Biointermediates and U: A potential step change in advanced biofuel economics

November 21, 2016 |

2005b6eBy Antoine C. Schellinger, Special to The Digest

On October 3, 2016, the EPA issued a Notice of Public Rulemaking (NPRM). Once published in the Federal Register, a 60 day comment period is triggered on the set of proposed rule changes to the Renewable Fuel Standard (RFS2). While the EPA proposed a wealth of rule changes, this article focuses on two particular aspects. First, the allowance of Biointermediates. Second is the creation of Pathway U.

Relevant Aspects of RFS2 in a Nutshell

A Renewable Identification Number (RIN) is the currency created under RFS2. A RIN is generated when a registered facility produces a gallon of renewable fuel using a pre-approved pathway. In order to become a registered facility, a potential renewable fuel producer must register with the EPA, including an independent engineer verification report, that it has a single facility which can fully exercise the complete pathway from feedstock to finished fuel. This changes under the proposed rules.

The EPA has performed lifecycle analysis on certain pathways and published them in the CFR as approved pathways. They are labeled with sequential alphabetical characters and currently range from A to T. These proposed rules contemplate a new pathway U.

Entities who produce petroleum based fuels are assessed a renewable volume obligation (RVO). The lifecycle of a RIN begins when it is generated alongside a gallon of renewable fuel, detached and moved to an obligated party, and then retired by the obligated party against their RVO.

The simplest manner this can happen is where the obligated party, a petroleum fuel producer, produces the renewable fuel as well. The current rules generally prohibit the petroleum fuels producer from using the same processing equipment to produce renewable fuels. The proposed rules relax this restriction. Under the self-production case, there is virtually no transaction cost from generation to retirement. However, the majority of RINs travel from a producer to an obligated party via either direct contractual relationships or through a market-maker. Many entities have stepped into the middle-men roles leading to accusations of RIN hoarding and price manipulation.

Biointermediates

The EPA has proposed to allow for the transfer of biointermediates from one registered facility to another. Currently this is not allowed due to restrictions contained within the facility registration requirements. Facility registration requires that the entire pathway be completed on a single site. For a biomass-fed facility, this effectively limits the size of a processing facility due to the economics of feedstock aggregation.

The radius around a facility that is considered economical to aggregate biomass is roughly 30 miles. Biomass transported further than that distance begins to incur prohibitively large transportation costs making the feedstock uneconomic to process. Glossing over a bit of analysis, a biomass-fed facility is practically limited to about 10% of the size of an average refinery in the United States. So if a biomass-fed process and a petroleum-fed process have equal production economics, then the petroleum-fed process will prevail based on economy of scale. Thus the importance of biointermediates and their role in the expansion of advanced biofuel production and an economic step change.

Two obvious biointermediates are industrial sugars and bio-crude.

Industrial Sugars
There are a wealth of hydrolysis technologies available today. A hydrolysis technology generally converts cellulosic biomass into industrial sugars. There are a number of variants of the technology, but they all aim to accomplish this basic task. Intuitively, the liquid sugar product is far more energy dense than the biomass it was created from.

If the proposed rules are adopted, a more economical supply chain can be developed; one where many distributed hydrolysis plants are installed, each with a reasonable radius of biomass collection. Then multiple batches of liquid sugars would be trucked to a more centralized fermentation center. This allows for the fermentation center to be larger, now that it is less constrained by biomass aggregation issues, and to have greater efficiency through economy of scale.

Bio-Crudes
Bio-Crude, as used here, is a crude-like substance that can be fractionated and processed into traditional transportation fuels using established upgrading technologies employed in a typical refinery.

For bio-crude to be RFS2 complaint, it must be made from an eligible feedstock as laid out in the various pathways: agricultural oils (ag-oils), algae, waste greases, crop residue, tree residue, short-rotation trees (if that portion of the NPRM is adopted), switchgrass, separated food waste.  For a complete feedstock listing, consult the regulations.

Similar to sugars, the final upgrading of bio-crude into finished transportation fuels can be limited in size by the facility registration requirements and the economic collection radius of waste greases, tree or crop residues. In this case, the raw materials can be converted into an energy-dense liquid bio-crude that is economic to transport to a central processing facility. Depending on the intricacies of specific technologies, some bio-crudes are even eligible for pipeline transport.

All of which leads to the question, if my bio-crude is similar enough to petro-crude, then why wouldn’t I simply process it in an existing refinery? That leads us to the proposed Pathway U.

Pathway U (A new co-processing route)

For a number of solid reasons, the EPA has been very specific about what technology conversion routes and feedstocks are eligible for RIN-generation. Not only is the EPA required to determine if you are a genuine RIN generator, it must also discern what type of RIN generator you are: D3, D4, D5, and/or D6. Further details on the various D-codes can be found from a myriad of sources. D3 is the cellulosic biofuel RIN and one of the most desirable to generate.

Under current rules, a refiner could make gasoline from cellulosic biomass that was co-processed with petroleum and generate a D3 RIN by following pathway M. Co-processing basically means that the bio-based substances are processed in the same equipment as the petroleum analogs.

