By John Auers and Elizabeth Hilbourn
“This is the song that never ends, it goes on and on my friends, some people started singing it, not knowing what it was, and they continued singing it forever just because this is the song that never ends, it goes on and on my friends…”
By now, you know that you are reading what is known in children’s songs, computer programming, and the push of cellulosic biofuel as the Infinite Loop. This is a song, program or push which loops endlessly, either due to the loop having no terminating condition, having one that can never be met, or one that causes the loop to start over. Cellulosic ethanol has been pushed for years, particularly since the start of RFS2 in 2010, and yet there are essentially just drops of it in the market in comparison to other renewable fuels. Like the song that never ends, cellulosic ethanol is given government money, tested on a bench-scale basis, pushed annually in the renewable fuel standards, then given more government money, tested on a larger pilot plant basis, and on and on in the Infinite Loop. Even with large government subsidies, it never seems to become economical enough for significant commercial plants to be constructed. Last week, we discussed EPA’s November 30, 2015 announcement of the 2014-2016 renewable fuel standards. The aggressive standards made quite a stir in the market, with RIN prices increasing by 15% and 60% for biodiesel and ethanol, respectively. 2014 and 2015 obligations appear to be set higher than the actual/projected RINs available; and, therefore, should reduce RIN carryover levels. The 2016 obligation appears to be set at a level where gasoline would need to contain approximately 10.8 volume percent ethanol. It seems fitting that we should continue discussing renewable fuel standards, and in particular, the category anticipated to grow the most, cellulosic biofuel.
The EPA believes that the RFS program can and will drive renewable fuel use, and as an important subset, cellulosic biofuel use. Numerous cellulosic ethanol bench scale, pilot, and demonstration plants have been built in the U.S. Some of the pilot and demonstration facilities are listed below. Commercial plants have just begun entering the scene beginning in 2013, with the latest 2015 startup being known as the largest in the world, the Dupont Nevada, Iowa cellulosic ethanol plant. Just as numerous and significant as the existing plants, are the ones who have closed or bailed. Even the December 7, 2015 issue of Ethanol Week announced Abengoa layoffs at its Hugoton, KS cellulosic ethanol plant. Valero’s exit in 2013 and BP’s exit in 2014 has been noted.
The figure below shows the cellulosic RINs produced to date. There are two categories of cellulosic RINs, cellulosic biofuel with a D3 RIN and cellulosic diesel with a D7 RIN. Cellulosic diesel is made with the Fischer-Tropsch process. Diesel fuel produced from cellulosic feedstocks that meets the 60% GHG threshold could qualify as either cellulosic biofuel or biomass-based diesel, and an obligated party is allowed the flexibility to apply a RIN with a D code of 7 to either their cellulosic biofuel renewable volume obligation (RVO) or their biomass- based diesel RVO. Cellulosic RINs have topped 100 million gallons in 2015 and have grown substantially since 2013 when less than 1 million gallons were generated. In 2014, the EPA also determined that compressed natural gas (CNG) and liquefied natural gas (LNG) produced from biogas from landfills, municipal waste-water treatment facility digesters, agricultural digesters, and separated municipal solid waste (MSW) digesters were eligible to generate cellulosic RINs. This determination led to a significant increase in cellulosic RIN generation beginning in late 2014, as fuel that previously had been qualified to generate advanced biofuel RINs could now generate cellulosic RINs. Consequently, less than 2% of cellulosic RINs to date have been produced from ethanol as shown by the green bar in the chart below.
Cellulosic Waiver Credits
In 2015, EPA clarified which data sources will be used in the cellulosic waiver credit (CWC) price calculation. The price of a CWC is determined using a formula specified in the Clean Air Act (CAA). The cellulosic waiver credit price is the greater of $0.25 or $3.00 minus the wholesale price of gasoline, where both the $0.25 and $3.00 are adjusted for inflation. The table below lists all the cellulosic waiver prices to date. One important point in comparing cellulosic waiver credit prices to cellulosic RIN prices is the nesting of cellulosic RINs. Any renewable fuel that meets the requirement for cellulosic biofuel or biomass-based diesel is also valid for meeting the advanced biofuel requirement; however, a cellulosic waiver credit cannot be applied to an advanced biofuel requirement. So, essentially, when market-driven and when both cellulosic waiver credit and cellulosic RINs are made available, a cellulosic RIN should equal the price of a cellulosic waiver credit plus the price of an advanced biofuel credit.
Cellulosic biofuels are required to have 60 percent or greater greenhouse gas (GHG) emission benefits on a lifecycle basis than the petroleum-based fuels they replace. The cellulosic biofuel industry continues to transition from research and development (R&D) and pilot scale operations to commercial scale facilities. RIN generation from the first U.S. commercial scale cellulosic biofuel facility began in March 2013. As shown in the table below, the EPA hoped that almost one-half of the renewable fuel requirements by 2022 be met by cellulosic biofuel, or more specifically, 16 of the total 36 billion gallons. Again, this requirement is significantly different than both the 2014-2016 final rulemaking and the cellulosic RINs generated to date. Also, the 230 million gallon cellulosic requirement in 2016 appears small in comparison to the statuary levels, but it is over twice the volume that has been produced in a year’s time.
Why is it so difficult to make cellulosic ethanol economically?
The production of ethanol becomes more difficult when starting with more complex carbohydrates from corn grain or other plant materials. Researchers are looking for more efficient, less expensive ways to easily separate the cellulose from the lignin and also to find less expensive enzymes that efficiently chop the cellulose into smaller pieces of glucose for fermentation. The National Renewable Energy Laboratory (NREL) is the U.S. Department of Energy’s main national lab for research and development on renewable energy and energy efficiency. NREL has been working on cellulosic ethanol since 1980. Over the past decade, NREL has reportedly brought down the cost of cellulosic ethanol from about $10 a gallon to a reported $2.15 a gallon, primarily by bioengineering better enzymes. Besides high enzyme costs, cellulosic ethanol has high capital and feedstock costs. In contract to cellulosic ethanol, the starch in corn kernels easily converts into simple sugars, with the enzyme catalyzing this process costing a mere 0.03 cents per gallon.
A glimpse of the tax support
It is not realistic in the scope of this blog to tally up all that has been paid by U.S. taxpayers toward cellulosic ethanol development; however, consider the following. U.S. taxpayers footed more than $100 million of POET’s Emmetsburg, IA facility. Abengoa reportedly received $229 million from taxpayers for its project in Hugoton, KS. For this, the combined plants are running at an annualized capacity of 1.7 million gallons of ethanol, which would sell on the spot market today for $2.6 million. In addition, the Abengoa plant is currently under such a financial crunch that it currently is laying off workers.
A section on alternative fuels will be included in our 2016 Crude and Refined Products Outlook, scheduled to be issued in early February. Also included in this report will be detailed forecasts of supply, demand and prices for refined products, both in the U.S. and throughout the world. The impacts alternate fuels have on the refined products markets will be incorporated into the forecasts. We also use this analysis, which we update on a regular basis in our other industry studies and work products. For more details about any of our publications, studies or other TM&C services, please visit our website, send us an email or give us a call.