Cost-effectiveness Analysis of Algae Energy Production in the EU

The transition towards renewable energy is being largely driven by the increase in global energy demand, challenges to energy security, and climate change. In the EU, fossil fuels constitute about 98% of energy consumption within the transportation sector. While biofuels are seen as a possible substitute for fossil fuels, having environmental, economic, and political benefits, first generation biofuels have come under fire<!–[if supportFields]> XE “fire” <![endif]–><!–[if supportFields]><![endif]–> because of their negative effects, including deforestation<!–[if supportFields]> XE “deforestation” <![endif]–><!–[if supportFields]><![endif]–>, water and soil degradation, and threats to food security. The European Environment Agency, doubting their ability to satisfy the EU’s energy needs, has proposed to suspend biofuels until a study has been conducted that weighs the costs and benefits of their production and utilization. These criticisms of first generation biofuels do not, however, apply to other potential biofuel alternatives and their external environmental benefits. In this study, Kovacevic and Wesseler (2010) completed a cost-effectiveness analysis of the possible utilization of algal biomass as a biofuel source. They took into account externalities, including emissions, impact on food prices, and pesticide<!–[if supportFields]> XE “pesticide” <![endif]–><!–[if supportFields]><![endif]–> use. They concluded that the development of biotechnology and the elevation of crude oil prices would lead to algal biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> outcompeting other fuels, but a substantial capital investment will be necessary to make this a reality.—Karen de Wolski
Kovacevic V., Wesseler J., 2010. Cost-effectiveness analysis of algae energy production in the EU. Energy Policy 38, 5749–5757.

