Ethanol Has Arrived

The 2006 National Ethanol Conference: Policy & Marketing, the ethanol industry's premier winter event, was sold out and buzzing with energy this year as the industry's extraordinary expansion seems to intensify by the day. The Renewable Fuels Association's 11th annual conference marked not only the celebration landmark policy achievements in 2005, but the trade group's own 25-year anniversary.
By Jessica Williams and Tom Bryan | April 01, 2006
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If good things come to those who wait, then perhaps great things come to those who wait and work and work and work—for a quarter of a century—and then, after victory, jump right back into action.

By and large, that's what the Renewable Fuels Association (RFA) has done—and is doing—for the U.S. ethanol industry. Since its inception in 1981, the RFA has worked for, and worked with, America's ethanol producers, serving as the "Voice of the Ethanol Industry." The RFA has functioned as both a trade organization and advocacy group supporting and effectively lobbying for the increased production and use of ethanol through federal policies, regulations and R&D initiatives.

The National Ethanol Conference: Policy & Marketing is the association's flagship event. By design, it's not an extremely large conference—attendance was capped at 1,400 this year—nor a technical one. Rather, as its name suggests, the event is primarily focused on the national marketplace for ethanol, the business of buying and selling the renewable fuel, and the implementation of federal policies that help drive those transactions. The National Ethanol Conference, hands down, is an event that every ethanol industry executive, marketer, lobbyist, dealmaker, fuel components buyer and financial power player must attend each year. Industry sources say a majority of all summer ethanol contracts are sealed during the two-day event—and conversations that lead to multi-million dollar deals, even ethanol plant acquisitions, are not uncommon there.

The 2006 National Ethanol Conference, held Feb. 20-22 in Las Vegas, Nev., was distinctive because it was the industry's first major gathering since 2005, a year widely considered to be a legislative and technological turning point for the industry.
So it was fitting that this year, the RFA's 25th anniversary, is one marked by such advancement, magnification and consequence. RFA President and CEO Bob Dinneen captured the magnitude of it all in his State of the Industry address at the 11th annual event when he verbalized an impression probably shared by nearly everyone in the packed opening session. "The ethanol industry has arrived!" he declared with fervor, adding that 2005 will be remembered as a "seminal year in the history of the U.S. fuel ethanol industry"—principally because the renewable fuels standard (RFS) was successfully integrated into the Energy Policy Act of 2005.

Accept default standard, wait for credit-trading

Not by coincidence, the event's first panel discussion addressed that very topic, albeit from a different angle. The meticulous details of RFS implementation, a hot issue following the passage of the energy bill, was explained by Chuck Knauss of law firm Swidler Berlin LLP, Paul Machiele of the U.S. EPA, Charlie Drevna of the National Petrochemical & Refiners Association and Jim Redding of Aventine Renewable Energy Inc.

A week before the conference, the EPA had signed off on the elimination of a 2 percent oxygenate in reformulated gasoline, which will go into effect in California on April 24 and nationwide May 5. The EPA will later write new oxygenate regulations that will include renewable fuels. To cover the rest of 2006, the EPA signed off on a default standard, which states 2.78 percent of domestic fuel must include ethanol or biodiesel, effective March 1. "The default standard needed to go into effect in 2006 to provide market certainty and stability," Machiele said. "This applies to refiners, blenders and importers collectively across the country as opposed to individually. It's the equivalent of about 4 billion gallons, which we recognized was likely to be met in 2006 because it already was in 2005." Later, the EPA will develop a more individually tailored standard.

With 2006 covered, the EPA's 2007 priority is to establish a credit-trading program that producers, first-time purchasers and blenders can take part in. The credits could vary between different renewable fuels, Machiele said.

Is a carbohydrate-driven world emerging?

Earlier, in Dinneen's tone-setting speech, he echoed what the industry is now experiencing: extraordinary activity and sheer growth. The last 12 months have been a period defined by the unveiling of new technologies, new markets and, across America, "a growing appreciation for the role ethanol can—and will—play in our nation's energy future," Dinneen said. "The state of the ethanol industry is sound, and its future is bright. … Ethanol has moved from a niche source of octane in the Midwest to a national and ubiquitous component of the U.S. transportation fuels market. Ethanol today is blended in more than a third of the nation's gasoline supply. It is used quite literally from coast to coast and from border to border. My friends, ethanol has arrived!"

