Ethanol industry reacts to energy bill

By EPM staff | November 13, 2007
Web exclusive updated Dec. 20, 2007, at 3:58 p.m. CST

For industry-related provisions of the energy bill, see related article.

A day after the Energy Independence and Security Act of 2007 (H.R. 6) was signed into law, the U.S. ethanol industry continues to celebrate and decipher the landmark bill that creates a 36 billion gallon RFS and carves out a new future for the advanced biofuels.

RFS provisions in the energy bill. (Source: Renewable Fuels Association)

VeraSun Energy, the nation's largest dry-mill ethanol producer following its November merger with U.S. BioEnergy, is well positioned to capitalize on the amplified biofuels requirements over the next 15 years. "The renewable fuels standard underpins the growth of the industry by providing a clear and positive market signal for investment in new technologies, production, distribution and storage infrastructure," VeraSun Chairman and CEO Don Endres said in a written statement.

Industry giant Poet LLC also applauded the passage of the bill and especially what it means for the cellulosic industry. "The energy bill obviously creates a solid foundation in gallons of demand in the cellulosic ethanol industry," said Poet CEO Jeff Broin. "It will continue to drive research and development at Poet, within the industry and even outside the industry. It will drive research around the enzymes and microorganisms to make cellulosic ethanol development happen."

Cellulosic carve-outs
One of the biggest winners in the new energy bill is the next generation of ethanol. H.R. 6 is a big step forward for all biofuels, but especially cellulosic ethanol, said Carlos Riva, president and CEO of Verenium Corp. "The science [of cellulosic ethanol] is well known and understood, but there have been a number of challenges in scaling it up," he said, noting that the entire supply chain—starting with the agronomics—needs to develop. "By providing market access certainty, this legislation gives the whole supply chain confidence to continue to invest and develop at a much faster rate. This legislation will galvanize the industry to move forward to meet these goals and demands."

BlueFire Ethanol Fuels Inc. is also developing a commercial-scale cellulosic ethanol process. BlueFire's waste-to-ethanol technology earned the company a spot with five others to receive funding from the U.S. DOE for its proposed cellulosic ethanol plant that will convert landfill waste to ethanol in southern California. BlueFire CEO Arnold R. Klann said his company is pleased with the federal government's commitment to the biofuels industry. "Not only does the energy bill solidify America's goal of independence from foreign oil but it positions the [U.S.] as a world leader in the battle against global warming while simultaneously recognizing the need for increased biofuels production from non-traditional sources."

The high volume of the new standard means there should be no shortage of work for project developers in coming years. "I think people are really waking up and seeing that we need to do something large scale—we need something big if we're going to make a difference in the balance of trade and oil imports," said Mark Yancey, vice president of BBI International Project Development. "Just raising the ‘current' one to 15 billion gallons would have been nice, but that's still a small fraction of our fuel consumption. If we're going all the way to 36 billion it's showing that we need to produce more of our own fuel."

BBI recently agreed to engineer cellulosic ethanol plants for Colusa Biomass Energy Corp., a California-based company preparing to use the Sacramento Valley's abundance of rice straw for the production of fuel-alcohol and sodium silicate. Ramping national productive capacity of renewable fuels to 36 billion gallons will not come easy. "It's going to be tough to reach 36 billion gallons in 14 years, and the industry has a lot of work to do," Yancey says, adding that BBI will help meet these goals through our technology, development and design efforts. In addition to engineering CBEC's plants, BBI is working on developing its own internal projects. "There was already significant interest in cellulosic ethanol and this really adds more fuel to the fire of really moving cellulosic technologies forward," Yancey says. But, in the meantime, it really means there's essentially a mandate for 15 billion gallons of corn ethanol, he says, which should relieve a lot of concerns about the market.

Broin acknowledged that meeting the cellulosic goals in the timeframe set by the bill will be a challenge. Poet, which operates 21 production facilities in the United States with six more in construction or in the midst of expansion, has put a lot of resources into developing a cellulosic project called Project Liberty. It was one of six cellulosic projects funded this year by the DOE. "Six hundred million gallons of cellulosic ethanol in 2009 may be a bit challenging, but we believe that cellulosic ethanol can be commercialized sometime in the next five years," Broin said. "Project Liberty is scheduled to come on line in 2011. Certainly the energy bill does make obvious the market that will keep our company moving and keep developing the commercialization of cellulosic ethanol."

