Regional Biomass Model for Ethanol Production in Mexico

México Country Report by Floren Cabrera F. de Teresa 1

MEXICO: Country Analysis for Ethanol New Plant Construction The Case for an Integrated Bio-Fuel Technology Model Pilot Program for an Ethanol Blending Mandate based on Sorghum Feedstock and Regional Biomass Cogeneration By Helios Energia Limited Floren Cabrera F. de Teresa Chief Executive Officer Claridge House 32 Davies Street Mayfair W1K 4ND London


Shortly after passage of the Bio-‐fuel Law1 in February of 2008, Mexico set an objective of 5.8% Ethanol blend in gasoline for the metropolitan areas of Mexico City, Monterey, and Guadalajara. Reaching this objective would require a 20-‐fold increase from current sugar cane based production levels of 21 million gallons; and would require significant new investment in sorghum-‐based (corn was outlawed as a feedstock by the 2008 Bio-‐fuels Law in Mexico) large capacity projects, under the assumption that these cities account for 30% of Mexico’s total gasoline use. PEMEX estimates new total Capex investments of over US$2.3 billion. This research paper is aimed at providing an informed background to private investors in order to promote the goal of a strong blending mandate in Mexico. As a bio-‐energy Investor and Ethanol-‐project investment-‐banking advisor to other U.S. Ethanol and biomass Investors, Helios Energia Limited is focused on strengthening a nascent Mexican Ethanol-‐industry platform. We seek to promote in Mexico growth of an Ethanol industry and our focus is particularly on the emerging possibilities for new plant construction and the development of sustainable bio-‐energy investment programs; benefiting agricultural communities and promoting new impact investments in Mexico by the private and public sectors. Today we are still waiting for the successful implementation of the Mexican blending program. The Mexican Bio-‐fuel Introduction Program states that the three biggest Mexican cities will have (the actual calendar for implementation is still tentative and in fact, the Program has been implemented on a trial-‐and-‐error basis) a gasoline blending with 5.8% Ethanol available for all gasoline on-‐road vehicle fleet. Also in 2010 the Mexican government programmed to start the substitution of Tier 1 (the adopted US emission standards) by Tier 2, which are more stringent emission standards for motor vehicles and gasoline sulfur control requirements. We believe that the Secretary of Energy of Mexico supports these efforts and we have made progress towards building the "first up and going plant" based on a sorghum feedstock, strategically located in the main production region. Bio-‐fuel development in Mexico has been contentious as the energy sector criticized the law for lacking specific targets and mandates, while others expressed concerns about negative impacts on food security. Amid highly publicized opposition to corn being diverted to Bio-‐fuel, the 2008 law ("Ley para la Promocion y el Desarrollo de los Bioenergeticos") states that feedstock will be sourced from “products derived from agricultural, forestry, marine, biotechnology and enzymatic activities, without compromising the country’s food supply.” Meanwhile, the sugarcane industry’s infrastructure is outdated, inefficient, dispersed and periodically embroiled in labor issues. 1 "Ley para la Promocion y Desarrollo de los Bioenergeticos," Feb. 2008


The sector remains highly regulated with large government participation. High sugarcane and/or sugar prices maintained by government policies are not conducive to competitive Ethanol production. In our opinion, in order to be a competitive player in global markets, Mexico’s bio-‐fuel industry will need substantial investment and greater involvement from the energy sector and perhaps from an advanced technology provider, like EPC Partner capable of providing the technology, industry experience and new R&D required for this mission. Private investors are presented with a unique new opportunity. The U.S. has the opportunity to make major contributions in this context. Given its strong tradition of development assistance programs in many potential bio-‐fuel export nations coupled with its expanding market for bio-‐fuel consumption, the U.S. could facilitate stronger linkages between its international development assistance and responsible trade, while promoting more sustainable production systems, something that has received scant attention in the past. For example, development assistance could contribute to programs that build local capacity for sustainable production systems and support for local efforts to improve capacity to implement laws protecting the environment. U.S. agricultural and bio-‐fuel policies impact world markets, prices, and the patterns of production in other nations around the globe. U.S. policies combined with trade agreements create special opportunities for some nations to access the U.S. bio-‐fuel market, as is the case with the CBI region. The proximity to the U.S. combined with free trade agreements will also allow Canada and Mexico to become integrated participants in corresponding U.S. bio-‐fuel markets and vice-‐versa. As bio-‐fuel programs grow in Canada and Mexico, they may find advantageous market segments in the U.S. based on NAFTA and proximity that facilitate efficient distribution. Mexico may have a unique opportunity to develop a relationship with EPC Partner and the Urban Air Initiative, if it can offer bio-‐fuel at competitive prices while meeting the criteria for environmentally sound production, in the context of U.S., European and worldwide standards. Government policies in Mexico generally appear to be designed to create incentives for investment and to accelerate expansion of a national bio-‐fuel industry. Policies and funding for the development and implementation of national standards for bio-‐fuel production, distribution, and blending, are instrumental in facilitating the development of a domestic bio-‐fuel market. Mexico completed a major Bio-‐fuel study2 that considered alternative feedstock and production costs in conjunction with the new laws and polices noted above. That study suggested that corn was a slightly more economical feedstock for Ethanol than sugarcane in Mexico, and that sorghum was the least-‐cost feedstock available.

