Biodiesel Production for Rural Australia An initial concept and model

Discussion paper prepared for Biodiesel in Agriculture Workshop, 13 September 2007, Canberra

by Australian Agricultural Crop Technologies Pty. Ltd., Wee Waa, NSW

August 2007

RIRDC Publication No 07/140 RDC Project No ACO-1A

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© 2007 Rural Industries Research and Development Corporation. All rights reserved. ISBN 1 74151 536 X ISSN 1440-6845 Biodiesel Production for Rural Australia: An initial concept and model Publication No. 07/140 Project No.ACO-1A The information contained in this publication is intended for general use to assist public knowledge and discussion and to help improve the development of sustainable regions. You must not rely on any information contained in this publication without taking specialist advice relevant to your particular circumstances.

While reasonable care has been taken in preparing this publication to ensure that information is true and correct, the Commonwealth of Australia gives no assurance as to the accuracy of any information in this publication.

The Commonwealth of Australia, the Rural Industries Research and Development Corporation (RIRDC), the authors or contributors expressly disclaim, to the maximum extent permitted by law, all responsibility and liability to any person, arising directly or indirectly from any act or omission, or for any consequences of any such act or omission, made in reliance on the contents of this publication, whether or not caused by any negligence on the part of the Commonwealth of Australia, RIRDC, the authors or contributors.

The Commonwealth of Australia does not necessarily endorse the views in this publication.

This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. However, wide dissemination is encouraged. Requests and inquiries concerning reproduction and rights should be addressed to the RIRDC Publications Manager on phone 02 6271 4165

Researcher Contact Details Mr Daryl Young Australian Agricultural Commodities Lot 421 Boolcarrol Rd WEE WAA NSW 2388 Phone: 02 6795 0315 Fax: 02 6795 4358 Email: dyoung@nrt.com.au In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 2, 15 National Circuit BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6271 4100 Fax: 02 6271 4199 Email: rirdc@rirdc.gov.au. Web: http://www.rirdc.gov.au Published in August 2007

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Foreword This report explores the opportunity for Regional Grower Groups and local industry to grow feedstocks and to process them into biodiesel for local use. This also provides the opportunity for growers to attain greater long term economic and environmental sustainability, while making a positive contribution to the region and reducing the global problems of greenhouse gas emissions and global warming. Regional Sustainable Models around biodiesel production deliver positive results not only for primary producers in increased returns per hectare of land but also to the local community in increased jobs, infrastructure and industry. The wider economy may also benefit through reduced imports, reduction in trade deficits, reduced dependence on fossil fuels and reduced toxic emissions. The grain growing industries need to invest in research and development to develop sustainable rotations that deliver economic advantage on a rotational basis rather than just as individual crops. Monoculture increases susceptibility to crop diseases, pests and soil degradation. Fertiliser and fuel consumption need to be minimized not only as expenses but also for environmental reasons. This report utilizes these basic fundamentals to research the relationship between sustainable crop rotations for delivery of overall economic advantage. The proposed Regional Sustainable Models utilise oilseed crops with high isocyanine-glucosinolate contents for soil biofumigation, biodiesel manufacture from the oil and livestock feed from the by-products, delivering a unique opportunity for agriculture. This report recommends all sectors including government, industry and private enterprise be involved in providing a national approach and commitment to maximise the benefits attainable from production of biodiesel from locally grown feedstocks. Ongoing research and development are essential parts of realising all the benefits mentioned in this report. This report recommends a strategic approach for development, investment and formulating policy. The overarching aim of the report and recommendations is to develop a grower owned and operated agricultural biodiesel industry that is effective without rebate, subsidy or government assistance other than the normal funding resources available for research and development. This project was funded from RIRDC Core Funds which are provided by the Australian Government. This report, an addition to RIRDC’s diverse range of over 1600 research publications, forms part of our Bioenergy, Bioproducts and Energy Research and Development Program, which aims to meet Australia’s research and development needs for the development of sustainable and profitable bioenergy and bioproducts industries and to develop an energy cross-sectoral reserach and development plan. Most of our publications are available for viewing, downloading or purchasing online through our website: • downloads at www.rirdc.gov.au/fullreports/index.html • purchases at www.rirdc.gov.au/eshop Peter O’Brien Managing Director Rural Industries Research and Development Corporation

http://www.rirdc.gov.au/fullreports/index.htmlhttp://www.rirdc.gov.au/eshop

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Contents Foreword ............................................................................................................................................... iii Executive Summary ........................................................................................................................... viii 1 Appraisal of the Current Australian Biodiesel Industry ............................................................... 1

1.1 Market segments........................................................................................................................... 1 1.2 Where Australia fits in the world picture ..................................................................................... 2 1.3 Australian biodiesel capacity and production............................................................................... 3 1.4 Australian biodiesel producers ..................................................................................................... 7 1.5 Industry strengths ......................................................................................................................... 7

1.5.1 Economic benefits ................................................................................................................. 7 1.5.2 Geopolitical benefits.............................................................................................................. 9 1.5.3 Value adding benefits............................................................................................................ 9 1.5.4 Health benefits..................................................................................................................... 10 1.5.5 Environmental benefits........................................................................................................ 10

1.6 Industry constraints .................................................................................................................... 11 1.6.1 Taxation policy.................................................................................................................... 11 1.6.2 Insufficient adjustment period............................................................................................. 13 1.6.3 Quality assurance ................................................................................................................ 13 1.6.4 Technical issues................................................................................................................... 14 1.6.5 Refuelling infrastructure...................................................................................................... 15 1.6.6 Import competition.............................................................................................................. 16 1.6.7 Supply of feedstock............................................................................................................. 16

2. Overview of the Regional Sustainable Model .............................................................................. 17 2.1 The description of the regional sustainable model ..................................................................... 17 2.2 Mission statement....................................................................................................................... 17 2.3 Partners....................................................................................................................................... 19

2.3.1 Australian Agricultural Crop Technologies ........................................................................ 19 2.3.2 University of Sydney and other research organisations ...................................................... 20 2.3.3 Australian Biodiesel Group Pty. Ltd. .................................................................................. 20 2.3.4 Regional grower groups ...................................................................................................... 21 2.3.5 Financial institutions ........................................................................................................... 25 2.3.6 Investors .............................................................................................................................. 25 2.3.7 Joint venture partners .......................................................................................................... 25 2.3.8 Research and development organisations............................................................................ 25 2.3.9 Industry................................................................................................................................ 26

2.4 Model features............................................................................................................................ 26 2.4.1 Commercial outcomes from research and development...................................................... 26 2.4.2 A network of regional grower groups ................................................................................. 26 2.4.3 A network of local community enterprise hubs .................................................................. 27 2.4.4 Major regional development benefits.................................................................................. 27

2.5 Success factors ........................................................................................................................... 29 2.6 Feedstocks .................................................................................................................................. 29

2.6.1 On farm benefits from growing brassica ............................................................................. 29 2.6.2 Tree crops ............................................................................................................................ 31

2.7 Regional Sustainable Model benefits ......................................................................................... 32 2.7.1 To local growers.................................................................................................................. 32 2.7.2 Benefits to the region .......................................................................................................... 32 2.7.3 National benefits — delivers on the national biofuels target .............................................. 33 2.7.4 Globally............................................................................................................................... 34

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3. Operations of the Regional Sustainable Model............................................................................ 35 3.1 Market segments for products .................................................................................................... 36 3.2 Revenue generation for the regional sustainable model............................................................. 37 3.3 Position in value network ........................................................................................................... 37 3.4 Competitiveness strategy............................................................................................................ 37 3.5 Interaction with the regional grower groups .............................................................................. 38 3.6 Capital requirement .................................................................................................................... 38

3.6.1 Required commitment ......................................................................................................... 38 3.6.2 Anticipated sequence of funds allocation processes............................................................ 39 3.6.3 Application of funds............................................................................................................ 39