Project development
For technology and construction companies like ICM Inc., the new energy bill and particularly its RFS component sends a clear message that renewable fuels will become a bigger part of our energy equation. And with this greater role comes the opportunity and impetus for the industry to grow in new directions. "We've had great success providing starch-based technology through our partner Fagen and we will continue to work with the starch base," said Greg Krissek, director of government affairs for ICM. "At the same time we'll keep pushing forward on the non-starch opportunities. For us that includes looking at things like corn fiber as well as the work we're doing on the research and development and commercialization of all sorts of biomass feedstocks from agricultural residues like corn stover, wheat straw and sorghum stubble to the energy crops with the goal that what we develop in those areas can be implemented at our existing family of plants."

Although the new RFS certainly has the largest impact, Krissek also points out that whatever transpires in the farm bill will ultimately play a significant role in how the industry grows. "[Through these bills] there continues to be a lot of programs that help move research and development along as well as setting up the systems by which we grow these other energy crops."

Without significant pressure on technology providers, fuel distributors and automotive companies to optimize production, increase blending and warranty higher blends, respectively, much of the debate on renewable fuels is a vicious circle. "Part of this chicken and egg discussion has just been broken loose," said Mitch Mandich, Range Fuels CEO, which recently broke ground on its 20 MMgy conversion refinery in Georgia. The company will employ a thermo-chemical conversion process taking woodchips to ethanol.

Range Fuels CEO Mitch Mandich says the new RFS will put the "right type" of pressure on companies to further develop their technologies—specifically on enzyme manufacturers and those projects relying on them for hydrolysis pretreatment. "Most are saying the enzymatic route is still four to five years out," he said. "Even then, big subsidies will be needed." According to Mandich, the bill—as impressive as it is—still lacked appropriate incentives and financial support. "While we are pleased with the bill, it is only the first in a series of things needed." The next step is the passing of a farm bill, he says, with ample subsidies.

"Thirty-six billion gallons tells investors in the venture capital world, in the hedge fund world, that there is a market and will help free funds for companies—especially with federally backed loan guarantee programs," Mandich said.

Financial considerations
"I think it's terrific," said Todd Taylor, a biofuels attorney with Fredrikson & Byron. "I think it was a long time coming. In fact, I am surprised that they even got it done this year because a lot of reports were that we wouldn't see an energy bill or farm bill until the first quarter. So I know that a lot of the groups we were work with that are financing groups had a different feel to the market until the first and second quarter."

The increased RFS in the bill should have a stabilizing influence on the traditional corn-based ethanol industry. "You may see a little difference in what people expect as far as consolidation," Taylor said. "There was a lot of talk going around that plants would start failing or be bought up cheap because they didn't want to go broke because they couldn't sell their product. That dynamic will likely change now because a lot of people will feel with a new energy bill that they will be able to sell enough of their product so a lot of these shareholders and board members should not be in so much of a panic."

Taylor said the bill has already rekindled interest from financial markets in both corn-based and cellulosic ethanol. "This morning I already had a call from a bank looking for deal flow. Believe me, that hasn't happened in the last six to nine months," he said. Deal flow is the rate at which investment offers are presented to funding institutions.

One of the strengths of the bill is that it treats advanced biofuels separately from traditional ethanol. Taylor said this will ease the mind of potential project backers and make more avenues of funding available. "If you are a financing source and are going to drop three times as much money in a cellulosic or gasification plant as a traditional corn based ethanol plant, you wouldn't have done it," he said. "Now, there are government incentivized economic reasons for [investing in advanced biofuels]. So we are seeing more interest in the past few days from investment groups wanting to capture that 21 billion gallon market."

West Coast response
Neil Koehler, the CEO of Sacramento, Calif.-based Pacific Ethanol Inc., made a brief television appearance Thursday morning on MSNBC's Squawk Box to comment on the energy bill. "This is profoundly positive energy, economic and environmental policy for this country and truly … moves us very much on the road to energy independence, energy security and meaningful CO2 reductions," Koehler said.