Kovacevic and Wesseler sought to quantify both the direct financial and the external cost-effectiveness of producing algae as a biofuel source in the EU. While microalgae are seen as having great potential in this arena, one of the largest obstacles is capital investment required to develop the necessary biotechnologies.
          The two characteristics of microalgae most appealing for utilization as an energy source are their high biomass yield relative to other terrestrial plants, and their high utilization of CO. Microalgae’s efficient conversion of solar energy and utilization of water, carbon, and nutrients leads to a yield 7–31 times higher than palm oil, the best oil-yielding terrestrial feedstock. Recent interest in microalgae has led to an array of research, with studies indicating a vast spectrum of possible yields dependent on various factors and conditions. While biotechnology advancement is seen as a major pathway for improving yield, Kovacevic and Wesseler indicate that this development is not sufficient. Rather, systems must be optimized for all growing conditions if lipid yields are to be high enough on a large scale. Currently, the only successful mass culture productions of microalgae have been achieved with species tolerant to extreme conditions, a limitation that will need to be overcome if microalgae are to be a major fuel source.
          In this study, the researchers compared algal biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> with rapeseed biodiesel<!–[if supportFields]> XE “rapeseed biodiesel” <![endif]–><!–[if supportFields]><![endif]–> and fossil fuels in the EU-25 transportation sector. Annuities (expressed per GJ of fuel energy delivered to the gas station) were used to aggregate the private and external costs and benefits of each fuel option for the cost-effectiveness analysis, and represented average annual cost to society accounting for production costs, environmental benefits and costs, energy security, and food price impacts. The European Commission’s established biofuel target of 10% vehicle biofuel use by 2020 was used as the time frame and production scale for the comparison. This proposal projects 1.48 EJ of biofuel utilization by the target year. Because discount rates for biofuels vary between 3% and 8%, 5% was chosen as the social discount in this study, although 2% and 8% were also applied. Discount rate is important because high discount rates would probably favor fossil fuels over biofuels because biofuels require higher investment.
          The researchers calculated the private production costs of the various fuels in question by choosing certain growing conditions and production processes. They assume favorable conditions (high solar radiation, optimal climate, low altitude, proximal seawater source) as would be found in southwestern and eastern Spain and southeastern Italy. They define three cases: a base case, a low-yield case, and a high-yield case. Kovacevic and Wesseler calculated land requirement through previous microalgal studies, and accounted for the relatively low opportunity cost of land use for algal production. They assumed a basic production unit of 400 ha with paddle wheel mixing, pure CO2 mixing, and anaerobic<!–[if supportFields]> XE “anaerobic” <![endif]–><!–[if supportFields]><![endif]–> digestion<!–[if supportFields]> XE “anaerobic digestion” <![endif]–><!–[if supportFields]><![endif]–> for nutrient recycling, with carbon supplied from nearby coal<!–[if supportFields]> XE “coal” <![endif]–><!–[if supportFields]><![endif]–> plants. Water supply is assumed to be from seawater sources, with replenishment from freshwater. The cost of the pipe network for water transport and pumping is based on other known engineering projects. The transesterification process of biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> production is assumed to be equal to the rapeseed biodiesel<!–[if supportFields]> XE “rapeseed biodiesel” <![endif]–><!–[if supportFields]><![endif]–> process. The researchers also calculated the cost of fuel distribution, considering the differences in energy content between diesel and biodiesel.
          Rapeseed biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> production costs were generated based on current rapeseed growth and processing. Germany, France, Poland, and the UK are the largest EU rapeseed producers, constituting 72% of total EU rapeseed production. The projected 30% yield improvement by 2020 was accounted for, and maximum land utilization by rapeseed oil was calculated to be 29.1 Mha, as compared to 1.35 Mha for microalgae. Fossil fuel production costs were also calculated based on gas station prices and taxes. Three cases were estimated due to the volatility of crude oil prices, and elasticity between crude oil and fuels price were applied for diesel and gasoline<!–[if supportFields]> XE “gasoline” <![endif]–><!–[if supportFields]><![endif]–>.
          The researchers next calculated the social cost of fuel utilization by considering external costs, especially environmental effects. These included costs of CO2, methane<!–[if supportFields]> XE “methane (CH4)” <![endif]–><!–[if supportFields]><![endif]–>, nitrous oxide<!–[if supportFields]> XE “nitrous oxide (N2O)” <![endif]–><!–[if supportFields]><![endif]–>, volatile organic compounds, particulate matter, sulfur dioxide, and nitrogen<!–[if supportFields]> XE “nitrogen” <![endif]–><!–[if supportFields]><![endif]–> oxide emissions. In order to calculate greenhouse gas (GHG) emissions, three drivers were considered: land use change (only applicable for biofuels), fuel distribution and dispensing, and fuel combustion (only fossil fuels). The effect of land use change on GHG emissions accounted for changes in nitrogen emissions from fertilizers, changes in methane emissions from livestock, and cropland conversion. Conversion of grassland<!–[if supportFields]> XE “grassland” <![endif]–><!–[if supportFields]><![endif]–> for rapeseed cultivation increases GHG emissions because of fertilizer use, while conversion of cropland to algal ponds decreases GHG emissions. Additionally, energy input for processing algal and rapeseed biodiesel<!–[if supportFields]> XE “rapeseed biodiesel” <![endif]–><!–[if supportFields]><![endif]–> production were considered in the calculation. Distribution and dispensing costs were based on previous estimates, and applied for all fuel types. GHGs from combustion were calculated only for fossil fuels because they release carbon.
          Next, the impact on food prices of the different fuel types was considered. It was assumed that microalgae biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> would have no impact on food prices because of their small land requirement and ability to use marginal land. Rapeseed requires a significant amount of land, and it was estimated that it would necessitate reallocating 70%, 55%, and 54 % of total wheat, barley, and maize<!–[if supportFields]> XE “maize” <![endif]–><!–[if supportFields]><![endif]–> acreage respectively across Germany, France, Poland, and the UK. The researchers also account for the costs of fertilizer<!–[if supportFields]> XE “fertilizer” <![endif]–><!–[if supportFields]><![endif]–> and pesticide<!–[if supportFields]> XE “pesticide” <![endif]–><!–[if supportFields]><![endif]–> leaching, comparing cost of purchase to theoretical environmental cost. Because energy security has become a major issue surrounding oil dependency, security of supply for biofuels was derived from the EC Biofuels progress report (2007).
          The entire analysis is presented as a comparison of annuities. The social cost for the base case of algal biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> is 52.3 ϵ/GJ, with significant cost differences for the alternative cases. Rapeseed oil and fossil fuel had total social costs of 36.0 and 15.8 ϵ/GJ respectively. However, the private costs dominated the cost structure of algal biodiesel production, while the externalities constitute a larger percentage of total cost for rapeseed and fossil fuels. The social cost of fossil fuels increases significantly when crude oil prices rise ($100–$200 /barrel). The private costs of both biofuel types are largely due to biomass production costs, with carbon supply and water supply being the primary factors. Food prices impact and GHG emissions are the greatest external costs of rapeseed biodiesel<!–[if supportFields]> XE “rapeseed biodiesel” <![endif]–><!–[if supportFields]><![endif]–> and fossil fuels, while only algal biodiesel has external benefit in GHG emissions mitigation.
          Kovacevic and Wesseler conclude that fossil fuels have the lowest private utilization costs while algal biodiesel<!–[if supportFields]> XE “biodiesel” <![endif]–><!–[if supportFields]><![endif]–> has the highest cost. This makes sense given the current infrastructure supporting fossil fuel energy production. Rapeseed oil is also relatively supported within the current fuel system. However, there are scenarios in which algal biodiesel can outcompete rapeseed biodiesel<!–[if supportFields]> XE “rapeseed biodiesel” <![endif]–><!–[if supportFields]><![endif]–> and fossil fuels, even with high production costs. This change would come as a result of biotechnology development, increasing crude oil prices, and high carbon pricing. Algal biodiesel has significantly lower external costs than the other analyzed fuel types. It is therefore concluded that environmental costs can be game changers when examining social costs. If environmental impacts are highly prioritized and enable support for biotechnology development through policy change and investment, microalgae could become the lowest cost fuel to society. 

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