Cellulosic Ethanol Exceeds Projections by EPA; Industry Fears Rule Changes

Source: by Andrew Childers, Bloomberg BNA • Posted: Monday, December 1, 2014

Ethanol Plant

For the first time cellulosic ethanol producers have met and exceeded the Environmental Protection Agency’s production predictions as part of the annual renewable fuel standard.

The industry had produced nearly 18.2 million gallons of the fuel as of Nov. 10, according to EPA data. That exceeds the 17 million gallons the EPA has proposed be blended into the nation’s gasoline supply.

But cellulosic ethanol producers fear an EPA proposal to reduce the overall renewable fuel blending requirements in 2014 could stifle growth in the industry just as it is achieving commercial viability.

“It’s been a decade or more that these companies have been working on these technologies, and it’s gratifying to see them being constructed on a commercial scale. That’s a very significant development,” Brent Erickson, executive vice president for the Industrial and Environmental Section at the Biotechnology Industry Organization, told Bloomberg BNA.

Cellulosic production has lagged well behind what Congress had anticipated in the renewable fuel standard, and the EPA has drastically reduced the annual blending requirement for the fuel each year. Less than 423,000 gallons of the fuel was produced in 2013.

If you look at the renewable fuel output this year, it’s been pretty robust. I can say that without having to project much because we’re in mid-November,” EPA Administrator Gina McCarthy told reporters Nov. 17.

In 2014 the first commercial-scale production facilities began operation and a recent rule change by the EPA has reclassified millions of gallons of advanced biofuels being produced from compressed and liquefied natural gas from landfills and wastewater treatment as cellulosic ethanol, providing a tremendous boost to the industry.

Refiners Fear Unwarranted Optimism

Though cellulosic production has increased significantly in 2014, the petroleum industry still argues that the renewable fuel standard is flawed and should be repealed.

“I don’t think it changes anything,” Patrick Kelly, senior policy adviser for downstream and industry operations at the American Petroleum Institute, told Bloomberg BNA. “I think the cellulosic piece of the RFS shows that it’s unworkable. It’s an unrealistic mandate. Even though these volumes are a significant increase from what had been produced up until now, they’re still a very far cry from the statutory volumes.”

The Energy Independence and Security Act had required 1.75 billion gallons of cellulosic ethanol to be produced in 2014.

The EPA has consistently overestimated the amount of the fuel that would be produced each year, forcing refiners to sue the agency each year to have the standards reduced. Kelly said refiners fear that increased production in 2014 will make the agency overconfident and it will once again begin setting unrealistic blending requirements in future years.

The U.S. Court of Appeals for the District of Columbia Circuit in 2013 ordered the EPA to set the annual cellulosic ethanol blending target to reflect each year’s actual production.

“It’s not the way the program was designed to guess high and rebalance at the end of the year,” Kelly said.

Blend Wall Brings Uncertainty

Despite the breakthrough in production in 2014, cellulosic ethanol producers are concerned that an EPA proposal to avoid breaching the so-called ethanol “blend wall” could limit their access to fuel markets, constraining future growth.

“You have to have space in the marketplace for these new biofuels to be sold,” Erickson said.

The first commercial-scale cellulosic production facilities have begun operation recently. Poet LLC and Royal DSM NV in September opened their 20-million-gallon Project Liberty facility in Emmetsburg, Iowa. More recently, Abengoa SA began operation at its 25-million-gallon Hugoton, Kan., facility in October.

Investors are unlikely to fund new production facilities without the guaranteed markets provided by the renewable fuel standard, Erickson he said.

The EPA’s 2014 renewable fuel standard proposal would require petroleum refiners and importers to blend 15.21 billion gallons of renewable fuels into their products. That is down from the 18.15 billion gallons required by the Energy Independence and Security Act as the agency takes steps to address the ethanol blend wall. That is the point at which the amount of ethanol that must be blended into the gasoline supply exceeds 10 percent, the maximum approved for all vehicles on the road.

The agency also took comment on a range between 8 million gallons and 30 million gallons. The EPA sent the proposed rule to the White House Office of Management and Budget for review in August.

The Clean Air Act allows the EPA to reduce the overall annual blending requirements due to lack of supply or the potential to cause economic harm. Using its authority for the first time, the EPA argued in its proposal that the lack of gasoline into which to blend additional ethanol constitutes a lack of supply.

Biofuel producers argue the agency is misreading the law, which was intended to push consumption of ethanol beyond the current 10 percent limit through expanded use of higher-blend fuels such as gasoline containing 15 percent ethanol (E15) or even higher blends such as E85.

“Congress was very clear they wanted the RFS based on biofuels supply and not gas consumption. It appears to us EPA has turned it on its head,” Erickson said.