energy policy

The U.S. Agriculture Secretary Tom Vilsack spoke today at the National Press Club on the future of biofuels in the United States. His remarks contained the expected boilerplate that the White House had previously blogged about here.

Growth Energy, the cheerleader of the ethanol industry, were very supportive of his remarks. But both Vilsack and Growth Energy got one thing wrong — the efficiency of ethanol production.

Growth Energy wrote:

During the Secretary’s speech, he mentioned that there have been efficiency gains in ethanol production. In fact, according to a new report out of the Office of Energy Policy and New Uses at the USDA, there have been significant net energy gains from converting corn into ethanol over the last two decades that have made ethanol one of the cleanest burning fuels on the market. For every Btu put into creating ethanol, we get 2.3 Btu’s in return—a significant increase from the 1.76 BTUs produced in 2004.

Robert Rapier, who writes an excellent energy related blog, explained the creative accounting employed by the USDA in these efficiency “gains” in a post titled “Fun With Numbers: The New USDA Report on Corn Ethanol. Incidentally, Rapier is the CTO of a bioenergy holding company and has a healthy respect for biofuels, but is quick to call BS when he sees it.

The post is long (worth the read if you’re interested in things like the methodology used by the USDA to calculate the amount of energy it takes to produce ethanol), but the cliff notes are that the USDA takes residuals from ethanol production, mainly grain, and subtracts that energy from the denominator of the energy return on energy invested equation. This is a misleading metric , it subtracts residual energy from the input rather than counting it as an output. It’s especially misleading as this wasn’t the methodology they used in some earlier reports, so the casual reader might believe that huge efficiency gains were achieved when most of these gains came from changing the methodology used to calculate the energy return.

Two excerpts from his post:

Imagine if financial returns were calculated in this manner. Say you invested $100, and got a return of $35 cash plus goods (byproduct) that you valued at $30. What is the return on investment? Most people would say that you got a total return of $65 on the investment of $100, for a total return of 65%. Or we could say the cash return is 35%. But if we utilize the USDA’s ethanol accounting, we would use the $30 co-credit to offset our initial investment. We could then argue that we only “really” invested $70 to get a cash return of $35, for a cash return of 50%. So, the answer to the question – “When can a $35 return on a $100 investment amount to a 50% return on investment?” – is “Whenever we apply the rules the USDA uses for ethanol accounting.”

That’s not to say it’s the “wrong” way to do it, but it is certainly a method that inflates the energy returns for ethanol. In the example above, the $35 cash return is analogous to ethanol production, and you can see how a 35% return gets inflated to 50%.

And

So if we keep the accounting methodologies consistent, here are the ethanol-only energy returns (ethanol output/total energy input) from the raw data in the USDA reports:

2002 – 1.09
2004 – 1.06
2010 – 1.42

Here are the ethanol plus byproduct energy returns (ethanol plus byproduct output/total energy input):

2002 – 1.27
2004 – 1.26
2010 – 1.69

Here are the ratios from utilizing the USDA’s 2002 methodology (subtracting byproducts from the inputs) across all three reports:

2002 – 1.34
2004 – 1.32
2010 – 1.93

Finally, the ratios that the USDA highlighted and reported across all three reports:

2002 – 1.34
2004 – 1.67
2010 – 2.34

Yes, the ethanol industry has made efficiency gains, but not nearly to the extent that they’d like you to believe.