Ethanol: I Love You, You're Perfect, Now Change

December 2, 2010 |

Just twelve months ago this week, the US Department of Energy announced $564 million in grants to integrated biorefinery projects for pilot, demonstration, and commercial scale facilities. These grants were provided out of Recovery Act funds.

Out of the 19 projects, nine were designed to produce ethanol, and received $318 million out of the total set of grants. That’s 56 percent. The ethanol projects selected were BlueFire Renewables, Enerkem, INEOS New Planet Energy, Algenol, American Process, Archer Daniels Midland, ICM, Logos Technologies, and ZeaChem.

We don’t believe that a single project has yet received its full funding. Yet US Secretary of Energy Steven Chu went down this week to the National Press Club and announced that he does not consider ethanol “an ideal transportation fuel.”

Secretary Chu added, in the Q&A following a speech on energy innovation, that “he preferred using biomass to make synthetic versions of gasoline, diesel and jet fuel because biomass doesn’t require specialized infrastructure,” according to an EIN report.

We said drop-in fuel, not drop ethanol

In a Biofuels Digest essay published in May 2009, Drop In, Tune Out, Turn On: new thinking for new days in bioenergy, we wrote: “The future lies in “drop in” renewable fuels that do not require changes in infrastructure or engine design to accommodate them.” We’re delighted that the DOE is coming around.

But what exactly was the rationale for the Secretary of Energy to award $318 million 12 months ago, under the guise of “the American Recovery and Reinvestment Act,” towards advanced methods for producing ethanol, if he takes the view that it is the wrong fuel platform? All you make people want to do is recover the money and reinvest it somewhere else.

How to create fear, uncertainty and doubt

It is precisely the creation of mixed signals that leads to chaos in Washington, chaos in investment circles, and chaos in the development of advanced renewable fuels.

What are this talented generation of developers – who are required by the DOE to produce large amounts of non-fed funding – in the case of BlueFire Renewables alone, $223 million, supposed to tell investors about the long term prospects for their fuels? It’s not as if these projects were short-term fixes – it takes years to bring projects from pilot to commercialization, and fully six of these were pilots.

It’s not exactly as if they only know how to produce ethanol. They have designed their projects to fit the policy. US Energy policy is beginning to resemble scenes from the Off-Broadway musical comedy, “I Love You, You’re Perfect, Now Change.” Down in the DOE’s Office of Biomass, they must be scratching their heads wondering: what exactly is wanted?

Battle Royal over the Ethanol tax credit and tariff

Meanwhile, the forces arrayed against the support of the ethanol tax credits have been highly active this week, with 17 senators led by Dianne Feinstein of California and John Kyl of Arizona circulating a letter opposing the extension of the corn ethanol subsidy, or the offsetting ethanol tariff – which primarily affects imports of Brazilian ethanol. It’s mostly the usual suspects from non-farm states – McCain, Enzi, Coburn – though notably joined by California’s two senators.

Elsewhere, 15 farm state senators led by Kent Conrad of North Dakota and Charles Grassley of Iowa circulated a letter in support of the tax credit and the tariff, writing that “Allowing the provisions to expire or remain expired would threaten jobs, harm the environment, weaken our renewable fuel industries, and increase our dependence on foreign oil.”

Ethanol production, US exports up

At the same time, the DOE is reporting that the ethanol industry continues to break production records with mid-November figures jumping 2.1% on the week before to reach 895,000 barrels a day. Stockpiles of ethanol climbed 4.1% while ethanol-blended gasoline fell by 2.2%.

And the Energy Information Agency is reporting that the US has exported 251 million gallons of ethanol during 2010—through September. The European ethanol association, ePure, is already saying the tax credit for blenders wasn’t intended to subsidize exports and spoke of legal action to stop such shipments.

So where does that leave us?

The tariff and the ethanol tax credit. Sources tell us to expect the renewal of the tariff and the tax credit, although at sharply reduced rates, consistent with the view that sunset time is fast approaching for ethanol subsidization. The developers of cellulosic biofuels – which have strong opportunities to compete at parity with fossil petroleum, once they have reached commercial scale – tell us that will benefit more from production tax credits and investment tax credits rather than ongoing subsidies.

US Renewable Fuel policy. A schizophrenic mess, coupled with too much silence from the President on what he really wants, and too much information on the private views of the Secretary of Energy. The good news is that the Obama Administration is taking a lot of meetings with industry, NGOs, and others in the past few weeks, and could be expected to develop some themes over the next few months as it focuses on energy policy as an area of potential progress in a divided Congress.

Global carbon policy. If we are to take the signals out of COP 16 meeting gathering in Cancun, there will be no major advance of any kind on a global carbon treaty – meaning more years in the dark, and higher expectations that regions and countries will simply take matters into their own hands. Cancun may well come up with a formula for wealth transfer from the West towards developing nations, in the form of assistance for the development of low-carbon industry. But we’re not sure of the form that will take, nor are we optimistic that it will not be subject to manipulation and corruption.

The nine ethanol projects which received funds under ARRA. Well, despite the DOE’s best efforts, some of these are likely to see the light of day anyway. Expect a few to emphasize chemicals production over fuels – for example, shifting to ethylene, ethyl acetate or potassium acetate. For example, ADM, ZeaChem, American Progress, Algenol.

A couple of these could well get through simply on the basis of the strong energy economics of converting waste biomass to transportation fuel. BlueFire Renewables and Enerkem have made substantial progress in recent months, in Mississippi and INEOS Bio is humming along in Florida.

Let’s hope so. These project developers deserve better than this.

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