Catching-up with the Ethanol Opportunity: The Emergent Ethanol Industry in Honduras
Currently petroleum is considered to be the most important energy source around the world; allegedly by its high energy density, easy transportability and relative abundance (which has been recently challenged). Recently the world has experienced many crises directly related to oil supply and increasing concern about climate change strongly linked with the use of fossil fuels. Uncertainty about future oil supply and the effects that CO2 emissions are having over the environment are the two main drivers that are encouraging the emergence of different energy alternatives.
Biofuels – fuels derived from biomass- appear as a promising alternative. Ethanol is an alcohol that in water-free form can be blended with gasoline and used as an energy source to power engines. A considerable world movement towards its promotion is perceivable. Until recently, most of the biofuel programs were created as part of agricultural-support policies; but today, many governments are extending such programs for energy security and economic and environmental reasons. Several developed and developing countries have established regulatory frameworks for biofuels such as blend targets and consumption level, and providing subsidies and incentives to support nascent biofuel industries.
The purpose of this master's thesis is to analyze the emergent ethanol industry in Honduras and identify the main blocking and enhancing mechanisms that will be faced in order to facilitate its further development. To do so, an innovation system approach was applied to the Honduran case. This framework was selected on the basis that it provides a systematic model based on the perception that the innovation process is not limited to individual firms, but to several related firms that are embedded within an IS that guides, aids and constrains them.
To perform this thesis, a brief analysis of ethanol technologies and the global ethanol landscape was performed in order to gain a fair understanding of the ethanol market, and identify important trends that could influence the Honduran IS. The main sources considered were: governmental reports, international organization reports, newspaper articles, Chalmers e-journal database (Elsevier Science, Research Policy, etc.), PhD and Masters Theses. After this, the thesis focused in the Honduran case. First, the structure of the Honduras system was defined; second, its performance was described and evaluated; and third, several blocking and enhancing mechanisms were identified as the result of the system’s assessment. The data for this analysis was obtained from local governmental reports, web pages of different local organizations and companies involved in the ethanol supply chain. Semi-structured interviews with actors involved in the nascent ethanol industry complemented this data.
Ethanol is currently produced from sugar and starchy crops – first generation- such as sugar cane or corn. Higher oil prices and lower production cost from advances in conversion technologies has made ethanol more competitive with oil-based fuels. While sugar cane ethanol competes effectively with conventional fuels, corn ethanol does not without subsidies. First generation ethanol presents environmental benefits in comparison with oil fuels. However, there is still concern regarding the effects on land use and displacement of food needs. Other promising biomass as cellulosic materials, which require more complex conversion technologies, can permit biofuels to play a more important role in the long term.
At the moment, the international trade of ethanol has remained low, but most of the forecasts show the production and use of ethanol will increase. Developed countries have limited land availability and ethanol production costs are higher than tropical and subtropical developing countries. The experience of Brazil in the development of an ethanol industry has pulled other developing countries in the Latin American region to engage in biofuel programs. They want to catch-up the opportunities of serving this increasing demand, reduce their dependence on fossil fuel and diversify its agriculture industries. There is window of opportunity to continue exploiting the advantages of the sugar cane to ethanol technology, since no breakthrough is expected in the next 10 years. In this context, Honduras has given the first steps toward the creation of a biofuel industry.
The Honduran ethanol innovation system is very young and there is still no commercial production of ethanol; but yet, several signals of structural development and dynamism can be spotted. First of all, there are several actors within the system that are already interacting between each others. This has created a number of networks, both learning and political, that have started to mobilize knowledge and influence across the system. There are also some initiatives regarding the establishment of an institutional framework that would dramatically help the system to further develop.
As the system is going through a systematization phase, the interactions between the components of the system are already taking the first steps of functional development. Knowledge Development and Diffusion is been performed fairly well. An important generation of knowledge related to the production of feedstock for biofuels is happening and is likely to become more active. The system is taking advantage of the core capability of the country, which is agricultural expertise. The system is likely to strongly pursue to sugar cane as the primary feedstock used for ethanol production. Market Formation in the international landscape looks very promising. In the national context, the formation of an initial nurturing market is almost entirely dependant on the establishment of a mandatory blend through the approval of the so expected “Biofuels Law”. Although non tangible ethanol production projects have actually started, Entrepreneurial Experimentation can be considered to be somewhat positive. This is due to the many motions and expectations from investors and entrepreneurs that are interested in the industry. Resource Mobilization has started with a number of investment projects announcements, both from national and international sides. This gives the system some important initial dynamism, but any entrepreneurial initiative is considerably discouraged by the absence of a positive national institutional framework. An opportunity for Honduras to diversify its agricultural sector and mitigate the heavy burden of petrol imports have also contributed to create Legitimacy over ethanol.
Several enhancing mechanisms that provide positive dynamism to the system were identified. Nevertheless, a “Weak Advocacy Coalition” and an “Unclear Governmental Position and Support” are two critical issues present in the system that are negatively affecting it. The lack of strong connections between key actors and the ambiguous position that the government is portraying are two main challenges that need to be overcome in order to develop the industry. Sugar producers have maintained a rather independent and leader position that has actively ignited the whole biofuels movement in the country. However, they have failed to create strong liaisons with other important actors, situation that has deteriorated their bargaining power over time. The main challenge for the private sector is to work together with other actors, such as fuel distributors, financers and the government. Its goal is to create a strong coalition that would allow them to exercise pressure over the governmental institutions involved in the creation of the institutional framework.
The “Unclear Governmental Position and Support” is another identified critical blocking mechanism. While the executive government, through the Presidential Special Projects Office, shows a strong commitment to biofuels; the legislative government seems to have forgotten about the subject. This situation brings important instability to the system creating an uncertainty that investors are afraid of and, spurs other actors’ reluctance. The challenge for the government is to define a joint strategy where the involved governmental entities delineate their roles and commit to the subject. In this way, a more stable situation can be perceived by entrepreneurs and investors that would encourage them to move resources in a certain field.
At this early stage these are two of the main challenges for the actors; however, as the system evolves over time, many other implications will arise, creating more different challenges. The Honduran ethanol industry has promising development expectations. Honduras has the possibility of becoming one important actor by catching-up with the ethanol opportunity.
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