Incentives: It's All About Location, Location, Location

Although federal programs and policies that support the production, distribution and use of ethanol are crucial to the continued development of the industry, many states have taken additional measures to ensure ethanol's success.
By Erin Voegele | January 04, 2010
Ethanol producers are well aware of the federal programs that have been implemented to support the growth of the industry. Federal programs, however, are not the only incentives available to aid the ethanol industry. In recent years, many state governments have passed laws that establish a variety of programs designed to make the production, distribution and use of ethanol more feasible within their borders.

These state programs can generally be divided into three broad groups: state renewable fuel mandates, infrastructure incentives for equipment to distribute E85, and incentives that directly benefit ethanol producers. At least 32 states currently employ some type of ethanol incentive, according to information provided by the American Coalition for Ethanol.

To date, 10 states have passed legislation to establish state-specific RFS programs, including Florida, Hawaii, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Oregon and Washington. Pennsylvania has enacted a mandate for cellulosic ethanol. The use of ethanol is also essentially required in California because the state has enacted a low carbon fuel standard that gives preference to biofuels over gasoline.

Several other states have attempted to establish an RFS, including Colorado, Indiana and Wisconsin. However, the legislation either failed to gain the traction needed to become law or was vetoed by the governor.

Twelve states currently offer incentives designed to aid in the establishment of retail infrastructure for ethanol-blended fuels, while 22 states provide some type of incentive to ethanol producers. Only Hawaii, Minnesota and Kansas currently offer all three types of incentives.

State Standards
Although the federal RFS currently requires the blending of 36 billion gallons of renewable fuel into the national fuel supply by 2022, the standard does not specify how much renewable fuel must be used in each state.

According to Ron Lamberty, ACE president of market development, many of the ethanol mandates that have been established on the state level date back to when the federal RFS program was first established by the Energy Policy Act of 2005. At that time, the standard, which has since been expanded by the Energy Independence and Security Act of 2007, required the use of substantially less renewable fuel.

"I think that most of the states that passed E10 mandates did it earlier to make sure that they got a bigger ethanol share of the RFS," Lamberty says. "With an 8 billion gallon mandate, there was a possibility that whole sections of the country would just decide not to [participate in the program]." By enacting state ethanol mandates, certain states essentially ensured they would take part in the RFS program, he says.

Even though the federal RFS has expanded significantly since the time when most state ethanol mandates were established, Lamberty says state policies are still helpful in supporting infrastructure development.

According to Lamberty, the biggest advantage of state ethanol mandates—whether they require the use of E10, E15 or E20—is that the state government is sending a strong indicator that ethanol-blended fuels must be made available to the public. "E10 mandates…help establish a market that allows the infrastructure and equipment to be put into place," Lamberty says.

Showing the EPA the Way
As the U.S. works to meet the RFS goals, the likelihood will increase that a mid-level ethanol blend, such as E15, will be approved for use in standard vehicles. While many state ethanol mandates require the use of traditional blends of ethanol, such as E10, several mandates require the use of more substantial quantities of the fuel, despite the U.S. EPA's hesitation to approve higher ethanol blends for use. In these states, higher ethanol mandates may help spur the development of additional infrastructure that will be needed to meet the sizable federal standard.

Minnesota was one of the first states to enact ethanol legislation, implementing an E10 mandate beginning in 2003. In 2005, its Ethanol Use Standard was amended to declare that if ethanol did not already comprise at least 20 percent of all gasoline consumed within the state by Dec. 31, 2010, a mandate would be triggered to require gasoline blends to contain at least 20 percent ethanol by Aug. 20, 2013. The amended law is contingent, however, upon EPA approval of E20 for use in standard vehicles.

In 2006, Iowa passed legislation requiring renewable fuels to replace 25 percent of gasoline used within the state by Jan. 1, 2020. The mandate began by requiring the use of 10 percent renewable fuel in 2009. The percentage is then to be increased on an annual basis through 2020.

Kansas also enacted an incremental RFS that began with a 10 percent renewable mandate in 2009, which while increasing at a slower pace, essentially requires fuel to contain 25 percent renewable content by 2024.

In some states, a trigger must be met before a mandate takes effect. Louisiana's Ethanol Use Standard requires ethanol to comprise 2 percent of the state's total gasoline sales within six months of in-state ethanol production reaching 50 MMgy. The fuel must also be produced from state-produced feedstock.

