Biomass and Bioenergy 122 (2019) 37–44

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Biomass and Bioenergy

journal homepage: www.elsevier.com/locate/biombioe

Research paper

Asset fixity and economic competitiveness of US ethanol production T

a b c,∗,1
Zidong Wang , Marta Wlodarz , Bruce McCarl
a
Alibaba Group Holding Limited, China, Wen Yi Xi Lu 969, Hangzhou, China
b
McKinsey & Company, Inc. Switzerland, Bleicherweg 30, Zurich, 8002, Switzerland
c
Department of Agricultural Economics, Texas A&M University, College Station, TX, 77843-2124, USA

A R T I C LE I N FO A B S T R A C T

Keywords: Once refineries are built they become fixed assets in location, general class of feedstocks that can be used and
Asset fixity basic technology employed. These fixed characteristics are ignored by most existing national-level biofuel
Cellulosic ethanol modeling analyses. In this study, we introduced such characteristics (asset fixity) into a model that is used in the
Mathematical modeling USEPA (Environmental Protection Agency) Renewable Fuel Standard Analysis. Analysis is then done on re-
Market penetration
newable fuel issues with and without considering such fixity. The results show that neglecting fixity upwardly
biases estimates of renewable fuel market penetration. Also ignoring fixity results in unrealistic location and
feedstock usage for simulated refining. Additionally under asset fixity the ethanol price needed to make cellu-
losic ethanol economically competitive is substantially higher than current levels and predictions of models
ignoring the fixity, reaching $1.06/liter.

1. Introduction
A number of studies have examined ethanol market penetration and
feedstock usage including several associated with USEPA
(Environmental Protection Agency) renewable fuel standard rule-
making [1,2]. However, the results of such studies can exhibit un-
realistic feedstock mixes and biorefinery locations. In particular, the
results often show a feedstock used in one place initially then later use
of other feedstocks in other places abandoning what in reality would be
expensive previously employed bio-refineries. Our experimentation
shows this occurs in one model used by EPA - the Forestry and Agri-
culture Sector Optimization Model or FASOM [1,3,4]). Here we ex-
amine the extent to which ignoring asset fixity (AF) can bias results on
processing location, feedstock mix, market penetration and fuel cost.
2. Background on asset fixity
Asset fixity has long been a concern when analyzing major invest-
ments. Glenn Johnson [5] did early agricultural work on the concept
motivated by the writings of D. Gale Johnson [6]. Later the AF concept
was formalized by Edwards [7] and Johnson and Quance [8]. Gardner
[9] summarizes earlier findings indicating that AF influences market
and policy responses since many investments once constructed are fixed
in place and many operating characteristics limiting responses during
their economic life. The concept has been subsequently been considered
in number of agriculturally-related analyses [10–12].
Putty-clay technology is a highly related concept originating with
Johansen [13,14]. In this concepts investments can be moved around
before construction (putty) but then harden into place once built (clay).
Fuss [15] argued a key technology characteristic is the extent to which
production flexibility is constrained by in place investments. He illu-
strated this arguing that the ability to adjust to energy price increases
was constrained by energy infrastructure that was already in place.
Atkeson and Kehoe [16] showed that putty clay/AF considerations help
explain the gradual shifts in energy use in response to persistent
changes in energy prices. Additionally, Rajagopal and Zilberman [17]
indicated that AF – putty-clay limited producer flexibility to adjust.
Another related theory is that of irreversible investment under un-
certainty also known as real option theory [18]. That theory asserts that
it in certain cases it is best to delay making fixed asset investment de-
cisions so as to allow one to obtain more information about such things
as processing technology, feedstock cost and other costs. Furthermore,
Skevas et al. [19] showed the investment irreversibility and uncertainty
coupled to dampen incentives to invest.
In the context of biofuel refining AF means that refineries once built
are fixed in location, general class of feedstocks that can be used and
the technology they employ. Although AF constraints such as location
and feedstock types are commonly considered in place specific

