ETHANOL MARKET ANALYSIS

Market Challenges And Opportunities

Ethanol Market Drivers:

Government subsidies and tax rebates: Government subsidies and tax rebates are significantly contributing to the adoption of ethanol as a biofuel and driving the growth of the ethanol market. Various governments around the world are providing production subsidies and investment tax credits to support the local ethanol industry. For instance, the U.S. government supports ethanol producers by offering a tax credit of U.S $0.45 per gallon of ethanol blended into gasoline. This subsidy lowers the input costs for biofuel producers and makes ethanol price-competitive with conventional gasoline. As a result, ethanol production in the U.S. has more than quadrupled since 2000 and currently stands at over 16 billion gallons annually according to the Renewable Fuels Association.

In addition, many countries offer generous blender tax credits to oil companies or importers that blend ethanol with gasoline. For example, in Brazil, the government exempts ethanol blenders from paying federal and state fuel taxes, which makes ethanol blends more cost-efficient than gasoline. Due to this rebate, flex-fuel vehicles that can use any blend of gasoline and ethanol now constitute over 90% of new car sales in Brazil. The country has thus emerged as the second largest producer of ethanol after the U.S. Such tax rebates and production incentives help offset the slightly higher costs associated with ethanol compared to gasoline and its infrastructure, thereby encouraging higher blending rates. For instance, the Renewable Fuel Standard (RFS) is a federal program in the U.S. that requires the blending of renewable fuels into transportation fuel. The program mandates the blending of 36 billion gallons of ethanol into gasoline by 2022.

Rising fossil fuel prices: Rising fossil fuel prices have significantly impacted the growth of the ethanol market in recent years. As the prices of gasoline and diesel continue to climb higher due to global factors like supply constraints and geopolitical issues, ethanol is emerging as a more economically viable and sustainable alternative fuel source for the transportation sector.

Ethanol is mainly produced from corn and sugarcane, which are abundant and renewable resources. It can be blended with gasoline up to certain percentages and used as fuel without requiring infrastructure changes to vehicles. This makes ethanol appealing as it helps displace the need for pure fossil fuels on one hand while being compatible with existing engines on the other. Furthermore, ethanol burns cleaner than gasoline and has substantially lower greenhouse gas emissions over its full lifecycle. For instance, According to the U.S. Department of Energy's Argonne National Laboratory, U.S. corn ethanol has been found to have 44%–52% lower greenhouse gas (GHG) emissions than gasoline. A study published in Biofuels, Bioproducts and Biorefining, also revealed a 23% reduction in corn ethanol's GHG emission intensity (CI) between 2005 and 2019.

Ethanol Market Opportunities:

Developing charging infrastructure: Developing charging infrastructure presents a great opportunity for the ethanol market to expand. As concerns over climate change intensify, governments and automakers are actively promoting the adoption of electric vehicles which require charging stations. This growing electric vehicle market means that demand for efficient renewable energy to power these charging points will also rise in the coming years. Ethanol produced from sustainable sources like agricultural waste has the potential to meet some of this increasing energy demand.

Several countries and states have already established plans to build out public fast-charging networks along major roadways and in cities/towns to encourage electric vehicle use. For example, the Biden administration has earmarked US $7.5 billion for developing a national electric vehicle charging network as part of the 2021 infrastructure bill passed in the U.S. Additionally, the European Union recently proposed rules requiring member countries to install public charging points every 60 kilometers on major roads by 2025. As more charging plugs come online, opportunities will open up for ethanol and other renewable fuels to provide clean electricity and power these chargers. Utilities and fuel retailers and looking adapt their existing infrastructure e.g. gas stations to accommodate electric vehicles. Ethanol produced from sources like corn stover or sugarcane waste offers a sustainable drop-in replacement for gasoline that could work in today's engines and distribution networks with minimal modifications. For instance, as per the International Energy Agency's 2021 report, clean energy investment needs to increase by almost 50% annually until 2030 in order to put the world on a path towards net zero emissions by 2050.

