankage & Blending Additions in Red
E99 E99 Delivery by Tanker, Road or Rail Blendstock 84 80.1
Blendstock 90 86.6
Blendstock 95 92.0 E8 Service Stations
Blendtock 97 94.2
+ Modifications and additions to safety / firefighting
Figure 8
Splash Blending of Ethanol in Road Tankers
Through E99 Anhydrous Storage E99 Ethanol Plant Direct from E99 Plant
Gasoline Depot
Delivery by Tanker, Road or Rail 84
90
95 E8 Service Stations
97
Figure 9
24 3.7 Fuel Pricing & Taxation Prices of crude oil and petroleum products in Peru are liberalized – they are established by supply and demand in a free and open competitive environment. Reference prices for petroleum products are established weekly based on an import parity formula but are used principally for the purpose of administering a price stabilization fund and not to actively intervene in the price establishment process.
Table 9: Peru Price Structure September 2005, Soles/gal GASOLINES RON Prices S/./gal DIESEL 2 97 95 90 84 PRICE EX-REFINERY 7.09 6.92 6.41 5.93 6.95 TAXES RODAJE (Vehicle tax) 8% of 0.57 0.55 0.51 0.47 ex-refinery –only on gasoline ISC (fixed unit tax on fuels) 3.85 3.62 3.31 2.60 1.40 IGV (19% value added) 2.19 2.11 1.94 1.71 1.59 COMMERCIAL MARGIN COMBINED WHOLESALE AND RETAIL MARGIN 1.31 1.24 0.31 0.38 0.17 (Imputed by difference) IGV on MARGIN (19% value 0.25 0.24 0.06 0.07 0.03 added) FINAL PRICE 15.25 14.68 12.54 11.17 10.14 Total taxes as % Final Price 45% 44% 46% 43% 30%
Table 10: Peru Price Structure September 2005, US$/gal
GASOLINES RON PrIces US$/gal DIESEL 2 97 95 90 84 PRICE EX-REFINERY 2.14 2.09 1.94 1.79 2.10 TAXES RODAJE (Vehicle tax) 8% of 0.17 0.17 0.15 0.14 - ex-refinery –only on gasoline ISC ( fixed unit tax on fuels) 1.16 1.09 1.00 0.79 0.42 IGV (19% value added) 0.66 0.64 0.59 0.52 0.48 COMMERCIAL MARGIN COMBINED WHOLESALE AND RETAIL MARGIN 0.40 0.38 0.09 0.12 0.05 (Imputed by difference) IGV on MARGIN (19% value 0.08 0.07 0.02 0.02 0.01 added) FINAL PRICE 4.61 4.44 3.79 3.37 3.06 Total taxes as % Final Price 45% 44% 46% 43% 30%
25 Tables 9 and 10 are summaries of the price structure for the four grades of gasoline as well as automotive diesel for the period September 2005, expressed in Soles/gallon and US$ /gallon respectively. As indicated combined taxes are a major component of the final price, amounting to 43 to 45% on gasolines and 30 % of the final price of diesel. The largest tax element is the ISC (impuesto selectivo al consumo); it is fixed in per gallon terms, while the rodaje (vehicle tax) is an ad valorem at 8% of the ex-refinery price, charged only on gasolines. The IGV (Impuesto General a las Ventas) is a value-added tax, charged at a 19% rate on the sum of ex-refinery price plus rodaje and ISC.
26 4. ETHANOL IN PERU
Ethanol is not currently being used as a vehicle fuel in Peru in any organized fashion. There was some anecdotal evidence provided that small amounts of ethanol were being used as a gasoline blending agent in some regions. Most of the focus in Peru on the use of fuel ethanol has been on the use of low level blends with gasoline. It should be noted that in some regions of the world ethanol is being used in low level blends with diesel fuel on an experimental basis and in other regions high level blends, such as E- 85, are being used in specially produced vehicles. The focus of this work has been on low level ethanol blends since these fuels are generally accepted by vehicle manufacturers and do not require any modification or replacement of the existing vehicle fleet. 4.1 Current Situation Ethanol production in Peru is currently limited to 13 plants with a capacity to produce 336,500 litres per day of hydrous ethanol. Not all of the plants are currently operating but those that are in operation are producing between 30 and 40 million litres per year. These ethanol plants are generally associated with a sugar mill and use molasses as the feedstock. The ethanol that is produced is used for industrial applications, potable alcohol, and some is exported to other countries in South America and sometimes to Europe. One of these plants, Complejo Agroindustrial CARTAVIO, La Libertad, has installed equipment to produce anhydrous ethanol that would be suitable for blending with gasoline but they have not yet commissioned the equipment. The consultants visited this sugar/ethanol plant complex and details of the visit and the plant, including photos, are included as Annex 5. 4.2 Ethanol Feedstocks The most likely feedstocks for fuel ethanol production in Peru are sugar cane or molasses production from existing sugar mills. The production of potential ethanol feedstocks is shown in Table 11 following.
Table 11: Peru – Potential Ethanol Feedstocks Feedstock Tonnes (2004) Sugar Cane 7,950,000 Rice, Paddy 1,816,621 Maize 1,180,769 Barley 176,901 Wheat 168,744 Quinoa 27,040 Oats 11,521 Other Cereals 7,000 Sorghum 135 Rye 69
27 Peru is self sufficient in rice with only small quantities imported and exported. Significant quantities of corn (Maize) are produced but almost 1,000,000 tonnes of corn are also imported each year. Production of 100 million litres of ethanol would require 250,000 tonnes of maize. The other cereal grains are not produced in large enough volumes to sustain a fuel ethanol industry in the country.
Figure 10
4.2.1 Sugar Cane Peru has a long history of sugar cane production. The cane production has been growing at a rapid rate in the past decade as shown in Figure 10. The acreage devoted to sugar cane is about 75,000 ha and is growing. Cane yield ranges from 100 to more than 150 tonnes/ha and is also increasing. The total amount of cane harvested approaches 9 million tonnes per year. The sugar content of the cane averages about 14 tonnes/ha but not all of the sugar can be extracted and crystallized so sugar production is between 800 and 900,000 tonnes per year. One advantage that sugar producers in Peru have is the ability to harvest the cane 12 months a year and thus operate the sugar mills on a continuous basis. This results in better utilization of the capital equipment and lower costs associated with the equipment. This benefit would also apply to ethanol production as well as sugar production. The US Department of Agriculture is projecting that in the near future Peru will once again be self sufficient in sugar production and become a larger sugar exporter than they are today. Peru sugar producers currently receive some protection from low world sugar prices by way of a variable import tariff. This support can be up to 15 cents/kg.
28 4.2.2 Molasses Twenty to thirty percent of the sugar in the cane cannot be easily crystallized and becomes molasses. The annual molasses production is therefore in the range of 240,000 to 270,000 tonnes per year. This molasses is used for ethanol production, for animal feed, as a flavouring, and as the feedstock for yeast production. About one half of the current production is used for producing the 30 to 40 million litres of ethanol currently being manufactured. Molasses values will vary with local and international supply and demand but are generally in the range of $30 to $70/tonne. One tonne of molasses will produce 260 litres of ethanol. 4.2.3 Bagasse One of the leading developers of this technology is the Brazilian company Dedini. They are developing a process for converting bagasse to ethanol and have a 5000 litre/day pilot plant at a Copersucar mill. Another leading developer is the Canadian company Iogen, who are currently working with straw as the feedstock. They have a demonstration scale plant in Ottawa, Canada producing 4 million litres per year. Neither of the technologies is currently being commercialized but both should be watched closely for possible applications in Peru. 4.3 Ethanol Production Ethanol production costs are dominated by feedstock costs in more regions of the world and Peru is no exception. This holds true both for ethanol produced from molasses as well as ethanol produced from sugar cane. Capital costs are important as well and there are economies of scale that can be achieved through ethanol production in large facilities. These economies are greater in developed countries that have high labour costs. In the United States the average ethanol plant has a production capacity of 160 million litres per year whereas in Brazil (which is a lower cost producer) the average plant size is 40 million litres per year. 4.3.1 Molasses The ethanol production costs as a function of the price of molasses is shown in Figure 11. With molasses selling for $30 to $70/tonne over the past several years this would suggest that the opportunity cost of ethanol production is between 20 and 36 US cents per litre (cpl). As sugar production increases so will molasses production. The sugar processors will have to find new markets for the molasses and will likely accept returns at the low end of the price range. Once sugar cane production reaches 10 million tonnes per year there will be an additional 100,000 tonnes of molasses available and this could produce 25 million litres of fuel ethanol at an opportunity cost of about 25 cpl. 4.3.2 Sugar Cane It is also possible to produce ethanol directly from sugar cane juice. In this process the ethanol yield is generally between 85 and 90 litres/tonne of cane.
29 In Brazil many of the ethanol plants can swing production between sugar and ethanol and do so depending on the relative prices for each product. This keeps ethanol prices closely tied to world sugar prices. The sugar prices in Peru are shown in Figure 12.
40.0 35.0 30.0 25.0 20.0 15.0 Ethanol, cpl Ethanol, 10.0 5.0 0.0 30 35 40 45 50 55 60 65 70 Molasses, $/t
Figure 11
0.45
0.40
0.35
0.30
0.25
0.20
US $/kg est. US $/kg 0.15
0.10
0.05
0.00
Raw sugar, ex plant Figure 12 The costs of producing ethanol in Peru have been estimated from sugar prices supplied by INEI and adjusting for sugar refining costs, adding ethanol production costs and
30 adjusting for yield. The relationship between ethanol costs and sugar costs is shown in Figure 13.
80 70 60 50 40 30 Ethanol, cpl 20 10 0 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 Sugar, cents/kg
Figure 13
In Figure 14 the ex-refinery and ex-ethanol plant production prices for gasoline and ethanol are compared without taxes. The ethanol prices are calculated from the sugar
70
60
50
40
30
20
10
0 9 0 1 2 3 4 5 o ulio ulio ulio 200 ulio 199-10 200 Julio 200 ro J ro 200 Julio ro J ro 200 J ro J Juli e e e e ero e En En En En En En Enero 200 Ethanol Gasoline Difference
Figure 14
31 selling prices and represent the opportunity cost to the producer under the current sugar supply and demand situation. It can be seen that for most of the past six years ethanol would have been more expensive than gasoline. In the past several years there has been an increase in both the world oil price and the world sugar prices so that ethanol would still be about 15 cpl more expensive than gasoline. There are taxes on both gasoline and ethanol and the difference in taxes provides some level of incentive for ethanol use. Most stakeholders, both inside and outside of government, are assuming that the current level of taxation on ethanol will remain in place when ethanol is used as a fuel component. Ideally this should be explicitly stated by the government to remove any uncertainty concerning fuel taxation. The typical taxation levels for gasoline and ethanol are summarized in Table. 12a. The ethanol price has been assumed to be 51 cpl. This has been chosen to approximately equal to recent 90 RON gasoline price to highlight the price difference caused by taxation and would be in the mid-range of ethanol costs based on production from sugar cane in the past few years (it is higher than the highest end of molasses-based ethanol cost, but ethanol from sugar cane will ultimately be the marginal production mechanism if the required national volumes are to be achieved).
Table 12a: Peru – Taxes on Gasoline and Ethanol, $/gal Gasoline, September 2005 Ethanol As % 90 84 90 $/gal RON Price, ex plant ex-tax 1.79 1.94 1.94 100 Rodaje 0.14 0.16 0.16 100 ISC 0.79 1.00 0.42 42 IGV 0.52 0.59 0.48 81 Total taxes 1.45 1.74 1.06 61 Price ex-plant tax incl 3.24 3.68 3.00 82
In this case, ethanol enjoys a tax incentive of $0.39 per gallon for 84 RON and $0.68 per gallon for 90 RON. This assumes that Rodaje applies to ethanol as well as gasoline and there was some uncertainty regarding this3. It also assumes that the 20% ISC applies to ethanol for industrial applications will also apply to ethanol from gasoline. The tax incentive for ethanol is a result of the difference in tax rates for the ISC on gasoline (fixed rate ~ 44 to 50%) compared to ethanol (20% ad valorem). This is not the ideal
3 Since all the three taxes, including rodaje, are paid by the refiner at refinery gate and/or by importer at entry point and billed to the wholesaler in the ex-refinery price, it is difficult to see what the mechanism would be to charge rodaje on the ethanol portion of the gasoline, since it is brought to the storage depot and blended there and is not part of the ex-refinery taxed volume.
32 way to provide an incentive, as the size of the incentive is larger when the difference in ex-plant price between gasoline and ethanol is the largest. Under these conditions less incentive will be required for ethanol and not more. Table 12b provides another variation of this price and tax comparison between gasolines and ethanol. The September prices for gasoline shown in Table 12a reflected among the highest world prices for crude oil and related products – in the range of $ 67/barrel for West Texas Intermediate (WTI). If gasoline prices ex-refinery at half of the September level are assumed (reflecting about $30/barrel WTI) and compared with ethanol at 51 cpl the results are summarized in Table 12b. Table 12b: Peru – Taxes on Gasoline and Ethanol, $/gal Gasoline, 50% of Ethanol September 2005 levels As % 90 84 90 $/gal RON Price, ex plant ex-tax 0.90 0.97 1.94 200 Rodaje 0.07 0.08 0.16 200 ISC 0.79 1.00 0.42 42 IGV 0.33 0.39 0.48 123 Total taxes 1.19 1.47 1.06 72 Price ex-plant, tax incl 2.09 2.44 3.00 123 As indicated even with lower total taxes, ethanol produced from sugar cane at the mid- range of costs would not be competitive with 90 RON gasoline based on $30 WTI with the current tax structure. Exoneration from Rodaje would still leave ethanol some 15% higher cost at plant gate than 90 RON gasoline. It is recognized that there are many other permutations and combinations of possibly lower ethanol costs with gasoline prices over a range of world prices but this illustrates the need to examine the tax structure for ethanol in order to render the plant gate price of ethanol competitive with gasoline within an array of possible gasoline price futures. Without a certain stability created in price competition between ethanol and gasoline, investors will be reluctant to risk their capital in new ethanol-producing ventures. 4.4 Market Development If all ethanol were to be added to the gasoline in Peru today there would be a requirement to either import a portion of the feedstock or some of the ethanol to meet the demand. In several years that should not be the case as increased sugar production will result in more molasses being produced and eventually in some sugar being sold on world markets. Under the export scenario full use of fuel ethanol should represent a viable alternative to sugar exports.
