At the end of 2016, the State Council appointed the National Development and Reform Commission to develop a multi-channel solution to the country’s “aged grain” problem, after China had accumulated a massive grain stockpile mountain of 200m MT (est.). Over the last five years, the Ministry of Agriculture and the State Administration for Grain had repeatedly sought support from the State Council to assist with a solution to reduce the colossal, and continuously growing grain mountain, as the product quality was rapidly deteriorating while eating up vast amounts of money in terms of subsidies and other fiscal allocations.
The much needed restructuring reform for the agricultural supply industry triggered the September 2017 energy policy roll out, jointly announced by the National Development and Reform Commission (NDRC and the National Energy Administration (NEA), to promote the use of Ethanol gasoline nationwide in vehicles by 2020. China's cabinet confirmed that it will speed up the use of the nation's grain stockpile by promoting industrial consumption of aging grains. The various measures include:
- Focus on dealing with grains that have gone mouldy, contain heavy metals in excess of the standards, or have been in storage for a lengthy period of time.
- To develop more grain-based Ethanol production, promote the use of Ethanol gasoline for cars, and explore launching pilot programmes to produce starch-based bioplastic and bio-degradable materials.
- Build more than 50 grains enterprises by 2020 and help enterprises from major consumption areas to build grains bases and warehouse and logistics facilities in major production areas, support transporting grains by railways, to reduce logistics costs, and offer subsidies to agriculture business operators for buying storage and drying facilities.
China's bold plan to blend renewable fuels into its gasoline supply within three years will revolutionise its fledging biofuels industry, likely spurring billions of dollars in investment in Ethanol factories. More than 10 new Ethanol plants are already planned in the North-eastern corn belt, with most of those going online over the next 12-24 months, adding 3m MT of capacity.
However, the policy roll out till date leaves a lot of questions about its implementation and longevity open. The policy is meant to be implemented nationwide. The impact it will have on the overall economy and social cost is yet unclear as this is a huge change to the fuel infrastructure in terms of investment and also air quality. Fuel-Ethanol has been known to increase VOC and ozone formation, which is another critical item that the government is trying to resolve in its air quality list.
No specific guidelines or timeline for actual implementation of Ethanol gasoline nationwide has been issued by the government till date, so it will be a taxing task to achieve the goal with only three years left.
Beyond this and referring to the uncertain consumer acceptance of Ethanol gasoline, the government may need to consider a different, market-based approach if the biofuel fails to be used across the country by 2020, requiring economic incentives to enhance and accelerate implementation. Further fiscal guarantees will potentially be required to ensure the viability of Ethanol in the gasoline pool, in case oil and fuel prices drop. In today’s market fuel-Ethanol and gasoline prices are near break-even, challenging the economic competiveness of Ethanol versus other blending components already, while a lower crude oil price will lead to lower gasoline retail and pump prices. Without fiscal programmes in place, Ethanol producers will not have a guaranteed return as agricultural products remain government-protected and supported, eventually jeopardizing ongoing supply.
Last but not least, till date only PetroChina and Sinopec have been granted the right to blend Ethanol into gasoline. If the biofuel is required to be used nationwide, the country need to open blending and distribution to more players in order to achieve and enhance market circulation.
The news about the policy roll out in September came just days after Beijing stated that it is studying when to ban production and sale of cars using fossil fuels in favour of electric vehicles and/or hybrid-fuel cell technology. People with knowledge of the matter believe that 2030 is the most likely target date, raising concerns among potential biofuel investors.
As of today, E10 gasoline is being used in 11 provinces in China, out of which 6 provinces mandated the biofuel. In actual facts fuel-Ethanol use is only promoted in the north-eastern provinces of Henan and Anhui, while other provinces and cities have switched back to selling regular gasoline grades. The country’s production capacity is less than 3m MT/y versus an assumed demand of 13m MT/y in 2020, in case a nationwide mandate for E10 would be implemented.
It will be a serious challenge for the government to convince consumers and stake holders to switch to the biofuel as China’s fuel quality will be adjusted to the new GB-VI (equivalent to Euro IV) standard by 2019. The new fuel quality will have the most stringent emission standards globally and the use of fuel-Ethanol will not improve the standards further. Beyond this, the biofuel adaptation could impact the ideal combination existing with the use of clean octane enhancers such as Alkylates and MTBE. By implementing the E10 policy, the fuel quality balance would potentially be deconstructed, leading to misspent, previous investments and now new, additional investments to incorporate fuel-Ethanol. This has a huge economic impact on China which may lead to higher petrol cost incurred for the country.
As much as China is looking at other parts of the world where Ethanol fuels have been promoted or mandated, trying to learn from the experience made, it needs to address today’s reality as far as conventional biofuels are concerned.
