Slow and Steady Wins the Race?

While the U.S. ethanol market has grown by leaps and bounds, the Canadian industry has grown at a slow, steady pace. As the country's industry grows to meet demand, rather than outpacing it, leaders say Canada is well-positioned to handle future growth as needed.
By Hope Deutscher | July 08, 2009
In the U.S., the ethanol industry has experienced tremendous growth over the past few years. Some would argue it built beyond current demand, creating an environment where some producers are being forced to declare bankruptcy or sell. By contrast, the Canadian renewable fuels industry has experienced steady incremental growth. With approximately 1.4 billion liters (approximately 370 million gallons) of current production capacity, Canada's growth has been characterized as being built out in a cautious manner. Industry leaders say it has been an intentional growth, driven by government, industry and partnerships with oil companies.

"Clearly we've experienced some very important growth in the ethanol industry in terms of plants that have come on line but we haven't been overly ambitious to build production capacity out ahead of government policies and programs," says Gordon Quaiattini, president of the Canadian Renewable Fuels Association. Since 1984, CRFA has promoted the use of renewable fuels for transportation through consumer awareness and government liaison activities. "The industry values partnerships and the relationship we have with government, both federally and provincially, and in doing so, I think there has certainly been an intelligent way that the industry has been built out in an effort to not get into some of the challenges that are being faced on the U.S. side," Quaiattini adds.

As much as the industry would have liked to have seen it grow bigger and have more plants in place, Quaiattini says Canadians have learned from the U.S. that in not building out too quickly, projects are not in jeopardy. "We don't have plants that are seeking bankruptcy protection. All of our plants are operating. We have projects moving forward and as the economy recovers, as energy demands begin to increase, additional investment will continue to happen here. I think the measured approach we've taken has ultimately served us well."

Provincial Government Support
In part, Canada's success was driven by the initial efforts of provincial governments to bring renewable fuels into the country's marketplace, Quaiattini says. Saskatchewan was the first province to pass a law requiring ethanol to be blended into its gasoline. A mandate requiring fuel distributors to blend 1 percent of ethanol into their gasoline became effective Nov. 1, 2005. On Jan. 15, 2007, the blend was increased to 7.5 percent.

In November 2007, the Manitoba legislature passed the 2007 Biofuels Amendment Act, which mandated that beginning Jan. 1, 2008, all fuel suppliers would be required to blend at least 8.5 percent ethanol into their gasoline. Manitoba and Saskatchewan recognized the market opportunity for wheat- and corn-based grain ethanol, Quaiattini says.

On Jan. 1, 2007, Ontario, the largest jurisdiction and the country's largest transportation market, set a mandate requiring the use of 5 percent renewable fuels. In addition to the benefits that ethanol could provide for the province, Ontario was also driven by the role that the fuel could play in addressing climate change imperatives and reducing greenhouse gases.

When Ontario set a renewable fuels mandate, the federal government began to look at it from a national perspective. "That became the tipping point in which the federal government, in partnership with the industry and this association, moved forward on bringing in a national renewable fuels mandate to govern the whole country," Quaiattini says.

The other factor that helped start Canada's ethanol industry, he adds, was the determination by government to meet certain oxygen levels in gasoline and the banning of methyl tertiary-butyl ether (MTBE) as a blending component in order to meet those standards. "When that happened the oil industry was looking for alternatives and some turned to ethanol as a good blending fuel to help meet those requirements. That allowed for the first ethanol plant to be built, followed by the second facility. It was done in a very measured way and now we've come full circle," he says. "We now have a national mandate that's coming into effect in 2010, and that has allowed the industry to build out. We have 20 years of ethanol experience in Canada but it's because of the MTBE ban and subsequently provincial standards that came into effect that sort of got us off in a measured incremental way."

Federal Government Support
Today, Canada's industry consists of 15 operating plants producing 1.4 billion liters of ethanol production capacity. Two of those facilities are planning expansions which, when completed, will add another 600 million liters (approximately 158 million gallons) to the nation's total capacity. In total, the industry will then be producing the 2 billion liters of ethanol necessary to meet the federal government's 5 percent renewable fuels mandate, which will become effective Sept. 1, 2010. Industry representatives are currently working with Environment Canada to help bring the mandate into effect.

The federal government has provided immense support to Canada's ethanol industry. Currently, the federal government has set aside CA$ 1.5 billion (approximately US$ 1.32 billion) through its ecoENERGY biofuels program that provides capital investment to build renewable fuels facilities. As well, the government created a CA$ 500 million
NextGeneration Biofuels Fund to assist with the commercialization of next-generation technology.

