Capturing the California 'Golden Gallon'

Ethanol producers need to learn their corn oil destination by working with marketers.
By Geoff Cooper | September 15, 2014

Biodiesel produced from corn distillers oil (CDO) is assigned an extremely low carbon intensity (CI) score under the California Low Carbon Fuel Standard, making it a tremendously attractive compliance option for regulated parties. In fact, at just 4.0 grams of CO2-equivalent per mega joule (g/MJ), CDO biodiesel has the lowest CI score of any approved LCFS fuel pathway listed in Table 6 in the CI lookup tables. As an illustration of the high compliance value of CDO biodiesel, consider that blending just 1 gallon generates the same amount of LCFS credit in 2014 as blending nearly 13 gallons of ethanol with a CI score of 85 g/MJ. For these reasons, CDO biodiesel has earned the nickname of “the golden gallon” in the California market.

California Air Resources Board data show that use of CDO biodiesel has increased exponentially in the state, rising from virtually zero in 2011 and 2012 to more than 6 million gallons in each of the two most recent quarters for which data is available. In the first quarter this year, CDO-derived biodiesel accounted for more than 40 percent of the total volume of biodiesel used in California, according to CARB data.

In normal functioning markets, the high compliance value of CDO biodiesel would be reflected in the price buyers (i.e., regulated parties) are willing to pay for the fuel. Anecdotal evidence suggests sellers of CDO biodiesel may indeed be receiving a premium price for the fuel in the California market, but the size of such premiums is not publicly reported. However, because the market value of LCFS credits is a known variable, the theoretical price premium for CDO biodiesel can be easily approximated. For example, if the market price for one LCFS credit is $50 (the average price during Q1), regulated parties should be willing to pay a 59-cent-per-gallon premium for CDO biodiesel over forms of diesel that exactly meet the 2014 diesel CI requirement of 97.05 g/MJ. Average credit values peaked at $79 in December 2013, meaning regulated parties should have, in theory, been willing to pay a 94-cent-per-gallon premium for CDO biodiesel at that time.

It does not, however, appear that price premiums for CDO biodiesel are being shared with the upstream supply chain. There is no evidence that suppliers of the CDO feedstock (i.e., corn ethanol plants) are receiving any premium value for oil that is processed into biodiesel and delivered to the California market. Given that roughly 7.5 pounds of CDO are needed to produce 1 gallon of biodiesel, the CDO biodiesel premium associated with a $50 LCFS credit price would be equivalent to a price premium of nearly 8 cents per pound of CDO (versus CDO destined for other markets or uses where no compliance value exists).

Of course, the biodiesel producer selling CDO biodiesel into California at a premium would not likely pass along 100 percent of the “golden gallon” premium to the CDO supplier. Still, even if the biodiesel producer and the CDO producer split the premium 50/50, the CDO producer would theoretically see a four-cent-per-pound increase in the value of every pound of CDO provided to a biodiesel producer who is selling CDO biodiesel into California (assuming a credit value of $50).

When Theory Meets Reality
Like other products manufactured by corn ethanol facilities, CDO is often distributed by third-party marketing firms. Thus, the ethanol producer may not know whether his CDO is ultimately being used as animal feed or as feedstock for biodiesel (let alone feedstock for biodiesel that will be sold in California). Further, CDO is a commodity, and, like all commodities, its market price is determined by a complex set of supply and demand factors. As long as the primary use of CDO is as an animal feed ingredient, its market value will be largely determined by feed market dynamics and competing fats and oils. Thus, it will be difficult for corn ethanol facilities to capture the LCFS premium value for their CDO until demand for CDO-derived biodiesel in California is substantial enough to reorganize the CDO market structure.

Still, given the extremely high compliance value of CDO biodiesel in California, it may behoove ethanol producers who extract CDO to work with their marketers to track more closely the ultimate use of their CDO and consider efforts to better capture some of the additional value associated with the feedstock.

Finally, it should be noted that the life-cycle analysis behind CARB’s CI value for CDO biodiesel has been the subject of heated debate. Some have argued that CARB essentially treated CDO as a waste product from an ethanol dry mill, and thus the bulk of corn germ (oil) production and processing emissions (including prescribed indirect land use change emissions) were improperly allocated to the other products manufactured by the ethanol plant (i.e., fuel ethanol and distillers grains). Given the debate over CARB’s life-cycle analysis of CDO biodiesel, it is possible that the fuel’s CI score may be revised in the future to reflect potential changes to CARB’s calculations.

Author: Geoff Cooper
Senior Vice President,
Renewable Fuels Association
636-594-2284
GCooper@ethanolrfa.org



References:
-Table 6. Carbon Intensity Lookup Table for Gasoline and Fuels that Substitute for Gasoline, Table 6.  http://www.arb.ca.gov/fuels/lcfs/lu_tables_11282012.pdf
-LCFS Reporting Tool Quarterly Summaries. http://www.arb.ca.gov/fuels/lcfs/lrtqsummaries.htm
-LCFS Credit Trading Activity Reports.  http://www.arb.ca.gov/fuels/lcfs/lrtmonthlycreditreports.htm
-Life Cycle Associates LLC prepared a detailed discussion and analysis of the problems with CARB’s CDO biodiesel analysis, available here: http://www.arb.ca.gov/lists/lcfs11/5-unnasch_-_lcfs_corn_oil_bd_comments.pdf

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