In the US, fuel-Ethanol is consumed by mandate at 10% in the gasoline pool, forcing the entire refining industry to adhere to the directive, while consumers and environmentalists are pushing for replacing the conventional biofuel by 2nd generation biofuels. In Brazil, Ethanol from sugar-cane has led to mismanagement and deforestation, raising concerns among numerous green organisations. In Europe, consumers are left with a choice to use E10 or not and Ethanol has been successful in some European countries while it failed in others. The European Union is pushing for phasing out conventional biofuels, after realizing the very limited impact the use of Ethanol has on greenhouse gas emissions and CO2 savings. In Asia, Ethanol is mainly used in Thailand and the Philippines. While successful in the case of Thailand, where huge volumes of domestically produced, agricultural waste are being processed and utilized as biomass in transportation fuels, the situation in the Philippines appears somewhat different due to limited supply to the local petrol markets as Ethanol producers achieve higher margins by supplying other industries. Beyond this, countries like India and Vietnam have a biofuels policy or even a mandate in place without accomplishing a significant break-through, as Ethanol in gasoline remains largely unworkable, on technical and particularly on economic grounds.
A push for the mandatory implementation will bring other challenges with it. In China, the gasoline market which presents itself today as a largely balanced market would tip over into a significant supply overhang.
In conclusion, Ethanol mandates wherever applied lead to an extra cost burden for the oil industry, other suppliers as well as for the governments’ coffers. Keeping Ethanol viable in the gasoline pool in China could cause a potential penalty for the country’s overall economic benefits.
The way forward – thoughts and recommendations
In today’s energy environment, China is one of the leading forces in terms of alternative fuel developments. Together with a number of European Union member states, China is actively pursuing new technologies to replace conventional, fossil fuel energy for the transportation and the stationary industry sector. In September 2017 the Beijing administration announced that it is studying the implementation the nation-wide use of electric vehicles. People familiar with the matter believe that the target date could be as early as 2030, in line with announcements made by some EU members planning to ban the admission of combustion-engine vehicles during the 2030-2040 time frame. Most popular, alternative energy technologies till date are EVs and hybrid-fuel cell engines. The global oil industry has already responded to the likely reduction in fuel demand expected over the next three decades. Based on the above, an intermediate, short-term policy change to other alternative fuel sources seems to be non-aligned with the overall strategy, particularly as the alternative supply will come at a high price for the country. Fuel quality standards in China are already at globally best-possible levels and, as stated by some experts, China would not benefit from the described policy change.
Apart from all positive future plans, China is facing another serious economic challenge on the Northeast part of the country. Since 2009 an enormous mountain of grain, totaling an estimated 200m MT, has been collected by the country’s intervention and support of the agricultural industry in the region. Price and offtake guarantees for the farmers have resulted in record harvest yields over the years and caused this mountain to grow which is now facing ageing issues and representing huge burden on the country’s budget. The National Energy Administration had been appointed by the State Council to establish a solution as soon as possible to tackle the quantity and quality issues caused by the ageing grain mountain. Converting the ageing grain into fuel-Ethanol emerged as the most popular solution, addressing the problem directly and also drawing a forward plan for the Northeast region for further economic growth and revenue. The existing grain mountain alone would yield around 60m MT of fuel-Ethanol, enough to cover the E10 demand for the entire country for 4-5 years.
However and as addressed in various parts in this newsletter, the solution comes with a number of drawbacks and other options should be also considered in order to enhance the returns for the country, such as:
- Conversion of aged grains to biogas for power generation and heating – a clean and sustainable solution
- Conversion of waste grain into green value-added green products and chemicals
- Conversion into fuel for industrial boilers
- Donate excess grain harvest to famine or impoverished countries to gain intergovernmental goodwill
- Improve granary technology for longer shelf life
- Improve grain distribution system throughout the country
- Convert grain into processed food and food canning to create new markets
- Conversion of fuel-Ethanol into ETBE production In order to master the constraints of fuel-Ethanol.
All of the proposed solutions represent viable alternatives in terms of required production infrastructure and ease of use. Apart from the technical advantages, most solutions would not require any significant investments and or long-term, public support.
BioGas technologies and applications have been targeted with preference in many other parts of the world, trying to solve pollution problems caused by stationary sources. Using Ethanol as a feed for industrial boilers would fit well into the country’s environmental policy, as a range of cities and regions have started or are considering using Methanol as a replacement feed for the operations, after this year’s environmental inspection programme. ETBE has been successfully tested in many markets globally. ETBE provides all the advantages MTBE holds over direct-Ethanol blending. ETBE is being used in Japan in annually increasing volumes and is the refiners’ and authorities’ preferred choice of biofuel. For more than 10 years, ETBE is also commercially used in Europe by oil companies, blenders and retailers who have not been able to carry the enormous cost burden which a switch to Ethanol gasoline blending will bring with it for all parts of the supply chain network, from transportation to blending and storage, into retail.
Undoubtedly, the ageing grain stockpile mountain needs a quick solution as it is representing a massive burden for the country as a whole and the Northeast region in particular. Mandating the use of E10 would partly solve the agricultural problem but unfortunately only by shifting the problem elsewhere and the overall cost of the directive may easily outweigh the gains by not providing any measurable benefits to the country overall, on the basis of social, economic and environmental benefits.