We need stable, long-term policy support! - evaluating the economic rationale behind the prevalent investor lament for forest-based biofuel production

Abstract

Uncertain and unstable policy support has often been claimed to be a major cause of the slower than expected deployment of technologies for production of advanced biofuels. We investigate the economic rationale of this claim using a real options framework incorporating uncertainties regarding energy prices, investment costs, and prevalence of policy support, which was linked to the greenhouse gas (GHG) performance of the produced biofuel. Six industrially relevant forest-based technologies for production of drop-in biofuels were evaluated. The technologies were integrated with a pulp mill and an oil refinery and are at different stages of their technical development. The results show a limited economic rationale behind the claim that policy uncertainties are a major source for the stalled deploymen. Rather, it is mainly related to the uncertainties regarding investment costs and future energy prices, resulting in technologies with lower sensitivity with respect to these uncertainties have a larger chance of becoming commercially relevant investment options. If policy support is intended to promote investment in technologies with high GHG performance, it must be directed specifically to these technologies, otherwise, it is more beneficial to invest in technologies with more favourable conditions for investment and operational costs, but lower GHG performance.