3.7 Scope of work for the development of the regional sustainable model local community enterprise hubs................................................................................................................................... 39

4. Financial Assessment of the Regional Sustainable Model .......................................................... 41 4.1 Funding options for the regional sustainable model................................................................... 42 4.2 Ongoing revenue ........................................................................................................................ 43 4.3 Long term ownership and control .............................................................................................. 43

5. Regional Grower Groups............................................................................................................... 44 5.1 Overview .................................................................................................................................... 44 5.2 Regional grower group structures .............................................................................................. 44

5.2.1 Co-operatives ...................................................................................................................... 45 5.2.2 Community bank model ...................................................................................................... 46 5.2.3 Franchise model .................................................................................................................. 48 5.2.4 Public company ................................................................................................................... 48 5.2.5 Private company .................................................................................................................. 50

5.3 Financial feasibility of local community enterprise hubs........................................................... 50 5.4 Existing grower groups .............................................................................................................. 51 5.5 Explanations for financial modelling of regional sustainable models and local community enterprise hubs................................................................................................................................... 51

6. Collaboration Options.................................................................................................................... 56 6.1 Non-government organisations .................................................................................................. 56

6.1.1 Biodiesel Association of Australia ...................................................................................... 56 6.1.2 Renewable Fuels Australia .................................................................................................. 57 6.1.3 National Roads and Motorists’ Association Alternative Fuels Group ................................ 57 6.1.4 Agriculture organisations .................................................................................................... 57 6.1.5 Bioenergy Australia............................................................................................................. 58 6.1.6 Environmental lobby groups and associations .................................................................... 59 6.1.7 Potential reference/lobby group .......................................................................................... 60 6.1.8 Industry-government group................................................................................................. 60

6.2 Government organisations.......................................................................................................... 60 6.2.1 Grains Research & Development Corporation.................................................................... 61 6.2.2 Commonwealth Scientific and Industrial Research Organisation ....................................... 61 6.2.3 Australian Research Council ............................................................................................... 62 6.2.4 AusIndustry ......................................................................................................................... 62 6.2.5 Rural Industries Research and Development Corporation .................................................. 63 6.2.6 Australian Greenhouse Office .............................................................................................. 64 6.2.7 Department of Environment and Heritage .......................................................................... 64 6.2.8 Catchment Management Authorities ................................................................................... 65 6.2.9 Potential reference groups ................................................................................................... 66

7. Project Development Stages .......................................................................................................... 67 7.1 Regional meetings or industry summit? ..................................................................................... 68 7.2 Working party and officers......................................................................................................... 71 7.3 Development and implementation of the working party ............................................................ 71

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8. Economic, Environmental and Social Risks of the Regional Sustainable Model ..................... 72 8.1 Research and development ......................................................................................................... 73

8.1.1 Development of the right brassica variety........................................................................... 73 8.1.2 Quality of the research and development ............................................................................ 73 8.1.3 Availability of research and development funding ............................................................. 74 8.1.4 Other research outcomes not realised.................................................................................. 74

8.2 Growing feedstock ..................................................................................................................... 74 8.2.1 Drought................................................................................................................................ 74 8.2.2 Lack of suitable land ........................................................................................................... 75 8.2.3 Community concerns........................................................................................................... 75 8.2.4 Poor agronomy/lack of knowledge...................................................................................... 75 8.2.5 Poor crop adoption .............................................................................................................. 75

8.3 Processing................................................................................................................................... 75 8.3.1 Feedstock supply shortages ................................................................................................. 75 8.3.2 Opposition from wheat growers and the Australian Wheat Board...................................... 76 8.3.3 Local community enterprise hubs do not happen................................................................ 76 8.3.4 Poor processing technology ................................................................................................ 76 8.3.5 Finance for local community enterprise hubs and the biodiesel plants ............................... 76

8.4 Marketing, distribution and finance ........................................................................................... 77 8.4.1 Inferior biodiesel supplies ................................................................................................... 77 8.4.2 Insufficient marketing outlets.............................................................................................. 77 8.4.3 Fall in international oil prices.............................................................................................. 77 8.4.4 Import competition .............................................................................................................. 77 8.4.5 Weak coordination .............................................................................................................. 78 8.4.6 Tax treatment....................................................................................................................... 78

Appendices ........................................................................................................................................... 79 Appendix 1 Current Australian Biodiesel Producers ....................................................................... 79 Appendix 2 Mustard for Biodiesel Project – Summary of Findings – 2006 .................................... 83 Appendix 3 Existing, Functioning, Grower Groups......................................................................... 89

The following references are not directly referred to as part of this report, however they contain relevant and useful information. The blue text is the internet link to the reports. Biofuels in the European Union — A vision for 2030 and beyond www.ec.europa.eu/research/energy Griffin energy report www.australianoilseeds.com/__data/page/44/Biodiesel_-_Fredrick_Suhren.pdf2 Securing Australia’s Energy Future — Government White Paper on Energy www.pmc.gov.au/publications/energy_future/overview/2_sector.htm - 7k - Biofuels Taskforce Final Report www.pmc.gov.au/biofuels/final_report.cfm - 17k

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Tables Table 1 U.S. rate of return on capital by feedstock type .................................................................... 1 Table 2 Top ten biodiesel producers — current and forecast producers ............................................ 7 Table 3 Biodiesel quality differences by feedstock.......................................................................... 14 Table 4 Australian production and importation of oil seed and meals ............................................. 16 Table 5 Crop rotations at Cryon ....................................................................................................... 30 Table 6 Working party expenses ...................................................................................................... 71 Table 7 Risk assessment matrix........................................................................................................ 73

Figures Figure 1 Biofuels Taskforce Report 2005 – total Australian production capacity .............................. 4 Figure 2 Oil prices — historical rise (West Texas Intermediate) ($US per barrel) ............................. 5 Figure 3 Australian production/use of diesel ....................................................................................... 6 Figure 4 Australian annual diesel sales................................................................................................ 6 Figure 5 Shows diagrammatically the workings of the Regional Sustainable Model ....................... 18 Figure 6 Research and Development Fund Management Flow Chart ............................................... 22 Figure 7 Local Community Enterprise Hub ...................................................................................... 28 Figure 8 Crown rot infections in wheat after mustards...................................................................... 31 Figure 9 Business model structure..................................................................................................... 35 Figure 10 Per tonne return after costs .................................................................................................. 53 Figure 11 Biodiesel cost price Regional Sustainable Model................................................................ 53 Figure 12 Return per hectare after costs............................................................................................... 54 Figure 13 Return on investment for Local Community Enterprise Hubs............................................. 54 Figure 14 Progress steps for the Regional Sustainable Model, Regional Grower Groups and Local

Community Enterprise Hubs ............................................................................................... 70

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Executive Summary What the report is about This report outlines the opportunities and the place within the market for an Australian biodiesel industry. The report proposes a Regional Sustainable Model where biodiesel feedstock is grown locally and converted cooperatively to biodiesel in a Local Community Enterprise Hub and used on farm to fuel the farm. This report demonstrates that a sustainable biodiesel industry based on good economics can be developed as presented by a Regional Sustainable Model. The model requires start up capital grants that are currently available through Government assistance packages. Who is the report targeted at? This report is a discussion paper initially targeted at workshop participants in the “Biodiesel for Agriculture Workshop”. However, it contains useful material for all those interested in biodiesel production by farmers for farmers. Background Australia has abundant coal reserves but very little liquid fuel reserves. The tyranny of large distances in Australia presents additional issues that are different from other parts of the world. This means that the emerging Australian biofuels industry may not be able to emulate the fledging biofuels industries in other parts of the world. Experience shows that strong, long government support has been integral in enabling infant biofuel industries to become established elsewhere. Additionally the availability of cheap and plentiful feedstock is a significant factor impacting on the competitiveness of the biofuels industry. Low price feedstocks and off take agreements that more than cover the costs of production will be essential elements of an Australian biofuel industry that is viable in the long term. Methods used This study provides an analysis of the Australian biodiesel industry, including its relative strengths and weaknesses, and offers a summary of conclusions and, most importantly, an ACTION PLAN to activate the biodiesel industry within rural Australia. The study provides a snapshot of the current biodiesel producers, explaining how they could fit into the action plan, as well as a set of grower groups currently showing an interesting biodiesel and feedstock production. This is combined with a consideration of involvement from the relevant government and research agencies. Business models were canvassed, developed and applied to a system using primarily brassica mustard as a mainstream feedstock for biodiesel production. Recommendations for investigation of several other feedstock options were also suggested. The business models are work-in-progress for a number of reasons. Firstly, substantial research is required to develop specialised seed cultivars for different climates and soil types. Secondly, research is required at the processing stage, particularly in relation to valuable by-products such as glycerol, biopesticides, fungicides and cattle feed. Thirdly, sound and equitable financing arrangements need to be formulated and negotiated.

