Another Good Winter for Bioheat

Bioheat-biodiesel blended at various levels with residential heating oil-has been gaining considerable support and market growth over the past three years, especially in the Northeast where heating oil is still predominantly used to heat homes and buildings. After this past heating season and projecting into the next, some claim that bioheat is more than just a niche market. Rather, it represents "an explosive time for the industry," a time for which bioheat is getting fired up.
By Anduin Kirkbride McElroy | May 01, 2006
Just a few decades back, as much as 20 percent of American households relied on heating-oil-fed boilers for warmth during frigid seasons of the year. That started to change-and kept changing-when natural gas entered the scene in the mid-1960s. In effect, heating oil was systematically edged out of many northern U.S. markets, so much so that fewer than 10 percent of U.S. households now use heating oil as a primary feedstock for heat.

From its inception, natural gas was billed as a clean, inexpensive way to heat homes-and it is-while heating oil got a bad rap for being a "dirty" fuel, and one susceptible to price volatility. In essence, the fuels were, and are, as different in form and reputation as in the way they are sold and distributed. There is typically only one provider of natural gas per market, which contrasts sharply with the much more decentralized heating oil market, characterized by several small companies competing for each individual customer within a given region. That's been an Achilles heal for heating oil. The very nature of the heating oil industry-small and independent-made it susceptible to fragmentation. So when natural gas encroached on territories once dominated by America's mainstay heating fuel, distributors were slow to organize and react. The pipelines moved in and the heating oil tanks moved out.

After years of market decline, something had to be done. The National Oilheat Research Alliance (NORA), a national check-off program, was formed in 2000, not just to preserve what was left of America's heating oil market, but to try make it grow. The timing was just right. Biodiesel had arrived on the scene and more and more people were touting it as a viable blend with petroleum diesel fuel. Paul Nazzaro, president of Advanced Fuel Solutions Inc., a petroleum industry consulting firm, quickly identified the potential symbiotic relationship for biodiesel and heating oil by pairing an "industry that needed help with an industry that was eager to help," he says.

That was half a decade ago. Since then, blends of the renewable fuel with traditional heating oil-now commonly referred to as "bioheat"-have gained considerable acceptance in the Northeast and Northwest, where heating oil is still common. Nazzaro explains that biodiesel gives heating oil an opportunity to change its reputation, to become a cleaner, environmentally friendly, American-made fuel. That is, with biodiesel in its coffers, heating oil can claim several marketing advantages over natural gas. But it's not a one-way street-this is a terrific symbiotic relationship, a thing of mutual benefit. While biodiesel gives heating oil a hip new image, heating oil gives biodiesel a ready-made market that augments its use as a transportation fuel and steadies demand for the alternative fuel in the winter.

Coming off the 2005-'06 heating season, all indications are that bioheat is continuing to make headway with petroleum companies, biodiesel producers, wholesalers, distributors and customers alike. The strength of the supply chain-and what appears to be a rising consumer pull for the product-perhaps means bioheat is becoming more than just a niche biofuels market. However, the fate of biodiesel-blended heating oil lies in the success and continued use of heating oil itself.

Is the Market Going to Be There?
Even at just 10 percent of the U.S. market, heating oil is used by more than 9.5 million households per year, according to Don Farrell, publisher of Oilheating Journal. NORA represents heating oil companies in 23 states and regions in the United States. An additional market is represented by the Canadian Oil Heat Association (COHA), which serves five provinces. NORA states represent over 92 percent of total heating oil sales, or about 7 billion gallons per year.
Industry experts have mixed opinions about the market for heating oil. Consumption of heating oil did increase in the 2004-'05 season, according to NORA, which reported in January 2005, "Nationally, residential heating oil sales increased by 550 million gallons or 8.6 percent to 6.9 billion gallons, the highest level since 1994. A sharply colder winter in the Northeast drove increased use."

The 2005-'06 winter was quite mild and consumption of all heating fuels were down from the previous year. But experts say winter temperatures, while still indicative of use, are no longer the only factor influencing heating oil demand.

Gary Hess, service and installation manager of heating oil retailer Worley & Obetz Inc., says there is no doubt the heating oil industry is shrinking, but not from customers switching to natural gas. Instead, he points to an increased efficiency of customer equipment as the cause of decreased consumption.

Efficiency is a good thing, and no one's grumbling about that. Plus, even though the market for heating oil doesn't appear to be growing at the moment, it represents a major market opportunity for the biodiesel industry. In fact, just 1 percent of the 7 billion gallon heating oil market represents a 70 MMgy market for biodiesel. If B5 bioheat was mandated nationwide, it would require at least 350 MMgy. This might be considered a small number when 1 percent of on-road diesel fuel demand is also 350 MMgy. However, Nazzaro points out that U.S. production and consumption of biodiesel in transportation fuels (mostly in low blends) totaled just 75 MMgy in 2005. The question is, however, can bioheat capture 1 percent, 2 percent or 5 percent of the heating oil industry? Nazzaro says it's a "slam dunk."

Nazzaro is adamant about his claim because the market for bioheat is a geographic one. In other words, while heating oil is used throughout the country, it is primarily concentrated on the East Coast. The 14 states within New England and the Mid-Atlantic comprise 73 percent of the U.S. heating oil market. "The heating oil market in the Northeast is at least two-to-one that of diesel fuel (for transportation)," says Joel Glatz, who in addition to being vice president of Frontier Energy, is also vice president of Biofuel Brokers LLC. "In Maine we use 150 MMgy of diesel fuel and 400 MMgy for heat. It's obvious that the larger market is in heating oil."

