Governors' Biofuels Coalition

Efforts to roll back rules that nurtured the corn-based ethanol industry threaten to stunt other promising biofuels, according to a developer working on one of the nation’s first commercial plants that won’t use the grain.

Lower quotas for renewable fuel use are being considered as part of a plan to raise the federal borrowing limit by U.S. House of Representatives Majority Leader Eric Cantor, a Virginia Republican. The move would threaten investments in a few next-generation plants, said Stephan Tanda, a managing board member at Royal DSM NV (DSM), a Heerlen, Netherlands-based manufacturer.

“The sprout’s coming out of the ground,” Tanda, whose company has joined Poet LLC, the world’s biggest ethanol maker, to build a next-generation plant in Iowa, said in a Sept. 5 interview. “You can’t step on it with your boots,” he said. In 2014, the $250 million factory in Emmetsburg will start making ethanol from such waste as corn cobs, leaves and husks.

Under the Renewable Fuels Standard passed by Congress in 2007, refiners including Exxon Mobil Corp. (XOM) must mix a certain amount of renewable fuels into their gasoline each year. Advocates say this spurs domestic production and cuts greenhouse-gas emissions by reducing gasoline and diesel use. Critics say the rules contribute little to energy security, especially when increased U.S. oil and gas output from hydraulic fracturing is easing dependence on energy sources abroad.

Cellulosic Source

The ethanol mandates, combined with a tax credit for blenders and a tariff on fuel imports, helped push production of corn-based ethanol to a peak of 13.9 billion gallons in 2011 from 3.9 billion in 2005. Under the 2007 measure, production of the biofuel is to reach 15 billion gallons by 2015. The corn-based mandate then levels off while advanced-biofuel output, mainly cellulosic, must rise to 21 billion gallons by 2022.

Producers such as Archer-Daniels-Midland Co. (ADM) and Valero Energy Corp. (VLO) have struggled to meet targets for greater use of the biofuel as declining demand for gasoline puts refiners closer to the “blend wall,” the point at which the ethanol content in gas exceeds 10 percent. Refiners say more than that can harm engines.

Meanwhile, cellulosic ethanol made from crop waste, grasses and wood chips and envisioned under the law as supplying 20 billion gallons of the biofuel by 2022, has fallen far short of government targets because of technological limitations.

EPA Action

The Environmental Protection Agency, which sets annual quotas for next-generation biofuel use, slashed the mandate to 6 million gallons of cellulosic ethanol for this year from a proposed 14 million gallons, in response to pleas from refiners last month. It also signaled it will cut the 18.15 billion-gallon mandate for corn- and cellulosic-based fuels next year, a requirement that had pushed up prices of ethanol credits that refiners can buy to comply when they can’t meet use quotas.

The changes show the government has the ability to adapt to realities without compromising the longer-term goals of the standard, Agriculture Secretary Tom Vilsack told a farmer group in Washington today. “The EPA has the capacity to create flexibility, and they’re using that capacity,” he said.

‘Full Repeal’

Still, stagnant growth has given longtime opponents a chance to pounce. “Ethanol requirements will continue to increase while gasoline demand continues to decline,” Bob Greco, a director for the American Petroleum Institute, said last month in a statement. “That’s why we need a full repeal by Congress.”

Groups such as the institute, which represents companies including Marathon Petroleum Corp. (MRO), Phillips 66 Co., Chevron Corp. (CVX) and Exxon Mobil, have pushed to repeal the mandates, describing them as fundamentally flawed and unworkable.

Opponents are backing a bill by Representative Bob Goodlatte, a Virginia Republican, that would cap the ethanol-content requirement at 10 percent of gasoline and set the mandate for cellulosic fuels at levels that reflect actual production. Senator Barbara Boxer, the California Democrat who leads the chamber’s Environment and Public Works Committee, also plans a hearing on the Renewable Fuels Standard this year.

‘Finally Here’

Adjusting the mandates would halt efforts to develop the cellulosic-ethanol industry and limit the use of biofuel derived from corn, Poet Chief Executive Officer Jeff Lautt said.

“We’re finally here, we’re at the doorstep of commercialization,” Lautt said. “Our opponents, who have had the luxury of having control of the fuel supply in the U.S. since the inception of automobiles, would love to see the RFS either tweaked or repealed or anything in between.”

Congress is unlikely to agree on changing the program, said Jerrod Kitt, an analyst at Chicago-based Linn Group Inc.

“They can barely agree on the color of the sky, let alone something as complicated as the Renewable Fuels Standard,” Kitt said.

Even without a change, the efforts to revamp the rules are likely to give investors pause, DSM’s Tanda said. Requirements are needed for at least three to five years while the first cellulosic-ethanol plants come online and prove their viability, he said. As biofuel based on corn grain needed tariff and tax incentives in its early years to become viable, newer sources need the use mandates to spur research and development, he said.

“We don’t count on this forever,” he said. Without the requirements, “potential clients for us will look at this nervously,” he said.

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