Economics of Biodiesel Production in

East Africa: the Case of Ethiopia

Zenebe Gebreegziabher
University of Mekelle, Ethiopia

Conference on Energy Agro-Food Nexus in East Africa:

Economics Engineering and Policy Perspectives, Friday
19th February 2016, Ghion Hotel, Addis Ababa
• Part of a paper entitled
‘Profitability of Biofuels Production: the Case of
Ethiopia’
• Co-authored with Alemu Mekonnen (UAA), Tadele
Ferede (UAA), Gunnar Kohlin (UoG, Sweden)
• http://www.rff.org/files/sharepoint/WorkImages/Do
wnload/EfD-DP-14-19.pdf
• My presentation focuses on Ethiopia but as the title
suggests would like the ‘future’ paper provides East
African perspective to enhance co-authorship with
colleagues from Tanzania and Kenya but also Ethiopia
 Outline
• Motivation
• Objectives and Questions
• Analytical Approach
• Study Considerations and Analysis
• Results and Discussion
• Conclusions and Implications
 Motivation
• Biofuels (i.e., bioethanol and biodiesel) are
emerging as part of the global energy mix
since the 1970s to meet the climate change
challenge as well as the scarcity and rising
prices of fossil fuels.
• Global biofuels consumption is projected to
grow by two-to three-fold over the next two
to three decades, from 3% of transport fuel
now up to 9% by 2030 [IEA (2009), (2010)].
 Motivation (cont’d)
• IEA’s Blue Map Scenario (IEA, 2008) that extends
analysis until 2050, projects biofuels will provide 26%
of total transportation fuel in 2050, with second-
generation biofuels accounting for roughly 90% of all
biofuel.
• The United States and Brazil are the largest
producers of bioethanol, and the EU largest
producer of the world’s biodiesel
• Ethiopia is viewed as one of the most suitable
nations in Africa for tapping renewable sources of
energy including biofuels.
 Motivation (cont’d)
• Potential area of about 25 million ha of land suitable
for production of biodiesel feedstock.
• Ambitious plan to revive biodiesel production, i.e.,
may reach 450m litres a year within the next five
years (GTP II), up from virtually zero currently.
• Still huge interest on gov’t side and this was even on
the international media, i.e., in Financial Times as
recent as early Feb, 2015.
• Biodiesel blending in transport fuel is not yet started
in Ethiopia, but the CRGE envisages 5% biodiesel
blending in transport fuel by 2030 and more.
 Motivation (cont’d)
• So given the huge interest, would be logical to ask is
it economically worth doing it?
• Moreover, volatility of world fuel prices leads to
variability in prices of both biodiesel and feedstocks
• Uncertainties in prices, in turn, influences viability of
biodiesel investments/ventures
• Therefore, it would be of interest assessing the
profitability (int’l competitiveness and viability) of
biodiesel industry in Ethiopia
 Objectives and Questions
• This study aims to investigate the economics
(viability) of biodiesel production in East Africa
taking Ethiopia as a case in point.
• Specifically, in this study we:
(i) analyze the viability of biodiesel production
and
(ii) investigate international competetivenes
 Objectives and Questions(cont’d)
Key questions can include:
• Can biodiesel be profitably produced in the
contest of Ethiopia/East Africa?
• Will it be economically feasible to produce
biodiesel if its price is lower than the fossil oil
price?
• What is the oil price threshold beyond which
biodiesel production (be it for import
substitution or export promotion) becomes viable
& profitable?
 Analytical Framework
• Two approaches employed (i) Farm budget (James
and Swinton, 2009) and (ii) Investment analysis
approach (Rose 2009)
• Farm budget approach provides details of the
revenue and cost structure of the biofuels industry
• Break-even analysis of yields and prices
– Given yield, determine break-even prices or
– Given prices, locate break-even yield
• By doing so, the economic viability of biodiesel
production can be assessed
 Analytical Framework (cont’d)
• Investment analysis approach takes a long-
term perspective
• More detail valuation and analysis of future
streams of costs and benefits of a biodiesel
venture including assessing associated risks
arising due to changes in prices, technology,
etc.
• So, in our case we apply investment theory as
underlying conceptual framework that informs
our analysis (Dixit & Pindyck 1994)
 Analytical Framework (cont’d)
• We consider a biodiesel firm (processing plant) that
operates independently from the farm unit to
maximize profit obtained from the difference b/n
revenue and cost cash flow.
• Note firm (investor) seeks to maximize discounted
value of the future cash flow less the current cash
outlay for the physical capital of the plant.
• Optimality condition implies that price (MR) equals
to the marginal production cost (MC) that includes
the operating cost component and the capital cost
component.
 Study Considerations and Data
Analysis
Study context
• GoE issued ‘Biofuels Dev’t and Utilization Strategy in
2007 (MoME, 2007)
• Biofuels investments have been underway since
them
• In Ethiopia crops/plants grown for biodiesel
production mainly jatropha, castor seed, and oil
palm.
• But, plants like Argemone mexicana and Croton
macrostachyus are also being promoted/
demonstrated in Tigrai by API (Africa Power
Initiative)
 Study Consideration … (cont’d)
Table 1 Number, type and regional distribution of biofuels developers in Ethiopia

