Governors' Biofuels Coalition

So much for the fuel of the future.

By pulling back Friday on an effort to guarantee ethanol an ever-growing share of the nation’s gasoline supply, the Obama administration could be putting a burgeoning industry into the deep freeze, just six years after biofuels drew strong support from both parties in Congress.

That chill will certainly affect the industry’s powerhouse, corn ethanol. But the risk is far greater for smaller sectors of the industry still struggling to get out of the gate — those aimed at producing next-generation biofuels like “cellulosic” ethanol, made from ingredients like switchgrass and corn stalks.

Corn-based biofuel has for years been untouchable politically, as presidential candidates seemed to over-promise on ethanol every four years in Iowa — but even that clout may be waning as both the tea partiers on the right and greens on the left push to abandon it.

Reasons for the turnaround are many: The boom in domestic oil drilling has dimmed the urgency to find other alternatives to Mideast petroleum. Demand for gasoline has slumped. And criticism of the environmental impacts of corn ethanol has dimmed its luster nationally.

At the same time, ethanol has faced a growing counterattack from the oil industry, which argues that the mandate could cause gasoline prices to spike. Other opponents include the livestock, poultry and restaurant industries, which say turning corn into fuel drives up the cost of food.

Ethanol supporters say that if Friday’s decision is the start of a lasting trend, both jobs and the promise of a new form of energy could be lost to other countries as the shifting federal winds scare off investment in advanced biofuels plants.

“The short answer is that it means stagnation in the biofuels market,” said Bob Dinneen, president of the Renewable Fuels Association, one of the main ethanol advocacy groups. “So it’s no growth, and no innovation or evolution of the industry into advanced biofuels or cellulosic ethanol. It’s really about the future.

“Boy, my goodness, are the oil companies going to benefit from this,” Dinneen added after the EPA announced its proposal Friday afternoon. “We’re all just sort of scratching our heads here wondering why this administration is telling us to produce less of a clean-burning American fuel.”

The administration has been promoting ethanol on multiple fronts, including requiring refiners to blend increasing amounts of ethanol into gasoline and pushing to allow higher-percentage ethanol blends to be sold at gas pumps. But EPA sent a very different signal Friday when it trimmed the blending mandate, the first year-to-year decline since Congress expanded the ethanol requirement in 2007.

“I don’t know if the EPA is aiming for uncertainty, but they may inadvertently create it,” said Jan Koninckx, the global business director of biorefineries for DuPont. “The impact could be that another country will lead this rather than the U.S.”

Hugh Welsh, president of DSM North America, a company heavily invested in cellulosic biofuels, said investors take note of any hints in Washington about the future of the blending mandate, formally known as the renewable fuel standard.

“Everybody that I speak to in the investment bank community … their first question is always, ‘What’s happening with this renewable fuel standard?’” Welsh said. “‘What’s the president’s position on this?’”

As recently as the 2012 election, Obama’s position seemed clear: He pledged to increase the use of biofuels and to support the mandate.

EPA leaders said Friday that they’re still committed to ensuring that ethanol has a future in the U.S. fuel mix.

“Biofuels are a key part of the Obama administration’s ‘all of the above’ energy strategy, helping to reduce our dependence on foreign oil, cut carbon pollution and create jobs,” agency Administrator Gina McCarthy said in a statement. She said the agency “continues to support the RFS goal of increasing biofuel production and use.”

Ethanol’s critics say the world is just not what Congress expected in 2005, when it created the mandate, and in 2007, when it expanded it into its current form. Back then, oil imports were soaring, and gasoline demand was expected to continue to grow.

“Just about everything … that that law was predicated on, the assumptions have proved to be null and void,” said Charlie Drevna, president of the American Fuel & Petrochemical Manufacturers, a major petroleum trade group.

One complaint by the oil industry involves something it calls the “blend wall”: With gasoline demand flat-lining, and most commonly sold gasoline containing only 10 percent ethanol, it will soon be physically impossible to blend more ethanol into the nation’s fuel supply. Once that line is crossed, the oil companies say, refiners might have to cut production and gasoline prices will spike —the kind of headache no president wants to deal with.

