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Tuesday
Apr022013

The economics of biofuels

Ensus, a manufacturer of bioethanol from wheat, has decided to suspend production at its plant in the North-east due to the poor harvest last year. How long this situation will continue for is anyone's guess but, somewhat remarkably, all of the plant's 100 workers are going to continue on full pay until the situation is resolved. Given that the winter wheat crop looks as though it may be in trouble too, that may be some time.

Interestingly, the Ensus plant seems to have been through this situation before.

The plant started operations in February 2010 but shut for 15 months from May 2011 until August 2012, also due to adverse market conditions.

So if I understand correctly, the plant has only actually operated for about 60% of the time since it was commissioned. The rest of the time it has been sitting idle and, since it re-emerged at the other end of the last shutdown, its staff may well have been retained then as well.

Reading between the lines then, the actual manufacture of biofuels seems to be somewhat peripheral to profits and losses of the Ensus factory. I'm left thinking that the biofuels industry must have some pretty interesting economics. Can anyone shed any light on this?

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Reader Comments (34)

Ensus is privately owned. No public reports so. It is hard to know what is going on. They must be losing money hand over fist.

Apr 2, 2013 at 9:12 PM | Unregistered CommenterRichard Tol

Details of the original financing are here. It would be interesting to see recent accounts to see if it is possible to work out who is providing loan facilities these days.

Apr 2, 2013 at 9:15 PM | Registered CommenterBishop Hill

They won't be losing money...far from it. Thanks to generous subsidies I'd wager your left testicle that Ensus will be racking the money in hand over fist!

A real company with real people's money on the line wouldnt spend the majority if its time creating nothing of value and thus making no money WHILE paying its employees to play golf and help little old ladies to cross the road. However, through in green subsidies and anything is possible I guess?

Regards

Mailman

Apr 2, 2013 at 9:18 PM | Unregistered CommenterMailman

......Ensus is owned by U.S. private equity funds the Carlyle Group and Riverstone

Think that just about sums things up.

In other news James Hansen has quit his job to fight the government:

http://www.businessinsider.com/james-hansen-climate-activist-retires-nasa-2013-4

Apr 2, 2013 at 9:22 PM | Unregistered CommenterPaul

"The plant can also produce up to ... 300,000 tonnes of carbon dioxide." Have they invented a perpetual motion machine? Is that how they pay their wages?

Apr 2, 2013 at 9:30 PM | Unregistered CommenterIan_UK

@Bishop Hill
That links to the plan. Reality is different.

@Mailman
The cost of construction was 242 mln pound, 2 mln of which was a subsidy.

They get price support for their products, but only if they make and sell things.

Apr 2, 2013 at 9:31 PM | Unregistered CommenterRichard Tol

Richard,

Just like no one builds windmills out of the goodness of their hearts, no one gets in to biofuels to save the planet ;)

Green subsidies will have been a vital component of their decision making tree to go ahead with building the site.

Mailman

Apr 2, 2013 at 9:36 PM | Unregistered CommenterMailman

See here -- http://www.rationaloptimist.com/blog/quintuple-whammy.aspx

The chairman of Ensus politely took me to task for writing this article, saying that their business plan is predicated on selling as a byproduct "brewer's grains" for high-protein cattle feed, of which there is a world shortage. To which the answer surely is: if there's such demand, then you don't need a subsidy.

Apr 2, 2013 at 9:38 PM | Unregistered CommenterMatt Ridley

1st March 2010

Annual production of the new £250 million Ensus biorefinery on Teesside is expected to meet about a third of the UK requirement under the Renewable Transport Fuels Obligation, which requires 3.5 percent of all transport fuel to come from biofuels in 2010-11. The saving in carbon emissions will be equivalent to taking 300,000 cars off the road. The plant will also produce 350,000 tonnes a year of high protein animal feed, which will replace imports.

Apr 2, 2013 at 9:50 PM | Unregistered CommenterMartyn

Sounds like a good place to work.

Apr 2, 2013 at 9:50 PM | Unregistered CommenterStephen Williams

Having just spent about an hour researching the 'consumer' end of biofuels, I can understand the company's predicament.

Oftec - the Oil Firing Technical Association website has sweet FA to guide potential users. A search for 'bioethanol' returns zilch.

A search for 'biofuel' returns one result:

"New renewable heat incentive proposals are no help for rural areas Sep 24 2012 10:30 AM

The latest announcement by the government that bio-liquids will not be included in the proposed Renewable Heat Incentive (RHI) will ensure that many off-gas homes continue to have very large CO2 footprints. According to OFTEC, the omission of bio-liquids means that homes in rural areas will have very little incentive to switch to renewable fuels."

Which further reduces end-user confidence.

