Did the President Just Say Switchgrass?

When the most powerful man in America says cellulosic ethanol is going to be commercialized within six years, the industry he's talking to listens up. Now, as the nation's energy department unveils a 30-year outlook on oil that makes biomass utilization a long-term energy option with teeth, EPM offers industry reactions to the speech that made a nation start thinking about cellulose.
By BBI Staff Report | March 01, 2006
Imagine a scenario in which the novel concept of producing transportation fuel from wood chips, wheat straw and other waste is endorsed by a team of researchers who co-author an article published by an internationally recognized science journal. Pretend that article makes national headlines, reinforcing the promise of biofuels and pushing researchers and politicians to think more seriously about the idea of biomass-derived fuels. Now envision immediately after that occurrence, the leader of the most intense energy-consuming nation in the world declares this new "green" fuel part of that nation's strategic energy plan. And then—let your imagination really soar here—pretend these events take place just weeks after that nation's energy department reveals a sudden and critical paradigm shift in how it views the petroleum-based source of energy the country is currently reliant on. Say, for example, the energy department predicts that oil will get more and more costly and fall into growingly tight supply in the next 30 years.

How might a nation react? How might an industry respond?

This scenario is not fiction, of course. It's precisely what happened in the United States between mid-December, when the U.S. DOE's Energy Information Administration (EIA) released a preview of its 30-year energy outlook, and Jan. 31, when President George W. Bush announced that cellulosic ethanol will be part of the nation's Advanced Energy Initiative in his State of the Union address. Coincidentally, the president's cellulosic bolt from the blue, as it were, came just two days after the journal Science published an article written by a group of energy and public policy researchers from the University of California, Berkeley, that reaffirmed the alternative fuel's positive energy balance and said the "large-scale use" of ethanol would almost certainly require cellulosic technologies.

Everything clicked when Bush, himself a former "oil man" from Texas, told the nation, "Keeping America competitive requires affordable energy. Here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world."

What came next was as much a surprise to the nation and mainstream media as it was to the ethanol industry. Bush outlined his Advanced Energy Initiative, a plan to replace at least 75 percent of U.S. oil imports from the Middle East by 2025, in large part by providing a 22 percent increase in clean energy research at the U.S. DOE. In explaining how Americans would change the way they power their homes, businesses and automobiles, the president made it clear that cellulosic ethanol is part of the plan. "We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips, stalks or switchgrass," Bush said. "Our goal is to make this new kind of ethanol production competitive within six years."

At EPM press time, the Bush Administration was expected to release its 2007 budget, said to include $150 million—a $59 million increase over the fiscal year 2006 budget—to support the development of biobased transportation fuels from agricultural waste products (i.e., cellulosic ethanol). A statement from the White House indicated that the administration had consulted with research scientists (confirmed later by EPM to be NREL researchers) who believe that accelerating research into cellulosic ethanol can make it cost-competitive by 2012, offering the potential to displace up to 30 percent of the nation's current fuel use.

While near-term funding for cellulosic ethanol R&D appears to be less than stunning, the fact that the president introduced the promise of cellulose to the masses is perhaps the upshot with the most meaning. It's unclear how the industry will respond in the coming weeks and months, but one thing is immediately clear. For good or bad, Bush got people talking about cellulosic ethanol.

Advocacy groups mostly pleased
Ken McCauley, first vice president of the National Corn Growers Association (NCGA), was at the nation's capitol for the State of the Union address. He says the NCGA anticipated that the president would comment on the future of the U.S. ethanol industry, but he didn't know anything beyond that. "We knew the president was going to talk about ethanol, but we didn't realize how positive it would be," McCauley tells EPM. "I think it shows that the president is very confident in our industry's ability to solve some of the nation's energy problems. He took it to a new level, actually attacking imported oil with ethanol."

Some might think a corn association like the NCGA might view cellulosic ethanol as a threat. After all, the U.S. ethanol industry does eat up over 13 percent of the nation's corn output each year—and that percentage is growing—but McCauley says corn growers don't see cellulose as a rival. "We're not worried about competing with biomass feedstocks," he says. "We see it actually as a positive for the industry, which is going to continue to expand and become a bigger business … and [corn-to-ethanol] will continue to expand as well.

The president really challenged the industry as a whole, and I think [corn growers] will respond."

