Cost goals for biofuels technologies

Federally funded energy research seeks to demonstrate that alternative fuels can be produced and then to induce private sector involvement by showing that they can be produced profitably. Prices for fossil fuels may be used as cost goals for biofuels to determine when profitability may be achieved. Achieving equality with fossil fuel prices drives out the highest-cost sources of supply and enables initial market penetration; as costs decrease, biofuels can potentially gain a greater market share. However, achieving competitive costs is not a sufficient condition for success unless prices of conventional substitutes are expected to rise. Cost goals are used for research planning purposes, as a common denominator to allow comparisons among many biofuels options. Application of standard investment criteria to biofuels R and D would require that benefits from their use pay back research costs. These benefits must be discounted because they are realized in the future. Furthermore, realization of future savings is uncertain, so risks must be accounted for. Research may be justified if the expected value of the discounted benefits is greater than the discounted cost of the research. Cost goals satisfying this condition might be substantially lower than projected fuel prices. This paper examines recent fossil more » fuel price projections and discusses the challenges biofuels research faces just to produce competitive products. In light of the difficult goals, researchers should adopt a strategy targeting major technological breakthroughs rather than incremental improvements. Production of ethanol from wood is used as an example of this strategy. 35 refs., 8 figs., 7 tabs. « less