But biofuel supporters say the administration is just rewarding the oil industry for dragging its feet on making higher-percentage ethanol fuels available. They say the mandate was always meant to encourage greater use of 15-percent or 85-percent ethanol blends — known as E15 and E85, respectively.

Those more potent blends remain niche or regional products, even though EPA has agreed to approve the use of E15 in newer cars despite the objections of the oil industry and some automakers. One reason: Not enough pumps, pipelines and other infrastructure exist to let motorists buy them.

DuPont’s Koninckx said the oil industry groups complaining about the blend wall have known about the mandate for years, “and now they’ve complained about the fact that they haven’t prepared for it.”

“If the EPA says, ‘OK, the oil industry says they can’t do it, we won’t ask them,’ then they get away with it,” he said.

Senate Agriculture Chairwoman Debbie Stabenow (D-Mich.) agreed Friday, saying that “the so-called blend wall is a crisis manufactured by the oil industry, which is interested in eliminating the competition so they can continue reaping even greater windfall profits.”

Lawmakers in 2007 had specifically rejected allowing EPA to use factors like the blend wall to justify reducing the corn-ethanol portion of the mandate, Dinneen said.

“If you say the ability to distribute gasoline is a factor of the program,” as EPA did in Friday’s action, “then you’ve turned the program over to the oil companies,” Dinneen said.

But it’s unclear just what EPA could do to force the oil industry to acquiesce to adding the infrastructure to sell fuels that carve out more of its market share. EPA itself seems unsure.

There are “over 3,000 E85 stations currently operating in the country. We recognize that we want that market to grow and are looking for … good ideas from people for how to get those markets to grow,” a senior administration official said Friday.

Both sides say ethanol will remain a part of the U.S. fuel supply even if Congress were to step in and scrap the mandate entirely. Consumers are used to the 10 percent ethanol blends, and the supply is certainly there.

But just maintaining the status quo is not what ethanol supporters expected from this administration. One ethanol sector, the biodiesel industry, said this week that even limiting its portion of the mandate to last year’s level could wipe out 8,000 to 12,000 jobs, equaling about $500 million in lost wages.

The industry is also struggling with a slower than expected start for the more advanced — and potentially greener — forms of ethanol like cellulosic. Instead, the mandate mostly led to creation of more corn ethanol.

Under the 2007 law, the cellulosic biofuel industry was supposed to be producing 500 million gallons in 2012, rising to 1 billion gallons this year. Instead, last year’s total was 20,069 gallons, and this year’s production will also fall way short.

That wasn’t the only shortfall. “One of the big promises that wasn’t fulfilled with the RFS was the concept of drop-in biofuels, which would have really had a dramatic impact on the blend wall,” said Patrick Kelly, a senior policy adviser with the American Petroleum Institute. “Drop-in” biofuels could simply be put into existing fuel pumps and used like regular gasoline, diesel or jet fuel, rather than requiring separate infrastructure the way corn ethanol does.

Without more progress for the advanced fuels, many of the administration’s green allies are loathe to throw their support behind biofuels when that essentially means championing corn ethanol, which they see as having a dubious environmental record.

That leaves biofuel producers like Welsh wondering where their future lies.

His company has invested $150 million in U.S. projects, and various companies have spent billions of dollars on advanced ethanol in the last two years, Welsh said. His company plans to produce commercial quantities of cellulosic ethanol at a plant in Iowa next year.

Now they and others in the advanced biofuels industry are likely to start looking outside of the U.S., Welsh said. The “gasoline industry enjoys a monopoly here,” he said.

Koninckx said that’s what Big Oil wants.

”What the opponents of renewable fuel, the people who want to keep the status quo will get, is uncertainty,” he added. “And the uncertainty helps them. Because it will shy away investments. It will shy away initiative.”

 

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