California incentivizes ethanol, just 1 producer to participate

By Kris Bevill | September 23, 2010
In June, the California Energy Commission began accepting applications for acceptance into its Ethanol Producers Incentive Program (CEPIP), the first state incentives ever offered by California to ethanol producers. In August, the CEC said it had approved three producers and four facilities to participate in the program, but it's unlikely that all of the approved applicants will ever qualify to actually receive funds from the program.

CEPIP is a unique incentive program, according to CEC spokesman Rob Schlichting. "There are other states that have incentive programs, but they pretty much just give money to producers to make ethanol in their state," he said. "Ours depends on the market and, depending on the crush spread, ethanol producers could get payments from the state or, if the market is really healthy, those same people would be required to return money to the state." In order to determine the ethanol crush spread, the CEC takes the near month Chicago Board of Trade corn price divided by 2.74, and subtracts that number from the Los Angeles Oil Price Information Service ethanol price. If the monthly average is less than 55 cents per gallon, eligible producers will receive an incentive equal to the difference between 55 cents and the average crush spread for the month times the number of gallons produced, up to 25 cents per gallon. The total amount of incentives allowed for each facility is capped at $3 million per year. During months that the crush spread is greater than $1 per gallon, participating producers will be required to pay back incentives at the amount the average crush spread is above $1 per gallon for each gallon of ethanol produced, up to 20 cents per gallon.

In order to qualify to participate in the program, corn ethanol facilities must be located in California and have an operating capacity of at least 10 MMgy. "And here's the tough part: you have to be operating," Schlichting said. There are four companies with facilities in California that meet the first two requirements for program participation, but Schlichting said only one companyCalgren Renewable Fuels LLCis currently producing ethanol. The company operates a 52 MMgy plant in Pixley and will be the only eligible facility able to receive payments when the program begins.

Matt Schmitt, founder and developer of Calgren, said CEPIP fits well with California's mission to fund projects that promote renewable and lower carbon alternative fuels through AB 118, which has a budget of approximately $100 million annually for five years. He stressed that money received through the program is not a straight subsidy, and must be paid back to the state when ethanol margins are favorable. Still, every bit of support helps, he said, even when it's a little later than some might have hoped. "The state of California has not contributed a penny to the development of any ethanol plants in the state," he said. "A lot of plants around the country have received state and local funding. When you look at the amount of money California is allocating for these four plants, it's small compared to what we've seen in other states."

California's lack of funding for ethanol to this point coincides with the technology options for ethanol production. The state has consistently favored other feedstocks and renewable fuels over corn-based ethanol and one of the requirements of CEPIP is that producers meet specific deadlines to either transition away from corn or implement technologies that will lower the facility's carbon footprint. Specifically, according to Schmitt, plants must either lower their carbon footprints by eight points from the state's Air Resources Board boiler plate rating of 80 gCO2e/MJ or replace 20 percent of corn feedstock with cellulose or waste sugar/starch-based material. At six months, producers must submit a plan to the CEC outlining their strategy to reduce the plant's footprint. Within 12 months, a timeline for those changes must be submitted, along with estimated costs of changes. At two years, permit applications must be filed for retrofits and, within four years of the start of participation in CEPIP, alterations must be complete.
Schmitt said the CEPIP's timeline should be an achievable goal for Calgren. Prior to being accepted for CEPIP funding, the company had already taken action to lower the plant's carbon footprint and he expects several of those features will be applicable to the program. The plant produces corn oil, which lowers the carbon rating, and utilizes cogeneration to provide heat and electricity to the facility and eliminate any need for power from the grid. Schmitt said the company is also exploring the use of biogas to replace natural gas demand at the cogeneration plant, which would significantly lower the plant's carbon rating. Other feedstocks are also being considered, but not as aggressively.

As for the other California ethanol plants that have gained acceptance into the program, none are currently operating and therefore will not be eligible to receive funds unless they resume operations. Pacific Ethanol Inc.'s 60 MMgy facility in Stockton and its 40 MMgy plant in Madera received approval to participate, as did AE Advanced Fuels Keyes/Cilion Inc. for its 55 MMgy plant in Keyes. The only other California ethanol producer with a facility large enough to meet the program's qualification requirements is AltraBiofuels Inc. It has a 31.5 MMgy facility in Goshen, but Schlichting said the company did not apply for the program. That plant is also not operating.

One of the goals of CEPIP is to increase statewide production of biofuels, but with so many of California companies in financial distress, can the program be effective in its goal if only currently operating producers are allowed to participate? Schmitt thinks so. "If you're talking to investors or lenders to restart these plants, it makes an investment more attractive because you know you'll have some support down the road," he said. "These payments won't make or break anyone's operation. If you have a well-running plant, ultimately we all survive or don't survive on the ethanol-to-corn spread."