33 In the meantime there are several opportunities for fuel ethanol in the country that need to be encouraged. PetroPeru imports high-octane blend stock to meet the octane requirements at the Talara refinery. This expensive imported material could be replaced with domestic ethanol produced from molasses at the existing sugar mills. PetroPeru also ships high octane cracked stock from Talara, through the Panama Canal around to the Amazon and upstream to the simple Iquitos topping refinery to meet its octane blending requirements. This extremely costly movement could be eliminated if domestically-produced ethanol could be supplied to Iquitos as blendstock. There are also several independent gasoline marketers who have expressed some interest in using ethanol as part of their product and marketing strategy. These companies need to be encouraged as experience with and the demonstration of ethanol gasoline blends on a voluntary basis will make the eventual introduction of ethanol in all gasoline less controversial and easier to implement. The choice of 7.8% ethanol in gasoline as the blend for Peru is unusual as this particular blend is not used anywhere else in the world. The most common blend is 10% ethanol. That is used in the United States, Canada, and now Australia. Higher blends of 20 to 26% ethanol are used in Brazil and lower blends of 5% ethanol are used in Sweden. The low 5% blend was chosen to circumvent an existing fuel specification. Work is underway in Europe to increase the blend to 10% ethanol. There is little reason to think that introduction issues would be less with 7.8% ethanol than with 10% ethanol. Issues such as vapour pressure increases and water tolerance are marginally reduced at 10% compared to 7.8%. Materials compatibility issues should not be significantly different at 7.8 and 10%. 4.5 Other Applications for Ethanol The use of ethanol in diesel fuel blends and in high-level ethanol-gasoline blends could be considered. Ethanol in diesel is being demonstrated in parts of the United States and in Brazil. Methanol and diesel blends were previously demonstrated in Chile with some success. The draw backs to ethanol diesel blends include the lowering of flash point of the fuel and the resulting implications with respect to fire and safety codes, and the lack of support for the blends from major oil companies and many equipment suppliers. The advantage is that it would back out diesel fuel imports, which are larger than gasoline blend stock imports and strategically could be attractive to the country. The high level blends require special vehicles, which are not currently available in Peru. Market penetration of E85 would therefore be slower than for E10, which can be used in the existing fleet. Technologies are being developed for the conversion of cellulosic materials to ethanol rather than converting sugar or starch feedstocks. This technology could have a significant impact on the Peruvian sugar industry since it would allow the conversion of the bagasse to ethanol. Some sugar mills have more bagasse than they need for supplying their own energy requirements. 4.5.1 Ethanol-Diesel Blends (E-Diesel) Ethanol diesel blends can not be considered as a commercial fuel anywhere in the world. There are a number of trials and demonstrations underway in Canada, the United States and in Brazil that are gathering valuable experience with the handling and use of
34 the fuel. Some of the essential issues that must be addressed before the fuel is likely to see widespread adoption are discussed below. Ethanol diesel blends require an additive to keep the two components in suspension. A number of different terms are used when discussing ethanol-diesel blends, and it is important to properly understand the definitions to avoid confusion. These are described below. Solution. A solution is a single-phase liquid system, homogeneous at the molecular level. Some e-diesel formulations may be a solution of ethanol, plus additives, in diesel fuel. Solvent. A solvent is a liquid substance capable of dissolving one or more other substances. A cosolvent is a solution component that imparts solvent behaviour to a system where solubility does not exist or is limited otherwise. Miscible. The term miscible or miscibility means that two or more components are capable of being mixed in any ratio without separation into two phases. Two liquids that are immiscible cannot be blended to make a solution (like oil and water). Ethanol and diesel fuel are not accurately described as either miscible or as immiscible. Some ethanol can be dissolved in diesel fuel at room temperature, but as the temperature is lowered, the solution will separate in to two phases. Emulsion. A system consisting of a liquid dispersed with or without an emulsifier in an immiscible liquid as very small droplets (as fat in milk). Emulsions tend to look cloudy or milky. E-diesel is not usually an emulsion. Stability of emulsions is always a concern, and emulsions may separate into two phases during storage. Micro-emulsion. A chemically and thermodynamically stable ultra-fine (or colloidal) dispersion of a dispersed liquid phase in an immiscible host phase. A micro-emulsion is clear, like a solution, but actually consists of droplets or micelles dispersed in the host phase. The micelle size is roughly one micron. A surfactant additive called an emulsifier and a small amount of water are typically required for formation of a micro- emulsion. E-diesel formulations are most likely micro-emulsions. Emulsifiers are known to extend the stability of ethanol-diesel blends to lower temperatures at ethanol blending levels as high as 15% or even 20% in conventional No. 2 diesel. However, stability of e-diesel micro-emulsions under a range of storage conditions still need to be demonstrated in commercial applications. Different additive packages are presently available from several different suppliers, and several of the known emulsifiers or emulsifier manufacturers are listed in the following table. For a 15% ethanol blend the emulsifier blending level ranges from 0.75 to 5%, depending upon the base fuel properties and additive supplier. Emulsifiers are also known to improve the water tolerance of ethanol-diesel blends. An emulsifier is required, even at 5% ethanol, for the fuel to remain a single phase in the presence of water and provision of water tolerance is a main function of emulsifiers. In addition to emulsifier effects, a number of other benefits are claimed for the emulsifiers. These include improved lubricity, detergency, and low temperature properties.
35 Emulsifier Manufacturers and Blending Levels (percent by volume) Emulsifier Producer Preferred Ethanol Level Emulsifier Level AAE Technologies, Inc/Octel Starreon, 7.7 or 10 0.5 LLC Akzo-Nobel 10 to 15 1 to 4 Betz-Dearborn, Inc. 5, 10 or15 0.25, 0.35-0.75, or 1 Pure Energy Corporation 5 to 15 1 to 5 Biodiesel 10 10
Because of the low cetane number of ethanol (on the order of 8) the additive package (i.e. the emulsifier plus other additives) must also include a cetane-enhancing additive such as ethylhexylnitrate or ditertbutyl peroxide. Depending upon the cetane additive blending level, the e-diesel cetane number can be increased relative to that of the blending diesel. There are a number of concerns regarding engine performance on the fuel. These include the idea that the solvency effect of ethanol might loosen deposits in older vehicles causing breakdowns. Another concern is that because of e-diesel’s higher volatility there may be greater incidence of pump and injector cavitation, leading to increased wear and hot restart problems. The issues of ethanol’s impact on exhaust emissions and on energy efficiency are addressed below. Exhaust Emissions Regulated pollutant emissions for e-diesel fuels produced by three manufacturers have been reported. As shown in the following figure, studies at three different laboratories show comparable PM emissions benefits for all three forms of e-diesel examined, with the observed PM reduction a linear function of fuel oxygen content. However closer examinations of the data indicates significant variation in PM emissions with e-diesel formulation, and in some cases PM emissions reductions in excess of 30% have been obtained at 7.7% ethanol. E-diesel developers claim large reductions in smoke opacity as well. PM Emissions of E-Diesel The three studies cited in the chart below show clear and consistent PM emissions benefits. However other studies have shown a PM increase over the AVL 8-mode tests (Sluder, et al., 2001) or PM decreasing over only a fraction of the engine map (Cole, et al., 2001). Additional studies will be required to fully understand potential emissions benefits for all engine models and driving cycles. The situation for CO emissions is less clear, but given observed correlations between CO and PM it seems likely that CO emissions are decreasing in concert with PM emissions on a cycle average basis. Many reports indicate a lower rate of reduction for CO compared to PM. Results for both AAE and PEC e-diesel showed a 15 to 20% decrease in emissions of CO (at 10% ethanol content). CO emissions increased in the study of Betz Dearborn e-diesel but were still one order of magnitude below the emission standard for heavy-duty engines. The model has been programmed for a factor of 1.5 applied to the ethanol content equaling the CO reduction.
36
0
-20
-40 5.7% Ethanol 7.7% Ethanol AAE
PEC 10% Ethanol -60 BetzDearborn Percent Change in PM Emission PM in Change Percent 15% Ethanol
02468 Weight Percent Oxygen in Fuel
It is likely that addition of ethanol will have no effect on cycle average NOx emissions as long as the cetane number of the e-diesel is matched to that of the blending diesel. If the emulsifier package is formulated to increase the cetane number relative to the base fuel by 5 or more cetane numbers, it may be possible to realize NOx benefits. Because of the cost of cetane improving additives there may be significant economic barriers to this approach, and the same NOx benefit could be obtained by adding cetane improver to a conventional diesel. Total hydrocarbon emissions increased by as much as 100% in all three studies, but were still an order of magnitude below the hydrocarbon emissions standard for heavy- duty engines. It is unknown to what extent emissions can be effected by the emulsifier. A diesel oxidation catalyst or other advanced catalytic after treatment technology could easily reduce the hydrocarbon emissions to very low levels. Energy Efficiency The low heating value of ethanol is 42% lower than that of a typical diesel fuel on a volume basis, as shown in the following table. Blending of ethanol with diesel lowers the volumetric energy density in proportion to the ethanol content of the fuel as shown in the calculated heating values in the table. The lower fuel energy content will translate directly into a lowering of miles per gallon fuel economy. The engine efficiency, in terms of BTU consumed per unit of power produced, does not appear to change when ethanol is added in the zero to 15% range. At some blending level modification to the fuel injection system to allow injection of larger quantities of fuel is likely to be required for engine performance and for fuel injector/pump durability.
37 Heating Value of Diesel, Ethanol and Blends Fuel LHV, btu/gal (MJ/L) % Decrease from Diesel Typical Diesel 132,000 (36.6) -- 5% Ethanol/Diesel 129,222 (35.8) 2.1 10% Ethanol/Diesel 126,443 (35.1) 4.2 15% Ethanol/Diesel 123,665 (34.3) 6.3 Ethanol 76,431 (21.3) 42
Regulatory Diesel Fuel Specification Ethanol diesel blends will not meet the specifications for diesel fuel when it is blended with a specification diesel fuel. The primary reason will be the flash point of the fuel. There is little that can be done to alter this property so that the blend will meet the specification as it is caused by characteristics of the ethanol. Flash point is the lowest temperature at which the vapour pressure of a liquid is sufficient to produce a flammable mixture in the air above the liquid surface in a vessel. Vapour pressure is a related property, which is defined as the pressure exerted by a vapour over a liquid in a container at a specified temperature. Vapour pressure and flash point are important from both a fire safety standpoint and from the standpoint of evaporative hydrocarbon emissions. Typical combustion safety metrics for diesel, ethanol (neat) and gasoline are listed in the following table. The flash point for ethanol- diesel blends is very similar to the flash point of pure ethanol, which is as much as 50 C lower than that of typical diesel. Additionally, in a report prepared for Growmark, Inc., Battelle demonstrated that blends of 10, 15, and 20% ethanol in conventional diesel exhibit combustion safety characteristics essentially identical to those listed in the following table for pure ethanol. These data were acquired on diesel ethanol blends that contained no emulsifier. However, the presence of emulsifiers has no effect on flash point. There is some possibility that flashpoint could increase for ethanol blending levels below 10%. Thus, additional data are required to quantitatively understand the flash point issue. It is also notable that the ethanol denaturant used in the Growmark study was most probably natural gasoline. The use of a higher boiling (lower vapour pressure) denaturant such as kerosene may have an impact on flash point. Approximate Combustion Safety Characteristics of Neat Fuels Typical Diesel Ethanol Typical Gasoline Vapor pressure@38°C, psi 0.04 2.5 7-9 Flash point, °C 55-65 13 -40 Boiling point (or range), °C 170-340 78 33-213 Autoignition temperature, °C 230 366 300 Flammability limits, vol% 0.6-5.6 3.3-19.0 1.4-7.6 Flammability limits, °C 64-150 13-42 (-40)-(-18)
38 The National Fire Protection Association (NFPA) has established guidelines for the safe storage and handling of flammable liquids. This code uses flash point to distinguish between different liquid fuels. A Class I liquid has a flash point below 38 C (100 F) and a Class II liquid has a flash point above this level. Ethanol and gasoline are Class I liquids while diesel is a Class II liquid. Addition of ethanol to diesel fuel changes its NFPA classification to Class I. This means that e-diesel has more stringent storage requirements than conventional diesel, including more distant location of storage tanks from property lines, buildings, other tanks, and vent terminals, as well as the requirement of flame arrestors on all vents. Essentially e-diesel must be stored and handled like gasoline. This places a considerable end user education burden on the industry to insure that the product is properly transported, stored, dispensed and used. The need for distributors and end users to make modifications to storage tanks and fuel handling equipment will also have significant cost. Some stakeholders in the e-diesel industry believe that low-flash point limits the market to centrally refuelled fleets, where there can be considerable control over fuel handling. In addition to storage requirements, there may be additional safety requirements for transport of e-diesel by truck or for on-board vehicle fuel tanks. In particular, neat ethanol can produce a flammable mixture in a vehicle fuel tank under a wide range of temperatures. This contrasts with the situation for gasoline where the vapour is too rich to be flammable at all but the lowest ambient temperatures, and for diesel where the vapour is too lean to be flammable. Because e-diesel appears to have vapour pressure properties identical to those of neat ethanol, the flammability of the tank vapour space may also be an issue here. An examination of regulations affecting fuel transport, on- board tanks and refuelling equipment is required to begin to understand the safety implications of e-diesel use. Fire safety experts and insurance underwriters will have to be consulted to determine if new fire safety standards need to be developed for this fuel, or if the existing regulations are adequate. Furthermore, the low flash point may create safety issues with the engine fuel system design. Equipment manufacturers that permit use of e-diesel may be exposing themselves to liability. OEM’s view the low flash point as a major hurdle, especially in the existing fleet. Engine Manufacturers Currently engine manufacturers will not warranty their engines for use with e-diesel because of not only concerns about safety and liability, but also materials and component compatibility. A large body of test data acquired in close cooperation with the OEM’s will be necessary to address this issue. Ethanol is chemically very different from diesel fuel components and will interact differently with elastomers and metal surfaces. This may also be true for emulsifier chemicals. It may also be that some emulsifiers protect the elastomers and metals from “seeing” the ethanol and materials compatibility issues are not significant. There may also be a difference from one emulsifier to another. Demonstration of similarity of e-diesel with conventional diesel fuel in terms of materials compatibility is a necessary prerequisite to engine durability testing. If similarity cannot
39 be demonstrated, an understanding of what materials must be replaced and of suitable replacements must be obtained. Engine durability testing and fleet studies are the ultimate test of materials compatibility. However, if certain materials need to be replaced on engines using e-diesel this should be known before initiation of durability or fleet studies. A number of field demonstrations of e-diesel are ongoing or have recently been completed. Marek (2001) recently described several studies and this description is briefly summarized here. In 1999, Archer-Daniels-Midland (ADM) began a test using three new 1999 Mack trucks equipped with Mack E7 engines. Two of the trucks were operated on Pure Energy Corporation (PEC) e-diesel with 15% ethanol (E-15) while the third was operated on diesel as a control. These trucks have each accumulated more than 270,000 miles with no fuel related problems. A second field test of PEC E-15 was initiated at the Chicago Transit Authority, also in 1999. Fifteen e-diesel buses and fifteen controls were operated for roughly 20,000 miles each. No fuel related problems were encountered, and fuel economy for the two fifteen vehicle fleets was identical. A number of farm equipment tests have also been reported with no fuel-associated problems. One difficulty with studies of this type is the lack of statistical analysis, a particularly important requirement for field demonstrations because of the relatively high uncertainty associated with real-world data. While the field demonstrations suggest that e-diesel will not cause engine durability problems, they do not eliminate the need for more carefully controlled laboratory durability studies of engines and engine components. A 500-hour durability test using PEC 15% e-diesel was recently completed by the University of Illinois using a Cummins B5.9 engine. Because the expense of running a controlled study was too great (i.e. running two 500-hour durability tests in parallel) the study relied on examination of engine components for abnormal wear and analysis of the lubricant for abnormal levels of wear metals. The study found that e-diesel promotes abnormal wear and corrosion on certain parts of the Bosch fuel pump and fuel injectors. There was also a materials incompatibility problem with an electronic sensor on the fuel pump. The excessive fuel pump wear was thought to be caused by excessive backlash in the timing device because of high fuelling rates, and thus may have been caused by the lower energy content of the e-diesel. On the positive side, there was no increase in metal contaminants in the lubricant and use of e-diesel appeared to reduce the amount of injector nozzle coking relative to petroleum diesel. To facilitate large-scale commercialization of e-diesel, major vehicle and parts manufacturers must warrant their products for use with this fuel. Engine manufacturers warranty the materials and workmanship of their engines, and are able to void the warranty if certain fuels are used in an engine that was not designed for them. The same is true for individual engine parts, such as fuel injectors. Therefore, it is important to gain acceptance of e-diesel by engine manufacturers for warranty coverage. It seems likely that a fuel will have to have a significant number of users before engine manufacturers will become interested in considering warranty issues. 4.5.2 High Level Ethanol-Gasoline Blends and Hydrous Ethanol The solubility of ethanol in gasoline is primarily a function of temperature and the presence of water. The actual composition of gasoline can also play a small role. When
40 ethanol is used at the 10% (volume) level the blend of ethanol and gasoline can contain about 0.5% water at a maximum. This means that the ethanol used for blending must be essentially free of water since there is some water usually dissolved in the gasoline (0.03%) and water can be picked up in the distribution system leaving little room for the use of ethanol that contains more than 1% water. The ability to dissolve water in a blend is a non-linear function of the rate at which ethanol is blended. At a 5% ethanol blend less than 0.25% water can be tolerated in the system and since the gasoline contains the same 300 ppm of water the amount that can be added with the ethanol is lower than at a 10% blend level. If higher ethanol concentrations were to be considered for use in purpose built vehicles then more water can be tolerated. The new generation of flexi fuel vehicles being sold in Brazil would appear to function on Brazilian gasoline (25% anhydrous ethanol) as well as on 100% hydrated ethanol and all blends in between. These are special purpose built vehicles and the typical Peruvian gasoline powered vehicle, that has been designed to operate on gasoline with low or no levels of oxygen, would experience severe operating issues if they were operated on either hydrated ethanol or probably even a 25% anhydrous ethanol blend. Apart from the vehicle performance/usage issues the use of high-level blends and/or hydrous ethanol, in addition to conventional gasoline or low level blends, would require considerable additions to the existing infrastructure. In effect additional, separate grades would now have to be distributed. Separate, segregated tanks and pumps would be required for these separate grades of motor fuels. These would have to be installed in existing service stations or in new, dedicated outlets.
