Understanding Ethanol Plant Economics

This University of Nebraska-Lincoln Extension Circular provides an analysis of several scenarios for ethanol plant economics. IT was developed to help local government officials and economic developers in understanding the future economic viabilityof ethanol plants. To understand ethanol plant economis requires a model of howplants operate int erms of revenues and costs. For this analysis, hypothetical scenarios for two types of ethanol lants most prevalent in Nebraska were developed -- a 40-million-gallon per year (MGY) plant built in 2002 and a 100-million-gallon per year plant built in 2005. It is important to note that the model is not a forecast of what will happen, but rather a project of what could happen if certain economic assumptions and policies remain in place. Further, these scenarios do not model how ethanol plants will respond to price changes to ensure profitability, such as reducing costs or increasing efficiency and productivity. Nonetheless, making reasonable assumptions allows us to better understanding how ethanol plants are affected by production and price changes over time. Following are summaries of the economics of each of the four scenarios:

1. A 40-MGY ethanol plant under the current federal Renewable Fuel Standard of 7.5 billion gallons per year (BGY) through 2015 would only be profitable between 2003 and 2010, generating losses by 2013.
2. A 40-MGY ethanol plant under the proposed 15-BGY federal Renewable Fuel Standard could be economically viable through the projection period of 2013, although it may struggle to break even in 2011 and 2012.
3. A 100-MGY ethanol plant under the curren 7.5-BGY is profitable from 2006 through 2013. Losses are generated in 2014 and 2015 but are covred by existing cash reserves.
4. A 100-MGY ethanol plant under the proposed 15 BGY would be the most profitable of the four scenarios, generating sizable net profits and double digit returns to investors in all years.