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Economic Feasibility of micro-production of B100 for use in

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Economic Feasibility of micro-production of B100 for use in

Micro-Production of Biodiesel: Independence

    for Municipalities and Private Fleets

A Gordon Brooke

     dba Plan B Fuels

    12 Madeline Terrace

    Chestnut Ridge, NY 10977

    Tel. 866.270.2400

Tuesday, August 01, 2006

Abstract

    Year after year fuel prices continue to steadily rise continually challenging private fleet

    profitability. During past decade, fuel expenditures have quickly blossomed into the single largest operational cost after initial vehicle acquisition expenditure. Biodiesel is a renewable, environmentally friendly alternative to traditional Petrodiesel that is can be readily produced by fleet operators, utilizing relatively simplistic equipment and local feedstock.

    Unlike Petrodiesel, Biodiesel is not categorized as a hazmat substance and thus does not require Biodiesel production registration or special licensing, combined with local availability of feedstock and significant State and Federal incentive programs make a compelling argument for localized micro-production of Biodiesel.

    The following brief highlights the primary economic factors, liabilities and feasibility of on-site production and utilization of Biodiesel (B100) and blends of Biodiesel with #2 1Petrodiesel (Bxx) in private fleets.

     1 Bxx represents the % by volume of Biodiesel in #2 Petrodiesel blends. B20, containing 20% Biodiesel and 80% #2 Petrodiesel and Bxx blends of less than 20% are currently industry accepted and regulated in US markets by the ASTM International standard D6751 and in EU by the EN14214 standard.

Index

    1 FUNDAMENTALS OF BIODIESEL ................................................................................................. 3 1.1 CHEMICAL SIMPLICITY ............................................................................................................... 3 1.2 MARKET DRIVERS & INFRASTRUCTURE FOR BIODIESEL ................................................................. 3 1.3 PRODUCTION OF BIODIESEL ....................................................................................................... 4 2 FEASIBILITY OF UTILIZING B100 IN PRIVATE FLEETS .............................................................. 8 2.1 MECHANICAL FEASIBILITY .......................................................................................................... 8 2.2 BIODIESEL MARKET & INFRASTRUCTURE ..................................................................................... 9 2.3 US DOMESTIC BIODIESEL LEGALITIES ......................................................................................... 9 2.4 ECONOMIC IMPACT OF UTILIZING B100 & BXX IN PRIVATE FLEETS ................................................ 10

    2.4.1 Onsite production of B100 from local WVO ....................................................................... 12

    2.4.2 Onsite production of B100 from Yellow Grease ................................................................. 13

    2.4.3 Onsite production of B100 from Straight Vegetable Oil (SVO) ........................................... 14

    2.4.4 Domestic B100 from Soya Oil ........................................................................................... 15

    2.4.5 Foreign B100 from Palm Oil .............................................................................................. 16 3 UTILIZATION OF BIODIESEL IN PRIVATE FLEETS ................................................................... 17 3.1 TO BLEND OR NOT TO BLEND BXX .......................................................................................... 17 3.2 LOCAL MICRO-PRODUCTION OF BIODIESEL ................................................................................. 17 3.3 FINISHED BXX BLENDS ............................................................................................................ 18 4 BIODIESEL PRIVATE FLEETS .................................................................................................... 18 5 APPENDICES ............................................................................................................................... 19 5.1 US-STANDARD FOR BIODIESEL ASTM D6751 ........................................................................... 19 5.2 INFORMATION LINKS ................................................................................................................ 19 Internal Confidentialpage 2

1 Fundamentals of Biodiesel

    1.1 Chemical Simplicity

    The diesel engine, as invented by Rudolf Diesel in 1893, ran on peanut oil! Pure Biodiesel, or (B100), is a safe, plentiful and renewable alternative to Petrodiesel. Biodiesel is made through the transesterification of either vegetable oil or animal fats. For the purpose of this brief we will specifically focus on Agri-Biodiesel, Biodiesel produced from 100% from vegetable oil feedstock. Biodiesel is the byproduct of catalyzing organic fat or oil molecules with alcohol & acid, a reaction that can be effectively achieved by blending the three ingredients in a common water bottle.

