Developing biofuels for aircraft is a risky endeavor, as transforming plant material into liquid fuel is still very expensive compared to the price of fossil fuels. Dr. Wallace Tyner and his colleagues at Purdue University used @RISK to conduct a cost-benefit analysis of building an aviation biofuel plant, and to determine the potential impacts of two different government policies to jump-start this technology: reverse auction and capital subsidy. In a reverse auction, the government would put out a request to supply aviation biofuels, and different private investors place bids on the price per gallon of fuel, with the lowest bidder winning the contract. The government must pay the contracted price per gallon of the biofuel, regardless of the current price of oil. A capital subsidy involves the government paying for a portion of the capital costs in developing the biofuel.
The Purdue researchers used a discounted cash flow model to find the net present value (NPV) of a theoretical aviation biofuel plant. They incorporated four variables that have a large impact on the non-risk adjusted breakeven fuel price: capital cost, feedstock cost, final fuel yield, and hydrogen cost (the price of hydrogen input used in producing biofuels). They created empirical distributions on all these variables from literature and/or experts, and then used @RISK to incorporate uncertainty into these variables using a PERT distribution. The researchers created projections to forecast what the fuel prices would be in the future, and what the breakeven biofuel price would have to be.
They found that both policies reduced risk in investment of aviation biofuels, however a reverse-auction policy reduced the risk of this investment more. Their research is detailed in their article “Field to flight: A techno-economic analysis of the corn stover to aviation biofuels supply chain,” published in the March/April 2015 issue of Biofuels Bioproducts & Biorefining.
Dr. Tyner uses @RISK for research, as well as for teaching his course in benefit cost analysis. “I use it to teach all my students to introduce uncertainty into project evaluation,” he says. “It’s been a tool in my portfolio for a long, long time.” He also notes how it has made his work drastically more efficient. “You can do something much less expensive and much easier with @RISK today compared to what I painstakingly did years ago,” he says.
The full article is available here.