Industry Market Trends
Is Cellulosic Ethanol The Loch Ness Monster Of Biofuel?
January 31, 2012
It was one of those "blink and you miss it" things. In June of last year, Congress formerly repealed the nation's ethanol subsidies in a bipartisan vote that raised few eyebrows and generated only a handful of news reports. The tax credit, which had been in place since 2004, gave the makers of ethanol $0.45 cents for each gallon they produced. It was an expensive program - it cost taxpayers $6 billion in 2011 alone - and it had few supporters, save the growers of the corn and the ethanol refiners. While corn farmers held out hope the subsidies would be renewed, they were opposed by both fiscal conservatives and Democrats as a prime example of corporate welfare. They were also opposed by environmentalists, since studies have concluded that ethanol is actually worse for the environment than gasoline. So while it may be the end of the road for government subsidies on corn-based ethanol, it's not the end of government financial support for biofuels or ethanol, particularly ethanol produced from other sources. Still in place are mandates adopted by the Bush Administration - and renewed by the Obama administration - that set goals for ethanol production. Let's back up a moment. In 2007, Congress, through the Energy Independence and Security Act, amended and expanded the Renewable Fuel Standards (RFS), which were created in 2005 to encourage production technologies for biofuels. According to the EPA, which oversees the standards, the rules were created to help achieve "significant reductions of greenhouse gas emissions from the use of renewable fuels, for reducing imported petroleum, and encouraging the development and expansion of our nation's renewable fuels sector." While the RFS are little disputed (though somewhat grumbled about) when it comes to goals for most kinds of biofuels, there is one type that has proved to be a considerable sticking point: cellulosic ethanol. While most ethanol in the past has been made from edible plants such as corn or sugar cane (one of the reasons environmentalists oppose it), cellulosic ethanol is made from the non-edible parts of plants, or non-edible plants. Corn stover (the leaves and stalks of the corn plant), switchgrass (a tall, wild grass that grows in abundance in bad soil), wood chips and even waste paper and wood pulp are all potential materials for the production of cellulosic ethanol. It's an ideal choice for biofuels since source materials grow abundantly throughout the world and replenish quickly and easily in relatively poor-quality soil. A benefit of cellulosic biomass is that it effectively ends the "food vs. fuel" debate that has set environmentalists so firmly against ethanol. It can also turn waste materials into fuel. The problem with deriving biofuel from these plants and plant materials is that they are primarily composed of lignocellulose, a tough structural material that makes up most of the mass of plants, and is the most abundant organic material on earth. Lignocellulose is harder to break down than the sugary, pulpy parts of plants, and doing so requires a lot more processing to make the sugars available to the helpful microorganisms that take those sugars and convert them into ethanol via fermentation. Until not very long ago, lignocellulosic materials were considered unsuitable for making ethanol because the fermentation process was so difficult and cost-prohibitive. (Whereas making ethanol from sugary biomass like corn is so easy you can start the process in a bucket in your garage.) So while the U.S. is on schedule to meet mandates for conventional biofuels and biodiesel set up by the Renewable Fuel Standards, the mandate for cellulosic ethanol - 16 billion gallons of it, ultimately - is another story. In 2010, the RFS mandate for cellulosic ethanol was supposed to be 100 million barrels, a number that rose to 250 million in 2011 and 500 million this year. By the end of this decade, the mandate will rise to 10.5 billion gallons a year. The problem is, when these goals were set, there were yet no large-scale production facilities for making cellulosic ethanol. The bigger problem is...there still aren't. When the standards were set, the production techniques had not yet been thoroughly mastered, which is why the bill tacked on a $2 billion bonus from the Department of Energy (DoE) program to help fund manufacturing plants. The Department of Agriculture threw another $1.6 billion into the pot. At the time of the mandate's passage, then-President George W. Bush assured the nation that cellulosic biofuels would be "practical and competitive" by 2012. So how many of the mandated 250 million gallons of cellulosic biofuel were produced last year? A few single-digit million gallons perhaps, and many of those gallons are disputed as not truly cellulosic. The biggest arguments arise from the fact that the mandates remain in place, but with no cellulosic fuel available, oil companies have had to purchase "waiver credits" to the tune of somewhere over $10 million in 2010 and 2011 for failing to comply with a mandate to buy a product that doesn't exist, according to the Wall Street Journal. "When these mandates were established, no companies produced commercially viable cellulosic fuel. But the dream was: If you mandate and subsidize it, someone will build it," wrote the WSJ. "It hasn't really worked out that way. Despite the taxpayer enticements, this year cellulosic fuel production won't be 250 million or even 25 million gallons. Last year the Environmental Protection Agency, which has the authority to revise the mandates, quietly reduced the 2011 requirement by 243.4 million gallons to a mere 6.6 million. Some critics suggest that even much of that 6.6 million isn't true cellulosic fuel." So where was all this cellulosic ethanol supposed to come from? About 70 million gallons of it was supposed come from a company in Alabama called Cello Energy. Unfortunately, at the time Cello was designated as a primary supplier of the product, the company had yet to build the production plant that would make the difficult conversion process from lignocellulose into sugar into alcohol. In 2009, a jury in a civil fraud case ruled that Cello had lied about how much cellulosic fuel it could produce, said the WSJ. As a result, there are still no fully operational, commercially viable production facilities for making cellulosic ethanol, although several are in the construction phase. Many critics have said it's actually a failure of government policy, not science. Production