41 5. BIODIESEL IN PERU Biodiesel can be produced from a wide variety of feedstocks and the resultant products have similar but not identical properties. The fuel mixes well with petroleum diesel fuel and can be used in blends that include less than 1% biodiesel up to the use of 100% biodiesel in unmodified diesel engines. Increased use of biodiesel from domestic feedstocks in Peru would reduce the need for imported petroleum diesel fuel. This would positively impact the countries balance of payments. Biodiesel can also be made in relatively small scale operations and thus may be ideally suited to supplying the fuel needs in some of the more remote regions of the country. 5.1 Current Situation Biodiesel is not yet commercially available in Peru but there has been considerable research undertaken at the universities and there is a 75 million litre per year biodiesel production facility under construction south of Lima4. 5.2 Biodiesel Feedstocks Biodiesel can be made from a wide variety of feedstocks including vegetable oils, waste restaurant grease, animal fats (Tallow) and fish oils. All of these feedstock categories are present in Peru. In the case of vegetable oils, the Peru oil crop production is summarized in Table 13. In order to add 5% biodiesel to the entire petroleum diesel stock in Peru, 165,000 tonnes of feedstock will be required. This is equal to the level of vegetable oils imported into Peru. The largest crop is palm oil but the country is a net importer of vegetable oils so even this production would need to be expanded in order to meet the requirements for a biodiesel industry. The supply and demand situation is summarized in Table 14. Most of the vegetable oil is used for food and food manufacturing. The supply of yellow grease and tallow are usually a function of the human population (yellow grease) and the animal population (tallow). Some of the biodiesel proponents have estimated that 4 million litres per year of yellow grease in available for collection in the Lima area. This may be low. The volumes available in North America cities are often estimated at 4.5 litres/person/year. This is probably not directly applicable to Lima but it suggests that an upper limit of yellow grease availability could be as high as 36 million litres/year. Fish oil is another possible feedstock. Only limited experience with this feedstock is available in the world but some biodiesel is produced from Peruvian fish oil in Canada5.
4 The Heaven Petroleum/HERCO biodiesel production facility is being built at the HERCO petroleum depot site, some 30 km south of Lima. Feedstocks will be locally-collected waste oils and palm oil from a producer with a plantation in the Selva with whom they have a supply contract, including agreed price for the palm oil unloaded at the plant. Daily biodiesel production capacity will be 60,000 gallons. 5 The Nova Scotia-based company, Ocean Nutrition Canada uses fish oils from local and imported sources to produce nutrition products such as Omega-3. After extracting these products the residual oil is sold to a biofuels producer.
42 Biodiesel feedstocks are relatively expensive. Palm oil is priced about $530/tonne in Lima and given the significant levels of oil imports the local price can be expected to vary with world market conditions. Yellow grease is often priced less than vegetable oils and while generators of the waste receive little value for the product the collection and processing costs can be significant. Table 13: Peru Oil Crops Production, tonnes
2003 2004
Oil Palm Fruit 180,446 208,538 Seed Cotton 126,125 160,460 Cottonseed 80,000 69,672 Olives 38,089 42,198 Oil of Palm 35,000 42,000 Coconuts 22,989 21,283 Palm Kernels 8,000 9,000 Groundnuts in Shell 5,188 5,200 Soybeans 1,928 2,581 Linseed 750 850 Sesame Seed 76 75 Castor Beans 0 0
Table 14: Peru Oil Crops Supply/Demand Balance, tonnes
2001 2002
Production 151,673 146,139 Imports 135,288 167,341 Stock Change -25,600 -25,700 Exports 8,288 7,047 Total Supply 253,073 280,732 Feed 28,571 42,857 Seed 3,549 3,770 Waste 17,588 18,694 Food Manufacture 88,288 87,435
Food 113,701 126,062 Other Uses 1,568 2,002
43 5.3 Biodiesel Production Costs Biodiesel production costs are dominated by the feedstock costs. The feedstock costs and the biodiesel selling prices can be very volatile. In Figure 15 the prices of vegetable oil, animal fats and diesel fuel are compared. In North America the price of yellow grease is usually close to but just below the price of animal fat.
0.70 0.60 0.50 0.40 0.30 $/litre 0.20 0.10 0.00 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
Veg Oil Anim al Fat Diesel Fuel
Figure 15 One litre of biodiesel feedstock produces approximately one litre of biodiesel. Depending on the price of the feedstock the biodiesel feedstock will represent 75 to 90% of the total production cost of the product. Like ethanol there is some confusion regarding the level of taxation that biodiesel would attract. It is the understanding of most stakeholders that there is no ISC on biodiesel. If this is the case then there is a tax incentive for biodiesel. The taxation of petroleum diesel and biodiesel is compared in Table 15.
Table 15: Peru – Taxes on Petrodiesel and Biodiesel, $/gal Petroleum Diesel Biodiesel September, 2005 Plant Price 2.10 2.10 ISC 0.42 0.00 IGV 0.48 0.40 Wholesale Price 3.00 2.50
44
The tax advantage for equal plant gate prices is $0.50/gal. The Diesel fuel price is the price for September 2005 (equivalent to about $67/barrel WTI) and the biodiesel price is equivalent to a feedstock cost of about $525/tonne (typical of palm oil prices). Again the price incentive structure is not ideal. The tax incentive is larger when biodiesel prices are low and less support is required and when biodiesel production costs increase then the level of the tax support will decrease. This structure does not provide long term stability to alternative fuel providers. Even if the biodiesel price were to stay at this level the advantage over petrodiesel would disappear if world oil price, reflected by WTI crude, were to drop below about $45 to $50/barrel. 5.4 Market Development Biodiesel is an attractive fuel option for Peru because of the high level of imported diesel fuel, the relative ease of implementation and the air quality benefits that biodiesel blends offer. Biodiesel feedstocks are relatively high in price and usually require some level of financial incentive to equalize the price with petroleum diesel fuel. There is an opportunity to use feedstocks other than vegetable oils for biodiesel production and these alternative feedstocks should not be excluded from any national program. These alternative feedstocks are often lower in cost than vegetable oils and improper disposal of them can cause environmental damage. Creating value from waste products is always good public policy. Biodiesel blends of greater than 5% can be used successfully in modern diesel engines especially in most of Peru where cold weather operating problems are not a major issue. The United States has a large amount of experience with 20% biodiesel blends and Germany has used 100% biodiesel for a number of years. The use of 100% rapeseed biodiesel in Germany was due in part because the German interpretation of the EU Tax directive was that biodiesel was not mineral oil and therefore there was no tax on it. Blends were mineral oils and therefore were subject to tax. The biodiesel was also used almost exclusively by the independent sector up to 2005 (when the tax incentive on blends was introduced) and it was thus almost entirely outside of the existing distribution system. About one half of the biodiesel was sold through retail outlets and the other half was delivered direct to end use trucking fleets.The fuel apparently worked in all climate conditions but rape biodiesel has the best cold weather properties. Annex 6 provides an overview of the area in hectares in Peru which is planted in oil palm. Palm oil biodiesel has cold weather properties close to tallow at the other end of the spectrum. It may be OK for use in the jungle regions but if any of the vehicles traveled from the jungle through the mountains it could cause problems when the temperature dropped. If the users in the jungle areas had their own fuel tanks then 100% palm oil biodiesel could probably be delivered to them directly from the biodiesel plant and that could be quite an efficient distribution system compared to what they currently have for diesel fuel. If they have to use the retail network then that would mean the installation of
45 another tank and pump in the service stations . The 100% German experience was all voluntary, people used it in part because it was cheap. If some engines had any performance issues they just switched back to petro diesel. Some loss of power at the top end is usual just because you can't get as much fuel into the engine. Any underpowered vehicles would therefore experience some operational issues. Substituting palm biodiesel for petrodiesel or mandating it for certain regions is a different issue and more experience with the fuel in the regions would be necessary before all stakeholders could be convinced that diesel should be replaced. This option of regional use of 100% biodiesel should not be eliminated but some caution is required before it is regulated into use. Biodiesel fuel quality is an important aspect of a successful biodiesel program. Biodiesel standards need to be developed that are appropriate for Peruvian engines. Too often national standards have been developed to create barriers rather than assist with implementation. In this regard care must be taken when simply copying standards developed in one region for use in Peru to ensure that market barriers are not being erected. 5.5 Other Applications for Biodiesel Biodiesel can also be used in other applications where diesel fuel or heating oil is used and not just in road transportation applications. In a voluntary introduction it will be important to allow access to as wide a market as possible to allow the biodiesel market to grow rapidly. If a mandated market introduction is contemplated then a narrow market focus can be successful.
46 6. ALTERNATIVE FUEL IMPLEMENTATION BARRIERS Creating markets for alternative fuels is not an easy task. There are significant issues that must be addressed for these markets to develop. There are no examples anywhere in the world where alternative fuel markets have developed without some level of government intervention. This intervention usually takes the form of either a significant tax incentive to equalize (or provide an advantage to) the cost of the alternative fuel compared to gasoline or diesel fuel, or to mandate the use of the alternative fuel (with or without a tax incentive). The issue of creating markets for energy technologies has been the subject of considerable focus at the International Energy Agency over the past five years. In 2003, the IEA published a report “Creating Markets for Energy Technologies” that considered the process of market development. This was not specifically focused on transportation fuels but the findings can be directly applied to the task of creating markets for alternative transportation fuels. The technological and market developments required to transform the energy system will be conceived and implemented largely in the private sector. But success in this endeavour will not be determined exclusively by market forces. Governments that value the wider benefits of cleaner and more efficient energy technologies will work in partnership with market actors to ensure there are real opportunities for technologies to make the difficult transition from laboratory to market. This book is about the design and implementation of policies and programs for that purpose. Governments are motivated to assist not only because they have a responsibility for the pursuit of long-term societal goals and stewardship of the planet, but also because they understand that their policy settings help to determine whether markets develop and operate efficiently. Policymakers must therefore understand the markets concerned and they must have a highly developed capacity to mount effective programs. In both cases, experience is the best teacher. The IEA reviewed 22 case studies of what they determined were successful energy market developments in IEA countries over the past twenty years. In studying the cases, the IEA considered three perspectives on deployment policymaking. These three perspectives have developed over the last quarter of a century. • The Research, Development and Deployment Perspective, which focuses on the innovation process, industry strategies and the learning that is associated with new technologies; • The Market Barriers Perspective, which characterizes the adoption of a new technology as a market process, focuses on decisions made by investors and consumers, and applies the analytical tools of the economist; • The Market Transformation Perspective, which considers the distribution chain from producer to user, focuses on the role of the actors in this chain in developing markets for new energy technologies, and applies the tools of the management sciences.
47 In part, the three perspectives are three vocabularies for looking at the same issue but each adds something that the others are missing. The strength of the R&D plus Deployment concept is its vision of the future and its focus on the technology itself, its costs and performance and the process of market entry through niche markets. The market barriers approach uses economic analysis to improve the understanding of the barriers to market entry and provides some discipline to the analysis of market intervention measures that could be used as policy tools. The Market Transformation perspective encourages sensitivity to the practical aspects of crafting policies that produce the desired effects. The IEA concluded that the adoption of clean energy technologies would not be likely to succeed unless all three perspective were considered and that it is necessary to: • Invest in niche markets and learning in order to improve technology cost and performance; and • Remove or reduce barriers to market development that are based on instances of market failure; and • Use market transformation techniques that address stakeholders' concerns in adopting new technologies and help to overcome market inertia that can unduly prolong the use of less effective technologies. Visually the IEA summarize the three perspectives as shown in Figure 16.
Figure 16: Overall Perspective on Technology Market Development
Around this central theme, a close reading of the IEA case studies revealed more detailed messages about the nature of successful policy-making. Some key points are:
48 • Deployment policy and programs are critical for the rapid development of cleaner, more sustainable energy technologies and markets. While technology and market development is driven by the private sector, government has a key role to play in sending clear signals to the market about the public good outcomes it wishes to achieve. • Programs to assist in building new markets and transforming existing markets must engage stakeholders. Policy designers must understand the interests of those involved in the market concerned and there must be clear and continuous two-way communication between policy designers and all stakeholders. This calls for the assignment of adequate priorities and resources for this function by governments wishing to develop successful deployment initiatives. Programs must dare to set targets that take account of learning effects; i.e., go beyond what stakeholders focused on the here-and now may consider possible. • The measures that make up a program must be coherent and harmonized both among themselves and with policies for industrial development, environmental control, taxation and other areas of government activity. • Programs should stimulate learning investments from private sources and contain procedures for phasing out eventual government subsidies as technology improves and is picked up by the market. • There is great potential for saving energy hidden in small-scale purchases, and therefore the gathering and focusing of purchasing power is important. • Most consumers have little interest in energy issues per se, but would gladly respond to energy efficiency measures or use renewable fuels as part of a package with features they do care about. The three perspectives from the IEA have been briefly considered here so that the issues that may impede market development for ethanol and biodiesel in Peru and that require addressing from a policy perspective can be identified and addressed. In the rest of this chapter, each individual perspective is described in more detail and then the market development issues for biofuels are assessed from that perspective. The description of the different perspectives draws heavily on the IEA report but the tools found in each of the perspectives have been applied to the specific application of biofuels market development. 6.1 Research and Development + Deployment While it is likely that most of the technology that will be employed in producing biofuels in Peru will be developed technologies from other parts of the world it is still important to consider the R&D + D perspective. There are lessons that can be learned from this view even with applying existing technology in new regions and in the case of ethanol there is the potential to one day produce ethanol from bagasse with technology currently under development. Many groups consider product or technology development as a linear process which moves from research and development through to the end market as shown in Figure 17.