New product launches: New product launches in the bioethanol space could provide significant opportunities for growth in the future. As concerns around sustainability and carbon emissions continue to increase, consumers and business alike are looking for lower-carbon alternatives to fossil fuels, especially in the transportation sector. Ethanol already plays an important role as a gasoline additive and octane booster and is blended into fuel in many countries around the world. However, the market remains dependent on corn and sugarcane as primary feed stocks which raises concerns about land use. Second-generation technologies that utilize agricultural residues, municipal solid waste or purpose-grown energy crops provide options to alleviate these pressures while still expanding ethanol production. Several firms have pilot and commercial-scale facilities coming online in the next few years that will produce cellulosic ethanol made from non-food biomass. For instance, according to recent data released by the Department of Energy, greater blend rates like E30 can provide meaningful carbon reductions of around 35-50% compared to traditional gasoline and help meet ambitious government targets for lowering emissions from the transportation sector.

Ethanol Market Restraints:

High cost of EVs: The high cost of electric vehicles (EVs) is significantly restraining the growth of the ethanol market. Ethanol is a biofuel that is produced from plant materials like corn and sugarcane, and it is blended with gasoline to power traditional internal combustion engine vehicles. However, as EVs emerge as a more viable and environment-friendly alternative to gasoline vehicles, consumer demand for ethanol blended fuel is expected to decline steadily over time.

Most EVs currently offer superior driving range and performance compared to similar gasoline counterparts, but their upfront costs are substantially higher. For example, according to the United States Department of Energy database, the average price of a new electric car in 2022 was around US$66,000 compared to US$48,000 for a similar gasoline-powered car. The higher battery costs and lack of economies of scale in EV production continue to keep prices elevated at the consumer end. While tax credits and other incentives are helping bridge the price gap to some extent, EVs will remain relatively more expensive for the average consumer in the near future. For instance, according to the United States Energy Information Administration, the U.S. doubled its market share to 20% by the end of the decade as recent policy while Europe maintains its current 25% share. The share of electric cars in total sales has more than tripled in three years, from around 4% in 2020 to 14% in 2022.

Counter balance: Encourage the development and adoption of flex-fuel vehicles (FFVs) that can run on high-ethanol blends like E85. Lobby for incentives that promote FFVs, which could maintain or even increase demand for ethanol-blended fuels.

Low charging infrastructure: The lack of widespread charging infrastructure is one of the major bottlenecks restraining the growth of the ethanol market. With insufficient public charging stations available, consumers are hesitant to switch to ethanol-powered vehicles because of range anxiety. This mismatch between evolving consumer demand and slow expansion of fueling options continues to limit the adoption of new ethanol-based technologies.

While the number of electric vehicles on roads is steadily rising globally, the charging infrastructure development has failed to keep pace. Several studies show that consumers will not switch to new fuel technologies until charging is as convenient as refueling gasoline.

On the manufacturer side as well, lagging charging infrastructure poses business risks. Automakers are reluctant to heavily invest in new ethanol models due to uncertainty over fuelling needs being adequately met. The protracted timelines for building out nationwide public networks have discouraged both consumers and businesses from committing to this alternative pathway, stifling the industry's transformation. According to the U.S. Department of Energy, studies estimate that the U.S. will need about US$40 billion of infrastructure investment to support 15 million EVs expected on roads by 2030 under the current policy scenarios. However, private capital alone may not be sufficient to achieve these targets in time. Unless governments proactively focus on accelerating the roll-out of charging amenities through incentives and mandates, it will be challenging to unlock ethanol's potential to revolutionize transportation.

For instance, according to the International Energy Agency, in 2021, there were approximately 1.2 million public EV chargers globally. However, this network needs to grow exponentially to meet the target of 50% of new car sales being EVs by 2030 in many countries.

Counterbalance: Invest in and advocate for the expansion of ethanol blending infrastructure at existing fuel stations, making it more convenient for consumers to choose ethanol-blended fuels.