2 Inter American Development Bank and GTZ German Technology Agency


However, the use of corn is controversial and the government has indicated that it will not support policies to produce Ethanol from corn. The national assessment report concluded that the most feasible feedstock is sugarcane. It recommended that distilling plants be built as part of the proposed revitalization of the sugar industry. The economics, institutions, and infrastructure associated with sugarcane and sugar production constrain the use of that crop for Bio-‐energy. High, government-‐maintained sugarcane prices are not conducive to Ethanol production. And, substantial changes to the country’s plants and infrastructure, and greater involvement by its energy sector, would be needed to support and sustain sugarcane-‐derived Bio-‐fuel production. Any significant increase in production will require financing and incentives that are not presently apparent. Therefore, Helios Energia believes that a new sorghum-‐based production plant presents a unique entry opportunity into a nascent Mexican Bio-‐fuel industry. Biodiesel production in Mexico is just beginning to develop, cautiously, based on the new policies and legislation. Biodiesel production historically has been limited to small operations that primarily use beef tallow, with total production estimated at 3.7 million liters/year. Though Mexico produces oilseeds, particularly soybeans and rapeseed (canola), it also imports these products from the U.S. These oilseeds typically are used for dietary consumption and higher corn prices may encourage planting corn instead of soybeans. Currently, biodiesel plants in Mexico are limited to relatively small private operations and research facilities. Mexico is a net importer of corn, but exports about 10% of its sugar production. Estimated baseline case cumulative production of sugarcane in Mexico in 2017 is about 63 mmt from 760 thousand ha, compared with 52 mmt from 670 thousand ha in 2005/06. For corn, estimated total cumulative production in 2017 is nearly 32 mmt from 7.2 million ha, compared with 19.3 mmt from 6.6 million ha in 2009/2010.3 Achieving the goal of 5.8% Ethanol blend of gasoline use in three major cities would require a 20-‐fold increase in Mexico’s Ethanol production. Although a new Biofuels Promotion and Development Law offers few specific incentives, a new National Sugar Program aims to produce about 6.5 mmt of sugarcane for Ethanol purposes by 2012. There are about 10 corn Ethanol plant proposals, but only one was reportedly under construction (although it seems the project was shut-‐down). Mexico is a dry country with variable weather conditions. Thus, it appears unlikely that Mexico would be able to contribute significantly to Ethanol production from corn in the coming years. Sugarcane is considered to be the best Bio-‐fuel feedstock option in Mexico, but there currently are only 13 sugar mills producing Ethanol for non-‐fuel purposes. Increasing Ethanol production both for export markets and domestic fuel blending would require substantial technology and infrastructure investments. 3 Oakridge National Laboratory white paper for U.S. Department of Energy


Cellulosic feedstock from sugarcane and corn production as well as forest residues could be used for Ethanol production with the availability of technology. However, a significant amount of the bagasse from sugar production currently is used for power generation, while other biomass resources (wood fuels) are used for domestic cooking purposes in Mexico. These uses are unlikely to be displaced by bioEthanol production in the near to medium time frame. Bagasse from sugarcane production is expected to be readily available at the sugar mills and its supply is estimated at 6 mmt (dry weight) in 2017 under the baseline case. Limitations on Current Infrastructure for a Blending Mandate Mexico, currently the highest fossil fuel emitter in Latin America, is a net exporter of crude oil but importer of refined gasoline and gasoline additives. These gasoline additives, such as MTBE, constitute an obstacle to meeting Bio-‐fuel targets, because Ethanol would have to substitute for MTBE and current production facilities are not equipped to do so. PEMEX has pointed out this as the primary barrier to entry. Additionally, the country’s fuel infrastructure, including its network of gas stations, would have to be modernized, inspected, and maintained to handle Ethanol. Mexico has established a technical cooperation relationship with Brazil with regard to Ethanol and Gulf of Mexico crude oil reserves, where Brazil provides technical assistance. The North American Free Trade Agreement (NAFTA) eliminates some protections for corn and other feedstock crops by 2008, creating concerns and uncertainties as to the impacts on local markets, domestic production, and trade in feedstock crops and Ethanol. Mexico currently produces between 56 and 82 million liters of Ethanol annually, though it has the capacity to produce nearly 170 million liters per year. That Ethanol generally is not used for fuel and is insufficient to meet the projected 20-‐fold increase in demand the blending targets imply. Mexico is a net importer of Ethanol from the US, Brazil, and, recently, China. Mexico likely would continue to rely on imports, primarily from the US and Brazil, to meet future Ethanol demand. Nevertheless, Mexico has the natural resources, arable land, and history of cultivating viable feedstock crops (sugarcane, corn, sorghum, wheat, sugar beet, cassava, and oilseeds) that could allow the country to achieve its Bio-‐fuel production goals. Meeting this demand would require a substantial investment, shift in domestic agricultural production, and changes in legislation, institutions, and infrastructure. The proximity to the U.S. market, combined with state targets for environmentally friendly fuel use and access to markets under NAFTA, offers future opportunities for Mexico to export Bio-‐fuel to California. These exports most likely would consist of modest quantities based on sugarcane, sorghum and recycled oils and oilseed for feedstock.


Impact Investment in Bio-fuel / Biomass Co-gen: Rationale for Rural Projects Agriculture is a potential instrument for reducing carbon and other greenhouse gases in the atmosphere. Crops naturally sequester carbon as part of the plant’s growth cycle. This carbon can become an energy source for humans and animals or can be converted into bio-‐energy, which can substitute for fossil fuels.

Biomass residuals from agriculture left on the fields can reduce erosion and contribute to soil fertility, or much of this biomass can be collected and turned into energy. The state of Tamaulipas produces over 2 million tonnes of sorghum per annum and we estimate an approximate 8 million tonnes of residual sorghum stems in the fields. Animal manure can also be used as a fuel instead of being left to decay and

release the potent greenhouse gas methane, with an atmospheric impact 21 times that of carbon dioxide (the other significant green-‐house gas from agriculture is nitrous dioxide, with an impact more than 300 times that of carbon dioxide). However, methane bio-‐digester systems have yet to prove their energy efficiency in operation in Mexico, as there are no installed systems yet. Doubts surround the feasibility of such systems, especially when accounting for their high Capex cost. The specificity of the feedstock, the logistics, the conversion, and local economic conditions make it difficult to define a single break-‐ even point for the production of Bio-‐fuels. If technology improves and oil prices continue their current upward trend, however, the production of Bio-‐fuels would be economically competitive in more countries and for a wider variety of feedstock. A key motivation in the development of Bio-‐fuels is the possibility of diversifying energy resources and displacing large oil import bills with spending on locally produced Bio-‐fuels. Rural development benefits from a dynamic bio-‐energy sector, beginning with feedstock production. Because agricultural production in many developing countries is characterized by labor-‐intensive activity, additional demand for agricultural products will increase employment and wages in the agricultural sector. Furthermore, the additional personal income generated has the potential to induce significant multiplier effects as the rural population spends it.