∗
Corresponding author.
E-mail address: mccarl@tamu.edu (B. McCarl).
1
Seniority of authorship is shared.

https://doi.org/10.1016/j.biombioe.2019.01.003
Received 23 February 2018; Received in revised form 2 December 2018; Accepted 11 January 2019
Available online 25 January 2019
0961-9534/ © 2019 Published by Elsevier Ltd.
Z. Wang et al. Biomass and Bioenergy 122 (2019) 37–44

Fig. 1. Visual representation of asset fixity concept depicted dynamically over two time periods.

biorefinery supply chain designs (i.e. determining optimal facility lo- However, if the demand grows in period 2 (from AD1 to AD2), the
cation, feedstock choice and transport routes) [20,21], to our knowl- price of ethanol rises from P1 to P2, which exceeds the entry price for
edge AF concerns have not been included in national-level modeling new construction then this stimulates new investment. So in general the
studies on biofuel feedstocks and market penetration. Here we will do market favors ethanol from the existing (AF) plants (because their
an analysis with and without AF consideration to see the implications. marginal production costs are cheaper) and new construction will occur
only if demand causes prices above the new plant entry price.
Furthermore, several AF aspects further complicate the situation but
3. Analytical exploration
are not shown in the graphical framework. First, the existing plants
create AF not only due to plant capacity but also in location, feedstock
Some important insights into the effects of AF can be developed
use and technology employed flexibility. The new capacity can only
using graphical economics (see Fig. 1). To do this we use a two-time
operate in the region where it is constructed and generally, the avail-
period framework following Tietenberg and Lewis [22]. In the first
able technology limits feedstock use to a given class of feedstocks and
period, ethanol is supplied to the market from existing (panel a) and
particular cost structure. Second, the supply curve for new plants is
possibly new capacity (panel b) resulting in the composite supply as
flatter than that for existing plants to reflect the fact that larger capa-
portrayed in panel c. For existing plants the capital costs are sunk fixed
cities can be reached by constructing new plants while the existing
costs, and the marginal supply costs include only maintenance and
facilities have a steeper cost curve since they can only raise production
variable costs. Consequently, supply arises from existing plants at a
by employing more expensive forms of operation. Third, if new capacity
lower price that does supply from new plants as their use involves in-
were constructed in period one then there would be a shift in the period
curring both variable and fixed production costs.
two existing capacity supply curve as the fixed costs become sunk ones.
Now suppose we consider demand market equilibrium. In the period
Furthermore, as time progresses, more plants are constructed ex-
1 graph if the industry confronts demand curve AD1 then equilibrium
panding the existing capacity category in the period of construction and
price for fuel is below the entry price for new plants and thus only
subsequent periods up until the point at which the plant becomes
existing plants would be used. In that case, the equilibrium price is not
functionally obsolete. This all means that once built the industry is
high enough to induce new plant construction incurring their fixed and
much more likely to use the currently existing plants in their places
operating costs and no new plants are constructed.

