EPA rolls the dice on cellulosic biofuels

A close reading of the Environmental Protection Agency’s 97-page final rule setting 2012 production requirement for renewable fuels reveals that when it comes to the futuristic area of cellulosic biofuels, the EPA is crossing its fingers, knocking on wood and blowing on dice.

The final rule, issued December 27, boosts cellulosic requirements next year by 31% to 8.65 million gallons. The EPA is relying on production from six facilities, five of which have yet to come online.

By contrast, the Energy Information Administration, the statistical arm of the Department of Energy, reported in October that it expects only three facilities to produce commercial quantities of cellulosic fuel in 2012, for a grand total of 6.7 million gallons.

Both estimates fall far short of the 500 million gallons required by statute. But more on that later.

After years of federal subsidies and technological advancement, the US is producing record amounts of ethanol made from corn as well as biomass-based diesel fuel. In fact, tax breaks for both fuels expire on December 31 and neither industry group has made a real fuss about extending them.

But making ethanol from municipal solid waste, corn cobs, switchgrass, wood pulp and other advanced sources has proven challenging. A number of plants are experimenting with some intriguing processes, but few have reached commercial scale.

The EPA’s final rule lists all the companies that might be able to commercially produce cellulosic fuels in 2012. Some are not ready for prime time, including an intriguing process being developed by Visalia, CA-based EdeniQ. The company is trying to turn the cellulose in corn kernels into feedstock for ethanol. It is working on a machine that would mill kernels into finer particles — a machine called, appropriately enough, given that state’s former governor, the “Cellunator.”

The EPA some of the facilities to produce as little as 50,000 gallons in 2012 and as much as 3 million gallons. Some of the facilities won’t even be built until the middle of the year.

The expectations strike some as being overly optimistic. Stephen Brown, vice president of government relations for Tesoro, called the expectations “conjecture-based fantasy” in an article in the Wall Street Journal.

The statutes creating the Renewable Fuels Standard, or RFS2 as it is known, spell out the milestones each fuel should reach year by year until 2022, when it requires that 36 billion gallons of renewables me mixed into the nation’s transportation fuel supply. Refiners and other blenders must meet those goals or purchase renewable identification numbers, called RINs, if they fall short.

The EPA is required to set the production requirements each year, but has considerable flexibility when it comes to cellulosic production. If the industry can’t meet the statutory target, the EPA has the option of lowering the requirement to a more realistic number.

But striking the right balance is tricky. Set the target too low and you discourage investment in the fledgling industry. The federal mandates create the only market for cellulosic fuels – just like they once did for corn-based ethanol.

Set the target too high and you force refiners and blenders to spend tons of money meeting an unrealistic standard with no guarantee that the innovative, but largely unproven cellulosic technologies will ever reach the market.

In publishing its proposed 2012 requirements back in June, the EPA set a range for cellulosic fuels of between 3.45 to 12.9 million gallons. It invited comment on whether a final target at the higher end of the range would spur investment by expanding the market for the fuels.

The agency clearly sided with those who urged higher targets, saying in the final rule that it was trying to help biofuel producers “know what baseline demand for their product will be so that they can secure financing and ramp up production with confidence.”

Which raises the question: is setting higher targets a legitimate way to spark investment and support potentially higher production? Or is the risk the EPA taking simply too high?
Platts