49 Figure 17: Stages of Development
In practice, the technology development process is cyclic in nature rather than linear with decisions being made at each stage having an influence on any eventual market success and in the later stages feedback between the market experiences and further technology development are very important. It is this feedback between deployment and R&D that is critical for success and that is why the IEA called this perspective Research & Development + Deployment. The market uptake of new biofuel technologies has two positive effects. First, there is the physical effect of using renewable energy and the reductions in greenhouse gas emissions that would accompany this and the second effect is the learning effect of how to produce new energy sources less expensively and more effectively. It is the combined effect that produces the real impact for new technologies. In the case studies that the IEA considered they found that many government sponsored deployment programs defined success in terms of sales growth and market penetration. They found that this was too narrow a view and it neglected the link between the programs and private sector investment decisions. Decision makers in industry often consider the initial costs of market learning too high and too risky. Governments on the other hand have scarce public resources and can’t bear the total cost of moving a new technology to market. However, in many of the case studies early government involvement in the deployment process played a crucial role in encouraging private sector involvement and in activating the learning process among the market participants. The IEA describes the process of the interaction between the governments and the private sector as shown in Figure 18. The figure summarizes how public sector and industry R&D interact to produce a ‘virtuous cycle’ in which government support encourages corporations to try out new technologies in genuine market settings. The two vertical arrows represent the encouragement for industry R&D and production with a new technology brought about by government policies. Expanded output and sales stimulate the ‘plus’ cycle in the diagram: industry R&D increases further, which enhances the technology stock, which in turn further stimulates production. The production increases also stimulate the learning process and the ‘minus’ cycle in the diagram, resulting in reductions in the cost of production. This further stimulates sales and the cycle reinforces itself. The figure also indicates the role of experience and learning curves, which will be discussed next in this chapter. They provide a quantitative measure of market learning and the efficiency of the feed-back from market experience (“M”) to production and industry R&D, which leads to cost reductions and improved technology.
50 Figure 18: Influences on the Learning Process from Public Policies
The figure also provides a powerful argument in favour of government support for technology deployment, if government is supporting research it should also be supporting deployment. Experience Curves There is overwhelming empirical evidence that deploying new technologies in competitive markets leads to technology learning, in which the cost of using a new technology falls and its technical performance improves as sales and operational experience accumulate. Experience and learning curves, which summarise the paths of falling technology costs and improving technical performance respectively, provide a robust and simple tool for analysing technology learning. Viewed from the Research, Development and Deployment (R&D + D) perspective, the curves provide a method to set targets and monitor programs; this includes a way of estimating program costs and providing a guide to phasing out programs as technologies mature and no longer require the support of deployment measures. The shape of the curves indicates that improvements follow a simple power law. This implies that relative improvements in price and technical performance remain the same over each doubling of cumulative sales or operational experience. As an example, the experience curve for ethanol production costs in Brazil is shown in Figure 19. Similar curves can be developed for the US ethanol industry. Ethanol production costs have declined continuously over the past 25 years as experience with the technology has
51 been gained. When this technology is transferred to Peru most of the technology can also be transferred but some will have to be learned locally. Thus it can be expected that over time fuel ethanol (and biodiesel) production costs will decline. Any support provided in the early years of market development should be able to be slowly reduced and experience is gained and costs decline.
Figure 19: Experience Curve for Brazil Ethanol Production Costs
The straight line captures a very important feature of the experience curve. Anywhere along the line, an increase by a fixed percentage of the cumulative production gives a consistent percentage reduction in price. This means that for technologies having the same progress ratio, the same absolute increase in installed capacity will yield a greater cost decrease for young technologies (i.e., they learn faster) than old technologies. This also means that the same absolute increase in cumulative production will have more of a dramatic effect at the beginning of a technology’s deployment than it will later on. For well-established technology, such as oil refineries using conventional technology, the volume required to double cumulative sales may be of the order of 100 million bbls/day, so the experience effect will hardly be noticeable in stable markets. 6.2 Market Barriers Perspective The Market Barriers perspective views the adoption of new technologies as a market process and focuses on the frameworks within which decisions are made by investors and consumers. Anything that slows down the rate of adoption can be referred to as a market barrier. The emphasis on this perspective to market development should be on understanding the barriers and in what role the government may act to reduce those barriers. The Research and Development and Deployment perspective focussed on the innovation and its relative advantages, the Market Barriers perspective considers more of the social systems and communications issues with respect to diffusion of the technology. The Market Barriers perspective is probably the most important one for the introduction of biofuels in Peru.
52 Inertia is likely to be found in well-established markets based on conventional energy technologies that have been around for many decades. For a variety of reasons – such as ingrained consumer attitudes combined with the large expense involved in trying to change them or the advantages that existing sellers have if their technologies are based on costly capital infrastructure that has been paid for in the past – the market system may be sluggish when it comes to welcoming new products. In the past several decades, many proponents of energy conservation and diversification believed that normal market processes were far too slow at bringing about the widespread use of new energy technologies that were urgently needed to enhance energy security and the environment. They suggested that this was due to various barriers in the way of the rapid market penetration of technologies that were obviously superior in their view and they advocated government action to reduce or eliminate them. This view has created some debate about the proper role of government in addressing the barriers with the incumbent energy producers and many economists on one side and energy technology developers and environmentalists on the other side. Out of this debate came what the IEA are calling the Market Barriers perspective, a view that focuses on the desirability of facilitating the adoption of cleaner and more efficient energy technologies, but by way of policies consistent with the underlying objectives and constraints of a market system. The objective of promoting energy conservation is still there, but subject to the constraint that the policy measures used to pursue that goal are economically efficient. Put another way, it is the perspective that results when the barriers that tend to slow the rate of adoption of new technologies are identified and subjected to analysis within the framework of neoclassical economics. The various market barriers that are viewed as important are well known. The following table provides a summary list, along with some typical measures that are taken to alleviate the barriers. Note that a list of this sort is not comprehensive and is not meant to suggest that the individual barriers are tight categories. The barriers overlap and there is interaction between them and their effects on decisions to invest in new technologies. Not all of these barriers apply to bioenergy in general or to biofuels specifically. In the following table, the market barriers are assessed for bioenergy in general and some other energy technologies. It is apparent from the table that the barriers that bioenergy faces are not that different from the barriers facing other forms of renewable energy or even new forms of fossil energy.
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Table 16: Types of Market Barriers Barrier Key Characteristics Typical Measures
Uncompetitive market • Scale economies and learning • Learning investments price benefits have not yet been realized. • Additional technical development
Price distortion • Costs associated with incumbent • Regulation to internalize technologies may not be included in ‘externalities‘ or remove subsidies their prices; incumbent technologies • Special offsetting taxes or levies may be subsidized. • Removal of subsidies
Information • Availability and nature of a product • Standardization must be understood at the time of • Labelling investment. • Reliable independent information Transactions costs • Costs of administering a decision to sources purchase and use equipment • Convenient & transparent (overlaps with “Information” above). calculation methods for decision making
Buyer's risk • Perception of risk may differ from • Demonstration actual risk (e.g., ‘pay-back gap‘) • Routines to make life-cycle cost • Difficulty in forecasting over an calculations easy appropriate time period.
Finance • Initial cost may be high threshold • Third party financing options • Imperfections in market access to • Special funding funds. • Adjust financial structure
Inefficient market • Incentives inappropriately split • Restructure markets organization in relation owner/designer/user not the same. • Market liberalization could force to new technologies • Traditional business boundaries market participants to find new may be inappropriate solutions • Established companies may have market power to guard their positions.
Excessive/ inefficient • Regulation based on industry • Regulatory reform regulation tradition laid down in standards and • Performance based regulation codes not in pace with development.
Capital Stock Turnover • Sunk costs, tax rules that require • Adjust tax rules Rates long depreciation & inertia. • Capital subsidies
Technology-specific • Often related to existing • Focus on system aspects in use of barriers infrastructures in regard to hardware technology and the institutional skill to handle it. • Connect measures to other important business issues (productivity, environment)
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Table17: Summary of Market Barriers by Technology
Small-scale Barrier Windpower Clean Coal Bioenergy Hydro
Cost 0 0 ++ ++ Price Distortion ++ ++ ++ ++ Informational + + + ++ Risk + ++ ++ ++ Financial Barrier ++ + ++ + Market Organization ++ * + * Regulatory Processes ++ ++ ++ ++ Equipment Turnover Rate + + ++ + Technology Specific Barriers Systems Infrastructure none none integration complexities Environmental ++ ++ ++ ++ Notes: 0 For some applications costs are close to competitive with established technologies + Weak barrier, not a key constraint ++ Strong barrier, primary focus of sector participants * Not obviously applicable
According to the principles of market economics, governments should intervene in the economy only in a situation in which the market fails to allocate resources efficiently and where the intervention will improve net social welfare. In the ‘strong‘ form of this view, barriers in the way of the adoption of new technologies should be dealt with by government action only if they involve market failure. In those cases, government should intervene to correct the market failure (again, subject to the intervention increasing net social welfare). Once this has been done, according to the market barriers perspective, government should leave decisions on the purchase of new technologies to the private sector. Therefore, one should consider to what extent the barriers identified involve market failure and whether there are any qualifications to the market failure argument. It is critical to note that not all market barriers involve market failure. Some of the market barriers shown in Table 16, such as higher product costs, the risk of product failure, the high cost of finance for small borrowers, and others included in the table, are normal and inherent aspects of the operation of most markets and they should be allowed to influence decisions in energy markets just as they influence decisions in all other markets. These barriers do not usually satisfy the market failure criterion because they involve necessary costs that have to be covered for all goods
55 and services; the existence of the barriers themselves does not provide a reason for favouring new energy technologies, which (in the classical economists view) should have to compete for investment dollars with everything else of value if resources are to be allocated efficiently. Most instances of market failure involve externalities, which occur in a market transaction if any of the costs or benefits involved in it is not accounted for in the price paid for the product that is sold. If there are costs that are external to the market (i.e., the buyer does not pay some of the costs incurred in producing the product), a negative externality occurs. If there are external benefits, a positive externality occurs. An example of a classic market barrier that can involve market failure is the cost and inconvenience to consumers of finding and analyzing information about energy-saving equipment (the communications issue of technology diffusion). Consumers require small amounts of technical knowledge to become aware that a useful new energy- efficient product is available and to evaluate the claims of competing brands. Given the administrative costs involved in large numbers of small market transactions, it is hard to imagine that such an information service would be offered exclusively by private firms through individual market transactions. Neither would potential suppliers of such information be very interested in such a market because they would know that the consumer who buys such information could so easily pass it on to others. Thus too little of this kind of information service would be provided relative to the benefit of it to consumers. These factors rationalize the involvement of government agencies in disseminating information on energy efficiency. Certain aspects of a market's structure may lead to inefficiency. For instance, a firm with monopoly power may be able to fend off competition from a new technology. In some countries or local markets, suppliers of financial services may not face much competition and this can result in unnecessarily high interest costs for financing purchases of energy-saving equipment. The equipment turnover barrier may be high for those technologies that address markets that are not growing fast and are served by a few dominant players that fight for market share. The transportation fuels market would be a classic case. Bioenergy technologies that try to penetrate this market could be termed disruptive technologies. They must fight with the incumbent technology for the relatively scarce market. Markets that are growing fast and served by many participants are generally easier to penetrate and the technologies that will address these markets could be considered incremental technologies. The incremental technologies will have lower market barriers. One can see that government action may be warranted in the case of some market barriers and not in others. In some situations, dealing with barriers in a pragmatic way can be a matter of making sure that normal aspects of market infrastructure (e.g., consumer protection laws, laws of contract) are working well in markets for energy technologies. Table 18 classifies the barriers identified in Table 16 as normal barriers or market failure barriers.
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Table 18: Classification of Market Barriers Barrier Barrier Type Uncompetitive Market Price Normal Price Distortion Market Failure Information Market Failure Transactions Costs Market Failure Buyer's Risk Normal Finance Normal Inefficient Market Organization Market Failure Excessive/ Inefficient Regulation Market Failure Capital Stock Turnover Rates Market Failure Technology Specific Barriers Normal
6.3 Biofuel Development from a Market Barriers Perspective Each of the identified barriers for new energy technologies will be evaluated to determine its applicability to biodiesel market development. 6.3.1 Normal Market Barriers There are four types of normal market barriers identified, uncompetitive market price, buyer’s risk, finance, and the potential for technology specific barriers. These are discussed below. Uncompetitive Price The cost of producing biofuel is often higher than the cost of diesel fuel, although the absolute value of the difference between the two is a function of commodity prices. In times of high oil prices and low agricultural prices, the gap can be small (or not exist at all) and when fossil energy prices are low, the gap can be large. In the regions of the world where biofuels have been used the gap has been eliminated through the use of tax incentives provided by governments. These tax incentives can also be viewed as learning investments. Governments have also invested in research and development in order to help to drive down the costs of production. Even where there is an incentive there is often concern on the part of some lenders, developers and marketers that the incentives could be removed in the future making their investments in biofuel production and marketing unprofitable. In previous sections the production costs of ethanol and biodiesel were estimated. It was determined that the biofuel production cost (or opportunity cost) was often higher
57 than the gasoline or diesel fuel cost. The taxation system in Peru for these biofuels will reduce this uncompetitive cost barrier but it has been noted that there are problems with the structure of the tax incentive as it provides a higher incentive when biofuels are more competitive and a lower incentive when they are less competitive. Biofuels also faces the problem of commodity price volatility. This can be addressed with a well conceived incentive program. Buyer’s Risk The Buyer’s Risk could also be termed business risk and it is important to note that it is the perception of risk that may be more important than the actual risk. The gap between perception and actual risk is larger when an industry is new and one of the measures that reduced this gap and the buyer’s risk for any venture is experience. The business risks identified by biofuel plant operators in other parts of the world are summarized below. • Risks related to equity financing o The idea for a biofuel plant development may originate with a small group of individuals who then undertake to raise equity for the project. There is no guarantee that the process can be successfully completed once it is started. In most cases, the investments made by individuals are placed in trust until certain thresholds are met and are returned if the equity drive fails, the original proponents may still lose their initial investment. o Individual equity drives can have additional specific risks such as restrictions on locations of participants, the presence or lack of brokers, the lack of a secondary market to sell shares in the future, no guarantees that future sales of units will not dilute the original shareholders. o These risks are generally reduced or eliminated once the equity drive has been successful. • Risks related to debt financing o There are no guarantees that after the equity is raised that sufficient debt will be available to complete the project. The project may be abandoned and some of the invested money lost. o Lenders may place restrictions on the corporate activities that reduce the rights and flexibility of the operation and the equity holders. o The inability to generate sufficient revenue from the operation to support the debt may reduce the value of the equity raised. • Construction and development risks o The owners are not generally experts in construction and design and must rely on third party specialists to carry out this work. Much of the ultimate operating success of the facility may be dependent on the performance of the contractors and the quality of their work. o The equity and debt is often raised before definitive agreements for construction are in place. There is a risk that there could be increases in cost and reductions in performance at this stage.