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Z. Wang et al.
Fig. 2. Ethanol price projection scenarios based on AEO 2015.
Fig. 3. Ethanol Production by feedstock in Base scenarios with and without AF.
with their characteristics and not to abandon those plants jumping
around chasing lower cost feedstock.
4. Material and methods
4.1. FASOM overview
So that we might examine the effects of including/excluding AF we
needed a model structure where we could impose or neglect it. To do
this we introduced option AF variables and constraints into the agri-
cultural sector component of the FASOM model that is under use in EPA
analyses of ethanol market feedstock roles, refining locations, produc-
tion costs etc. [1,3,4]. FASOM is a dynamic, nonlinear, and price en-
dogenous model for the agricultural and forestry sectors in the con-
tiguous U.S. with the rest of the world modeled as exogenous trading
regions. Here we use the agricultural component deactivating forestry.
In the agriculture component the contiguous U.S. is divided into 63
production regions. Key decision variables are the allocation of land
over time to crop and livestock activities along with levels of process,
consumption, imports and exports of commodities, depicting the con-
sequential economic, social and environmental impacts. In total,
FASOM includes about 100 commodity types arising from 40 crops, 25
livestock production systems including 50 types of processed goods
(with different types of ethanol production included). On the supply
side, all the modeled commodities and production activities compete
for scarce resources such as land, labor, and other inputs (e.g. fertilizer,
energy), leading to upward-sloping supply curves. On the demand side,
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Biomass and Bioenergy 122 (2019) 37–44
FASOM contains demand curves for agricultural raw commodities and
processed goods. When solved, FASOM endogenously determines the
equilibrium price and quantity of all modeled agricultural primary and
secondary commodities by maximizing net market surplus given the
supply-demand balance constraints and resource restrictions. GHG ac-
counting is also incorporated. Broadly speaking the FASOM model
maximizes the net present value of consumers' and producers' surplus
which following McCarl and Spreen [23] leads to a simulation of an
economic equilibrium for all the modeled commodities in all the
modeled time periods. FASOM in this case simulates activities for 100
years in five year intervals. FASOM simulates crop and livestock pro-
duction in the 63 regions choosing acreage of each crop along with its
management in terms of irrigation use, fertilization, and tillage method.
This includes growing energy crops of switchgrass, energy sorghum,
miscanthus, short rotation poplar, and willow. It also includes potential
harvest of crop residues like corn stover, and wheat straw. Livestock
include beef, dairy, sheep, hogs and poultry. Resources constraining
production include cropland, grazing land, irrigation water, family and
hired labor and for livestock available feed.
Additionally in the model regional productions move into livestock
feed, demand, interregional transport, export or processing with im-
ports also allowed. The processing activities broadly convert crops to
mixed livestock feeds, sugar, soy meal and oil, corn syrup, crop ethanol,
cellulosic ethanol and biodiesel. Byproducts from processing can go into
further processing or feed. Livestock are also processed into meat, milk
products, tallow and yellow grease. Readers wishing more details on
FASOM should examine the on line documentation in Beach and McCarl
[1], and Adams et al. [3].
4.2. Modeling of asset fixity
In the absence of AF, the FASOM model contained biofuel proces-
sing variables that allowed the choice of producing region and feed-
stock without any links between adjacent time periods. This meant that
it was free to, for example, generate ethanol at a plant in the Midwest
from corn stover in one time period then in the next generate the
ethanol from switchgrass in the Southeast. To model AF we separated
the ethanol variables into two parts; one for facility construction and
one for level of refining where the constructed capacity provided an
upper limit on refining. Additionally the capacity was made persistent
with for example construction in 2020 supplying capacity from 2020
through to the end of the plants assumed life which we set at 30 years.
In order to have capacity beyond that life a new plant would need to be
Z. Wang et al.
Fig. 4. Ethanol production by region and feedstock in Base scenarios with and without AF.
built. In turn, the FASOM model decided where to locate processing
facilities and their characteristics.
In setting up the investment an operating parts we used EPA and
NREL (National Renewable Energy Laboratory) estimates of feedstock
bio-refining budgets and separated the costs into fixed and operating
cost components. In turn, we developed an estimate that the capital
construction costs were 35% of the cost per gallon estimates and the
operating/variable cost components were 65%. We then formed the
investment variables as plant construction in a location at a fixed cost
equal to the net present value of 35% of the per gallon costs times the
plant capacity over a 30 year operation and then had that supply the
processing capacity for handling a particular feedstock class for 30
years. These feedstock classes then contain feedstocks with similar
characteristics (see the class definitions in the Appendix).
In the modeling we also had to deal with technical progress. In
particular EPA and NREL both assume substantial processing cost re-
ductions due to technological developments in the future. In the ex-
isting FASOM model, in the absence of AF, the model can exploit the
falling costs producing at a relatively higher cost in 2020 and then