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Results The Regional Sustainable Model presents an approach involving local ownership of renewable energy. This underlying concept involves farmers growing an industrial oil crop (mustard) as part of a regional grower group. The crop is then converted to biodiesel at a central location and then used to fuel the farm. In addition to on-farm benfits, there will be substantial benefits filtering throughout the region as economic returns are kept locally. This in turn develops ownership, loyalty and valuing of the biodiesel industry. The model has been formulated by a consortium comprising: Australian Agricultural Crop Technologies Pty. Ltd. - a company based in Wee Waa, New South

Wales, with an interest in developing cultivars to deliver sustainability within rotational systems. University of Sydney (US Plant Breeding Institute) Randall Jitts Consultant for Australian Biodiesel Group Pty. Ltd. - Australia’s largest biodiesel

producer, with Sydney headquarters and plants at Narangba (Queensland) and Berkley Vale (New South Wales).

The program proposes to use state-of-art plant breeding to rapidly improve the grain yield and oil content of Indian mustard (Brassica juncea) for biodiesel production. Early research and development work has shown that Brassica juncea has the capacity to add value within a rotation system and give an economic production return per hectare. The development model will enhance yield and content traits through cultivar development, will provide pesticide and feed meal by-products. In addition to this, significant rotational advantages of growing mustard within existing cropping systems will be gained. The program also has scope over time to investigate and adopt other annual and perennial crops within the model’s research and development program. Recommendations It is proposed that a network of Regional Grower Groups be coordinated by a Regional Sustainable Model Management Company. These groups would share the technology, produce the feedstock, and invest in the manufacture of biodiesel and downstream products within their local region. These Groups are seen as important future partners of the consortium. The key elements of this proposal are:

Biodiesel is an efficient, biodegradable and renewable fuel, with potentially outstanding benefits for regional Australia.

Australian agriculture has a responsibility to reduce its greenhouse emissions. Agriculture contributes 16 % of total emissions. Biodiesel use and utilisation of by-products for fertiliser will make significant contributions to reduce this level.

Worldwide the supply of feedstock is the single biggest constraint to the biodiesel industry’s development. It also represents 80 per cent of the cost of biodiesel production.

Brassica mustard has been identified as having the potential to address this in the short term, and has the ability to be quickly adopted across large areas of the low rainfall areas of Australia’s wheat belt.

The subsequent rotational advantages and cumulative gross margin value for the grower increases the sustainability of grain grower’s operations.

Take-all and crown rot infections in wheat crops reduce productivity by $58 million per annum. Mustards have the ability to reduce crown infection by 50% when used in rotation with susceptible crops.

In the longer term, tree crops such as Pongamia may be the answer as they have very low ongoing costs. This warrants further research.

Regional Australia is in serious decline, and the energy industry will provide the key to develop new opportunities. A model has been formulated to realise this opportunity to develop regional enterprise.

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This report identifies the need to place key emphasis on the agricultural sector ‘producing and consuming’ its own fuel requirements as the starting block for a truly sustainable biodiesel industry which may be fully integrated with other cropping.

Investment in a research and development program that encompasses a full profile of plant breeding, by-product uses and new product development is critical to the overall success of creating an industry based on biodiesel.

Economic models show the ability to reduce diesel costs to the farm gate to under 0.50cents per litre.

The Regional Sustainable Model shows return of capital of over 30 per cent, subject to crop adoption.

The Local Community Enterprise Hubs through economic modelling show returns on investment of over 30 per cent

Brassica mustards provide a key to open the door to further research and development opportunities with other crop types and product development.

This program is founded on Regional Sustainable Models that deliver opportunities for a regional industry resurgence and an agricultural revival. This opportunity has matured with the advent of dwindling mineral oil supplies.

The authors of this report hope to share ideas, generate debate and fine-tune the concepts outlined in this report. They welcome your views. Daryl Young CEO, Australian Agricultural Crop Technologies Pty. Ltd. 421 Boolcarrol Road Wee Waa NSW 2388 Phone 02 - 67953050 or 0427 954932 dyoung@namoirural.com.au Richard Trethowan Prof. Plant breeding University of Sydney PMB 11 Camden Sydney, NSW 2570 rtrethowan@camden.usyd.edu.au Phone.(02) 9351-8860 Randall Jitts General Manager – Australian Biodiesel Group Limited Berkeley Vale, Phone (0421371827) jitts@bigpond.com Rod Brown APD Consulting Ltd., Canberra Phone 02 – 62317261 or apd@orac.net.au

mailto:dyoung@namoirural.com.aumailto:jitts@bigpond.commailto:apd@orac.net.au

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1 Appraisal of the Current Australian Biodiesel Industry 1.1 Market segments

The biofuel market comprises two segments — biodiesel and ethanol. Biodiesel is a substitute for mineral diesel and ethanol is a substitute for petroleum. While the primary concern and detail within this study is biodiesel, there are many industry issues that are common with the emerging ethanol industry, which include but are not limited to:

• uncertainty regarding excise tax arrangements • difficulties with fuel distribution • misinformation at all levels • poor understanding of the substitution of these products by end users.

Biodiesel is made from a variety of different feedstocks. Essentially any fat or oil can be converted to biodiesel. Industry has adopted the cheapest first, these are used fats and cooking oil, the second being animal fats and tallow (Table 1). Oil seed crops, because of their higher cost compared with other feedstocks, were seen as a last bastion of acceptable feedstocks. However, price is not the only consideration; oil seed crops produce superior quality oil and higher grade biodiesel than used fats and oils and animal fats and tallow. Table 1 U.S. rate of return on capital by feedstock type

Source: Australian Bureau of Agricultural and Resource Economics Feedstock costs are an integral part of biodiesel production economics as seen from Table 1 (supplied by Australian Bureau of Agricultural and Resource Economics as a paper for the Grains Research update September 2006). The Table clearly demonstrates that using a crop such as canola is not an economic option for biodiesel production as the cost is too high since it competes with the human consumption market. Other crop type alternatives need to be identified. Additionally, the economics of biodiesel production from a particular feedstock is also determined by the value of the co-products and by-products such as meal and glucosinolates. Biodiesel production in Australia is currently lower than that for ethanol, but the biodiesel market is growing more strongly due to demand from the road transport and farm sectors. The industry has suffered setbacks due to poor publicity and aggressive competition from the mineral diesel sector; most of the issues have been due to poor quality. To date most of the production has been based around large populated areas and agriculture has not been seen as a potential marketplace, even though it is a great consumer of diesel.

