The Energy Bill's Sleeper Cellulose Provisions

Tucked within the 1,700 pages of the Energy Policy Act of 2005 are a number of provisions intended to help jumpstart the commercialization of cellulosic ethanol in the United States. Considering the long-term outlook for oil prices, some experts believe biomass will soon fill petroleum's proverbial shoes. Can legislation get cellulose-to-ethanol on its feet?
By Kory Wallen | March 01, 2006
Take a close look. It's in there.

The U.S. renewable fuel standard (RFS) defines cellulosic ethanol as ethanol derived from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. It's a blanket definition that includes "dedicated energy crops," trees, wood and crop residues, grasses, fibers and just about every other non-petroleum waste imaginable. And here's the beauty of it. The RFS provides—if not in appropriations, in law—the economic apparatuses to start producing fuel from these underutilized domestic resources now, in this decade.

The truth of the matter, however, is that until President George W. Bush dropped the "switchgrass" bombshell in his Jan. 31 State of the Union address, hardly anyone in America was talking about cellulose-to-ethanol, and the mainstream ethanol industry seemed to have more immediate concerns. For most, cellulose was simply a distant hope.

Here's why. The cellulosic ethanol provisions of the RFS have been largely overshadowed by the corn-to-ethanol industry's fast and furious industry expansion en route to the 7.5 billion-gallon floor required by the RFS in 2012. Industry experts say there's also been an underlying lack of faith, not in the promise of cellulosic ethanol, but in the existing technologies to produce it. As the old saying goes, "Be not the first by whom the new are tried, nor yet the last to lay the old aside."

Don't expect American producers to lay grain-based ethanol aside in this decade or the next, but it's fair to say that companies engaged in cellulosic ethanol are already in good company. Almost every major ethanol producer in America is taking a close look at cellulose—or even participating in R&D—and many say it's simply a matter of time before the industry is eating up more than just grain.

Worldwide, the stars are aligned for biomass utilization. The walls that once stood in the way of cellulosic ethanol are crumbling—and the ethanol industry is watching and waiting. "There are three reasons why cellulosic ethanol wasn't economical before," says Brian Duff, project manager for BBI International Project Development. "The cost of oil, the cost of enzymes and the high cost of building a plant."
Now, that's all changing. The era of cheap oil is over, the cost of enzymes needed to make cellulosic ethanol, once prohibitively high, has fallen exponentially, and companies like Canada's Iogen Corp. are itching to get into the big league with their process technologies.
That's where the RFS might help. But pulling apart the energy bill and clarifying how certain RFS provisions will be enacted will be a long and tedious process. "The Energy Policy Act of 2005 is the most aggressive pro-cellulose policy language of any government in the world," says Jeff Passmore, executive vice president of Iogen Corp. "The issue now is, how will we implement the Energy Policy Act and get what was authorized actually done?"

How the implementation of these provisions may come to be is unclear, but the importance they may play in the years ahead is starting to come into focus. A handful of RFS provisions are designed to promote the development and use of cellulosic ethanol in the United States. To grasp the full potential of the bill, Passmore says it's important to think about the provisions collectively. "You have to look at the cellulose provisions in the energy bill as a complete package," he says, qualifying his advice by saying that three specific provisions stand out among several. According to Passmore, here's what probably will count the most to would-be producers:

  • A provision that allows oil companies to treat one gallon of cellulosic ethanol as 2.5 gallons of grain ethanol in fulfilling their obligation to meet the renewable fuels requirement of the RFS.

  • A provision that requires at least 250 MMgy of the 7.5 billion gallons of ethanol produced under the RFS to come from cellulosic ethanol post-2012.

  • A provision that provides federal loan guarantees on up to $250 million of debt for qualified cellulose-to-ethanol plant developers.

  • As the industry moves towards the 7.5 billion-gallon RFS target, the energy bill allows a 2.5:1 per gallon trading bias for cellulosic ethanol. In other words, for every gallon of cellulosic ethanol a refiner blends, it would receive a credit as if 2.5 gallons of grain-based ethanol were used. The existing VEETC legislation that allows blenders to receive a 51-cent tax credit for every gallon of ethanol blended will not be magnified by 2.5 with this cellulose provision. "This is exclusively a trading scheme," Passmore explains.

    "The bottom line is that this will help us reach the 7.5 billion gallons quicker," Duff says. "It allows oil companies to blend less cellulosic ethanol and still be compliant with the [2.78] percent of their gasoline sales that is now required to be comprised of ethanol." Giving cellulosic ethanol 2.5 times the credit as grain ethanol certainly holds value while the nation races toward the 7.5 billion target. However, the provision would likely hold little value after that goal is met, unless the RFS is extended. Industry experts say oil refiners likely see this provision as a "cost saver" because, for example, they might only have to retrofit one refinery, rather than two, to incorporate ethanol blending. The blending ratio provision will expire in 2013 as a new cellulosic ethanol mandate begins.