going to a lower cost in 2025 and yet a lower one in 2030 etc. However,
the ability to take advantage of new technological developments is
limited once a plant is built, it is built to use a particular technology.
When we modified FASOM to incorporate AF we reflected this in the
capital and operating costs. In particular the capital costs were all in-
curred at the time the plant was built using the costs in place then not
future lower ones. Thus we did not let the costs continue to fall over
time rather locking in the technology and making the particular facility
unable to take advantage of future technological developments.
Mathematically, this involved adding a plant construction variable,
Zt , reg, class representing the amount of bio-refining capacity that is built
in period t in region reg that uses feedstocks in the group identified as
class.2 In turn the annual amount of ethanol production created by plant
2
A detailed list of the feedstock classes appears in Appendix I.
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Biomass and Bioenergy 122 (2019) 37–44
operations, Yt , reg, process, class , was constrained by the cumulative capacity
of previously built and any newly built plants as in equation (1).
t
∑ Yt , reg, process, class ≤ ∑ CAPclass Ztt , reg, class
process tt = t − k
∈ p (class ) tt − k > 0
t
+ ∑ CAPclass ZPtt , reg, class
tt = t − k
tt − k ≤≤ 0 (1)
Here the capacity is summed across all previously constructed
plants in the previous k years where k is the economic life of the bio-
refinery, process identifies the specific bio-refinery production process
product and treatment method (e.g. grain dry mill or switchgrass based
cellulosic) and CAPclass is the capacity of plants built to handle feed-
stocks in a type class. The capacity also includes plants that exist when
the model starts up (ZP). Also, a maximum rate of new construction was
also incorporated. During the boom between 2005 and 2010 there were
many plants waiting construction due to capacity of contractors and we
set the five year maximum as the amount built in 2005–2009.
4.3. Analysis design
To illustrate the impact of AF we did a number of model runs. First,
we ran AF and no AF cases without imposing the renewable fuel re-
quirements from the 2007 Energy Independence and Security Act
(which we will call RFS2). In the non-AF scenario we did not include
data on existing capacity.3
Second, we examined effects of AF inclusion/exclusion in a setting
where we imposed mandates for 2025 at the levels suggested in RFS2.
This involved imposing constraints requiring 406 billion liters of
3
Activating the existing capacity in the AF scenario would make ethanol
processing cost cheaper than the non-AF scenario since the cost for existing
capacity was sunk cost and not reflected in the model objective function.
Z. Wang et al.
Fig. 5. Ethanol production by region and type in RFS2 scenarios with and without AF.
Note: CB: Corn Belt; GP: Great Plains; LS: Lake States; NE: Northeast; RM: Rocky Mountains; PSW: Pacific Southwest; PNWE: Pacific Northwest - east of the Cascade
mountain; SC: Southcentral; SE: Southeast; SW: Southwest.
ethanol blending with no more than 57 billion liters coming from corn
grain and a minimum of 49 billion liters from cellulosic ethanol.4
Third, we set up several ethanol price scenarios in the absence of the
RFS2 requirements in an exercise designed to see how much cellulosic
ethanol was economically competitive with and without AF. The base
scenario was set at $0.48 per liter (or $1.8 per gallon), an upper bound
for the ethanol price observed from since 2016. The high price scenario
of $1.06 per liter (or $4 per gallon) was set as based on the existing RIN
(Renewable Identification Number) price of $0.7/liter, which is the
price obligated parties such as refinery facilities needed to pay to
ethanol producers under the RFS2 mandate, indicating the price gap
between cellulosic ethanol supply and demand without the current
production mandate. Another scenario of $0.79/liter (or $3/gallon)
was set as intermediate scenario between the base and high scenario.
Price in all three scenarios escalated at the rates projected in AEO
(Annual Energy Outlook) 2016 (see Fig. 2). The model setup in this case
did not have RFS2 mandates imposed but did have the NREL projected
reductions in cellulosic ethanol production costs.
4
RFS2 requires 61 billion liters (16 billion gallons) of cellulosic biofuel by
2022. Here we require 49 billion liters (13 billion gallons) of cellulosic ethanol
assuming the rest is fulfilled by advanced biodiesel production.
41
Biomass and Bioenergy 122 (2019) 37–44
5. Results
5.1. AF effects without RFS2
Fig. 3 shows the ethanol production by feedstock in the absence of
mandates with and without AF. In both scenarios ethanol production is
projected to increase over time due to rising ethanol price and tech-
nological progress in agricultural crop yields lowering commodity
prices and in turn feedstock supply prices.
In the results a significant difference is observed between the AF and
non-AF scenarios. With AF present, the total amount of conventional
crop ethanol increased to 95 billion liters by 2050, about 16% lower
than that in the non-AF projection (see Fig. 3). No cellulosic ethanol
production was projected with AF in place, compared with 1.6 billion
liter in 2030 without AF scenario (about 0.83 billion from switchgrass,
0.57 billion from bagasse and the rest from agricultural residues). This
shows omitting AF biases upwards the market potential of cellulosic
ethanol. More significant differences occur in the regional results as
discussed below.
As expected without AF (as indicated in Fig. 4 by the red lines),
unrealistic spatially varying variations in ethanol production were ob-
served. For example, there were about 23 million liters of cellulosic
Z. Wang et al. Biomass and Bioenergy 122 (2019) 37–44