58 o In some cases in the US, the contractors and designers are taking equity positions in plants, which can lead to conflicts of interest. o Unforeseen issues may arise during construction. o The plant may not perform as expected or it may cost more than expected. Generally, increased costs must be covered by equity injections. • Operation risks o A Board of Directors often controls the operation and there may be some conflicts of interest between the Board and shareholders in general. o In the case of new operations, the company often has no experience with biodiesel, and co-products production and marketing and relies on third parties for some functions that are critical for success. o Demand for the products is generally driven by factors outside of the influence of the owners. o In some cases, new unproven technologies are being considered for adoption or demonstration. These carry high levels of risk. • Biofuel production risks o The actual production of biofuel is dependent on the supply of the raw materials, which fluctuate in price and quality. Higher input costs cannot always be recovered in the selling prices. o Profitability is also dependent on the existence of production and tax incentives, which are not usually guaranteed. o The industry may be competitive and they may be more competitive operations, which can produce and sell biodiesel at lower costs. o Successful operations require skilled operating personnel. These may be difficult to obtain and retain in some locations. o Plants are subject to environmental regulations, which may change over time. • Corporate structure risks o Depending on the corporate structure chosen there may be additional risks for investors. In a partnership, the distributions of cash may not be sufficient to cover the investors tax liability. o Cash distributions are not guaranteed and may fluctuate with plant performance and market conditions. It can be seen that the Buyer’s risk generally is reduced as a project proceeds through fundraising and construction. There are methods of reducing some of these risks through insurance, bonding and structural approaches but these generally add cost to a project. In general, the more successful projects that there are, the lower the perception of risk becomes. Once a plant is operating and has demonstrated that it meets the design criteria then the risks tend to be mostly commodity risks. In some cases, it may be possible to hedge
59 and offset these risks but these programs can be expensive and they may not be available to all producers. The types of policy measures that can be considered to address this barrier are investments in demonstration projects, programs to reduce commodity risks, and assurances that there will not be changes in government programs that would negatively impact performance. Finance A barrier that is somewhat related to Buyer’s Risk is that of finance. Most projects are financed by a combination of equity and debt. Raising the debt portion can be challenging for a number of reasons including imperfections in market access to capital. Debt providers generally have no opportunity to participate in any project upside so they focus on ensuring that there are no downsides to their participation. They focus on the issues of what could go wrong. Lenders have many opportunities presented to them and they choose those opportunities that provide them with their best returns or most limited risk. Many lenders also specialize in certain sectors of the economy. These are sectors for which they understand the risks and rewards. New sectors require lenders to become comfortable with the risks or at least the perception of the risks. The first projects are therefore the most difficult to finance since there is no track record which lenders can rely on. It is extremely important that the first projects be successful. Problems or failures with early projects increase the difficulty in demonstrating that new projects won’t have the same problems. In the United States, most biofuel projects have had their debt financing led by banks that specialize in the agricultural sector. Sometimes these banks syndicate their loans with other lenders that are not agricultural specialists but these other lenders rely on the expertise of the lead institutions. Note that in cases where there is imperfect access to capital, finance barriers could be considered a market failure barrier and increased government involvement may be warranted. The involvement could include special funding, third party financing options, loan guarantees or other approaches. Technology Specific Barriers There can be technology specific barriers to the creation of biofuel markets. One example is the issues raised by adding biodiesel to diesel fuel. The process increases the blends propensity to gel in cold weather conditions. In the existing diesel fuel distribution infrastructure, this creates the need to handle the product in a different manner. This need for special handling can create additional costs but they can be overcome as shown by the widespread use of biodiesel in Europe where many of the same issues have been addressed. There are similar issues with respect to ethanol and the problems of phase separation in the presence of excess water. Technology specific barriers can also be related to the skills necessary to handle the differences between new systems and the existing infrastructure. Programs to overcome these barriers generally focus on increasing knowledge and promoting a full systems approach to dealing with issues.
60 6.3.2 Market Failure Barriers Market failure type barriers are more difficult for individuals to overcome since they are systems related. A stronger case can be made for government intervention to address these barriers. The five categories of market failure barriers are discussed below and whether or not they are barriers to the development of a biodiesel market. Price Distortion Price distortion arises when some of the costs or benefits that arise from using a product are not reflected in the selling price. The most common example of this is the environmental costs that arise from using products that pollute the environment. These costs are real and are paid for by society through reduced crop production, increased maintenance costs and higher health costs. They are not generally included in the product cost. Governments can and have taken action to remove these price distortions. One example with transportation fuels was the tax differential applied to leaded gasoline by some governments prior to the ban on the use of leaded gasoline. That additional tax, which removed the financial incentive for using lower cost leaded gasoline, was very effective at accelerating the switch from leaded to unleaded gasoline. In the case of biofuels, the lifecycle analysis indicates that there are greenhouse gas reductions from using the fuels and there are also reductions in the emissions of some of the tailpipe contaminants from using the fuel. These should have some value and could be used to offset the higher cost of the fuel. Information Markets work best when all participants have the information required to make informed decisions. The time and effort required to gather and analyze the information about new products can act as a serious impediment to their adoption. It was shown earlier that the communication of information about innovations is a very social process and one that can take considerable time, effort and financial resources. Proponents of new energy technologies often do not have the necessary resources to make this happen. Policy options that can be used to address the issue of insufficient information include providing reliable independent information, standardization and labelling activities. Transaction Costs Closely aligned with the issue of information is the issue of the cost of making decisions. Large numbers of small purchases are costly and can overwhelm the benefits of choosing cleaner energy technologies. If consumers had to make a separate purchase for the biodiesel portion of their diesel purchase the added inconvenience and cost of the transaction would make many buyers and sellers think twice about the purchase. This is not likely to be the case for biofuels since the transaction for the biofuel is likely to be upstream of the point of consumer purchase and be a transaction between the biofuel plant and the fuel marketer. Downstream of this transaction, all subsequent transactions should be transparent. Transaction costs are not likely to be a significant barrier to the development of a biodiesel market. Inefficient Market Organization
61 Inefficient market organization applies when one firm or a small group of firms act in a similar manner and using the advantages of being the incumbent suppliers to resist the market penetration efforts of the new technology. In the case of transportation fuels, there are many end users of the fuel but they all purchase the product from a limited number of companies. These are also the companies that produce the competing products, diesel fuel and gasoline. In order for biofuels to penetrate the market and be available for the ultimate end user, it must be integrated into the existing distribution system. Excessive/Inefficient Regulation Regulations and standards are often prescriptive and not directly performance driven. This can be effective and efficient in cases where there is significant experience with a product and the performance can be controlled in a prescriptive manner. The system does not function particularly well when new products are introduced that may not have the wealth of experience associated with their use and may not behave in exactly the same manner as the incumbent technology. In many countries, regulations are developed through a consensus process involving producers, consumers, and regulators. In most cases, the producers are the most knowledgeable members of the panels and exert a strong influence on the outcome. In the case of new products, the incumbent producers can use this dominance to resist change to the specifications that might favour a new product. The best example of the problems that inefficient regulation imposes for biodiesel is probably with the T90 limits for blends. Pure biodiesel is composed of esters and many have T90 points above the limit for all hydrocarbon diesel fuel. As more biodiesel is blended into diesel fuel, the blend reaches a point where it no longer meets the T90 specification. The question should be do esters have identical combustion properties to the hydrocarbon components used in diesel fuel? Only if the answer is yes can there be any justification for enforcing identical specification on biodiesel as used for petroleum diesel fuel. This issue has held up the development of a biodiesel blend specification in Canada and the United States for some time. Capital Stock Turnover The petroleum industry has invested significant money in the construction of refineries to convert crude oil into gasoline and diesel fuel. The addition of a fuel component produced outside of this existing infrastructure has the potential to reduce refinery throughput, which has a negative impact on the economics of refining. If the volume of additional product supplied to the system is large enough, it could result in marginal refineries being closed and written off. Peru is an importer and exporter of petroleum products. New transportation fuels can have an impact on the throughput of existing refineries but it has been noted that the country is a net importer of diesel fuel and does import some gasoline blending components and these components could be replaced with ethanol. The economy is also growing and demand for petroleum products will continue to grow so there should be an opportunity to maintain and even increase refinery throughputs at the same time as expanding the use of biofuels.
62 6.3.3 Summary Market Barriers The market barriers identified for biodiesel are summarized in Table 19. For the normal market barriers, the category of uncompetitive prices is rated as being a medium to high market barrier for biodiesel and low to medium for ethanol. The range is created by the different feedstock costs
Table 19: Summary Market Barriers Barrier Biodiesel Ethanol Normal Market Barriers Uncompetitive market price Medium-High Low to medium Buyer’s risk Medium Low to medium Finance Medium-High Medium-High Technology-specific barriers Low Low Market Failure Barriers Price distortion Low Low to medium Information Medium Medium Transactions costs Low Low Inefficient market organization in High High relation to new technologies Excessive/ inefficient regulation Medium Medium Capital Stock Turnover Rates Low Low to medium
The buyers risk is primarily influenced by the relative lack of experience with the design, construction and operation of these plants in Peru. The financing risk is rated medium to high. These facilities are difficult to finance because they are still relatively new and do not have a long successful track record. The producers are dependent on the tax incentives for their profitability and the markets for the products are not well developed. For the use of biodiesel, there is considerable know-how in Europe with respect to the distribution and use of that is directly transferable to Peru and the technology related barriers are ranked low. There is also a large body of experience with ethanol in South and North America. In the cases of the market failure type barriers, the use of biofuels provides some reductions in greenhouse gas emissions and reductions in some of the criteria air
63 contaminants from vehicles, these benefits are not factored into the price of the product and thus there exists some price distortion. There is some level of knowledge about biofuels in the market place but there is still a requirement and an opportunity to increase consumer knowledge about the fuel so the information barrier is ranked low to medium. Transaction costs are not expected to be a barrier to increased biofuels use. The market organization is inefficient related to biofuels. The distribution of biofuels from the producer to the final user is essentially controlled by a small group of integrated oil companies. This group has been reluctant to embrace alternative fuels. This group has used the argument of reduced refinery throughput and stranded assets in the past as justification for not using these alternatives. In many regions of the world, the incumbent fuel marketers have used the inefficient standards and regulatory system as a means to slow the development of appropriate standards for biodiesel. The lack of appropriate standards can slow the market development of biofuels. The position of the auto manufacturers in Peru with respect to a 7.8% limit on ethanol and no biodiesel use is an example of erecting barriers through standards. 6.3.4 Summary Market Development Barriers There are four primary and two secondary barriers to the development of biofuel markets in Peru. The primary market barriers are: 1. High biofuel prices. This is partially offset by tax incentives but the tax incentives provided in Peru would appear to be a legacy of taxation on industrial ethanol production and vegetable oil production for food purposes and not as a result of a deliberate biofuels policy. They do not function in an efficient way to address the volatility of the cost differential. 2. Inefficient market organization. The major petroleum companies are not the end users of biofuels but they do provide the distribution system by which biofuels reach the end consumer. The larger oil companies have shown little interest in biofuel marketing. 3. Finance risk. Raising the debt portion of the required capital can be difficult. In many regions of the world this is a significant issue. While no lenders were visited in Peru this is likely to be an issue here judging from the comments made by some proponents. 4. Business risk. Successful new businesses must raise equity and debt financing, have plants designed and built, operate the new facilities and adapt to changing market conditions. This is difficult to do the first time but becomes easier with each new successful operation as can be seen with the US ethanol industry. The secondary barriers are: 1. Price distortion. The marketplace does not place a monetary value on environmental impacts. Fuels that reduce greenhouse gases or exhaust emissions sell for the same price as fuels that don’t impact emissions. In most
64 cases, this price distortion is offset by the tax incentives offered by the federal government and some of the provinces. 2. Excessive/inefficient regulation. Biofuels have some different properties than petroleum based fuels. The standards developing bodies in most of the world have been trying to have biofuel blends meet the same specifications as petroleum fuels. Biofuels have a different chemical composition than petroleum diesel and it is reasonable to expect that performance based specifications would be a better approach than the prescriptive approach that is currently being followed. 6.4 Market Transformation The term market transformation refers to a significant or even radical change in the distribution of products in a given market. A market transformation program refers to actions taken by government (or sometimes by some other entity acting in the public interest) to facilitate the market transformation process. In effect, the long-term objective of most such initiatives is to make a new efficient or low impact technology or product- type the preferred ‘norm‘ in a market place. The objective of a market transformation program is to make changes that are both substantial and sustainable. An isolated instance in which a government supports the introduction of a new energy technology does not constitute a market transformation program. Market transformation is about creating substantial change in the market for a particular class of products: changes in the behaviour of consumers so that they choose to buy more efficient goods or services; changes in the behaviour of producers, so that they bring to the market only efficient (or at least more efficient) models; changes in the behaviour of wholesalers and retailers in regard to what they make available to final buyers; and changes in the capabilities of suppliers in related markets to provide whatever ancillary goods and services are needed (e.g., suppliers of equipment parts and other intermediate goods, installers, repair companies). When the process is completed, a successful market transformation program will have had a lasting and significant effect. This perspective thus also addresses the social aspects of technology diffusion but in a different way from the Market Barriers perspective. It focuses more (but not exclusively) on the end use of the technology or the market rather than on the whole supply chain. In the work of the IEA on creating markets, the idea of a market transformation perspective is further expanded. It considers the market transformation perspective as fitting into a larger picture of what can be done by governments to help build markets for new energy technologies. The RD&D and the market barriers perspectives are useful, however these perspectives do not address an important additional process affecting market deployment. The RD&D perspective deals primarily with the implications of learning and the interactions between R&D and market development, particularly for the cost and performance of new technologies. The market barriers perspective identifies obstacles in the way of new technologies and suggests ways to deal with them that conform to the constraints of market economics, but does not deal in depth with how to implement change. Although economic analysis is rich in insights about problems in existing markets, it does not say very much about the steps needed to create new markets out of the entrepreneurial process. Correspondingly, the IEA focuses the
65 market transformation perspective on the outcome to be achieved and then runs the logic back through all the factors that would be necessary to attain that outcome: improving technology cost and performance and removing barriers, but also actively creating the conditions that facilitate the rapid market uptake of new more efficient products. A key aspect of the Market Transformation process is to identify all of the important decision makers according to the different roles they play. In the technology diffusion process, the importance of these key influencers in promoting the uptake of new technology is well understood. Table 20 illustrates that the number of different market players can be large and varied. While some of the roles played by market actors overlap and many actors have multiple roles, the table indicates that consulting with stakeholders, and involving some of them in the transformation process in other ways, is a large job. It is nevertheless a centrepiece of most market transformation programs. The chances of having a performance enhancement or a new product accepted can be greatly increased through the involvement of important market players, especially when the changes are technically complex and currently accepted products are well established. Working with stakeholders can be done by tapping into existing networks, such as trade associations and consumer groups, or by building new networks of contacts. For instance, in technology procurement programs developing cooperative networks among buyer-groups is important. Industry associations may develop their own networks to work together on building the foundations for the offering of a new product. Some, but not all, of these strategies are applicable to some of the biomass energy opportunities Three broadly based models that are often used in market transformation programs are: • Procurement Actions • Strategic Niche Management • Business Concept Innovation.
There may be some potential to assist in the development of new alternative fuel markets with procurement actions. Governments are usually large purchasers of transportation fuels and changing their purchases to alternative fuel can send a strong signal to the market place. Procurement processes are thus natural vehicles for encouraging technology market development – they offer an entry point for influencing industry decisions in a framework that governments know well. In the market transformation perspective, a procurement specification list provides a useful pathway for program designers to get into the details of market operations. Procurement programs are ineffective where the volume of product represented by the purchasers is not sufficient to cause the creation of production economies of scale. In general, the more capital intensive the production process, the less likely that procurement actions will be a useful tool for market development.