    No less than 250 million gallons of the 7.5 billion gallons of ethanol produced under the RFS post-2012 must come from cellulosic ethanol. If the government expects to see 250 MMgy of cellulosic ethanol, that could easily be done with four 60 MMgy plants, Passmore says. While the industry today could raise capital and build four grain-based plants of that size in 18 months, building a single cellulosic ethanol plant that large—let alone four—is easier said than done. With only Iogen's demonstration-scale cellulose-to-ethanol plant producing a small amount of wheat-straw-based ethanol today, estimating the cost of constructing a commercial-scale plant requires guesswork. Most experts say the cost would be three to four times greater than the capital needed for a grain-based plant of equal capacity Operating costs would be less, however.

    The loan guarantee program outlined in the legislation has particular appeal to future producers. The program provides the project owner/developer with a loan guarantee, backed by the federal government, up to a maximum of $250 million. "The reason that this provision is important is because it is very difficult to commercialize new technology," Passmore says. "All new technology has a problem raising debt." Hence, conventional lenders would be able to lend debt to qualifying cellulosic ethanol projects if that debt was backed by a strong credit rating, such as the government.

    "To put it simply, the provision states that to make it easier for potential producers to get capital, the government has said, ‘If you qualify, you will get a government guarantee on that debt,'" Passmore explains.

    So now qualifying has become the operative word. But what qualifies a producer to receive a loan guarantee? To make sure the companies coming forward to receive these loan guarantees are credible and pushing viable projects, the federal government has set certain criteria in the RFS that will have to be met. "It's sensible that the government has done that," Passmore says. "You have to make sure you are making a prudent decision on behalf of the taxpayers." The loan program was developed as an 80/20 debt-to-equity split with a maximum of $250 million in government-backed loan guarantees on debt. With cellulosic ethanol plants coming with an estimated price tag in the $350 million range, companies would be looking to raise $80 million to $100 million from the private sector (i.e., 20 percent equity) before the government could consider issuing them loan guarantees. "The equity has to be at the table," Passmore says. "A company can't come in and get a loan guarantee if it doesn't already have the equity raised." Secondly, a company must have a demonstration plant producing cellulosic ethanol and have a proposed plant with a minimum nameplate production capacity of 30 MMgy to qualify.

    The future direction of cellulosic ethanol has yet to be written. The U.S. Congress has set the guidelines—now it's up to the industry to deliver on them. "Congress is hoping that the loan guarantee program will be significant in stimulating the development of cellulose ethanol in the U.S. between now and 2012," Passmore says. "The loan guarantee program should help get plants financed … and financing everyone's largest hurdle today."

    There are no guarantees that these cellulosic provisions will spark an industry dominated by cellulosic ethanol. "All Congress can do now is watch and see if any companies will come forward and respond with qualifying projects," Passmore says.

    If they don't, one of two things can be said. Either the industry simply isn't ready to move towards cellulosic ethanol, or Congress didn't go far enough to "incentivize" such a leap. "It would be premature to make conclusions about cellulosic provisions today," Passmore says. "We will have to see what they are and how the administration and various departments are going to implement them."

    Interestingly, Duff says high oil prices provide more of an incentive for cellulosic ethanol production than the energy bill does. "The provisions in the RFS are simply an added bonus for prospective producers," he says, explaining that the cost a crude oil is the real determining factor of biomass utilization.

    If and when a cellulose-to-ethanol industry does take off in America, experts say it will probably start small and conservatively. They say the industry should expect to see smaller cellulosic plants as a result of construction costs and availability of technologies. For example, a plant producing cellulosic ethanol from enzymatic hydrolysis uses a thermo-chemical process that uses acids to separate the cellulose from various lignocellulosic materials. This process would require acid-resistant metals, such as Carpenter 20, whereas conventional corn-to-ethanol plants can use stainless or conventional steel. That's the type of building-cost deterrent that would have to be overcome.
    Eventually, after the process is proven and accepted, plants would likely increase in size. "You could get into bigger plants running on corn stover that could be upwards of 60, 80 or 100 million gallons per year," Passmore predicts.

    Other provisions in the RFS for cellulosic ethanol include a number of grants earmarked for R&D. Over $700 million would go into the U.S. DOE's Bioenergy Program. The U.S. EPA would receive $550 million for research on advanced biofuels technologies.

    In the end, what the energy bill accomplishes is altering the business landscape to a point where companies are forced to at least take a very serious look at the United States as a market for cellulosic ethanol commercialization. "It's Iogen's intention to continue to work with the U.S. government to try and get a plant commercialized," Passmore says. Now with multiple provisions in motion, and new technologies and other key factors making cellulosic ethanol more economical, Passmore and Duff see the industry taking off. "If oil prices stay above $45 a barrel, it makes a lot of technologies economical, and cellulosic ethanol is one of them," Duff says.

    Kory Wallen is an Ethanol Producer Magazine staff writer. Reach him at [email protected] or (701) 746-8385.