Outlook and Perspective

Industry leaders share what's on their minds as a new decade begins. What opportunities and challenges lie ahead?
By Holly Jessen and Kris Bevill | November 15, 2010
2010 marks the end of a decade of expansion for the U.S. ethanol industry. In 2000, there were 54 plants with a capacity of 1.7 billion gallons. Ten years later, there are 218 plants with just over 14 billion gallons of capacity. Average U.S. ethanol plant size has doubled from around 31 MMgy in 2000 to 64 MMgy in 2010. The decade saw hefty profits that helped fuel the mid-decade building boom, followed by a bust that toppled some of the largest players and introduced a round of consolidations and reorganizations.

An industry doesn't flourish by looking back, however. The next decade belongs to those who look ahead. EPM asked industry leaders to share their perspectives on the opportunities and challenges they foresee as 2010 turns into 2011.

Market access will be the defining factor for the ethanol industry in 2011 says Jeff Broin, CEO of Poet LLC. Poet is seeking to solidify its corn ethanol base as it prepares to commercialize cellulosic production. In Nebraska, Chuck Woodside, CEO of KAAPA Ethanol LLC, is optimistic and encouraged by the commitment to renewable fuels and the innovation he sees throughout the industry.

The past decade was marked by the oil industry entering the ethanol industry in new ways. Mansfield Oil CEO Doug Haugh shares his perspectives as a marketer and distributor of renewable fuels. Valero Energy Corp., of course, took the industry's breath away when it snatched up a big share of the bankrupt VeraSun assets and became one of the top U.S. ethanol producers overnight. Media relations director Bill Day shares how the nation's largest oil refiner views the year ahead.

As the corn ethanol industry stabilizes and matures, the cellulosic industry is just approaching its ascent. Inbicon A/S CEO Niels Henriksen says cooperation is as important as competition for the nascent industry to succeed. Fiberight LLC CEO Craig Stuart-Paul emerged from the waste management sector to lead his company into the cellulosic ethanol arena, using municipal solid waste as the feedstock.
In the next few pages, each of these industry leaders shares his perspective and outlook for the second decade of the 21st century.

A Poet's Vision for 2011

The market for ethanol is a topic of concern never far from Poet LLC CEO Jeff Broin's mind. The ethanol blend wall, infrastructure issues, demand and implementation of E15 will combine to be the defining factors of the ethanol industry in 2011, he says, and the industry needs to band together to compete on a level playing field with the oil industry. "Market access is far and away the most important issue the ethanol industry will face in 2011," he says. "Without the ability to compete for more market share, we will be unable to get the cellulosic ethanol industry off the ground, fulfill the RFS [renewable fuel standard] or continue to grow the industry. We face a lot of challenges in the coming year, but all of them pale in comparison to the lack of market access for our product."

Market access is a big issue for Poet. It's already one of the top three ethanol producers in the U.S., and it plans to expand its corn ethanol capacity in 2011 as well as to become one of the first commercial-scale cellulosic ethanol producers. Poet's total annual production capacity will increase to 1.7 billion gallons next year when it brings its newest acquisition online in Cloverdale, Ind. The 90 MMgy plant, formerly owned by Altra Biofuels, was purchased by Poet in June after Altra shut it down due to difficult financial conditions. Approximately $30 million in upgrades and retrofits were necessary to improve operation flaws and prepare it for Poet's fermentation technology. That work is expected to be complete in the spring.

Breaking ground at Project Liberty, the company's 25 MMgy cellulosic facility, and commercializing cellulosic ethanol will be Poet's biggest goals as a company next year, Broin says. It's made some great progress toward advancing cellulosic technology in the past year, but it will be difficult to make commercial-scale production a reality without market and governmental support. "Currently, market access for ethanol and U.S. DOE loan guarantees (so that the first few plants can be built) are the most critical needs," he says. "A small investment from the government today could reap huge returns for our country in the future, but we can't afford to delay any longer. Poet is ready to start construction on Project Liberty once a loan guarantee is approved and we are confident a future market is assured."

Broin sees the federal government's recent partial approval for E15 use as a promising sign of market expansion, but more will be needed to alleviate pressure on the blend wall. "Industry growth depends on opening that market further, through E15 approval for legacy vehicles, proliferation of blender pumps, flex-fuel vehicles [FFVs] and dedicated ethanol pipelines," he says. "Infrastructure and FFVs are critical for ethanol to compete head-to-head with gasoline in the future." If the EPA's October approval of E15 for 2007 and newer vehicles is expanded soon to include 2001 and newer models, as many in the industry believe will happen, that will provide some breathing room for producers. "This will give the industry an opportunity to continue growing next year, but without a long-term strategy, we will hit the blend wall again," Broin says.

