Governors' Biofuels Coalition

Persistently lagging sugarcane ethanol production in Brazil could make it very expensive for obligated parties to meet biofuels volume requirements in the U.S. as early as this year, according to energy consulting firm Hart Energy. The company recently released a study titled “U.S. & Brazil Ethanol Outlook to 2022,” which finds that without adequate supplies of Brazilian ethanol, the cost of compliance with the renewable fuel standard (RFS) and California’s Low Carbon Fuel Standard could become surprisingly high as blenders compete for tight supplies of Brazilian ethanol to meet advanced biofuel requirements.

Further, the report’s authors suggest that the lack of available sugarcane ethanol leaves a 300-million-gallon gap in advanced biofuels supply for the RFS in 2012, a scenario which is not expected to improve until 2019. When considering this expected shortfall, combined with other factors such as the E10 blendwall and the slow ramp up of cellulosic biofuel production, Hart Energy experts believe the RFS will need to be modified in as few as two years in order to reflect the lack of volume available to be realistically blended into the U.S. fuel supply.

“Much of the focus has been on the blend wall, biodiesel and cellulosic biofuels targets of the RFS program in the public forum,” said Tammy Klein, assistant vice president at Hart Energy and co-author of the report. “But what’s so striking to us is that Brazilian ethanol is needed to meet targets under those programs—and our forecast shows it will not be available at critical points in the study period.”

According to the study, Brazil will gradually increase its ethanol capacity potential over the next several years as aging sugarcane fields are re-planted and new processing mills are constructed. However, if international sugar prices spike, mills will opt to produce more sugar than ethanol, reducing the amount of ethanol available for export. Brazil’s domestic demand is also expected to increase as more flex-fuel vehicles enter the marketplace. Combined, these factors indicate that ethanol customers in the U.S. and Europe should not expect to rely on ample Brazilian supplies anytime soon, according to the study.

In the U.S., where sugarcane ethanol has been regarded as the most cost-effective advanced biofuel option for compliance with the RFS and the LCFS, blenders may soon find themselves paying much higher prices for smaller amounts of Brazilian ethanol. To make up for the shortfall, the study’s authors expect those parties will need to supplement their advanced biofuel stocks with more expensive fuels, such as renewable diesel and biodiesel. But the availability of those fuels is also limited, which causes concern that there simply will not be enough advanced biofuel to satisfy the mandates. The future of the LCFS is uncertain due to pending litigation, but the study concluded that even without the LCFS in place, the RFS demands more advanced biofuels than the industry can supply.

For U.S. ethanol producers, Brazil’s lagging production continues to translate into an opportunity to export their product, although perhaps not at the record levels witnessed in 2011, according to Raphael Hudson, Hart Energy’s Latin America director. U.S. exports to Brazil are up currently compared to the same time last year, he said, but he expects demand for U.S. imports to slow in the middle of the year as the harvest hits full swing before recovering toward the end of 2012 as distributors seek to build up their inventory for the interharvest period. “There’s going to be a seasonal pattern to it,” he said.

Long-term, he expects Brazil to continue requiring at least some U.S. ethanol in order to meet growing demand while the country expands its own capacity. Exports will become critical for U.S. producers as their domestic market becomes completely saturated, according to the study, which determined that E15 implementation is not likely to expand the market fast enough to relieve pressure from the blendwall.

Hart Energy experts believe that the RFS will require modifications within the next several years in order to address advanced biofuel and cellulosic biofuel supply shortages. The expected adjustments include modifications to expand the types of fuels that qualify as advanced and cellulosic, an increase in the amount of corn ethanol’s RFS share as the industry improves its production process, the implementation of additional incentives for advanced ethanol and renewable diesel production, and continued changes in RFS volumes for specific categories in order to reflect actual availability of the fuels.

The study’s authors also noted that infrastructure constraints for higher ethanol blends will also need to be addressed to ensure orderly expansion of the RFS. None of these changes are likely to occur without heated debate, however. “Any agreement on specific changes will be contentious and vociferously debated,” the authors wrote.

Previous | Next