Where are the Unicorns?
Congress Mandates Cellulosic Ethanol and The EPA Tracks It
The U.S. Environmental Protection Agency (EPA) is tasked with tracking compliance under the Renewable Fuel Standard (RFS2) that was set in the Energy Independence and Security Act of 2007 (EISA). Obligated parties under the RFS2 must demonstrate compliance with Renewable Identification Numbers (RINs), which the EPA created to track RFS2 compliance. A RIN is a 38-character number assigned to a gallon equivalent of renewable fuel produced or imported. For corn ethanol, 1 gallon of ethanol produced generates 1 RIN. Other kinds of biofuel generates RINs at different rates which are defined by the EPA. For certain gaseous biofuels, such as di-methyl-ether (DME) and bio-methane (methane typically produced from sewage sludge or manure), the EPA has specified that 77,000 British thermal units (BTUs) of fuel are 1 gallon of renewable fuel equivalent. Not coincidentally, this is the energy content of 1 gallon of ethanol.
Obligated parties that produce or own RINs must register with the EPA, and RIN generation and transaction data is available from the EPA Moderated Transaction System (EMTS). A RIN is attached to each gallon of renewable fuel (or equivalent) as it is transferred to a fuel blender. After blending, RINs are separated from the blended gallon and are used by obligated parties (blenders, refiners, or importers) as proof that they have sold renewable fuels to meet their RFS mandated volumes. An obligated party can purchase RINs to satisfy their obligations, and that’s exactly what many obligated parties do.
In the 2007 EISA, Congress mandated that 100 million gallons of cellulosic ethanol had to be blended into the fuel supply in 2010, 250 million gallons in 2011, and then rapidly ramping to 16 billion gallons per year by 2022. Despite the mandates, there was no cellulosic biofuel produced in 2010 or 2011, and only 20,000 gallons were produced in 2012 by a company that subsequently declared bankruptcy. In 2013 about 230,000 gallons of cellulosic biofuel were produced by KiOR, which also subsequently went bankrupt.
I have written a number of articles on the cellulosic ethanol situation. To understand what cellulosic ethanol is, and to see that the history of this fuel in the U.S. dates back about 100 years, see my 2010 article Cellulosic Ethanol Reality Begins to Set In, my 2012 article The First Commercial Cellulosic Plant is NOT About to Open, or my 2013 article Why I Don’t Ride a Unicorn to Work.
The “First” Commercial Cellulosic Ethanol Plant is Announced
Several companies have either claimed they were about to open commercial cellulosic ethanol facilities, or that they have indeed done so. Each time this happens, there are headlines proclaiming that commercial cellulosic ethanol is a reality. My response to that is always essentially “You have to give it a few years before making that assessment.” Today, I provide evidence that despite the headlines, commercial cellulosic ethanol production has yet to be demonstrated.
In 2012, INEOS Bio and its joint venture partner New Planet Energy announced the opening of the Indian River County BioEnergy Center in Florida. Jim Greenwood, who was President and CEO of Biotechnology Industry Organization (BIO), testified before the House Committee on Agriculture “The biorefinery is a major landmark for this country. It’s the first commercial cellulosic refinery.”
Two things. The first, as you will see if you read my previous articles, is that the country’s first commercial cellulosic ethanol refinery was built nearly 100 years ago. Second, if I build a spaceship, and I tell you that commercial travel to Mars is now at hand — you would probably want to see me commercially fly that spaceship to Mars. In other words, I have to be both technically capable and it has to be economically viable before I can claim commercial success. If I spend a billion dollars and customers pay me a total of $5 million to take them to Mars, I am not a commercial success even if I am a technical success. With cash flow like that I would require heavy subsidies to keep my venture in operation.
Back to INEOS. Despite the May 2012 proclamation that the facility was about to open, it wasn’t until July 31st, 2013 that INEOS issued a press release that the company “is now producing cellulosic ethanol at commercial scale. First ethanol shipments will be released in August.” The nameplate capacity of this plant was 8 million gallons of cellulosic ethanol per year. In December 2013, the company issued a press release that said in part:
“Bringing the facility on-line and up to capacity has taken longer than planned due to several unexpected start-up issues at the Center. These efforts have highlighted some needed modifications and upgrades.”
Nine months later, in September 2014, the company issued another press release that read in part:
“INEOS Bio’s Vero Beach facility has recently completed a major turn-around that included upgrades to the technology as well as completion of annual safety inspections. We are now bringing the facility back on-line. In addition we will soon finish installation of equipment that will be used to remove impurities from one of our process streams that have been negatively impacting operations. This equipment will be commissioned and brought online over the remainder of the year.”
There have been no further operational updates. So what does the INEOS plant say about commercial cellulosic ethanol? Keep in mind that nobody disputes that you can build a plant to make cellulosic ethanol. The issue has always been about cost — due to complexity and high energy inputs. That’s why the cellulosic ethanol plants from 100 years ago were shut down.
