Inside Insight

FROM THE JANUARY ISSUE: To kick off the new year, we rounded up a few experts to discuss five main industry topics: exports, policy, production, finance and technology. Find out what they said.
By Lisa Gibson | December 20, 2017

As we head into 2018, ethanol producers have plenty to think about and likely have predictions for how the year will play out. This month, Ethanol Producer Magazine rounded up a few experts to discuss five main industry topics: exports, policy, technology, production and finance. They look ahead, compare 2018 with 2017 and provide a roadmap for the new year. Here's what they have to say. 


Thomas Sleight
President and CEO
U.S. Grains Council

Q. What are the most promising export markets for ethanol producers in 2018, and how do they differ from 2017’s top prospects?
A. Our ethanol export market development program is truly global, with the chief difference between 2017 and 2018 being the broadening scope of activities across more markets as we build partnerships with countries developing their own ethanol policies. That said, we have a priority list that currently includes markets with major potential and, sometimes, major challenges: Brazil, Canada, China, India, Japan and Mexico. The commonality among these players is shifting policies with regard to biofuel mandates and a need for information and policy development related to the role trade plays in meeting those mandates in tandem with local production.

Q. Why do these markets hold promise and what is being done to develop them?
A. Our partner markets are generally countries looking to enhance their use of biofuels to meet policy goals that include greenhouse gas emissions reductions to achieve Paris Agreement commitments (Canada, Brazil and Japan) or countries with large and growing populations and serious air quality issues also seeking to boost rural economic benefits (Mexico, China and India). Like with our corn and DDGS market development work, each country has its own plan of action, including a mix of technical assistance, bringing trade teams to the U.S. for tours of our own industry’s set-up, and working directly with policy makers, industry, local media and others. While ethanol market development is more policy focused than grains market development, the same principles apply.   

Q. The ethanol industry saw changes to some major markets (China and Brazil) in 2017 because of new tariffs. Is there any talk of similar moves in other major export destinations for this year?
A. The policy landscape for ethanol exports is dynamic in ways that both enhance and hinder our efforts to build demand globally. China and Brazil both presented unexpected challenges to existing markets. We are actively and creatively working on both of these issues with our industry partners, our own government and with those in these countries who recognize the important role imports have in meeting national mandates. We know from experience that this work requires extreme diligence in following potential policy-based threats as part of larger strategies customized for the needs and conditions of each individual potential export partner. At the same time, we are expanding our activities into new markets to head off changes in policy that restrict market access.

Q. Are there any expected changes to transportation infrastructure that could impact, positively or negatively, export markets or access to them?
A. Increasing ethanol exports from the U.S. will require strong infrastructure in both our own supply chain and at destination locations. We know from promoting grains for more than 60 years that well-functioning infrastructure—fast, reliable, maintains quality of the product—is critical to meeting our customers’ expectations and keeping them buying from us. The U.S. industry sees exports as the future growth opportunity and is making investments accordingly. We also work with our domestic partners to ensure the ethanol industry’s needs make it into the federal prioritization process. Like building demand, improving infrastructure requires intensive planning and long-term engagement.

Bob Dinneen

President, CEO
Renewable Fuels Association

Q. What would you consider the biggest federal policy wins of 2017, and why? What do they mean going into 2018?
A. Without a doubt, the biggest policy wins included EPA finalizing the 2018 Renewable Fuel Standard renewable volume obligations on time and maintaining the statutory 15 billion-gallon requirement for conventional renewable fuels like corn ethanol. Maintaining the 15 billion-gallon conventional biofuel requirement will accelerate investments in the infrastructure necessary to distribute mid-level ethanol blends like E15 and E30, and flex fuels like E85. For 2018, that means EPA continues to help promote and support the domestic biofuels industry.

Q. What were the largest federal policy challenges or disappointments of 2017, and why? What can be done to mitigate their negative effects?
A. Among the continued disappointments is that consumers are still being denied year-round access to E15. Due to an outdated EPA regulation, retail gas stations are essentially prohibited from selling E15 in more than two-thirds of the nation’s gasoline market during the summer ozone-control season, from June 1 to Sept. 15. EPA’s nonsensical and disparate Reid vapor pressure regulation of allowing E10, but not E15, during the summer months offers no consumer or environmental benefit whatsoever. Whether through legislative or administrative action, securing equal RVP treatment for all ethanol blends remains our top priority.

Q. EPA Administrator Scott Pruitt says he has directed the EPA to explore whether it has the legal authority to issue a nationwide Reid vapor pressure waiver for E15. Do you think this signals meaningful progress toward a waiver in 2018? Why or why not?
A. Yes. Again, EPA has the authority to extend RVP parity with E15. We want to make sure all consumers have access to E15, whether it’s February, July or December. Nearly 90 percent of new 2018 model year vehicles are explicitly approved by the manufacturer to use E15 and likewise, more than 90 percent of the vehicles on the road were built in 2001 or later, meaning they are legally approved by EPA to use E15. We want to ensure year-round consumer access to E15.