Fig. 6. Ethanol production by price and type with and without AF.

ethanol production in the Pacific Southwest in 2025 but no production Mountain, Great Plains and Lake States. Such a production patterns
before or afterwards. Similar short-term variations were also observed would not be likely in reality as it implies building then abandoning
for other regions such as Pacific Northwest-east of the Cascade expensive facilities. The AF solution exhibited much more stability (See

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Z. Wang et al.
Fig. 7. Cellulosic ethanol production by feedstock in the AF model.
the blue lines in Fig. 4). Again ignoring AF allows the model solution to
jump around exploiting lower costs and alternative regional rates of
technological progress upwardly biases cellulosic ethanol production,
leading to an over-optimistic prediction of market penetration.
5.2. AF effects under RFS2
We also investigated the effects of AF under the renwable fuels
mandate obtaing the results shown in Fig. 5. Again omitting AF resulted
in unrealistic production patterns. For example, about 8 billion liters
were produced in the Northeast in 2035 but this was reduced to 4
billion in 2040 and disappeared in 2045. Also, more than 15 billion
liters of ethanol production moved from the Great Plains to the Corn
Belt between 2015 and 2020. No such dramatic changes were observed
once AF although there was a shift in Great Plains during 2040–2045 at
the end of a plants life.
5.3. AF and cellulosic ethanol competitiveness
We also wanted to examine whether AF omission biased the prices
at which ethanol would rise to the volumes contemplated by the RFS2
in a competitive market. Fig. 6 shows total crop and cellulosic ethanol
production for different price scenarios with and without AF. Here
under AF we only see mandate comparable volumes in 2025 if the price
is $0.79 per liter or higher. On the other hand, without AF the projected
ethanol production is much higher.
A few more details are noteworthy. First, crop ethanol grows be-
yond today's levels as the price escalates over time in all cases but at
low prices, we see no real penetration from cellulosic sources. However,
as initial ethanol price rises above $1.06/liter, then cellulosic ethanol
surpasses the 49-billion-liter level contemplated in RFS2 by 2025. This
was consistent with price plus RIN levels in June 2017 (gas was $0.41/
liter and the cellulosic RIN price $0.7/liter, placing the price needed to
induce cellulosic ethanol at $1.11/liter 5).
Second, let us examine the feedstocks used. On the first-generation
side corn was the dominant feedstock. For cellulosic, agricultural re-
sidues, mainly corn stover, were the dominant feedstock when
5
We used the following approximation formula as suggested by Dr. Wallace
E. Tyner: Pcell = Pgas ∗ 2/3 + RINcell where 2/3 adjusts the difference in energy
content between gasoline and ethanol.
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Biomass and Bioenergy 122 (2019) 37–44
cellulosic ethanol was produced (prices above $0.79/liter). When
ethanol price increased to $1.06/liter, a considerable amount of
switchgrass based ethanol entered (see Fig. 7).
6. Concluding comments
When a bioenergy plant is built, the location, capacity, processing
technology and class of feedstock it can use are generally fixed, which
we call asset fixity herein. Our results unsurprisingly show neglecting