And what is an appropriate long-term strategy for the ethanol industry? As a co-founder of Growth Energy, Broin fully supports the group's policy initiatives and expansion plans for ethanol. A large part of Growth Energy's agenda consists of its Fueling Freedom plan-a long-term outline released earlier this year that consists of diverting money from the Volumetric Ethanol Excise Tax Credit to invest in blender pumps, FFVs and ethanol pipelines. The plan was initially met with skepticism by other ethanol groups, but a slightly modified version appears to be growing in popularity. Broin says the Fueling Freedom plan would solve the industry's blend wall issue and he will devote much of his time in 2011 to passing legislation at the state and federal levels that will support that plan. "While some industry groups and media outlets were initially critical of the Fueling Freedom plan, I'm encouraged that all of the major groups representing the industry have united around a very similar plan," he says. "The future success of our industry depends heavily on political progress that needs to be made in 2011."

Expanding the market for ethanol may be the most critical issue facing the ethanol industry in the short-term, but it's not the only area of concern. The USDA's October reduction in expected corn stocks, combined with a spike in corn futures, left some ethanol producers feeling a bit uneasy about future feedstock supply. Looming greenhouse gas (GHG) regulations, which could include indirect land use change considerations for ethanol, could also change the face of the industry in 2011. Broin is strategizing to combat all of these factors. If the USDA's reduced corn stocks prediction holds true, he'll work to convince farmers to plant more corn in the spring. Through Growth Energy, Poet and other producers are negotiating with politicians to ensure that ethanol is treated fairly in any future GHG legislation, but he says it will take the entire industry to disprove the ill-conceived notion of indirect land use change. At the plant level, Poet's engineers are constantly striving to improve the ethanol production process in order to further reduce its environmental impact. "Ethanol is a low-carbon fuel, and Poet's proprietary BPX process that eliminates cooking produces an even lower carbon fuel," Broin says. "In addition, we are developing new technology to lower our GHG emissions even further. The industry itself continues to become more efficient, and our country's farmers do as well."

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 850-2553

Optimism Amid Challenges

Chuck Woodside, CEO of KAAPA Ethanol LLC in Minden, Neb., sees both opportunity and challenges ahead in 2011. Overall, the chairman of the Renewable Fuels Association is optimistic about the future of the ethanol industry and encouraged by what he sees as a "tremendous commitment" to renewable fuels. "It's still a relatively young industry, and that creates, along with all the challenges, the opportunity as well," he says.

One example is the increased ethanol exports in 2010. By the end of the year, U.S. ethanol producers are expected to export 300 to 400 million gallons of denatured and nondenatured, nonbeverage ethanol. That's not insignificant, Woodside says, especially considering it wasn't many years ago that the ethanol industry didn't export much product at all.

Woodside, who was elected chairman of the RFA in September, succeeds Chris Standlee, executive vice president of Abengoa Bioenergy, who served three one-year terms. KAAPA Ethanol, which has been operating for seven years and now produces 60 MMgy, has been a member of RFA since the beginning, he says.

It's an exciting time for ethanol producers. All around him, Woodside sees ethanol producers finding ways to drive down the cost of production or explore technologies to access other parts of the value chain. "You can't talk to a plant that isn't doing something innovative in how they approach their marketplace," he says.

He also sees opportunities for producers to work together. He pointed to the former VeraSun plant at Janesville, Minn., which KAAPA and five other companies were involved in purchasing a year ago. By banding together, the group was able to add value for all members. "That model has worked really well and it's something we'll continue to look at as we move forward," he says.

The other side of the coin is risk. Ethanol producers are subject to more political risk than many businesses, particularly due to the future of governmental policies such as the Volumetric Ethanol Excise Tax Credit, the renewable fuel standard and California's low carbon fuel standard (LCFS).

Woodside sees the extension of VEETC as an important short-term challenge. VEETC is a proven program that, while the tax incentive doesn't go directly to producers, still provides an incentive for blending and building infrastructure. There's been a lot of talk in recent months about the blend wall. It wasn't too many years ago when the major market constraint occurred at terminals, Woodside says. Once VEETC is extended for one year, RFA does want to have a good discussion on possible changes to VEETC. Any change that is implemented, however, needs to be well thought through.