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However, a refiner is currently prohibited from producing cellulosic diesel, jet fuel, or heating oil and generating a corresponding RIN. This is due the statutory definition of these products prohibiting them from being co-processed with petroleum.

Under the greenhouse gas (GHG) reduction targets of the program, there should be no resistance to flowing bio-based fuels through an existing refinery. The same reduction in GHG is achieved whether the materials are processed in a stand-alone bio-only facility or whether they were processed in a comingled fashion. One might argue that greater GHG reductions are achieved in the latter due to efficiency gains stemming from economy of scale. The proposed rules recognize this incongruity and seeks to remedy it through the creation of Pathway U.

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Pathway U encompasses a myriad of technologies with the most prevalent being the pyrolysis of cellulosic feedstocks and the production of Fischer-Tropsch crude from gasified biomass or municipal solid waste (MSW). A notable exclusion is ag-oil and algae-oil feedstocks.

Co-Processing of Ag-Oils & Algae-Oils Remains Prohibited: The persistence of pathways F & H

Two common feedstocks in the biofuels industry are ag-oils and algae-oils. The former are harvested from crops and the latter are lipids harvested from algae. Each of these oils lend themselves to hydrotreating technology as noted in pathways F & H, see below. Pathways F & H are differentiated only in terms of co-processing.

If soybean oil is hydrotreated at a stand-alone facility, it generates a D4 RIN. If the same material is hydrotreated within a refinery, it generates a D5 RIN despite possibly having a greater GHG reduction. With the breakdown of the co-processing barrier proposed in new pathway U, it is vexing why the artificial barrier remains for selected feedstocks.

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Combining It All: A Refiner’s Point of View

A refinery operator may be looking at Pathway U as a means to simultaneously use spare processing capacity while also becoming a D3 RIN producer. While a refiner has always had the ability to generate D5 RINs by co-processing ag-oils in their hydrotreaters, there has been little commercial reason to do so since D5 and D6 RIN’s have historically been inexpensive. Also, there are characteristics of ag-oil that require modification of most refinery hydrotreaters to process. A hopeful outcome of a refiner would be for the elimination of the co-processing penalty which degrades a RIN from a more valuable D4 status to D5 status. However, this is not currently embedded in this set of proposed rules.

What is embedded in this rule set is the new ability to introduce pyrolysis oil (py-oil) or biomass-based FT-crude into the refinery and generate valuable D3 RIN’s.

While the refiner could follow existing pathway M, there are two challenging restrictions. One, the chemical make-up of these biointermediates lend themselves to distillate production (diesel, jet fuel, and heating oil) and second, the entire pathway has to be conducted at the refinery. In the instance of either pyrolysis or biomass gasification, that means that a new supply chain of renewable biomass would have to be entered into the refinery asset and owned by the refinery operator.

Most refiners view this as too much distraction for too little benefit. Combining pathway U with the allowance of biointermediates makes the proposition far more palatable for the refinery operator. Now, a refiner simply has to register the existing refinery as a renewable fuels producer, purchase a qualified biointermediate from a separate producer, and upgrade the biointermediate to finished fuel.

That does leave the refinery with the traditional technical work of modeling the new flow into the system and potentially making equipment or operating adjustments to accommodate the physical properties of the new materials. Refiners routinely perform this type of analysis as it surveys various potential petroleum feedstocks.

The refiner also retains the burden of proof about the portion of finished fuels that were generated from RIN-eligible feedstocks. In the past this has been an exercise in mass balances and biogenic carbon testing. The accounting rules contemplate and seek comment upon the continued viability of a mass balance approach.

This may incent a number of refiners to seek out biointermediates producers for offtake contracts.

Combining It All: A Biofuel Technologist’s Point of View

Conversely, a biofuels producer has opportunity within the proposed rules. Take, for example, the now defunct pyrolysis technology company KiOR. KiOR spent a considerable amount of capital and bandwidth on self-developing an upgrading section for its py-oil production. While KiOR suffered many ills, the necessity, for pathway compliance, of upgrading the py-oil to finished fuels was clearly a detractor from their enterprise. Should the current set of proposed rules be adopted, KiOR could have negotiated an offtake contract with an established refinery. While that feat is not easy, it is considerably less difficult than the alternative of self-developing a micro-refinery to perform the same functionality.

Thus the offtake arrangements, enabled if this set of rules is adopted, can be of great value to certain biotechnology companies.
A word of caution is that refineries are highly sensitive to potential contaminants; particularly ones that not presently handled.

Another potentially enabled business plan is co-location.

Currently, if a biomass gasification company located itself across the fence from a refinery and simply produced syngas for sale to the refinery, there would be no opportunity to produce RINs due to facility registration requirements. So long as the gasification facility and the refinery are owned by separate entities, the facility registration requirements prevent RIN generation.

However, the proposed rules allow for the transfer of biointermediates. Thus, syngas transferred from the gasification company to the refinery, under pathways M, N, and U, could become RIN-eligible transportation fuel products. The same holds true for the over-the-fence transfer of a Fischer-Tropsch crude.

