Is the opening of Poet-DSM's Project Liberty, the country's first commercial-scale cellulosic ethanol plant, a game-changer for the industry? During today's OnPoint, Rob Walther, director of federal affairs at Poet, discusses the cost-competitiveness of cellulosic ethanol and the existing market challenges for the fuel, following last week's ribbon cutting at the Iowa facility. Walther also explains why he believes the industry continues to need strong support through the renewable fuel standard for continued growth.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. With me today is Rob Walther, director of federal affairs at Poet. Rob, thanks for coming on the show.
Rob Walther: Thanks for having, especially under these circumstances.
Monica Trauzzi: Definitely a big week for your company last week with the opening of Project Liberty, the country's first commercial-scale cellulosic ethanol plant. How significant is this for Poet?
Rob Walther: This is big for Poet and for its partner, DSM. You know, we're the leading corn producer -- corn ethanol producer in the country, and this is an opportunity for us to now become the leading cellulosic ethanol producer. When we opened last week, this was a 25-million-gallon facility. When we opened last week, we knew that we were starting something very big and very different. We were going to be creating a fuel source that's 90 percent emissions-free relative to gasoline. That is a sustainable fuel and something that can move our transportation sector finally to something that has a carbon profile that is sustainable, that is environmentally friendly.
Monica Trauzzi: So cellulosic ethanol from this facility now able to come to market and is it cost competitive?
Rob Walther: It is cost competitive. We are, right now, in the startup phase, so we're going through the batch processing right now, which is just part of the usual startup of a plant like this. We did the same thing with corn ethanol plants when we were starting those. But we should be up to commercial scale, up to about 20 million gallons in production capacity later on this year, in the next six months or so, and then we'll get up to 25 million gallons.
Monica Trauzzi: OK, so going back to the cost competitive question, cost competitive compared to what? Corn ethanol?
Rob Walther: No, it's not going to be cost competitive to corn ethanol. Corn ethanol's a very cheap product. It trades at about $45 a barrel, but it is cost competitive with oil. Oil is roughly in that $100 to $110 a barrel. We are beneath that. So again, it is -- it's going to help wean us off of oil -- foreign oil imports. I think we still will have a robust corn ethanol supply, around 15 billion gallons, but this is the future. This is where the market growth potential is.
Monica Trauzzi: What are the market concerns, though, that still exist for cellulosic?
Rob Walther: Well, frankly, the major market concern that exists now, of course with any disruptive technology, something that is going to be displacing something as entrenched as oil, there are a number of things that you can point to. I think for us, the major concern is what happens to the renewable fuel standard because that is the market certainty that we need to go out into the investor pool and say yes, there is revenue out there that could come from the next plant, that could come from Liberty Two, Liberty Three, Liberty Four, Liberty Five. So the RFS is tremendously important to us.
Monica Trauzzi: Right, and we're going to talk a little bit more about the RFS in a moment. We've had many conversations on this show, including with Abengoa's CEO about the industry's difficulty in holding onto investments. How does the opening of this facility shift the dynamic on investments?
Rob Walther: Well, it shifts it in that we have a plan. We actually have one that's going to be able to prove out and provide product and begin to produce revenue. When you evaluate tranches of risk, if you're in a private-equity firm, one of the first tranches of risk, and the highest tranche of risk around cellulosic ethanol, has always been the technological risk. Can you actually make this thing work? The longer we run this and the more gallons that come out and the better our expertise -- as our expertise grows, you know, we're experts at corn ethanol. We're going to become experts at cellulosic. As that grows, the risk profile comes down, and that means our cost of capital comes down, so then all of a sudden, private-equity firms look at us and say, you know, we can give you the cash or the debt that you need at a lower price than what we originally came to you with.
Monica Trauzzi: Cellulosic ethanol has been squarely challenged on the Hill, by the press, by other industries. Does the opening of this facility serve as an effective counterpoint or effective enough?
Rob Walther: Well, it's certainly a counterpoint. I don't know if it'll resonate with some folks on the Hill. It certainly won't resonate with our competitors in the fossil fuel industry because they know it's market share that we're taking away from them with a cheaper product and a cleaner product and a better-for-your-health product. The -- as far as whether or not it's an indication that we're here to stay, I think absolutely. We have a plant, it's running, it's cost competitive, the sky's the limit now.
Monica Trauzzi: So there are other facilities that are expected to open this year as well by other companies. Do you consider them competitors, or is everyone sort of just trying to work together now to get things off the ground?
Rob Walther: Well, listen, I work for Poet, so of course I'm going to say we're first out of the box and we're getting to run this plant now so we're ahead of the game. I'm sure our friends at Abengoa and DuPont would have very different things to say, but I love the fact that this is the conversation that's happening now. Instead of the conversation being can we do this, the conversation has pivoted to who's going to win. Who's going to have the most market share? Who's going to build the most of these plants? That's a remarkable shift from 2005, 2007, even last year when we didn't know or folks didn't know if this was real. This is real. Our competitors like to call it a phantom fuel or a fantasy fuel, and I think during the grand opening, we really tried to play into that theme that the fantasy has become a reality.
Monica Trauzzi: So let's talk about the RFS because it's been a key driver in keeping cellulosic on the map. Without the RFS, would this facility have happened?
Rob Walther: That's a great question. I don't see a pathway that it could have happened. This incentivized us to explore cellulosic in the first place because we knew that there was a market. You know, a number -- a significant portion of the funding came from DOE and Iowa, so perhaps those subsidies could have gotten this first plant out, but really it's the market that the RFS creates that allows us to go out and access private capital and start rolling out Two and onwards -- Liberty Two and onwards. So maybe this plant happens without the RFS, but it's what we're going -- where we're going because of the RFS going forward, as long as it stays consistent and solid in its application.
Monica Trauzzi: All right, so the 2014 RFS was sent to OMB in August. Do you expect the final numbers to be released ahead of the elections?
Rob Walther: I couldn't speak to that. I don't have any intelligence one way or the other that is convincing. Just to be clear, though, the numbers are one part of this equation. You know, if the numbers go up, great because it provides more RINs and the renewable identification credits, which incentivizes uptake of ethanol. But the other part of it is the justification, the methodology that EPA used, which is basically buying into this blend wall idea that you can't put more than 10 percent ethanol out into the marketplace. If you buy into that methodology, if EPA has a proposed rule that looks, in methodology and justification, similar to the proposed rule, if their final rule looks like the proposed rule, it will so chill investment in this country because we don't necessarily have room to grow. We don't necessarily have market to access beyond 10 percent. You already have 15 billion gallons of corn ethanol built out. Where would the cellulosic gallons go? I think it's very telling that this grand opening last week, we had representatives from China, from India, from Brazil and a host of other nations, and they all have said that they are thrilled with what EPA is doing because it means they become more attractive for our investment in cellulosic in their countries. So will it drive investment overseas, you know, time will tell, but it is very clear that the U.S.'s competitors in other countries are very excited about the possibility that the proposed rule looks like the final rule.
Monica Trauzzi: All right. We'll end it there. Thank you for coming on the show.
Rob Walther: Thank you so much.
Monica Trauzzi: Nice to see you. And thanks for watching. We'll see you back here tomorrow.
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