Biofuels hype ignores challenges: Rabobank

Australia's biofuels industry - which has a number of Western Australian entrants - faces big challenges to becoming a strong, stable, cost-effective source of alterative energy.

According to Rabobank's Global Focus Report on Biofuels, the buzz surrounding the industry has changed from a murmur to a roar as the price of crude oil has continued its upward climb during 2005 and 2006.

The report says the future of a sustainable biofuel industry in Australia will depend on a number of factors including consumer acceptance, motor industry and fuel industry cooperation, the price of oil, the price of feedstocks and by-products, the US dollar/Australian dollar exchange rate and plant construction and operation costs. Chief among these, however, will be the level of long-term government support provided to the industry and the availability of feedstock.

"In spite of high oil prices, any investment in biofuels in Australia or overseas remains heavily exposed to the policy and feedstock supply environment in which the facility is operating," the report says.

Report author and Rabobank analyst Ingrid Richardson says overseas experience has shown that strong, long-term government support has been integral in enabling infant biofuel industries to become established.

"It is clear from the experience of the EU, US, Brazil and a number of other countries that a biofuels industry is unlikely to emerge without strong government support over many years," she says.

Ms Richardson says mandates or targets which impose minimum levels of biofuels to be used in fuel have proved particularly popular in the EU, US and Brazil as a means of ensuring a market for biofuels through the creation of compulsory demand.

"At this juncture, it looks unlikely that the current federal government will support a biofuels inclusion mandate in Australia," she says.

Ultimately, long-term government support - in terms of policy to encourage both consumption and production increases - is a critical issue which must be addressed between proponents of the industry and government, Ms Richardson says.

Availability of cheap and plentiful feedstock is another significant factor impacting on the future competitiveness of the biofuel industry, according to the report.

"In Australia it is unlikely that production of grains, oilseeds and sugar can be increased significantly enough to support the biofuel, human consumption, export and livestock markets," Ms Richardson says.

"In order to be in business in the long-term, it will be essential for biofuel plants to ensure consistent access to low-priced feedstocks, in addition to off-take agreements for the biofuel that more than cover the cost of production."

For this reason, one of the areas of growing investigation and investment is the production of biofuels from alternative, non-food sources such as cellulose, often termed 'second generation' biofuels.

Although cellulosic raw material is derived from readily and cheaply available waste products, cellulosic ethanol production is not yet commercially viable on a large scale, the report says.

In the meantime, Ms Richardson says, the global growth of conventional 'first generation' biofuels - driven by concerns about rising oil prices, energy security, pollution reduction and regional development - is fuelling demand for a range of agricultural commodities.

"This heightened demand is having a positive impact on farm gate prices for these commodities in Australia," she says.

"Whatever eventuates with our local biofuel industry, Australian farmers, particularly sugar and grain growers, do stand to benefit from the worldwide biofuels boom thanks to stronger demand and potentially higher commodity prices," she says.