When asked about the recent "glut" of ethanol on the market, Koehler said the situation has improved considerably and that the 2008 ethanol requirement established by the new energy bill—9 billion gallons—exceeds current supply. On the other hand, new ethanol plants coming on line in 2008 should again exceed the RFS requirement by 2 to 3 billion gallons. Even so, Koehler predicts a healthy market situation in the months ahead. "There will not by any glut of ethanol and, if anything, we will see a very snug balance between supply and demand," he said.

A spokesperson for the California-based New Fuels Alliance said Wednesday that the energy bill sets up significant opportunities for California consumers and businesses like Pacific Ethanol. "The RFS is critical to encouraging the research and development, production and use of clean-burning, renewable fuels," said Brooke Coleman, executive director of the NFA. "Liquid fuel markets are currently dominated by Big Oil, and this legislation will provide market security for dozens of companies located in California and elsewhere that are working to diversify our fuel options."

Duncan McFetridge, director of the California Renewable Fuels Partnership, believes California is well positioned to drive the next generation of biofuel production, as several research and development leaders in ethanol and biodiesel production are currently headquartered in the state. Moreover, feedstock for cellulosic ethanol and/or advanced biodiesel can be grown or harvested in California and surrounding states. "Sixty percent of the renewable fuel gallons required under the new RFS will be advanced biofuels, and California companies are critical to making this vision a reality," McFetridge said.

Not everyone is elated
Although H.R. 6 is receiving a warm welcome from biofuels producers and the agriculture industry, not everyone is lining up to praise Congress and President Bush. The Competitive Enterprises Institute (CEI) released a statement Wednesday titled "President Signs Anti-Energy Bill." The group objects to the Energy Independence and Security Act of 2007 as a bill that will drive up costs to taxpayers and consumers and will compromise the safety of vehicles. In order to increase fuel efficiency, CEI said, manufacturers will have to build cars and trucks lighter, a move that will diminish the safety of the vehicles.

"American families now face the prospect of paying more for food, gas and vehicles," said CEI Director of Energy Policy Myron Ebell. "Under the guise of addressing our energy problems, the Congress and president have made them worse."

"There were a lot of questionable provisions in the energy bill, but making fuel economy rules more strict is by far the worst of the lot," said CEI General Counsel Sam Kazman. "Subsidizing inefficient technologies and raising consumer prices is bad enough, but Congress and the White House should have drawn the line at taking more American lives."

The American Petroleum Institute was another group in opposition to the passage of the energy bill. According to Al Mannato, API fuels issues manager, some parts of the bill were satisfactory, while others weren't. "We're concerned about the size of the renewable fuels standard that was passed, and basically we think we need a reasonable and workable standard," he said. "Also, the provisions aren't as comprehensive as they should have been. There are some advanced biofuels that aren't covered, but most are, so we're happy about that." Although a federal RFS has passed, U.S. states are still free to create their own varying fuel mandates. "That's a real concern because if you want to get renewables into the marketplace in the most efficient way, we now have a large federal program that says how to do it in a complicated way, and [individual state legislation] could make it even more complicated."

The API was pleased with at least one provision: a waiver for cellulosic biofuels if the minimum volume requirement isn't met. "That was very important and one of the things we tried to get into that legislation," Mannato said. "As we move into the future, if the technological breakthroughs that people are predicting don't occur, we need [a waiver]."

Jerry Gidel is an associate with North America Risk Management Services Inc. specializing in the cash and futures grain markets. According to Gidel, at current price levels for feedstocks, construction and production overhead, the 9 billion gallon standard that is called for in 2009 is not enough. "[The act] isn't super friendly to the market … the mandates are not high enough in comparison to capacity."

Gidel thinks the energy bill will give the struggling ethanol industry some buoyancy heading into 2008, but will do little to actually increase margins for producers. In order for that to happen, Gidel is watching oil prices and corn futures. As of the end of December 2007, December 2008 corn is selling for $4.40/bushel at the Chicago Board of Trade. Projections into the beginning of 2009 put the price of corn at $4.50/bushel or higher. Unless crude oil prices stay high—or go higher—the mandate may not have much effect on the demand for ethanol. "There's been a lot of talk about changing [the 10 percent ceiling for ethanol blended with gasoline] which could increase demand by a factor."

Visit Ethanol Producer Magazine for further industry reaction to the 2007 energy bill.