Searches of 3 x oil-burner manufacturers' websites (Riello, EcoFlam & Weishaupt) also produces zilch.

So Ensus were certainly not in a 'market-led' market.

Apr 2, 2013 at 10:00 PM | Unregistered CommenterJoe Public

From the Telegraph article (bold mine):

"Unfortunately, the European ethanol market continues to be challenging as the price of ethanol has not risen in line with input costs," the spokesman said.

"In the UK the poor wheat harvest in 2012 has also had an adverse impact on the quality and price of the feed wheat feedstock used within the plant, while rising gas prices have pushed our costs up considerably."

I suspect it is easier for the company to blame the poor wheat harvests publicly than admit how sensitive their margins are to energy costs. Making ethanol, drying the DDGS animal feed co-product and compressing the CO2 by-product is an energy-hungry process. UK gas prices are among the highest in the world and the recent weather has caused a spike.

"March gas prices have swung between 69 and 150 pence per therm versus a range of 55 to 62 a year earlier."
http://uk.reuters.com/article/2013/03/28/uk-energy-gas-britain-idUKBRE92R0BA20130328

Apr 2, 2013 at 10:12 PM | Unregistered CommenterVerity Jones

Rough figures for 2012 from Companies House lodged accounts:

Turnover: £75M
Cost of Sales: £101M
loss: £26M

Company kept afloat by 'Exceptional finance income' of £120M from some other parts of the group.

Some fairly complex financing here and several directors coming and going.

Someone believes there's some money to be made.

Apr 2, 2013 at 10:23 PM | Unregistered Commenterch_research

"Factories that convert corn into the gasoline additive ethanol are releasing carbon monoxide, methanol and some carcinogens at levels "many times greater" than they promised, the government says.

In an April 24 letter to the industry's trade group, the Environmental Protection Agency said the problem is common to "most, if not all, ethanol facilities.""

http://www.cbsnews.com/2100-205_162-508006.html

"- Ethanol increases ozone forming emissions on hot days by up to 70%

- Burning ethanol has been shown to double ozone-forming NOx emissions

- Ethanol increases two carcinogens - formaldehyde and acetaldehyde

- Ethanol plants themselves emit tons of air pollution

- Ethanol production strains water resources in places: It takes 3-6 gallons of water
to make just one gallon of ethanol"

http://www.evsroll.com/Pros_and_Cons_of_Ethanol.html

Apr 2, 2013 at 10:34 PM | Unregistered CommenterBruce

@ Verity Jones - Apr 2, 2013 at 10:12 PM

"March gas prices have swung between 69 and 150 pence per therm versus a range of 55 to 62 a year earlier."

(Sound's dear, but at 29.31 kWh/therm, those ranges are 2.4 - 5.12 p/kWh vs 1.88 - 2.12 p/kWh)

Due solely to the prolonged cold March.

There was very little left to release from Storage, and, I suspect all 'Interruptibles' were 'off'.

Shipper Nominated Interruptible:-

Sites which are classified as 'Shipper Nominated Interruptible' (SNI) receive a reduction in the transportation charge which may be included in the price of gas. In return National Grid can interrupt these supply points for up to 45 days in each Gas Year. SNI is not a uniform Network Code term and care must be taken in not confusing Transporter interruption at an SNI with a commercial interruption carried out by shippers, sometime referred to as "shipper interruption".

Transporter Nominated Interruptible:-

A Transporter can designate a site as Interruptible (TNI) by giving at least 12 months notice. This gives the relevant transporter the ability to interrupt these sites for more than the usual 45 days (for example, up to 60 days in a 1-in-50 cold winter). This number of interruptible days is determined by Network Planning and is a specified number for each site.

Apr 2, 2013 at 10:45 PM | Unregistered CommenterJoe Public

@mailman,

I think the answer is that there are different sorts of subsidy. With windfarms you have an assured market and assured price for all you can produce. You can even be paid not to produce. You can say within limits how many KWh a windfarm will produce in a year.

In this case they only get the subsidy if they can sell the ethanol. There's no assured market and price so they are on a much more dodgy number.

No doubt there are moves afoot from the EU which will give relief to biofuel producers. I wonder why they are so sanguine about the temporary shut down and if that's the reason.

It would be interesting to know how big a part the subsidies played in the decision to open the plant. It looks as if there's no question of running it for cattle food and selling the ethanol at best.

Apr 2, 2013 at 11:59 PM | Unregistered Commentercosmic

"Sounds like a good place to work."

I thought that. I wonder if they are recruiting?

Mind you, 60% is quite a good capacity factor for a renewable energy source!

