Potholes On The Road To Renewable Fuels

Four years ago, speaking to 1,300 ethanol supporters in the heart of the Corn Belt, then-president George W. Bush gave a rousing speech singing the praises of biofuels, particularly corn-kernel-based ethanol. His speech on the eve of the 2006 congressional elections was music to the ears of the crowd attending the government-organized St. Louis conference, aptly titled “Advancing Renewable Energy: An American Rural Renaissance.”

The president outlined his plan to offer tax credits, subsidies, and federal research support to fuel a drive for ethanol that would move the nation “beyond a petroleum-based economy and make our dependence on Middle Eastern oil a thing of the past.” He added that cellulosic ethanol made from nonfood sources, waste, and energy crops was “right around the corner” and would be “practical and competitive within six years” (C&EN, Dec. 4, 2006, page 57).

Bush’s support for ethanol and his mix of energy, economic, and electoral policies have been continued by President Barack Obama, particularly the push for fuels made from cellulosic feedstocks. Obama’s Departments of Energy and Agriculture have offered billions of dollars to support cellulosic ethanol R&D and biorefinery construction.

But despite the money and talk, no commercial cellulosic ethanol biorefinery is operating today, and the most optimistic cellulosic ethanol boosters acknowledge that commercial-scale production could be years away. Meanwhile, they clamor for additional federal support.

On the other hand, ethanol made from corn kernels is on a roll, with a predicted output this year of 12 billion gal, twice the volume produced as when Bush made his speech. U.S. farmers are selling about one-third of the nation’s corn crop for ethanol, and corn-kernel ethanol makes up about 10% of the nation’s motor fuel, hitting a cap set in law for the maximum content of ethanol that can be added to gasoline.

The continued competition between corn for food and corn for fuel worries food and agricultural experts. Cellulosic ethanol was supposed to ease the demand for corn as fuel, but instead, reliance on corn as a gasoline additive has become secure, and now the price of corn is “hooked” to the volatile price of oil, according to Craig Cox, Midwest vice president of Environmental Working Group (EWG), a nonprofit research organization. Cox, a former USDA official and congressional staff member, believes that when oil prices rise, they will drive up the price of corn ethanol and consequently the price of corn—with a ripple effect on the cost of grains throughout the world.

The U.S. population uses very little corn for human food—one-half of the nation’s corn crop feeds animals, one-third runs cars, and the rest is exported or processed to produce sweeteners, corn oil, and a number of other products—but that is not the case for most of the world’s population. They eat corn, Cox notes, along with other grains, such as wheat and rice, with which corn competes in the international marketplace.

In the U.S., farmers have increased corn production for all uses to record levels, according to USDA. The nation’s farmers are on pace to produce the largest corn crop in history this year, with a harvest of 3.4 billion bushels, 2% greater than the previous record, set last year. Corn acreage is also near a record, only exceeded by the 2007 acreage, when the food-versus-fuel debate got started, Cox notes.

“In 2007, there was a hue and cry over corn’s price and whether it was responsible for the large run-up in food commodity prices at that time,” Cox notes. “The debate ended when prices settled back down due to the global recession and the lack of demand for food or oil.”

But Cox sees a repeat of 2007 on the horizon. Despite corn production increases, he says, corn reserves are at record lows, which could have disastrous consequences for world’s poor, who largely depend on corn and other grains for food.

The escape valve was supposed to be cellulosic ethanol, but it’s stuck. How to break it loose concerns ethanol producers, scientists, and developers who see a big market in new non-fossil-fuel-based motor fuel. The cellulosic ethanol impasse also worries environmental activists, who predict grave environmental damage from the intense use of water, pesticides, and herbicides that comes with more corn production.

As a result, a mix of ethanol opponents and some supporters think it is time for a change in agricultural policy concerning ethanol. Their focus has been in three areas: the tax credit of 45 cents per gal for ethanol production, which expires this year; the limit on how much ethanol can be blended with gasoline; and the Renewable Fuel Standard, part of a 2007 law, written to spur ethanol development.