66 Table 20: Types of Market Actors Involved in Case Study Projects Typical Role Market Actor Buyer Facility operators Buyer & seller Distributors, wholesalers, retailers, purchasers, contractors, service companies, utilities, energy distributors Development Planners, architects Development – manufacturing Manufacturing companies, parts suppliers Financing Funding brokers & other financial institutions Information dissemination Energy agencies, mass media companies & agencies, individual investors Policy & funding Government agencies, other public institutions Policy – formulation & decisions Politicians, regulatory agencies & other public authorities Represent special interests Trade associations, consumer associations, other NGOs Basic research Universities Research & development Research institutes, corporate research labs Seller Equipment installers, energy distributors Special tasks (e.g., policy Consultants analysis) Technology user Homeowners, consumers, customers, end-users
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7. COMMENTS ON BIOFUELS LEGISLATION Legislation concerning the promotion of biofuels has been passed in Peru as follows: Ley 28054 de Promoción del Mercado de Biocombustibles and its relevant regulation Decreto Supremo Nº 013-2005. The texts for these are attached as Annex 1. General The main thrust of the legislation as stated is to encourage the development of biofuels in a free, open and competitive environment, within the bounds of maintaining health safety, environmental and vehicle performance standards. This principle should be honoured throughout the legislation. There should not be any restrictions in the legislation which unduly stifle the creativity of individual operators/entrepreneurs in introducing new technology or approaches to biofuels supply and commercialization. The provisions of the legislation are not mandatory; there are no sanctions if operators do otherwise than prescribed in the regulation. Specific to Articles in the Regulation Art 3 Definition of Biodiesel: This specifies esterification of oils of vegetable origin only. This would exclude animal fats and fish oils as well as possible waste oils which may contain animal oils or fats. Definition of Bases for Blending: This specifies that the bases for blending with ethanol are the current finished gasolines of 84, 90, 95 and 97 RON. This could be restrictive. Definition of Ecological Gasolines: This specifies that this gasoline is a mix of the four current finished gasolines and fuel alcohol. This implies that there would be no specification for the final finished ecological gasoline blends but only for the blending components of which it is comprised. There would be no way of checking on and enforcing the finished gasoline quality since no specification would exist. Art 6 Fuel Alcohol - Gasoline Mixture Percentage: This is specified as 7.8% - no more and no less. 10% is the most common percentage above which there are problems with automobile manufacturers’ warranties. 5 % has been a frequent starting point in blends elsewhere. Even if 7.8% is decided as a maximum there should be freedom to blend lesser percentages. Art 7 Schedule for Gasohol Introduction: This specifies as follows for application and use of the fuel alcohol blended gasolines: • As from June 30, 2006 the regions of: La Libertad, Lambayeque, Ancash, Piura and the provinces of Barranca and Huaura of the Lima Region. • As from January 1, 2008 in the regions of: Loreto, Ucayali, Amazonas, San Martin and Huánuco. • As from January 1, 2010 in all the country. The immediate June 30, 2006 date seems to be based on gasohol use in the traditional northern coastal sugar-producing regions. This is theoretically where the ethanol should be readily available, but there is only one plant (Cartavio) that has any hope of supplying anhydrous ethanol on this date. Based on a rough estimate of gasoline
68 consumption in these regions the Cartavio plant could probably supply about half to 2/3 of the requirements. All the supply would have to be by road tanker to appropriate depots serving the regions. The logistics and attendant costs to all regions from Cartavio would have to be verified to see if they are reasonable or possibly, in some cases, prohibitive. Art 8 Biodiesel percentage in Petrodiese: This specifies 5% as the percentage of biodiesel to be blended with present finished petrodiesels – no more no less. Biodiesel blends of greater than 5% can be used successfully in modern diesel engines especially in most of Peru where cold weather operating problems are not a major issue. The United States has a large amount of experience with 20% biodiesel blends and Germany has used 100% biodiesel for a number of years. The Heaven Petroleum/HERCO plant has made arrangements for oil feedstocks and plant design to operate at a 20% biodiesel blend and would suffer financially if forced to operate at low percentages such as 5%. Art 9 Schedule for Biodiesel Introduction: This specifies as follows for application and use of biodiesel blend: • January 1, 2008 the regions of: Loreto, Ucayali, Amazonas, San Martin and Huánuco. • From January 1, 2010 in all the country. The earlier date applying to the northern Selva regions, seems to be based on the likelihood that these would be the location of crops yielding oil as feedstock for biodiesel production. This date is restrictive however to entrepreneurs such as Heaven/HERCO who are set up with waste oil and palm oil sources and have a biodiesel plant coming on stream within a few months. If they were forced to wait until January 2008 they would suffer financially by having to await returns on their investment. Art 13 Blending Location: This specifies that the mixtures of Fuel Alcohol with gasoline and of Bio-diesel with diesel will be performed in the Gasoline Depots and the blending operations will be in charge of the Operator of the Gasoline Depots. In the case of ethanol with gasoline this wording would not preclude the “splash blending” practice discussed under 3.5.1 and illustrated in Figure 9 page 23. Even though the ethanol would be added to its tank compartment before the road tanker arrives at the petroleum product depot, the final blending with gasoline would be done in the depot under the control of the depot operator.
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8. SUMMARY - CONCLUSIONS AND RECOMMENDATIONS 8.1 Conclusions 1. There are four gasoline grades designated by Research Octane (RON) 84, 90. 95 and 97 but the sales volume is dominated by the 84 and 90 grades, accounting for some 86% of the total. 2. The weighted average octane of the total national gasoline pool is relatively low at 87.9 RON. 3. There would be benefits to rationalizing the gasolines available to lesser number of grades e.g. to two or three maximum; the savings would be in production, storage and dispensing infrastructure and operating costs 4. The RON 84 grade will likely soon be phased out as the weighted average model year of the automobile fleet advances 5. The volume of anhydrous ethanol required for blending the entire national gasoline pool to 7.8% is 102 million litres, based on 2004 sales volumes. 6. It is estimated that roughly 20 million litres would be required for blending all the gasoline to 7.8% in the north coastal regions (La Libertad, Lambayeque, Ancash, Piura and the provinces of Barranca and Huaura of the Lima Region) where ethanol is to be introduced by mid-2006. 7. Blending ethanol at 7.8% with the existing finished grades would produce finished gasolines with significantly higher octanes than the specifications as follows: Blendstock/Finished 84/87.6 90/93.1 95/97.7 97/99.7 8. The maximum Reid Vapour Pressure (RVP) of the finished blends may exceed the national specification since ethanol has a very high blending RVP. 9. Ethanol blends will result in lower tailpipe emissions of major pollutants and net reduction in greenhouse gas in the ethanol production/consumption cycle 10. Biodiesel blending with petrodiesel will decrease sulphur content and increase cetane number of the finished diesel. 11. Biodiesel production and use will reduce diesel imports, and improve the domestic rural economy 12. Biodiesel blends are more readily biodegradable in the event of spills, result in significantly lower tailpipe emissions of major pollutants and result in net reduction in greenhouse gas in the biodiesel production/consumption cycle 13. There are two options for blending ethanol with gasoline in the existing gasoline storage depots: a. In-line blending of ethanol with the gasoline base stock upon loading of road tankers; this involves the installation of ethanol receiving and storage and in-line blending facilities as well as some additions/modifications to safety and firefighting facilities and materials.
70 b. “Splash blending” in the existing gasoline depots of gasoline into road tankers which have already been partially loaded elsewhere with the requisite amount of fuel ethanol; this option requires no ethanol storage or in-line blending at the existing depot site. Both of these options are compatible with the existing biofuels legislation 14. Current production of hydrous ethanol in Peru is wholly from molasses, a byproduct of sugar production 15. There is insufficient molasses at present or for the foreseeable future to produce the volume of anhydrous ethanol required for the national gasoline pool at 7.8% concentration in gasoline 16. The choice of 7.8% ethanol in gasoline as the blend for Peru is unusual as this particular blend is not used anywhere else in the world. The most common blend is 10% ethanol. 17. The most likely source of future ethanol production beyond the molasses- sourced volumes will be directly from sugar cane (juice). 18. Based on opportunity values for sugar and the expected future variability of oil/gasoline prices it is anticipated that ethanol costs/prices will at times be uncompetitive with gasoline prices based on equal taxation. 19. The production cost of biodiesel in Peru, based on current palm oil prices would be some $2.10/gallon ex-plant excluding taxes 20. The differential taxation of fuel ethanol and biodiesel at levels lower than the gasoline and diesel base stocks is the most common method worldwide of providing an incentive for the development and commercialization of biofuels. 21. The taxation of biofuels in Peru is not clearly defined. Since fuel taxes are charged and collected by refiners or importers and charged to wholesalers in the ex-refinery price upstream of the storage depots, tax on biofuels blended in depots would not automatically be captured at gasoline and diesel taxation rates. At present prospective fuel ethanol producers are assuming they will have the same tax treatment as hydrous ethanol. In the case of biodiesel the stakeholders are assuming (similar to food oils) that there will be no ISC levied – only IGV. 22. Biodiesel blends of greater than 5% can be used successfully in modern diesel engines especially in most of Peru where cold weather operating problems are not a major issue. The United States has a large amount of experience with 20% biodiesel blends and Germany has used 100% biodiesel for a number of years. 23. It is common for some government intervention in the marketplace to promote alternative fuels. Biofuel markets are unlikely to develop on their own without this intervention. 24. The intervention is usually in the form of tax incentives to equalize or provide a price advantage, through the use of mandates, or both. 25. The attitude of the various stakeholder groups in Peru towards biofuels was not significantly different from the views held by similar stakeholders in other parts of the world.
71 26. The market barriers facing biofuels in Peru are generally the same as those facing biofuels in other countries.
72 8.2 Recommendations 1. The biofuels taxation situation should be thoroughly analyzed and clarified. A study pursuant to this should include, inter alia, the following elements: a. What taxes are to be charged, e.g. Rodaje on ethanol in gasoline? ISC on biodiesel in diesel? b. At what point in the supply chain are these taxes documented and collected? c. Recognizing the need to support and encourage the introduction of biofuels in competition with hydrocarbons what are the recommended tax rates on biofuels? d. Should there be a sliding scale mechanism to provide more support incentives in situations when biofuels costs are high and competing hydrocarbons prices are low? 2. The decision to use a 7.8% ethanol blend should be reviewed; a move towards 10% would not result in any difficulties with the finished gasoline specifications, vehicle performance or its mechanical integrity. 3. The use of ethanol in diesel fuel blends should be studied and considered for promotion. 4. The Biodiesel maximum allowable blend composition should be reviewed. An increase from 5% to 20% would not impact on engine or fuel system performance and would result in a more financially viable scale of production and blending operations for biodiesel operators 5. The following modifications in the regulation to the Biofuels Law Decreto Supremo Nº 013-2005 should be made: Art 3 Definition of Biodiesel: This should be expanded to include animal fats and fish oils as well as waste oils which may contain animal oils or fats. Art 8 Biodiesel percentage in Petrodiesel: This should be modified to increase the maximum allowable to 20%. Art 9 Schedule for Biodiesel Introduction: This should be liberalized to accommodate an earlier introduction of biodiesel; operators will be ready to supply the Lima area by mid-2006. 6. The following Articles of the regulation should be reviewed with a view to possible modifications: Art 3 Definition of Bases for Blending: and Definition of Ecological Gasolines. These should be reviewed in light of possible difficulties with testing and enforcement of final gasoline quality specifications. The existing definitions may also preclude using ethanol as an octane enhancing component, which is one of its primary attributes. Art 6 Fuel Alcohol - Gasoline Mixture Percentage: Increase maximum allowable to 10% and allow freedom to blend lesser percentages
73 Art 7 Schedule for Gasohol Introduction: These dates should be technically reviewed to see if they are practical in light of lack of supply facilities and difficult and costly logistics from the one facility that will exist.
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LEY N° 28054 EL PRESIDENTE DE LA REPÚBLICA POR CUANTO: LA COMISIÓN PERMANENTE DEL CONGRESO DE LA REPÚBLICA; Ha dado la Ley Siguiente:
LEY DE PROMOCIÓN DEL MERCADO DE BIOCOMBUSTIBLES Artículo 1°.- Objeto de la Ley La presente Ley establece el marco general para promover el desarrollo del mercado de los biocombustibles sobre la base de la libre competencia y el libre acceso a la actividad económica, con el objetivo de diversificar el Mercado de combustibles, fomentar el desarrollo agropecuario y agroindustrial, generar empleo, disminuir la contaminación ambiental y ofrecer un mercado alternative en la Lucha contra las Drogas. Artículo 2°.- Definición de biocombustibles Se entiende por biocombustibles a los productos químicos que se obtengan de materias primas de origen agropecuario, agroindustrial o de otra forma de biomasa y que cumplan con las normas de calidad establecidas por las autoridades competentes. Artículo 3°.- Políticas Generales El poder Ejecutivo implementará las políticas generales para la promoción del mercado de biocombustibles, así como designará a las entidades estatales que deben ejecutarlas. Son políticas generales: 1. Desarrollar y fortalecer la estructura científico-tecnológica destinada a generar la investigación necesaria para el aprovechamiento de los biocombustibles; 2. Promover la formación de recursos humanos de alta especialización en materia de biocombustibles comprendiendo la realización de programas de desarrollo y promoción de emprendimientos de innovación tecnológica; 3. Incentivar la participación de tecnologías, el desarrollo de proyectos experimentales y la transferencia de tecnología adquirida, que permitan la obtención de biocombustibles mediante la utilización de todos los productos agrícolas o agroindustriales o los residuos de éstos; 4. Incentivar la participación privada para la producción de biocombustibles; 5. Incentivar la comercialización de los biocombustibles para utilizarlos en todos los ámbitos de la economía en su condición de puro o mezclado con otro combustible; 6. Promover la producción de biocombustibles en la Selva, dentro de un Programa de Desarrollo Alternativo Sostenible; 7. Otros que determine el Poder Ejecutivo para el logro de lo establecido en el artículo 1° de la presente Ley. Artículo 4°.- Uso de biocombustibles El poder Ejecutivo dispondrá la oportunidad y las condiciones para el establecimiento del uso del etanol y el biodiesel.
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Artículo 5°.- Programa de Cultivos Alternativos DEVIDA como Ente Rector en la Lucha Contra las Drogas en el Perú, conjuntamente con los Gobiernos Regionales y PROINVERSIÓN elaborarán Proyectos dentro del Programa de Desarrollo Alternativo, que promoverán la inversión privada, así como fondos de Cooperación Internacional en la zona de ceja de selva orientados a la obtención de biocombustibles. Las entidades estatales dentro del portafolio de combustibles, dispondrán la compra de biocombustibles producidos dentro de los programas vinculados a la Lucha contra las Drogas.
DISPOSICIONES COMPLEMENTARIAS Y TRANSITORIAS
Primera.- Créase el Programa de Promoción del uso de Biocombustibles – PROBIOCOM, el cual estará a cardo de PROINVERSIÓN, que tendrá por objeto promover las inversiones para la producción y comercialización de biocombustibles y difundir las ventajas económicas, sociales y ambientales de su uso. Segunda.- Constituyese una Comisión Técnica encargada de proponer y recomendar las normas y disposiciones complementarias para el cumplimiento de la presente Ley, observando los siguientes lineamientos básicos: a. Elaborar el cronograma y porcentajes de aplicación y uso del etanol anhidro, como componente para la oxigenación de las gasolinas, así como el uso de biodiesel en el combustible diesel. b. Proponer un programa de sensibilización a los usuarios y a las instituciones públicas hacia el uso de etanol anhidro y biodiesel. Tercera.- La Comisión Técnica señalada en la disposición precedente está presidida por un representante del Consejo Nacional del Ambiente – CONAM- e integrada por los representantes de: a. Ministerio de Energía y Minas. b. Ministerio de Economía y Finanzas. c. Ministerio de Agricultura. d. Agencia de Promoción de la Inversión PROINVERSIÓN. e. Comisión Nacional para el Desarrollo y Vida sin Drogas – DEVIDA. f. Sociedad Nacional de Minería, Petróleo y Energía. g. Asociación Peruana de Productores de Azúcar y Biocombustibles. Cuarta.- La Comisión Técnica, referida en la disposición segunda, tendrá un plazo de ciento ochenta días desde la entrada en vigencia de la presente Ley, para remitir al Poder Ejecutivo sus propuestas y recomendaciones. Quinta.- El Poder Ejecutivo reglamentará la presente Ley en un plazo no mayor a noventa días de recibida la propuesta de la Comisión Técnica. Comuníquese al señor Presidente de la República para su promulgación. En lima, a los quince días del mes de julio de dos mil tres. CARLOS FERRERO Presidente del Congreso de la República
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HILDEBRANDO TAPIA SAMANIEGO Tercer Vicepresidente del Congreso de la República
AL SEÑOR PRESIDENTE CONSTITUCIONAL DE LA REPÚBLICA POR TANTO: Mando se publique y cumpla. Dado en la Casa de Gobierno, en Lima, a los siete días del mes de agosto del año dos mil tres. ALEJANDRO TOLEDO Presidente Constitucional de la República
BEATRIZ MERINO LUCERO Presidenta del Consejo de Ministros.