Advocacy and the Big Picture

While certainly not lone voices, Advanced Biofuels USA, American Council on Renewable Energy (ACORE), and myself have advocated for these changes over the last several years.

The proposed rule set takes a significant step towards the artificial barriers that exist between petroleum and biofuel producers. The goal of RFS2 is not the complete replacement of petroleum fuels with biomass-derived analogs. Rather, it is to reduce the GHG-intensity of the transportation fuel pool in the United States while simultaneously reducing reliance on imported energy.

RFS2 is also not intended to be a perpetual program. A sign that the program has achieved success, fostering the growth of a biofuels industry that is competitive with the petroleum fuels industry such that America achieves greater energy independence and a better environment, is that the cost of RINs is reduced to a de minimus administrative cost. Once that is achieved at the desired volumes, the program could be ended by Congress bearing in mind that structural changes in the energy complex are measured in decades, not years.

Therefore, the EPA should continue to interpret rules that encourage and mimic an integrated post-RFS2 supply chain. In that vein, we ponder the following questions.

Questions that Remain

1. What is the rationale of adding short-rotation trees to pathway L, while excluding them from pathway U? Short-rotation trees have shown great promise to be an economic and reliable source of biomass feedstock for renewable fuels. Using them to feed a processing facility that involves co-processing or not, the only difference between the pathways, does not seem to affect their advantageous status as a GHG-reducing feedstock.

2. There remains a slight penalty for co-processing biofuels with their petroleum equivalents, albeit a much reduced penalty. Under revised pathway L, a D7 RIN is generated. Under new pathway U, a D3 RIN is generated. The only difference between a D7 and D3 RIN is their flexibility in use. A D7 RIN, for which there is no corresponding obligated volume, can be converted to either a D3 RIN or a D4 RIN. In general, D3 and D4 RIN’s have similar commercial value. However, why is the flexibility withheld from an entity that chooses co-processing?

3. Why did the co-processing of ag-oils get excluded from the co-processing routes? If all agree that the GHG reduction benefits are achieved through the co-processing of cellulosic biomass, as proposed in pathway U, then isn’t the co-processing of ag-oils the same? The modification of existing pathway F to remove the co-processing exclusion appears to be an appropriate move.

References:
1. See Environmental Protection Agency, Notice of Proposed Rulemaking, EPA-HQ-OAR-2016-0041 (Oct. 3, 2016) (Submitted for publication to the Federal Register) [hereinafter NPRM Oct2016].
2. Id. at 1.
3. Id. at 6-7.
4. 40 C.F.R. § 80.1450(b).
5. See Antoine C. Schellinger, Energy Is Energy: Segregation Of Renewable and Fossil Fuels Impedes Energy Security Goals, 55 S. Tex. L. Rev. 471, 503-7 (2014) (discussing feedstock aggregation issues).
6. 40 C.F.R. § 80.1426 Table 1.
7. Id.
8. 40 C.F.R. § 80.1401 (referencing definition of “co-processed”)
9. See id. (referencing definition of “biomass-based diesel”) and 40 C.F.R. § 80.1426 Table 1.
10. See NPRM Oct2016 at 166-7.
11. Id. at 225.
12. Id. at 225-6.
13. Id. (noting that agricultural oils or algae oils are not included in the eligible feedstocks for proposed pathway U).
14. Ag-Oils as used here refers to all eligible oils obtained from crushing crops. Some examples are soybean oil, rapeseed oil, and canola oil.
15. 40 C.F.R. § 80.1426 Table 1.
16. Id.
17. The administrative fix would eliminate pathway H and allow pathway F to include both stand-alone and co-processed fuels.
18. NPRM Oct2016 at 20-1.
19. See Joanne Ivancic’s presentation at the 2015 Advanced Biofuels Feedstock Conference available here.
20. See generally American Council on Renewable Energy, ACORE White Paper: Co-Location Requirements Under the RFS Impede Advanced Biofuels Development (May 2015) available here  and” ACORE Brings Together Biofuel Industry to Publish Comments Addressing RFS Rules Which Impede Biofuels Development” available here.
21. See generally Schellinger.
22. 40 C.F.R. § 80.1427(a)(iv)(2).

Antoine Schellinger is the Vice President / Counsel, Strategy and Technology at International Alliance Group (IAG), a project management consultancy and execution firm to the energy, petrochemical, and biochemical markets. Antoine is a Houston-based expert on the development and structuring of strategic industrial facilities. Antoine frequently consults both refiners and biotech companies on US renewable fuels legislation. Antoine was previously the technology diligence leader for a corporate venturing arm investing in emerging energy technologies. Antoine holds a Juris Doctorate, Magna Cum Laude, from South Texas College of Law, a MBA, with honors, from the University of Houston, and a Bachelor’s Degree in Chemical Engineering, with honors, from Worcester Polytechnic Institute in Massachusetts. Antoine is a member of the Texas State Bar and serves on the UH Executive MBA Program Advisory Board.

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