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Currently in Australia there are large coastal based biodiesel plants that are price takers on the international market in that they will quickly use our small supply of cooking oils and tallow and will be forced to import oil due to short fall in supply. They are thus unlikely to add much value to our agriculture. This Regional Sustainable Model is different and has far more reaching effects on our agriculture and rural economies. The Regional Sustainable Model is much more sustainable, as process plants are smaller and self sufficient, and are thus price “makers” due to the closed cycle nature of the business. While there is a place for the coastal based large producer, we are proposing multiple small plants as part of the Regional Sustainable Model that take the place of the small backyard farmer based producers. This will thus ensure quality and quantity for the bush. 1.2 Where Australia fits in the world picture

The recent surge in oil prices from July 2006 through to December 2006 has focused attention on all forms of alternative energy within Australia. Australia’s approach to alternative energy supplies has been formulated from a government white paper produced by the federal government in 2004. Essentially the paper outlined few concerns for Australia’s future energy demands as the country’s wealth of coal, natural gas and uranium reserves underpinned the nation’s requirements. The paper portrays the opportunity for Australia to become a super nation within the energy markets, which is well within its capabilities. Addressing the issues of climate change and greenhouse gases were not part of the paper and were not addressed in detail. Several initiatives have been formulated for alternative energy supplies and the Australian Government has introduced certain initiatives and targets for those industries as a whole. Alternative and/or renewable sources have been combined and include all sources from “hot rock thermal technology”, solar, wind, wave, geothermal, hydro, biomass and biofuels. The relevance of this is that liquid fossil fuels have not been isolated within the total energy package. Within Australia’s economy the tyranny of distance is an obstacle in itself. If the average Australian is restricted in their capacity to travel freely, it is an emotive issue and a concern to our politicians but the real problem is that that cost of freight and the movement of consumables within the nation forms a major cost to all operations. If transport fuels become higher priced (over $2.00 per litre), and security of supply is not addressed, it could cripple the nation. This is summed up in comments from Allan Fels, Dean of the Australia and New Zealand School of Government who said: “If Australia were thrown back on its own oil resources tomorrow, it would have enough supplies for just nine years and four months. Some time in 2014 the heavily transport-dependent economy would literally grind to a halt. The bare nine-and-a-bit years of self-sufficiency is the new figure from GeoScience Australia, based on known reserves. The previous figure was 11.1 years, but reserves are dwindling. In the post-9/11 world, such a sobering calculation should inject a note of urgency into energy policies. To be fair, the federal government is reviewing fuel emergency procedures, examining ideas to encourage dual-fuel conversion petrol with LPG of essential services such as police, ambulances and fire brigades, as well as part of the food-distribution system. But this is a sidelight. The main energy game – Australia’s reliance on imported oil, its petrol and diesel economy, and its failure to develop alternative and perhaps renewable fuels – remains largely ignored.” Other nations have been developing alternative transport fuel reserves according to their geographical aspect, demographics and reserves of liquid fossil fuels. The following are examples of this: • Brazil, with large reserves of sugar and bagasse, cheap labour and undeveloped farming area, has

built an ethanol industry to the point of critical mass that it can compete on the export market with fossil fuels. This has been accelerated by the government’s foresight in fostering the industry.

• India is rapidly expanding its biodiesel industry using Pongamia and Jatropha plantations. Additionally, Malaysia is also entering the market using some of their stocks of palm oil. This has increased demand for feedstock oils and pushed up the price of imported oils in Australia.

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• Europe’s transport sector has a 98per cent dependency on fossil fuels, the majority of which are being imported. This leaves Europe extremely exposed to any oil market disturbances. Not only is there an urgency to meet the Kyoto Protocols for CO2 emissions, security of supply is paramount. Janez Potocnik, Commissioner for Science and Research for the European Union stated, “We need a clean, secure and affordable supply of transport fuels. Biofuels can provide a very significant contribution in the short to medium term”. Liquid biofuels production in the EU25 amounted to 2,040 kilo ton of oil equivalent in 2004. Biodiesel from rapeseed predominates with production of around 1,720 kilo ton of oil equivalent in 2004.

• The U.S.A. has recently seen a significant growth industry in biofuels. The U.S. Government, through an address to the nation by President George W. Bush in January 2006, ratified alternate fuels sources as a priority for the nation to reduce its dependency on imported oils. The major alternative fuel type has been ethanol, with production increasing from 4 billion litres in 1996 to 14 billion litres in 2004. The figure as of October 2006 is staggering with the Renewable Fuels Association reporting production at 1.63 billion litres per day; with ethanol usage (demand) reported at 1.92 billion litres per day. Currently there are 101 ethanol refineries nationwide. 39 more are under construction and 7 are expanding production. Biodiesel has enjoyed a similar expansion from 95 million litres in 2004 to 1.135 billion litres in 2006.

• Worldwide, a global market survey titled BIODIESEL 2020, conducted by Merging Markets Analysis Houston Texas, summarised the opportunity in the following statement: “It is possible that biodiesel could represent as much as 20 % of all on–road diesel used in Brazil, Europe, China and India by the year 2020. If governments continue to aggressively pursue targets; enact investor-friendly tax incentives for production and blending; and help to promote research and development into new biodiesel feedstocks” (www.emerging-markets.com/biodiesel).

1.3 Australian biodiesel capacity and production

Biodiesel production in Australia is in its infancy, compared with Brazil, Europe and the U.S.A. which together account for 90 per cent of world production. The bulk of biodiesel production in Australia is sold in blends of 20 per cent or less with petroleum diesel. B5 (5 per cent biodiesel – 95 per cent petroleum diesel) is expected to be common following recent changes to the excise arrangements. However much higher blends — B20 right through to B100 (i.e. neat biodiesel) — are technically feasible. There are transport companies currently using B100 in Australia. In 2005, biodiesel production capacity was around 15.5 million litres. This is expected to exceed 100 million litres by late 2006 (Figure 1). To put this in context, the government target for total biofuels production (i.e. including ethanol) is 350 million litres by 2010. The four projects supported by the Biofuels Capital Grants Program alone have the potential to produce 482 million litres of biodiesel. With the various biodiesel projects on the drawing board, biodiesel capacity could theoretically break the 750 million litres level by 2007. However, there are industry concerns about recent excise tax changes, and the softening of the international oil market since September 2006 has added further doubts. Some sections of the local industry have recently pushed the Federal Government to mandate a certain level of biofuels production in order to improve investor confidence. This has been rejected on the grounds that such a mandate would be artificial, and do nothing to improve the economics of the industry. In 2004, the Federal Government also rejected requests for a mandated target for the wind energy industry. This followed a review by an expert group similar in composition to the Biofuels Task Force.

http://www.emerging-markets.com/biodiesel

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Figure 1 Biofuels Taskforce Report 2005 – total Australian production capacity

Current and Proposed Biofuels Production Capacity

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

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Ethanol Biodiesel Total Biofuels

However, the fact remains that the local biodiesel industry’s growth is being restricted. The forecasts of the Biofuels Taskforce Report (2005) actually showed no capacity growth beyond 2007, presumably due to its doubts about the planned investments being realised, feedstock supply, the potential to import cheaper feedstocks and biofuels and the overall view at that time of crude oil prices. This is reflected in Figure 1 and is consistent with the Biofuels Taskforce Report. This report will identify the need to place key emphasis on the agricultural sector to be involved in producing its own requirements as the starting block for an Australian biodiesel industry. In the absence of a production mandate, an industry plan is the only other option. This would involve industry and government addressing the constraints in a staged approach, including a consistent set of federal and state regulations and incentives. Forecasts by most analysts (Figure 2) are for a continued high price for crude oil. The Biofuels Taskforce concluded that biodiesel production is competitive without government assistance if the world oil price per barrel lies in or above the $US 52 to $US 62 range. Since the price of oil is still above $US 60, this is thus a cause for optimism for the biofuels industry. On the other hand, Australian Bureau of Agricultural and Resource Economics told the Biofuels Taskforce that oil prices would drop to $US32 a barrel in the next three years. Although Australian Bureau of Agricultural and Resource Economics’ track record in energy market forecasting is questionable, its forecasts have shaped federal government policy in respect to alternative fuels and have dampened investor confidence in the biodiesel industry. The latest forecasts (September 2006) of the authoritative world body, the International Energy Agency, suggest that oil prices will remain around or above $US 60 through 2006 and 2007, falling to $US 45 by 2010, but rising after 2020. Pricing is not and should not be the single driver for the implementation of a biofuels industry, particularly with respect to the issue of climate change and fuel supply issues.

