Some see make-or-break year for cellulosic industry

Source: Amanda Peterka, E&E reporter • Posted: Wednesday, January 16, 2013

Long described as an industry that’s “five years away,” manufacturers of U.S. cellulosic biofuels say they’re ready at last to make big gains in 2013.

At least five cellulosic facilities are expected this year to commercially produce fuels from farm residue, switchgrass and municipal garbage, and several others will have cornerstones laid for production in the next two years.

“This is going to be a pivotal year,” said Bob Dinneen, president and CEO of the Renewable Fuels Association. “We are either going to decide to continue moving forward on the tremendous progress we have made on biofuels, or we will throw the agenda in reverse.”

But the industry’s arrival will depend on whether federal incentives, including the renewable fuel standard, survive. Detractors have vowed to use legislation and litigation to whittle away at the standard, which came under fire last year as the drought across the Corn Belt drove up prices for livestock feed.

And though gallons of cellulosic fuels may flow this year, it will likely still be a few years before investors line up.

“When these facilities start coming online, will they actually be able to make money?” asked Andrew Soare, a renewable energy analyst with Lux Research. “Nobody has been able to produce it economically yet.”

Cellulosic biofuel is a broad category that refers to various technologies capable of breaking down lignocellulosic material found in plants and converting it into sugars that can be used in fuels.

Products range from those that need to be blended with traditional gasoline, like ethanol, and those that exhibit the same characteristics of petroleum-based fuels and can be dropped right into the existing infrastructure, like renewable diesel.

By most estimates, the cellulosic industry is about a decade old, begun shortly before the government signed into law the original renewable fuel standard in 2005. Though it was spurred on by the 2007 revision of the RFS, which mandated that the country produce 21 billion gallons of advanced biofuels by 2022, the industry has grown in a series of fits and starts.

In recent years, progress in the industry has been stymied by the recession, which all but dried up the loans that companies were counting on to build their first capital-intensive commercial-scale plants. Banks are largely still holding onto their money in the face of the recession and policy uncertainty.

“Financing is definitely a different animal than it was before 2008,” said Chris Standlee, executive vice president at Abengoa Bioenergy Corp., one of the first companies expected to open a commercial-scale cellulosic plant in the nation. “It was much easier to get financing in 2008 than it is today.”

Signs of progress

Still, the biofuels industry is coming off a year in which it both saw increasing momentum and fended off some of the most aggressive attacks to date on the 5-year-old renewable fuel standard, which sets targets for both advanced biofuels and traditional ethanol.

In late October, INEOS Bio announced it had begun producing renewable power using yard, vegetative and agricultural wastes at its new facility in Vero Beach, Fla. At full capacity, the facility is expected to churn out 8 million gallons of cellulosic ethanol and 6 megawatts of renewable power a year.

A little more than a week later, KiOR Inc. announced it started operating an 11-million-gallon-a-year commercial cellulosic biofuel plant in Columbus, Miss., that is capable of producing gasoline, diesel and jet fuel from several types of plant-based feedstocks.

“Production at Columbus — the first such milestone for any commercial-scale cellulosic biofuel production plant in the U.S. — is a big step not just for KiOR but the entire Gen2 biofuel space,” Raymond James, an energy analyst at Pavel Molchanov, wrote then.

Several other companies announced construction milestones and key partnerships.

Early in the year, Poet LLC, one of the largest ethanol companies in the country, announced a joint venture with Royal DSM NV of the Netherlands to build a cellulosic plant in Emmetsburg, Iowa. In March, Poet-DSM began construction on the $250 million plant.

In May, Novozymes North America Inc. began operating a $200 million biofuel enzyme factory in Blair, Neb., that is supplying ethanol plants with the enzymes needed to convert sugars and starch to biofuel. In the fall, Novozymes also announced it formed a partnership with Beta Renewables, a biofuel company that in recent weeks began operating a 20-million-gallon-per-year facility in Italy.

Also in the fall, Dupont Industrial Biosciences began construction at a 30-million-gallon-per-year facility in Nevada, Iowa, that will be one of the largest cellulosic biorefineries in the world.

Earlier in the year, U.S. EPA recorded the first-ever gallons of commercial cellulosic biofuel that were available for refiners to use toward meeting their obligations set out in the renewable fuel standard. The 20,000 gallons came from a facility in Wyoming run by BlueFire Renewables Inc.

Abengoa Bioenergy’s Standlee said he believed that the industry was on track.

“Frankly, 10 years is a fairly standard time frame [to develop an industry]. We started in mid-2003 and really got serious in 2005 when we saw the first RFS,” he said. “We’re really on a fairly normal, if not aggressive, development scale. You can’t just start building commercial-scale development facilities.”

To be sure, the industry was not without setbacks, as two major oil companies scaled back their efforts last year in developing cellulosic fuels.

In the spring, Royal Dutch Shell PLC terminated a research agreement with cellulosic ethanol company Iogen Corp., while in October BP PLC shelved its plans to build a 36-million-gallon cellulosic ethanol plant in Florida.

“Given the large and growing portfolio of investment opportunities available to BP globally, we believe it is in the best interest of our shareholders to redeploy the considerable capital required to build this facility into other more attractive projects,” Geoff Morrell, BP vice president of communications, said at the time.