    (ester + alcohol) (different ester + different alcohol)

The basic Biodiesel vocabulary includes:

    Agri-Biodiesel- Biodiesel made from vegetable matter, US government uses term to clarify tax incentives.

Feedstock - Refers to the type of oil/fat used to produce Biodiesel

    Waste Vegetable Oil (WVO) - Commercially used vegetable oil blends typically from restaurants or other food production facilities.

    Yellow Grease Is WVO that has been homogenized and filtered to remove impurities.

Straight Vegetable Oil (SVO) Is food grade virgin vegetable oil.

1.2 Market Drivers & Infrastructure for Biodiesel

    Biodiesel presents a unique alternative energy option. Of all the various alternative fuels available today, Biodiesel is the ONLY alternative fuel capable of running in existing unmodified engines. Further, Biodiesel can utilize all existing distribution & storage infrastructure. As an added bonus, combusted Biodiesel far exceeds Clean Air Act mandates and is a 100% renewable resource.

Internal Confidentialpage 3

    Given the above facts alone, the logical question is why B100 does not have greater utilization today. The simple answer is economics. Moving to a diesel-based fuel for

    motor vehicles requires a directed consumer market shift. Moreover, a shift in fuel opens the window of opportunity for new producers to undermine the profits of the entrenched Petrodiesel and Automotive industries. The established producers of Petrodiesel are able to produce #2 Petrodiesel at approximately $0.64 per gallon with no additional capital equipment charges compared to B100 at $1.08 per gallon (less with economies of scale equal to those of Petrodiesel).

    Maintaining the status quo has been the more comfortable, profitable and risk adverse approach for Petrodiesel refiners. As oil prices have steadily increased, along with global tensions, the consumer has begun to call for change. As a direct result, BP has instituted a new ad campaign extolling their virtues as the first oil company on the cutting edge of B100 research. DuPont is a close second in the marketing race. Such marketing campaigns not only appeal in the environmental marketing genre they

    foretell the coming shift in B100 prices which will be actively traded on the commodities exchange.

    B100 is coming - but the greater fuel infrastructure will be slow to evolve. This period of transition has opened the playing field to nimble new producers and pioneers unencumbered by a leviathan organization. Additionally, the relative ease of B100 production has foddered a growing number of small-scale producers; from single vehicle home users to municipal, US military and private fleets alike.

    Governed by capitalism, Biodiesel simply makes economic sense for end users. Self produced or sourced finished B100 is lower than or matches current diesel prices. In the case of WVO Biodiesel can be produced at close to $1/ gallon. While most likely temporary in nature, currently, both federal and state government actively provides tax incentives and rebates that equal $0.23 - $1.10 / gallon. Most companies are eligible for a 30% -50% tax credit for capital expenditures related to alternative fuel use and production.

    Assuredly, the tax-free status of B100 and alternative fuel incentive programs will be phase out, as the Biodiesel infrastructure matures. However; unless one believes the price of crude will end its 50-year path of steady price increases, the market for Biodiesel will only increase in years to come. The fact that B100 combusts more cleanly and can be domestically produced only further guarantees that B100 is destined to greatly augment the current fuel market.

1.3 Production of Biodiesel

    In 2005, domestic Biodiesel production increased nearly three fold, year over year - to 75 million gallons. While this explosive growth will give way to many new process innovations, this brief analyzes a basic three-stage production method that has been Internal Confidentialpage 4

    successfully employed by both small scale and larger commercial Biodiesel producers for the last 20 years.

