Bhutan is a small landlocked country located between the two largest populated countries globally, China to the north and India to the south. Over the years, the country has achieved significant progress in terms of development with Bhutan’s real GDP registering a CAGR of 8.9% during 2005-09, which is relatively higher vis-à-vis average growth rate of 5.9% achieved in the 1990s.
Bhutan’s growth has been largely attributed to the development of hydropower with it contributing close to a quarter of GDP and around 40% of total national revenue. By 2020, the government plans to increase generation capacity to 10,000 MW about seven times the present level.
The development of the hydropower project has resulted in need for big trucks and earth moving equipment’s, which has resulted in diesel imports. With more projects starting and with many more individuals purchasing vehicles, the demand for fossil fuel is expected to increase significantly.
With the price of fossil fuel having surged above the historic mark of US$ 100 barrel in 2007/2008 and with the increase in fuel in recent days there is more urgency to look at alternative energy sources. While the electric and hybrid cars are being used in Bhutan, other alternatives should also be considered – biofuels.
It is hoped that the use of biodiesel fuel mix in would help reduce demand of fossil fuel imports thereby reducing expenditure of Bhutan hard earned foreign exchange reserves. This is at a time when fossil fuel prices have been soaring with it to continue to increase further in future.
This initiative would also reduce carbon emission and emission of hazardous toxic pollutants from the exhaust of the automobile engine which would Bhutan remaining carbon neutral and clean.
This business idea was initially conceived with the intention that maize corbs would be made into ethanol. This was because DHI was studying the possibility of manufacturing maize starch and using the by-product as a key input into manufacturing ethanol. The process of manufacturing ethanol from maize corb was being researched by the company Danisco (which is taken over by Dupont) and Novozymes. As per Novozymes subsidiary company PRAJ in India, the technology is still under development. Therefore, another alternative Jatropha another plant was considered for study.
The objective is to manufacture biofuel that can be blended with diesel for diesel powered vehicles thereby reducing demand from imported fossil fuel. The venture will be undertaken in a commercial manner and will be initially taken as a pilot project for local public transport in Thimphu, the capital of Bhutan.
Bhutan has seen a rapid increase in vehicle numbers. From less than 20,000 in 2000, the number has increased to over 66,000 in a span of a decade. With the increase in vehicle there is corresponding an increase in demand for fossil fuels.
In 2011 the fuel import bill was more than Nu. 5 billion, which constitutes over 70% of revenue earnings from hydropower exports to India. This is indeed alarming and with more development projects the fuel demand will continue to increase. Therefore, it is important that alternative fuel sources such as Biofuels be considered to address high cost associated with importing and dependence on fossil fuel.
However, with biofuels there is the issue of fuel vs. food security that needs to be addressed before considering this option.
Ø Land for cultivating Biofuel
Major crops cultivated in Bhutan are maize and rice. In 2010, the total area harvested by maize cultivation was 61,467 acres where as paddy was 56,375 acres. All the other crops – wheat, barley, millet, buckwheat, potato, mustard, chilli, cabbages etc. individually harvested less than 10,000 acres.
Many households in the past relied on maize for food and income. However, given that Bhutanese preference for rice is increasing, people with higher income, those in regions where their earlier stable diet was maize are now switching to rice. The overall impact is that there is decrease in cultivation of maize.
In addition to the change in food habits, there are several factors for leaving the land fallow:
- Farmers could earn as much working on a daily wage from off-farm activities
- Crop losses to wild animal – over 11% of maize crops are lost to wild animals (monkey, wild pigs, bear, porcupines, rodents and birds)
- Near drought conditions – maize crops in Bhutan have been decimated by near drought conditions in 2012 in Eastern Bhutan
According to the Maize Commodity Chain Analysis, Ministry of Agriculture, 2006 they have concluded that the importance of maize is decreasing and their recommendation in the long run is the policy should focus on encouraging diversification towards other crops, specifically horticultural crops suitable to the region.
With unpredictable heavy rainfall and drought like conditions which have impacted maize harvest, it was felt that another crop that be considered which would be resistant and at the same time address other issues such as fuel import substitution.
Ø Type of Biofuel
Biofuel can assume significant importance globally as it can address energy demand. There are two type one being Bio-ethanol and the other Bio-diesel.
Bioethanol is manufactured from sugar, either harvested from sugar either harvested directly or broken down from starches. Given that sugarcane is not grown in Bhutan and maize-growing being an issue as mentioned earlier, it would be difficult to consider Bioethanol.
