Brazilian consumers were shaken up in recent weeks by the steep price of ethanol at pumps throughout the country. People wonder why this happened and if it will happen again in the future. The most radical critics even said we could be facing a potential fuel shortage and raised doubts about the very future of ethanol. All of this calls for a careful analysis of the issues.
From 2000 to 2008, sugarcane production increased by 10.3% annually, driven by strong sales of flex-fuel vehicles. With about 20 new plants opened per year since 2005, the period was characterized by an abundance of cheap capital, new investors with limited experience in the sugarcane industry, and traditional businesses with limited access to modern financial tools. With prevailing low sugar prices, new investments were spurred on by the prospect of good profit margins for ethanol in Brazil and abroad.
However, the 2008 global crisis came and impacted primarily the companies that invested the most. One third of the industry ran into difficulties and went through significant financial and corporate restructuring. New actors have emerged from the crisis: existing companies achieved solid growth while traditional agribusiness, oil and chemical groups entered the sugarcane industry with full force. But investments were directed to the purchase of troubled companies, while expanding production grew at only 3% per year since 2008. The post-crisis scenario is dramatically different: over 70% of the cane industry is now comprised of groups with sizeable assets, capital structure and governance, operational performance and access to high quality capital. These are groups ready to invest.
The problem is that today’s market catalysts are very different from those observed in 2005. In the past six years, the cost of ethanol production increased more than 40%, hurting its competitiveness against gasoline, which has seen virtually no price fluctuation at the pump since 2005. Besides a significant reduction in margins, which currently do not justify heavy investments in new units, investors feel insecure about the lack of criteria in setting gasoline prices, a direct competitor of ethanol at the pumps with “managed” prices in Brazil, which do not follow the laws of supply and demand.
Land availability, technology, or capable and motivated employees, are not factors that currently affect or hinder the efficient growth and expansion of the ethanol industry. Difficulties in management, governance, and capital have also been overcome. What’s really lacking at this point is an adequate strategy to address structural factors that have reduced the competitiveness of ethanol. These are measures that require major efforts from both the public and private sectors: harmonization of federal and state taxes with reduced tariffs, strong incentives to bioelectricity, improved logistics and storage, a commitment to ensure the supply of the biofuel, increased productivity, cost reductions and improvements in flex-fuel engine efficiency.
Brazil is currently the country with the greatest availability of natural resources and technology to simultaneously expand the production of both oil and biofuels. The challenge is to grow quickly and in an organized manner. We do not want to repeat the stop-and-start growth witnessed in 2006. Brazil has built one of the most diversified and clean energy matrixes on the planet, with sugarcane appearing as the country’s number-two source of energy behind petroleum. Thanks to flex-fuel cars, Brazil is the only place where consumers can choose freely, at the pump, which fuel to use. If flex-fuel technology and ethanol did not exist, consumers would have spent an additional R$ 20 billion over the last six years to fill their tanks only with gasoline. Not to mention the damage that society would have incurred in the form of higher greenhouse gas emissions, worse public health, lower job creation and income generation, all of that leading to less development away from major urban centers. The world recognizes that Brazil has taken bold and innovative decisions in its energy sector. We must now advance faster and better.
A version of this article was originally published in the Brazilian newspaper, “Correio Braziliense”, on April 27, 2011.
Ethanol Summit 2011 – Day 1
Géraldine Kutas — posted 2011-06-06
Welcome to our first blogpost directly from the 2011 edition of the Ethanol Summit, one of the world’s top events focused on renewable energies, which takes place in São Paulo, Brazil today and tomorrow.
Today was an exciting and enriching debate surrounding solutions for a low-carbon economy. The day was kicked off with several Brazilian government officials sending a clear message to an audience of over 2,000 researchers, executives and renewable energy enthusiasts: the importance of sugarcane by-products as a solution to increasing global energy needs and climate change mitigation, as well as the need to increase the production capacity of the sector to supply this demand. As Geraldo Alckmin, governor of São Paulo, the main ethanol-producing state in the country, clearly stated: the benefits of ethanol go beyond what is initially imagined. An aspect that sometimes is not given so much attention is the impact of ethanol use on public health, and how ethanol use can reduce local pollution and result in fewer respiratory related hospitalizations and deaths.
However, the debate heated up during “The Future of Oil and Role of Biofuels” panel, where top executives from major oil companies (BP, Petrobras, Shell and Total) where challenged by Vinod Khosla, a well-known investor in clean technology, better known as one of the co-founders of Sun Microsystems. All four oil companies had high praises to sugarcane as being the only feedstock that is able to compete with oil, and which reduces greenhouse gas emissions by 90 percent on average compared to gasoline, the best environmental performance of any biofuel produced at commercial scale. Nevertheless, Mr. Khosla emphatically pointed out that, despite these recognized benefits, investments from oil companies were still extremely shy. “The bad part of innovation is failing. But investors like us should not be afraid to fail. We have to commit to taking risks,” said Mr. Khosla. He also reiterated that ethanol is not the only fuel of the future. The opportunity is also on non-ethanol molecules, from biomass the “and beyond” that we always like to point out.
At the end of the day after discussions that ranged from certification to public transportation, bioelectricity, investments in the sector and new products from sugarcane, the last plenary session gathered speakers that represented ¼ of the total sugarcane production in Brazil. These top executives sat down to talk about the future of the sugarcane industry by 2020 and beyond. Despite the many challenges that the Brazilian sugarcane industry faces, especially in the area of logistics, hopes and investments are expected to rise in the next decade.
All in all, today’s event was a positive debate that engaged people from different backgrounds, industries, countries and even technologies. But at the end of a long day of work, we conclude that events like these are not only important for the industry to showcase our accomplishments, but also recognize the challenges and opportunities that lay ahead. All that can be offered by this low-carbon plant: sugarcane.
By 2050, the world’s population will grow by 40 percent and add another 2.5 billion people who will need to eat and power their lives. During the same time period, global energy needs will likely double. And unless current trends change, carbon dioxide emissions that contribute to global warming could increase by 80 percent.
These alarming figures help explain why global leaders are searching for clean, renewable options to provide energy and reduce petroleum use. And in turn, this website is intended to explain how sugarcane can contribute solutions to many of these pressing challenges.
The Brazilian sugarcane industry decided to launch this new site to share knowledge and information with a growing global community of people who want to know how their food and energy choices affect our environment and people worldwide. And we did it specifically to provide information, new data and analysis about the efficiency and sustainability of sugarcane products including sugar, ethanol, bioplastics, bioelectricity and more.
We are excited to share what we know about this incredibly versatile plant and hope this website is a useful resource.
Knowing that you are one of many who look for research and insight to shape renewable energy policy and improve practice, we’ve built our site to make it much easier to find materials. As you navigate our pages you will see that we’ve also gathered information from other organisations whose perspectives inject new thinking into sustainability conversations.
We’ve also built a Global Agenda page to help you keep up to date on latest events that shape conversations on global renewable energy policy. Stay tuned in the coming months for new materials. We’ll add links to government policies or new research that we think will be of interest to you as it becomes available.
The launch of our website today coincides with the first day of the annual World Ethanol Summit in São Paulo. This year it’s about Solutions for a Low-Carbon Economy where we are going to be joined by nearly 1,000 participants to discuss the contribution of sugarcane products to the reduction of greenhouse gas emissions.