From an environmental perspective, David Hamilton, director of global warming and energy programs at the Sierra Club, says he has mixed reactions to the president's whole energy initiative. "We found it very discouraging that the president is willing to admit that we are addicted to oil but that he is going to wait 10 to 20 years to do something about it," Hamilton says. "We were encouraged that the president has acknowledged the problem but disappointed in that it took so long to notice and that there is not going to be more decisive action."

Hamilton says he is also generally skeptical of Bush's plug of cellulosic ethanol production. "We are supportive of the development of cellulosic ethanol but find it somewhat troubling that it seems right now to be a recent invention of the White House," Hamilton says, adding that based on a tour of NREL's cellulosic ethanol research facility a decade ago, it was his understanding that there have been few developments in the solutions to such production problems as economies of scale that make cellulosic ethanol production in the present impractical.

The Renewable Fuels Association (RFA) was encouraged by the fact that ethanol will be seen as an independent energy source, not simply an additive to gasoline. "The president recognizes that the future of ethanol is not just as a blending component, but as a replacement fuel in the form of E85," RFA President Bob Dinneen says.

The Natural Resources Defense Council (NRDC), an environmental action organization with 1.2 million members, says Bush's energy initiative falls well short of what the nation really needs—"a meaningful action plan for getting America off oil." The NRDC maintains that legislation introduced by a bi-partisan coalition of U.S. House and Senate members, the Fuel Choices for American Security Act, is much more meaningful and progressive than the president's plan and "would protect jobs now at risk in the auto sector and boost the market for fuels made from agricultural products grown right here at home."

Nathanael Greene, senior policy analyst for the NRDC, tells EPM there should be more of an emphasis on bringing new technologies to consumers in addition to research and development. Greene would like to see the administration focus on practical concerns in the development of cellulosic ethanol technology such as the government-backed loan guarantees outlined in the Energy Policy Act of 2005. "Investment bankers are unwilling to take risks on new technologies and companies such as Iogen [Corp.], which could start construction quickly in Idaho on a cellulosic ethanol plant if they could get a guaranteed loan," Green says. He says he is also concerned that the United States could lose out to countries like Canada or Germany in the development of cellulosic technology—"and end up following in an area where we should be a leader."

Hinging on the price of oil
It's true that Bush's State of the Union address pushed common ethanol industry terms like "cellulose" and "wood chips" straight into mainstream dialogue. However, those in the ethanol business know that it takes more than a "laundry list" of talking points, as one conservative radio talk show host said, to make cellulosic ethanol commercially viable.

"I think [Bush's commitment to cellulosic ethanol is] good—and it's about time," says Brian Duff, a biofuels consultant with BBI International Project Development. "But once the hoopla dies down, people will revert to the same questions about ethanol relating to economics and energy. … I think it's good to focus on it, but I think [the hype] is going to be temporary."

Hoopla, hype and jokes about a greener, grass-guzzling America aside, Duff says BBI International Project Development started noticing an increase in inquiries about cellulosic ethanol before the president's address. He points out that cellulosic ethanol production is practical but, at this point, just not economical. The rising cost of a barrel of crude oil may be changing the game, though. "When oil is at $30 a barrel, certain things are economic, but when oil is $60, other things become economic," Duff says. "The development of technology is directly linked to the price of oil."

Duff is quick to add that natural gas prices play the same role as oil prices, in that when natural gas becomes too expensive, the ethanol industry finds ways to get around it. Some plants are installing gasification technology, for example, that will help them cut down on energy costs. In that way, Duff says the ethanol industry doesn't rely on government-funded programs as much as some may think. "Companies are going to realize the benefit of using biomass energy feedstocks by themselves," Duff tells EPM. "American companies will turn to those solutions based solely on economics."

If Duff is right—if the economics of biomass utilization are, in fact, directly tied to oil prices—the next three decades look pretty good for cellulosic ethanol.

The EIA's recent adjustment of its prior expectations about world oil prices have come in light of current circumstances in oil markets. The EIA says that world oil prices have risen sharply since 2000 as supply has tightened, first as a result of strong demand growth in developing countries such as China, and later as a result of supply constraints resulting from disruptions and inadequate investment to meet demand growth. Taking all this into account, an "early release" of the EIA's Annual Energy Outlook 2006 includes much higher world oil prices than were projected in previous reports. In the 2006 report, world crude oil prices are projected to increase from $40.49 per barrel in 2004 to $54.08 per barrel in 2025 (2004 dollars)—about $21 per barrel higher than what was projected last year.

