The US is the fastest expanding market in the world for biologically derived renewable fuel, according to Ernst & Young’s quarterly "Biofuels Country Attractiveness Indices."

According to the Indices, although high food prices threaten to harm the commercial viability of the industry in what has been dubbed the ‘food versus fuel’ debate, investment for inedible feedstock technologies continues to increase, with the US being the front runner. The attractiveness of the US for investment in biofuels was given a further boost last month by the US House of Representatives, which announced that it plans to provide billions of dollars of tax breaks and incentives for renewable energy.

US Expands at a Pace
Jonathan Johns, Head of Renewable Energy at Ernst & Young, says investment in the US biofuels industry shows no sign of abating. “The increased investment in biofuels in the US is being driven by its attractive regulatory environment, support mechanisms, and project pipelines, which are unrivalled,” he says.

“It has a strong development pipeline in ethanol production and the world’s largest project pipeline for biodiesel, which should produce 450 million gallons by 2008, compared to 136.5 million gallons in 2006. The sheer size of the pipeline provides investors with a greater choice in both operating assets and project development opportunities.”

He adds, “In addition, recently proposed legislation would require US refineries to blend a mandatory minimum of 1.25 billion gallons of biodiesel per year by 2012, and although not passed, it sends a very positive message to investors about future demand for biofuels in the US.”

These factors have strengthened the US’s position at the top of the All Biofuels Index and given the US a significant four-point lead over its closest rival Brazil.

German Market in Distress
In some European countries, the picture for biofuels looks less than rosy in comparison. The second quarter of this year saw confirmation that the world’s largest biodiesel market, Germany, is in distress as several of its biodiesel refiners announced they are operating at 50% capacity.

Johns comments, “Germany was once the shining light for investors, buoyed by its exemption on excise duty for all biofuels. However, stepped tax increases on biofuels, which are set to reach similar levels of mineral oil by 2012, rising food stock prices, and cheaper imports are reducing the commercial viability of biofuels.

“The result is an uncertain market where some players will face financial difficulty and the project pipeline will be significantly reduced.”

UK Pioneer Carbon and Sustainability Reporting
The UK score in the All Biofuels Index remained steady at seventh position, but until the implementation of the Renewable Transport Fuels Obligation (RTFO) in 2008, current incentives, which provide tax breaks on capital expenditure and a GBP 0.20 reduction in fuel duty, are not sufficient to develop the UK biofuels market beyond niche supply.

With the recent launch of the Carbon & Sustainability (C&S) consultation on the RTFO, the UK government has taken a lead globally in pioneering a mechanism that from 2011 could differentiate incentives received by different biofuels. In the initial phase of the RTFO (2008 – 2011), only data will be collected and the incentives received shall remain unaffected.

Johns comments, “The UK Government’s objective with the consultation is laudable, as it’s likely to bring greater rewards for biofuels suppliers who can improve the efficiency of their biofuels production, but this should not act as a barrier to rapid deployment of biofuels capacity.”

The Next Generation
Johns believes that overall the biofuels industry faces many challenges from the rising demand for agricultural commodities. However, he says that investment in second generation biofuels is the future. “Second generation biofuels are derived from by-products that we cannot eat such as switchgrass, corn and wood chips, and are less exposed to the price fluctuations of the first generation biofuels, which are derived from food crops,” he concludes.

Other Country Highlights Include:

    * Brazil sees mounting pressure to stimulate further export potential, as the headroom in the domestic market is reaching its limits following record sugarcane harvest and production outputs.

    * Spain’s score has risen closer to that of France and Germany as its newly instated mandatory blending targets of 1.9% biofuel content by 2008, 3.4% by 2009 and 5.83% by 2010 are expected to increase demand, prompting investment in new production capacity.

    * Sweden has moved into sixth place, mainly due to the rapidly growing national demand for ethanol, which is set to increase further as the next phase of the distribution obligation will take effect this year.

    * China’s overall score remains the same despite the drop in its ethanol score, caused by the fact that no more grain-based ethanol sites will be granted permits in response to continuing rises in food crop prices.

    * The Netherlands is a new entrant into the All Biofuels Index top 15 with its position as Europe’s fuel hub expected to help it add over 1.2 million tons per annum of production capacity over the next two to three years.

    * India drops one place in the index as newly implemented support mechanisms are insufficient to stimulate significant growth in either biofuels technology.

    * Australia drops by five points over doubts surrounding the government’s ability to enforce blending targets and the vulnerability of the agricultural sector to droughts. Actual biofuels production was 13 million liters per annum in 2006 against a target of 82–124 million liters per annum.