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APRUEBAN REGLAMENTO DE LA LEY DE PROMOCIÓN DEL MERCADO DE BIOCOMBUSTIBLES
DECRETO SUPREMO Nº 013-2005-EM
EL PRESIDENTE DE LA REPÚBLICA CONSIDERANDO: Que, el artículo 1 de la Ley Nº 28054, Ley de Promoción del Mercado de Biocombustibles, establece el marco general para promover dicha actividad, sobre la base de la libre competencia y acceso al mercado, con el objeto de diversificar el mercado de combustibles, fomentar el desarrollo agropecuario y agroindustrial, así como generar empleo, disminuyendo los niveles de contaminación ambiental existentes, además de constituir una alternativa contra el cultivo ilícito de la hoja de coca; Que, la Segunda Disposición Complementaria y Transitoria de la Ley Nº 28054 constituyó una Comisión Técnica encargada de proponer y recomendar las disposiciones para el cumplimiento de la presente Ley, teniendo como base la elaboración del cronograma y porcentajes de aplicación y uso del etanol anhidro, como componente para la oxigenación de las gasolinas, el uso de biodiesel en el combustible diesel, incluido el diseño de un programa de sensibilización a los usuarios e instituciones públicas para el uso del etanol anhidro y biodiesel; Que, la Quinta Disposición Complementaria y Transitoria de la Ley Nº 28054 facultó al Poder Ejecutivo a reglamentar la presente Ley; De conformidad con la Ley Nº 28054; y, en uso de las atribuciones previstas en los numerales 8 y 24 del artículo 118 de la Constitución Política del Perú; DECRETA: Artículo 1.- De la aprobación del Reglamento de la Ley Nº 28054 - Ley de Promoción del Mercado de Biocombustibles Aprobar el “Reglamento de la Ley Nº 28054 - Ley de Promoción del Mercado de Biocombustibles” que consta de dos (2) Títulos, diecinueve (19) Artículos y dos (2) Disposiciones Transitorias, que forman parte integrante del presente Decreto Supremo.
Artículo 2.- De la Derogatoria Derogar los dispositivos que se opongan a la presente norma.
Artículo 3.- Del refrendo El presente Decreto Supremo será refrendado por el Presidente del Consejo de Ministros, el Ministro de Energía y Minas, el Ministro de Economía y Finanzas y el Ministro de Agricultura.
Dado en la Casa de Gobierno, en Lima, a los treinta días del mes de marzo del año dos mil cinco.
ALEJANDRO TOLEDO
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Presidente Constitucional de la República
CARLOS FERRERO Presidente del Consejo de Ministros
GLODOMIRO SÁNCHEZ MEJÍA Ministro de Energía y Minas
PEDRO PABLO KUCZYNSKI Ministro de Economía y Finanzas
MANUEL MANRIQUE UGARTE Ministro de Agricultura
REGLAMENTO DE LA LEY Nº 28054 - LEY DE PROMOCIÓN DEL MERCADO DE BIOCOMBUSTIBLES
TÍTULO I
DISPOSICIONES GENERALES
Artículo 1.- Objeto El presente Reglamento promueve las inversiones para la producción y comercialización de Biocombustibles, difundiendo las ventajas económicas, sociales y ambientales de su uso, y establece los requisitos técnicos de seguridad para su producción y distribución; de modo que salvaguarde la salud pública y el medio ambiente y coadyuve a la Estrategia Nacional de Lucha contra las Drogas promoviendo la inversión en cultivos alternativos en las zonas cocaleras del país.
Artículo 2.- Referencias Cuando en el presente Reglamento se haga referencia a la Ley, se entenderá que se está haciendo referencia a la Ley Nº 28054 - Ley de Promoción del Mercado de Biocombustibles. Asimismo, cuando se mencione un artículo sin hacer referencia a norma alguna, estará referido al presente Reglamento.
Artículo 3.- Definiciones En el presente Reglamento se utilizarán los siguientes términos cuya definición se detalla:
Biocombustibles: Son los productos químicos que se obtienen a partir de materias primas de origen agropecuario, agroindustrial o de otra forma de biomasa y que cumplen con las normas de calidad establecidas por las autoridades competentes para su uso como carburantes.
Etanol: Es el alcohol etílico cuya fórmula química es CH3-CH2-OH y se caracteriza
5 Annex 1 Peru Biofuels Legislation por ser un compuesto líquido, incoloro, volátil, inflamable y soluble en agua. Para los efectos de este reglamento se entiende como el alcohol obtenido a partir de caña de azúcar, sorgo, maíz, yuca, papa, arroz y otros cultivos agrícolas.
Etanol Anhidro: Tipo de alcohol etílico que se caracteriza por tener muy bajo contenido de humedad y ser compatible con las gasolinas con las cuales se puede mezclar en cualquier proporción para producir un combustible oxigenado para uso motor.
Sustancia Desnaturalizante: Sustancia extraña, generalmente gasoline motor sin contenido de plomo, que se agrega al alcohol carburante para convertirlo en no potable y para evitar que sea desviado para usos diferentes al de los componentes oxigenantes de combustibles.
Alcohol Carburante: Es el Etanol Anhidro desnaturalizado, obtenido de la mezcla del etanol anhidro con la sustancia desnaturalizante en un pequeño porcentaje; entre 2 y 3% en el caso de ser gasolina motor sin contenido de plomo.
Biodiesel: Mezcla de ésteres (de acuerdo con el alcohol utilizado) de ácidos grasos saturados e insaturados de diferentes masas moleculares derivados de la transesterificación de aceites y grasas de origen vegetal. Para fines del presente reglamento se entiende como una sustancia oleaginosa obtenida a partir del aceite de palma, higuerilla, soya, girasol y otros aceites vegetales.
Bases de Mezcla: Son las gasolinas de 97, 95, 90 y 84 octanos, y el Diesel Nº 1 y Nº 2, comercializados en el país y cuyas calidades se establecen en las normas técnicas peruanas correspondientes.
Gasolina Ecológica: Es la mezcla que contiene gasolina (97, 95, 90, 84 octanos según sea el caso) y Alcohol Carburante.
Diesel Ecológico: Es la mezcla que contiene Diesel Nº 1 ó Nº 2 y Biodiesel.
Artículo 4.- Normas Técnicas Las características técnicas del Alcohol Carburante y del Biodiesel deben cumplir lo establecido por la correspondiente Norma Técnica Peruana aprobada por el Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual - INDECOPI.
Artículo 5.- Alcances y ámbito de aplicación El presente Reglamento se aplica a nivel nacional y establece las normas que deben cumplir los productores de Biocombustibles, comercializadores y distribuidores.
TÍTULO II
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DE LA PROMOCIÓN DE LOS BIOCOMBUSTIBLES
CAPÍTULO I
PORCENTAJE Y CRONOGRAMA DE APLICACIÓN Y USO DEL ALCOHOL CARBURANTE Y BIODIESEL
Artículo 6.- Porcentaje de mezcla - gasolinas El porcentaje de Alcohol Carburante en las gasolinas que se comercialicen en el país será de 7,8 (siete coma ocho) por ciento. Las mezclas que contengan 92,2% de gasolina y 7,8% de Alcohol Carburante se denominan gasolinas ecológicas según grado de octanaje: 97E, 95E, 90E y 84E.
Artículo 7.- Cronograma para gasolinas Cronograma de aplicación y uso del Alcohol Carburante en las gasolinas:
- A partir del 30 de junio del 2006 las gasolinas ecológicas serán producidas y comercializadas en las regiones: La Libertad, Lambayeque, Ancash, Piura y las provincias de Barranca y Huaura de la Región Lima.
- A partir del 1 de enero de 2008 en las regiones: Loreto, Ucayali, Amazonas, San Martín y Huánuco.
- A partir del 1 de enero de 2010 en todo el país.
Artículo 8.- Porcentaje de mezcla - Diesel El porcentaje de Biodiesel en el diesel que se comercialice en el país sera de 5,0 (cinco coma cero) por ciento. La mezcla que contenga 95% de Diesel Nº 1 o Nº 2 y 5% de Biodiesel se denomina Diesel Ecológico Nº 1E y Nº 2E.
Artículo 9.- Cronograma para Diesel Cronograma de aplicación y uso del Biodiesel:
- A partir del 1 de enero de 2008 el Diesel Nº 1 Ecológico y Diesel Nº 2 Ecológico se comercializarán en las regiones: Loreto, Ucayali, Amazonas, San Martín y Huánuco.
- A partir del 1 de enero de 2010 en todo el país. - Artículo 10.- Declaración Anual de Producción de biocombustibles Los productores nacionales de Alcohol Carburante y de Biodiesel deben presentar al Ministerio de Energía y Minas, en el mes de enero de cada año, sus planes de producción quinquenal de Alcohol Carburante y de Biodiesel, detallando el volumen de producción mensual y el área geográfica en la cual se realizará. El productor que no presente su plan de producción será considerado con producción cero por el Ministerio de Energía y Minas. Artículo 11.- Modificación de cronograma El Ministerio de Energía y Minas con una anticipación no menor a 12 meses, podrá modificar el cronograma de aplicación y uso establecido en los artículos 7 y 9 del presente
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Reglamento cuando los productores nacionales no puedan abastecer el volumen de Alcohol Carburante y Biodiesel requerido para el consumo nacional.
Artículo 12.- Comercialización Mayorista Los distribuidores mayoristas de combustibles líquidos debidamente registrados en el Ministerio de Energía y Minas son los únicos autorizados a comprar Alcohol Carburante y Biodiesel en el mercado nacional.
Artículo 13.- Lugares de Mezcla Las mezclas de Alcohol Carburante con gasolinas y de Biodiesel con diesel se realizarán en las Plantas de Abastecimiento y las operaciones de mezcla estarán a cargo del Operador de la Planta de Abastecimiento.
CAPÍTULO II
PROMOCIÓN DE CULTIVOS PARA BIOCOMBUSTIBLES
Artículo 14.- Promoción de Proyectos de Inversión Los Proyectos de inversión en cultivos para la producción de Biocombustibles cumplirán con la Ley del Sistema Nacional de Evaluación del Impacto Ambiental. Estos proyectos deberán tener en cuenta la zonificación ecológica y económica de la región, cuenca y/o localidad, y de no existir la misma, se tomará en cuenta la Capacidad de Uso Mayor de los Suelos.
Artículo 15.- Del Mecanismo de Desarrollo Limpio En el marco del Protocolo de Kyoto, los proyectos que busquen el incentive económico del Mecanismo de Desarrollo Limpio - MDL, podrán coordinar con PROBIOCOM, sin perjuicio de las competencias del Consejo Nacional del Ambiente.
Artículo 16.- De los Cultivos Alternativos La Comisión Nacional para el Desarrollo y Vida sin Drogas - DEVIDA, proporcionará la información necesaria a los Gobiernos Regionales y al Ministerio de Agricultura sobre las áreas que requieran de Programas de Cultivos Alternativos, con la finalidad de promocionar la producción de biocombustibles en la selva, ofreciendo un mercado asegurado a la inversión privada y productores organizados.
Artículo 17.- Programa de Cultivos Alternativos DEVIDA, como Ente Rector en la Lucha Contra las Drogas, cumplirá con las siguientes funciones:
a) Recibirá y calificará a la empresa privada interesada en desarrollar proyectos agroindustriales o industriales en las áreas requeridas de cultivos alternativos, para la producción de alcohol carburante y biodiesel. b) Elaborará proyectos agroindustriales destinados a la producción de alcohol carburante y biodiesel, para desarrollarse en las zonas requeridas de sustitución de cultivos ilícitos, en coordinación con el Ministerio de Agricultura y PROBIOCOM.
8 Annex 1 Peru Biofuels Legislation
c) Coordinará con los Gobiernos Regionales los proyectos a desarrollarse en las áreas calificadas por DEVIDA para la sustitución de cultivos ilícitos, con el propósito de generar condiciones favorables a la inversión privada.
d) Canalizará hacia la empresa privada previamente calificada, las líneas de crédito nacional e internacional que sea captada para la producción de biocombustibles.
e) Coordinará con PETROPERÚ y con los productores y comercializadores de combustible privados, la suscripción de convenios de adquisición de biocombustibles, producidos dentro del Programa de Desarrollo Alternativo vinculado a la Lucha Contra las Drogas y Cuidado del Medio Ambiente.
f) Auspiciará a la empresa privada, si fuera necesario, en la instalación de la agroindustria para la producción de biocombustibles, en las áreas que no estén directamente comprometidas con la sustitución de cultivos ilícitos dentro de su ámbito de acción.
CAPÍTULO III
PROMOCIÓN PARA EL DESARROLLO DE TECNOLOGÍAS
Artículo 18.- Del desarrollo de tecnologías El Poder Ejecutivo, a través del Consejo Nacional de Ciencia, Tecnología e Innovación Tecnológica - CONCYTEC y las Universidades, promociona e incentive la creación y el desarrollo de nuevas tecnologías para la producción, comercialización y distribución de biocombustibles.
CAPÍTULO IV
PROGRAMA DE PROMOCIÓN DEL USO DE BIOCOMBUSTIBLES
Artículo 19.- Creación del Programa del Uso de Biocombustibles El Programa del Uso de Biocombustibles (PROBIOCOM) se encuentra bajo la dirección de PROINVERSIÓN, entidad que se encargará de emitir las directives para su funcionamiento en un plazo no mayor a 90 días a partir de la vigencia del presente reglamento.
DISPOSICIONES TRANSITORIAS
Primera.- En tanto no sean aprobadas las normas técnicas peruanas por el Instituto
9 Annex 1 Peru Biofuels Legislation
Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual - INDECOPI, son de aplicación las normas técnicas internacionales.
Segunda.- Los productores nacionales de Alcohol Carburante y de Biodiesel deben presentar al Ministerio de Energía y Minas, dentro de los 60 días de vigencia del presente reglamento sus planes de producción quinquenal de Alcohol Carburante y de Biodiesel, detallando el volumen de producción mensual y el area geográfica en la cual se realizará.