This has big implications for both the oil and ethanol industries. The most significant impact is on the outlook for U.S. petroleum imports, according to the EIA. Higher world oil prices reflected in the 2006 report lead to lower demand for petroleum products, and consequently lower levels of petroleum imports in the United States. Likewise, higher world oil prices are also projected to affect fuel choice and vehicle efficiency decisions in the transportation sector, which the EIA says bodes well for ethanol, flexible fuel vehicles and hybrids like Ford's E85-electric hybrid Escape concept vehicle.
Interestingly, the EIA is projecting "minimal market penetration" by hydrogen fuel cell vehicles in the next few decades.

Todd Alexander, a partner with the Project Finance Group at Chadbourne & Parke LLP, agrees with Duff that the price of oil will dictate how willing the federal government is to fund cellulosic ethanol projects. "Certainly, the higher oil prices stay, the federal government will be more interested in relieving economic pain to consumers," Alexander tells EPM. "If we wind up in a position of sustained petroleum prices in excess of $50 per barrel, it's more likely the federal government will lend a helping hand."

From the perspective of a company that helps ethanol plants with financing, Alexander says there is a benefit to all the mass media hype surrounding Bush's speech. The more mainstream ethanol becomes, the broader the spectrum of private equity money and other forms of finance will be. "The president is helping this come about, creating a shift in the mindset of the general public that ethanol is not just a small niche," Alexander says. "It will definitely be easier for people to raise more money."

Gordon Ommen of U.S. BioEnergy, which is currently building two dry mill ethanol plants, echoes that sentiment. "The direction our country is taking is that biofuels are going to be an important part of our future," Ommen tells EPM. "[The president] confirmed that direction. Biofuels are moving from being an additive in gasoline to being recognized as part of our fuel stream, and I think that's important."

Technology stakeholders hopeful, not stunned
Even though many professionals in the technology sectors were expecting to hear Bush verbalize the nation's relatively newfound commitment to using cellulose for the production of ethanol—thanks to their intimate ties with the DOE—it didn't make it any less exciting when the term "switchgrass" came out of the president's mouth in front of a listening national audience.

According to Gerson Santos-Leon, director of Abengoa Bioenergy R&D Inc., the DOE issued a Notice of Public Interest back in October in which the DOE sought guidance on how to structure the commercial demonstration of cellulosic ethanol production processes, and how to validate those projects. "Abengoa submitted ideas in response to the Notice of Public Interest," Santos-Leon says. "Then in December, the DOE announced how to proceed. The president's State of the Union address really announced to the nation that the executive branch supports the DOE's decisions."

Phil Madson, president of KATZEN International Inc., was also aware of the pending announcement prior to Jan. 31. "As far as the actual numbers, no, we didn't really know all of that," Madson tells EPM. "But we were certainly aware of the buzz. I think the announcement has much more public relations value than monetary value—I'm talking about the national attention and commitment to cellulosic ethanol."

While it certainly was invigorating to hear the president talk about lignocellulosic feedstocks like wood chips, stalks and switchgrass, ensuring that Congress fully funds this initiative is critical. "Last year, the DOE requested approximately $95 million, and when it got appropriated from Congress, they had approximately 60 percent of that earmarked for other programs," Santos says. "The discretionary funding for the DOE was only 40 percent of that $95 million." Santos-Leon is concerned that if overzealous earmarking chips away at this year's DOE request of $150 million, then this six-year timetable—the intent of which is to have commercially viable demonstration plants by then—might not be feasible.

Of course, the reemerging concerns about reluctant financial institutions being hesitant to take the risks associated with a relatively unproven industry have not been reconciled with this announcement. "Sadly, it's not been the lack of desire or the lack of technological opportunities for commercial demonstrations, but the lack of financial commitments," Madson says. "But certainly for commercial demonstrations, there's merit in the enthusiasm generated by the president's position."

