“My gosh, it’s been a boon for everybody,” said Myrna Heddinger, a retired nurse serving her third term as the mayor of Emmetsburg, a town of 3,500 people that has squeezed in 500 temporary construction workers. “We just don’t have that many places for people to rent to stay,” she added.
Poet and its joint venture partner, the Dutch industrial giant and enzyme maker DSM, have received $100 million in Energy Department grants and $20 million in financial incentives from the state of Iowa. They say they expect to begin production of ethanol at the Emmetsburg plant in early 2014, at a rate of about 20 million gallons a year.
Not a moment too soon. For months, a brawl has been brewing in Washington over the future of ethanol plants like this one, pitting well-financed oil giants against trade groups and companies representing the politically well-connected biofuel industry.
The heart of the dispute is the Energy Independence and Security Act passed by Congress in 2007 with rare bipartisan support. The law provided a road map for increasing the use of renewable agricultural byproducts in the U.S. motor fuel supply. The Poet plant is just what Congress envisioned, a Middle America biofuel displacing Middle East crude — with some possible climate benefits to boot.
Corn-based ethanol, which makes up nearly 10 percent of U.S. motor fuel, has been in large-scale production for years. But Congress was worried about driving up the price of corn used as feed for livestock and poultry. So lawmakers capped the total production of corn-based ethanol and set a schedule for ramping up the use of “advanced” biofuels made from corn husks, switch grass, wood chips and other stuff known as “cellulosic” material to 16 billion gallons by 2022.
There’s one problem, though: So far, no company has produced cellulosic ethanol at commercial volumes.
A slower-than-expected start
Congress assumed that it could be phased in gradually, but not this gradually. This year refiners were supposed to mix about one billion gallons of it into motor fuel. So far, there has been hardly a drop. More than a dozen companies have tried and failed to find a profitable formula combining sophisticated enzymes and the mundane but costly and labor-intensive job of collecting biomass.
Congress had the foresight to provide a safety valve. The Environmental Protection Agency, using its authority under the 2007 law, slashed the cellulosic ethanol quota this year, first to a paltry 14 million gallons and then again to 6 million, equal to about 0.004 percent of the fuel consumed by U.S. automobiles. It also extended the deadline for compliance. The EPA is widely expected to announce minimal quotas for next year soon, too. Oil industry lobbyists believe the EPA will also, for the first time, trim the minimum quotas for corn-based ethanol, angering farm interests and big corn-ethanol producers.
The shortfall in cellulosic ethanol output has helped trigger high costs for some oil refiners under an arcane enforcement scheme that has the oil industry screaming — and lobbying — for congressional and regulatory relief. Ashley M. Smith, vice president for investor relations for Valero, the nation’s biggest oil refiner, said during an Oct. 29 conference call with analysts that the company expects to spend $500 million to $600 million this year to buy certificates to comply with the program.
The American Petroleum Institute, a trade group for the nation’s oil and gas industry, says that petroleum refiners shouldn’t have to wait for the EPA to amend the targets every year. It wants the mandates — known as the Renewable Fuel Standard — abolished so that refiners don’t pay penalties for failing to comply. The API has wallpapered billboards, Web sites and subway systems with ads. It has lobbied key members of Congress. And it has filed a lawsuit against what it called an “unrealistic mandate.”
“Our bottom line is that the RFS must be stopped once and for all,” said Bob Greco, API’s director of upstream and industry operations. He said the standard was “simply broken.”
William R. Klesse, chief executive of Valero, which is also the nation’s third-largest cornethanol producer, wrote to EPA Administrator Gina McCarthy in September saying that cellulosic ethanol “is still basically nonexistent with only small volumes expected.” He said Congress “should develop an alternate RFS that encourages the development of the business, but also represents the real world.”
The ethanol industry has fired back that the oil companies’s real agenda is to prevent a new industry from competing for space in American fuel tanks. They charge that oil firms fear losing even a 1 percent share of the roughly $450 billion-a-year gasoline market, especially since U.S. gasoline consumption peaked in 2005 and has been falling as a result of higher fuel-efficiency standards for new American cars.
“We would never have invested the amount of money we’ve done without a clear framework like the one the RFS is providing. It is absolutely critical,” said Manuel Sánchez Ortega, the chief executive of Spanish engineering giant Abengoa, which is finishing a cellulosic ethanol plant in Hugoton, Kan. Repealing the RFS, he added, “would be somehow misleading to the investment community.”
Rep. John Shimkus (R-Ill.), a senior member of the House Energy and Commerce Committee, is one target of lobbying groups. The goals set by Congress in 2007 were “just too aggressive,” he said during a September meeting with reporters organized by Platts, an energy newsletter. But, he added, “there are people who’ve made major investments. You’re talking billions of dollars. . . . So what kind of signal are you sending” by changing the RFS? “That kind of scares me,” he said.