Given the weight and bulk of most biomass feedstock, it is necessary to locate collection and conversion facilities in rural areas, close to where the feedstock is grown. Consequently, construction and operation of those facilities will generate additional economic activity in rural areas. This fact emphasizes the close link between the Bio-‐fuels sector and rural development. Organizing small-‐scale producers to meet the throughput volume and reliability needs of conversion facilities can enhance local benefits, especially for the poor. In Brazil and the United States, large corporations dominate the bio-‐energy industry, but farmer cooperatives play a useful role in linking these large firms to independent growers. Similar arrangements may be needed in other countries if the industry is not to develop in a vertically integrated way with only large-‐scale growing of biomass feedstock. Additionally, since certain biomass co-‐generation energy crops like trees and grasses require few inputs, they sometimes can be grown on land too marginal for food crops. These energy crops have the potential to extend the land base available for agricultural activities and to create new markets for farmers. These positive impacts in the dynamics of the rural economy could have a substantial role in reducing the traditional exodus to urban areas and could create a more favorable economic environment for greater investment in rural infrastructure, health, and education. Bio-‐energy crop systems can yield significant benefits, both environmental and social. The right choice of biomass crops and production methods can lead to favorable carbon and energy balances and a net reduction in greenhouse gas emissions. But bio-‐energy production systems also need to be adapted to local conditions to avoid generating environmental problems. As a guiding principle, bio-‐energy crop systems can potentially provide benefits if implemented on land that is currently under annual row crops or is undergoing uncontrolled degradation. In either case, providing social benefits will require engaging local communities and understanding the current uses of the land, such as food production, livestock grazing, and fuel wood gathering. Bio-‐energy crop production can be a suitable alternative if designed in a participatory manner with those whose livelihoods will be affected. New technological innovations in bio-‐energy, along with dramatically rising international oil prices and extremely volatile natural gas costs, have opened the door to a revolution in commercial bio-‐energy production. Improvements have been made in Ethanol and biodiesel production and in the gasification of Bio-‐fuels. In most countries these developments have important implications for agriculture and may offer new income-‐earning opportunities for farmers. In some cases, such as Brazil, they dramatically reduce the need for imported oil. Residues are an especially important potential biomass energy source in densely populated regions, where much of the land is used for food production. In fact, biomass residues play important roles in such regions precisely because the regions produce so much food; crop production can generate large quantities of by-‐product residues.


To put this in perspective, if half of this resource were to be used in China for generating electricity at an efficiency of 25 percent (achievable at small scales today), the resulting electricity generation would be about half of the total electricity generated from coal in China4. There is also significant potential for providing biomass for energy by growing crops specifically for that purpose. In one scenario from the Intergovernmental Panel on Climate Change (IPCC), 385 million hectares globally are planted with biomass energy plantations in 2050 (equivalent to about one-‐quarter of the present planted agricultural area), with three-‐quarters of this area in developing countries. Using so much land for bio-‐energy raises the issue of intensified competition with other important land uses, especially food production. Competition between land use for agriculture and for energy production can be minimized, however, if degraded land and surplus agricultural land are targeted for energy crops. Though these lands are less productive, targeting them for bio-‐energy plantations can have secondary benefits, including restoration of degraded land and carbon sequestration. In developing countries in aggregate, about 2 billion hectares of land have been classified as degraded, though this land is certainly not entirely unoccupied. Although there are many technical, socioeconomic, political, and other challenges involved in growing energy crops on degraded lands, successful plantations have already been established on such lands in some developing countries. Biomass-‐based industries are also a significant source of jobs in rural areas, where high unemployment often drives people to take jobs in towns and cities, dividing families and exacerbating problems of urban decay. Compared with other fossil fuel and renewable energy production, biomass is relatively labor intensive, even in industrialized countries with highly mechanized industries. Traditional bio-‐energy provision also creates a significant source of employment. One study reported that 33 percent of randomly selected respondents in one charcoal-‐producing area claimed charcoal production as a source of income. It should not be assumed, however, that all rural areas in developing countries are characterized by surplus unskilled labor and that labor-‐intensive bio-‐energy projects will automatically have a pool of workers from which to select. Employment in rural areas is primarily agricultural and hence, highly seasonal. It also moves in longer cycles coinciding with good and bad harvests, which can have ripple effects extending into the formal economy. 4 U.S. Department of Energy, estimated energy production levels in China, 2010


Mexican Social and Rural Context for Agri-business Investment Projects Mexico’s public agricultural budget for 2011 amounted to some 5.8 billion dollars; nearly double the total in the year 2000. An estimated 52 million of Mexico’s 112 people live in poverty, and 25 percent of the population does not have enough to eat, according to the government’s National Council for the Evaluation of Social Development Policy (CONEVAL). 5 In addition, the centre and north of the country are suffering from drought, which is having a heavy impact on agriculture, livestock, and the incomes of thousands of farm workers. Mexico has made significant progress in improving a key indicator for the realization of the right to food, namely, achieving the Millennium Development Goal of reducing the national average of children under 5 years who are underweight (target 1.8) from 14.2 per cent in 1988 to 5 per cent in 2006. Progress has, however, been uneven and deprivation levels in enjoyment of the right to food remain dramatic for a large part of the population. The National Council on the Evaluation of Social Development Policy (CONEVAL) estimates that 18.2 per cent of the population (19.5 million people) lived in “food poverty” in 2008, up from 13.8 per cent (14.4 million people) in 2006. The situation has remained largely unchanged since 1992, with a drastic deterioration in 1996, when the number of people living in food poverty almost doubled to reach 37.4 per cent and a short-‐ lived drop in food poverty in 2006. According to the most recent official figures, in 2010, total of 52 million people (46.2 per cent of the population) lived in poverty while 28 million (24.9 per cent) had insufficient access to food. These national averages cover significant disparities between deprivations in access to adequate food between urban and rural areas as well as between States in North, South and Central Mexico. Of the 18.1 million people living in municipalities considered to have a high or very high degree of marginalization, 80.6 per cent live in rural areas. There are also marked differences in relevant right to food indicators between indigenous and non-‐indigenous populations. For both groups, child malnutrition rates have gradually decreased. Nevertheless, one in three (33.2 per cent) indigenous children under the age of 5 years suffered from chronic malnutrition in 2006, compared with one in 10 (10.6 per cent) non-‐indigenous children. National statistics also show that women and the elderly are particularly vulnerable to deprivations in access to adequate food.

5 United Nations Rights Council in Geneva, U.N. special rapporteur on "The Right to Food," Olivier De Schutter, March 9, 2012 interview with IPS.