A year after Bush’s St. Louis speech, Congress passed the Energy Independence & Security Act of 2007, which carried several inducements for cellulosic ethanol production, particularly the Renewable Fuel Standard (RFS), which calls for 36 billion gal per year of ethanol and “advanced fuels” capacity to be on-line by 2022. The Environmental Protection Agency implements the law. The law’s rationale was to reduce vehicular greenhouse gas emissions, cut U.S. dependence on imported foreign oil, and increase income for U.S. farmers.

All of the 36 billion gal are to be made from renewable feedstocks, and the law calls for a life-cycle analysis of greenhouse gas emissions from different feedstocks and fuels—from start of production to end use. Some 16 billion gal are to be made from cellulosic materials that produce at least 60% less greenhouse gas emissions than gasoline, and another 5 billion gal are to be other advanced biofuels and biodiesel with similar greenhouse gas reductions.

The rest, 15 billion gal, is expected to come from corn-based biorefineries that were operating or planned when the law passed. These facilities were offered a break through a lower greenhouse gas compliance threshold. Consequently, some 200 biorefineries that are operating today and producing 12 billion gal of U.S. ethanol are considered to be included in the RFS system, no matter their emissions.

EPA was given the authority to develop a schedule intended to take cellulosic ethanol production up to 16 billion gal per year, but for two years running, EPA has had to drastically revise and weaken the schedule. Next year, for instance, the cellulosic ethanol target in the law was set at 250 million gal, but EPA accepted reality and cut the target to 5 million to 17 million gals, the amount made by a handful of cellulosic ethanol pilot plants.

So is cellulosic ethanol dead?

“No,” says Hosein Shapouri, a senior agricultural economist with USDA who has followed ethanol’s development for decades. But he points to big problems in financing, technology, and logistics.

Construction costs for a cellulosic ethanol plant can be three times higher than the costs for a similar-sized corn-kernel-based plant, and technologies are expensive and untried at commercial levels, he says. Adding to the uncertainty, the current blend cap that sets the level of ethanol in gas at 10% has been reached through corn-kernel-based ethanol, so little market currently exists for cellulosic ethanol.

Also, logistics can be overwhelming when scale is figured in, Shapouri notes. He points to difficulties in finding, transporting, and preparing the huge amount of material needed to feed a cellulosic ethanol plant.

“For a biorefinery to produce 40 million to 100 million gal of cellulosic ethanol per year, it needs 2,000 to 4,000 dry tons of cellulosic feedstock per day,” he says. “How do you deliver all this? How do you keep it dry and avoid decay? And then where do you get the energy to grind and prepare it?”

Several companies, Shapouri notes, are considering a wide variety of feedstocks, from corn waste to switchgrass grown on marginal lands to waste products. But farmers, he says, are reluctant to change from a cash crop to an energy crop for a government-developed market that might not exist in the future.

Undaunted, however, Shapouri believes commercial development of cellulosic ethanol is just around the corner.

“There are lots of demonstration and pilot plants in operation,” he notes. “Everybody is waiting for the first plant to be built, and then they will invest in the second,” he stresses. “The key will be the first.”

He underscores a host of tax breaks and government incentives that are intended to drive the industry and notes that both USDA and DOE have provided billions of dollars in research grants and have promised new construction loan guarantees for cellulosic ethanol plants. Although ethanol supporters applaud the grants, they say the government has set the bar too high for guarantees.

Only one loan guarantee has been offered, by USDA, for $80 million to support a loan for Range Fuels to build a cellulosic ethanol biorefinery in Soperton, Ga. Range Fuels announced last March, more than a year after USDA offered the guarantee, that it had lined up financing. In August, the company said it had begun small-scale operations, producing methanol to make biodiesel from wood waste. Next year, it intends to begin construction of a full-sized ethanol biorefinery.