Apr 3, 2013 at 12:00 AM | Unregistered Commentergraphicconception

Economics of nearly all of these operations is highly volatile. Basically the cost of your input (some form of grain) at least doubles if there is a drought, or other low harvest. Price of your output, (which is some form of petrol), is also quite volatile.

As a result operating margin is extremely volatile, and plants are often forced to shut when the margin becomes negative.

Despite government mandated markets, far more money has been lost than made in biofuels to date.

Apr 3, 2013 at 12:41 AM | Unregistered CommenterBill

A story here of a green company utilising a somewhat related business model.

"Employees at Stimulus-Funded Battery Plant Play Cards and Board Games Because There's No Work

By Noel Sheppard | October 19, 2012 | 10:34

Here's your tax dollars at work.

Target 8 in Michigan reported Thursday that employees at the stimulus-funded LG Chem lithium-ion battery plant in Holland have so little to do that they spend their time playing cards and board games:

"There would be up to 40 of us that would just sit in there during the day," said former LG Chem employee Nicole Merryman, who said she quit in May.

"We were given assignments to go outside and clean; if we weren't cleaning outside, we were cleaning inside. If there was nothing for us to do, we would study in the cafeteria, or we would sit and play cards, sit and read magazines," said Merryman. "It's really sad that all these people are sitting there and doing nothing, and it's basically on taxpayer money."

Two current employees told Target 8 that the game-playing continues because, as much as they want to work, they still have nothing to do.

"There's a whole bunch of people, a whole bunch," filling their time with card games and board games," one of those current employees said."

http://newsbusters.org/blogs/noel-sheppard/2012/10/19/employees-stimulus-funded-battery-factory-playing-cards-and-board-gam

Apr 3, 2013 at 12:57 AM | Unregistered CommenterMick J

How about the consumer rip-off.

You pay for road fuel on a volume basis, both the actual cost and applied taxes. Ethanol has a nominal energy value of 80% of that of gasoline on a volume basis.

Further the use of Ethanol eliminates the need for other octane blend enhancers, read more expensive, and increases the volumetric yield of gasoline per barrel of crude feed to a typical refinery.

ln Canada I go out of my way to find zero or low ethanol blends, by regulation up to 10% by volume, and get a nominal 10% lower fuel consumption.

Who is winning? depends on the jurisdiction and the degree and point of application of "government subsidy", still all your hard earned money.

Play with the math.

Regards
Mike

Apr 3, 2013 at 1:46 AM | Unregistered CommenterOld Mike

A few years ago I was working in agriculture in Nigeria and because the power grid is history everything ran off diesel generators. Having grown up in a modern first world city I had formed the idea that diesel was stuff you occasionally filled your car with, maybe once a week, and that was it.
It soon became clear that the whole modern world runs on diesel.
As far as agriculture is concerned I would say that Food = Diesel and if I had the mathematical symbol of the three line equals I would use it. Every move we made from harrowing, planting, spraying, irrigating, harvesting and transporting food was diesel usage. Having poured over a ton of diesel into a fleet of tractors every morning for a couple of months I began to wonder how much diesel there was in the world. I reminded myself that we were just one farm amongst a hundred others in a pin prick on the map and not even in a part of the world where there was any serious agriculture. I hardly dared think how much diesel was used for industrial operations. Some ex-pats I met described a dairy operation in Saudi in which their irrigation pivots consumed 30 tons per day just to pump water.
Given that diesel was not all that cheap I was keen to find an alternative and that is when one of the many travelling snake oil salesmen suggested bio-fuel. It sounded great ... right up until I did some quantitative analysis. I think I worked out that under ideal conditions we would use about a litre of diesel for every litre of ethanol produced. A very expensive way of destroying 30% of your energy. If you can use hydro to power your irrigation then maybe you can beat this and of course subsidies are nice if you can scam them.
The only way bio-fuels work is as a method of subsidy mining. As long as you can dump all your real costs on someone else then it is possible to make a profit, as in any scam. If however you are not in on the scam then you are the sucker and in this case the sucker seems to be the ever suffering taxpayer.

The perception many people have of course is of nice clean bio- alcohol being used to run cars with clean emissions and that all looks very nice.
I would like to make an advertisment in which we show a field of maize or wheat being planted, fetilised, sprayed, irrigated and harvested, all the time under the careful gaze of a benevolent farmer. Once it is harvested and cleaned up we then see lovely golden wheat or maize being shovelled into a furnace to run an electricity generator. Ideally the shovelling would be done by jovial third world farm workers who appreciate that if they work hard shovelling cheerfully for a day the will earn enough money to take home half a shovel load for food...

Apr 3, 2013 at 6:53 AM | Unregistered CommenterKeith L

That sums the whole scam up very nicely.

Looks like the efficiency of nationalised industry in this country hasn't changed since the glory days of the 70s.