Q. What other far-reaching changes could be implemented in 2018?
A. Another high-priority issue for RFA in 2018 is to ensure there is free trade of ethanol around the world, ending nonsensical tariff and nontariff barriers to trade, such as those imposed by China and Brazil, and continuing to grow the production and use of conventional and cellulosic biofuels. Ethanol provides tremendous economic, environmental and energy-security benefits and we want consumers around the globe to have access to the lowest-cost, cleanest and highest-octane fuel. Additionally, we will continue to push for higher-level ethanol blends as auto manufacturers move toward higher-octane fuels. A high-octane, low-carbon ethanol blend in optimized engines would be the lowest-cost means of achieving compliance with fuel economy and greenhouse gas standards in the future.

Q. What are RFA’s biggest federal policy goals for 2018?
A. Maintaining a strong RFS, ensuring year-round access to E15, growth of high-octane, mid-level ethanol blends to meet future fuel economy and greenhouse gas standards, and growing production and use of conventional and cellulosic biofuels.

Matt Haakenstad
Vice President of Advisory Services
Kinect Energy Group

Q. What technologies were ethanol plants most interested in in 2017?
A. • Combined-heat-and-power (CHP) technologies. Conventional CHP inquiries increased due to increasing electric costs combined with concerns about electric reliability.  Plants also have an interest in reducing emissions and reducing the cost of compliance, and this has driven interest in exploring emerging CHP technologies with the potential for reduced emissions.

• Renewable energy projects, including solar and wind. Solar received the most inquiries due to continued price declines improving project economics.

Q. What drove those investments, and did they work?
A. Boosting plant efficiency is high priority for plants that have been operating for five to 10 years, or more. There are opportunities to replace aging equipment and potentially remove constraints with more efficient technologies, at an acceptable return on investment.

Lowering emissions is also a driver, especially for plants that are using the Efficient Producer petition process to increase volumes that can generate renewable identification numbers (RINs).

Reducing operating cost is a priority for plants—and, indeed, many of the renewable energy or CHP projects being considered reduce costs.
Q. Financial advisers often suggest diversification. What are some of the common ways ethanol plants are doing that through new technologies?
A. Onsite power generation can be a diversification play, in addition to being an economic or financial investment. Diversity of electric supply means beyond the grid—whether from solar, wind, or natural gas-fired CHP. Many plants are now considering microgrids for at least a portion of their electric load in order to avoid a catastrophic loss of production due to a power outage. A microgrid permits the plant to “island” all or a portion of its process loads, to help protect and insulate it from disturbances on the power grid due to weather events, maintenance issues or other external factors.

Q. What do you expect will be the driving force behind technology investments on the part of ethanol plants in 2018?
A. Key technology investment drivers will likely include:

• Cost reduction: Plants are paying increased attention to the bottom line as the industry has matured and become more cost competitive.

• Resiliency: Facilities are taking steps to be able to stay online even when the grid is down, through some form of onsite power production. 

• Value maximization: Plants are exploring ways to increase the value of their ethanol product, through improved efficiency and lower carbon intensity (CI). Lower CI lets plants produce RINs for volumes above the grandfathered level.

• Increased production: Many plants are seeking capital-efficient ways to produce more ethanol. CHP, in particular, is a potential vehicle.

Q. What kinds of new technologies are being developed that you think could be widely used this year?
A. Renewable energy technologies are advancing at a phenomenal pace, especially for solar energy systems. Not only are costs dropping rapidly, but panel power density is improving each year, resulting in less acreage and capital needed for the same watt output per square foot.

Battery costs are also falling precipitously, providing plants with the option to make greater use of renewable energy generated from solar or wind.

Finally, some plants are investigating in emerging CHP technologies to help destroy volatile organic compound emissions much more efficiently than through the classic approach of thermal oxidation.

Ron Alverson

Board Member, Dakota Ethanol LLC
Chairman of the Board, American Coalition for Ethanol

Q. What was the biggest challenge producers faced in 2017, and what do you anticipate could be the biggest challenge of 2018?
A. Ethanol producers enjoyed low-cost corn in 2017, but ethanol sales prices were also low. Compared to many preceding years, the volatility of input costs and selling values were very low, resulting in steady but modest net income per month.
Looking forward to 2018, corn supplies look to be low priced again and other input costs look to be flat. 2017 is on track to set a new record for ethanol exports, and we are cautiously optimistic that China may provide new ethanol export opportunities in the coming years. However, the Brazilian tariff on ethanol imports is a great concern and may negatively impact ethanol demand.

