Monday, December 20, 2010

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.[1] 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.

In 2009 the Naval Air Systems Command has asked for 40,000 gallons of Hydrotreated Renewable HRJ-5 only (JP-5 jet fuel from bio-based feedstocks) in a request for proposal issued by the Defense Energy Support Center (now called DLA Energy). Initial laboratory analyses and rig testing is planned to consume 1,500 gallons; the static engine tests, 16,500 gallons; and the flight tests, 22,000 gallons.
On 31 August 2009 the DLA Energy awarded to Sustainable Oils $2,664,000 for delivery of 40,000 gallons (base quantity) and 150,000 gallons (option quantity - to be exercised at the Government's option) of Hydrotreated Renewable HRJ-5 only. This makes $67 per gallon. Another source says the DLA Energy awarded in early 2010 a $2.7 million contract to Sustainable Oils of Seattle and Bozeman, Montana, for this 40,000 gallons of camelina-based fuel. This makes $67.5 per gallon. For camelina, the current price tag is said to be 30-something dollars per gallon.[1]
On 1 September 2009, DLA Energy awarded to San Francisco-based company Solazyme a contract worth $223,500 for delivering 1,500 gallons of algae derived jet fuel (HRJ-5) for testing and certification by the US Navy. This makes $149 per gallon.
On 24 September 2009, the Navy paid to Solazyme $424 per gallon for the acquisition of 20,055 gallons of renewable algae derived F-76 Naval distillate fuel for use in Navy ships. The contract price included Research and development costs. The cost of the fuel is now estimated to be around 60- some dollars a gallon. [1]
Associated Press news on 29 October 2010 reported that the U.S. Navy in September 2010 ordered more than 150,000 gallons of algal derived HRF-76 fuel for the U.S. Navy's testing and certification program in 2010-2011. But Solazyme’s announcement didn’t mention anything about the money. Meanwhile in August 2010 the U.S. Department of Energy - whose goal is to scale up production of commercially viable biofuels - awarded the company $21.8 million under the American Recovery and Reinvestment Act to expand its biggest production facility at Cherokee Pharmaceuticals in Riverside, Pa.

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.

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