Brazil Overtakes US for Biofuels Investment

Jonathan Johns, head of renewable energy at Ernst & Young, says Brazil's attractiveness has been boosted following the 1 July 2008 compulsory introduction of B-3 blending – the legal requirement to mix 3% biodiesel and 97 per cent conventional fuel.

"As a result of B-3, annual biodiesel demand has increased in Brazil from 800 million to 1.2 billion litres. Brazil's position has also been boosted by India's increasing appetite for biofuels. This has significantly increased Brazilian export potential to this emerging economy."

"It is also exporting increasing quantities of ethanol to the US and beyond, a strategy made possible by local investment in overseas distribution assets, which is expanding the international reach of Brazilian biofuels," Mr Johns says.

US Feels Pressure

After 12 months in the top spot, the US’ attractiveness for investment has suffered because of the tightening of the credit markets and the weakening performance of listed biofuels companies, which is resulting in investors losing confidence in the sector.

Mr Johns says the growing scientific and political debate surrounding first generation biofuels and the impact on world food prices is compounding the problem.

"Recent research by the World Bank indicated that large increases in biofuel production in the US and Europe were directly behind the sharp increase in global food prices. This caused investors to carefully consider investing in these regions as these dynamics bring additional concerns into the investment picture," he says.

An Industry in Transition

With criticism of first generation biofuel production increasing, Johns says the transition to second generation biofuel technologies - which involve the breakdown of nonedible crops and waste to create liquid motor fuels – needs to be accelerated as political and economic pressures on first generation technologies mount.

"Accelerating second generation biofuels will help the sector establish its long-term viability and attractiveness to investors. For this to happen, improved government incentives are required to attract the necessary capital into the market, to stimulate growth and accelerate the evolution of the industry. This will ultimately bolster investor confidence over the long-term," he adds.

Mr Johns continues by saying that in the interim, first generation technologies will continue to have an important role to play in meeting existing targets.

"There is likely to be a shift in focus of production to a few key markets where first generation fuels can be produced most economically and sustainably – most notably Brazil," he says.

Country Updates

Germany saw the biggest drop on the All biofuels index, falling from third to sixth. This was a direct result of the government’s decision to withdraw the E10 roadmap – the plan to blend 10% biodiesel with conventional fuel. The rise of France, Spain and Canada are predominantly due to Germany’s fall down the index. The UK retained ninth position, but investor confidence has been harmed by criticism over first-generation biofuels by British non-governmental organizations and top environmental scientists.

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