Biofuels: How business can make smart choices

The amount of news concerning biofuels has increased dramatically in the last six months.

Governments and companies alike appear to be in a race to state commitments concerning the current and future use of biofuels.

This race is a result of the increased focus on climate change and a desire for energy independence from the traditional oil-producing regions, in addition to (at least in some jurisdictions) pork-barrel politics favoring farmers.

In addition, the rise in the oil price has made biofuel more economical relative to fossil fuels.

For instance, the U.S. is aiming to diversify its transportation energy mix towards ethanol, biomass and hydrogen and spends some USD $7bn a year on biofuel subsidies.

The EU has stated a 10% target for 2020 as the share of biofuel in the overall transportation fuel consumption.

On the corporate front, McDonald’s recently launched a biofuel program in the UK, converting all its delivery trucks to biodiesel within the year.

This biodiesel consists of 85% of the restaurants’ recycled cooking oil and 15% rapeseed (canola) oil.

Also in the UK, retailer Tesco now fuels 75% of its distribution fleet with 50% biodiesel blend.

And Essent, a Dutch energy company, is now one of the world’s largest consumers of biofuels for power production and has converted a number of energy plants to allow adding biofuels to their burn cycle.

Biofuel programs need a more rational framework

All biofuel programs share one thing: good intentions. However, there are uncertainties concerning the benefits and sustainability of biofuel schemes.

In addition, many companies fail to integrate their biofuel policy with their strategy and specific needs.

Concerns on the benefits and sustainability of biofuels have been extensively researched and can be divided into three general groups; economical, environmental and social.

Issues include the cost of biofuels vs. fossil fuels, their net CO2 emissions and the results of increased demand on pollution and biodiversity.

On the social side, issues include diversion of food resources away from the hungry, working conditions on the plantations, child labor and the expropriation of land.

A recent polemical discussion between the UN, major NGOs and academics even questions the modest biofuel targets that many Governments have set.

The thinking is that any use of food as biofuel in the current economic, technological and social environment is indefensible, but that biofuel does have a significant role in the future as technology improves.

Having a clear overview of concerns like these is a real challenge, and actions undertaken with good intent have more than once resulted in a negative outcome.

Nuon, another Dutch energy company, started mixing palm oil with fossil fuels as fuel in their production process out of purely good intentions.

After some months, NGOs discovered that there were strong indications that Nuon's palm oil program was driving rainforest destruction, as well as using bad labor practices.

In hindsight, issues like these may seem straightforward, but identifying them in advance while making business decisions requires both good data and good thinking.

Counting biofuel initiatives

Concerns over biofuel feedstock sustainability (environmental and social responsibility) predate the use of agricultural products as fuel.

Growers, processors, distributors and retailers have responded by creating initiatives which bring together a variety of major players in several issue-prone agricultural value chains.

The aim is to develop a set of rules and guidelines to assure that the feedstock is produced more sustainably.

Examples include the Roundtable on Sustainable Palm Oil, the Round Table on Responsible Soy and the Better Sugarcane Initiative.

Now that the use of such products as (transportation) fuel has taken off, new players have entered such initiatives, including major oil companies (BP, Shell).

In 2006, The Swiss Ecole Polytechnique Fédérale de Lausanne’s Energy Center initiated the Roundtable on Sustainable Biofuels, designed as an umbrella initiative for biofuels, to complement the focus on specific feedstock such as palm oil.

The stated aim is to create a tool to help assure that that biofuels are sustainable.

Of course, the launching of an initiative does not mean that the feedstock in question is sustainable; if anything, it is testimony to the opposite.

This means that those joining such initiatives (and those unable to join but affected by decisions taken) have a good hope that in the future (perhaps 2 to 10 years) the desired level of sustainability will be reached.

Given the extent of concerns with respect to biofuels, any biofuel commitment should be treated as a strategic decision requiring thorough analysis of costs, benefits and risks, a clear rationale, and a clear and visible link to the corporate CSR program and vision.

Four strategic postures

As a framework to base biofuel decisions on, we present a matrix with four strategic postures between which companies should choose.

This matrix is the result of the two relevant axes for basing choices on. The first axis is “Influence”.

Influence is a relative indicator, defined as the buying power of the company as a fuel user and the resulting influence the company has in decision-making in the industry or value chain. The second axis is “Necessity”.

This necessity reflects the net gains a company can achieve from implementing an aggressive biofuel program.

Such gains can be external, when a biofuel program creates positive visibility and reduces regulatory and/or reputation risks.

Internal benefits can be achieved when a biofuel program brings a company closer to its stated environmental or social goals.

The two axes logically lead to four possible strategic postures, each with their own set of implied actions.

1. Do nothing

A company which reaches the conclusion it has little to gain by adopting a biofuel program, and which cannot influence industry/value chain decisions on biofuels, should shy away from biofuel commitments and wait for things to develop.

Any such commitment carries significant risks. Biofuel costs could rise, prompting a default on commitments made, or the industry or value chain could adopt standards which could then become difficult to meet.

Of course, in this posture, legal requirements to use biofuels will need to be met in any case.

2. Talk

This applies to companies which do not see great immediate benefits in adopting a biofuel program, but which do have the opportunity to influence the development of biofuel adoption in their industry or value chain.

Given the potential future impact of biofuels on all businesses, joining initiatives that seek to work towards the sustainability of specific feedstock (such as the Roundtable on Sustainable Palm Oil) is worthwhile.

You will gain influence, increasing the chances that future measures reflect costs and benefits relevant to you and your customers.

As in the posture of Do Nothing, you can to move into biofuels for your own fuel sourcing when the time is right, perhaps 3 to 5 years from now.

3. Source Locally

If your company has a very thorough CSR policy or is in a position to make hay from moving into biofuels, but cannot influence events in its value chain, making a biofuel commitment makes sense.

However, having no control over the provenance and sustainability of the biofuels you buy on the open market would put your company at significant risk, amplified by the fact that your company is likely to widely publicize your biofuel enthusiasm.

The sober approach here is to source biofuels locally from a value chain you verifiably trust, where you know you are not likely to run into trouble.

If volumes are greater, making local sourcing impractical, sourcing from "European" feedstock (rapeseed/canola, corn, wheat) is a relatively safe option.

4. Build

The last posture applies when your company can benefit strongly from a biofuel commitment and you have the ability to influence decision-making in your value chain.

You are then faced with very high volume needs for biofuels, making local sourcing impractical.

Your influence over developments, however, will not lead to immediate risk reduction, since it can take years before an industry can assure itself and others that its biofuels are sustainable.

All this time, you face an unacceptable choice between not using biofuels or running grave risks. A logical choice is then to set up your own supply chain for biofuels, preferably using local feedstock.

This approach has been taken by French bus company Veolia, which is building a biofuel plant near Paris.

Buying and processing your own fuel reduces or eliminates risks, can reduce cost, and perhaps even lead to new products or capabilities.

If circumstances do not permit building your own supply, a consortium approach can bring the same benefits at minimum cost.

The current biofuel hype undeniably involves both great risk and opportunity for a large section of the business world. It seems many businesses are aware of the opportunities from biofuels, but many are underestimating the risks.

Others seem oblivious to both. For all, only a sound analytical approach to biofuels, imbedded in a larger CSR/sustainability program, will allow your business to capitalise on this phenomenon.


Michael Blok is a Managing Director and Joop-Joost Hietbrink is an Analyst with The Anders & Winst Company, a sustainability strategy consultancy. joopjoost@anderswinst.com / www.anderswinst.com