World Energy Alternatives LLC is a producer, distributor and marketer of biodiesel. President and CEO Gene Gebolys says that biodiesel for bioheat blending is still a relatively small percentage of the company's total sales. When asked about future sales, he projects, "As a large part of our sales, I wouldn't expect it to get over 10 percent to 15 percent." However, Gebolys qualifies his statement by telling Biodiesel Magazine, "It could get much bigger. The bioheat industry has huge potential."

Logistical Challenges
The geographic market-combined with competitive, individual retailers-present both opportunities and challenges. Until recently, if a heating oil retailer wanted to sell bioheat, it would employ a "splash blending" method, in which it would mix biodiesel from one terminal in the delivery truck with heating oil from another terminal. This method can add time and expense as well as compromise quality. Beyond that, splash blending effectively makes bioheat a boutique fuel and does not establish continuity within the industry.
Nazzaro explains that this "prehistoric method" is not conducive to nurturing bioheat into a viable product. It is crucial for large wholesalers to provide pre-blended fuel, as that is where most retailers acquire fuel. "They need to put those assets in place to get growth," he says. "Commercial infrastructure will make or break the bioheat market. If it's not available-even if [the retailers are] embracing it, they won't buy it."

March 30 marked a huge step for the bioheat industry, as Sprague Energy opened a biofuel terminal in Albany, N.Y. It is the first terminal in the Northeast to offer ratio blending of biodiesel, and arguably the only terminal that will also provide blends for heating purposes. "We provide the most sought after blends of bioheat and biodiesel, which are B2, B5 and B20," says Tim Keaveney, manager of premium fuels and biodiesel marketing for Sprague. "Sprague is endorsing both NBB and NORA recommendations to introduce bioheat in B2 to B5 blends."

Sprague is one of the largest heating oil wholesale companies in the area; it sells 20 percent of all heating oil in New England. "It was a landmark day because it was the first time anyone of our magnitude introduced biodiesel at a terminal," Keaveny says.

Bioheat is still in its infancy stages, and faces more challenges than infrastructure. Of course, there are the logistical challenges of getting biodiesel to the center of bioheat applications from the center of production. Additionally, because heating oil gets used in one season of the year, large volumes must be accumulated and stored, Gebolys says. However, "because so many people are buying heating oil that has a fixed price guarantee, that means a lot of the heating oil procurement is done in futures contracts," he explains. "That provides real opportunities for biodiesel to make a contribution."

Gebolys also describes a financial drawback to producing and trading biodiesel for bioheat: "Heating oil trades at a discount to onroad diesel fuel. Generally you want to sell to most expensive distillate markets, not least expensive." A solution identified by Biofuel Brokers is to index biodiesel in a package similar to that found in petroleum markets, Glatz says. "We're offing a contract to heating oil and diesel distributors that are similar to what they're familiar with."

Getting Hotter
Despite the challenges, most of those involved with the heating oil industry identify a market with all the potential. "There are more pressures toward the success of bioheat than there are toward the obstacles," Gebolys says. Industry organizations, such as the NBB and NORA, are working together to promote bioheat. This last season saw NORA in an aggressive campaign to market heating oil as a clean fuel. "If we're going to get homeowners excited, NORA is where it is," says Farrell.

To market to consumers, Glatz believes the opportunity for the heating oil marketer is great because heating oil is a commodity. "If you're in the retail heating oil business, you're in the same market and sell the same product," he says. "So how do you differentiate from 10 other companies in the market? With bioheat, you have a totally different product-cleaner, renewable, domestic ... red, white and blue." n

Anduin Kirkbride McElroy is a Biodiesel Magazine staff writer. Reach her at
[email protected] or (701) 746-8385.
Array ( [REDIRECT_REDIRECT_HTTPS] => on [REDIRECT_REDIRECT_SSL_TLS_SNI] => [REDIRECT_REDIRECT_STATUS] => 200 [REDIRECT_HTTPS] => on [REDIRECT_SSL_TLS_SNI] => [REDIRECT_STATUS] => 200 [HTTPS] => on [SSL_TLS_SNI] => [HTTP_HOST] => [HTTP_CONNECTION] => Keep-Alive [HTTP_ACCEPT_ENCODING] => gzip [HTTP_X_FORWARDED_FOR] => [HTTP_CF_RAY] => 772770173a30801e-IAD [HTTP_X_FORWARDED_PROTO] => https [HTTP_CF_VISITOR] => {"scheme":"https"} [HTTP_USER_AGENT] => CCBot/2.0 ( [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [HTTP_ACCEPT_LANGUAGE] => en-US,en;q=0.5 [HTTP_CF_CONNECTING_IP] => [HTTP_CF_IPCOUNTRY] => US [HTTP_CDN_LOOP] => cloudflare [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] =>
Apache/2.2.15 (CentOS) Server at Port 443
[SERVER_SOFTWARE] => Apache/2.2.15 (CentOS) [SERVER_NAME] => [SERVER_ADDR] => [SERVER_PORT] => 443 [REMOTE_ADDR] => [DOCUMENT_ROOT] => /datadrive/websites/ [SERVER_ADMIN] => [email protected] [SCRIPT_FILENAME] => /datadrive/websites/ [REMOTE_PORT] => 16774 [REDIRECT_QUERY_STRING] => url=articles/900/another-good-winter-for-bioheat [REDIRECT_URL] => /app/webroot/articles/900/another-good-winter-for-bioheat [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => url=articles/900/another-good-winter-for-bioheat [REQUEST_URI] => /articles/900/another-good-winter-for-bioheat [SCRIPT_NAME] => /app/webroot/index.php [PHP_SELF] => /app/webroot/index.php [REQUEST_TIME_FLOAT] => 1669851728.647 [REQUEST_TIME] => 1669851728 )