Coming Up Short

As the U.S. EPA ponders comments submitted in response to its proposed rule for the second stage of the renewable fuel standard, cellulosic biofuel producers wonder how they will produce enough fuel to meet a 2010 mandate, and what will happen to the industry if they don't.
By Kris Bevill | October 06, 2009
The U.S. EPA's proposed rule for the second stage of the renewable fuel standard (RFS2) is filled with complicated issues that address everything from indirect land use impacts to definitions of feedstocks and greenhouse gas emission reduction rates. A final rule is not expected from the EPA until at least Dec. 1 and could possibly be delayed until next year due to the complexity of the issues being addressed. Nevertheless, in its proposal, the agency calls for 2010 mandate requiring 100 million gallons of cellulosic biofuel to be produced and, so far, there is no indication the agency plans to lessen the volume requirement.

A Harsh Reality
The mandate, considered aggressive even at that time, was initially established in the Energy Independence and Security Act of 2007. The aggressive nature of the mandate, which typically would a positive for the renewable fuel industry, could prove to be too optimistic and potentially damaging for the industry, as it appears U.S. producers will struggle to produce even half of the 100 million gallons of cellulosic biofuel required next year. David Woodburn, a senior research analyst at Chicago-based research, brokerage and investment banking firm ThinkEquity LLC, says there is no way the industry can produce 100 million gallons of cellulosic biofuel next year. He authored a report earlier this year that estimated a total of 39 million gallons of cellulosic biofuel is a more likely amount to be produced next year. "Unless there are plants that have been built under the market's nose, there's really no way we can reach 100 million gallons either with U.S. production or, in my view, international production in 2010," he says. "It's not necessarily bad news or a failure. They were aggressive goals to start with."

Woodburn and his colleagues regularly track the status of biofuel projects and producers and used in-house information as well as EPA and U.S. DOE estimates to reach the 39 million-gallon conclusion. In his report, Woodburn disputes the EPA's inclusion of several producers on its list of 2010 cellulosic biofuel contributors—specifically Alabama-based Cello Energy. The EPA expects the company to contribute three-quarters of the cellulosic biofuel mandate by producing a cellulosic biomass-based diesel fuel substitute at four separate facilities. However, Woodburn says until he obtains evidence of construction at three of the four sites or is made aware of further funding received by the company, he can only expect Cello to contribute 20 million gallons of cellulosic biofuel to the total volume mandate.

Woodburn also points out that many of the facilities expected to produce cellulosic biofuel next year are pilot-scale or demonstration-scale facilities and are likely to produce less than their nameplate capacities. Delays in construction and start-up of facilities are also likely to occur. Therefore, Woodburn says that speculating a cellulosic biofuel production shortfall is "just admitting reality."

Industry View
"We do not believe that the cellulosic biofuels mandate will be met in 2010," says Range Fuels Inc. CEO David Aldous. Many industry experts have been anxious to see the company begin producing cellulosic biofuel at a commercial-scale at its Soperton, Ga., facility and believe Range Fuels to be a front-runner in the cellulosic field. However, the company is only expected to produce 10 million gallons of cellulosic biofuel next year. Aldous is confident that longer-term production mandates are achievable, but will hinge on the federal government's commitment to mandates and a comprehensive energy policy. "A comprehensive energy policy must include significantly reduced dependence on foreign oil, material short-term and long-term reduction of greenhouse gases from transportation fuels and incentives for green job creation in biofuels," he says.

"A minor delay in achieving the first target in a 15-year schedule is not significant in and of itself," says John Howe, vice president of public affairs at Verenium Corp. "It is widely recognized that the industry will not be in a position to produce 100 million gallons during 2010. What is crucial to the industry is to keep the schedule of the mandate in place, as it provides the basis for this emerging industry's access to the capital required to develop and commercialize these important new technologies." Verenium, also a front-runner in the lead-up to commercialized cellulosic ethanol production, has for some time known it would not produce at a commercial-scale until 2012, although the company initially called for a 2010 start-up. Howe says Verenium expects to produce no more than 1 million gallons of cellulosic ethanol at its 1.4 MMgy Jennings, La. facility next year, but that it's on track to bring its first 36 MMgy facility into production in two years.

Brian Jennings, executive vice president of the American Coalition of Ethanol, says the ethanol blend wall, logistical challenges regarding biomass production, collection and handling, and high construction costs coupled with technology conversion hurdles have all contributed to stalled or delayed cellulosic biofuel projects. "This is a consequence of how the economic downturn and technology challenges run head-on into a policy that's more prescriptive than it needed to be," he says. "Ask who came up with 100 million gallons in 2010 and why they came up with that number. I'd be fascinated as to what that answer might be."