The United States is not alone, Dinneen said. Nations around the world are benefiting from the economic, environmental and energy security benefits of ethanol. "This is not just a U.S. phenomenon," he said. "Ethanol production and use is growing worldwide, as every corner of the globe seeks the … benefits of indigenous biofuels production."

Approximately 60 percent of the 12 billion gallons of ethanol produced worldwide last year was derived from sugar, Dinneen said, explaining that the renewable fuel is now a driving force in the world sugar market. Leading the sugar-to-ethanol charge, of course, is Brazil, the world's largest ethanol producer—but perhaps not for long. "The United States is now poised to overtake Brazil and become the world's leading producer of ethanol this year," Dinneen said.

The impetus for America's ethanol capacity surge was, for the most part, the passing of the RFS coupled with high oil prices. Other factors, such as President George W. Bush's recent mention of cellulosic ethanol in his State of the Union address also boosted the renewable fuel's public perception, not to mention investor interest. To the surprise of some, Bush, a former oil man from Texas, has become one of the ethanol industry's closest and most valuable allies. "When the president signed the energy bill, a clarion call rang out that America's addiction to oil must end and that this bill would be the first step toward recovery," Dinneen said, adding that the RFS provides a "floor" from which the industry can grow with confidence. Dinneen also said the RFS allows ethanol to grow beyond its traditional role as a gasoline component and perhaps eventually displace a greater amount of petroleum imports. "It's just the start," he said. "The Energy Policy Act of 2005 will someday be seen as the bill that ushered in a new era in America's economic development—replacing a carbon economy with a more sustainable carbohydrate economy."

The successful implementation of the RFS is now the U.S. ethanol industry's collective challenge. Dinneen said the policy must remain flexible, simple and enforceable. "If it meets these three tenants, I'm confident it will be a success," he said.

Peak oil pondered, cellulose touted

Dinneen also said 2005 would go down in history as the year cheap oil came to an end—for good. He said volatility in the oil-producing regions of the world, and oil consumption rising steeply in both China and India, all but assure that. It was a sentiment echoed by speaker Paul Roberts, author of the controversial book The End of Oil, who said, "Oil demand is not only rising faster than expected, but in ways that challenge conventional expectations. … As demand grows steadily, prospects for new production are less certain."

Roberts continued, "What is critical to note about the success of biofuels isn't simply the volume being produced but the ways in which this nascent industry can serve as an example of success." The example Roberts spoke of is not just grain-based ethanol production but also cellulosic ethanol production. Even the pragmatic Dinneen spoke optimistically about the industry's race toward commercializing cellulose-to-ethanol technology, saying, "I firmly believe that cellulosic ethanol production will evolve from today's ethanol [plants]. … The people in this room are working every day to crack the code that will allow production of ethanol from cellulose to occur economically. It will happen. … Cellulosic and grain ethanol production will coexist in a growing biofuels market."

A later breakout session continued the cellulose-to-ethanol dialogue. Larry Russo of the U.S. DOE elaborated on the biomass opportunities Dinneen and Roberts introduced. Russo, taking part on a panel that included Carol Werner of the Environmental Energy Study Institute, Nathanael Greene of the Natural Resources Defense Council, Roger Conway of the USDA Office of Energy Policy & New Uses, John Ashworth of NREL and Anna Rath of Ceres Inc., broke down the cellulose-specific sections of the energy bill and explained the significance of each. "We want to make cellulosic ethanol basically competitive in six years … competitive with not only gasoline but with ethanol from corn, so they can coexist in the marketplace and both lead us to an energy independent future," Russo said.

Ashworth discussed a U.S. Biomass Resource Assessment, updated in April 2005, called the "billion-ton study." The study assessed the forest and agricultural resources available to the cellulosic ethanol industry. Ashworth and his team found that forest resources could provide 368 million tons per year of wood waste, while ag resources, such as switchgrass and corn stover, could supply 933 million tons per year. The two sources total 1.3 billion tons of biomass annually. That study answered the question of how much biomass, but the question of cost competitiveness of cellulosic ethanol is still unanswered. Although the enzyme cost has been greatly reduced, experts say cellulosic ethanol is still over $2 per gallon. To help solve this problem, Ashworth introduced the idea of an integrated corn stover biorefinery that would process corn kernels and corn stover together. Since the corn-to-ethanol process has a 1.7 energy balance and cellulosic ethanol tallies even more than that, the process should be economically viable.