facilities are pricey to build, and Washington has failed to provide assurances to investors that cellullosic ethanol will continue to be subsidized going forward, Reuters has reported. As a result, investment has stalled. And at least one group has called the oil industry's complaints about the waiver credits they've had to buy "crocodile tears," and says the credits will help kickstart what will ultimately be a very viable industry. "For perspective, the anticipated cost for 2011 waiver credits for obligated parties is $6.8 million," wrote the Western Farm Press. "In 2010, the three largest publicly traded oil companies reported profits of $58.3 billion. These waiver credits represent approximately one percent of these profits and a pittance compared to the billions of dollars in taxpayer subsidies enjoyed by oil producers. Yet, this provision maintains at least a base level incentive in the marketplace for the oil companies to facilitate rather than obstruct the deployment of advanced ethanol." The Advanced Ethanol Council echoes these thoughts. "In a very difficult financial and policy environment, the first wave of commercial advanced [cellulosic] ethanol production facilities are under construction in a number of states across the country," said the Council's Executive Director Brooke Coleman. "The progress of cellulosic ethanol industry has been slower than anyone in the industry would like due to a number of factors outside of their control, but it is simply false to suggest that the technology is not working and the industry is not emerging." Coleman says that as world oil supplies continue to be threatened by a variety of factors, the U.S. simply can't afford to backtrack on an RFS program that has already dramatically reduced foreign oil dependence and will remain a linchpin for the future of a more sustainable biofuel industry. The supporters of a continued RFS mandate for cellulosic ethanol are correct in that a number of new cellulosic producers hope to be commercially viable this year or next. The White House recently approved loan guarantees for the construction of two new cellulosic ethanol plants, one in Kansas and another in Iowa. However, even if these production facilities are wildly successful, it will still take some time to get anywhere near the kind of mandates the EPA has set. The delay in building biorefineries means that the long-term goal of 16 billion gallons of cellulosic biofuel by 2022 is a fairy story. In fact, it will probably take until 2018 for the first commercial producers to put one billion gallons on the market. According to the RFS, that number should be seven times higher by that year. For the industry to get off and running, investors need to be reassured that Congress will extend a cellulosic production tax credit for several years, and cellulosic output targets will be big enough to encourage blenders to lock in future capacity, reported Reuters. "It would certainly increase volumes at a faster rate than what we've seen in the last couple of years," said Mac Statton, a biofuels analyst with the U.S. Energy Department. It's a bit of a Catch-22 when it comes to investment. As cellulosic ethanol producers try to go commercial, they need cash, and venture capitalists are reluctant lay out the $150 million or so it takes to build a production plant, says the Advanced Ethanol Coalition's Brooke Coleman. "The venture capital guys will spend $20 million or $30 million on you in the start-up phase," said Coleman. "They don't build plants and [they] like to get in and get out in five years." So who are the primary players in cellulosic ethanol? One company, Coskata Inc., is operating on $250 million in federal loan guarantees. The company is currently building a production facility in Alabama that is expected to make about 55 million gallons of ethanol from cellulosic biomass, including municipal solid waste, each year. The world's largest ethanol producer, POET LLC, got about $105 million in loan guarantees to build the plant in Iowa that is expected to make 25 million gallons of ethanol from corn cobs beginning next year. The company hopes to raise its production to 3.5 billion gallons by 2022. Colorado-based ZeaChem has recently developed a cellulose-based biorefinery platform capable of producing advanced ethanols. The company says it has crafted an indirect approach that leapfrogs the yield and carbon dioxide (CO2) problems associated with other cellulosic-based processes, which critics have labeled overly energy-hungry and emissions-causing. ZeaChem says its process offers the highest yield, at the lowest cost, with the lowest fossil carbon footprint. Better yet, the company says its production process is good to go: it recently completed construction of a core facility for its process in Boardman, Oregon. Once the plant goes online this year, it will result in the production of up to 250,000 gallons per year of cellulosic ethanol, the company says. Other companies with their fingers in the cellulosic ethanol pie include DuPont's Genencor, Abengoa Bioenergy, Qteros and Novozymes A/S. Some companies that were thought to be major players have not been so successful. For starters, there is Range Fuels Inc., a cellulosic ethanol company that grabbed something like $160 million in federal loans and grants from the Bush administration, according to Bloomberg. After failing to come up with the goods, Range Fuels is being forced by the feds to liquidate its only (unsuccessful) factory. The company, which was backed by prolific venture capitalist and Sun Microsystems co-founder Vinod Khosla (who disputes some of the numbers that have been thrown around in the press as to how much federal money it received) had to close its Soperton, Georgia facility after failing to commercialize a process that would have converted wood chips into cellulosic ethanol. Despite the failure of his own venture, Vinod Khosla (who was also very loosely linked to the failed Cello Energy, though not a direct investor) remains positive about the technology. In a letter correcting what he says are inaccuracies in the Wall Street Journal article, Khosla wrote, "Range's original formulation may not have been successful, but such risk-taking deserves applause, not derision. In the end, success is never assured." While success may not be assured, federal loan guarantees are - at least for the moment - and 2012 had best be a successful year for commercial cellulosic ethanol production, lest the industry find that the public, the government and the investors' tastes for risk-taking is rapidly dissolving.