According to Jennings, cellulosic and advanced biofuels could be promoted by the federal government without being overly regulated and many legislators agree. However, the mandate model has been put into play and now the industry must work to meet its demands or to modify the mandate to a more reasonable level. According to the proposed rule, the EPA recognizes that cellulosic biofuel is in the infant stages of commercialization and the current economic climate could impact its progress. Due to the complexities involved in projecting achievable production volume levels next year, EPA officials asked for comments and additional information that could influence its final rule, possibly resulting in a lowered mandate. Despite its request, nearly all of the comments presented to the agency prior to the Sept. 25 commentary deadline addressed indirect land use change and virtually ignored the EPA request for input regarding cellulosic biofuel production mandates.

Safety Net?
So what are the implications of an unmet goal? If the cellulosic biofuel volume mandate is reduced, it is likely that some form of a precautionary measure proposed by the EPA to counteract a shortfall would be put into effect. According to the proposal, one way to make up the production shortage would be to allow excess advanced biofuels to fill the gap left by a shortfall of cellulosic biofuel. According to the proposal, "For instance, if we determined that sufficient biomass-based diesel was available, we could decide that the required volume of advanced biofuel need not be lowered, or that it should be lowered to a smaller degree than the required cellulosic biofuel volume." The agency proposes that it would then also lower the total renewable fuel volume to the same degree so as to not allow conventional biofuels to meet standards that were put in place to support cellulosic or advanced biofuels.

The EPA would also issue credits to replace not-produced gallons of cellulosic biofuel in the form of renewable identification numbers (RINs), which refiners would be required to purchase to meet their obligatory non-petroleum fuel requirements. The price for these RIN credits would be calculated by determining the difference between the cost of a gallon of gasoline and $3, with a minimum price set at 25 cents. Revenue generated through the sale of these credits would be placed in the U.S. Department of Treasury general fund, according to EPA senior press officer Cathy Milbourn. The total number of RIN credits issued by the agency would be no greater than the total reduced cellulosic biofuel standard, but would be allowed to be used by refiners to meet advanced biofuel and total renewable fuel standard mandates as well as cellulosic biofuel mandates. It is this item that has caused concern among ethanol industry members.

"If we're unable to meet the threshold and EPA wants to reduce the target and make these credits available for sale, we don't want them to be used to qualify for the obligations for other categories of renewable fuel use," Jennings says. "It's a very serious issue and it's only one of dozens of very serious issues [in the proposed rule]."

At the request of an ACE member, whom Jennings declined to name, Jennings drafted a comment to the agency stating that the proposed handling of credit issuances is not in line with Congress' intentions for cellulosic biofuel production. "It was, and remains, the intent of Congress to increase, not diminish, the use of renewable fuels, and in particular, to help launch an ambitious platform for cellulosic biofuels," Jennings commented, adding that this proposed revised RIN system could inhibit cellulosic biofuels commercialization. In addition, the proposed price system for the credits could result in cellulosic biofuels being placed at a price disadvantage, further negatively impacting investment in the industry.

"The mandate in 2010 will not be met by the industry and thus the use of RIN credits is necessary," Aldous says. "A pressing issue is there are no clear and defined indications of how these RIN credits will be administered by the market. If the RIN credits are structured properly, it will mean increased investment in cellulosic biofuel production."

Clayton McMartin, president of Clean Fuels Clearinghouse, which owns and operates the RINStar Renewable Fuels Registry, says if cellulosic biofuel RINs were being issued today they would sell for approximately $1 each, compared to 10 cents for each ethanol RIN. He says the 25-cent price floor for credits could offer some reassurance to investors, but there remains much uncertainty. "If you're building a capital project and you're banking on that credit, you know the least amount of money you're going to get for your cellulosic RINs, what we call a Type C RIN," he says. "The most you're going to get, we really don't know. The EPA Administrator is really the wildcard and could change the market instantaneously depending on if they issue those cellulosic RINs."

Howe says the RIN credit program is "a common sense response" by the EPA. "If production cannot be achieved, then it is a logical step for EPA to provide these credits as a substitute for the production shortfall. EPA's proposal is to issue the quantity of credits required to compensate for any production shortfall at the end of the calendar year, so that its action does not distort the market for cellulosic ethanol."

Woodburn says the RIN credit proposal could give the early cellulosic biofuel producers an added boost, but he doubts their business plans are beholden to revenues generated through RIN sales. "I think that's the least of their concerns," he says. "I think everybody right now is just trying to scale up." EP

Kris Bevill is the editor of Ethanol Producer Magazine. Reach her at (701) 373-8044 or kbevill@bbiinternational.com.