Co-movement of prices between biofuel co-products in Canada: ethanol, electricity, and pellets

Abstract

The potential emergence of a second-generation ethanol industry in Canada will depend on future production technologies and prices. Financial viability might be improved by producing cellulosic ethanol with co-products such as lignin pellets or electricity. Financial returns to ethanol production will depend on price variability and possible price spillovers among ethanol and its co-products. We use a multivariate BEKK–GARCH approach to investigate past mean price interactions and volatility spillovers between ethanol and electricity prices. Wood pellets are investigated in a univariate framework because of data constraints. Results show substantial price interactions and volatility spillovers among these products. If a second-generation ethanol industry emerges, co-production of products from common feedstocks may strengthen already established relationships between the prices of these energy products. These conditions could create increased risk and the clustering of high–low price fluctuations among co-products. For investors, results suggest that risk reduction strategies should protect against correlated volatility. For policy makers, results suggest that policies that target one commodity may lead to unintended impacts on co-product(s). In sum, understanding links between markets is important for designing future policies and for insights into how a second-generation ethanol industry may emerge.