Fall 1995
U.S. Department of Energy
Bioenergy Feedstock Development Program at
Oak Ridge National Laboratory

Energy Crops Forum was published periodically by the Bioenergy Feedstock Development Program, Environmental Sciences Division, Oak Ridge National Laboratory, managed by UT-Battelle, LLC., for the U.S. Department of Energy under Contract No. DE-AC05-00OR22725.

Table of Contents

• Environmental Answers and Questions
• Estimated Government Savings from Biomass Production on CRP Acres
• To Market, To Market with Biomass Energy Crops . . . But Where? And When?

Environmental Answers and Questions

Virginia Tolbert, Biofuels Feedstock Development Program

The Biofuels Feedstock Development Program (BFDP) organized a conference entitled "Environmental Effects of Biomass Crop Production. What do we know? What do we need to know?" It was held on August 7-8, 1995, in Oak Ridge, Tennessee. The U.S. Environmental Protection Agency Office of Global Climate Change and the American Forest and Paper Association provided additional support for the conference which established a benchmark for what is known about the environmental sustainability of perennial biomass crop production systems.

The conference addressed issues ranging from the global scale to the site-specific scale. Greg Marland, (Oak Ridge National Laboratory) described the potential role of biomass crops in offsetting the effects of greenhouse gases and in reducing potential global climate changes. Robin Graham (BFDP) identified several areas in the Tennessee valley with the potential for improved water quality through biomass crop production. Bill Berguson (University of Minnesota, Duluth), David Grigal (University of Minnesota, St. Paul), David Bransby (Auburn University), and David Parrish (Virginia Polytechnic Institute and State University) summarized carbon sequestration changes that occur with conversion of land from traditional row crops to biomass crop production. These studies showed that both woody and herbaceous crops can increase carbon storage on agricultural sites. Herbaceous crops store more carbon than traditional row crops but less than pasture and undisturbed grasslands. For the first few years after establishment of tree crops, carbon is lost due to soil mineralization and erosion losses. Carbon retention increases with canopy closure.

Several speakers emphasized the positive environmental benefits. Jon Kourt (AgCanada) and Michael Collins (University of Kentucky) showed that both woody and herbaceous perennial biomass crops can provide site stabilization and reduce erosion compared with annual crops. Perennial crops were also shown to be more energy efficient and to require lower nutrient input than annual agricultural crops by Paul Heilman (Washington State University) and Rich Norby (ORNL). Richard Schultz, Iowa State University, vividly demonstrated the desirability of using biomass crops to provide buffer strips along waterways and drainage areas with photos from Iowa. Wayne Hoffman (Audubon Society) found that switchgrass plantings in Iowa provided habitat for species that have been previously restricted to wetland habitat by lack of available grasslands. In Minnesota, Don Christian and JoAnn Hanowski (University of Minnesota, Duluth) found that hybrid poplar plantings were used more extensively than traditional row crops by both birds and small mammals but less than native mixed forests.

Conference speakers also posed a number of questions that need to be answered to ensure environmentally beneficial deployment of biomass crops while meeting the economic needs of individual crop producers, local agricultural communities, and industrial consumers at both local and regional scales. For instance, what are the consequences of increased fertilizer use, particularly nitrogen, to sustain or enhance yields on soil quality? What are the long-term consequences of nutrient removal with successive crop harvesting? How can or should nonnative or genetically transformed species of energy crops be incorporated into existing landscapes? How can energy crops be deployed with respect to size, shape, and existing vegetation distribution to increase habitat connectedness?

With more than 100 attendees, the conference offered a timely opportunity for participants to exchange information and ideas. This forum helped the BFDP identify mechanisms to answer the questions raised. The BFDP plans to facilitate publication of the papers presented at the conference. Watch this space for information on the availability of the proceedings.