Bio-diesel on the other hand can be manufactured from natural plant oil. A look at various plants shows how Jatropha has one of the highest yields per area.
|Crop||Kg oil / ha /yr.||Liters oil / ha|
In terms of Jatropha as a plant is a great crop as:
- It can grow on dry marginal non-agricultural land
- It can even grow in low temperature and can withstand light frost even though it is found in tropics and subtropics
- Can withstand drought conditions by shedding most of it’s leaves to reduce transpiration losses
- Plant seeds are rich in oil (40%-45%)
- Wild animals do not eat it as it is slightly toxic and smells
From the Jatropha seeds Biodiesel can be easily manufactured which have the advantage:
- Can be directly used after extraction with blend of 20% biodiesel mixed with diesel fuel without engine modification
- Biodiesel extends life of diesel engine – more lubricating than petroleum diesel fuel
- Reduction of 75%-90% in environmental pollution & 90% cancer risk
In terms of calorific value – biodiesel is almost same as diesel:
|Properties||Jatropha Oil*||Biodiesel||50% Biodiesel & 50% Diesel||Diesel*|
|Calorific value (MJ/kg)||39.5||41||42.7||45|
Table: Observed Properties of Oil and Fuel
In fact the performance of mixture of 50% biodiesel & 50% diesel mix improved brake power, brake thermal efficiency than diesel.
The exhaust of the biodiesel mix compared to the diesel shows that the percentage of carbon dioxide is lower, the oxygen higher and carbon monoxide zero for the biodiesel mix.
Table: The exhaust Gas analysis by ORSAT apparatus
Based on the advantages as mentioned above and given that diesel engines can use 20% biodiesel mix without engine modification, the proposal is to substitute 20% of the diesel with biodiesel.
Market & Client
The biodiesel will be sold to diesel power vehicles with blending of 20% of bio-diesel. In the initial phase the venture will supply to Bhutan Post which is a government state owned enterprise that operates local transport in the capital city Thimphu. Currently Bhutan Post has a fleet of 19 buses in Thimphu with plans to expand.
Bhutan’s current policy to strive for food self-sufficiency in staple food is not the best strategy to ensure national food security, a research undertaken by the Agricultural and Food Policy Research and Capacity Development Project under the agriculture ministry in collaboration with the International Food Policy Research Institute (IFPRI) has shown.
Even though there is a long standing debate on whether food self-sufficiency is a useful strategy to achieve food security, experts believe that it is costly for a household or the country to focus on food self-sufficiency rather than producing as per its comparative advantage and purchasing some of its food requirements from the market. For example the cost of maize in the northeast region of India cost about Nu. 9 but in Bhutan the cost is about Nu. 14 that would mean that people would purchase imported maize. With maize being expensive, the problem is further compounded with drought like conditions, unpredictable rain, and wild animals destroying crops. This has resulted in decrease in land use for growing maize.
Therefore given that it is costly for the country to focus on food self-sufficiency it should be left to the market forces and land usage should be left to the product that is most competitive.
Times have changed and while people talk of self-sufficiency, the fact of the matter is that Bhutan is depended on other countries. Assuming that we are self-sufficiency, we would still need fuel to transport the goods and therefore Bhutan is still dependent. Therefore, by allowing for use of land for growing crops such as biodiesel, the land which are being left abandoned, can be used to supplement biodiesel thereby reducing fuel imports and hence reducing Bhutan expenditure on fuel imports.
While the government policy strives for food self sufficiency, the Maize Commodity Chain Analysis, Ministry of Agriculture, 2006 recommends that in the long run is the policy should focus on encouraging diversification towards other crops. Therefore with that assumption that government would consider allow for growing of jatropha on abandoned land has this business proposal been considered as a case study. Obviously good lands that are cultivating maize should definitely not be encroached upon.
In India, the “National Bio-fuel Policy” proposes an indicative target of 20 per cent blending for both biodiesel and bio-ethanol by the year 2017. While the targets for biodiesel are in the nature of recommendations, ethanol blending was made mandatory from October 2008. In fact, Bio-ethanol already enjoys concessional excise duty of 16% and biodiesel is exempted from excise duty, and there are proposal for no other Central taxes and duties on bio-diesel and bio-ethanol. Such policies if implemented in Bhutan will encourage growing on biofuel crops. Currently there is 25% exercise duty and custom tax by the central government and 22% in form of sales tax and entry tax collects by the state government.