This, of course, has been a recent industry issue. RFA, the American Coalition for Ethanol and the National Corn Growers Association have focused on the importance of extending VEETC while Growth Energy has called for reforms in exchange for access to the marketplace. When people ask him about the RFA/Growth Energy thing, and they do often, Woodside says both organizations support the growth of the biofuels industry. "We can all argue about how things should be done, but at the end of the day, everyone wants to advance the renewable fuels effort," he says. "I don't think there's a whole lot of disagreement on where we need to get to, the difference is the tactics of how we get there."

Another huge issue on the list is E15. Getting the higher level blend is only the first step, next comes addressing the individual state issues that will crop up with selling a blend greater than 10 percent. Woodside is also frustrated with the fact that the U.S. EPA has only approved E15 for some vehicles so far, saying it will confuse consumers. "We need to get beyond this 2007 and newer model year approach," he says.

KAAPA's location in Nebraska means California's LCFS is looming large with Woodside, perhaps larger than ethanol plants located in the eastern portion of the corn belt or the state. It's something all producers should be concerned about, however. "If other states start to pick up that model, everybody is going to be faced with that same issue," he says, adding that's why RFA worked with Growth Energy to file a lawsuit in federal court against the regulations. "We need to make sure that there's good science out there."

Addressing the issues facing the industry is what Woodside considers one of the RFA's biggest strengths. It's fun, he says, to work with an organization full of so many passionate and committed people. Although lobbying is important, RFA offers so much more-research, technical services and development are examples Woodside offers. "All of those things go way beyond just Washington," he says. "It is truly a producer-run organization, and I think that's really critical."

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
(701) 738-4946

Cooperation is Primary

For the health of the ethanol industry, Niels Henriksen, CEO of Inbicon A/S, sees cooperation as being just as important as competition. The company, which developed Inbicon Biomass Refinery technology, has a narrow focus on converting biomass to renewable energy. Still, the company sees a need for broad and diverse cooperation within the ethanol industry. "In the two years since we've been moving into commercializing our technology, I've realized we can't go down this path alone," he stresses.

Henriksen appreciates all those who prepared the way by establishing a market for ethanol, building political connections and getting E10 mandated, among other things. "So many different individuals, companies and organizations have plowed the field and tilled the soil and made it ready for our technology to be planted," he says. "So many more will be needed to help us grow to commercialization and beyond."

In addition, Inbicon recognizes that it can, and should, help the ethanol industry continue to grow. One way to do that is to show support for U.S. DOE and USDA policies for ethanol and share knowledge with those agencies. Inbicon also supports the efforts of industry groups such as the Renewable Fuels Association, Canadian Renewable Fuels Association, Growth Energy and American Coalition for Ethanol. The company can speak out to help get E15 approved for all cars, Henriksen says. It also supports the Blend Your Own campaign for blender pumps as a good idea to help stimulate consumer choice. Attending conferences is another valuable way to make connections. "We have formed more collaborations among companies we've met through conferences than any other single way, and this has accelerated our move to commercialization," he says.

To encourage cooperation among cellulosic ethanol producers, Henriksen suggests a roundtable discussion on ways to accelerate commercialization. After all, on close examination, competitors often don't compete in every area. Inbicon could share knowledge gained through 15 years of biomass gathering, storage and logistics experience it has in Denmark. "Our parent company has developed the logistics and mechanization to handle 1.6 million tons of wheat straw and wood chips a year, which is used in power stations to generate electricity," he says. "We might share some of that knowledge in exchange for specific knowledge of American or Canadian biomass. That would get us both to commercialization faster. And commercializing cellulosic faster will revitalize the entire ethanol industry."

Henriksen's fear for the future is that the opportunity for cellulosic ethanol will come and go without the ethanol industry seizing the moment. He points to a report that says the Chinese government invested $38 billion in clean energy last year. It would be amazing to see the results if only a fraction of that money could be funneled into the effort to commercialize cellulosic ethanol, he says.

Although Inbicon is working to license its technology globally, the company sees the U.S. as the best market for commercialization, followed by Canada. "Anything that stands in the way of cellulosic commercialization in North America is an important issue, whether it's the blend wall or the lack of consumer choice in fuels," he says. "If the ethanol industry, together with the government agencies and private investors, can show we're all moving quickly to commercialize cellulosic, that would be huge."