Estimated Government Savings from Biomass Production on CRP Acres

Marie E. Walsh, Denny Becker, Robin Graham, BFDP
Erik Lichtenberg, University of Maryland

The Conservation Reserve Program (CRP) was enacted in the 1985 Food Security Act (Farm Bill) as a means of removing environmentally sensitive (primarily highly erosive) cropland from row crop production. Farmers offer to remove vulnerable cropland (generally for a 10-year period) in exchange for annual rental payments. Currently, 36.4 million acres in the United States are enrolled in the CRP. The annual cost of the program is approximately $1.8 billion. Given current federal budget constraints, modifications to the CRP have been suggested for the 1995 Farm Bill. U.S. Department of Agriculture Secretary Glickman has suggested modifying the program to allow economic use of the CRP acres under specified conditions (haying and grazing, biomass energy crop production) in exchange for reduced rental payments.

The U.S. Department of Energy, through the Biofuels Feedstock Development Program at Oak Ridge National Laboratory, has supported development of short-rotation woody crops (e.g., hybrid poplar, hybrid willow) and herbaceous crops (e.g., switchgrass) to produce power, liquid fuels, and chemicals. These crops are among those currently grown on CRP acres for their environmental benefit; however, they cannot presently be harvested and sold. Under the proposed changes to the CRP program, these crops could be sold in exchange for reduced rental payments. If conducted appropriately, harvest of these crops will not significantly reduce the environmental benefits of the program.

Estimates of the potential 10-year savings to the federal government resulting from reduced rental payments in exchange for the sale of short rotation woody crops or switchgrass produced on CRP acres are presented in Figures 1 and 2. The analysis includes all CRP acres considered suitable for biomass production from the mid Plains states eastward (about 17.4 million acres for switchgrass and 14.2 million acres for hybrid poplar). The western regions of the U.S. have been excluded from the analysis due to the lack of available data regarding likely biomass yields and production costs in these regions.

Estimates are made for 3 yield levels for switchgrass and hybrid poplar (weighted national average yields for 4 regions and 11 subregions), and 6 market prices for biomass (price offered to biomass producer). The analysis assumes the same distribution of CRP rental rates that occurs in the twelfth CRP sign-up. Farm income per CRP acre with biomass production is restricted to being at least equal to the income earned from CRP rental payments without biomass production. The estimates assume that the CRP acres are planted entirely with hybrid poplar (Figure 1) or entirely with switchgrass (Figure 2) and that the stands remain in production for 10 years. Intermediate savings would result from simultaneous production.

Government savings are estimated as the difference between the cost of the CRP program with no economic use of the acreage and the cost of the program with economic use allowed. The cost of the program with no economic use is the 10-year net present value of the annual rental payments plus a one time charge of of the establishment cost. The estimated government program cost with economic use (biomass production) includes a one-time charge of of the establishment costs plus the 10-year net present value of

• Zero rental payments if the profit from the sale of biomass (i.e., biomass price biomass yield biomass production cost) is greater than the CRP rental rate,
• the difference between the CRP rental rate and the biomass profit if the profit from the sale of biomass is greater than zero but less than the CRP rental rate,
• the CRP rental rate plus the difference between the CRP rental rate and the biomass profit if the profit from the sale of biomass is less than zero (i.e., a government subsidy).

For example, at annual national yield levels of 4 and 3 dry tons/acre for switchgrass and hybrid poplar respectively, farmers would need to receive a market price of at least $1.50/MBtu ($27.75/dry ton) for switchgrass and $2.25/MBtu ($37.13/dry ton) for hybrid poplar to generate biomass profits greater than zero. Positive biomass profits offer, at least in theory, an opportunity to reduce CRP rental payments in exchange for the right to produce and sell biomass. The savings estimated should be interpreted as an upper bound. The production and harvest of biomass will entail additional resources on the farmers' part, primarily labor. Thus, farmers may not be willing to accept as large a reduction in rental payments as this analysis assumes.

Higher yields such as 6 and 7 dry tons/acre for switchgrass and hybrid poplar can potentially result in significantly greater government savings. Sustained research funding will be needed to increase yields from the 4-5 dry tons/acre currently expected. The payoff, however, could be substantial.