Historical and Projected Price of Corn (U.S. Department of Energy) With recent constitutional reforms, Mexico has joined a small but rapidly growing group of States that are making the right to adequate food explicit in their national Constitution, thus empowering courts to ensure that this right is fulfilled with. The legal framework could be further improved, however, by the adoption on a framework legislation on the right to food, as has been done in a number of other countries in the region and as recommended by the Committee on Economic, Social and Cultural Rights and under the Voluntary Guidelines to Support the Progressive Realization of the Right to Adequate Food in the Context of National Food Security of the Food and Agriculture Organization of the United Nations. In this regard, the United Nations notes with interest the draft bill on planning for agricultural, food and nutritional sovereignty and security ("Proyecto de Ley de Planeación para la Seguridad y la Soberanía Agroalimentaria y Nutricional"). The relatively high degree of dispersion of the rural population, in part attributable to the policy of agrarian reform dating from the 1917 Constitution, makes it difficult to provide rural households with adequate basic services, including, in particular, health care and education, and to promote off-‐farm rural employment. The concept of “sustainable rural towns” (ciudades rurales sustenables) is seen as an answer to this challenge.


This concept is being tested in the State of Chiapas with support of a number of United Nations agencies, including in particular the United Nations Development Program. Based on recent conversations with the Secretary of Energy of Mexico, we are convinced that a new public bidding process will be announced during the first quarter of 2012 for Chiapas and Oaxaca, in order to test the new PEMEX Ethanol purchases pricing formula. If successful, then the program may be opened for the city of Monterrey, which is a significant first step towards a blending mandate in Mexico. Lobbying efforts are necessary by industry participants in order to provide technical assistance and best practices for PEMEX.

Feedstock Production Costs Several factors contribute to higher production costs, lower yields, and lower potential growth for Bio-‐fuel feedstock sectors in Mexico when compared to other countries in this assessment. Mexico’s feedstock production primarily is from small, rain-‐dependent parcels with relatively limited access to technology, capital, inputs, and markets. Additional cultural and social issues that can influence production include the role of corn in society and the impacts of NAFTA. Finally, physical conditions including climate and weather variability, soils, and limited availability of water, create significant constraints to rapid agricultural expansion for Bio-‐fuel crops such as sugarcane. Crop yields are highly susceptible to weather conditions.


Sorghum as an Ethanol Feedstock One set of crops with great potential for Ethanol production is sweet sorghum, which is similar to grain sorghum but features more rapid growth, higher biomass production, and wider adaptation. The dual-‐purpose nature of sweet sorghums—they produce both grain and sugar-‐rich stalks—offers new market opportunities for smallholder farmers and does not threaten food trade for sorghum. Because sweet sorghum requires less water and has a higher fermentable sugar content than sugarcane, which contains more crystallizable sugars, it is better suited for Ethanol production than sugarcane or other sources, and sweet sorghum Ethanol is cleaner than sugarcane Ethanol, when mixed with gasoline. Opportunities for Cellulosic Ethanol R&D in Mexico Agricultural Bio-‐fuels are currently based on the generation of Ethanol from sucrose or starch derived from vegetative biomass or grain, on biodiesel from the more direct use of vegetable oils and animal fats. Ethanol has a high octane rating and can be blended in low proportions with gasoline for direct use in normal internal combustion engines. Further down the line, there is enormous potential to develop cellulose-‐based bio-‐energy systems. Plant biomass is an abundant and renewable source of hydrocarbons, and crops can generate more cellulose per hectare than sucrose or starch. Plant breeders should aim for high-‐density biomass production (for example, 15 tons per hectare in maize) rather than competing with crop residues or forest production for supplying materials to cellulosic bio-‐refineries.


Best Practices: The Success-Case of Brazil

The government of Brazil announced on March 2nd 2012, a new 5-‐year investment program totaling US$38 Billion dollars in order to expand the availability of sugar cane for Ethanol production. The initial investment, part of the "Brazilian Strategic Plan for the sugar-‐Ethanol Sector" will be over US$16.9 billion dollars in order to renovate 6.4 million hectares of sugar cane, which are currently at an optimal production level of three cuttings per year. This is a clear example of a leading Ethanol and bio-‐energy leader in Latin America and perhaps the world.

Mexico would be well served by implementing government programs aimed at improving energy security while promoting rural development. In this light, Brazil’s experience offers some relevant policy lessons. Among the policies most important to Brazil’s success may be the following: • Subsidizing Bio-‐fuels during market development until economy of scale allowed fair competition with oil products; • Allowing renewable energy-‐based independent power producers to compete with traditional utilities in the large electricity market; • Supporting private ownership of sugar mills, which helps guarantee efficient operations; and • Stimulating rural activities based on biomass energy to increase employment in rural areas


Synergies with the Sugar Market The coupled production of Ethanol and sugar, which occurs in almost all sugar mills, is a significant driver of Brazil’s successful Ethanol program. International sugar prices have been both highly volatile and on a general downward trend. If sugar prices fall, mills may find it more profitable to shift to Ethanol production. Experience has shown, however, that it is important to protect the domestic market for Ethanol—that is, in order to prevent domestic Ethanol shortages, sugarcane producers often have to produce Ethanol even when they could make greater profits by selling sugar. Significant improvements in the productivity of the sugar industry have benefited Ethanol production. Between 1975 and 2010, sugarcane yields in the Sao Paulo region rose by 33 percent, Ethanol production per unit of sucrose rose by 14 percent, and the productivity of the fermentation process rose by 130 percent. Thanks to these productivity improvements, the cost of producing Ethanol declined by an annual average of 3.8 percent from 1990 to 2000 and 5.7 percent from 2000 to 2010. Synergies with Electricity and Heat Production Another important contributor to the success of Bio-‐fuels lies in the energy content of sugarcane residues. At present, cogeneration of heat and electricity from bagasse supplies most of the energy needs of the Bio-‐fuel production process itself, as well as allowing an increasing amount of electricity to be exported to the grid. From 1997 to 2004, the amount of electricity from biomass sold to the grid increased from 80 to 1550 gigawatt-‐hours (GWh). This surplus electricity came mainly from retrofitting existing energy supply facilities in some 30 sugar mills. Institutional Support Replacing gasoline with another fuel faces a “chicken-‐and-‐egg” problem in the supply chain. Consumers are afraid to buy cars that use a new fuel that may be difficult to find. Service station owners are not interested in investing in a parallel fuel distribution system since the number of potential users is usually very small. Therefore the Brazilian government, at both the federal and state level, had an essential role to play in providing incentives and setting up a clear institutional framework. This role included setting technical standards, supporting the technologies involved in Ethanol production and use, providing financial advantages, and ensuring appropriate market conditions.