Shapouri rattles off a half-dozen companies that, like Range Fuels, are on the cusp of commercialization. One is Poet, another is Coskata.

Jim Sturdevant is the manager of Project Liberty for Poet, the U.S.’s largest biofuels company, made up of 26 biorefineries producing 1.6 billion gal of ethanol per year.

Project Liberty is Poet’s plan to produce 25 million gal of cellulosic ethanol per year at a new plant that Sturdevant says will be “bolted on” to its currently operating 55-million-gal, corn-kernel-based plant in Emmetsburg, Iowa. The company plans to break ground next year and have the facility operating in 2012.

Project Liberty will cost $200 million, and Sturdevant underscores the difficulty in lining up funding in today’s economy and tight credit market.

“The only way we can pull this off is to get a federal loan guarantee,” he says. “That is just a fact.” Poet applied for a DOE loan guarantee in November 2008 and submitted a final application last April. But so far, no luck. Sturdevant is circumspect on the status of the loan or guarantee, saying only that he has been in negotiations with DOE, and to stay on schedule the company needs to “wrap up financing by the end of the year.”

Delays in the release of loan guarantees by USDA and DOE have been roundly criticized by the biofuels industry and Congress. In response to reporters’ questions, DOE offered a statement: “There is a lot of interest from the biofuels industry in the loan-guarantee program, and we are working to review applications as quickly as possible while remaining stewards of taxpayer dollars. The department is actively working with the biofuels industry to identify key elements of strong loan-guarantee applications.”

USDA said four applications are under review.

Poet intends to use corn cobs, husks, stalks, and stover as a feedstock source for Project Liberty. It will buy corn waste from some 700 farmers who live within a 35-mile radius of the biorefinery and who already supply Poet with corn kernels for its older plant, Sturdevant explains.

“These farmers know and trust us, and we can take advantage of the roads and rails needed for the existing plant,” Sturdevant says. The company needs a quarter-million tons of corn waste annually to produce its 25 million gal of cellulosic ethanol.

To break down the cellulose in the plant waste, the company will use a chemical process of enzymatic hydrolysis; leftover lignin will be used to make methane biogas, Sturdevant says. The gas will supply energy for the new combined plant, further reducing its greenhouse gas footprint.

Technological repeatability and a systems approach, Sturdevant says, are key to Poet’s future. “We want to take this technology and roll it out to our 26 other Poet plants in the Corn Belt and license it to the other 200 U.S. corn-based plants. We are also looking at other feedstocks: rice hulls, wood waste, wheat straws. Once we crack this first nut—getting a commercial-scale plant operating and profitable—we have a plan to roll it out throughout the country.”

Another cellulosic ethanol developer that hopes to break ground next year is Coskata, a four-year-old company with no operating ethanol biorefineries but some influential investors: French oil company Total, Blackstone Cleantech Venture Partners, Khosla Ventures, and General Motors.

Indeed, several large companies are hedging their bets on future fuels by investing in ethanol: BP, Dow Chemical, DuPont, ExxonMobil, and Shell are among them.

To break down cellulose, Coskata intends to use a hybrid technology relying on gasification and microbial fermentation, explains Wesley J. Bolsen, marketing director and vice president for government affairs. Coskata will also use syngas generated in the process to run turbines to generate electricity for its plant. The company has been using this technological approach at a pilot facility in Madison, Pa., Bolsen says, and it is fully engineered and ready to go.

Coskata intends to begin building and operating a 55-million-gal-per-year facility in the southeastern U.S. next year, Bolsen says, but he would not say where. For feedstock, Coskata plans to use almost every waste product imaginable—from garbage to pulp.

“We have to be flexible,” Bolsen stresses. He envisions a fleet of biorefineries around the U.S., each converting locally generated wastes into locally used ethanol.

Like Poet, Bolsen blames difficulties in obtaining financing as the key hindrance to development, and also like Poet, he wants the government to open the loan-guarantee program and speed up release of guarantees.