    Utilizing WVO (waste vegetable oil) requires the greatest amount of effort, as the initial feedstock must be cleaned of contaminates, typically bits of food & water that have fallen into it. Straight, Vegetable Oil requires the least amount of effort and in most cases does not require an initial cleaning. Regardless of the feedstock used, the basic equipment and ingredients utilized to produce Biodiesel remain the same.

Basic ingredients

    Feedstock WVO for our example

    KOH or NaOH Potassium Hydroxide (NaOH is commonly known as lye)

    Methanol or Ethanol Sold in automotive stores as Heet or Dry Gas; Ethanol

    may also be used but has lower yield over methanol

Advance ingredient

    Magnesol Synthetic Magnesium Silicate traditional used to purify shortening in

    food services industry, reduces water wash requirements in making Biodiesel

Phase I - feedstock preparation & cleaning

    The presence of water in feedstock will adversely affect the reaction, producing low quality Biodiesel with a high level of soap contaminates. Therein, it is important to “process” the feedstock by heating it to 120 degrees F for approximately 60 minutes. Water and contaminates settle to the bottom of the tank and are poured off as biodegradable waste. Incorporating a centrifuge separator will increase yield over the pour-off method, but will require an additional capital investment. The feedstock is now tested to determine the percentage of free fats. This determines the exact amount of KOH and methanol required for complete reaction. The salient point is that when utilizing non-virgin oil, the exact proportion of ingredients varies based on the chemical properties of the feedstock. Thus, an operator must perform a simple test for every batch. Several groups are experimenting with sulfuric acid in 1% concentration to normalize the reaction and reduce the amount of methanol required.

Phase II reaction

    Feedstock is transferred to a reaction tank. A separate vessel is not required but eliminates the need to clean tanks between batches. KOH and Methanol are blended into the feedstock. Ingredients are agitated for 20 minutes to insure a homogeneous mixture and then allowed to separate. Separation time varies with temperature. If speed is of the essence, the addition of internal tank heaters will speed separation time. Several academic studies report promising results on the use ultrasonic waves to 2,3,4 As the reaction takes place, glycerin decrease separation time dramatically.

     2 Stavarache, C., Vinatoru, M., Nishimura, R., & Maeda, Y. (2003). "Conversion of Vegetable Oil to Biodiesel using Ultrasonic Irradiation." Chemistry Letters, 32(8) 716-717.

    Internal Confidentialpage 5

    settles to the bottom of the tank while Biodiesel rises to the top. Critical separation is attainted in 4 to 12 hours at room temperature. Glycerin is drained from the bottom of the tank and can be resold as crude glycerin. Approximately one third of the initial methanol added may be recovered for reuse. Adding a vacuum condenser will increase recovery yield. At this point we are left with unrefined B100.

Phase III clean & polish

    The next process focuses on purifying the B100, further removing impurities primarily

    remaining suspended glycerin particles. The crude B100 is transferred to a washing tank where it is literally washed with water. Sinking water droplets, being heaver than B100, attract the remaining glycerin. The glycerin settles to the bottom of the tank attached to the water. Washing is currently receiving the most focus in the attempt to more quickly clean B100. A variety of additional additives and methods are being marketed to reduce or eliminate the need for a water wash.

     5 is the most widely used additive and several companies are promoting Magnesol

    waterless wash by adding Magnesol combined with a high volume centrifuge. The financial models that follow in section 2 anticipate a combination of a water wash with Magnesol use. Assuming no additives, B100 is washed twice to attain ASTM grade fuel quality. The water required for washing is typically 50% of the volume of B100 being washed. Wash water may be reclaimed and may be reused for the second wash. Water droplets are introduced through standard greenhouse mister nozzles located are the top of the washing tank and fish tank style bubbler stone located at bottom of the washing tank. Complete Separation takes 4 -12 hours and as with the reaction time separation time is dependant on ambient temperature. As with the reaction phase, initial research into ultrasonic waves appear to offer a low cost method accelerate separation.

