The drop in consumer demand since 2007 has been matched by an increase in production of renewable fuels. This unanticipated inverse pattern, in combination with a fuel infrastructure not built to support more than E10, has created a marketplace that cannot currently support higher levels of ethanol adoption, whether they be derived from cellulosic sources or corn.
While the current marketplace may appear bleak for growth in ethanol, EPA says it is committed to promoting further growth in renewable fuels in the future. It says the reductions in mandated volumes “[are] intended to put the RFS program on a manageable trajectory while supporting continued growth in renewables over time.” Additionally, surplus ethanol production capacity in the marketplace may support growth in E85 consumption, which is gasoline that is blended with 85% ethanol and can be used by a small number of specialized hybrid vehicles.
Effect on Cellulosic Ethanol
Cellulosic ethanol is a biofuel that is produced from plant fibers in grasses, woods and other inedible parts of plants. President George W. Bush made it a goal in his State of the Union message to Congress in 2006 for the United States to produce cellulosic ethanol on a commercial scale within six years. The federal government’s commitment to cellulosic ethanol was reaffirmed by the Obama administration in 2010 when it adopted a renewable fuels standard known as RFS2 that required distributors of US transportation fuels to be mix 16 billion gallons of cellulosic ethanol annually by 2022.
However, US cellulosic ethanol production has been slow to get off the ground. There were no commercial volume producers of cellulosic ethanol in the United States before 2013.
The EPA proposal would reduce the required volume of cellulosic biofuels in 2014 from the statutory level of 1.75 billion gallons to 17 million gallons. Cellulosic biofuels include any renewable fuel derived of cellulose, hemicelluloses or lignin that also has a life-cycle greenhouse gas emission-reduction threshold of 60% as compared with petroleum-based motor fuels.
While by the numbers, the EPA proposal may appear to be a drastic reduction, this type of reduction is not unprecedented for EPA. EPA has authority to set the mandated volumes of cellulosic ethanol below the statutory minimums if the projected production of cellulosic ethanol is below the statutorily-mandated minimum. In fact, since the implementation of the mandated volumes, the EPA has consistently set the volume of cellulosic ethanol at a level far below the statutorily-mandated minimum. Even with these significant reductions, petroleum refiners have still been unable to meet the mandated volumes due to a lack of supply of cellulosic ethanol in the market.
As an example, in 2012, the EPA mandated a volume level for cellulosic ethanol of 8.65 million gallons, but only 20,269 gallons were produced for sale. Despite the lack of supply, petroleum refiners have still been required to meet the mandated volumes of cellulosic ethanol by purchasing renewable identification numbers, called RINs, to fill the void of cellulosic ethanol. Not surprisingly, petroleum refiners were angered by having to purchase RINs when there was no actual renewable fuel supply to purchase. Refineries and other petroleum organizations have had to petition EPA each year for waivers.
There is so little existing production capacity that the proposed volume reduction for cellulosic ethanol is unlikely to have any effect on cellulosic ethanol output. However, it could reduce new investments in US projects.
There has been meaningful progress toward commercialization in the last two years. New investments have been made in multiple countries in various technologies. Beta Renewables opened a second-generation biorefinery in Italy and announced plans to open another in North Carolina. KiOR, the largest US cellulosic ethanol producer, pioneered catalytic conversion technologies at one existing facility in Mississippi and plans to use it at another facility. In addition, INEOS Bio announced this past summer that it is now producing cellulosic ethanol on a commercial-scale at a facility in Florida.
The real impact of the proposed reductions is the signal it gives to future investors that the US commitment to the renewable fuel standard is wavering. While EPA reiterated its commitment to renewable fuels, if the federal government takes any more steps to undercut the RFS program, then the entire biofuel industry may be in trouble. The best thing that the industry can do to prevent this is to show that commercial-scale production is feasible.
One indication that the federal government will continue to support biofuel is the section 9003 biorefinery assistance program. The biorefinery assistance program guarantees loans for construction and development of biorefineries that make advanced biofuels. The program is currently soliciting bids for $181 million in funding until January 30, 2014.
State government initiatives are also important. In 2007, California adopted a low carbon fuel standard or LCFS that requires the state to achieve a 10% reduction in the carbon intensity of transportation fuels. Like the RFS program, the LCFS is a mix of command and control regulation that requires certain volumes of low-carbon fuels to be mixed into the transportation fuel supply. Also like the RFS program, the mandated volumes under the LCFS increase over time. While corn ethanol has a lower carbon-intensity than petroleum, forms of cellulosic ethanol have an even lower carbon-intensity and widespread usage of cellulosic ethanol could make compliance with the LCFS easier for refineries. Although California is the only state officially to adopt an LCFS, other states have considered similar programs.
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