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By Andrew Holland on Aug 9, 2013 with 9 responses

Commercial Production of Cellulosic Biofuels is No Longer a Unicorn

This week, the EPA announced that it was adjusting the Renewable Fuels Standard (RFS) in order to reflect market realities. As originally proposed earlier this year, the rule called for 14 million gallons of cellulosic ethanol, but the final rule sets a requirement for 6 million gallons of cellulosic ethanol this year.

However, as all the news stories focus on how the EPA has “backed down”, what goes overlooked is that there is finally a cellulosic biofuel industry in which commercial production has started.

KiOR’s biorefinery in Columbus, Mississippi started commercial production in March using wood chips to produce cellulosic fuels, and Ineos just announced on July 31 that their Indian River BioEnergy plant in Florida has begun operations to make biofuels from plant waste. Both of these are now operating at full commercial scale. Whether they’re making money yet, we don’t know, but the fact that they’re producing large volumes of cellulosic biofuels may be a historic turning point. These developments are important steps towards developing a real advanced biofuel industry that can help move us toward a point where we have other options for how to fuel our cars and trucks.

Robert Rapier, writing about this issue in January, had called commercial cellulosic ethanol production a “unicorn” because it was something that doesn’t exist, no matter how much we want it to. Today, we can honestly say that is no longer the case.

Legislative Background

Since 2010, under the requirements of the bipartisan Energy Independence and Security Act of 2007, the EPA has been required to include a standard for cellulosic ethanol. Under the law, that was to start at 100 million gallons in 2010 and increase to 1 billion gallons by 2013. However, the law gives the EPA wide latitude to set the RFS based on current technology and production capacity. That’s why the actual RFS rule for 2010 was 6 million gallons, not 100 million and the rule for 2013 was originally 14 million gallons, now down to 6 million. The RFS was intended to provide an incentive for the development of cellulosic fuels – and it seems to have finally done the job.

Now – to be clear – this has been a long time coming. When I was working on the Hill in ’06 and ’07 as we were considering updating and increasing the RFS, we had the ethanol lobbyists and businesses come in and sell us on the corn ethanol RFS as a stepping stone towards cellulosic ethanol. At the time, they told us that cellulosic was only two to three years from commercialization. It turns out they were off by a few years – but in that intervening time, we had a deep financial crisis that made financing anything difficult. It turns out that financing a factory for an unproven fuel that will compete with the largest incumbent companies on the planet was nearly impossible.

This differential between what Congress anticipated in the law and the reality of actual production shows how difficult it has been to bring these to market.

Why Do We Still Need the RFS?

Let’s remember, reducing our oil use is an important step for national security. It reduces our dependence on volatile prices, set by whatever the most recent unrest in the Middle East is; for example, over the last month, we have seen a 10% oil price spike on news of a restart of Egypt’s unrest – and they’re not even a major oil producer! I’ve written about how development of Advanced Biofuels would help our National Security by giving consumers an option to separate from the global oil market.

One of the best ways to reduce our oil use is to develop biofuel replacements. Corn ethanol has gone a long way – it now makes up 10% of the U.S. fuel supply. However, it also has gone about as far as it can go due to the upcoming ‘blend wall.’ Today, companies like KiOR, Virent, and many others are moving forward with the next generation of biofuels. The RFS ensures that they have buyers when they bring their product to market. There is an increasing discussion in Congress about dismantling the RFS – but the development of advanced biofuels are too important to leave hanging without support. The EPA announcement shows the flexibility of the RFS, and the breakthroughs in commercial production of cellulosic biofuels show that it is working.

  1. By Robert Rapier on August 9, 2013 at 4:52 pm

    “Both of these are now operating at full commercial scale.”

    KiOR just announced in this week’s earnings call that their second quarter production was 75% below their forecasts:

    They aren’t forecasting that they will reach full production until next year, which means they know they still have a ways to go.

    This is what I mean by the unicorn. At the time of these mandates, there was no commercially available fuel. Thus, they were mandating something that didn’t exist. Today, the amount of commercially available fuel is far short of the mandates. The EPA was counting on KiOR for 4 million gallons or so, and what KiOR has said is they might make 1 or 2 million gallons this year.

    So while I have always acknowledged that one can incentivize a unicorn into existence, the real test is going to be whether these facilities have staying power. The one facility that produced cellulosic ethanol RINs in 2012 has already gone bankrupt.

    • By Andrew Holland on August 14, 2013 at 4:37 pm

      My point is that we’ve been waiting so long for cellulosic ethanol to be produced at large scale. Now, that era is finally beginning, but the only story that’s running in the press is that its not meeting predictions. But – its still a big deal that they’ve started production at KiOR and Ineos!

      • By TimC on August 15, 2013 at 1:56 pm

        The EPA allows small oil refineries to apply for hardship exemptions from the RFS ethanol blending requirements, with “small” meaning capacity 10,000 tons of biomass per day, producing at least 20,000 barrels of fuel per day. A biorefinery of this size will cost about $4 billion to build. It is not clear right now if there is any site in the US where this much biomass feedstock could be provided to a plant year-round at economical cost. Cellulosic biofuels are still a unicorn. We are still waiting for them to be produced at large scale.