    Polished B100 is now dried (heated to 120 degrees for 30 minutes) to reclaim residual methanol and pumped into storage/delivery tanks. At current, the B100 does not require special handling or labeling. Producers are asked to conform to EPA standards used for regulating disposal of “soapy water” though the installation of floor drains with

     3 Alape Benítez, F. (2004). Effects of the use of Ultrasonic Waves on Biodiesel Production in Alkaline Transesterification of Bleached Tallow and Vegetable Oils : Cavitation Model. (Doctoral dissertation, University of Puerto Rico, Mayagüez Campus), 157 leaves.

     4 Colucci, J. A., Borrero, E. E., & Alape, F. (2005). "Biodiesel from an Alkaline Transesterification Reaction of Soybean Oil using Ultrasonic Mixing." Journal of the American Oil Chemists

    Society, 82(7) 525-530.

     5 Since the initial writing of this brief waterless wash with Magnesol has become the preferred method by most small scale producers. While adding approximately 6 cents the gallon of costs, it insures cleaner fuel while eliminating the creation of 2 gallons of waste water for every gallon of fuel produced. Internal Confidentialpage 6

    grease traps. More formal standards are expected to follow. With Biodiesel being 100% biodegradable and less toxic than salt, any formal standards will be limited.

    The B100 is now ready for use or blending into any diesel engine.Biodiesel Processing Diagram

Internal Confidentialpage 7

2 Feasibility of utilizing B100 in private fleets

    There are four primary risk factors to consider when evaluating the use of B100 and BXX blends within private fleets:

    1. Mechanical Feasibility 3. Legality

    2. Immature Market/Infrastructure 4. Economic Impact

    2.1 Mechanical Feasibility

    One of the biggest advantages of Biodiesel compared to many other alternative transportation fuels is that it can be used in existing diesel engines without modification, and can be blended in at any ratio with petroleum diesel. Prof. Michael Briggs, University of New Hampshire “Wide scale Biodiesel Production from Algae”; 2004

    Biodiesel represents the most feasible and immediately available alternative to traditional Petrofuels. It is made feasible by the inherent mechanical ability of B100 to combust in any existing diesel engine. Further, Biodiesel readily mixes with Petrodiesel to form homogeneous blends. Outside of a fuel filter change, traditional diesel engines require zero modifications to attain the same performance as engines operating on pure #2 Petrodiesel. This also means that vehicles may interchangeably utilize B100 or Petrodiesel.

    Biodiesel has slightly greater viscosity, making it a natural lubricant. Formal studies by ASTM International have well established that blends of up to 20% Biodiesel have zero impact on vehicle safety or longevity. The Engine Manufacturers Association (EMA) recently approved B20 for use in any currently produced engine. These standards are 6documented in the internationally recognized specification D6751. Independent

    studies claim B100 “lubricating properties” lead to greater engine longevity but have yet to be validated by the industry at large.

     Crystalline Temperatures of Biodiesel blends

    Biodiesel’s greatest mechanical Pure #2 Petrodiesel 3 F limitation is Cold Flow.

    B10 10% by volume 5 F Biodiesel begins forming solid

    crystals (becoming cloudy) at a B20 20% by volume 7 F

    much higher temperature than B30 30% by volume 14 F that of #2 Petrodiesel. B50 50% by volume 18 F

    B100 100% by volume 32 F Therein additional operational

    considerations must be made

    when operating vehicles with B100 and BXX blends. Kerosene has proven a very effective and well-researched fuel additive to lower the crystalline temperature of Biodiesel. Several commercially available anti-gel additives, which when added at 1%

     6 See Appendix 5.1

    Internal Confidentialpage 8

    concentrations, will enable the free flow of B100 to -40F. Alternatively or in conjunction, a variety of commercially available fuel-line heaters may be installed in vehicles.