asset fixity in a spatial, multi-feedstock model causes production, and
feedstock use to jump around between time periods. This permits pro-
duction to occur with whatever technology, feedstock combination is
cheapest at that particular time. In other words, without asset fixity
assumption a model fail to consider continuity of biorefinery capacity at
a location as well as designed feedstock usage. Also this assumes plants
can utilize all technological developments as they come along without
any constraints imposed by refinery equipment and design. Running
with and without place, feedstock and cost stage fixity shows a sub-
stantial bias in fuel production costs and market share when the model
is allowed to cherry pick and does not have to lock in facility locations,
feedstock capabilities and cost structure.
Collectively this shows that when models do not fully consider asset
fixity that their results can substantially understate the costs of ethanol
production and or overstate potential market penetration. In particular,
in some of our analyses the consideration of asset fixity substantially
reduced production of both conventional and cellulosic ethanol ulti-
mately eliminating cellulosic ethanol production.
This paper also examined the future economic competitiveness of
cellulosic ethanol with different price projections with AF considered.
The results showed free market ethanol production by 2025 only ap-
proached US legislatively contemplated levels if the price of fuel ap-
proached $1.06 per liter compared to recent prices of $0.48 per liter.
This is substantially greater than the highest historical ethanol price
($0.68 per liter in 2006).6
Acknowledgement
This paper was partially funded by the Texas A&M Institute for
6
See at: http://www.neo.ne.gov/statshtml/66.html. Accessed Feb. 26th,
2017.
Z. Wang et al. Biomass and Bioenergy 122 (2019) 37–44

Advanced Study and an agreement with Environmental Protection interest to disclose.

Agency through Research Triangle Institute. We have no conflicts of

Appendix

When adding AF we required plants to be built with a choice of general type of feedstock to use where we grouped the feedstock types into
classes. For example, plants constructed that produce dry mill ethanol were assumed to be able to use both corn and sorghum, but were not allowed
to handle other feedstocks such as wheat or oats. We also defined similar AF classes for and biodiesel production. The classes and permitted
feedstocks for ethanol and biodiesel are listed in Table A1.

Table A1
Asset fixity classes and attached feedstocks modeled in FASOM

Bioenergy AF Class Feedstocks in the class

Crop Ethanol Dry Mill Ethanol Corn (Dry Mill), Sorghum

Wet Mill Ethanol Corn (Wet Mill)
Sugar Ethanol Sugar
Sweet Sorghum Ethanol Sweet Sorghum
Wheat Ethanol Five types of wheat -Soft White, Hard Red Winter, Soft Red Winter, Durum, Hard Red Spring
Oats Ethanol Oats
Rice Ethanol Rice
Barley Ethanol Winter Barley, Spring Barley
Cellulosic Ethanol Sweet Sorghum Pulp Cell Ethanol Sweet Sorghum Pulp
Bagasse Cell Ethanol Bagasse
Crop Residue Cell Ethanol Corn Residue, Wheat Residue, Sorghum Residue, Barley Residue, Oats Residue, Rice Residue
Grass Cell Ethanol Switchgrass
Wood Cell Ethanol Hybrid poplar, Willow
Biodiesel Biodiesel Oil Soybean Oil, Corn Oil, Corn Oil Non-food-grade, Canola Oil
Biodiesel Fats Tallow, Lard

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