The industry takes off
The fight is coming to a head just as the first well-financed, truly commercial-size cellulosic ethanol plants are poised to come onstream. These ventures, while behind schedule, aren’t start-ups, and the companies behind them have the financial muscle to push ahead. Dupont is close to completing a plant in the town of Nevada, Iowa, that will produce 30 million gallons a year. Abengoa, the Spanish multinational energy, engineering and construction firm with more than 22,000 employees worldwide, says its Kansas plant will start up by early next year and produce 25 million gallons a year. It has been signing 10-year contracts with farmers within a 50-mile radius to buy biomass.
Poet and DSM expect to begin production in Emmetsburg in early 2014 at a rate of about 20 million gallons a year. Poet, which is the country’s biggest corn-based ethanol producer, has worked on cellulosic technology since 2001. The plant is located next to a Poet corn-ethanol plant, so that it can draw on the same farmers for raw material.
“You’ve got $1 billion plus of investment in steel, and people don’t put that kind of money in just for fun,” said Adam Monroe, president of Novozymes America, the subsidiary of a Danish company that makes enzymes used to convert plants into sugars and then ethanol. “That first wave is coming online. It’s been delayed, but many companies have experienced this in the economy we’ve had in the past five years. I’ve given my opinion to the guys up on the Hill: The standard has delivered the objectives of developing the fuel and the technology.”
Even with the opening of those three plants, U.S. cellulosic ethanol output will be minuscule compared with the ocean of gasoline American cars use. Altogether, they would produce about 4,900 barrels a day — or less than 0.06 percent of U.S. consumption. But the companies building those facilities say that they could replicate them and ultimately capture about 10 percent of the U.S. motor fuel market.
“There is no question that there is a delay and therefore we expect the EPA to adapt the targets to the real production capacity of the industry,” said Ortega, the Abengoa CEO. But he said abolishing the standard would be a mistake.
“This is a huge change for the next 200 years. Two or three years delay — that’s nothing,” he added. “Ten years from now, when you look back, no one going to remember whether the industry took two or three more years to get to commercial scale. It’s like asking when the airplane industry came to scale. You might get the decade but not the year.”
Navigating the RIN market
To reach the ethanol goals set by Congress, the government came up with a byzantine implementation plan.
Each gallon of renewable fuel has its own 38-character number, called a “renewable identification number,” to track its use and monitor trading. There are different types of these RINs for different biofuels, including corn-based ethanol, cellulosic ethanol and biodiesel.
In February of each year, refiners who fail to provide enough renewable fuel to the blenders who mix ethanol and gasoline must buy extra RIN certificates.
When companies have extra credits for renewable fuels, the RINs can be banked and sold in later years. If there are not enough renewable fuels overall, the price of RINs rises — and provides an incentive to produce more.
Normally, the RIN market is sleepy, with certificates selling for a few pennies a gallon. But earlier this year, uncertainty about whether the EPA would scale back the production targets and an element of speculation by traders at financial institutions combined to drive up the price of RINs to about $1.40 a gallon in July. Industry sources say that Morgan Stanley and energy trading firm Vitol took positions by buying and selling RINs.
Suddenly, some refiners desperately needed RINs — and paid dearly for them. “And you can’t consider that an investment,” Bill Day, a Valero spokesman, said. “It’s just a cost of compliance. It has no benefit, except if you’re the one who made a lot of money off of the RINs.”
Oil refiners say the RIN system also punishes consumers. “It has affected gasoline prices at the pump,” Day said, though the amounts tend to be modest. At $1 a gallon, and with ethanol making up a tenth of motor fuel volumes, that would add a dime to the cost of gasoline for as long as the high RIN prices persist. After the EPA changed the targets again in August, the RIN prices tumbled closer to their usual levels.
The system has been subject to fraud. Last year, in the suburbs of Baltimore, Rodney Hailey of Clean Green Fuel was convicted of selling $9 million of fake biofuel RINs to oil companies, brokers and producers. The refiner Tesoro allegedly used 861,000 invalid RINs, the EPA said
. Hailey’s attorney said the brokers knew what he was up to. Hailey used the money to rent private planes, buy jewelry and More than a dozen luxury cars.
Scaling the ‘blend wall’
Boosting the use of ethanol in motor fuel faces another obstacle: the “blend wall.”
Oil industry executives say that ethanol should not make up any more than 10 percent of every gallon of motor fuel sold. The API says that motor fuel with 15 or 20 percent ethanol levels might damage vehicle engines and wouldn’t be covered by automakers’ warranties. Moreover, oil companies don’t want to pay for new pumps at gas stations, most of which are independently owned.