Region Type*
Biodiesel Bioethanol
Benshangul Gumuz 4(3)
Amhara 7(5) 1
Oromia 16(3) 4(1)
SNNP 21(3)
Gambela 4
Afar 1
Total 52 6
* Numbers in () indicate projects that have started operation.
Source: Lakew and Shiferaw (2008)
 Study Consideration … (cont’d)
Data
• Two sets of data sources are used: (i) Survey data
(Biofuels investment survey by EEPFE (now ECRC) at
EDRI in 2010)
 Study Consideration … (cont’d)
Table 2 Overview of characteristics of the biofuels sector in Ethiopia

Indicator Number / description

No of firms/companies >15 (incl. NGOs)

No of firms already at production 2(bioethanol)

stage
No of firms that started export 1(biodiesel)?

No of firms at production test stage 2(biodiesel)

Total investment (capital) Multimillion >1.3 b ETB (>0.1 billion USD)

Investment (type) Largely foreign but also domestic

Land (000’ ha) >308 (currently operated); >101 (additional)

 Study Consideration … (cont’d)
Table 2 Cont’d
Indicator Number / description

Year in operation Since 2005

Installed plant capacity 492 to 28,800 liters/day

Employment opportunities. >17,714 (Temp), >236 (Perm)

Crop types Jatropha, castor bean, palm oil (biodiesel)

Sugarcane molasses (bioethanol)

Technology Plantation, out-growers, and community

development
Regions All regions, Oromiya, SNNPR, Amhara, etc

Source: Results of biofuels investment survey 2010.

 Data Analysis and Study … (cont’d)
• (ii) Estimation data
• Bio-diesel production in Ethiopia is at its
infant stage and has yet to mature
• Much of the efforts so far has been on
nurturing the feedstock market/supplies
• So, own estimation data based on field visits
and literature reviews (best guess approach) is
used especially in the case of unit cost analysis
of bio-diesel production.
 Study Consideration … (cont’d)
Data analysis
• We employ ‘unit cost analysis’ for empirical
calculation as well as international
comparison
 Study Consideration … (cont’d)
Study considerations
• The following considerations are made in the
case of biodiesel
1. 2000L/day biodiesel processing plant
2. 6days/week for 52 weeks
3. 1,000,000ETB inv’t on plant and building
4. 2 operators + 1 chemist
5. 15yrs/ 9% interest rate, maintenance 3.8%of plant
6. Feedstock (oilseed) purchase price of ETB 3,6,7/kg
 Results and Discussion
Table 3 Results of viability (unit cost) analysis of bio-diesel production

Item Argemone Jatropha Castor

mexicana
Feedstock (oilsees) 9.00 18.00 21.00
Machinery, plant, 1.26 1.26 1.26
power
Supplies 6.50 6.50 6.50
Labor 0.16 0.16 0.16
Others 0.10 0.10 0.10
Total unit cost (ETB/L) 17.02 26.02 29.02
Total unit cost (US$/L) ≈1.00 ≈1.50 ≈1.70
 Results and Discussion (cont’d)
• The analysis considers exchange rate (as of
August, 2010) ETB/US$ of 13.5
• As seen from the results in Table 3 biodiesel in
Ethiopia from Argemone mexicana, jatropa and
castor bean can be produced at costs 1 US$,
1.50 US$ and 1.70 US$ per liter respectively
• To draw meaningful insights results presented
above need to be contrasted with world oil prices
and international experiences
 Results and Discussion (cont’d)
• In Peru production cost of biodiesel from oil
palm and jatropha is 0.23-0.31 USD/L 0.84-
0.87USD/L, respectively
• In India the sales price of jatropha biodiesel to
oil companies vary between US$ 0.68 and US$
0.90 per liter
• So, if world oil price is expected to vary
between 42 to 200 USD/barrel, bio-diesel
firms in Ethiopia must be able to produce at
less than 1USD/L.
 Conclusions and Implications
Conclusions
• Following conclusions are drawn from the foregoing
analysis in terms of viability of biodiesel production
• i) Biodiesel production in Ethiopia is not
economically viable at least currently.
• ii) Viability (and competitiveness) of bio-diesel
production in Ethiopia will largely depends on
cost/price of feedstock
• iii) Both macro and micro evidence suggest that
biofuels/biodiesel industry can be a way out of
poverty but a lot remains to be done to enhance its
viability
 Conclusions and … (cont’d)
Implications
• i) R and D effort/ knowledge support to
biodiesel industry including search for better
adaptive/ better yielding varieties and good oil
quality biofuels crops (long-run)
• ii) viable alternatives of co-production through
value addition from byproduct seedcake and
intercropping options need to be considered
to enhance profitability (short run)
• iii) better regulatory framework and follow up
 Conclusions and … (cont’d)
• We considered biodiesel processing plant
capacity of 2000L/day,
• Bu there are other current initiatives, A
15,000 liter-per-day biodiesel processing
facility was scheduled to be commissioned in
February by African Power Initiative (API),
with backing from Saudi Arabia’s Al Romaizan
family and Pegasus Capital in the US.
• So further investigation is called for on the
effect of scale
Thank you