Economics of Navy's Green Fuels
According to the Navy officials, going green is not just about natural security. It is about strengthening national security, combat capability and assuring mobility. Towards that end the goal of Navy is to be an early adopter of new technologies and fuels. In my previous post I mentioned about Navy's Key Achievements in Biofuels
Both the Navy and the Air Force have launched multimillion-dollar test programs to demonstrate that their aircraft and ships can run on blends of alternative fuels and conventional oil. They continue to certify their vehicles to operate with these green fuels.
So far, both services have made excellent public relations campaigns. They demonstrated how well their vehicles run on these green fuels. But when it comes to the economics both services are quite silent. They assume that they will give the right signal to investors to make the necessary investments so that when produced in large enough quantities these green fuels will be no more expensive than conventional fuel. I do not share their wishfull thinking but I do hope that I am proven to be wrong.
Here is some of the economics for the Navy acquired green fuels.
For the companies involved it seems that this green fuel push is a very lucrative business.
Based on its announced goals, Navy is estimated to need 8 million barrels of biofuels (236 million gallons), 4 million of each of F76 and JP5 by 2020. Similarly the Air Force has set a goal of acquiring half of its annual domestic aviation fuel requirement via alternative blends derived from locally sourced feedstocks. Estimated requirement for the alternative fuel amounts to 400 million gallons of JP8 by 2016.
Until mid 2010, DESC has procured about 450,000 gallons of bio-derived fuels for the services’ testing purposes. The challenge is how to procure these fuels in mass quantities. DESC typically awards one year contracts and only has the authority to award five-year contracts with up to five, one year option. But because the alternative fuels market is just starting to develop manufacturers are looking for much longer term contract terms, probably 15-20 years, to give them the time and incentive to build the infrastructure required to produce these fuels. Environmental legislation is another issue. Under section 526 of the Energy Independence and Security Act, federal agencies can only procure alternative fuels that do not produce more lifecycle greenhouse gases –from the time the products are extracted from the ground until they are consumed by a vehicle- than would be produced using petroleum based products. (Sara Moore, Powering Up, Loglines, July-August 2010, 24-29).
I think this contract length is not a big problem. If DOD continues to pay multiples of conventional fuel per gallon it will always find a company that will produce large amounts green fuels. Why? Because 15 year contract can be squeezed into 5 years if per gallon fuel price high enough. If the Navy energy goals are really achieved then extraordinarily high fuel costs might be justified. Even then the government’s job should not be to pick the winners. Let life cycle economics and environmental constraints pick the winners.
In any case one thing is clear: in the next decade more tax payers money will evaporate in the name of green military fuels.