    Biodiesel requires one other mechanical consideration. Biodiesel has higher solvent properties than Petrodiesel and will dissolve any deposits within the fuel system and fuel tank. Thus, if switching to pure B100, existing vehicles must phase into its use over three tanks of fuel. The first tank is a B20 blend. The second tank is a B50 blend and the third is pure B100. The fuel line filter is monitored at each fill and replaced during the last quarter of the third fill. This prevents fuel line filter failure as a result of clogging. Note: At up to a B20 blend - no phasing in is necessary.

    The strong solvent properties also affect natural rubber. Engines produced before 1993 must be checked for natural rubber fuel lines. If found they must be replaced with synthetic lines. Cost associated with filter or fuel line replacements are very minimal.

2.2 Biodiesel Market & Infrastructure

    According to the National Biodiesel Board: in 2005, annual US domestic Biodiesel production tripled year over year. With 34 major Midwest production facilities coming online in 2007 we can expect an exponential change within State & Federal incentive programs as well as an increase in the cost of virgin feedstock.

For the moment, retail pricing of B100 is directly linked to Petrodiesel pricing as B100

    gains wider acceptance, it can be expected that B100 will adopt its own commodity-pricing model based on supply and demand. Underlying feedstock prices will also be affected and it is prudent to assume that the price of WVO and Yellow Grease will rise above current prices.

    Given the ensuing change, a flexible positioning regarding the exact implantation of B100 into fleet operations is advisable. While B100 poses significant operational savings, early adopters must stay nimble, reevaluating the economics behind B100 quarterly. It is likely that over the next five years, economies of scale will make purchasing finished product more competitive with self-production.

    2.3 US Domestic Biodiesel Legalities

    Biodiesel is registered as a fuel and fuel additive with the Environmental Protection Agency (EPA) and meets clean diesel standards established by the California Air Resources Board (CARB). Neat (100 percent), Biodiesel has been designated as an alternative fuel by the Department of Energy (DOE) and the U.S. Department of Transportation (DOT). - National Biodiesel Board “Commonly Asked Questions”

    At current, Biodiesel producers operate in relative freedom from traditional petrochemical regulations and taxation. B100 blenders and commercial producers are required to register with the EPA, while production for self-utilization is currently exempt. Internal Confidentialpage 9

    Annual membership with the National Biodiesel Board mitigates additional testing requirements while keeping members informed of legal changes on a national level.

    The greatest source of legal risk concerning the utilization of B100 in private fleets is manufactures engine warranties. Warranty policies must be considered prior to utilizing 7, and combusts more blends of greater than B20. As B100 is significantly less toxic

    completely, B100 has a lower flashpoint and higher viscosity than petrofuel alternatives. Thus the adoption of B100 standards legislation will follow in the next few years. Until then, fleet operators must balance the economic and environmental benefits with any potential engine warranty complications.

    2.4 Economic Impact of utilizing B100 & BXX in private fleets

    Given the immature state of Biodiesel infrastructure, forcasting total financial impact beyond 12 months is not currently feasible. To minimize any potential downside risk, the following scenarios account for capital equipment charges in the first fiscal year with no depreciation schedules.

    Combined with the rapidly evolving state Biodiesel infrastructure and availability, we will consider a variety of scenarios for incorporating B100 into fleet operations. Our bias for comparing several scenarios is not to illustrate the most cost effective, but rather to establish the flexibility of B100 operating models available to private fleets. Considering the immaturity of the Biodiesel industry, future market conditions are likely to impact which scenario is most advantageous in any given fiscal year.

    We have concentrated on on-site production vs. purchasing finished B100 product. At any time, a fleet may fuel with a BXX blend or even pure Petrodiesel interchangeably. To fully outline the variants and potentials of incorporating B100 into fleet operation 5 basic models have been drawn. Each model assumes a single batch size of 2000 gallons of B100. Three of the models assume local production and two of the models source finished product. For ease of comparison, pricing is in $/gallon and initial capital equipment costs are listed separately.

     7 “Environmental & Safety Information” National Biodiesel Board

    Internal Confidentialpage 10

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