Biofuels Producers may fall Far Short of Federal Mandates

The emerging cellulosic biofuel industry, stung by frozen credit markets, ineffective federal loan programs and lagging federal policies, will fall far short of mandated production volumes over the next few years.

U.S. EPA is now pushing to implement a new renewable fuels standard (RFS) that will ramp up to 21 billion gallons of mandated cellulosic and advanced biofuels use by 2022, provided that fuels meet specified greenhouse gas reduction thresholds -- and that enough gallons can reach the market.

"The current economic climate almost makes the RFS a moot point for the time being," said Matt Carr, policy director for the Biotechnology Industry Organization.

His organization estimated last month that 2010 volumes will, optimistically, reach 12 million gallons, far short of the 100-million-gallon mandate that year. Those shortages will also ripple into later years, such that even by 2013, meeting the 1 billion gallons required will be a stretch.

EPA, meanwhile, is working to finalize the mandate by the end of this year to take effect in 2010, but says it is also considering delaying the rules by as much as a year, as the petroleum refining and blending industry is urging. The comment period on its proposal closed in September.

These are the harsh realities faced by producers that have yet to open a commercial-scale facility -- even as controversy continues to swirl around the RFS, which in addition allows for 15 billion gallons of conventional corn-based ethanol.

In the House-passed climate bill, farm state lawmakers succeeded in inserting a provision temporarily stripping EPA's authority to calculate the increases in greenhouse gas emissions caused by land-clearing abroad, as fuel based on food replaces U.S.-grown food grains.

Investment community feels the chill

Corn-ethanol producers find indirect land-use emissions accounting particularly hard to stomach. But Carr said the unstable policy, backed by still-developing science, also "chills the investment community" looking at new fuels.

That hard-fought House provision, delaying the calculations for five years, is notably absent from the climate bill introduced by Sens. John Kerry (D-Mass.) and Barbara Boxer (D-Calif.) in the Senate last week, as is another that exempts currently existing conventional soy-based biodiesel plants from the calculations.

The discrepancy promises to cause more political fallout, and former Agriculture Committee Chairman Tom Harkin (D-Iowa) has vowed to reinsert it.

If the provision successfully passes the president's desk, however, observers said there could potentially be a further delay of EPA's rules.

"The most important thing is to get the rule out by the end of this year. What we don't need is to legislatively slow this process down," said Michael McAdams, executive director of the Advanced Biofuels Coalition.

Wes Bolsen, chief marketing officer of Coskata Inc., an Illinois-based company that is working to build a commercial-scale cellulosic ethanol plant, said that final rules are also needed to obtain funds. "You need to build into the financing of a plant what the final rules are. Right now, there's a lot of uncertainty. There's a lack of investment," he said.

Incorporating the uncertainties of the indirect land-use emissions calculations should be possible "without using a meat cleaver," McAdams noted. This is what EPA Administrator Lisa Jackson vowed in a letter to Harkin in September that she would do in the final rule.

Meanwhile, the industry is also concerned about ambiguous language in both the Senate and House versions of the bill that does not clearly exempt the biofuels component of blended petroleum fuels, such as E10 and E85, from an economywide carbon cap, Carr said.

Industry groups claim 'double jeopardy'

On Friday, five industry and agriculture groups sent a letter to Boxer asking that the language be changed to explicitly exempt biofuels, to avoid the potential "double jeopardy" of counting biofuel emissions under the RFS and a carbon cap.

The Senate climate legislation does have an added bonus for advanced biofuels producers that is not in the House-passed bill. In it, EPA would offer new research, development and commercial deployment grants to support new biofuel technologies.

But producers, while welcoming any new funds, questioned the utility of adding another agency to an already complex government grant and loan process.

The Department of Energy's loan guarantee program, producers say, has been particularly flawed. No advanced biofuel makers, aside from a partnership between BP PLC and Verenium Corp., have so far won approvals.

"We received a 'Sorry, Charlie' letter," said Bill Schafer, a senior vice president of Range Fuels Inc., which is now building a cellulosic facility in Soperton, Ga., slated for completion early next year.

He said that under the program, biofuels companies must compete directly against solar, wind and even compressed natural gas -- all energy technologies that, unlike advanced biofuels, have already been built at commercial scale.

GAO wants to drop tax credit for corn-based ethanol

"Basically, what I'm hearing is what DOE is requiring is the same as a commercial lender," said Schafer. "The object of this whole thing was to support new technologies and help them get through the difficulties of early-stage funding," he said, noting that BP isn't exactly a startup company.

Carr of the Biotechnology Industry Organization said he believes that Boxer's objective in establishing the EPA grants was to incorporate more of the agency's sustainability expertise into the process.

Boxer's concerns may have been stoked by a recent Government Accountability Office study. The report was requested by Boxer and Sen. Susan Collins (D-Maine) and was sent to them in August, though it was delayed for public release until last Friday at their request, GAO said.

The report recommended that Congress require EPA to consider all environmental effects of biofuels production -- not only greenhouse gas emissions -- when deciding which fuels meet the RFS mandate.

GAO also offered a blow to the corn ethanol industry, recommending that Congress seriously consider ending the federal 45-cent-a-gallon domestic ethanol tax credit. They noted that, unless crude oil prices rise significantly, the credit does little to stimulate ethanol production, and that the corn ethanol industry is already "mature" and "well understood."

A separate $1.01 tax credit is available for advanced biofuels.

The Renewable Fuels Association, an ethanol trade group, panned the report. "As long as petroleum and fossil fuel companies that dominate the energy market continue to receive preferential tax treatment and hidden subsidies, incentives are needed to develop renewable alternatives such as ethanol," said its president, Bob Dinneen, in a statement.

source: nytimes