The use of CRP acres for biomass production reduces the required market prices and improves the reactive competitiveness of biomass energy compared to fossil fuels. Current coal and natural gas prices are approximately $1.30/MBtu and $1.65/MBtu delivered respectively. Advances in biomass management and harvest strategies can potentially decrease biomass production costs below those used in this analysis and further improve the competitive position of biomass.

To Market, To Market with Biomass Energy Crops . . . But Where? And When?

Mark Downing, BFDP

Wheres the market? When will commercialization take place? These and other related questions are being asked by potential producers and consumers of biomass feedstocks.

As recently as five years ago, short-rotation woody crops such as genetically superior hybrid poplar clones were just being adopted in large plantings by the pulp and paper industry. The trees were planted for use in pulp mills although energy was a co-product after harvest.

Recently, new emphasis has been given to understanding the economics of using woody and/or herbaceous crops for a variety of energy production processes. In response to the U.S. Department of Energy's Economic Development Through Biomass Systems Integration solicitation, ten site-specific feasibility studies were initiated. All regions of the country were represented and industrial participation was strong. The results of these studies show the interdependence and integration of supply and demand systems. The National Renewable Energy Laboratory in Golden, Colorado is preparing the study reports for publication.

However, these individual studies do not clarify how regional markets will develop for energy feedstocks. There are several steps that can be taken by community or regional organizations to develop markets...and the important word in that statement is develop. Markets do not just happen. They are developed and they evolve over time.

New business efforts are stimulated and guided by market research. Market research can help identify the range of potential customers such as ethanol producers, electric power producers, and the fiber industry as well as heating and cogeneration opportunities. It can also identify the specific requirements of each potential customer, including feedstock requirements. As potential customers are defined, the size of potential regional markets can be defined.

To facilitate market development, the relationship between cost and supply of biomass feedstocks in the region must be analyzed. This information, combined with estimates of the annual, monthly, and daily feedstock consumption of potential customers, will allow planners to assess the mix of industries that can be supported and their total economic impact on the region. Project planners will also need this information to analyze scale and efficiency issues, including the interactions between facility size, capital investments, and operating costs.

Next, market research should identify publicly available or easily obtainable indicators that can be used to estimate the consumption level of the resulting energy products, including long-term growth and investment incentives that residential and industrial energy users might create. Focusing only on individual facilities rather than total regional impacts is inappropriate. For example, public schools in the State of Vermont which could be considered "small markets" have provided enough demand for feedstock and heating conversion systems to be a significant market for wood residues in that region.

Concurrently, the opportunity for farmer-producers to enhance their income through expanding the production and marketing of biomass feedstocks must be analyzed. An individual farmer-producer decides what land, labor, and capital to allocate to energy crops. The sum of all decisions made by farmer-producers in a region affects the supply available to market channels. Joint risk management on the part of the feedstock producers and feedstock consumer helps the farmer-producer choose the production and marketing alternatives that are most consistent with the farmer's profit objectives and willingness and ability to bear risk.1 Long term contracts between feedstock producers and feedstock consumers, combined with annual payments to farmers, can reduce the risk of market failure.

To develop energy markets for biomass feedstocks, several specific things must happen. Long-term demand for energy must be sufficient for firms to locate energy production facilities in a region. Feedstock purchasers and farmers must agree on payment and delivery schedules. An adequate supply of capital must exist, and an infrastructure must be available or easily developed to support transportation, storage and handling of the feedstock.

Although each region may have a different cost structure for biomass feedstocks, regional similarities will exist in the ways in which markets actually develop. Industries looking for investment opportunities and farmers who are thinking about an alternative enterprise for their operation will rely on marketing studies. They will also look to other regions and markets for models of agricultural products that most closely resemble energy feedstocks in seasonality, price level, and stability. Because potential energy markets are very large, all regions have much to gain by sharing such information.

1. Adapted from Stegelin, et al., "To Market, To Market To Sell Fresh Produce; But Where? and When? Journal of Food Distribution Research, February 1990.