Another issue with using biomass for ethanol is whether there's enough land to provide the feedstock. Rath reminded attendees that land in the United States is not scarce. For example, there are 40 million acres of CRP land in the United States and a total of 80 million acres on which exported crops are grown. Rath took the 120 million-acre total and, based on the calculation that five tons per acre of switchgrass could produce 60 gallons per ton of ethanol, said switchgrass grown on that amount of land could replace 75 percent of the current gasoline demand in the United States. There are also 600 million acres of rangeland that could also be used. Furthermore, she said this number would increase as, over time, more crops have been grown on less acres. Ceres has been testing biomass genes in rice, a close relative to switchgrass and corn, with the goal of developing ideal commercial energy crops. "When we see something in rice, we feel pretty confident that it will translate very well into switchgrass and other crops," Rath said.

Conway asked attendees to help add ethanol to the Preferred Procurement Program for Biobased Products. "You can help us in getting ethanol as a designated item," Conway said. "We need information on the product availability, the lifecycle analysis, and we also have to provide information to federal agencies about relative price, performance, environmental and public health benefits, and also recommend the level of biobased content and the procurement of the product." Visit www.biobased.oce.usda.gov for more information.

Government officials speak up for ethanol

Several government dignitaries spoke at the National Ethanol Conference, including U.S. Rep. Stephanie Herseth, D-S.D.; U.S. Sen. Tim Johnson, D-S.D.; EPA Administrator Steve Johnson; and Agriculture Secretary Mike Johanns. Kansas Gov. Kathleen Sebelius and Nebraska Gov. Dave Heineman also spoke via video.

A poised and on-message Herseth said biofuels will be an integral part of America's future. "If we can put a man on the moon in 10 years in the 1960s, there's simply no reason we can't make biofuels like ethanol and biodiesel the cornerstone of our national energy policy," she said. She added the Democratic Rural Working Group and the House of Representatives will be offering a comprehensive plan to completely eliminate the country's dependence on foreign oil "by making an unprecedented national commitment to domestically produce biofuels."

Johanns, who flew all day just to speak at the conference, made an exceptional funding announcement. He said the USDA will make available almost $188 million in loan guarantees and grants for renewable energy and energy efficiency improvements by ag producers and small businesses, drawing applause from attendees. He added that Energy Secretary Samuel Bodman was, at nearly the same moment, announcing the availability of $160 million in cost-shared federal funding over three years through the U.S. DOE to construct up to three biorefineries in the United States.

New tech, new power

Biorefining, experts say, is where the ethanol industry is headed. One of the more popular breakout sessions at the conference discussed three emerging ethanol plant technologies that are reducing energy costs and improving ethanol yields. BBI International's Mark Yancey moderated the panel that included Kerry Nixon, general manager of Central MN Ethanol Co-op; Keith Kor, general manager of Corn Plus; and Larry Ward, director of project development for Broin Companies.

Nixon's 20 MMgy ethanol plant in Little Falls, Minn., plans to build an on-site gasifier that would produce a synthetic gas to replace the plant's use of expensive natural gas in the ethanol production process. Nixon said 60 percent of the syn gas will be produced from wood waste, including sawdust, treetops, etc. Another option for the plant would be to burn distillers grains. The final resort would be natural gas. The plant has secured a 10-year contract with Woodline Sawmills Inc. in Onamia, Minn., which will deliver a minimum of 150 tons per day of wood waste to the plant everyday. Nixon estimated that the gasifier would more likely take in between 250 and 280 tons per day. The new technology was made possible by a $2 million USDA grant and a matching Xcel Energy grant. Nixon said Central MN Ethanol plans to start test-burning in April; an open house will possibly be held in June.

