1. The Case for Biodiesel John Mixon, University of Washington Business School Ian Kraucunas, UW Department of Atmospheric Sciences James Dack, UW Evans School of Public Policy Jia Feng, Humphrey Fellow, UW Evans School BBUS 550

2. Introduction Technology Public Policy Marketplace Seattle China Recommendations Environmental Problems = CO2 curve?

3. Introduction Technology Public Policy Marketplace Seattle China Recommendations National Security Benefit

4. Introduction Technology Public Policy Marketplace Seattle China Recommendations Value Proposition Biodiesel provides the following benefits: Regional economic stimulus Local and global environmental benefits Reduced dependence on foreign oil Why is biodiesel relevant now? Huge potential market (1% of U.S. diesel market = $460 million/year!) Mature production process (many possible feedstocks?) Can be used in existing diesel engines Public policies are rapidly evolving

5. Introduction Technology Public Policy Marketplace Seattle China Recommendations What is Biodiesel? Renewable alternative to petroleum-based diesel fuel Chemical name: methyl esters Made from plant oils or waste fats and oils (e.g. soybeans, rapeseed, yellow grease) Can be blended with conventional diesel at any ratio (e.g. B20)

6. Introduction Technology Public Policy Marketplace Seattle China Recommendations How is Biodiesel Produced?

7. Introduction Technology Public Policy Marketplace Seattle China Recommendations Biodiesel Performance Safe, non-toxic, biodegradable, easy to transport and store Excellent lubricity: reduces engine wear High cetane number: ideal for blending Slight reduction in power / fuel economy (1-2% reduction for B20) Some problems in cold weather

8. Introduction Technology Public Policy Marketplace Seattle China Recommendations Environmental Benefits

9. Introduction Technology Public Policy Marketplace Seattle China Recommendations What’s Driving the Biodiesel Market? Mandates Incentives Encourage Behavior Change Require behavior change Decisions made by policy makers

10. Introduction Technology Public Policy Marketplace Seattle China Recommendations Current Public Policy Influencing the Biodiesel Market Mandates  Federal EPAct ULSD (ultra-low sulfur diesel)  State School Bus Pilot Project  Local Clean Green Fleet Action Plan Incentives  Federal Commodity Credit Corp. EPAct Tax Deductions  State HB 1240-Production HB 1241-Distribution Sales tax exemptions Grants

11. Introduction Technology Public Policy Marketplace Seattle China Recommendations Why is this important to investors investigating biodiesel? In certain markets, the mandates and incentives may begin to overlap Individually, mandates and incentives lower the risk to biodiesel investors Overlapping mandates and incentives provide extra insulation The best biodiesel markets will be ones that have strong state and local policy drivers

12. Introduction Technology Public Policy Marketplace Seattle China Recommendations Biodiesel Production

13. Introduction Technology Public Policy Marketplace Seattle China Recommendations Market Potential Annual U.S. diesel usage = 36 billion gallons If diesel price = $1.30, total market size is… $47 billion!!!!! 1% market share = $470 million!!

14. Introduction Technology Public Policy Marketplace Seattle China Recommendations Market Overview – Supply Chain

15. Introduction Technology Public Policy Marketplace Seattle China Recommendations Market Overview – Supply Chain Petrodiesel Supply Issues  Intermediaries Transport / Commodity Brokers Ship / Pipeline Operators  Political Instability  Spills Biodiesel  Regional nature of supply promotes stability  Safe, non-toxic, biodegradable, easy to transport and store  Flexible feedstock reduces price volatility

16. Introduction Technology Public Policy Marketplace Seattle China Recommendations Price Comparison *Based on Dr. Dan’s Fuelwerks in Seattle, WA

17. Introduction Technology Public Policy Marketplace Seattle China Recommendations Input Cost Variation

18. Introduction Technology Public Policy Marketplace Seattle China Recommendations Market Segmentation

19. Introduction Technology Public Policy Marketplace Seattle China Recommendations Seattle Opportunity

20. Introduction Technology Public Policy Marketplace Seattle China Recommendations Why Seattle? Large Initial Dedicated Customers  King County Metro (~9 Million gallons)  Washington State Ferries (~11 Million gallons)  Allows production efficiencies  Long-term contract stability Minimal Transportation Costs  Fuel depot on Harbor Island  Could mix with petrodiesel on-site and use existing local trucking / distribution

21. Introduction Technology Public Policy Marketplace Seattle China Recommendations Why Seattle? Feedstock Supply  Well established yellow grease market 9 – 11 Million gallons (cost is ~ $0.95 / gallon) Long term: mustard seed grow in Eastern Washington? Production Cost Mitigation  USDA $0.95 subsidy for yellow grease  Economies of scale

22. Introduction Technology Public Policy Marketplace Seattle China Recommendations Why NOT Seattle? Distribution difficulties Mandate for ULSD by 2006  Need to change mandate to include biodiesel Gold standard: ULSD + B20 King County Metro is still concerned with B20 emissions profile and power issues

23. Introduction Technology Public Policy Marketplace Seattle China Recommendations International Markets Overview-China Diesel Demand Diesel use in China: 18-21 billion gallons in 2002 33% more imported 4% growth rate (30 billion gallons in 2010) GDP growth rate = 9.4%

24. Introduction Technology Public Policy Marketplace Seattle China Recommendations International Markets Overview-China Potential Biodiesel Feedstocks Oilseed crops (soybean, rapeseed) Native high oil-content tree (Huang Lian Mu) Acid oil food Waste cooking oil Animal fat / tallow

25. Introduction Technology Public Policy Marketplace Seattle China Recommendations International Markets Overview-China Producers Hainan Zhenghe Bio Energy Company (Hebei Wuan Factory and Beijing Changping Factory) Sichuan Gushan Grease Chemical Company, Ltd Fujian Zhuoyue New Energy Development Company Customers Construction sites Heavy truck transportation companies Farmers Gas stations

26. Introduction Technology Public Policy Marketplace Seattle China Recommendations International Markets Overview-China The Price of Biodiesel Petrodiesel Biodiesel (rapeseed) Biodiesel (YG) $1.208/gal $1.414/gal $1.049/gal Current Biodiesel Output in China 15 million gallons (vs. 300 million gallons in EU) Reasonable Feedstock Output ~900 million gallons

27. Introduction Technology Public Policy Marketplace Seattle China Recommendations International Markets Overview-China) What’s Obstructions? Breaking the oil industry monopoly Setting up national standards on quality and manufacturing equipment for biodiesel Are there Opportunities in Chinese Biodiesel Market? Risk investment and potential fraction of biodiesel market in China Two birds with one stone: Cooking oil safety and biodiesel production in Beijing Exporting Biodiesel from China to Other Countries ?

28. Introduction Technology Public Policy Marketplace Seattle China Recommendations Recommendations

29. Questions?

30. Introduction Technology Public Policy Marketplace Seattle China Recommendations Biodiesel Provider Value Set Government Value Set  > Price Energy Demand/Capacity Distributed Sourcing Source Stability Environment Reliability Economic development Fuel diversity risk Petroleum price risk Increased Lubricity Reduced Odor/Dirt Consumer Owner Value Set   Value Summary