Imperial County's Emerging Ethanol Empire

The Imperial Valley in southeastern California is teeming with ethanol project activity. Beef and dairy operations are hefty in the valley, and agriculture thrives with diverted Colorado River water. EPM investigates why this county has attracted so much attention from would-be ethanol producers.
By Ron Kotrba | November 01, 2007
From ethanol projects backed by money from venture capitalists, to a series of proposed plants from one of the longest running family farm operations in southeast California, the Imperial Valley has attracted them all. Publicly traded producer Pacific Ethanol Inc., whose most notable investor is Microsoft Chairman Bill Gates; project owner Cilion Inc., which taps into the seemingly bottomless pockets of Khosla Ventures; Batley Enterprises, a family farm business in the valley for nearly a century with Bill Batley at the helm; and other interested companies including Imperial Bioresources LLC and U.S. Farms Inc., all are lining up to stake their ethanol claim in this heavily irrigated California farmland in the nation's largest ethanol market of a billion gallons.

"The Imperial Valley has good resources for development," says Paul Koehler, Pacific Ethanol vice president of business development. "There's quality land, livestock and irrigation water for good crop development. It's a good place to be building." Of course, with Pacific Ethanol's destination model, Koehler and his crew are less reliant on growing feedstock crops. As Koehler puts it, Pacific Ethanol isn't railing in corn from the Midwest—rather his company is railing in unit hopper cars full of ethanol and feed in their raw, pre-value-added forms. California rails in tons of Midwestern feed corn for its larger-than-life dairy and beef cattle operations. Similar to the U.S. federal government's redirection of waters from the mighty Colorado River to irrigate the abundance of agricultural lands in the Imperial Valley, the diversion of corn bound for California dairy farms and feedlots, allows for the opportunity to add value to its large feed and fuel markets. As far as ethanol markets go, Pacific Ethanol is working with the California Air Resources Board (CARB) and other stakeholder groups to hash out a timeline to bring refiners onboard with the recent ruling allowing instate fuel formulae to increase from its current 5.7 percent concentration to 10 percent, Koehler says. "We think there will be companies blending 10 percent before the deadline requires it," he says, adding that CARB's ruling will increase the California ethanol market to an astounding 1.7 billion gallons a year. "With our plans to build and with our plants on line, and other projects out there, that would bring California ethanol production up significantly but it will still be well below 500 MMgy," or well under a third of the state's expected consumption rate in a few years. "Southern California is a huge ethanol market, so we'll not only serve the Imperial Valley markets but we'll serve Los Angeles, San Diego and others as well."

While instate ethanol production may never surpass its huge rate of consumption, Koehler says his company does have some concerns about the eventual topping out of the local wet distillers grains markets. "There's a limit as to how much wet distillers grains the local markets can absorb," he says. With the Mexican line abutting the Imperial County border, Koehler says Pacific Ethanol is eying the Mexican beef and dairy markets to diversify its distribution options.

Pacific Ethanol's Imperial plant in Calipatria, Calif., broke ground this summer. Other projects it owns include its operational plant in Madera, Calif., the company's first; Boardman, Ore., which completed a successful startup in September; a 42 percent ownership stake in the 48 MMgy Front Range Energy LLC plant in Windsor, Colo.; and two other projects under construction. The company's Imperial plant, much like many of its projects, is positioned near several hundred thousand head of livestock—beef cattle in this instance—allowing its plant to save 30 percent on energy costs by not drying its grains and distributing it locally. "We don't dry our grains so as natural gas prices increase, our competitive advantage also increases," a Pacific Ethanol spokesman says. This model also helps lower build costs because the company doesn't need to capitalize the cost of a dryer. "Then, if there's a [carbon dioxide] standard, we'll be even further ahead," the spokesman adds. A low carbon fuel standard was placed into law via an executive order from California Gov. Arnold Schwarzenegger in January 2007. The company also prides itself in finding build sites with strategic infrastructure for speedy and cost-competitive modes of transportation—rail, interstate and water. Delta-T Corp. is providing all the design work for Pacific Ethanol's plants, which will top out at 60 MMgy of operating capacity. The company will internally provide general contracting services, but will still use the services of a construction contractor. The Delta-T design will help conserve water in this heavily irrigated region, quelling concerns over ill usage of this precious commodity.

When it comes to competition, Pacific Ethanol is well aware of those with which its own plants may be rubbing elbows soon enough. "Cilion, they're in the permitting cycle and we'll keep our eyes open to them," Koehler says. Cilion is hoping to build several 55 MMgy destination model plants in California, much like Pacific Ethanol, and is working on gaining regulatory approval to build in the Imperial Valley. "And then we're also aware of several sugar interests," Koehler says. "Planting sugar for ethanol could be a smart thing to do in Imperial County. At the end of the day, if they grow sugar for ethanol production here it would be good for the industry and good for Imperial Valley farmers." Koehler is referring to California Ethanol & Power (CE&P), a newly formed company backed and partly owned by Batley Enterprises run by longtime Imperial Valley farmer Bill Batley, who has 60-plus years of experience working the valley soil.

