Ethanol development in China
Although the world’s fourth largest ethanol producer, China accounted for just over 3 percent of global production 2015. The Chinese government wants to expand production setting a target of 10 million tonnes capacity by 2020, almost a quadrupling of the 2015 output. Given low oil prices, incentive scale-back and feedstock limitations, it seems a tall order unless cellulosic ethanol commercialises fast.
China started developing its so-called first-generation ethanol industry in 2001 for the purpose of utilizing stale grains, grains no longer fit for human consumption. Four pilot plants received licenses in 2001 to produce ethanol from such feedstock, three on corn (maize) and one on wheat. By the end of 2006, the licensed capacity reached 1 million tonnes. Five provinces – Liaoning, Jilin, Heilongjiang, Anhui and Henan – and part of other four provinces – Hebei, Hubei, Shandong and Jiangsu – had introduced ethanol-blended gasoline and China rose to become the world’s fourth largest ethanol producer after the United States (US), Brazil and the European Union (EU).
The rapid growth of grain-based ethanol production, coupled with concerns over possible issues related to food security, prompted the government to begin regulating corn-based ethanol in December 2006. Instead of expanding corn-based ethanol production, the focus turned towards encouraging non-grain-based ethanol using feedstock such as cassava and sweet sorghum.
China National Cereals, Oils and Foodstuffs Corporation (COFCO), is one of the pioneering companies in Chinese ethanol industry. In 1993 COFCO set up its first ethanol plant in Heilongjiang province. It has an annual capacity of 30 000 tonnes and was subsequently enlarged to 280 000 tonnes per annum. In 2007, it merged and reconstructed another ethanol plant in Anhui province with a capacity of 320 000 tonnes per annum. The third plant, in Guangxi province, began trial operations in December 2007 and was designed to produce 200 000 tonnes of ethanol per annum using only cassava as its feedstock. This is China’s first commercialised non-grain-based ethanol project. On 23 July 2010, COFCO founded National Biofuel Research and Development Center, aiming to accelerate the cellulosic ethanol industrialisation. By the end of 2013, COFCO had a total ethanol production capacity of 960 000 tonnes accounting for 47 percent of domestic production.
Subsidy removal hampers growth
– The Chinese ethanol industry is heavily regulated with licensed production operating in a closed market. Licensed producers are only allowed to supply local provincial market or designated cities. This is one factor that limits the growth of the Chinese ethanol industry, said Hailong Lin, Director of COFCO Center of Biotechnology.
E10, 10 percent ethanol blend in gasoline, is made available in six designated Chinese provinces and 30 other designated cities. In 2014, these designated markets produced and consumed 2.27 million tonnes of ethanol accounting for 23 percent of the national gasoline consumption. However the ethanol price is not determined by agricultural commodity markets, instead it is directly coupled to production cost of gasoline set at 0.911 times the ex-factory price of 90 grade gasoline.
Subsidies and tax incentives have both become less attractive post-2010. The fast growth of grain-based ethanol production in early years relied on high subsidies and tax incentives. In 2004 the grain-based ethanol subsidy was CNY 2 736 (≈US$331) per tonne but kept decreasing due to policy adjustment. In 2012 it was down to CNY 500 (≈US$80) per tonne and by 2015 it was removed entirely. For non-grain ethanol, the subsidy in 2013 was set at CNY 750 (≈US$124) per tonne whereas for cellulosic ethanol the subsidy was set at CNY 800 (≈US$129) per tonne in 2014.
Furthermore Valued Added Tax (VAT) exemption has been gradually reduced for grain-based ethanol, from 100 percent exemption during 2004-2010 to 80 percent in 2011 to zero exemption in 2015. However VAT for non-grain-based ethanol continues at 100 percent exemption. In addition grain ethanol excise duty was zero percent during 2004-2010 and has since gradually increased to 5 percent in 2015.
The reduced subsidies and tax incentives have lead to dramatic profit decreases for COFCO. Ethanol isn’t profitable without subsidies, said Hailong Lin.
Chinese ethanol challenges
While grain-based ethanol project are no longer approved, prospects for non-grain ethanol projects seem more optimistic. These so called “1.5 generation” ethanol are being scaled-up and second-generation cellulosic ethanol is shifting from demonstration to market scale. However, feedstock is a big challenge as 70 percent of the cassava is imported from Southeast Asia. Projected increases in the price of imported cassava will result in significant decreases in the profitability of the cassava-based ethanol plants.
Although the ethanol production process for sweet sorghum is the same as for sugarcane, ethanol production from sweet sorghum has not yet been commercialized. The major challenge for sweet sorghum as a feedstock for ethanol production is stem collection and sugar storage. Because in most areas of China sweet sorghum can only be harvested once a year and the sugar content of the stem degrades quickly. This means that a production facility that uses sweet sorghum as feedstock can only operate during a very short period. The reoccurring volume of agricultural waste in China is enormous; an estimated 200 million tonnes of straw and stover are typically burned or discarded in the fields each year. If collected and properly processed, this waste could contribute 30-40 million tonnes of cellulosic ethanol under current technical levels of processing. China’s first commercialized cellulosic ethanol plant, the 50 000 tonne per annum Longlive Group plant in Shandong province, went into operation in 2012. It uses corncob as feedstock to produce ethanol, xylitol and other high value products using proprietary technology.
COFCO is also developing a 50 000 tonne per annum cellulosic ethanol demonstration project in cooperation with Sinopec and Novozymes. They expect cellulosic ethanol to be economically competitive with gasoline without subsidies at an oil price of about US$100 per barrel. However, due to the current low crude oil price and low subsidy level, COFCO seems to prefer to take a conservative path so far.
The Chinese ethanol industry is still at early development stage. Obstacles in productivity, energy consumption, cellulosic enzymes and pre-treatment, and wastewater treatment all still lie ahead of the industry. There is still big gap to the 2020 10 million tonne capacity target. The emergence of second-generation biofuels provides a unique opportunity for China to diminish its dependency on fossil fuel imports and to fight climate change. China needs to think carefully about implementing further measures to create the right incentives for biofuel production and consumption.
Text & photo: Xinyi Shen