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The current level of biodiesel production in Australia is unclear. There are no regularly published statistics.1 In any event, the level of future investment in biofuels production capacity will be determined by: • how investors view the future course of the world oil price • the ability of technology breakthroughs to generate significant production cost savings • the availability of production subsidies to close the production cost gap until the appropriate

technologies are in place • the opportunities created by external price enhancements such as carbon credit trading • further awareness of climate change by the general public.

Note: These points are discussed in greater detail in Section 8 on Risk Analysis

Figure 2 Oil prices — historical rise (West Texas Intermediate) ($US per barrel)

Source: International Energy Agency Biodiesel production has suffered from a short term focus on investment opportunity in production infrastructure with most of the prospectus’s of these companies illustrating (see Australian Renewable Fuels — www.arfuels.com.au/prospectus) the capacity to be profitable on current 2003/04 values of feedstocks and the ability to arrest that feedstock from the other markets that currently use used fat, oils and tallow. The dramatic change in the world view of biofuels particularly by Europe and the U.S.A. has taken the lower cost based feedstock commodities and driven these feedstocks to new record price levels through increasing demand. This is coupled with poor quality production and low quality implementation which has lead to poor adoption and bad publicity. The fact that Australia could be a net importer of diesel within the next five years has not been fully addressed, neither has the issue of security of supply that is driving the U.S.A. and European markets, other than to be projected as being supplemented by imports. Security of supply in the short term is being underrated as a risk factor. Within five years it could be one of the major factors affecting agriculture’s ability to operate economically and efficiently. Australian Bureau of Agricultural and Resource Economics clearly demonstrate in Figure 3 that Australian reserves are not meeting demand. Australian demand for diesel is forecast at an annual increase of 2.9 per cent as demonstrated by the Figure 4. 1 While data is collected by the Australian Taxation Office as part of the subsidy payment arrangements, this cannot be made available to the public due to confidentiality concerns.

http://www.marketvector.com/leading-indicator/

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Figure 3 Australian production/use of diesel

Figure 4 Australian annual diesel sales

In conclusion, it is important to understand that the Australian situation for biofuels is completely different to other countries in the world; there are a different set of parameters and policies that have done and will continue to drive the opportunities and present threats within the fledgling industry. All these parameters are discussed within different sections of this report; the most important are listed below. These parameters are dynamic. With the exponential world growth in biofuels production these rapid changes will continue. If the industry is to create a solid foundation it will have to present a case that is insulated from the commercial ramifications of fluctuating dynamics and encompasses other micro enterprises from co-products and by-products of the feedstock. • Australia’s low population does not have the capacity to support a mandate. • Alternative fossil fuel types such as liquefied natural gas and liquefied petroleum gas have taken

precedence over renewable fuels in overall alternative fuel supplies. • Greenhouse gas abatement is not linked to the Kyoto Protocol in Australia so carbon trading has

been slow to develop. • Feedstocks for biodiesel production have been reliant on current available stock (used cooking oil

and tallow) and crop sources that are specific to human consumption markets.

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• An industry planning process has not been implemented. • Long term research and development into the industry has been disjointed. 1.4 Australian biodiesel producers

Table 2 shows the top ten Australian biodiesel producers. Further information is presented in Appendix 1 to this report. Table 2 - Top ten biodiesel producers — current and forecast producers

Biodiesel capacity (million litres) 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Biodiesel Industries Australia, Rutherford New South Wales

0.5 20 20 20 20 20

Australian Biodiesel Group, Berkley Vale New South Wales

15 40 45 45 45 45

Biodiesel Producers Australia, Barnawartha Victoria

0 0 60.2 60.2 60.2 60.2

Australian Renewable Fuels, Adelaide 0 44.7 44.7 44.7 44.7 44.7

Riverina Biofuels 0 0 44.7 44.7 44.7 44.7

Australian Renewable Fuels, Picton West Australia

0 0 44.5 44.5 44.5 44.5

AJ Bush 0 0 60 60 60 60

Australian Biodiesel Group, Queensland 0 0 160 160 160 160

Natural Fuels 0 0 150 150 150 150

South Australia Farmers Fuel 0 0 15 15 15 15

Total biodiesel 15.5 104.7 644.1 644.1 644.1 644.1

Total biofuels 90.7 179.9 1,249.3 1,249.3 1,249.3 1,649.3

Source: Federal Government 2005 report (biofuel industry participants, Renewable Fuels Australia.)

1.5 Industry strengths The competitive advantages of biodiesel vis-à-vis mineral diesel are five-fold. 1.5.1 Economic benefits The economic benefits of biodiesel are now broadly appreciated. The key benefit is its potential to play an integral part of the overall energy mix over the next 20-30 years. This needs to be stressed as part of positioning biofuels in the energy debate. Unfortunately there is little detailed study in Australia regarding the economic benefits of biodiesel production; however we can look to the countries with expansive biodiesel industries. Studies in Europe and the U.S.A. are quoted here for an indication of the benefits that should follow through to Australia. Europe A study by the European Renewable Energy Council estimates that meeting the European Union target for renewable energy for 2010 will result in a growth in net employment in the biofuels sector of 424,000 jobs. An indirect effect could be the multiplier opportunities creating a range of minus 40,000 to plus 15,000 jobs.

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The “Biofuels in the European Union – A vision for 2030 and beyond” report, based on the 2005 market prices, suggests that 25 per cent biofuels in road transport in 2030 could cost in excess of Euros 31 billion per year, equivalent to a 6.6 Euro cents per litre of gasoline and 8.2 Euro cents per litre of biodiesel. In this context the cost of increased biofuel use to society has to be weighed up against the monetary value of the benefits, such as: • enhanced security of supply • reduced greenhouse gas emissions • diversification of the energy mix • job creation in rural areas. The inclusion of biodiesel into a multi-faceted approach to fuelling Europe is seen to be good news for the agriculture sector. In January of this year Commissioner Fischer Boel said the “Energy package is good news for agriculture” further saying: "I am delighted with today's adoption by the Commission of a wide-ranging energy package. The paper represents a bold and well-balanced effort to solve some of Europe's energy problems, while making a major contribution to environmental protection. It is also good news for agriculture! I believe bioenergy could prove to be a strong card for the future of European agriculture. Although it is not an inexhaustible goldmine, it does provide farmers with an opportunity to produce with an eye for the market and in an environmentally sustainable manner. Of course, the first task of farmers must be to produce food. Biomass production will not replace food production. The 10% target is ambitious but realistic and sustainable for the future of EU agricultural production. I believe there is room for both in our farming sector. We can guarantee food security while giving our farmers attractive new outlets for their production. This will of course mean that some of our bioenergy needs will have to be met by imports. On my recent travels in Europe, I have noticed great enthusiasm among farmers for bioenergy. I hope that the energy package will give our rural entrepreneurs the reassurance they need to make the necessary investments.” U.S.A.: A study of the aggregate economic benefit of biodiesel to the U.S. economy was conducted by John M.Urbanchuk of LECG, LLC for the National Biodiesel Board (see http://www.biodiesel.org/resources/PR_supporting_docs/20061112_EconomicImpactLECG2006.pdf). The main conclusions were: • America’s biodiesel industry will add $24 billion to the U.S. economy between 2005 and 2015,

assuming biodiesel growth reaches 650 million gallons of annual production by 2015. • Biodiesel production will create a projected 39,102 new jobs in all sectors of the economy. • Additional tax revenues from biodiesel production will more than pay for the federal tax

incentives provided to the industry. • It will keep $13.6 billion in America that would otherwise be spent on foreign oil. This total

impact of biodiesel on the economy includes the temporary impacts of construction, the permanent impacts of annual production and the direct value of biodiesel and co-products (glycerine).