Q. What were some of the main strategies producers implemented to increase efficiency or revenues in 2017? Will those strategies change at all in 2018?
A. Ethanol companies have always strived to increase efficiency, and 2017 was no different. Several new production technologies that improve efficiency have been developed that reduce energy, enzyme, yeast, and other chemical use at plants, improve yields and result in new coproducts. Corn that grows its own enzymes (Enogen), dry fractionation, cellulosic ethanol from corn kernel fiber (ACE), and energy use efficiency (municipal-solid-waste energy recovery) are examples. These efficiency improvements are incentivized in part by the California LCFS and Federal RFS provisions that reward producers for lowering carbon intensity. I don’t see any of this slowing or changing in 2018.

Q. What efforts can be taken by producers and trade organizations to help increase demand for ethanol, further grow domestic markets and encourage higher blends?
A. Each trade organization has and will continue to make unique contributions to those efforts. Programs and private businesses that install blender pumps deserve much support. These are critical infrastructure investments that have to be made. 
On the political side, work with the EPA on RFS issues are ongoing. We also continue to work with low-carbon fuel market administrators in California and Oregon to ensure that corn ethanol has a fit in their transportation fuel greenhouse gas reduction programs. 
Q. Is Dakota Ethanol planning any expansions or diversifications? If so, what are those plans?
A. At Dakota Ethanol, as is the case in most ethanol plants, debottlenecking, efficiency and new energy-reduction technologies are almost constantly being evaluated and deployed. Several plans are being evaluated currently at Dakota Ethanol, but it’s too soon to say if they will be feasible. 

Q. What are the main goals ACE will work toward for the ethanol industry in 2018?
A. Efforts to educate potential ethanol fuel blenders and retailers are a priority. Ethanol exports have rapidly increased the past few years, so efforts in this area are ramping up. On the regulatory side, we continue to push for Reid vapor pressure relief, and defend the RFS legislation. And because ethanol fuel has unique attributes (low life-cycle GHGs, high octane and oxygen content) that provide transportation sector GHG and toxic emission reductions, we actively support strong federal Corporate Average Fuel Economy standards, low carbon fuel programs, and other transportation fuel emission reduction efforts.

John Christianson
Managing Partner
Christianson PLLP

Q. Overall, how were margins for ethanol producers in 2017? What are your predictions for 2018?
A. Margins in 2017 were comparable to those seen in the two previous years. EBITDA (average earnings before interest, tax, depreciation and amortization) is down about 4 cents per production gallon over 2016, but is virtually identical to the 2015 average. The most profitable 25 percent of plants in our survey reached over 20 cents per gallon, and even the least profitable 25 percent were able to deliver some earnings on average. The marketplace has concerns about overproduction for 2018, creating some downward pressure on prices. We are optimistic that continued interest from the global market, and increased availability of higher-blend products like E15, will help keep margins relatively stable in the year ahead.

Q. In general, was a lot of debt paid off in 2017? Will 2018 allow more debt payment and why/why not?
A. About a quarter of plants have held essentially no long-term debt for the past several years. 2017 held to this pattern, with even more plants able to completely pay off debt obligations. On average, long-term liabilities for an average ethanol plant were about 13 cents per production gallon in 2017, a number that has decreased steadily over the past few years. Even plants with substantially higher debt levels were able to pay them down in 2017. If margins hold steady as expected in 2018, debt repayment will likely continue at a similar pace. But some plants are opting to make investments or dividends a priority over further debt reduction.

Q. What types of projects are ethanol plants investing in (bolt-on coproduct systems, efficiency improvements, emissions control, debottlenecking, etc.)? Why?
A. While we’re still seeing projects that focus on production increases and debottlenecking, we’re starting to see increased investment in value-added coproducts to diversify revenue streams. Energy efficiency investments are also on the rise, as plants seek to reduce cost and the carbon impact. And many plants are approaching or beyond the 10-year age mark, so they are starting to look at replacing large capex items.

Q. How can smaller plants stay competitive?
A. Identifying their more meaningful advantage—low corn prices, superior logistics or quality operations teams—will help. Openness to innovation is another way a small plant can stay competitive—new technology always involves risk, but there is no question that new processes, enzymes or technologies can pay off bigger for early adopters. Some successful smaller plants are also finding that local initiatives such as E30 campaigns, or partnerships with fuel stations to place and brand more E15 pumps, are meeting with success.

Q. Do you foresee any changes to financing programs of use to ethanol producers, or any completely new programs in 2018? 
A. Program funding through the USDA and DOE are always in question during budget cycles. Most of the programs are focused to provide an incentive to improve energy efficiency, plant efficiency, and plant production. Two common federal grant programs include the Value Added Producer Grant and the Rural Energy for America Program, and each state offers unique funding sources, as well.

Q. What tips do you have for producers to get through the up and down cycles the ethanol industry faces?
A. First, focus on feedstock: good relationships with elevators and farmers are critical. Make sure storage is adequate. Next, hire the best managers and operators you can find, and make sure you keep them. Finally, maintaining excellent communication between the board and investors is critical, during up cycles and down cycles.

Author: Lisa Gibson
Managing Editor, Ethanol Producer Magazine