Agricultural Land Brazil has abundant agricultural land and an appropriate climate for sugarcane. Its sugarcane industry was already developed, and the dominant state in this industry (Sao Paulo) sugar mills are also diversifying their energy outputs. Since 1997, when legislation allowed independent power producers to sell electricity to the grid, the supply of electricity to the grid from sugar mills has grown strongly. Around 600 MW of installed power from sugar mills were delivered to the grid in 2010. Sugar mills are starting to economically compete with conventional sources of electricity to meet the needs of the national power grid, and this activity is expected to increase. In addition, sugar mills are installing biodiesel plants that offer a number of synergies with sugar/Ethanol production. Sugar/Ethanol production does raise concerns about land use. Sugarcane production for Ethanol competes with production of food and other export crops. Yet the 5.5 million hectares cultivated with sugarcane represent only 8.6 percent of the total area harvested with essential crops. In addition, farmers are increasingly rotating between sugarcane and food crops like tomatoes, soy, peanuts, beans, rice, sorghum and maize. This approach has helped maintain the balance between energy and food and has improved land profitability. The expansion of sugarcane plantations could, however, indirectly lead to increased deforestation, as cattle ranching displaced from pastureland by sugarcane production could encroach on forest areas. Until now, most of the cattle ranching activities in the region have continued on a more confined, less land-‐ intensive scale. Development of a Sustainable Bio-energy Industry in Mexico Launching and developing a new industry like bio-‐energy poses difficult challenges for the private sector. The substantial investments that must be made up front can yield little return until sufficient scales of production and demand have been achieved to slash unit costs. But achieving those scales depends on complementary investments throughout the market chain, and these investments may not be forthcoming until bio-‐energy costs have fallen to a level competitive with alternative energy sources. The Bio-‐fuel industry is a good example. A viable Bio-‐fuel industry requires large and coordinated investments not only by farmers and processors, but also by car manufacturers, consumers, fuel distributors, and garages. Until these investments are in place, Bio-‐fuel sales are destined to be low, and economies of scale in production and distribution cannot be exploited. Given higher costs, Bio-‐fuels may remain uncompetitive with oil.


The solution to this problem is for Mexico to provide initial incentives to help launch the industry. The public sector can help achieve critical market size by offering tax rebates on Bio-‐fuels (but not on oil-‐based gasoline and diesel), by mandating fuel blending requirements (like the European Union’s current requirement that diesel contain at least 2 percent biodiesel), by offering investment incentives such as tax exemptions or holidays on bio-‐energy investments by industry and subsidies to consumers (to buy flex-‐fuel cars, for instance), and by investing directly in research and development and relevant infrastructures. Brazil began using these kinds of interventions in the mid-‐1970s and has now built up a viable Bio-‐fuels industry that not only contributes a significant share of the country’s energy requirements for transportation, but also exports to other countries.

The European Union and the United States began later and are in the process of building up their own domestic industries. Many other countries seem likely to follow. Although Bio-‐fuel production has clear benefits for the agricultural sector, the net impact on poverty and food insecurity in developing countries is less clear. Not all countries have the natural resource base to justify significant production of bio-‐energy crops, but for those that do, the diversion of land and water away from the production of other agricultural outputs, especially food and feed, needs to be considered. Although current levels of bio-‐energy production are too small to have much impact on world food prices, any rapid and widespread expansion within the constraints of existing technologies could lead to significant food price increases.


Such price increases would be beneficial to farmers who produce a net surplus of food, but they would be detrimental to poor consumers and food-‐deficit farmers, who would have to balance more expensive food against less costly energy. Since the poor typically spend much larger shares of their consumption budget on food than energy, this trade-‐off is unlikely to be favorable. Policy Recommendations for a Mexican Bio-fuel / Bio-energy Industry There are several ways to reduce the trade-‐offs between bio-‐energy crops and food production: • Develop biomass crops that yield much higher amounts of energy per hectare or unit of water and thereby reduce the resource needs of bio-‐energy crops. • Focus on food crops that generate by-‐products that can be used for bio-‐energy, and breed varieties that generate larger amounts of by-‐products. • Develop and grow biomass in less-‐favored areas rather than in prime agricultural land (an approach that would benefit some of the poorest people.) • Invest in increasing the productivity of the food crops themselves, since this would free up additional land and water for the production of bio-‐energy crops. • Remove barriers to international trade in Bio-‐fuels. The world has enough capacity to grow all the food that is needed as well as large amounts of biomass for energy use, but not in all countries and regions. Trade is a powerful way of spreading the benefits of this global capacity while enabling countries to focus on growing the kinds of food, feed, or energy crops for which they are most competitive. Trade would also allow bio-‐energy production patterns to change in the most cost-‐effective ways as new second-‐generation technologies come on line. Sugar Cane Production and the Installed Ethyl Alcohol Plant Assets in Mexico Although sugarcane is among the most expensive (in terms of the opportunity cost posed by higher pure-‐ethyl-‐alcohol and sugar markets prices) of Mexico’s potential Bio-‐fuel crops, the country’s sugar industry probably is best suited for producing Ethanol. Sugarcane is a key component of Mexico’s sugar industry. The seventh-‐largest global producer of sugar, Mexico produces about 5 million tons of sugar annually from approximately 633 million ha, and the industry directly or indirectly employs 12 million people. Land holdings typically are small, held by individual growers or through communal ownership of 3–5 ha farms.