• The additional tax revenues generated by a profitable U.S. biodiesel industry will be significantly larger than the value of the federal tax incentives provided to the industry. Assuming that the biodiesel tax credit of $1 per gallon for agri-biodiesel and 50 cents per gallon for biodiesel from other sources is extended past 2008, this program would cost a total of $3.5 billion by 2015.

• The industry will generate $8.3 billion of new revenue for the Federal Treasury for a positive net balance of $4.8 billion.

• Oil dollars stay in America: The biodiesel industry will play a significant role in improving America’s energy security. Expansion of the biodiesel industry as estimated will displace 242 million barrels of crude oil between 2006 and 2015. Since the U.S. is a net importer of oil, this means that less oil will need to be imported. As a consequence, $13.6 billion (2005 dollars) will remain in the American economy instead of being sent abroad to finance oil imports.

• Permanent impacts: The ongoing annual operation of biodiesel plants offers the most significant impact from biodiesel production on the U.S. economy. The biodiesel industry will add $15.6

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/29&format=HTML&aged=0&language=EN&guiLanguage=enhttp://www.biodiesel.org/resources/PR_supporting_docs/20061112_EconomicImpactLECG2006.pdf

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billion (2005 dollars) to America’s gross domestic product as it spends $7.6 billion (2005 dollars) on goods and services between 2006 and 2015.

• Construction investments: Biodiesel producers will invest nearly $810 million (2005 dollars) by 2015 to build new biodiesel plants and expand existing facilities. This spending will increase gross output by $2.8 billion (2005 dollars) to gross output, adding $1.5 billion to America’s gross domestic product. Biodiesel construction will create as many as 11,700 jobs in all sectors of the economy.

• Benefits to farm prices: The additional demand for soybean oil used to produce biodiesel will increase demand for soybeans, raise soybean prices and revenue for soybean growers, and keep land in soybean production. Analysis published by the U.S. Department of Agriculture indicates that every 50 million gallons of biodiesel raises soybean prices one percent. Consequently, the 498 million gallons of biodiesel that will be produced between 2006 and 2015 will increase farm level soybean prices nearly 10 percent by 2015.

• Using the U.S. Department of Agriculture’s 2006 long-term baseline forecast for soybean prices as a starting point, soybean farmers can expect increased biodiesel demand to increase average soybean prices $0.58 per bushel by 2015.

Jim Kleinschmit, from the University New Hampshire’s Carsey Institute, gave the following points as being critical for biofuels development (the full report can be found at http://www.carsey institute.unh.edu/documents/Biofuels_final.pdf): • prioritize rural development considerations in biofuel incentives • help with start-up capital: • education and technical assistance: • make public research public: • make biofuels a part of conservation programs: • ensure that biomass feedstocks are sustainable over the long term. 1.5.2 Geopolitical benefits A biodiesel industry based on a sustainable and renewable resource has long-term geopolitical advantages for Australia. In particular, reduced dependence on foreign supplies of petroleum from the Middle East is expected to become an increasingly important issue. The shift underway to alternative fuels (solar, nuclear, wind energy and biofuels) is opening up new global alliances outside the multinational oil set. Importantly, Australia’s track record in agriculture, biotechnology and energy sciences provides a platform for biofuels to become progressively embedded in international science and energy agendas. The Commonwealth Scientific and Industrial Research Organisation has a particularly good opportunity to play a leadership role through its Energy Transformed Flagship. Apart from the U.S.A. and Canada, the European Union (notably Spain, Germany, France and the U.K.) and China are actively supporting the development of biofuels. There is therefore significant potential for Australia to form research and commercial alliances with agencies in these nations. 1.5.3 Value adding benefits The benefits offered by biodiesel for Australian grain growers are outlined in the Regional Sustainable Model research program (see subsequent sections). Overseas evidence suggests there are also major opportunities in downstream product areas, principally in glycerol, biopesticides, fungicides and cattle feed. These opportunities are not well-understood at present. There is an urgent need for market research in this field.

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The main by-product is crude glycerine – or glycerol. Glycerine is a widely used commodity for making soap and other products through relatively expensive refining processes. Large biodiesel producers have historically disposed of their glycerol on this market, more recently saturating the market. The chemical industry's work in green chemistry so far includes: developing new products, such as bioplastics and biofuels; implementing technologies to reduce pollution and waste for existing products; and replacing hazardous chemicals with non-toxic substitutes. However the renewable feedstocks program must compete on financial terms with existing processes or product attributes that customers will pay for. “There's no automatic payback for being green.” Other uses for oils — such as edible oil, paints, stains, lubricants and plastics — might be more valuable than the bulk production of biodiesel. Future research is expected to focus on producing multiple, high-value products from different oils, with biodiesel providing the base volume for a plant. A significant shake-out of the oil industry will provide an interesting window because it will change the economics of industries using petroleum as its feedstock. Australia has big potential to carve out new business opportunities by applying its science strengths and forming new alliances (as above). 1.5.4 Health benefits In Australia, the Biofuels Taskforce made a particular point about the potentially significant air quality and health benefits from biofuels. Results of health effects testing concluded that biodiesel is non-toxic and biodegradable, posing no threat to human health. Also among the findings of biodiesel emissions compared to petroleum diesel emissions in this testing: • The ozone (smog) forming potential of hydrocarbon exhaust emissions from biodiesel is 50 per

cent less. • The exhaust emissions of carbon monoxide (a poisonous gas and a contributing factor in the

localized formation of smog and ozone) from biodiesel are 50 per cent lower. • The exhaust emissions of particulate matter (recognized as a contributing factor in respiratory

disease) from biodiesel are 30 per cent lower. • The exhaust emissions of sulfur oxides and sulfates (major components of acid rain) from

biodiesel are completely eliminated. • The exhaust emissions of hydrocarbons (a contributing factor in the localized formation of smog

and ozone) are 95 per cent lower. • The exhaust emissions of aromatic compounds known as polycyclic aromatic hydrocarbons and

nitrated polycyclic aromatic hydrocarbons (suspected of causing cancer) are substantially reduced for biodiesel compared to diesel. Most polycyclic aromatic hydrocarbon compounds were reduced by 75 per cent to 85 per cent. All nitrated polycyclic aromatic hydrocarbon compounds were reduced by at least 90 per cent.

1.5.5 Environmental benefits The fact that bio-based fuels are renewable is a selling point. They have lower life cycle carbon dioxide emissions than diesel derived from mineral oils. They are also bio-degradable and non-toxic. Neat biodiesel contains almost no sulphur and no aromatics. In a properly tuned engine this leads to lower particulate exhaust emissions, because the absence of sulphur allows more efficient use of oxidation catalysts. This reduces the non-soluble particles and acts as a lubricity improver. However the production of biodiesel requires certain energy and water inputs. While the resource inputs for growing mustard for biodiesel are likely to be lower than for other feedstocks, there are no reliable data to prove this. This is an area for priority attention to balance the views of the critics of

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biofuels, as below. If this is not properly researched and reported it will allow critics to continue to dispel the advantages of biodiesel with misinformation. Section 2 gives further environmental benefits of biodiesel with particular reference to this project. 1.6 Industry constraints

