Sunday, November 20, 2011

LMI Study on DoD Use of Renewable Fuels

A new report entitled “Opportunities for DoD Use of Alternative and Renewable Fuels: FY10 NDAA Section 334 Congressional Study” conducted by LMI was released recently.

This LMI study is different in quality from another LMI study (in 2007) entitled Transforming the Way DoD Looks at Energy: An Approach to Establishing an Energy Strategy,” which I described as Much Ado for Nothing. The 2011 report is much better, but not as much one would expect from a $419,592 price tag.

The report assesses renewable fuel supply (anticipated feedstock availability, production capacity and production) and demand (projected fuel quantities based on the military Services’ requirements and plans) through 2020.

Here are its major findings:

Increased DoD renewable fuel use helps advance U.S. strategic energy security interests, achieve the Services’ goals, and gain some limited military utility (such as lower freeze points, cleaner combustion).

At present, these fuels command a price premium, but it is anticipated to decline significantly as the market develops. Despite that, the Services’ renewable fuel goals could still impose $2.2 billion in additional estimated annual fuel costs by 2020.

The Services’ 2020 goals for renewable jet fuel alone far exceed even the high-end projected domestic supply.

 DoD would require more than 40 percent of the total projected U.S. drop-in renewable fuel supply (regardless of fuel type) in 2020, just to meet the military Services’ stated demand for 745 million gallons.

Camelina appears to be a promising renewable feedstock for producing hydrotreated renewable jet (HRJ) fuel, but annual production capacity for camelina-based HRJ is projected at only 68–98 million gallons by 2020.

Third generation renewable fuels production systems, such as photosynthetic algae, are unlikely to supply significant quantities of feedstock oil by 2020.

The additional costs and potential adverse effects of creating a new DoD commodity class outweigh the potential benefits.

Many of these fuels are expensive to produce, and how rapidly their costs will drop over time is unclear. Drop-in renewable fuels are expected to cost more than their petroleum counterparts: the estimated price premium will be between $1.43 and $5.24 per gallon in 2015. Given the Services’ goals, mid-range estimates suggest that DoD’s drop-in renewable fuel use would represent an additional annual fuel cost of $865 million by 2015 and $2.2 billion by 2020, which represents a 10– 15 percent increase over just conventional petroleum fuels.

Without a medium-term guaranteed demand and price floors for renewable fuels, many renewable fuel products lose their cost competitiveness (even with incentives) because of the short 5-year period that investors need to recover their capital investment costs.

In conclusion, increased DoD renewable fuel use contributes to U.S. national security interests, achieves Service energy security goals, and offers some limited military utility. However, the projected supply of drop-in renewable fuels will not be sufficient to meet anticipated DoD demand for renewable jet fuel products. Also, price premiums for drop-in renewable fuels and the budgetary implications associated with meeting renewable fuel goals may be considerable. Further action by DoD and Congress could help to promote renewable jet fuel production and address the price premiums necessary for the Services to achieve their renewable fuel goals.

Almost all these conclusions are supported with convincing (although some production cost data are outdated) calculations. What is missing is a thorough comparison, a chart or table, with conventional fuel.

What the report also does not say or question is the fact that the DOD will never ever be short of fuel supply. SO, all these fuel supply security arguments are void. You will have the same problems with nonpetroleum alternative liquid fuels as well. If the aim is to reduce the amount of imported oil, then the US should simply open Outer Continental Shelf to exploration. OR better produce liquid fuels from shale gas. If the aim is to generate income for renewable energy industry then the DOD is right. It should continue spending millions of tax payers’ dollars.

The exaggerated focus of DOD on biofuels as if it is a remedy is nonsense. Subsidising them is even bigger nonsense. Here is what I suggest. Give the companies a guarantee to buy large amount of biofuels at the price of conventional petroleum based fuel per gallon in the next 10 years, whatever the conventional fuel price may be in the future.  If they can produce cheaper, they can pocket all the difference as profit. Let them take some risk. Guaranteed business over many years with large profits is a common practice in countries where corruption is widespread.

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