POET Also Announces the “First” Commercial Cellulosic Ethanol Plant
Then there is POET, one of the largest producers of ethanol in the world. On July 7, 2011 the U.S. Department of Energy announced a $105 million loan guarantee to POET for the development of its 25 million gallon per year corn cob-to-ethanol facility, dubbed Project Liberty, at Emmetsberg, Iowa. Construction of the facility was expected to begin in August 2011, and cellulosic ethanol production was slated to begin in May 2013.
In September 2014, more than a year later than projected, in an announcement that must have been a surprise to INEOS, POET issued a press release: First commercial-scale cellulosic ethanol plant in the U.S. opens for business. The grand opening was attended by Willem-Alexander, King of the Netherlands, U.S. Secretary of Agriculture Tom Vilsack, Deputy Under Secretary Michael Knotek of the DOE, Iowa Governor Terry Branstad and Lieutenant Governor Kim Reynolds and thousands of guests. From the press release:
“Some have called cellulosic ethanol a ‘fantasy fuel,’ but today it becomes a reality,” said Jeff Broin, POET Founder and Executive Chairman. “With access now to new sources for energy, Project LIBERTY can be the first step in transforming our economy, our environment and our national security.”
To be clear, I never called it a fantasy fuel, I just compared commercial cellulosic ethanol to a unicorn. The “commercial” modifier is important, because once again we have known for a very long time how to produce cellulosic ethanol.
Abengoa Announces a Commercial Cellulosic Ethanol Plant
Next up was Abengoa (NASDAQ: ABGB), which had been building a cellulosic ethanol plant in Hugoton, Kansas. In October 2014 they announced the grand opening of the facility, an event attended by U.S. Secretary of Energy Dr. Ernest Moniz, Kansas Governor Sam Brownback and Kansas Senator Pat Roberts. The press release stated in part:
“Abengoa’s new industry-leading biorefinery finished construction in mid-August and began producing cellulosic ethanol at the end of September with the capacity to produce up to 25 million gallons per year.”
Last week, here was what Abengoa CEO Manuel Sánchez Ortega said about the facility when addressing Q1 2015 earnings:
“With regards to Hugoton, we continue working in the startup of the plant where we are making progress everyday resolving the issues that we have encountered, all of them related to the mechanical part of the plant. The bad news is that we still have our work to do to fix all identified challenges and the good news is that none of this are related to the biochemical process, which is the innovative part of the project.”
Is commercial cellulosic ethanol a reality? Certainly not yet according to Hugoton.
While both INEOS and Abengoa have announced problems, to my knowledge POET has been silent about their progress. But they do all report production numbers to the EPA. The newest numbers were released today for April 2015 production.
Keep in mind that April 2015 marks nearly 2 years since INEOS announced they were producing commercial cellulosic ethanol. For POET and Abengoa, April marked the 8th month since they had announced the beginning of production. The total announced nameplate capacity of these 3 plants is 58 million gallons. So how close have they come to achieving this capacity?
Through March, EPA had listed year-to-date production of 286,237 gallon of cellulosic ethanol. The newly released data show that for April, the year-to-date cellulosic ethanol production was 574,922 gallons. This means that April’s production was 288,685 gallons. Annualized, this comes out to be 3.5 million gallons from plants with total announced nameplate capacity of 58 million gallons. Total production for the record month of April was then only 6% of nameplate capacity. That’s pretty bad considering these companies are at least 8 months into their learning curves. Normal learning curves on a process don’t mean sub-10% capacity more than 6 months after start-up. That’s an indication that serious miscalculations have been made about the complexity of the process.
The reason this is significant is that the production volumes have to be supported by the capital that is spent. If, in reality, only a fraction of the nameplate capacity can be reached (and clearly from the INEOS and Abengoa updates the capital costs are still rising) the hundreds of millions of dollars of capital buy very few actual gallons of capacity. Production at only a fraction of nameplate capacity will destroy the economics of the process and in turn the notion that commercial cellulosic ethanol is now a reality. A publicly traded company would eventually have to take an impairment against the facility — as KiOR did prior to their bankruptcy.
Still No Unicorns
While companies are rushing to take credit for commercial production of cellulosic ethanol, a look at the numbers released by the EPA today tells a different story. They warn of very high capital costs per actual gallon of production — a recipe for commercial failure. On the positive side, April’s numbers were slightly greater than the year-to-date production of the previous 3 months combined. If I had to guess, based on the lower capacity of INEOS and the ongoing problems at Abengoa, that production is predominantly POET’s.
POET probably does have the greatest chance of success. By co-locating their cellulosic ethanol process adjacent to one of their corn ethanol plants, they can share infrastructure, energy, and personnel – driving down costs. But the capital cost of that facility was announced at $275 million. Even if we assume that all of April’s production was from POET, it’s going to take a lot more than 3.5 million gallons of ethanol per year to support that level of capital spending – at least commercially. On the spot market that much ethanol per year would currently sell for about $5 million. Production rates will have to be more than an order of magnitude higher to justify hundreds of millions in capital spending.
Of course you can subsidize all sorts of schemes into existence. The real question is whether there is a realistic pathway to the process standing on its own commercially. We will check back in on this developing situation later in the year, but it’s going to require exponential production increases over the next few months to salvage the economics. Alas, despite claims of unicorn sightings, I still can’t find one to ride to work.
Link to Original Article: Where are the Unicorns?