Kansas wind, ethanol industries ride through a rough patch ahead

Source: BY DAN VOORHIS, Wichita Eagle • Posted: Monday, March 2, 2015

Abengoa ethanol plant in Colwich.

Kansas has been called the “Saudi Arabia of wind,” but why limit ourselves?

We have lots of wind. We have lots of sun. We have lots of grain for ethanol. Heck, maybe we should figure out how to burn those lumpy orange hedgeapples.

Renewable sources of energy are big business in Kansas. The sector, largely ethanol and wind, make up about 10 percent of the energy consumed in all forms by Kansans, according to the U.S. Energy Information Agency.

The year ahead will, as always, be an interesting one for the state’s fitfully prosperous alternative energy sector, even as the traditional oil and gas sector struggles with low prices.

The ethanol plant in Colwich reopened in the fall, even as the industry looks at tighter margins and a likely decline in production in 2015.

Wind energy in Kansas continues to expand, and with the completion of higher capacity power lines between western and eastern Kansas late last year, that power is more available for consumption and export.

And solar energy, well, that remains a boutique industry in Kansas, although its popularity is growing, because the cost of systems are still expensive despite a generous 30 percent federal tax credit. At this point, just a few hundred of Westar Energy’s 680,000 customers have solar systems.

Tighter margins

Ethanol has been on a confusing trip over the last six months.

The corn-based alcohol is produced in refineries, mostly sitting amid vast corn fields in the Midwest, bound for the nation’s gas tanks.

The ethanol industry more or less hit a ceiling five years ago. It had grown rapidly in the previous decade and reached a point where it supplied the federally mandated 10 percent of all automobile fuel, with a little more for export. It found itself capped by overall U.S. demand for gasoline.

But because oil prices were so high, gasoline prices were high, and that meant producing ethanol was profitable, despite high prices for producers’ main feedstock, corn.

In the last eight months, things have changed because of the dramatic fall in oil and corn prices.

Falling oil prices lowered the price for automobile fuel, which has encouraged more people to drive. That means more demand for ethanol.

Bob Casper, president of Poet Ethanol Products, an ethanol marketing company based in Wichita, said more driving, plus a growing export market and a larger percentage of new cars capable of burning higher blends of ethanol are all driving demand.

In response, he said, ethanol production has risen, likely to an all-time high.

The problem, he said, is that the fall in the price of oil has squashed the margins ethanol producers enjoyed, despite the sharp drop in the price of corn.

“The price of gasoline is directly related to the price of crude oil,” he said. “If we see a 50 percent drop in crude oil, we’ll see a 50 percent drop in the price of gasoline. Ethanol has to compete against that, and while the price of corn has fallen, it hasn’t fallen by 50 percent. Certainly the profitability of the ethanol producers has been reduced materially as a result of the margins having been compressed for the producer.”

The result, he said, is that producers are starting to shut down production because there is no margin for some.

Continual adjustments

Abengoa reopened its ethanol plant in Colwich in September when the profit margins in the industry were generous and looked like they would continue for a long time.

The plant goes back to the 1980s, when it was High Plains. Although it’s been modernized, it’s still small by today’s standards, with a capacity of 25 million gallons per year. Abengoa had just reopened the plant after having it closed for about three years.

Then the price of oil dropped in the fall and margins in the industry tightened way up. As a small plant, it’s not as cost efficient as bigger plants, said Chris Standlee, executive vice president, global affairs, of Abengoa Bioenergy.

Standlee said the company hasn’t decided to shut it again.

“There’s no immediate danger,” he said. “They’re volatile, the commodity markets, the ethanol and gasoline markets. There are good times and bad. You have to adjust those operations. We are certainly have no intention of long-term shut downs or layoffs, although that could change.”

The plant can be closed for shorter-term maintenance or operated at a lower capacity, he said. Some of the plant’s workers are needed to help with the opening of the company’s cellulosic ethanol plant in Hugoton.

Standlee said that, at this point, the betting is that oil prices will rise again and the plant can be more profitable.

“We think it’s temporary, that petroleum is at a bottom and will head back up,” he said.

More wind coming

This year and next will see a lot of wind farm construction in the state, with more than 671 megawatts of new generation capacity in seven wind farms.

Kansas, which currently ranks ninth among states for the amount of wind power, would see its generation increase by about a quarter, to about 3,700 megawatts.

“We’re actually going to see a pretty good amount of construction in the state,” said Kimberly Gencur Svaty, Kansas spokeswoman for the industry. “We have seven projects that are under construction slated to come on line in the 2015-16 time frame.”

She said Yahoo, the Internet portal company, has committed to buy 25 megawatts of wind energy from a wind farm in Rush County.

The story of wind power in Kansas, as in the rest of the country, in recent years has largely been tied to the off-again, on-again federal subsidy called the Production Tax Credit.

The credit provides buyers of wind power a 2.2 cent per kilowatt hour subsidy on the purchase.

Because of political disputes over whether the federal government should subsidizing wind power, Congress has allowed the PTC to lapse or nearly lapse several times. That makes it difficult for sound business decision-making over whether to build a project or not.

The PTC lapsed at the end of the 2013, and last year the wind industry pushed to get it reinstated for both 2014 and 2015 as a phased-out credit. Congress, in December, agreed to a package of tax credits that included the PTC. Because of compromise needed to get legislation passed, Congress approved it just for 2014.

It made all projects started in 2014 eligible for the credit. But since it was approved in December, it gave the wind developers just two to three weeks to get new projects started.

Not an ideal situation, but the industry is strong enough now that it can adapt, Svaty said.

“Ideally we’d like to have a glide path down rather than a hard stop, but that is up to Congress,” she said. “We’ll be the first (energy) industry not to have any incentives, no tax credits or deductions or other subsidies.”