Grease is the word

April 6, 2016 |

BD-TS-040716-grease-smI solve my problems and I see the light
We gotta loving thing, we gotta feed it right
There ain’t no danger, we can go too far
We start believing now that we can be who we are
Grease is the word

“Grease (is the word)”, from the musical Grease.

When the United States passed the Energy Independence and Security Act establishing the Renewable Fuel Standard 2, the congressional target for 2017 was 20.5 billion gallons (ethanol equivalent) of renewable fuels in 2015, rising to 22.25 billion in 2016 and 25 billion in 2017.

By contrast, the actuals for 2015 are in and the US achieved 17.9 billion in 2015, the EPA mandate for 2016 has been slashed to 18.11 billion, and based on the EPA’s slow-as-she-goes approach on expanding biodiesel or challenging the E10 saturation point on ethanol, we can expect volumes somewhere around 19 billion for 2017.

The halt and the why

In short, renewable fuels has reached a crisis of growth in the United States — years of expansion have halted, and everyone is entitled to ask why.

The oft-cited reasons are two.

1. The E10 saturation point has been reached, and there’s nowhere left to distribute ethanol in the growing volumes once anticipated under RFS2. (We might add that, yesterday, Growth Energy felt bullish enough on E15 ethanol to send out a press release, touting 150 million E15 miles driven in the past 12 months. Hmm. That represents 7.5 million gallons — at 20 per —which contain 1.125 million gallons of ethanol, or just 375,000 more than if E10 were being used. That’s the capacity, roughly, of one ethanol plant.)

2. Advanced bioconversion technologies are too immature to deploy at the rate once anticipated — whether they produce ethanol or any other fuel.

Let’s look at the hard data.

Demand signals

As we have observed in The Digest and in the March Madness webinar series, the floor price for cellulosic ethanol in California is around $3.74 per gallon — miles ahead of conventional fuels. So, the regulatory regimes are working as designed in terms of creating a price signal, and RFS2 itself sends the demand signal.

Screen Shot 2016-04-06 at 4.50.19 PM

EPA’s timidity

Sure, there’s some strange timidity at EPA — looking for dodgy legal theories that waive-down on renewable volumes can be justified on the basis of inadequate distribution infrastructure. After all, no one in the world thinks that there’s anywhere near the demand to handle all the oil that’s beeing pumped out right now, but we don’t anyone stepping in to limit oil production. There’s hardly a storage tank in the world right now not stuffed to the gills with excess oil production that currently has no place to go.

We’re surprised that EPA’s toilets and flower pots are not being employed to store oil — everything else in the world is.

The airline market as an example

Airlines have shown they will buy renewable jet fuel in massive quantities, if it’s affordable and available, and it qualifies under RFS, and companies like AltAir have proven that they can make it at affordable rates. The Navy is buying advanced, drop-in, in-spec renewable marine diesel at $2.05 per gallon. Who would have thought that possible a few years ago?

Last July, US carriers consumed 1.6 billion gallons of jet fuel, so think in terms of an 800 million gallon market per month at 50% blend rates, or 160 million gallons at 10% blend rates. That would equate to roughly 4.8 billion RINs even in 15 percent blends. More than making up the difference between the congressional targets and today’s volumes.

If airline demand stayed at those (elevated, summer) rates, US jet fuel supply alone could reach as much as 10 billion gallons per year, or 17 billion RINs. Presto, the gap between today’s renewable fuel distribution and the 2022 RFS targets melts away.  Not to mention the upside in biodiesel and renewable diesel.

Our conclusions

1. There isn’t an overall distribution problem, there’s a road transport distribution problem.

2. The technologies are sufficiently mature to produce non-food, in-spec, cost-competitive renewable jet fuel and renewable diesel.

So, we don’t believe the conventional thinking for a second.

Moving with the evidence, beyond conventional thinking

Rather, we think that financiers shy away from renewable jet projects because they fear that the feedstock costs will soar, and the economics will go upside down, at material volumes.

Is it a technology crisis, or a distribution crisis? We think it’s a feedstock crisis — or rather, feedstock that is compatible with the systems that work at scale and produce affordable fuel for ready and willing buyers.

There’s ample evidence that the new sugars, for now, are going down the renewable chemicals route, as we’ve seen with the amazing opportunities uncovered in the March Madness webinar series in organic acids and the like. Fuels are rarely the focal point these days in the start-up of a technology based on food sugars.

The chicken and the egg

Cellulosic feedstocks, especially in the form of syngas — why, those are at the heart of technologies such as Ensyn, LanzaTech and Fulcrum, that are expected to reach commercial-scale in the fuels space well before the end of the decade. Especially to the extent that they utilize MSW and already-aggregated yard wastes, they tap an abundant and affordable source of feedstock. But we have seen with technologies such as Enerkem that they will compete for MSW — and not all projects will yield renewable fuels.

But, more importantly, there’s the chicken and egg dilemma in standing up an industry. Will anyone build a bioconversion plant until there is abundant, available feedstock? Will anyone grow abundant, available feedstock until there is a bioconversion plant.

For that reason, industries begin with residues. Take an example from recent history, the birth of biodiesel. To a great extent, it was the result of a breakthrough in using soymeal for animal feed. As that market opened up, co-ops were left with the problem of finding a market for soybean oil. It was steadfast work in application development that  led groups like West-Central Cooperative to develop a biodiesel plant technology, and to with others begin to build a market for the fuel — eventually West Central spun off its technology at Renewable Energy Group.

Likewise, the modern US ethanol industry was born out of a crisis of finding higher-value markets for an existing feedstock — in this case, corn sugars. Entrepreneurs like Jeff Broin developed new markets based on a feedstock problem he could see right before him on the family farm in the crisis of the 1980s.

So, it begins with waste.

How much waste oil feedstock is there? It’s a question open to debate — the biggest weakness we ever spotted in the DOE’s Billion Ton Study (and its successor, Son of Billion Ton) is that  waste oils do not fit into the equation. Ironic, considering that virtually every technology producting RINs at commercial scale is tapping that feedstock — and virtually none of the cellulosic feedstock identified in the report has been so far utilized.

The obvious conclusion? If feedstock is the key and sugars are going to be short, then, for fuels. the country needs more waste oils and oil-producing plants. Recycled oils, fats, greases today, and cellulosic residues today. Dedicated crops tomorrow. For the next few years, as cellulosic technologies mature, it is renewable oils, oils, oils will lead to renewable fuels, fuels, fuels — that’s the evidence we’re seeing in the marketplace.

So, as the song said, grease is the world.

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