Most of the country’s sugarcane is used to produce centrifugal sugar. Nevertheless, the Bio-‐ Fuels Promotion and Development Law and the National Sugar Development Plan encourage the use of sugarcane for Ethanol. The Sugar Development Plan seeks to diversify the sugar industry and envisions building up to a 120-‐million gallon/year Ethanol production capacity by 2012. Current sugarcane production in Mexico mainly is for domestic sugar consumption. However, about 13% of the sugar production is exported in either raw or refined form. The Mexican sugar industry is undergoing a number of changes that may affect sugarcane uses for Ethanol fuel. These changes include implementation of NAFTA provisions, a pending Supreme Court decision on a new sugar law, the launching of a new National Sugar Program by the government, privatization of sugar mills, and the enactment of a Bio-‐fuel Law that encourages sugarcane use for Ethanol fuel production. One of the targets of the new National Sugar Program is to allocate about 11% of the total sugarcane production target for 2012 of 61mmt to Ethanol. Mexico produces over 50 million tonnes of sugar cane per annum, which are dedicated to production of over 5.8 mmt of sugar and 1.8 million mtt of molasses, of which its principal use is the production of alcohol of diverse grades of purity. Some sugar cane mills have installed dehydrator columns in order to produce anhydrous Ethanol. This initiative emerged from a collaboration agreement between the Sugar Industry Chamber of Commerce and the Government of Mexico City; although it does not have yet the official endorsement by PEMEX. In the 2009 collaboration agreement, it was stipulated that at least 10 million liters of Ethanol would be produced in order to blend in the gasoline of Mexico City official vehicles. Unfortunately, that effort failed since PEMEX was unwilling to provide an economically attractive pricing formula for its purchases of Ethanol. The PEMEX open auction for the city of Guadalajara was declared, "deserted" on March 2010. The Mexican sugar-‐cane chamber of commerce estimates that the top-‐production 12 (twelve) mills produced during 2010 over 60 million liters (or 15 million gallons) of anhydrous Ethanol, which was sold and used for other industrial purposes and not used at all in any type of blending in Mexico. Surprisingly, these 12 top-‐tier sugar cane distilleries only produce an average 30 million gallons of anhydrous alcohol per year. At the same time, industry reports state that nearly 180 million gallons of stillage are produced and applied as bio-‐fertilizer for the same sugar cane plantations, surrounding the mills. Industry data mention that from one (1) tonne of sugar it is possible to produce 243 liters of absolute pure alcohol (200-‐proof).


PEMEX, through its "Mexican Institute of Petroleum" has become a supporter of the sugar cane mill industry and has paid for several research programs, aimed at testing different blend mixes of Ethanol with vehicular gasoline. In order to overcome the economic challenges, posed by the combination of high feedstock costs and uncertain Ethanol purchase prices by PEMEX, derived from its obscure pricing formula, several industrialists and sugar cane mill owners are turning to the lessons learned from Brazil. There is currently a dynamic discussion about the need to conceptualize, develop and implement an integral production model, which encompasses its own power and steam generation for each plant. Several sugar cane mill owners are exploring biomass energy co-‐generation new projects and there is a high level of interest in new biomass power technologies. A clear opportunity for new investors who are seeking entry into Mexico presents itself, particularly in the biomass co-‐generation capital investment niche, since sugar cane producers have already stated publicly their desire to upgrade their sugar cane mills with new electricity and steam generation technologies. Mexico Sugar Cane Production Estimates6 Bio-energy from Sugar Cane Production The processing of one tonne of sugarcane produces about 280 kg of bagasse with about 50% average moisture and 13-‐15% dry fiber. There is an additional estimated 50-‐250 kg of “trash” (leaves and straw) potentially available with the wide range depending on the harvest and collection process used. Most of this is usually left in the fields. The sugar mills and Ethanol plants are usually designed to crush the sugarcane and process the solid cane residue, bagasse, for combustion on site. 6 Biofuel Feedstock Assessment, Oakridge National Laboratory, U.S. Department of Energy


The energy value in the bagasse is greater than sugar mill processing thermal requirements. Therefore, the combustion processes in mills was traditionally thermally inefficient because there was a need to dispose of the bagasse on site. As the value of energy and bagasse has increased, many sugarcane-‐processing plants are upgrading their equipment to make more efficient use of bagasse and other byproducts. There is growing use of efficient co-‐generation systems that produce heat for processing and electric power that can serve the mill and in many areas, be sold back to the grid. This transition is catalyzed where higher prices and government regulations facilitate profitable participation of private power producers such as sugar mills in national electricity markets. The U.S. Oakridge National Laboratory (based on the projected amount of sugarcane production) calculated the total amount of bagasse available. Available bagasse is reported on an equivalent dry biomass basis at the rate of 140 kg of bagasse for each tonne of sugarcane (half the total weight generated). With efficient systems, U.S. Department of Energy researchers suggest that only 25-‐30% of available bagasse will be needed to meet process heat needs at a processing plant, leaving the majority available as a potential feedstock for cellulosic Bio-‐fuel production while maintaining a self-‐sufficient energy supply system for the plant. Although there are not formal or consistent markets for bagasse, spot markets can occur. Excess bagasse is also used as a fiber feedstock for paper production in some localities. An estimated opportunity cost is assigned for this analysis based on reported values occasionally observed in Brazil of approximately $1/MJ, or $8.40 per metric tonne. This value is adjusted somewhat based on information about demand and markets in each country studied.

Estimated Land Surfaces for Biomass Production7

7 Ibid


Estimated Cost US$/metric tone for Biomass8 Crop Residues as Biomass for Co-Generation Strategies in Latin America An assessment by the U.S. Department of Energy, estimated total crop residues in Latin America in 2010. The amount of recoverable residues as a function of the projected crop production in 2017 ranges from 182 mmt in the low growth case to 344 mmt in the high growth case, and sums to 246 mmt in the baseline case. The baseline estimate includes 187 mmt from bagasse, 40 mmt from corn stover, 17 mmt from wheat straw and 2 mmt from palm oil processing wastes. Due to environmental considerations, none of the wastes from soybean harvesting is assumed to be recoverable. Total crop residues recoverable in 2027 are projected at 326 mmt, ranging from 200 mmt to 570 mmt in the low and high growth cases. The recoverable crop residue estimates summarized here are based solely on the crop-‐country combinations studied. The distribution of estimated recoverable crop residues by country is presented in Figures 2.13 and 2.14 (for all three cases in 2017 and 2027, respectively). Environmental and Social Issues related to Biomass Feedstock in Latam Biofuel feedstock production can have negative or positive effects depending upon the local situation and factors such as crop type, the methods used to cultivate and harvest it, and what the alternative land use would be. A recent book, Biofuels for Transport, notes that Bio-‐fuels offer tremendous potential benefits “if policies are enacted to steer developments in the right direction.”

