Priming the Renewable Fuels Pump

Renewable fuels got the best holiday gift ever in December—an Energy Bill with an unprecedented 36 billion gallon renewable fuels standard. Right after it was signed, EPM talked with a number of corn-ethanol producers and those advocating cellulosics to gauge their reactions.
By | January 10, 2008
In August, U.S. Rep. Collin Peterson, D-Minn., and chair of the House Agriculture Committee, said a 36-billion gallon renewable fuels standard was "a bit much." In October, legislative aides to those in power said chances were slim that an Energy Bill would pass out of both chambers this year. By that time, penetrating media reports on ethanol's contribution to rising food prices, and its limited ability to achieve energy independence, were putting significant pressure on corn producers. Now, in late December shortly after the Energy Independence and Security Act of 2007 (H.R. 6) became law, the U.S. ethanol industry celebrates the landmark occasion and continues to decipher the bill—and its massive 36 billion gallon RFS.

One of the biggest winners in the Energy Bill is the next generation of ethanol. H.R. 6 is a step forward for all biofuels, especially cellulosic ethanol, says 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 says, 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 Chief Executive Officer Arnold Klann 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 nontraditional sources."

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," says Mitch Mandich, Range Fuels chief executive officer. Range Fuels recently broke ground on its 20 MMgy conversion refinery in Georgia. The company will employ a thermochemical conversion process taking wood chips to ethanol. 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, Mandich says. "Most are saying the enzymatic route is still four to five years out," he says. "Even then, big subsidies will be needed." The bill—as impressive as it is—still lacks appropriate incentives and financial support, Mandich says. "While we are pleased with the bill, it is only the first in a series of things needed," he says adding that the next step is the passing of a Farm Bill 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," he says.

Tom Bowers, chief executive officer of Colusa Biomass Energy Corp., a California-based company preparing to use the Sacramento Valley's rice straw to produce fuel-alcohol and sodium silicate, says the new Energy Bill will change the way people view harvest residues, if that's not already happened. "Not only will the residues have a value that makes them worth gathering and processing to ethanol and other chemicals, a whole new set of industries will be spawned that will give the rural and agricultural regions a new area to develop that will require thousands of local workers," he says.

Response from Current Producers
The bill should provide a shot in the arm for existing producers as well. Mark Hanson, a partner with the law firm Stoel Rives LLP says Congress' commitment to biofuels shows that ethanol and biodiesel will continue to grow and that should increase stability and help open new markets. "I think this new legislation will provide renewed comfort and stability to existing producers and in some cases opportunities for expansion," he says. "I think it is very encouraging that Congress has gone this far and provided support to the biofuels but that is not to say that we don't have a ways to go yet." The final version of the Energy Bill is more than 800 pages and it will take time to understand all of its implications. "In any large piece of legislation, a number of the provisions are fairly technical," he says. "They need to be that way because of the different areas they are involved in." The main thrust of bill is fairly clear, however, and will be good for the industry, according to Hanson. "The biggest thing for the industry is this: Congress again has affirmed that biofuels will be part of the fuel supply in an even greater way."

Industry giant Poet LLC applauded passage of the bill. "The Energy Bill obviously creates a solid foundation in gallons of demand in the cellulosic ethanol industry," says Poet Chief Executive Officer 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." Broin acknowledges that meeting the cellulosic goals in the time frame set by the bill will be a challenge. Poet, which operates 21 production facilities in the United States with six more being constructed or expanded, has invested a lot of resources into developing a cellulosic initiative called Project Liberty. It was one of six cellulosic projects funded this year by the U.S. 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 says. "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
The high volume included in the new RFS 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," says Mark Yancey, vice president of BBI International's project development division. "Just raising the current RFS 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." Ramping national production capacity of renewable fuels to 36 billion gallons won't 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 those goals through its technology, development and design efforts. BBI recently agreed to engineer cellulosic ethanol plants for Colusa Biomass Energy. In addition to engineering Colusa'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. In the meantime, there's essentially a mandate for 15 billion gallons of corn ethanol, he says, which should relieve a lot of concerns about the market.

For technology and construction companies like ICM Inc., the 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 Inc. and we'll continue to work with the starch base," says Greg Krissek, ICM's director of government affairs. "At the same time we'll keep pushing forward on the nonstarch opportunities. For us, that includes looking at things like corn fiber and 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 energy crops." The goal is to develop those areas and implement them in their existing family of plants.

Financial Considerations
"I think it was a long time coming," says Todd Taylor, a biofuels attorney with Fredrikson & Byron. "In fact, I'm surprised 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." The increased RFS should stabilize the traditional corn-based ethanol industry. "You may see a little difference in what people expect as far as consolidation," Taylor says. "There was a lot of talk going around that plants would start failing or be bought up cheap so they wouldn't 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."

The bill has already rekindled interest from financial markets in both corn-based and cellulosic ethanol, Taylor says. "This morning (Dec. 20) 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 says. 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. This will ease the mind of potential project backers and make more avenues of funding available, Taylor says. "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 says. "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."

Not Everybody 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 George W. 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 saying it will drive up costs to taxpayers and consumers and will compromise vehicle safety. In order to increase fuel efficiency, CEI says, manufacturers will have to build lighter cars and trucks, a move that will diminish the safety of the vehicles. "American families now face the prospect of paying more for food, gas and vehicles," says CEI Director of Energy Policy Myron Ebell. "Under the guise of addressing our energy problems, the Congress and president have made them worse."

Jerry Gidel, an associate with North America Risk Management Services Inc. specializing in the cash and futures grain markets, says at current price levels for feedstocks, construction and production overhead, the 9 billion gallon standard 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." He 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 a bushel on the Chicago Board of Trade. Projections into the beginning of 2009 put the price of corn at $4.50 a 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," Gidel says.

The American Petroleum Institute was another group opposed to some provisions in 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 says. "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 says. "As we move into the future, if the technological breakthroughs that people are predicting don't occur we need [a waiver]." EP

By Ron Kotrba, Anduin Kirkbride McElroy, Jerry W. Kram, Jessica Ebert, Susanne Retka Schill, Bryan Sims, Craig A. Johnson, Michael Shirek, Sarah Smith and Jessica Sobolik