Kor's 40 MMgy ethanol plant in Winnebago, Minn., installed a fluidized bed reactor (FBR) to turn excess syrup from the production process into a syn gas that would replace natural gas use. At the time the plant decided to install the new technology, Kor estimated a return on investment of four and a half years, assuming $4 per MMBtu of natural gas, a conservative number compared to today's prices. The plant started using the FBR in May and has saved $4.6 million in natural gas purchases since then. Kor added all the plant's syrup is being burned and the boiler is maxed out, so the company is looking for ways to recycle more waste heat to reduce natural gas by another 10 percent.

Ward updated attendees on Broin Companies' latest technologies: BPX and BFrac, released last year. BPX is now installed in 11 U.S. ethanol plants, representing 525 MMgy, and the company plans to add another 300 MMgy of ethanol production under BPX in 2006. For the first time ever, enhancement of the BPX process has allowed these plants to obtain 20 percent ethanol concentration by volume in the fermentation process. Furthermore, Ward said plants that combine both technologies—no-cooking and fractionation—together reduce energy requirements by 20 percent, air emissions from the coproduct dryer 75 percent and potentially 5 percent to 20 percent in the net cost of producing a gallon of ethanol. The processes also increase protein content in distillers grains by 50 percent, Ward said. Ward announced that Broin Companies is now offering both BPX and BFRAC, which used to be exclusive to Broin-managed plants, to all ethanol companies in the United States. The offer will be extended to international companies in the near future. Interested parties are asked to call Broin Companies' Jeff Lautt.

From moving product to getting financed

As moderator Darwin Brewster of Archer Daniels Midland Co. explained it, the "virtual pipeline" of ethanol is the entire network of infrastructure, including barge, rail, terminals, etc. When put together, these pieces of the puzzle get the product to the consumer. Each piece is equally important.

Bob Kelly of BNSF assured attendees that his company and other railroads are making necessary investments to handle additional ethanol production growth. Tom Robbins of Sound Tanker Chartering Inc. explained how the country's river tanker barge fleet is aging, and many ships are being rebuilt. In 2006 alone, 100 tank barges with single hulls will be replaced with now-mandatory double-hulled ships.

BBI International's Jeff Kistner corralled some key financiers in the final panel of the conference. Bill VanHerwarde of Trust Company of the West (TCW), Paul Ho of Credit Suisse First Boston and Natalie Mason of First National Bank of Omaha all took part in the discussion.

VanHerwarde discussed mezzanine investments, a middle layer of debt financing between senior lending and equity. VanHerwarde said one benefit of mezzanine investment was that it reduced the amount of equity otherwise required and therefore increased the equity return. It also helps sponsors maintain control and increases leverage value. "[TCW] looks for strong [projects with] strong technology [and] a strong economic position," VanHerwarde said. "We would avoid pure tax motivated structures, first model technologies, and creative solutions to technical and financial risk."

Ho discussed B loans, which weren't typically used in ethanol plant financing until about 12 to 18 months ago. He added that it is not uncommon for some hedge funds to be looking at both mezzanine debt and equity, or senior debt and equity for the same project at the same time.

Mason's bank, which represents the most traditional source of ethanol plant financing, has dealt with 40 ethanol plant projects, she said. First National Bank of Omaha even has its own renewable energy team. "That allows me to form relationships with our customers, which we emphasize because we as a bank can be held accountable as our customers can be accountable for the success of this industry," she said. First National Bank of Omaha only looks at senior debt for 40 MMgy plants and above; it stands for 40 percent equity unless it involves expansion or partnerships, in which the bank would releverage the project.

Whether future producers seek traditional or less-than-conventional financing paths, the months and years ahead appear to be very promising for the ethanol industry. With cellulosic ethanol on the horizon and the U.S. ethanol industry expanding at a rate that's far outpacing the RFS schedule—the nation's production capacity may top 10 billion gallons by 2012, experts say—there doesn't appear to be much standing in the way of ethanol someday displacing up to 30 percent of America's present petroleum consumption.

Yes, the ethanol industry has arrived.

Jessica Williams is associate editor of Ethanol Producer Magazine. She can be reached at jwilliams@bbibiofuels.com or (701) 746-8385. Tom Bryan is editorial director of Ethanol Producer Magazine. He can be reached at tbryan@bbibiofuels.com or (701) 746-8385.