Political battles

And opponents last year increased broad criticism of the renewable fuel standard and — specifically — the standard’s cellulosic biofuel targets.

There were several attempts to persuade EPA to waive the standard for up to one year to cope with the drought, which the agency ultimately rejected, and increased chatter on Capitol Hill about legislation that would revise the standard to better reflect current market conditions.

The American Petroleum Association and American Fuel & Petrochemical Manufacturers last year filed lawsuits against EPA for its 2011 and 2012 cellulosic biofuel targets, saying that the agency was penalizing them for not blending nonexistent cellulosic biofuel into gasoline.

EPA “based its projections on the predictions of cellulosic biofuel facility owners, even though those projections have proved to be highly unreliable,” API argued in its case over the 2012 figures in front of the U.S. Court of Appeals for the District of Columbia Circuit. The court is expected to rule this year.

But the cellulosic biofuels industry says that it believes it has the momentum going into 2013, both on the ground and in Washington, D.C.

“I think we’re beginning to finally turn the corner,” said Michael McAdams, president of the Advanced Biofuels Association. “I think between 2013 and 2017, you’re going to be seeing people who have really done their research and development and really see these new gallons start to flow into the market.”

The “fiscal cliff” deal signed by President Obama extended the cellulosic production tax credit for a year, while the defense authorization bill passed late last year maintains the military’s capabilities to use advanced biofuels.

Several North American companies are expected to begin producing cellulosic fuels this year or complete construction on large-scale plants.

Abengoa is expected to complete construction of its first 25-million-gallon cellulosic ethanol plant in Hugoton, Kan. Canada-based Enerkem Inc. is expected to begin operating a plant in Edmonton, Alberta, that will convert municipal solid waste to ethanol and other products. Poet-DSM is expected to complete construction of a cellulosic plant in Iowa in late 2013.

“We continue to be very optimistic. We were optimistic a year ago, and we remain very optimistic today,” said Larry Ward, senior vice president of project development at Poet who is in charge of the Emmetsburg plant. “Since last year with our project we have gone into full construction mode. We continue to see a very optimistic landscape to the industry.”

The Energy Information Administration has estimated there will be 9.6 million gallons of cellulosic fuel produced in 2013. McAdams said he expects to see around 20 million gallons.

Soare of Lux Research said he saw reason for optimism in the industry in 2013 and that the plants coming online will largely act as bellwether projects that will be watched by other companies to see whether they succeed.

“I’m pretty confident in their ability to scale up and start producing ethanol,” Soare said, “but the big question is, will they be able to produce and scale up economically to encourage investors to be able to put money down?

It will likely be at least two or three years before cellulosic biofuel plants become profitable, Soare said, adding that he expects to see consolidation in the market as it matures.

‘Bedrock policy’

The nascent industry’s progress is still very much tied to policy in Washington, especially the renewable fuel standard.

The RFS is the “bedrock policy that we depend upon,” said Brent Erickson, executive vice president of the industrial and environmental section at the Biotechnology Industry Organization. The recession was “a real punch in the gut to the biofuels industry,” he added, and the RFS helped the industry weather the storm by providing a market for the fuels.

Last year, the standard required that refiners blend 8.65 million gallons of cellulosic biofuel into the nation’s fuel supply — a target that was not even close to being reached. EPA has yet to come out with its 2013 volume requirements.

Critics, who say the RFS is misguided and does not reflect current market conditions, have vowed to take on the policy this year in legislation and congressional hearings (see related story).

“Despite repeated and ongoing efforts to address the program’s shortcomings — through regulatory petitions, legal actions and suggested solutions to implementation concerns — little has been done to make the program workable, and sometimes actions have been taken that make matters worse,” Bob Greco, the American Petroleum Institute’s director of downstream activities, said last year in announcing API’s push for the repeal of the standard. “There is a fundamental flaw in the enabling statute, so the only way to fix it is to scrap the law and start over if Congress believes such a program is necessary.”

Another drought this year could become a rallying point for critics, as it did last year, Soare said. Increasingly optimistic reports about domestic oil production could also give ammunition to those against the standard.

The cellulosic industry’s progress is still tied to a production tax credit that helps new plants get up and running. Congress did extend the $1.01-per-gallon incentive in the fiscal deal at the beginning of this year, but there is no certainty about what will happen to it at the end of this year when the extension expires.

The cellulosic industry is looking for more than just an extension but also comprehensive tax reform that changes the way incentives are allotted to the oil industry, said Brooke Coleman, executive director of the Advanced Ethanol Council.

“There’s still a headwind regarding tax reform,” Coleman said. “Oil companies can spend a little money on extremely high-risk projects because they have the cash to do it and the tax incentives and the policy. That’s the game they’re continuing to play. We just don’t have the policy that they have to reduce the pain of taking risk in the marketplace.”

The advanced industry is also still struggling to raise awareness among the general public, said Adam Monroe, president of Novozymes North America, despite efforts by entities like NASCAR to promote biofuels and increased ethanol use in car engines.

“We’re still girding for a tough year. If there’s a lesson learned [from last year], it is to never be surprised. Because if we’re optimistic, from every aspect you can imagine — homegrown jobs in this economy, cleaner air, all those aspects — despite that there have been attacks all along,” Monroe said.

“We do need to get the message out that one, biofuels are an important part of the fuel supply,” he added, “and two, second generation is now coming online.”