Cellulosic refiners hamstrung by chaos in RFS-credit market

Quad County Corn Processors produced the Midwest's first gallons of cellulosic ethanol last summer with new technology added to a corn-ethanol plant in western Iowa.

And the company reached a milestone last month by producing its millionth gallon of the advanced biofuel.

But all is not well for Quad County.

Refiners aren't buying cellulosic fuel credits through the renewable fuel standard program for what the company produces. And so Quad County has received as much as $600,000 less than expected for its wares -- a shortfall that's hurt the company's bottom line and affected its negotiations with other ethanol companies over licensing the technology.

"We can't tell people who license the technology if this is worth zero or this is really worth the proper value," CEO Delayne Johnson said Friday.


The difficulty of selling high-value credits under the renewable fuel standard (RFS) program is emerging as a key issue for the nation's first producers of cellulosic biofuels, or fuels made of non-food crops.

Renewable identification numbers, or RINs, are 38-digit numbers that are attached to gallons of biofuel. Under the RFS program, which Congress passed in 2007, refiners are obligated to use the credits to demonstrate compliance with annual biofuel mandates.

Cellulosic RINs represent gallons of ethanol that have smaller emissions of heat-trapping greenhouse gases than conventional corn ethanol.

"This is really a small issue within the broad scope of all the debates of the RFS, but it's actually, I think, quite an important issue," said James Stock, a professor of political economy at Harvard University and a former member of President Obama's Council of Economic Advisers. "It's not where all the political attention is, but it's really an important piece of the puzzle."

Quad County was formed in 2000 as a small conventional ethanol plant that converted corn into fuel. Eight years later, it opened a research and development facility to explore the production of advanced biofuel.

After several years, the company developed technology that would convert leftover fiber in the corn kernel into ethanol, a process that would generate an additional revenue stream and help meet the goals of the renewable fuel standard.

Quad County built the $9 million "bolt-on" technology at its 35-million-gallon conventional ethanol plant with grants from the federal Departments of Agriculture and Energy, as well as the state of Iowa. The technology allows Quad County to increase its ethanol capacity by about 6 percent (Greenwire, July 2, 2014).

"For existing ethanol dry grain facilities, this is a natural progression," Johnson said in an interview early this year. "It's getting more out of the same feedstock that they already have. It makes the operation more efficient. I feel that this technology is easy to adopt relative to starting out with a whole new feedstock."

In April, Iowa Gov. Terry Branstad (R) visited the plant to celebrate the production of 1 million gallons of cellulosic ethanol. Since the announcement, Johnson estimates that the plant has produced an additional 150,000 gallons of the advanced biofuel.

But out of the total production, Quad County has been able to sell 80,000 cellulosic renewable fuel credits, Johnson said.

"A very small percentage of our total production has been able to be sold at this point," Johnson said.

Instead of selling cellulosic RINs to refiners, the company has instead been forced to detach the credits from the fuel and sell the cellulosic ethanol along with corn ethanol RINs of lower value. That has meant less money in Quad County's pocket.

"We need to be able to sell [cellulosic biofuel RINs] for the value that was intended under the market of the renewable fuel standard to continue to incentivize plants like us to be innovative," Johnson said, "and come up with ways to process cellulosic ethanol and make fuel streams for consumers that are renewable and lower greenhouse gases and so forth -- and that really was the intent of the renewable fuel standard to start with."

'How do you square the circle here?'

The problem, according to Johnson and other advanced-biofuel producers, is how U.S. EPA has issued what are known as cellulosic waiver credits that allow refiners to forgo actually using physical gallons of fuel to meet the RFS's cellulosic biofuels requirements.

The price of waiver credits is set by EPA. In March, the agency announced that the 2014 price will be 49 cents a gallon, and the 2015 price 64 cents a gallon. To buy a waiver, refiners must also retire a separate advance biofuel credit (E&ENews PM, March 25).

When the RFS was established in 2007, there was no commercial production of cellulosic biofuel. So Congress included the waiver credit in order to fill the gap between the actual production of the fuel and EPA's annual mandate for the fuel.

But guessing how much cellulosic biofuel will be produced each year has been a daunting task for EPA, and the agency has historically made available enough waiver credits to cover its entire cellulosic requirement. EPA has also previously provided refunds to refiners for purchases of waivers.

The result is that there's "no incentive to buy the physical fuel that's being produced," Johnson said.

"They [refiners] think that they've got a way to handle their obligation just by doing the waiver credit, so they have no incentive to buy the physical fuel that's being produced," he said. "The legislation always anticipated that there would be a hand-off from the waiver credits to the physical fuel at the moment in time that the new fuel is being produced."

According to Stock, the cellulosic credit market is further complicated by the fact that cellulosic production is growing quickly because of EPA's recent decision allowing biogas to count for credit. EPA has to walk a fine line, he said, between setting a standard that's not too high or too low.

A federal court in 2013 struck down the agency's cellulosic target because EPA's methodology in calculating the mandate included a "special tilt" in promoting the growth of the industry.

"The challenge is to put those three things together," Stock said. "How do you square the circle here? How do you put all of these pieces together in a way that supports the [cellulosic] producers but that doesn't expose anyone to really high prices and makes everything predictable and orderly?"

Other biofuel companies with U.S. cellulosic operations have also expressed concerns about the liquidity of the credit market.

Christopher Standlee, executive vice president of global affairs for Abengoa Bioenergy, said market issues could affect future production of cellulosic ethanol in the United States.

"We're more concerned about the market overall, an impact on the market that was not what the statute anticipated or was passed to the producers," he said.

Abengoa opened a 25-million-gallon cellulosic ethanol plant in Kansas last October, though it has yet to sell any fuel. Standlee said that the company is doing "preliminary market exploration" while it waits to get a significant amount of fuel produced.

According to Johnson of Quad County, a group of biofuel producers met with EPA in October to raise concerns about navigating the cellulosic credit market. According to a letter obtained by Greenwire, trade organizations representing advanced biofuel producers pressed EPA in December about the issue.

In the letter, the Advanced Ethanol Council and the Biotechnology Industry Organization wrote that refiners had indicated that they would purchase waivers instead of cellulosic credits regardless of whether cellulosic credits are available at a lower cost.

Waivers, they wrote, were meant to be used only when necessary and not as an alternative means of compliance in the renewable fuel standard program as advanced biofuel plants start coming online.

"We are increasingly concerned about the efficiency, liquidity and transparency of the [cellulosic] RIN marketplace going forward," the trade groups wrote. "If not corrected administratively, the current [cellulosic] RIN market dynamic will create unnecessary supply chain risk for the cellulosic biofuel industry and curb the incentive to develop new biofuel capacity."

In a paper posted online last week, Stock laid out what he called a "solution" to the issues with the cellulosic credit market.

He recommended that EPA simply estimate the volume of cellulosic biofuel available in the market at the beginning of the year and then "reset" the mandate at the end of the year when actual production numbers are known.

"That way," he wrote, "all parties know that if a [cellulosic] RIN is generated it will be sold."

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