Similarly, Montana's Ethanol Use Standard will take effect once 40 million gallons of ethanol have been produced within the state on an annualized basis for three months. Once the trigger is met, all gasoline sold within the state is required to contain 10 percent ethanol.

Florida's Ethanol Use Standard is currently expected to be the next state ethanol mandate to take effect. Beginning Dec. 31, 2010, the program requires that all gasoline offered for sale within the state be blended gasoline. The standard defines "blended gasoline" as a fuel mixture containing 90 to 91 percent gasoline and 9 to 10 percent ethanol.

The mandate is significant because Florida consumes approximately 8.7 billion gallons of gasoline annually. However, according to Jim Smith, president and CEO of the Florida Petroleum Marketers & Convenience Store Association, the pending E10 mandate isn't expected to have a significant impact on Florida petroleum marketers. "We've already started implementing it," he says. "Almost all of the gasoline sold in Florida now is E10."

Smith says at least 90 percent of petroleum marketers in Florida are already offering ethanol-blended fuels. "The only place in the state where you do not have a consistent supply of E10 is in the panhandle, but it is sparsely populated," he says.

Cellulosic Incentives
While only 10 states have enacted mandates to spur the increased consumption of ethanol, ACE estimates that at least 22 states offer some sort of incentive for ethanol production. These programs are generally designed to make the state a more attractive place for potential ethanol producers to locate. Although several of the programs benefit producers of traditional corn-based ethanol, some programs have been designed specifically to attract cellulosic development.

Indiana's Production Incentive program offers benefits to producers of both cellulosic and corn ethanol. A tax credit of $2 million is available for companies producing between 40 MMgy and 60 MMgy of grain ethanol. The tax credit increases to up to $3 million for those that produce more than 60 MMgy. For cellulosic ethanol, a tax credit of $20 million is available for the production of at least 20 MMgy.

The Ethanol Production Tax Credit in Kentucky currently allows producers of cellulosic ethanol to be eligible for a $1-per-gallon tax credit. The program has an annual cap of $5 million. In the event the cap is reached, the tax credit would then be pro-rated among all eligible producers. The state also currently offers a $1-per-gallon tax credit for grain-based ethanol, which caps at $10 million.

Virginia's Advanced Biofuel Production Incentive program allows qualified producers of advanced biofuels to receive an incentive grant of 10.5 cents per gallon of advanced biofuel that is sold. Under the program, "advanced biofuel" is defined as a fuel derived from cellulose, hemicellulose or lignin that is derived from renewable biomass or algae.

Unique Incentives
Rather than offer producers a benefit based on the quantity of fuel produced or sold, several states offer unique incentives that can benefit those working to develop advanced biofuel projects. Michigan has developed a tax incentive designed to incent the purchase of agricultural machinery that can be used to harvest biomass specifically for energy production.

In Maryland, a tax credit is available for individuals and businesses that invest in cellulosic ethanol technology and development. The credit covers10 percent of the qualified expenses paid or incurred by an individual or corporation during the previous tax year.

South Carolina offers a similar research and development (R&D) tax credit that began in 2007 and will be available for the taxable years until 2012. The credit can be used for up to 25 percent of qualified R&D expenses in feedstock and production development for cellulosic processes. A tax credit can also be claimed for up to 25 percent of the cost of constructing or renovating a commercial biofuels plant.
In North Dakota, a recently established incentive program allows the state board of higher education to establish biomass energy centers at institutions of higher learning. In addition, a state program also appropriates funds that are available to carry out certain renewable energy development activities. Various forms of assistance are available, including grants or loans that can be used to complete feasibility studies, apply research, and develop demonstration projects.

Virginia has put in a place a program that may also spur job growth. The state currently provides corporations an income tax credit of up to $700 for each full-time clean fuel vehicle job created. Qualifying jobs include those in the manufacturing of vehicles that are designed to operate on clean special fuels, as well as the manufacturing of components that allow these vehicles to be converted to operate on clean fuels.

The credit can also be claimed for jobs that are created in the manufacturing of components that are designed to produce, store or dispense these kinds of fuels. The tax credit, which will expire on Dec. 31, 2011, can be used in the taxable year in which the job was created, as well as each of the following two years as long as the job is continued.

While federal incentive programs will remain vastly important to the continued development and expansion of the ethanol industry, incentives offered on a state level are likely to play an important role as well. EP

Erin Voegele is a BBI International associate editor. Reach her at or (701) 850-2551.