Biofuel is the oldest form of energy used by humanity and is produced through contemporary biological processes, including anaerobic digestion and agriculture. Biofuel is derived from plants or animal, domestic, and commercial waste. Bioenergy accounts for almost 10% of the total world energy and represents the primary source of energy for people in developing countries who use it for heating and cooking. Advancements in biofuel technology have enabled to produce bioenergy from materials such as wood, crops, waste materials, and fishery products. Biofuels are available in many forms including ethanol, biodiesel fuel, green diesel, and biogas. They are also used by industries such as automotive, aviation, marine, and power to generate electricity. Although it is a contemporary source of energy, the procurement market intelligence report from SpendEdge predicts the market to grow 5.2% annually.
Procurement Challenges in Biofuel Production and Distribution
Mid-Stream Distribution Bottlenecks
To use biofuels such as ethanol and biodiesel as an additive for gasoline, an efficient distribution system is essential. But suppliers face significant challenges in distribution due to underdeveloped civil infrastructure such as pipelines and rails. For instance, in the US only around 50% of the existing civil infrastructure for the transportation of fuels support the distribution of biofuel. As a result, it is essential to select suppliers with an extensive distribution network and capabilities in terms of pipelines.
High Transportation Cost
Apart from the distribution bottleneck, transportation of biofuels through pipelines or railways requires efficient logistics support for their delivery to the fuel station which inadvertently increases the procurement costs for the buyers. Additionally, the various transportation laws and regulations also increase the compliance costs for the buyers. As a result, buyers prefer to nearshore the procurement in order to reduce the transportation and compliance costs.
Countries such as Argentina and Brazil produce some high-quality biofuel. However, anti-dumping laws in regions such as Europe are restricting prospective buyers to procure the biofuel from such countries. As a result, they are resorting to using substandard biofuels from another region. Apart from quality taking a hit, buyers may have to incur additional cost to set up quality control processes at buyer’s facility to ensure optimal quality of biofuel.
Difficulty Estimating Procurement Budget
Biofuel production is highly dependent on input raw materials such as soybean, sugar beets, and cornstarch whose prices in the commodity market are highly volatile. This not only causes trouble in estimating the demand and supply of biofuel but also creates a problem in ascertaining procurement budgets for biofuel purchase. In some cases, suppliers might be able to help out buyers in forecasting the future prices of biofuel to help them optimally allocate the budgets.
Fluctuation in Supply
There is always an air of uncertainty for buyers to get the inputs in the desired quantity. This is because it can be difficult to ascertain the continuous supply of corn or sugar for biofuel production as food production is prioritized. Most buyers prefer to partner with suppliers who have a vertically-integrated supply chain in order to minimize risks arising out of raw materials supply disruption.
Read more about the procurement challenges in biofuel production and distribution along with biofuel technology, supplier cost models, pricing strategies, sourcing strategies, and procurement best practices in SpendEdge’s upcoming report on the global bio-fuel market.