8 Ibid


Several studies have examined environmental and social issues associated with expanding global Bio-‐fuel production, including food security, greenhouse gases, expansive monoculture production systems, and poverty, finding both risks and opportunities. Although several concerns are observed in specific instances, there appears to be a growing consensus that if best practices for socially and environmentally sound development can be applied, then appropriate Bio-‐fuel feedstock crops could offer farmers enhanced employment and incomes while reducing the burden of foreign oil imports on developing nations. Best practices should guide production systems to be increasingly socially responsible and environmentally sound. Optimizing system efficiency by minimizing and recycling wastes in a manner that maintains productivity is important and some feedstock crops (such as sugarcane in Brazil) appear to be moving in that direction. But any rapid agricultural expansion poses risks if it distorts markets and disregards local needs, or undermines human rights, equity and long-‐term sustainability.


The scope and degree of social, environmental and political constraints associated with increased Bio-‐fuel feedstock production vary depending on the crop and the country. Capacity for land use planning and enforcement is important to avoid or minimize detrimental impacts associated with expanding areas under any form of cultivation. Brazil, for example, has enacted progressive environmental protection regulations but faces many challenges in achieving compliance. Agricultural expansion in Brazil (particularly soybeans) has generated concern among stakeholders about potential contributions to deforestation and pollution in the Amazon and other sensitive ecosystems. And while increases in the area used for sugarcane typically come from previously cleared land (primarily pastures), it is difficult to determine what impact this may have on more distant agricultural frontiers. Deforestation, land tenure, water use and pollution represent important and politically delicate issues in most countries. In some countries, concerns have been raised over small-‐farmer and indigenous land rights and the loss of biodiversity due to expanding palm oil plantations in tropical low lands. A positive trend is that recent growth in Bio-‐fuel feedstock production has been accompanied by increased local and international attention to what are often long-‐standing social and environmental development challenges.


Stakeholder participation in discussing the issues of expanding production of Bio-‐fuel feedstock has been supported by various sectors (industrial, government and environmental) and is producing growing networks of practitioners at multiple scales. The increased transparency is generating a better understanding of the issues and mechanisms to address them. These may serve as important mechanisms to promote more sustainable systems for feedstock production, harvest and transformation. Soils Any agricultural system needs to maintain soil health and productivity to be sustainable in the long term. Traditional annual feedstock production including intensive corn and soybean cultivation has often been associated with soil degradation and erosion. Negative impacts tend to be more severe in large-‐scale operations where machinery is heavier (leading to soil compaction) and tillage is more expansive and intensive thereby creating more opportunity for erosion from wind and rain. Improved crop varieties combined with the use of fertilizers, pesticides, herbicides and irrigation, has compensated for negative soil impacts as reflected in consistent yield increases over time (on average and thus far). Expansion of annual crops for Bio-‐fuel will likely have negative consequences on long-‐term soil health and productivity unless more sustainable practices are employed. Studies referenced in country analyses. Specifically note some of the concerns associated with expanding corn and annual cultivation in Argentina, Colombia and Canada. Other cultural practices including site preparation, irrigation, and the use of fire, fertilizers, pesticides and herbicides, can impact soil health. Furthermore, if cultivation takes place in environmentally sensitive ecosystems (wetlands or tropical forests) or on marginal lands (steep slopes or shallow soils), negative soil impacts may be unavoidable and special precautions may be required to mitigate them both for site productivity and to reduce damage to surrounding ecosystems. Over several decades, the sugarcane industry has researched options to return liquid and solid processing residues to fields and has developed sophisticated procedures and guidelines for recycling wastes and maintaining productivity. Sugarcane industries in some nations, such as Guatemala and Colombia, have consistently improved yields, in part by ongoing improvements in soil management. Studies in Brazil have suggested that commercial sugarcane plantations reduced erosion and improved soil quality when compared to prior land uses. However, traditional sugar cane operations often involve annual burning of fields prior to harvest, with associated loss of nutrients and increased proclivity for subsequent erosion. These practices make new sorghum field-‐leftovers attractive.


Water In some geographic areas, water availability and costs are expected to increasingly become limiting factors for expanding agricultural production. The local climate combined with a crop’s water requirements and other economic factors help to dictate the need for and use of irrigation. Crops with high value and high input costs are often irrigated even though they are produced in areas where average rainfall could support a fair level of production. Irrigation in these cases reduces uncertainty and the risk of loss due to drought and allows more intensive cultivation and precise planning of inputs. Growing climate variability and climate change increase the amount of land area where irrigation (and drainage) infrastructure are required to reduce risk to acceptable levels. Climate change may eventually cause shifts in where crops can be grown successfully without irrigation and generally, will require additional irrigation in traditional production areas. Once irrigation is established, cultivation intensity (crop density) increases to reap the most from the infrastructure investment. This in turn creates increased demand for water, fertilizer and other inputs. Although it does not directly limit potential feedstock production, water pollution is another factor where intensively cultivated annual crops such as corn and soybeans have documented negative impacts (as will any crop that involves high levels of fertilizer and chemical applications that can eventually reach local water tables). Monitoring and minimizing runoff or leaching of agricultural chemicals is an important component of best practices for sustainable production. Erosion and run off can have detrimental impact on urban water supplies, freshwater ecosystems and, in some cases such as CBI nations, damage marine ecosystems and coral reefs as well. The use of improved (more sustainable) agricultural practices is vital to avoid or mitigate these impacts. Land The countries and region studied vary in the amount of arable land that could be available to produce feedstock. A combination of physical attributes (e.g., soil, slope, climate, water), tenure, prior use, economics and policies will influence what lands could become available for expansion of Bio-‐fuel feedstock production. At one end of the spectrum, Brazil has an estimated 100–200 million hectares of underutilized or undeveloped arable land suitable for feedstock that could be available without deforestation and with little impact on other productive sectors. At the other extreme, availability of arable land in countries such as India and China pose severe constraints on Bio-‐fuel feedstock production given national priorities for food security.