  2. By ben on August 13, 2013 at 7:54 pm

    Robert’s response is, typically, charitable. The unicorn remains behind the wardrobe and we will do well to keep our greening transportation fuels imaginations in check. RFS is in need of change and, perhaps, the old Washington line that I occasionally heard about revisions to Affirmative Action is in order: “Amend it, don’t end it.” Regardless of perceptions (good and bad), change is surely coming, as even old-line defenders acknowledge the status-quo only stands to further erode the renewable fuel industry’s credibility among those “middle of the roaders” who have no particular axe to grind, but need to show folks back home that they aren’t buying any more bridges to nowhere. The natives are increasingly restless and pontificators in Washington who fantasize about job creation via government fiat will do well to temper their appetites in expectation that today’s financial repression will be a decade-long proposition against the backdrop of less than inspiring demographic trends. Muddling Toward Reality appears to remain the order of the day.
    Keep up the good work via ETI.

    • By Andrew Holland on August 14, 2013 at 4:34 pm

      Ben – I think you may be right – amendments to the RFS could go a long way towards making it actually sustainable. The problem, of course, is that Congress is so dysfunctional that if you open up that can of worms, you simply don’t know what will come out. The idea of a rational, middle of the road approach to reforming the RFS is simply a non-starter for right now.

  3. By Russ Finley on August 14, 2013 at 1:02 am

    Let’s remember, reducing our oil use is an important step for national
    security. It reduces our dependence on volatile prices, set by whatever
    the most recent unrest in the Middle East is; for example, over the last
    month, we have seen a 10% oil price spike on news of a restart of
    Egypt’s unrest – and they’re not even a major oil producer!

    If I produced corn ethanol, and the price of oil went up, I’d charge a lot more for my ethanol to maximize profitability while my competitor’s prices were high, which, in a nutshell is why ethanol does little to protect consumers from oil price spikes. Ethanol producers aren’t crazy. Oil price increases largely increase ethanol profit margins at the consumer’s expense.

    Reducing liquid fuel use might buffer our economy from liquid fuel price fluctuation, but certainly, ethanol, being a liquid fuel, won’t do that.

    I also don’t see how cellulosic ethanol gets past the blend wall. Affordable cellulosic ethanol would be corn ethanol’s worst nightmare.

    Read Is the U.S. Military Presence in the Middle East a Subsidy for Big Oil?

  4. By Mark Green on August 15, 2013 at 3:48 pm

    Robert is right. The 73,000 gallons of cellulosic produced as of the end of July is about 1.8% of the new EPA mandate (4 million gallons or 6 million “ethanol-equivalent” gallons). Just think, if EPA hadn’t reduced the mandate from 14 million gallons, actual production would be something like 0.6% of the requirement. Even with the reduction, it’s a mandate not connected with market reality.

  5. By Ben on August 15, 2013 at 8:58 pm

    I’m not sure, Andrew, that I was citing potential amendments to RFS as potentially contributing to the policy’s “sustainability, as I believe only market-disciplined performance will ensure such an objective. That test can only be met, arguably, by taking away the fiat of government subsidies over time. I guess “over time” is the operative point here with many arguing that the time (for revision) is LONG overdue.
    I tend to sympathize with such a view, as do most taxpayers looking to the actual
    ROI on all the expense and hype.
    Rapier understands that fossil fuels are pretty much the only consequential energy
    source for now (like it or not) and until we go on a major diet (don’t hold your breath)
    we are simply stuck with current circumstances. Can we do anything about it? Yes,
    but to the extent it involves meaningful sacrifices, well, again, let’s not hold our breath.
    The notion of fair, shared sacrifice for the common good seems a tad old-fashion for today’s digital generation. We may be yet tested on our visceral fortitude, but our instinctive response to 9/11 hardly leaves one overly inspired. Yet, we self-congratulate, as if we’ve done something consequential. Hubris is the hallmark of
    prideful civilizations that too often fail to see the warning signs of their own decline.
    I really would love nothing better than to be wrong in my observations.
    Thanks for the open–and candid–exchanges here at ETI.

  6. By Forrest on September 30, 2013 at 9:00 am

    Cellulosic biofuel is off to a slow start. The technology is changing quickly and advancements make it difficult to engineer commercial processes in a timely manner. These are good problems and valued per the brighter future of this fuel source. Poet-DSM process utilizes yeast and enzymes to convert corn stover material to fermentable c5 and c6 sugars to ethanol. The left over or by product lignin is a valuable solid fuel source about like coal energy density. Their commercial plant production scheduled for 2014. Their company goal is to be equivalent with grain ethanol cost. Some 1.3 billion tons of biomass available for conversion. The 100 gallons per ton goal, appear often in my reading of cellulose conversion. As the improvements stack up I expect they will meet that target. Currently, corn stover sells for $40 ton. Appears there is room for farmers to make more and produce a competitive fuel source. Tests per the agricultural colleges determined up to 40% of the stover removal can be achieved without harming field growing conditions. Poet has established a 25% threshold nonetheless. These biofuel plants about 4-6 times more expensive than corn ethanol. So, I would expect slow progress until risk can be minimized per investment dollars. The Poet cogen approach with corn/starch ethanol has synergy lowering investment and increasing benefit upon both processes. But the investment community rightly so, fears that some revolutionary process will make their hard earned investment worthless. It’s a good thing for us and bad thing for risk takers.

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