10 Annex 2
Actividad WBS 142 “Analizar la Aplicabilidad de los Biocombustibles en el Perú”
Persons Met Oct 18 – Nov 11, 2005
1. GOVERNMENT Ministerio de Energía y Minas Dirección General de Hidrocarburos Gustavo Navarro V. Director General Asesores DGH Ing. Luis Zavaleta Vargas Angie Garrido Ponce
Ministerio De Agricultura Dirección General de Promoción Agraria Ing. Alexander Chávez Cabrera Ph.D. Especialista en Cultivos
Superintendencia Nacional de Administracion Tributaria (SUNAT)
National Environment Council (CONAM) Peruvian Program on Climate Change (PROCUM) Jorge Álvarez Environmental Specialist
2. DOWNSTREAM OIL INDUSTRY Integrated Refiner-Marketers Repsol YPF William Ojeda Urday Gerente Seguridad, Calidad, Medio Ambiente, Compras y Sistemas PETROPERU Jaime Santillana Soto Gerente Dpto. Mercado Externo Edgardo Candela Velazco Gerente de Comercialización Alfredo Coronel Escobar Gerente Dpto Control Operativo José Estrada Valverde Jefe Unidad Técnica, Dpto. Control Operativo Augusto Núñez Zela Jefe Unidad de Negociaciones, Dpto. Control Operativo
Regional Refiner-Marketer Maple Gas Corporation of Perú Cesar Valderrama Morón Vicepresidente de Operaciones e Ingeniería
1 Annex 2
Arturo Ruiz R Quality issues
Terminal Operators Consorcio Terminales Roberto Cairo Gerente General Jorge Burgos Toledo Gerente de Operaciones Franklin Muñoz Junco Gerente Técnico Roxana Reluz Vela Asistente Técnico Vopak Serlipsa Kees Bergmans Gerente General Ramón Camero Roldan Gerente de Terminales
“Independent” Wholesaler –Retailers Ferush Carlos Fernández Ushella Gerente de Administración y Finanzas HERCO - also same group for “Heaven Petroleum” for Biodiesel Production and Commercialization Samir Abudayeh Giha Gerente de Comercialización y Finanzas Alberto Siles Julio Figueroa Guzmán Ing. Consultor
3. BIOFUELS INDUSTRY Sugar/Ethanol Industry Asociación Peruana de Productores de Azúcar y Biocombustibles (APPAB) Freddy Flores Herrera Gerente General Complejo Agroindustrial CARTAVIO (in La Libertad just north of Trujillo – ETHANOL) Hugo Dávila Trinidad Asesor de Gerencia Biodiesel Industry Heaven Petroleum (see above under HERCO)
4. UNIVERSITIES – BIOFUELS RESEARCH Universidad Nacional Agraria La Molina Javier Coello Part of Biodiesel Research Team - Laboratorio de Energías Renovables, assigned by British NGO in sustainable development “Soluciones Prácticas – ITDG” Ing. Liliana Castillo Sánchez Docente – Departamento Tecnología de Alimentos Universidad Nacional de Ingeniería Diego Cáceres Rolando Final Year Student Petrochemical Engineering
2 Annex 2
Sergio Sedano Final Year Student Petrochemical Engineering
5. AUTOMOTIVE INDUSTRY Asociación de Representantes Automotrices del Perú (ARAPER) Peter Davis Scott Consultor
3 Annex 3 Fuel Ethanol Specifications Fuel Ethanol Specifications
Brazil National Department of Fuels Technical Regulation DNC - 01/91 Specifications for Anhydrous Fuel Ethanol ("AEAC") and Hydrous Fuel Ethanol ("AEHC").
Characteristics Units AEAC AEHC Methods (Anhydrous) (Hydrous) 1. Appearance __ Clear and free of Visual suspended matter 2. Total acids, as acetic acid mg/litre 30 max 30 max MB-2606 (30 p.p.m) (30 p.p.m) (NBR-9866) 3. Electrical conductivity µS/m 500 max 500 max MB-2788 (NBR-10547) 4. Chlorides, as Cl. mg/kg __ 1 max MB-3055 (1 p.p.m) (NBR-10894) 5. Sulphate, as SO4 mg/kg __ 4 max MB-3055 (4 p.p.m) (NBR-10894) 6. Specific gravity at 20°C, kg/m³ 791.5 max 809.3±1.7 MB-1533 (at point of production) (NBR-5992) 7. Specific gravity at 20°C, denatured with kg/m³ __ 808.0±3.0 MB-1533 3% v/v gasoline (at point of sale) (NBR-5992) 8. Material non-volatile at 105°C, (at point mg/litre 30 max 30 max MB-2123 of production) (30 p.p.m) (30 p.p.m) (NBR-8911) 9. Copper, as Cu. mg/kg 0.07 max __ MB-3054 (0.07 p.p.m) (NBR-10893) 10. Iron, as Fe. mg/kg __ 5 max MB-3222 (5 p.p.m) __ 11. Sodium, as Na. mg/kg __ 2 max MB-2787 (2 p.p.m) (NBR-10422) 12. Acidity/alkalinity pH __ 7.0±1.0 MB-3053 (NBR-10891) 13. Residue on evaporation, (at point of mg/litre __ 50 max MB-2053 sale) (50 p.p.m) (NBR-8644) 14. Ethanol content, °INPM 99.3 min 93.2±0.6 MB-1533 (at point of production) (NBR-5922) 15. Ethanol content, when denatured with °INPM __ 92.6 to 94.7 MB-1533 3% v/v gasoline, (at point of sale) (NBR-5922) 16. Gasoline content, mg/litre __ 30 max CNP/DIRAB (at point of sale) (3.0% v/v) No. 209/81
1 Annex 3 Fuel Ethanol Specifications
United States of America
The American Society for Testing and Materials (A.S.T.M.) have established a standard D4806-98 for "Denatured fuel ethanol for blending with gasoline, for use as automotive spark-ignition engine fuel", which is generally accepted throughout the industry. For full details and test procedures, reference should be made to the standard, which is available from A.S.T.M.
1. Ethanol, %v/v: 92.1 min. 2. Methanol, %v/v: 0.5 max. (5,000 ppm) 3. Water, % v/v: 1.0 max. (10,000 ppm) 4 Solvent-washed gum, 5 max. (50 ppm) mg/100ml: 5. Chloride ion, mg/L: 40 max. (40 ppm) 6. Copper content, 0.1 max. (0.1 ppm) mg/kg: 7. Acidity, as acetic 0.007 max. (70 ppm) acid, %w/w: * 8. Appearance: Visibly free of suspended or precipitated contaminants (clear and bright). 9. Denaturant: A minimum of 1.96% v/v, and a maximum of 4.76% v/v of natural gasoline, gasoline components or unleaded gasoline.
* Note: There was an error in the original standard. It stated "mass % (mg/Litre)" which are not the same units, whereas the relevant analytical method specifies "%w/w."
2 Annex 3 Fuel Ethanol Specifications United States of America Fuel Ethanol Ed 75 – Ed 85 (otherwise referred to as “E85”) Specifications
The American Society for Testing and Materials (A.S.T.M.) have established standard D 5798-98a for "A fuel blend, nominally 75 to 85% v/v denatured fuel ethanol and 25 to 15 addition % v/v hydrocarbons, for use in ground vehicles with automotive spark-ignition engines". For full details, test procedures and a review of the significance of the properties specified, reference should be made to the Standard, which is available from A.S.T.M.
Note re classes: The vapor pressure is varied for seasonal and climatic changes, by having three vapor-pressure classes of fuel ethanol Ed 75 - Ed 85. In most states, class 1 fuel is required in the summer months, class 2 in the spring and fall, and class 3 in the winter months. For a detailed table of classes required for each state for each month, reference should be made to the Standard, which is available from A.S.T.M.
Properties Specification for classes Class 1 Class 2 Class 3 1. Ethanol + higher alcohols, 79 74 70 minimum % v/v 2. Hydrocarbon/aliphatic ether, 17-21 17-26 17-30 % v/v 3. Vapor pressure, (a) kPa 38-59 48-65 66-83 (b) P.S.I 5.5-8.5 7.0-9.5 9.5-12.0 4. Lead, 2.6 2.6 3.9 maximum mg/litre (p.p.m. w/v) 5. Phosphorus, 0.2 0.3 0.4 maximum mg/litre (p.p.m w/v) 6. Sulphur, 210 260 300 maximum mg/kg (p.p.m w/w) All Classes 7. Methanol, 0.5 (5000 p.p.m v/v) maximum % v/v
8. Higher alcohols (C3 - C8), 2 (20,000 p.p.m v/v)
3 Annex 3 Fuel Ethanol Specifications
maximum % v/v 9. Acidity, as acetic acid, 50 maximum mg/kg (p.p.m w/w) 10. Solvent-washed gum content, 5 (50 p.p.m w/v) maximum mg/100 ml (p.p.m w/w) 11. Unwashed gum content, 20 (200 p.p.m w/v) maximum mg/100 ml 12. Total chlorine as chlorides, 2 maximum mg/kg (p.p.m w/w) 13. Inorganic chloride, 1 maximum mg/kg (p.p.m w/w) 14. Copper, 0.07 maximum mg/litre (p.p.m w/v) 15. Water, 1.0 maximum % mass 16. Appearance This product shall be visibly free of suspended or precipitated contaminants (clear and bright). This shall be determined at ambient temperature or 21°C (70°F), whichever is higher.
4 Annex 3 Fuel Ethanol Specifications
Canada
Department of National Revenue, (Customs and Excise) Excise Act. Specifications for Denatured Alcohol Grade (D.A.G.) 2-F (anhydrous).
1. Composition: 100 litres of anhydrous ethyl alcohol and 1 liter of unleaded gasoline. 2. Ethyl alcohol, % by volume: 98.75 min. 3. Density, kg/L @ 20°C: 0.789 max. 4. Water content, % by weight (Karl Fischer): 0.10 max. 5. Flashpoint, °C (Tag closed tester): 5 6. Color, APHA: 10 max. 7. Non-volatile matter, g/100ml: 0.0030 max. 8. Acids, g/100ml, as acetic acid: 0.003 max. 9. Copper, mg/L: 0.1 max. 10. Chlorine, mg/kg: 10.0 max.
5 Annex 4 Biodiesel Specifications Biodiesel Specifications
USA ASTM 6751 (July 2003)
Property ASTM Method S 15 Limits S500 Limits Units Flash Point 93 130 min 130 min degree C Water & Sediment 2709 0.05 max 0.05 max vol.% Carbon Residue 4530 0.05 max 0.05 max wt. % Sulfated Ash 874 0.02 max 0.02 max wt. % Kin. Viscosity, 40C 445 1.9 - 6.0 1.9 - 6.0 mm²/sec. Sulfur 5453 15 max 500 max ppm Cetane 613 47 min 47 min Cloud Point 2500 Report Report degree C Copper Corrosion 130 No. 3 max No. 3 max Acid Number 664 0.80 max 0.80 max mg KOH/g Free Glycerin 6854 0.020 max 0.020 max wt. % Total Glycerin 6854 0. 240 max 0.240 max wt. % Phosphorous 4951 10 max 10 max ppm Distillation, T90 AET 1160 360 max 360 max degree C
S15/S500 designation only applies officially to B100 at this time, not to blends
Petrodiesel, D975, plans to use same nomenclature
When applied to blends: – S15 B20 is B20 with total sulfur level less than 15 ppm – S500 B20 is B20 with total sulfur level less than 500 ppm – Companies can market other levels if they want:
S30 B20 would be B20 that has less than 30 ppm
S30 B100 would be biodiesel with sulfur less than 30
1 Annex 4 Biodiesel Specifications
European
Biodiesel Criteria Derv (EN590) Biodiesel (EN14214) (DIN51606) Density @ 15°C (g/cm³) 0.82-0.86 0.875-0.9 0.86-0.9 Viscosity @ 40°C (mm²/s) 2.0-4.5 3.5-5.0 3.5-5.0 Flashpoint(°C) >55 >110 >101 Sulphur (% mass) 0.20 <0.01 <0.01 Sulphated Ash (% mass) 0.01 <0.03 0.02 Water (mg/kg) 200 <300 <500 Carbon Residue (% weight) 0.30 <0.03 <0.03 Total Contamination (mg/kg) Unknown <20 <24 Copper Corrosion 3h/50°C Class 1 Class 1 Class 1 Cetane Number >45 >49 >51 Methanol (% mass) Unknown <0.3 <0.2 Ester Content (% mass) Unknown >96.5 >96.5 Monoglycides (% mass) Unknown <0.8 <0.8 Diglyceride (% mass) Unknown <0.4 <0.2 Tridlycende (% mass) Unknown <0.4 <0.4 Free Glycerol (% mass) Unknown <0.02 <0.02 Total Glycerol (% mass) Unknown <0.25 <0.25 Lodine Number Unknown <115 120 Phosphor (mg/kg) Unknown <10 <10 Alcaline Metals Na. K (mg/kg) Unknown <5 <5
2 Annex 4 Biodiesel Specifications Brazilian ANP 255, 2003
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Annex 5
Visit to the Agroindustrial Complex of Cartavio, La Libertad by William Matthews and Donald O’Connor November 8, 2005
A day trip was organized to the Cartavio Agroindustrial Complex in Trujillo State and the two consultants toured the complex which included the sugar mill, molasses production, bagasse handling and production and the anhydrous ethanol plant. The tour of the Cartavio complex was preceded by an excellent presentation by Sr. Hugo Dávila Trinidad the Management Advisor (Asesor de Gerencia) of Cartavio. His presentation covered the following topics: • The sugar production facilities in Peru – number and location of mills and total production capacity • Molasses production related to sugar production and the molasses supply / consumption balance • Range of molasses prices in Peru and the dynamics of pricing • Total (hydrous) ethanol production at present • Ethanol shipping logistics • Flowsheet/schematic of the Cartavio production complex, including bagasse production to electricity generation, bagasse to paper mill, sugar production and alcohol production. • The extent of protection of the Peru sugar industry and impact on internal pricing of sugar Tour of the Complex The following gallery of photographs summarizes the tour of the Cartavio facilities : Irrigation Pump & Cane fields The entire northwest coastal area of Peru is very dry and depends upon pumping of deep ground water for the crops. Groundwater is diminishing and studies are underway to conserve water through drip irrigation techniques. Trucking to the Mill Although Cartavio has significant cane of its own planted, much of the supply to the mill is from independent cane producers who receive a contractually agreed % share of the gross value of the sugar produced. Cane Crushing and Bagasse Recovery The extraction of the sugar cane juice from the cane involves the production of a significant amount of waste lignocellulosic material – bagasse which is recovered and used for both electric power generation within the plant and sold locally as a raw material for paper production. The plant grinds some 5,000 tonnes/day of cane,
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producing 1,500 tonnes/day of bagasse. The installation of a new boiler utilizing most of the bagasse renders the plant self-sufficient in electricity. Cane Juice Concentration and Recovery of Sugar The cane juice extracted in the cane crushing process is concentrated through evaporation, forming sugar crystals in suspension; the liquid is then passed through centrifuges to separate the sugar crystals from the remaining liquid, molasses.
Ethanol Production Molasses Fermentation With the addition of the appropriate yeast, molasses is fermented to a “beer” with an ethanol concentration of 7 to 8%. Ethanol Distillation and Dehydration The “beer” from the fermentation process is distilled to produce a 95% ethanol 5% water azeotrope also known as hydrous ethanol. Because it is an azeotropic mixture the ethanol in this 95/5 ethanol /water mixture cannot be concentrated further through simple distillation. An extractive distillation process is installed at Cartavio and will be commisioned to further dehydrate the ethanol to 99% using cyclohexane as the extraction agent. This is older technology ; most plants now use molecular sieves to dehydrate hydrous ethanol. The (hydrous) ethanol production capacity is 60,000 litres/day but they were only producing 50,000 litres/day because of a shortage of molasses. Plans are to initiate anhydrous (fuel) ethanol production in mid-2006.
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Annex 6 Area Devoted to Oil Palm in Peru Palm production requires a permanent diversion of the land to the crop. Three to four years are required between planting the trees and the first production crop is obtained and then many more crops are obtained from the tree. Beginning in 1991, the United Nations Office on Drug’s and Crime began to undertake projects in Peru to convert land from cocoa production to palm production. A number of projects have been successfully undertaken and the area dedicated to palm production is growing. The current area devoted to palm is shown in the following figure.
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There is the potential to increase this area by a factor or two or three, providing not only the potential for increased farm income in rural regions but also employment at the crushing facilities and potentially the biodiesel production plants. There is also the existing potential to offset palm oil imports for current applications in addition to the potential biodiesel market. Palm is produced on the east side of the Andes, an area where petroleum imports can be difficult and costly to supply. The production of a local source of fuel for diesel trucks could have additional benefits such as reducing the transportation subsidy required for diesel fuel in the region, a more secure local supply as well the economic benefits from the production of palm oil and biodiesel.
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