Feasibility and Cost Benefit Analysis
The public transport in the capital city of Thimphu currently has a fleet of 19 buses with another 12 to be added in the coming months. Assuming that on average all the 31 bus travels 40 km a hour, make 10 rounds per day, with the fuel consumption of about 5 km per liter, the buses in total would consume 905,200 liters of diesel in a year.
If blending of buses in Thimphu are required to have 20% as biodiesel, the requirement of biodiesel is 181,040 liters annually. Given that the yield of Jatropha is about 7 tonnes of seed, which is about 2.2 tonnes of oil per ha, the total land required for jatropia cultivation will be 83 ha.
The following are the assumptions:
- While the current price of diesel at Nu. 44.76 /liter, we use the Indian Government approved selling price of biodiesel for Nu. 36/liter (i.e. 0.65 cents per liter)
- Plantation area is 100 hectares
- Each ha of land will have 2,500 jatropha plant
- Each plant will give about 1 liter of biodiesel
- Annual labor charge will be USD 4,000 per ha
- Power tariff 9% of revenue
- Land lease rent per ha is USD 200
- Operating Expense 12% of revenue
- Plants will be harvested from the third year
- Considering a debt to equity ratio of 60:40, the WACC is 12.2%
For the investment of will be USD 164,500 the project is unviable with an NPV of USD -105,780 and Project IRR of -22%.
However, two scenarios have been considered:
- If the donor agency provides the initial investment cost the project will be viable with an NPV of USD 26,788 and Project IRR of 48%. This may be possible as companies in Japan are currently providing such support to start up companies in South East Asia.
- If the government was to approve a policy requiring 20% blending of biofuels in diesel. However this would mean that the cost of biodiesel would cost more than the cost of diesel due to investment and production cost. The project would be viable if biodiesel is sold at USD 1 per litre higher as against the price of diesel which is currently at around USD 0.8 per litre.
- While the cost is transferred to the consumers the government exchequer will benefit in that the demand on government exchequer will be reduced by USD 200,000 (which would other wise be used for importing fuel and result in loss of hard currency from the national exchequer)
The government could also give possible subsidy on the following considering the health benefits:
- By the use of 20% blend of bio-diesel there will also be a 17% reduction in carbon dioxide emissions and 12% reduction in particulate matter from public transport buses and the carbon dioxide emission will decrease by about 600 tonnes per year.
- PM and HC emissions from diesel fuel combustion are toxic or carcinogenic. Blend of B20 reduces air toxics by 20% to 40%, which would reduce the government’s expenditure on health given that it is free in Bhutan. Therefore part of the subsidy could be from the health sector given that health hazards would be reduced significantly.
Project Idea Note (PIN)
Considering scenario 2, it is possible that the project could also apply for carbon credits given that this project would reduce carbon emission by 600 tonnes per year and given that the venture is not viable.
Assuming that each CER carbon credit has a market value of USD 5 per tonne of carbon dioxide, the earning from carbon credits will be USD 3,000. The amount is insignificant to be considered considering the work that needs to be done for the project.
National Appropriate Mitigation Action (NAMAS), a new carbon mechanism which is currently being developed in the international market can be considered as such proposal which involves national mass transport policy would be considered. However, in terms of carbon credits it may be similar to that of CDM.
Critical Success Factors
The critical success factors for the success of this business model will be:
- The government allows for land that is currently fallow (which can be used for growing maize) to be used for growing Jatropia
- For the project to be successful policy intervention is required (i.e. 20% blending requirements) for scenario 2. However, the government exchequer would benefit in that less hard currency is spent on importing fuel. In addition health expenditure related to health problem from emission would be reduced.
Biofuels have significant importance globally as it address changing pattern in energy supply and demand. With the growing demand, the insecurity of long-term supply and the consequence of fossil fuel use for climate change governments around the world are looking for alternatives. Bhutan too should look for alternatives and given that land usage are decreasing for agriculture products there is possibility to look for other usage. With the growing on land that is being left fallow the land can be put to use to grow jatropha that is a bio-diesel, which can be blended with diesel. The benefits are immense given that it addresses (a) reduces demand for import of fossil fuel thereby reducing expenditure of hard currency (b) with the use of blended fuel the emission hazards are drastically reduced. However, the venture on it’s own will not be viable without either policy intervention or donor funding.
The project is beneficial to the Bhutanese economy in that by growing biofuel within the country there is reduced demand for fossil fuel, which in turn reduces the demand on the government’s exchequer, which at the current stage is under enormous pressure.
Project Proposal Prepared by: Jigme T Tsering