One of the ethanol companies to utilize government funding support is GreenField Ethanol Inc. The company, previously known as Commercial Alcohols, built its first ethanol plant in Tiverton, Ontario, in 1989. GreenField Ethanol negotiated the first fuel ethanol supply contract in the country and, two years later, built Canada's first large-scale ethanol facility.

Today, the largest ethanol producer in Canada operates four plants in Tiverton, Chatham, and Johnstown, Ontario, as well as Varennes, Quebec. When the market allows, the company is planning to build a fifth facility in Hensall, Ontario.

The ongoing government support, which is designed around a safety net concept, is important, says Robert Gallant, president and CEO of GreenField Ethanol. "The ecoENERGY program provides a payment of about 10 cents per liter of produced ethanol. It's a producer payment, not a blender credit," Gallant says. "The actual payment is based on the average industry profitability and that's determined on a quarterly basis so it's variable - if the industry is doing well, there's less there, if the industry average shows that margins are too tight for sustainability then the program kicks in."

In Ontario and Quebec, similar programs exist. For example, the Ontario Ethanol Growth Fund which provides operating support of up to 11 cents per liter is in place until the end of 2016. Gallant says the formula for accessing that money reflects fluctuations in the price of corn, ethanol and crude oil. In Quebec, the system is a reimbursable tax credit program that provides up to 18 cents per liter of ethanol, however, it's dependent on the prevailing value of crude oil.

"I call them safety nets and it just boils down to if you need it, it's there and when you don't need it - it's not," Gallant says. "It's a healthy way of helping an industry to get to its feet without just saying ‘here's some money, call me when you're successful.' If the fundamentals of the business when you start up are problematic, and we all know that this industry in North America has been very volatile, that's when the safety net concept contributes best. Because it helps you get over the low spots and buys the industry time effectively to get it back together."

Gallant says the economy has been tough, but with a current installed capacity of 1.3 billion liters and a future mandate of 2 billion liters - the supply and demand ratio is good, allowing the industry to weather the current economic climate. The ethanol industry has further been helped by the establishment of take-or-pay agreements with the oil industry.

Under the multi-year contracts, ethanol producers must supply an oil company with ethanol; and an oil company must take the ethanol or pay for it.

While U.S. ethanol producers have only recently begun to see a shift in working with the oil industry, the oil-ethanol relationship has been established in Canada for several years. Some of the largest ethanol producers in Canada are also oil companies. Suncor Energy Inc. currently operates a 200 MMly ethanol facility in the Sarnia-Lambton region of Ontario.

A CA$ 120 million expansion project is underway to expand production capacity to 400 MMly. Royal Dutch Shell plc is a major investor in Iogen Corp., a Canadian cellulosic ethanol technology and producer. Industry leaders fully expect that the oil industry will continue to see the value of participating in the renewable fuels industry.

"Here in Canada, the oil industry has recognized the fact that biofuels are here to stay and participates in two ways - obviously they purchase from ethanol producers and some of them have elected to get into ethanol production for their own captive use, primarily on their own," Galllant says. "It's somewhat less confrontational than it has been in the U.S., but from what we are seeing in the U.S. - that's shifting as well."

The CRFA expects to see the partnerships between government and the industry continue as the volumes of renewable fuels required in the Canadian market place increase. "We would continue to look to the government to be a partner in investing, not only in the production capacity that's being built out now but more importantly the commercialization of advanced renewable fuels like ethanol. And that's certainly the next step," Quaiattini says. "In the absence of government policy and programs being in place, the investment would continue to likely happen in the U.S. and then you would simply import the fuel to meet these mandates." The provincial and federal governments understand the value of having the investment and production capacity in Canada - and the economic investments and activities that occur when a facility is built, he says.

The provincial mandates were a great start. However, Quaiattini says the biggest step for the industry is moving from provincial mandates to a federal mandate. "Ultimately we needed a national footprint for renewable fuels. This blending needs to happen in all regions of the country and, therefore, having the federal government see the value of bringing a renewable fuels strategy to Canada on a national basis is a big step. It would be pretty hard for the industry to have been viable simply with a patchwork of different provincial standards in place."

Hope Deutscher is an Ethanol Producer Magazine associate editor. Reach her at hdeutscher@bbiinternational.com or (701) 373-8046.