One could look at this national exposure as a catalyst to change this trend of financial reluctance toward cellulosic production facilities, too. Raphael Katzen, professional engineer and founder of—but no longer affiliated with—KATZEN International, brings up similar financial situations that occurred with ethanol early in its development. "Years ago, the ethanol people were chasing after the financial groups for money," Katzen tells EPM. "Now, at various conferences like the ones BBI [International] holds, the financial groups are chasing after the ethanol people."

According to Murray Burke, vice president and general manager of SunOpta Inc., the provider of pretreatment technology for Abengoa's cellulose demo facility in Salamanca, Spain, the president putting cellulosic ethanol in the limelight was fantastic. "I applaud Mr. Bush for putting this in place and setting the policy," he says. "Also, I thank him for educating people in layman's terms as to what the differences are between ethanol from starch and ethanol from lignocellulosic materials." Burke wasn't surprised by the announcement either, but it still affected him. "We knew it would be an event," Burke tells EPM. "But, quite frankly, we were excited. This gives [the United States] potential to alleviate a massive energy security issue. Also, it will help transfer wealth from the Middle East to the Midwest, and I know I'd like to see that."

With the war in Iraq, rising oil prices, concerns over Iran and increasing volatility in the Middle East, Santos agrees that the content of the president's speech was very timely.

Katzen believes the first comprehensive report on biomass feedstocks jointly conducted by the USDA and DOE in April 2005—in which it is estimated that there is currently 1.3 billion tons of available biomass in the United States from wood waste and other sources—may have helped focus Bush's attention toward cellulose.

"The address was excellent," Katzen says. "I believe his concentration on energy needs is important. Moreover, the fact that we have a president who used to be an oil man and now he's pushing for renewable energies is amazing."
Although everyone in the industry is excited about this, caution and practicality are still necessary. "We are encouraged that the national attention is in this direction," Madson says. "But I always fear that excess enthusiasm leads to foolishness—and we need to temper that enthusiasm with serious business."

Jeff Broin, CEO of Sioux Falls, S.D.-based Broin Companies, tells EPM the president's support of ethanol is a shot in the arm for the entire biofuels movement. "His comments have sparked national attention on not only ethanol, but also on cellulosic ethanol conversion," he says. "Additional funding for cellulosic ethanol research could aid in advancing technology development during the next decade."

The Broin Companies have been working on cellulose-to-ethanol research for several years. Broin says that while several major challenges remain before the process can be commercialized, it may be possible sometime within the next decade. "Our companies will continue to dedicate a percentage of our resources to the advancement of these technologies," he says, adding that the two major obstacles that exist for cellulose-to-ethanol production include an effective and environmentally friendly pre-treatment process as well as a micro-organism that can convert the mixed sugars that come from biomass to ethanol.

Government labs expect big things
Government research labs are right in the middle of the president's plan, and that's got experts within the ranks of the USDA and DOE already fielding inquiries about cellulose. "It seems the president has created a lot of interest," says Hosein Shapouri, an agricultural economist for the USDA. "Since the address, I have had a number people call me looking for information on switchgrass and cellulosic ethanol." Roger Conway with the Office of Energy Policy and New Uses has also seen an increase in discussions about cellulosic ethanol. "There's been an explosion in public interest since the president's address," he tells EPM. "That's the motivation for the State of the Union address—to show vision and leadership to the American public."

The consensus among government types seems to be that the speech had a universally positive message that will be a driver for the development of the cellulosic ethanol industry. "This is a very special time in our history in energy," Shapouri says. "This is the best time to start building these plants with the RFS provisions and high oil prices." NREL's Michael Pacheco agrees, saying, "The time is right to invest in cellulose research and development."

NREL provided the president's staff with a lot of information to make sure everything he would deliver would be credible, Pacheco says. That information likely enabled Bush's speechwriters to incorporate details about cellulosic ethanol that is seldom talked about in the mass media. "I was thinking he would say cellulosic material," Shapouri says. "But he said switchgrass. That was a pleasure to hear."
Another general sentiment within the DOE seems to be that the speech was a bold move and is right on track for launching a domestic cellulosic ethanol program. "The president obviously thinks of cellulosic ethanol as a high priority," says Doug Faulkner of the DOE. "All ethanol is good whether it is cellulosic or starch based," Faulkner says.

Shapouri adds, "You have to be able to look beyond corn. The president has put confidence behind cellulosic ethanol with his speech." EP

The entire EPM editorial staff contributed to this report.