Driven by unpredictable oil prices and concern over climate change, interest and investment in biofuels — made from renewable, organic sources — has exploded over the past few years.

But while a host of Canadian companies have entered the field, many barriers to growth remain — from controversy over the impact on food basics such as corn and soybeans to shrunken credit markets and bruising trade wars over government subsidies.

Still, the sector has come a long way since it first emerged in the 1960s. New investment in biofuels worldwide in 2007 was $19.2 billion, a slight drop from $19.4 billion in 2006 but up massively from $1 billion in 2004 and $5.2 billion in 2005, according to figures from the London-based New Energy Finance, which tracks alternative energy industries.

The picture in Canada — where the federal government recently passed a biofuels bill that will require 5% renewable fuel content in gasoline by 2010, and 2% renewable content in diesel fuel by no later than 2012 — is also dynamic. According to Natural Resources Canada, the new federal standard will result in a 4.2-megatonne annual reduction in harmful greenhouse-gas emissions.

“The Canadian biofuels industry sees this as a good place to start,” says Stu Porter, vice president of development with Kitchener, Ont.-based BBI Biofuels Canada, an arm of Colorado-based BBI International, a global biofuels consulting firm. On the other hand, Porter says, the federal government’s overall indifference to international carbon reduction schemes, such as the Kyoto protocol, has constrained government leadership on biofuels.

Perhaps some of this government hesitation is warranted. Subsidies for biofuels were recently targeted by the Toronto-based C.D. Howe Institute. Public funds for ethanol amount to “approximately $368 for each tonne of CO2 produced, roughly seven times greater than the cost of alternative policy measures,” a C.D. Howe report asserted.

The report is also unenthusiastic about the impact on the agricultural sector: “Production subsidies provide benefits to some farmers while hurting others, with perhaps more being hurt financially than helped. Increased domestic production of ethanol contributes to increases in food prices, both directly and indirectly, for Canadian and foreign consumers. Domestically, increased food prices cost consumers an estimated $400 million each year.”

David Layzell, executive director of the University of Calgary’s Institute for Sustainable Energy, Environment and Economy, says Canada could meet 20% of its total fuel needs by using biomass-based fuels. For example, says Layzell, a “bio-energy corridor” around the existing natural gas pipeline infrastructure could provide a supply of wood and straw for conversion to a renewable, biosynthetic natural gas. But that won’t happen without clear government leadership.

Porter worries that Canada will be left behind by more aggressive countries that view biofuels as a key to energy security. The crisis in the capital markets isn’t helping, adds Porter: “The challenge with biofuel is that the capital costs are anywhere from $30 million and up for a biofuels plant.”

GROUND TO A HALT

Money has evaporated from the biofuels sector in recent months. “Most equity and debt investment in biofuels capacity has pretty much ground to a halt,” says Jerome Peters, senior vice president with TD Banknorth Inc. in Westport, Conn. The exception, he adds, is advanced biofuels research and development, which “continues unabated.”

Indeed, in 2008, rising commodity prices wrought havoc across the biofuels industry, especially for companies that had locked in on high corn prices before they began to slide in recent months. Many major U.S. biofuel producers have seen their share prices plummet fourfold or more in recent months.

“The biggest problem for the biofuel sector, and the main reason why share prices have done poorly in the past two years, has been inflation in feedstock prices, particularly corn, wheat, rapeseed, soybeans and palm oil,” says Angus McCrone, spokesman for New Energy Finance. “Most of the excitement in biofuel investment, outside Brazil, is now in second-generation biofuels made from non-food biomass.”

Ottawa-based Iogen Corp., a private company that recently sold a 50% equity stake to Netherlands-based Royal Dutch Shell PLC, is the Canadian leader in so-called “next generation” biofuels; these differ from conventional ethanol, which is derived from corn or wheat, by using the non-food portion of plant fibres. Iogen’s focus is on cellulostic ethanol, which is made with plantstock such as wheat straw. This is converted into sugars, which are then fermented into fuel. In March, the federal government said Iogen’s application for financial support for a refinery to be built in Saskatchewan is in the due-diligence phase.

@page_break@In all, there are 16 Canadian ethanol plants in operation or under construction, according to data from the Canadian Renewable Fuels Association. The industry leader is Greenfield Ethanol Inc., with five plants in Ontario and Quebec and production capacity that will hit 700 million litres.

Biodiesel capacity is also expanding rapidly. Considerably more than half of Canada’s biodiesel will be produced using canola at a plant operated by Canadian Bioenergy Corp. near Edmonton, which is expected to be operational by mid-2009. Both BIOX Corp. in Hamilton and rendering company Rothsay Biodiesel in Montreal, a division of Maple Leaf Foods Inc., currently produce biodiesel using inedible waste products, including animal fats and discarded cooking oils.

In the biogas sector — the collection of methane from landfills and manure —Toronto-based StormFisher Biogas is launching start-up projects backed by $350 million in private equity. Company president Das van Berkel says he expects North America will emulate Europe, where 5,000 biogas facilities supply energy sufficient to heat 1.5 million households.

The world leader though, is Brazil, where since 2007 the biofuel sector has grown more quickly than in the U.S. and Europe. Brazil is now the world’s second-largest producer of ethanol, after the U.S., and the world’s largest exporter. After 30 years of steady government promotion, almost 80% of cars sold in Brazil in 2005 were powered by “flex-fuel” — meaning they can burn ethanol as well as gasoline. IE