Both companies are members of Growth Energy, a new ethanol trade association that has proposed a gradual change in government ethanol policies. It has suggested a slow phaseout of the 45-cents-per-gal tax incentive and a shift of government funding from the tax break to a program to create a new ethanol infrastructure.

Although the tax credit encourages ethanol’s use, it does not line the pockets of biorefiners. Instead, the money goes to the oil companies that must blend ethanol into their gasoline.

Growth Energy’s plan would shift the funds to tax credits to help increase the number of gasoline service stations that offer E85, a fuel blend containing 85% ethanol. The proposal also would require that automakers produce more cars capable of running on this blend.

The tax credit will expire by the end of this year, and many critics want to kill the subsidy, which costs taxpayers $6 billion per year. Opponents include the Congressional Budget Office. In a report released in July, CBO found that the cost of ethanol to taxpayers is quite high—about $1.78 for each gallon of gasoline offset by ethanol. It developed a cost formula that, in part, considers the fact that ethanol carries only two-thirds of the energy value of gasoline, which greatly reduces how much gasoline it can offset.

CBO recommended that the tax incentive be dropped when it expires and said that the RFS by itself was sufficient to drive increased ethanol production in the future. CBO has been joined by a host of taxpayer and environmental groups who want to see the subsidy ended.

EWG’s Cox, too, says it is time to scrap the U.S.’s renewable fuels policy and replace it with greater emphasis on vehicle efficiency and development of alternative energy sources. He has many allies in the environmental community as well as at oil and auto companies.

In particular, he worries about the impact of more fertilizers and herbicides, as well as the growing amount of water needed to increase corn yield. He also sees greater and greater density in the amount of corn being planted in farm states and is worried about the impact on farmland.

Cox is also troubled by the use of corn stover and crop residues for ethanol. “These materials appear to be waste, but they are essential to protecting the soil from erosion, reducing polluted runoff from crop fields, and enhancing carbon sequestration in the soil. What crop waste is to some is soil food to others.”

Cox predicts that if ethanol prices continue to rise, farmers will not use marginal lands to grow energy materials as the biofuels industry had hoped. “They will use their most productive lands for energy crops and push for the highest yields possible, and as a result, it will take land from grain production, and we will be right back where we started with more environmental impacts and competition for land between food and fuels.”

Another alternative policy is being pushed by the Union of Concerned Scientists. The organization’s “Billion Gallon Challenge” would wean the U.S. off corn ethanol and produce the first billion gallons of cellulosic ethanol, explains Jeremy Martin, a senior scientist at UCS.

“We are spending nearly $6 billion a year on the tax credit, and it doesn’t really do anything to support the biofuels market,” he says. Instead, Martin would shift the tax credit to create a $4 billion fund that would provide about $1 billion per year to help start up biorefineries that use cellulosic feedstocks.

“It is silly to continue arguing about what cellulosic crop is best and whether the economics will work when we have no operating cellulosic-based biorefineries,” Martin says. “The arguments about fuel versus food only show it is important to try to build plants that use different fuels and see if they work.”

UCS advocates investment tax credits and loan guarantees based on a weighted scale depending on the plant’s potential to reduce greenhouse gases. Martin estimates that the $4 billion would be sufficient to encourage 10 to 20 cellulosic ethanol biorefineries.

Hot battles are likely in Congress over the subsidy as traditional associations of corn growers and other ethanol groups, such as the Renewable Fuels Association, argue for the tax incentive to be extended another five years.

Under normal circumstances, Congress would be unlikely to take up such an explosive issue in an election year, but with the 45-cents-per-gal tax break set to expire this year and the biofuels industry running into the 10% ethanol “blending wall” and clashing with other industry and environmental groups over whether to increase the limit, Congress cannot sit this one out.

Lawmakers’ decisions will have a big impact on the future of renewable energy, the pocketbooks of U.S. farmers, and the price of grain in the developing world.