Averting a bioenergy bubble

Based on the paper J. B. Cruz, R. R. Tan, A. B. Culaba, and J. B. Ballacillo (2009) “A dynamic input-output model for nascent bioenergy supply chains.” Applied Energy 86: S86 – S94.

(Second of two parts)

Last week, we described the problems arising due to growth imbalances in nascent biofuel supply chains. Our recent work describes a two-part model for such systems. We first developed a dynamic input-output model to describe the dynamic characteristics of typical nascent bioenergy supply chains. It is based on a well-known modeling framework (Russian economist W. Leontief received the 1973 Nobel Prize in Economics for developing input-output analysis); however, the specific form that we use includes dynamic aspects based on physical and information flows across a supply chain, and also allows for accounting of inputs of natural resources (e.g., land) and outputs of pollutants (e.g., carbon dioxide). In the dynamic model, production capacity changes in response to surpluses or deficits of various commodities (i.e., intermediates or final products) as well as environmental pressures (i.e., resource scarcity or pollutant emission limits) within the supply chain. The model is then augmented using control theory principles to allow for interventions that simulate government policies or market-based instruments. We then describe some of the mathematical consequences of the model formulation, and present a series of numerical simulations to illustrate various hypothetical scenarios. Our key findings are as follows.

Firstly, we find that the undesirable dynamic characteristics of nascent bioenergy supply chains arise from unfavorable information flows across sectors. For instance, excess investment in J. curcas plantations results from farmers anticipating a market for the final biodiesel product, even if there is currently no logical market for the seeds that they produce, and even if capacity for producing the biodiesel is currently very low. Our model predicts that such systems may exhibit supply fluctuations under some conditions. Such supply fluctuations in real life will translate to price volatility, and thus defeats the energy security benefits of locally sourced biofuels. In the worst-case scenario, such systems may even exhibit the characteristics of a “bioenergy bubble” that experiences rapid capacity growth followed by a dramatic collapse.

Secondly, we also show that it is in principle possible to intervene to suppress the undesirable dynamics of nascent biofuel supply chains. Such interventions may come in the form of government policies (e.g., regulations on land or water use) and economic incentives/disincentives (e.g., subsidies or taxes). Our work rigorously shows that, for any bioenergy supply chain with known characteristics, the interventions can be systematically designed such that production capacities are guided towards stable growth to eventually reach desired levels of fuel output. This result is of particular significance since, in the case of the Philippines, as with most other countries, it is the desire for stable fuel supplies that is the very reason for commercial bioenergy production in the first place.

In summary, our work outlines a mathematical modeling framework that can be used to describe nascent bioenergy supply chains, including (but not limited to) those found in the Philippines. The model also includes control elements that can be used to design government policies using a mathematically rigorous basis. Although the current applications pertain to production of bioenergy, the principles we describe can be readily extended to the analysis of any nascent energy system comprised of multiple decision-making agents — for instance, carbon dioxide capture and storage (CCS) in power generation and the so-called “hydrogen economy” for fuel cell vehicles. At the moment we are continuing to work on both additional theoretical enhancements and practical applications of our model to current energy issues.

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Dr. Jose. B. Cruz Jr. is a distinguished professor of Engineering at the Ohio State University, USA. He has published seven books and more than 300 journal articles, conference papers, and book chapters on sensitivity analysis, use of feedback for maintenance of near-optimality, and dynamic games. He obtained a BS degree (summa cum laude) from UP Diliman, a MS degree from the Massachusetts Institute of Technology, and a PhD degree from the University of Illinois at Urbana-Champaign, all in Electrical Engineering. He is a member of the National Academy of Engineering (USA) and a Corresponding Member of the National Academy of Science and Technology (Philippines). He served as vice president for technical activities and also for publication activities of IEEE. He has received many awards including the American Automatic Control Council Richard E. Bellman Control Heritage Award, and the IEEE James H. Mulligan, Jr. Education Medal. He can be contacted at [email protected].

Dr. Raymond R. Tan is a full professor of Chemical Engineering and University Fellow at De La Salle University, Manila. His main research interests are process systems engineering, life cycle assessment and pinch analysis. He is the author of over 40 published and forthcoming articles in ISI-indexed journals in the fields of chemical, environmental and energy engineering. He is also the recipient of multiple awards from the National Academy of Science and Technology and the National Research Council of the Philippines. He can be contacted at [email protected].

Dr. Alvin B. Culaba is a full professor of Mechanical Engineering, director of the Center for Engineering and Sustainable Development Research, and university fellow at De La Salle University, Manila. He is a member of the National Academy of Science and Technology, vice president and Engineering Division chairman of the National Research Council of the Philippines, and former president of the Philippine American Academy of Science and Engineering. He is also one of the country’s leading experts in energy and environmental systems engineering. He can be contacted at [email protected].

Jo-anne B. Ballacillo is a former research assistant at the Center for Engineering and Sustainable Development Research at De La Salle University, Manila. She received her MS in Environmental Engineering and Management from De La Salle University, Manila in 2008 and her BS in Chemical Engineering from the University of the Philippines, Diliman in 2004. She can be contacted at jb[email protected].