Ford Motor Co., which is developing cars capable of handling high levels of ethanol, warns on its Web site that “ethanol blends above E10 . . . may damage engines that are not designed to operate on higher concentrations of ethanol; this poses a particular concern for older vehicles.”
Supporters of biofuels say that, when it comes to cars, the API is relying on the results of limited studies, such as one by the Coordinating Research Council, a group supported by the oil and auto industries. It looked at eight cars, three of which suffered engine problems. The Energy Department called the study “seriously flawed” because, among other things, it subjected engine parts to unusually severe stress.
The Energy Department’s own study, based on 86 cars and four types of fuel, found no damage from the higher ethanol levels. The department said its tests “showed no statistically significant loss of vehicle performance (emissions, fuel economy, and maintenance issues) attributable to the use of E15 fuel compared to straight gasoline.” It called the industry study “unreliable and incomplete.”
An earlier Energy Department test of 2009 model cars also showed no effects from higher ethanol levels.
The EPA has approved the use of fuel with 15 percent ethanol, but only for cars manufactured after 2001. E85, with 85 percent ethanol, can be used by flex-fuel cars, which make up a small portion of the nation’s cars, mostly in the Midwest. In order to absorb the final congressional targets for ethanol use, ethanol will need to make up 20 percent or more of motor fuel.
Higher volumes of ethanol have other challenges. Ethanol absorbs water, which can contribute to pipeline corrosion, so companies usually transport ethanol by truck or rail and the blending of ethanol and gasoline takes place at distribution terminals close to gas stations.
Ethanol also has two-thirds of the energy content of gasoline, so increasing the portion of ethanol reduces the miles per gallon slightly.
The API also says that high ethanol fuel would damage gasoline-fired lawn mowers, leaf blowers and chain saws. But Hugh Welsh, president and general counsel of DSM North America, countered, “we shouldn’t make U.S. energy policy according to what’s good for chain saws.”
Battles over the fuel standard
In July, the API launched an aggressive “fuel for thought” print, radio and television campaign to rally public support to kill the Renewable Fuel Standard. It paid for a study by NERA, an economic consulting firm, which used the phrase “death spiral” a dozen times in a report, saying the standard “in its current form” could jack up diesel fuel prices threefold and raise gasoline prices 30 percent.
The group’s ads were placed in the District but also in the states and districts of lawmakers targeted by the API, an effort to prod constituents into pressuring their representatives. One shows a photo of a woman in a grocery store holding up her receipt above the words: “Diverting crops from food to fuel? We’re the ones who pay the price.”
“Battle ads are running not only here but in some parts of the country,” Shimkus said, adding that “it does not make for good negotiations when you’re getting pummeled.”
Oil industry lobbyists say they still hope for legislative change, if not repeal. One outcome the lobbyists have explored: keep the 10 percent limit on ethanol, trim the corn’s share and increase the cellulosic quota. Because cellulosic ethanol’s level of greenhouse gas emissions is lower than corn ethanol’s, the oil lobbyists hope they can make common cause with some liberal lawmakers concerned about the climate.
The farm lobby remains a potent force in favor of leaving the fuel standard alone. The ethanol business has provided new markets and more demand for corn. “There is no need for Congress to intervene in this,” Agriculture Secretary Tom Vilsack said in a speech in September. “There is no need for Congress to try to rewrite this renewable-fuels standard. They got it right the first time.”
Refiners bristle over that. “The only one this is working for is the corn growers in Iowa, but that’s not why we created this program,” said Stephen H. Brown, vice president for government affairs at Tesoro. “The idea was not to lift all boats in Iowa. The idea behind this was not a Marshall Plan for the Midwest.”
Many refiners also want Congress to restructure the enforcement system. In a Jan. 25 unanimous ruling on a case brought by the API, the U.S. Court of Appeals for the District of Columbia Circuit wrote that the RIN system punishes refiners for biofuel producers’ failings.
“Apart from their role as captive consumers, the refiners are in no position to ensure, or even contribute to, growth in the cellulosic biofuel industry. ‘Do a good job, cellulosic fuel producers. If you fail, we’ll fine your customers,’ ’’ the court wrote. “Given this asymmetry in incentives, EPA’s projection is not ‘technology-forcing’ in the same sense as other innovation-minded regulations that we have upheld.”
While the court upheld the EPA’s power to issue waivers or independently calculate reasonable renewable-fuel requirements, it faulted the agency for leaning toward setting targets higher than actual output in an effort to stimulate new production. The ruling said the agency should not “let its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.”
But the view from Iowa is that the prophecy is starting to be fulfilled, albeit slowly. DSM’s Welsh said “the idea that this is some kind of phantom fuel is evaporating. And that’s why there is so much rhetoric from the oil industry. Every drop of ethanol that replaces a drop of gasoline costs them money. But without the mandate, there’d be no industry.”