While biodiesel has some very significant benefits, there are weaknesses and constraints that must be addressed over the medium term. Some of these are due to misinformation, while others are of a more substantive nature. They need to be carefully understood by industry stakeholders because they provide the focus for action. They are outlined below in order of likely importance. 1.6.1 Taxation policy The tax changes that took effect on 1 July 2006 are due to conclude on 1 July 2015. Fuel tax of 38.143 cents per litre is applied to petroleum and diesel transport fuels but domestically-produced ethanol, and imported and domestically produced biodiesel receive equivalent production grants to offset the fuel tax until 1 July 2011 — as the fuel tax will begin to apply incrementally until 2015 when the long-term rate of 12.5 cents per litre for fuel ethanol and 19.1 cents per litre for biodiesel will be reached. From July 2011, imported ethanol and domestically produced ethanol will be treated equivalently, opening domestically-produced ethanol to full international competition. This might see strong import competition from Brazil, which is a significant low-cost producer of ethanol. The major issue for both producers and end users of biodiesel is that the July 2006 legislation changes have effectively minimised the market to blends of B5 that meet the petrodiesel specification. This is not sustainable for regional Australia which requires a minimum of B50 and the current applicable energy rebates until the establishment of lower cost energy crops, and hence cost of biodiesel production. It is noted that the Department of Environment and Heritage are currently receiving submissions on a draft specification for biodiesel blends, which requires a broader consideration from other potential stakeholders such as the feedstock/grower communities outlined in this proposal. The following quotes demonstrate how this negatively impacts on the industry. ‘The fuel tax bill which came into effect on 1 July 2006 has created massive complications for our customer base. There are six different tax treatments for biodiesel…the new bill eliminated the incentive for off-road users, like farmers and miners, to take up biodiesel. The industry is still working through the changes.’ — Dr. Len Humphreys (Australian Biodiesel Group) The new tax arrangement ‘substantially reduces biodiesel's capacity to compete in the market. Progress in new production growth has just come to a shuddering halt in Australia. The biggest beneficiaries are the major oil companies, because they pegged for a 5 per cent limit on the use of biodiesel in the market.’ — Bob Gordon (Renewable Fuels Australia) ‘Under these laws a lot of the certainty is certainly gone and that has a big impact on whether people will commit the resources that are required to develop the crops and the infrastructure around it to supply to biodiesel.’ — Adrian Lake (President, Biodiesel Association) The new B5 limit is a significant barrier, and the industry needs to lobby the federal government to have this lifted to at least B20. In this regard, the strong political interest in alternative fuels (e.g. by

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independent federal members, the NSW Government, the NRMA) should be tapped by the industry. It is also significant that in August 2006, the Labour Opposition announced its support for biofuels. This is an about-face, given Labour had claimed in 2001 that ethanol damages vehicles, and that it was only supported by the Prime Minister's friendship with Manildra’s Dick Honan. The Labour Opposition now says biofuels form part of an immediate solution to break Australia's dependence on Middle Eastern oil. Previous Labour leader Mr. Kim Beazley was quoted as follows ‘What we have to do is to get ourselves unhooked from the worst excesses of the international market here and we can only do it by domestic self-sufficiency, but self-sufficiency demands a bit of innovation here — so ethanol, biofuels and gas-to-liquid conversion.’ In a similar vein, the New South Wales Farmers Association Conference voted in July 2006 to push for tax incentives to encourage the development of biodiesel products. It sought legislative changes so farmers can make their own biodiesel for off-road use. While it stopped short of demanding mandatory 10 per cent ethanol in petrol in Australia, the conference voted in favour of the establishment of a Biofuels Cooperative Research Centre to research the development of biofuel-specific crops to maximize yield potential and fuel production efficiency2. These examples show is that there is strong support for proactive measures to build sustainable long-term capacity of the biofuels industry. In the 2011-15 period, the federal government will tax biodiesel at the same rate as mineral petroleum. This is a problem because even by 2011-15 the biofuels industry will still be in an infancy period. The post-2011 taxation arrangements do not take account of the true economic, environmental and geopolitical costs associated with continuing high levels of petroleum usage. It means that biofuel oil producers have neither the commercial incentive nor the cash flow to invest in research and development to lower their production costs. Although biofuel production costs are coming down and new technologies are on the horizon, the taxation regime must account for these externalities. A further problem is that the market power of the oil producers provides them with the option of increasing production and/or cutting their refining margins to thwart the development of alternative fuels. Finally, it should be noted that the biggest biodiesel markets in the European Union — Germany and France — offer sizeable tax incentives to the industry. At least 2 per cent of all transport fuels must be biofuels, rising to 5.75 per cent by 2010. The European Union policy is instructive because it derives from its commitment to the Kyoto Accord and recognition that road transport contributes 84 per cent of the carbon dioxide emissions of the transport industry. Some European Union nations are selling blends of 10 per cent biodiesel. In 2005, biodiesel production within the European Union rose by 65 per cent over the preceding year, to just over 3 million tonnes. Production in 2006 is estimated at 6 million tonnes. In the U.S.A., the second-biggest market, a number of states have mandatory targets for biofuels to improve city air quality. There needs to be a real need within Government to ensure that the costs of biofuels are such that they compete economically with mineral oil based alternatives. Taxation policy is one tool available to do this. Taxation of biofuels should only be increased AFTER the industry is fully established and competitive.

2 Richard Clark, Senior Vice President, NSW Farmers Association, also called for the Government to remove the bureaucratic impediments to on-farm biodiesel production.

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1.6.2 Insufficient adjustment period As noted above, there is growing evidence that the level and timeframe of assistance to place the industry on a sustainable long-term footing is not sufficient. The process of weaning consumers off petroleum and developing energy alternatives is expected to take a decade or more. Indeed, John Keniry (member of the Government Taskforce, and Chair of the Australian Biodiesel Group Board) has stated, ‘I think the Government has spent quite a bit of money, around $50 million, to encourage the development of some of these (biodiesel) plants and it would be a shame if, having spent that money, they get killed off because they have taken away subsidies perhaps earlier than they should have’. Part of the problem is that Australian Bureau of Agricultural and Resource Economics says that biofuels are only commercially viable through the ongoing industry support. However this is premised on its own forecast that the price of oil will fall to $US 32 per barrel by 2009, whereas oil has stayed above $US 60 throughout 2006, and very few analysts see the world oil price falling below $US 50 in the foreseeable future. 1.6.3 Quality assurance The quality of biodiesel varies considerably (Table 3). Since the majority of Australian biodiesel is produced from used fats, cooking oil and tallow, quality is not always good and it needs to be blended to produce a quality product. This is not the story for all feed stocks; brassica oil produces excellent quality biodiesel. Production of biodiesel is currently not standardised. There is a concern that biodiesel manufactured outside European or U.S. standards can cause corrosion, fuel system blockage, seal failures, filter clogging and deposits at injection pumps. In this regard, the Biofuels Taskforce concluded that the industry faces considerable market barriers including low consumer confidence and high commercial risk due to the uncertainty about standards. Consumer confidence in the biofuels industry was in fact seriously damaged in 2002. While the Biofuels Taskforce found that the low level of consumer confidence is not justified by the facts, it highlighted the important task for government to restore consumer confidence in the biofuels market, and for industry stakeholders to increasingly involve themselves in this. The federal government subsequently agreed to the following actions: • Commonwealth vehicle fleets to purchase E10 where possible. • Testing of vehicles in the Australian market to validate their operation with E5 and E10 ethanol

blends, and subject to testing, to allow E5 blends to be sold without a label, as in Europe, to give fuel companies greater commercial flexibility to increase supply.

• The Commonwealth to work with the Federal Chamber of Automotive Industries to ensure that consumers receive accurate and up-to-date information.

• Increase fuel quality compliance inspections to ensure ethanol blends meet fuel quality standards.

• Simplification of the E10 label, which inadvertently acts as a warning to consumers against using ethanol.

• The Commonwealth to work with Australian fuels and transport industries to establish standard forms of biodiesel to provide certainty to the market. The Australian Standards Institute may be an appropriate body to implement this, certainly there could be a case where a range of feedstocks are being used for defining two or more specific grades e.g. summer and winter, each with its own characteristic operating ranges.

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• Work with the States/Territories to adopt fuel volatility standards that are transparent, nationally consistent and take full account of the latest information on the impacts of ethanol blends on air quality.