Following Brazil, Argentina and Colombia are considered to possess relative abundance of underutilized arable land. But in both of these nations, land suitable for sugarcane is already developed leaving little room for expansion without relatively high costs and displacement of other productive systems. Within Central America over the next decade, expansion in sugarcane and Ethanol production is expected to be led by Guatemala and Nicaragua based on suitable lands, existing industries and the limitations of land and climate in other parts of the region. Most nations use their best available land (in terms of climate, soils and access) for existing food, feed and fiber sectors. Thus, to achieve increasing Bio-‐fuel production targets will often require trade-‐offs and shifts in farming practices such as: expansion to marginal (less productive) lands, changes in the proportion of land dedicated to different crops, rotation and tillage practices. These shifts bring associated changes in fertilizer and pesticide use, water demand and land use intensity that could contribute to negative impacts on soil, water and ecological services – and impinge on sustainability, if not carefully managed. Some countries plan to improve land use while simultaneously increasing Bio-‐fuel feedstock production. This can occur when prior land use is less sustainable than systems used for feedstock – such as the use of perennials in areas that might otherwise be prone to erosion. China hopes to promote the production of Bio-‐fuel feedstock using drought resistant tree crops on marginal lands that do not compete with food and feed related production. And lands cleared and abandoned or repeatedly burned for pasture can be more productively managed for sugarcane or perennial crop production. Corn and soybeans have similar climate and soil requirements. In many of the countries studied, most of the land being used for increased production of soybeans and corn is former pastureland and significant areas of underutilized pastures remain available for expansion. (In Latin America, this is an artifact of former land tenure regimes that required claimants to show land “improvement” in order to gain ownership. The “improvement” was nearly always clearing/burning the land and calling it “pasture.”) While sugarcane is also expanding on former pastures, it will tend to displace any land use of lesser value while focusing in localities that offer appropriate climate, soil, topography and infrastructure (including processing plants). With the exception of Brazil, land availability represents a growing constraint to the expansion of feedstock supplies in most countries studied. Land is a more important constraint to sugarcane (outside of Brazil) than for other feedstock due to its more demanding site requirements for competitive production. A transition to cellulosic feedstock would substantially alleviate the land constraint in most nations, but Brazil would still be best positioned for low-‐cost supply due to the size of its sugarcane-‐Ethanol industry and corresponding availability of bagasse as feedstock in the mills and distilleries.


Deforestation Leaders in Bio-‐fuel production (Brazil and the United States) along with four countries with plans for future Bio-‐fuel feedstock expansion – Colombia, Indonesia, Canada and Peru – contain the majority of the world’s remaining primary forests. This raises serious concerns among national and global environmental constituencies about potential impacts of Bio-‐fuel feedstock expansion on world forest resources and biodiversity. Among the nations studied, this concern is most evident in Brazil and Colombia. A review of literature conducted for this research paper suggests the following: (a) Deforestation is a product of a complex set of factors including access, land speculation, social injustice and weak law enforcement capabilities; (b) Expansion of sugarcane production can occur without directly contributing to further deforestation; (c) Expansion of other feedstock crop areas is likely to occur on land more recently cleared of forest; (e) Other factors being equal ("ceteris paribus"), when alternative uses of cleared land are considered, expansion of well-‐managed Bio-‐fuel feedstock production may often be environmentally preferred.


Social Factors Social factors are a potential constraint to the growth of Bio-‐fuel feedstock supplies in some sectors and countries, especially where a large percentage of the local population perceives impacts. Social concerns related to feedstock production revolve around two key areas: changing land use and loss of employment. Related to land use, issues derive from the displacement of traditional small farmers by large commercial agricultural enterprises typically associated with Bio-‐fuel production. While such displacement could be applicable to any feedstock crop, it appears to be most severe in cases such as the conflicts publicized when new palm plantations displace forest dwelling indigenous groups. Sugarcane and soybean operations also tend to acquire large, concentrated holdings by buying-‐out prior small holders who typically used more labor intensive and diversified agricultural systems. And as industries expand and become more mechanized, employment opportunities may be reduced. This is a large concern as sugarcane operations switch from manual to mechanized harvests. In any of these scenarios, compensating employment and income opportunities are needed to avoid social problems that could begin to undermine or constrain the industry. Risks posed by Concentration on Bio-fuel Feedstock The concentration of a major percentage of the world’s traded commodities in just a few countries, and the cultivation of these crops in large monoculture plantations, exposes globally important supplies to significant vulnerabilities from severe weather events, political unrest, plagues and pests. A majority of Bio-‐fuel feedstock supply expansion is expected to occur in the tropics where extreme weather events such as hurricanes, droughts and floods have disrupted past production and caused unforeseen spikes in prices. For example, the sugar content in a harvest is influenced by weather and an untimely tropical storm and flooding can cause an unexpected decline in the total annual harvest despite expanding area under cultivation. The supply curves developed for the baseline cases in this study assume that growth within a given state or nation continues based on past average rates within a defined set of parameters. However, in any given year, supplies will likely be somewhat higher or lower than the baseline, moving up and down in response to the many variables discussed, but probably within the range bracketed by the high and low growth cases. If future conditions differ greatly from the past, the assumptions behind projections based on past trends will no longer be valid. And the risks posed by the concentrated production of key commodities may increase as a consequence of increasing climatic change.


Comparison of Existing Blending Mandates by Country (U.S. DOE)

Note: Mexico passed the Bio-‐fuels Law on February, 2008



Afterthoughts These are but a few simple ideas in order to convey the message that there is an important opportunity in Mexico for development of a new Bio-‐fuel industry. Success in this country is probably dependent on a model that integrates high technology with impactful social investment. A new model that draws from lessons learned in the case of Brazil and which integrates a regional biomass cogeneration strategy, together with a fully integrated soil to Ethanol production chain. The Mexican government has been advised by multilateral agencies like the IDB and the German technology transfer office. Diverse economic players have begun to make inroads into the nascent game for new plant development. Undoubtedly, it is a great opportunity for a technology leader like EPC Partner to participate in this nascent market. All efforts should be directed towards building a first up and going plant in Mexico, which is based on a profitable economic model.


Helios Energia Limited recommends a business model for new plants that is not dependent on the outcome of a PEMEX blending mandate, but rather, which is able to withstand wide fluctuations in the price of feedstock by introducing advanced energy generation technologies. We recommend EPC Partner to analyze and pursue a new model for an integrated value chain from recovery of agricultural land, bio-‐fertilization of sorghum to recovery of biomass on the fields in order to generate electricity and steam at a low cost. One of the keys for success is to design an integrated plant that is able to achieve the lowest cost of production and thus, is able to deliver the profitability, which is undoubtedly the basis for sustainable development of a Bio-‐fuel industry in Mexico. A strategic goal posited by the CEO of EPC Partner and which we invite you to develop together. We are bringing to the table all of the necessary pieces in order for this to be the time and place for a successful sorghum-‐based milestone plant in Mexico. Respectfully, Floren Cabrera F. de Teresa Chief Executive Officer Helios Energia Limited Washington, D.C. on March 9th., 2012

Documents

Regional Biomass Model for Ethanol Production in Mexico