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
(701) 738-4946

A New Normal

Valero Energy Corp., parent company of Valero Renewable Fuels, sees the transportation fuels market as being an area of critical importance in 2011, but has a different slant on the market compared with a pure-play ethanol producer. "Valero is one of the largest ethanol producers in the country now-we have the capacity to produce 1.1 billion gallons of ethanol every year-but it's a relatively small part of Valero's overall business," says Bill Day, media relations director for Valero. "Our refining business is much larger, so we're also facing challenges on the petroleum/refining side with greenhouse gas regulation, lack of demand for refined products and an oversupply."

The biggest contributing factor toward declining gasoline demand in the U.S. has been the recent economic slowdown, according to Day. An aging population that drives fewer miles, increased production of fuel-efficient vehicles and a rising ethanol mandate compound the issue, but the economy will be the main driver in bringing back demand for gas, which will in turn influence Valero's ethanol plans. "We have been looking for recovered strengths in economic demand for awhile now," Day says. "We had a pretty good summer driving season this year. We would hope that 2011 will be even better. But we need people to get back to work. Demand for fuel is directly tied to the economy, so that's what we'll be looking for in 2011-increased signs of economic growth."

But while gasoline demand may be decreasing, ethanol demand will continue to grow through 2022 thanks to the renewable fuel standard (RFS). It was this mandate that spurred Valero to enter the ethanol industry and it will continue to provide support to the blossoming ethanol industry, according to Day. "Valero recognizes that ethanol is going to be an important part of the transportation fuel mix in this country going forward, no question about it," he says. "The government has made it clear that it will increase the amount of ethanol required for blending in gasoline, there are millions of flex-fuel vehicles on the road and that number is increasing, and we're seeing increased locations where products like E85 are being sold. If we're going to be required to blend ethanol and gasoline anyway, we might as well be on the production side."

Day declined to speculate whether vertical integration by refiners will continue in 2011, but says refiners' interest in producing ethanol should be viewed positively by the industry as a sign that ethanol is becoming accepted as part of the national fuel mix. "I think people realize now that we're in it to stay," he says. "It's an important part of our business and we bring certain advantages to the industry that companies hadn't had before. We have a lot of expertise in product trading and dealing with markets and commodities. We have a trading floor at our headquarters in San Antonio where traders do nothing but buy and sell commodities like crude oil, gasoline, diesel, and now ethanol. We're buying and selling corn and corn products. With that level of expertise, plus other synergies such as purchasing and logistics, it adds up to a lot of advantages."

According to Day, the successful ethanol producers in 2011 will be those who can produce a product efficiently and at a low cost, regardless of whether they're backed by a major corporation. "Fuels production, whether it's ethanol or refined products, has traditionally been a cyclical business and a low-margin business and that's the environment we find ourselves in now," he says. "We're back to the new normal."

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 850-2553

A Pivotal Year for Cellulosics

While many operating ethanol producers see market demand as the No. 1 issue of 2011, producers who haven't yet introduced their product to the market have another perspective on what's really important. Craig Stuart-Paul, CEO of Fiberight LLC, isn't very concerned about the ethanol blend wall because he says the renewable fuel standard (RFS) will provide plenty of demand for his municipal-solid-waste-based ethanol. Instead, he, like many other cellulosic ethanol producers, is losing sleep over simply getting the plant to operate at a profitable level. "There's always a fear of the unknown," he says. "We have done huge amounts of work to de-risk the technology, we've got thousands of sets of data that says it's going to work, but until you turn the thing on, you don't truly know. That's the point we're at: we've made some cellulosic ethanol, but now we've got to make it day after day and make a profit doing it."

The price paid for cellulosic renewable identification numbers [RINs] could be the determining factor in whether Fiberight and other cellulosic producers can turn a profit. Stuart-Paul says the industry needs clarity on the value of its RINs, which should conceivably be $3 per gallon, before it can accurately assess the economic viability of its processes. The difficulty is that RIN values can't be proven until physical transactions occur, creating a chicken-and-egg predicament. Cellulosic ethanol has to be produced and sold before RIN values can be assured, but producers need to know how much those RINs are worth before they can determine if their process is profitable. "The only way that we'll be able to say to a financial counter-party that we're going to get this much value is by actually transacting at $3 per gallon," he says. "I think that's a highly likely outcome, but you can't take it to the bank yet." He believes the issue should be resolved by the second quarter of 2011, when RINs that were allowed to be carried over from 2010 expire and buyers will need to begin purchasing cellulosic D3 RINs.