Apr 3, 2013 at 9:13 AM | Unregistered CommenterSteve Jones

Why is that article illustrated with what looks like a photo of a head of barley rather than wheat? Or has grain changed a lot since my youth?

Apr 3, 2013 at 9:29 AM | Unregistered Commenterdearieme

@ch_research
Thanks!

Apr 3, 2013 at 10:19 AM | Unregistered CommenterRichard Tol

I've been told by fellow members of the owners club that petrol containing ethanol is not kind to classic cars, where pipes, seals and joints are made of rubber and plastics less resistant than found in today's cars.

Apr 3, 2013 at 10:32 AM | Unregistered CommenterBig Oil

Ensus (company number 05453404) has the following directors:
Dr Robert James Campbell Easton
Mr Oliver James Lightowlers
Mr Peter Sopp
Mr Robert Coxon
Mr Shaun Mercer
Sir Robert John Margetts

Their auditors (PricewaterHouse) have just resigned. Here is the text of their resignation letter:


21 February 2013

Dear Sirs,

Statement of Circumstances connected with our ceasing to hold office as Auditors

In accordance with Section 519 of the Companies Act 2006, we confirm that there are no circumstances connected with our ceasing to hold office as auditors of Ensus Limited, registered no: 05453404 and Ensus UK Limited, registered no 05816694 (the Companies) effective from 21 February 2013, which we consider should be brought to the notice of the Companies' shareholders or creditors


Yours faithfully

PricewaterhouseCoopers LLP

It's parent company (Ensus Holdings Limited) entered into voluntary liquidation on 20th December.

Apr 3, 2013 at 10:40 AM | Unregistered CommenterTerryS

Much of the bio-ethanol produced in the USA is exported. Is this company substituting USA product for that which would otherwise be produced in the UK - is this where the "exceptional financial income" is coming from?

Apr 3, 2013 at 10:40 AM | Unregistered Commenterpeter azlac

The exceptional financial income came from a debt for equity swap (they gave the banks shares in the company) and new finances from the Carlyle group. Without that their losses would have been around £38M.

They have received at least the following grants:
£1,970,000 from One NorthEast between 2006 and 2012
£116,000 European Commission FP7 between 2010 and 2012
£86,000 Feasibility grant from Technology Strategy Board 2012
£464,000 Mainstream grant from Technology Strategy Board £125,000 paid so far

Apr 3, 2013 at 11:03 AM | Unregistered CommenterTerryS

Maybe they have a deal like the story below, they ship using a train the same biofuel back and forth across the US/Canada border and make money. Since they use the same fuel they don’t have to worry about pesky details like making it.

http://www.cbc.ca/news/canada/story/2012/12/19/cn-rail-border-biofuels-probe.html

Apr 3, 2013 at 12:22 PM | Unregistered CommenterDJF

I know I'm old, stupid and clearly missing something, but if you're growing wheat shouldn't this go into - er - FOOD..??

Oh - I know what I'm missing......... SUBSIDIES..!!

Apr 3, 2013 at 12:29 PM | Unregistered Commentersherlock1

sherlock1,

I asked about that when I saw a wheat burning boiler being demonstrated at an agricultural show. The answer was that if your wheat doesn't have the necessary protein content, and they thought that was a bit of a lottery, then it isn't first grade for food use and using it in one of their boilers is an attractive option to selling it at low price. They said that if you live in an agricultural area, there's bound to be lots of low grade wheat around cheaply. They were salesmen.

But basically yes, the biofuels scene is a nonsense from the point of view of saving carbon dioxide emissions, it's putting up the price of food, and it wouldn't exist without subsidies and markets created out of nowhere by legislation.

Apr 3, 2013 at 1:01 PM | Unregistered Commentercosmic

I recall a time in Canada when gas prices skyrocketed and electrical peak supply was limited that I worked for a client who ran a 100MW gas fired cogen plant. At the very time that the grid required power the plant was on idle fully staffed and ready to go but not moving. Why? Because the plant was able to sell its long term contract gas supply on at higher prices than the electricity it would have produced. So why run the plant when all you have to do is clip the coupons? Sounds like the ethanol plant may be doing this to but perhaps such contracts are not available in the UK.

Apr 3, 2013 at 3:15 PM | Unregistered Commenterleglise

Distilling fuel additives from food crops should be declared a crime against humanity.

Apr 3, 2013 at 5:30 PM | Unregistered CommenterPaddyL

All "renewables" are a scam, to a greater or lesser extent.
This was one of the "greater".
http://motls.blogspot.co.uk/2013/04/italy-seizes-17-billion-from-sicilian.html#more

Apr 3, 2013 at 8:12 PM | Unregistered CommenterDon Keiller

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