A GIS-enabled comparison of fixed and discriminatory pricing strategies for potential switchgrass-to-ethanol conversion facilities in Alabama

Ethanol is produced from organic material and is important as a strategic and cleaner alternative to fossil fuels. The cost of producing ethanol, which ultimately affects its price and demand, depends to a large extent on the delivered cost of raw materials. For a planned ethanol production facility, the cost of raw material is a function of (1) the facility location, (2) the facility size, and (3) the method of procurement. In a previous paper, two of the authors provided a methodology for computing a marginal price “surface” to better understand the location decision under several facility size scenarios. The methodology was implemented in a GIS-based decision support system to investigate the economic feasibility of locating a switchgrass-to-ethanol conversion facility in Alabama. In this paper, we use the methodology to construct delivered cost surfaces in order to evaluate two methods of procurement pricing; fixed and discriminatory. In the fixed pricing method of procurement, the facility pays one fixed price per delivered tonne. In the discriminatory pricing method of procurement, the facility pays a source-specific price per tonne before delivery and then pays the cost of delivery transportation. The results from the current study confirm the cost advantage of discriminatory over fixed pricing. However, it was observed that the relative cost advantage showed considerable variation as a function of location and facility size.