These recommendations are principally for ethanol. Biodiesel needs to be given similar priorities to enable the industry to consolidate. The Biofuels Industry Association should be tasked with monitoring the implementation of these recommendations. Finally, the New South Wales Farmers Association has called on government to allow farmers to make their own biodiesel. This is a real risk in the absence of quality standards or monitoring arrangements, because it could further damage consumer confidence. The Regional Sustainable Model proposal for biodiesel processing hubs, with strict quality protocols, would address this. Additionally a laboratory to run board scale quality testing is expensive (in the order of one million dollars). For grower - producers this is not a feasible option, but as part of the Regional Sustainable Model infrastructure it is. Table 3 Biodiesel quality differences by feedstock

Mustard oil produces excellent quality biodiesel

ImportedLimited quality

ExpensiveConsideration

$750$950$700$500$550$900$950Approximate Cost MT oil

1352831.279Oxidation stab. (>6h)

114121156165162150155Flash Point (>120 °C)

33.143.098.393.582.696.597.7FAME (>96%w/w)

-4-5137191-5Cloud Point (°C)

Coco-nut

PK Olein

Palm oil

UCOTallowCottonCanola mustard

Red = high concern or uneconomic Orange = medium concern, may be uneconomic Green = best option on quality and economics 1.6.4 Technical issues As biodiesel has been proven globally over many years, with millions of vehicles running on various biodiesel blends from B5 to B100, the issue is to ensure feedstock types and processing plants produce a fuel that is fit for purpose, in addition to meeting suitable government regulatory specifications. As shown in Table 3, the level of saturated fatty acids in various feedstocks determines the cloud point of the produced biodiesel, which is the main consideration for suitability of a particular blend ratio for given temperature ranges (summer and winter). A critical component in the regional model is the investment required to build and operate a fully equipped chemical laboratory sufficient to test and validate the quality of product at four distinct phases:

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1. Feedstock selection — for purchase, inwards inspection and blending recipes 2. Plant control — critical stages require real time lab analysis to ensure consistency 3. Final product — to ensure B100 biodiesel meets regulatory specifications (2003) 4. Biodiesel blending — to ensure biodiesel blends meets regulatory specifications.

A minimum equipped laboratory to measure and control only 50 per cent of the biodiesel specifications requires over $1 million worth of high precision instrumentation and appropriately trained chemists. This will effectively limit the ability of most on-farm production to measure and maintain a consistent product quality, and will require the size and volume of the regional enterprises contemplated here-in to sustain the costs of compliance. Of the 23 specifications stated in the Biodiesel Fuel Determination 2003, the major parameters that can cause issues within a compression (diesel) engine are:

• ester content • glycerol content • alcohol content • density

• viscosity • flash point • contamination • cloud point (not in specifications, but critical)

It is noted that high levels of biodiesel blends have been used extensively in the transport and off road industry within Australia, with many reports of reduced engine temperatures through higher lubricity, and significantly reduced emissions. There is an urgent need to review the application of various specification test methods and limits set for both B100 and blends to ensure the environmental and engine benefits of higher blend ratios can be realized. Due to the fledgling nature of the biodiesel industry in Australia, there is a proliferation of misinformation and exaggeration. A combined industry – government body is required to address the technical and user aspects of biodiesel, and recommendations of the Biofuels Taskforce. 1.6.5 Refuelling infrastructure There are presently few places where Biodiesel can be purchased, largely because oil companies have been reluctant to distribute non-renewable fuels. This could be overcome through development of an industry code of practice based on existing Petroleum industry standards, augmented with variations of existing standards such as the U.S.A. BQ9000 to meet the specific of the Australian market. Regional Australia is seeing most of the major petroleum companies withdraw services and infrastructure, similar to actions of the banking industry and telecommunications industry in previous years. To arrest this decline, the regional model could include local refuelling infrastructure as an addition to the significant processing plant infrastructure and a producer-consumer arrangement such that the suppliers also retain some benefits as users. Technology is also available for deployment of unmanned, self-bunded tanks and dispenser facilities to outlying regions during times of high diesel use (sowing and harvest). This solution will reduce farmer costs, increase market acceptance and allow a low cost entry requirement on infrastructure, avoiding complicated layers of trading requirements such as wholesalers, distributors and retailers. It is noted that the Bendigo Bank is currently raising funds for a Community Enterprise Model ™ to establish a regional refuelling facility as the first step in developing an overall biodiesel model.

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1.6.6 Import competition The possibility exists of import competition in the local biofuels market from low cost producers. For example, Brazil has been a significant biofuels producer for 20 years and it could conceivably become a significant exporter and thus threaten the Australian industry in its establishment phase. Indeed, it has been suggested that a situation could develop where petrol companies meet any government biofuel sales targets by switching to imported biodiesel. This underlines the need for an effective industry plan that, inter alia, allows time for the research and development results to be introduced and for production volumes to be built up. 1.6.7 Supply of feedstock The feedstocks that supply the existing biodiesel producers are largely used fats and oils. Producers are dogged by lack of alternative feedstocks, in both price and availability. There are a variety of oil crop feedstock options available, with varying quality biodiesel production. Table 3 shows some of these options and the problems with their supply (e.g. price, quality). The large coastal biodiesel plants are looking towards Malaysian palm oil, the price of which is rising as demand from biodiesel producers (including those in Malaysia) increases. Unfortunately palm oil biodiesel has a high cold point which could bring rise to quality problems in winter. Of all the available crop types, brassica, and in particular mustard, is the only crop that has the ability to develop quickly and has the agronomic characteristics to grow over all soil types of the Australian grain belts. Table 4 shows how the oil seed crops have increased in production in the last ten years. Table 4 Australian production and importation of oil seed and meals

TYPE Production 1995/6

(kilotonnes)

Production 2001/2

(kilotonnes)

Exports

(kilotonnes)

Imports Oil

(kilotonnes)

Imports Meals

(kilotonnes)

Soybeans 43.9 70.4 10.36 3.28 258.76

Canola 557.1 1797.0 303.1 0.09 0.64

Sunflower 68.9 63.0 1.98 0.80 *16.64

Linseed 12.7 9.1 0.03 1.04 2.43

Safflower 29.8 27.8 10.36 *Inc

Peanuts 38.5 36.6 5.10 5.77 0.35

Cottonseed 933.0 979.8 593.64 0.64

Castor Beans 1.41

* Sunflower and Safflower Oil Imports

Source: Australian Bureau of Statistics

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2. Overview of the Regional Sustainable Model 2.1 The description of the regional sustainable model

The Regional Sustainable Model is a structure that allows growers to grow their own oil feedstock and as part of a commercial entity to convert their grain to biodiesel to fuel their own farm. However it is more than this to both the grower and the wider community, it is designed to boost regional sustainability and growth. It will prove a specific investment opportunity for rural Australia and associated partner organizations, as well as the wider biodiesel industry in Australia. See Figure 5. This will be achieved through an integrated set of projects — extending across the value chain from biodiesel feedstock crops, to biodiesel and to high value by-products. This will be delivered through a Regional Sustainable Model Management Company that is best practice in terms of commercial viability, environmental management and regional engagement. It will also seek out collaborative partners among growers, researchers, biofuel producers and the investment community. 2.2 Mission statement

The Regional Sustainable Model will provide a commercial pathway for the on farm growing of feedstock oils for the cooperative production of biodiesel for on farm use. It will provide and coordinate research and development associated with industrial oilseed crops and facilitate the development of Regional Grower Groups and Local Community Enterprise Hubs so farmers can grow their own biodiesel. This involves an overall management body to facilitate the project, manage the Regional Grower Groups, involve peak farmer organisations, liaise with biodiesel and associated product processing industries, research and development corporations and various research agencies, government departments, community organisations. They will be involved in the extension and uptake of industrial oilseed research by growers and the adoption of the Regional Sustainable Model. The goal is to quickly build a knowledge base of the biodiesel industry and of the local socioeconomic environment so that it underpins investment in regional industry, product