Sugary Plans
Batley is virtually an agricultural institution. His father started Batley Farms in 1919 after being discharged from the Marine Corps. The younger Batley, now in his early 80s, went to the University of California-Davis after which he started an alfalfa dehydrating business, which operated successfully for more then six decades and was eventually closed. "Agriculture has been on a downhill slide ever since this so-called world market took hold," Batley tells EPM. "After my alfalfa business closed I started looking into this ethanol from sugarcane plan." According to Jeffrey Lee, CE&P president and project development manager, the company formed in March 2007 as a Delaware limited liability corporation, and became officially functional as a company on June 1. Lee says CE&P has stacked its company management with a sophisticated project development and finance team. "We're using a pure project financing scenario," Lee says, meaning only 10 percent equity will be needed in order to secure senior and subordinate debt, which he anticipates having arranged by the third quarter of 2008.

Along with Batley Enterprises, Washington Group International has a significant stake in CE&P. With a longtime friend in the Washington Group backing the project, Batley tells EPM 100 sugarcane seed acres are growing right now to eventually supply enough seed for 37,000 acres—the acreage needed to supply just one of five 50 MMgy plants that CE&P anticipates building. CE&P's vice president of Imperial Valley operations, Nora Batley, says the seed from one acre of seed cane can produce 10 acres of cane. "We'll continue to grow enough seed cane to eventually supply our needs," she says.

Each 50 MMgy plant is projected to cost roughly $200 million, or twice that of most corn ethanol plants. The high costs are reflective of the novelties each plant will possess, such as energy systems run on bagasse for conversion into electricity, production of which will far exceed what's required at the plant. Each plant will produce 40 megawatts of electricity, only consuming 6 megawatts with the large 34 megawatt surplus planned for sale to an unnamed California utility as green power. For ethanol process conversion technology, CE&P is talking with two world leaders in the field and likely will have made a decision by the time this article is published.

"Our plants will be dependent on sugarcane, and sugarcane growth in Imperial County will depend on our plants," Lee says. Bill Batley elaborates, saying that it all goes back to the Farm Bill and the sugar program. "California is a beet state. Cane growing states like Louisiana and Florida exerted tremendous political pressure to keep California off the cane-growing list," he says, which essentially rendered growing sugarcane for sugar unprofitable in California as the feedstock is ineligible for the 14-cents a pound federal subsidy under the sugar program. "This is the good ol' USA, so I can't complain too loudly—things are pretty good overall of course," he says. "But the Imperial Valley is one of the best sugarcane growing places in the world." That's precisely why the other cane-growing states lobbied with vigor to keep California off the sugarcane subsidy list. "In the states where they can get the subsidy they can get 14 cents a pound from the government, and make twice as much money making sugar than we can by making ethanol," Batley says. "But we can grow twice as much cane as they can, mainly because we have year-round growing and no severe seasons or weather—we can run all year round." He says his plants will be able to squeeze a whopping 1,500 gallons of ethanol per acre from sugarcane grown in the Imperial Valley every year.

Neither sugarcane nor any other crops grown in the Imperial Valley such as carrots, broccoli and asparagus would be viable were it not for the abundance of water diverted from the Colorado River. "Look at the water history for Imperial County," Batley tells EPM. "We're the third priority on the Colorado River. There's worlds of water here"—six acre-feet of water per acre of land. "Don't get caught up in all the city talk about water. Los Angeles wants it—people want to muscle in and get our Imperial Valley water," he says. "Our plants will not be water users. We'll be water positive." Lee explains that, while a corn ethanol plant brings in dried corn which then has to be ground up and mixed with added water to make slurry, the sugarcane-to-ethanol process starts with the juice that's mechanically extracted from the cane. "We ferment the sugar in its own juice," he says. "We will get a 96 percent liquid stream effluent. We'll pull the organics and the water will be reused." CE&P says while its plants will be water positive, corn ethanol plants on average require four to five gallons of water for every gallon of ethanol produced. But Pacific Ethanol's plants are being designed by Delta-T, a company proud of its low-water-consumption process design.

CE&P is familiar with its local rivals. "We're not in the least bit worried about our competition," Batley says. "The true fact is we're out in front compared with our competition. There may be one or two corn plants under construction in Imperial County, and maybe one of them has their permits all in order. But their backgrounds are not backed by the strength of ours—so no, we're not worried."

Lee expounds on CE&P's competition, saying, "Pacific Ethanol has $60 million of Bill Gates' money and Cilion has Western Milling and Vinod Khosla backing them. We're familiar with their destination model. We don't have anything to rail in," which he says saves 30 cents per gallon in transportation costs. Therefore, feedstock costs for CE&P would, when compared with a corn-ethanol plant, equate to roughly $2.15 cents a bushel of corn using locally grown sugarcane.

Nora Batley says property for CE&P's first plant is already under company ownership and is situated in the Mesquite Lake industrial area of Imperial County, in an enterprise zone that's "the icing on the cake." The zone was created to help attract businesses to, and grow the commercial base of, the valley by offering companies like CE&P grants for equipment purchases and more. The site is also near a Union Pacific rail line, which will be instrumental in marketing the outbound ethanol the company hopes to be producing by 2010.

Ron Kotrba is an Ethanol Producer Magazine senior staff writer. Reach him at or (701) 746-8385.