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Industry says RFS proposal will chill cellulosic investments

By Erin Voegele | January 22, 2014

The U.S. EPA’s proposed reductions to the 2014 renewable fuel standard (RFS) volume requirements will not only impact current biofuel producers, the move will also chill investment in second generation cellulosic projects and technologies.

During a Jan. 22 teleconference hosted by the Renewable Fuels Association, leaders of three companies developing second generation ethanol technologies spoke about the impact the EPA’s proposal will have on their business operations, the U.S. market, and the cellulosic industry as a whole.

The RFA has held similar teleconferences in recent weeks focusing on a wide range of issues tied to the EPA’s reduced RFS proposal, including those focused on renewable identification numbers (RINs), gas prices and the trends and successes of the RFS. However, Bob Dinneen, president and CEO of the RFA, opened the Jan. 22 call by stressing that the biggest impact of the EPA’s proposal is on the successful commercialization of cellulosic technologies.

Chris Standlee, executive vice president of institutional affairs at Abengoa Bioenergy U.S. Holdings Inc., spoke about the impact of the proposal on his company’s international operations. Abengoa owns 15 ethanol production facilities globally, including those in Europe, the U.S. and Brazil. The company’s first cellulosic facility is under development in Hugoton, Kan. “We’ve actually completed phase one of the startup of that facility, which is the boiler and the electric cogeneration system, and the ethanol startup is intended to be commenced within the next few weeks,” he said.

According to Standlee, Abengoa views the RFS as the single most important investment and market driver in the biofuels industry. It’s a critical program, he said, noting that the RFS is the primary reason his company has invested more than $1 billion in the U.S. over the past several years. The program promotes investment by guaranteeing a market for products produced at cellulosic facilities, he continued.

Standlee also stressed that Abengoa believes that first-generation ethanol is inexplicitly tied to second-generation ethanol. “We, as a major first-generation ethanol producer, have invested heavily in second-generation,” he said. “We believe that the future growth of renewable fuels, and ethanol fuels in particular, are tied to cellulosic ethanol, second generation technologies. At the same time, we think that the most likely investors in these new facilities and these new technologies are first generation ethanol producers.”

Abengoa’s business plan is focused on proving its cellulosic technology and then licensing that technology to other companies, particularly existing ethanol producers. However, Standlee notes that EPA’s proposed rule has essentially validated the blend wall and limited the U.S. biofuels market to 10 percent. “That creates a battle for market share between existing producers and new producers,” he said. The proposed rule rule basically asks first-generation to strand hundreds of millions of dollars of existing investments in first-generation ethanol plant in order to invest in second-generation facilities.

Standlee called the EPA’s proposal a box around the market for ethanol, limiting it to 10 percent. There is already enough capacity to fill that 10 percent market share. That means that first-generation producers are having to fight with second-generation producers for market share.

Even if the EPA were to change the proposal and carve out a market specifically for second-generation fuels, Standlee said the EPA has already placed into question the administration’s support of the RFS. According to Standlee, questionable support from the administration will make it nearly impossible for new investors and existing producers to have confidence there will be a market for cellulosic fuels. As a result, they may not be willing to invest large sums of money in a new facility.  

Abengoa is also experiencing that hesitancy to invest. “We have decided that we are placing a hold on our evaluations of future investment in bioenergy within the United States until we see what the final rule is and what impact it does have on the markets,” Standlee said. “We have high hopes that the EPA will reconsider the rule and its impact and perhaps revise this rule.” Rather than focus on its original business plant to immediately begin licensing the technology to existing produces once the Hugoton plant is operational, Standlee said Abengoa is instead looking at potential investments in other countries.

Brian Foody, president and CEO of Iogen Corp., also stressed that the RFS is the single most important investment and market driver in the U.S. “It’s critical that investors see [the program] as continuing,” he said. If investors see the American ethanol market as fixed and bound, there will be no motivation to invest in new fuel technologies. “I think that would be a shame for America, and it would undermine the good intentions and public policy benefits that the RFS and Energy Independence and Security Act were intended to promote,” Foody continued.

While cellulosic biofuel has the promise to deliver tens of billions of gallons of ethanol to the U.S., the E85 and E15 markets need to grow in order to accommodate that production. “Those markets are nascent and the signals that are created by the RFS, particularly the signals through D6 RIN pricing are important. We believe it is critical for EPA to create a segment or a space in the market for E85 to grow and to set numbers that will provide incentives for the growth of E85. E85 is going to be in a position to offer very cost effective fuels to America and it will create the vision and the space for the growth of cellulosics and the continued prosperity in the corn ethanol sector, and we are very keen to see this happen,” Foody said.

Delayne Johnson, general manager of Quad County Corn Processors, spoke about bolt-on technology under development by his company that can produce cellulosic ethanol from the cellulosic materials found in the corn kernel. Quad County began construction to add the cellulosic process to its Iowa-based plant in July. Johnson estimates the bolt-on facility will be operational by May or June. Once complete, the plant will be capable of producing 1.8 to 2 million gallons of cellulosic ethanol per year. If the technology was added to all existing U.S. ethanol plants, Johnson estimated that the process could produce approximately 2 billion gallons of cellulosic ethanol annually.

Quad County also intends to license its cellulosic technology to existing producers. According to Johnson, the EPA’s RFS proposal is expected to create uncertainty in financing for plants that considering adopting the technology.

Johnson also expressed concern that the EPA’s proposal could negatively impact investments being made by yeast and enzyme companies to produce products for use at second-generation facilities. “Those investments are going to be stifled if, in fact, the RFS is changed as indicated,” he said. “[It will] hinder the ability to further improve the efficiencies of cellulosic technologies of all kinds.”

“You don’t need a degree in economics to understand that if you turn a growth market into a shrinking market, you are going to have investors going the other way,” said Brooke Coleman, executive director of the Advanced Ethanol Council.

According to Coleman, it’s critical to understand that the administration is not just proposing cuts from a statutory increase. It is proposing cuts from what was achieved last year. “They are proposing for oil companies to blend less gallons this year than they actually had to blend last year, and that’s a terrible signal for investment,” he said.

Coleman said that within the proposal, the president and administration have reengineered the RFS to react to the market rather than to drive change in the marketplace, meaning that change won’t happen. “[The president] has turned what has previously been the global gold standard with regard to advanced biofuels policy, into a shell of its former self,” Coleman said, adding that as a result investors will turn their attention to other regions, such as Brazil and China. “This is a president that was committed to creating new jobs and new industries. There is no better way to do it than this. And we hope that the administration will change its mind and change the proposal in the final rule,” he said.

 

 

 

 

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