2011 will likely prove be a pivotal year for Fiberight and the cellulosic industry overall. Fiberight is expected to not only begin commercial operations next year, but also to be the largest cellulosic contributor to the RFS next year-providing 2.8 million gallons to the total goal. The company is also working with U.K.-based TMO Renewables Ltd. to design and construct 15 commercial-scale municipal-solid-waste-to-ethanol facilities across the U.S. within five years. Stuart-Paul says the demand for waste solutions and waste-based biofuels is "huge" and there is ample feedstock available, so the only hurdle remaining before a rapid build-out of facilities can occur is the first commercial process demonstration. His sentiments on commercial expansion echo that of many future ethanol producers. "Once you have the first plant going you've got a commercial history, you know what you sell it for and you've de-risked the technology and can get performance guarantees for the next five plants," he says.

Recent advancements made in the academic and private sectors to increase the conversion efficiencies of advanced metabolic pathways are an encouraging sign that the industry is moving toward commercial viability, according to Stuart-Paul. The USDA's increased participation in financing biorefineries is a positive indicator that funding issues are being addressed and will soon be alleviated. There is still much work to do, however, and Stuart-Paul says his company is willing to cooperate with future competitors in order for the entire industry to succeed. "If people need to de-risk a process, our plant might be available to work with them," he adds. "We see that a rising tide lifts all boats. The more success there is, the more momentum we gain to become a legitimate industry."

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 850-2553

An Interesting Year Ahead

Mansfield Oil Co. doesn't currently own or operate any ethanol plants and doesn't intend to in the future, says CEO Doug Haugh. What the company does, and does well, is market and distribute renewable fuels. In the past year and a half, the company acquired California-based ethanol fuel distributor Western Ethanol Co. LLC and C&N Co., a biofuels distribution and marketing company in Minnesota. In all, the company has offtake agreements with 11 ethanol facilities and works with biodiesel as well.

Renewable fuels accounts for 20 percent of Mansfield Oil's business and continues to be the fastest growing sector of the business. "Renewables is going to be a big part of our business and it will stay that way for a long time," he tells EPM. Although he doesn't want to sound too pessimistic, Haugh does see some big barriers to the further growth of the ethanol industry. "2011 is going to be interesting," he says.

The No. 1 hurdle for the ethanol industry is regulatory uncertainty. If the Volumetric Ethanol Excise Tax Credit does not get extended by Congress-and, from what Haugh was hearing in October it didn't sound promising-it will likely mean some closed ethanol plants.

Haugh doesn't anticipate the ethanol industry will be as hard hit as the biodiesel industry, however. Ethanol can still be profitable without VEETC, but it will take an increase in prices for renewable identification numbers (RINs). What will happen is a differentiation between plants that are operated efficiently and those that not, he says. Ethanol plants with an edge, such as good rail transportation and corn supplies close by, will continue to operate profitably while other plants may have to shut down and/or declare bankruptcy.

What scares Haugh the most is that the renewable fuel standard could be revoked. In fact, in early October he heard reports of a Congressman putting that very thing on the table. At this point, that's not likely to happen, but just the fact that it's being discussed shows a dangerous shift in thinking.

He also points to the U.S. EPA's July decision to cut the cellulosic volume for 2011. While the RFS2 called for 250 million gallons of cellulosic biofuels by 2011, the EPA predicted that the achievable volume range would actually be 5 million to 17.1 million gallons. At what point, Haugh wonders, will several years of missing the production targets for cellulosic make it easier politically to just repeal that part of the RFS2-or even the whole thing?

He also strongly believes that corn ethanol should remain an important part of displacing gasoline, not just cellulosic ethanol. Progress would have been stymied if, 80 years ago, the U.S. had restricted itself to producing straight cut gasoline from one kind of crude oil. "We'd all still be driving horse and buggy," he says.

The corn-to-ethanol industry does need to become more sustainable, however. Haugh has seen good things happening but more needs to be done, he says. The difficulty is getting funding for projects, something that has plagued more than just ethanol in this economy. It's pretty hard to put up capital for a project when the company doesn't have that money available, even if it would save money, energy, and improve overall sustainability in the long run, he asserts.

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
(701) 738-4946