Cellulosic Ethanol Flaws

OMAHA (DTN) -- The federal government may be underestimating the growth potential of cellulosic ethanol and advanced biofuels, a number of witnesses testified on Tuesday on the latest proposed volumes in the Renewable Fuel Standard. They asked the U.S. Environmental Protection Agency to get a better handle on that potential.

The EPA held a public hearing in Washington, D.C., getting an earful about its proposed reduction in cellulosic ethanol and overall advanced biofuels numbers in the latest RFS proposal.

The agency is taking heat on two fronts. First, the biomass-based biodiesel industry says it is poised to increase its production far beyond the proposed 2.1 billion gallons.

Second, industry representatives told the EPA the proposed reduction in cellulosic ethanol, by 73 million gallons down to 238 million, fails to take into account the state of the industry.

EPA proposed an overall drop in the total Renewable Volume Obligation for 2018 from 19.28 billion gallons to 19.24 billion gallons. That includes a reduction of advanced biofuels from 4.28 billion gallons to 4.24 billion gallons. EPA would set the biodiesel blend requirement at 2.1 billion gallons for 2019, although the industry has maintained the actual production is poised to reach close to 3 billion gallons.

Witnesses told EPA they are concerned about the agency's pursuit of resetting the overall RFS.

The Clean Air Act requires the agency to reset the statutory RFS volumes for future years through 2022, if annual volume requirements are waived by at least 20% of the statutory volume target for two consecutive years, or at least 50% of the statutory volume target for a single year.

According to the EPA proposal, "the administrator has directed EPA staff to initiate the required technical analysis to inform a reset rule." Current statute requires 36 billion gallons of biofuels production by 2022, a level unlikely to be realized.

CELLULOSIC ETHANOL OVERLOOKED

Rob Walther, vice president of federal advocacy for Poet, which owns and operates a cellulosic ethanol plant in Emmetsburg, Iowa, said President Donald Trump has vowed to support the growth of the biofuels industry.

"When President Trump visited Poet's Gowrie, Iowa, ethanol plant and shook hands with the men and women who worked there, he said our industry would continue to grow under his administration," Walther told the agency during the public hearing.

"When our CEO met President-elect Trump, he said the same thing. And just recently on June 21, Mr. Trump, now as president of the United States, again in Iowa said clearly, 'we are saving your ethanol industries in the state of Iowa just like I promised I would do in my campaign.' Yet, the proposed rule offered by EPA would be the first in the 10-year history of the Renewable Fuel Standard program that lowers the total volumes of biofuels from a prior year."

Walther told the agency it isn't taking a comprehensive look at cellulosic ethanol.

"Meanwhile, the signal this has sent across the industry is negative and highly regrettable," he said.

Paul Winters, director of communications for the Biotechnology Innovation Organization, or BIO, said the agency needs to do more to spark cellulosic ethanol production.

The agency takes, on average, about three years to approve new RFS pathways for new cellulosic feedstocks. In addition, he said the 2018 proposal for cellulosic ethanol identifies 105 million gallons of capacity under development. The agency then gives those companies a 1% chance of starting production in 2018.

"The majority of these plants will use proven cellulosic technology with a track record of consistent production," Winters said.

"EPA should do everything it can -- including changing the efficient producer rule to allow fast track approval of bolt-on cellulosic technology -- to give these companies a better than 1% chance of starting up production as quickly as possible."

At the end of last week the U.S. Court of Appeals for the District of Columbia Circuit ruled the EPA cannot consider a lack of demand for biofuels in setting RFS volumes, as it did in the 2015 final rule that included volumes for 2014-to-2016.

RULE DEFIES COURT

Jonathon Lehman, advisor to the American Coalition for Ethanol, told the EPA the current proposal defies the court's ruling.

"As the D.C. Court of Appeals stated, the intent of the RFS's 'increasing requirements are designed to force the market to create ways to produce and use greater and greater volumes of renewable fuel each year,'" Lehman said.

"EPA must not use the lack of demand as justification to bring volume requirements down. Any effort to reset RFS levels below what can be produced by the industry runs counter to the statute."

Lehman said the court ruled EPA cannot consider infrastructure constraints, the number of retail outlets offering biofuels, pricing of those fuels, the prevalence of vehicles that can use renewable fuel, and marketing efforts to promote biofuels.

The EPA proposal includes discussion about assessing attainable volumes based on these factors, he said.

"While the proposed rule does not reduce total volumes based on the legally flawed interpretation of 'insufficient domestic supply', the rule does extensively review inappropriate demand-side factors such as gasoline demand, retail stations, vehicle engines, pricing, and marketing efforts in its determination to not use the authority," Lehman said.

Bob Dinneen, president and chief executive officer of the Renewable Fuels Association, said the agency has "erred on the side of pessimism" on cellulosic ethanol's potential.

"We know that many plants are in the process of adding bolt-on fiber conversion technology to their existing facilities that could dramatically increase cellulosic ethanol production next year," he said.

If the agency decides to reset the RFS, Dinneen said the EPA should proceed with caution.

"We respect the agency's obligation to reset the advanced and cellulosic biofuel targets to provide greater, long-term stability and certainty in these markets," he said. "But we caution the agency that reset does not mean repeal, and the agency must be faithful to the spirit and intent of the RFS. Congress entrusted EPA with the ability to reset the RFS, not to gut the RFS."

BIODIESEL REQUEST

American Soybean Association Vice President and Iowa farmer John Heisdorffer asked the agency to set the biomass-based biodiesel volumes to at least 2.75 billion gallons and the total advanced biofuels volumes at 5.25 billion.

"Our industry has always advocated for RFS volumes that are modest and achievable and we have met or exceeded the targets each and every year that the program has been in place," Heisdorffer said.

Iowa Gov. Kim Reynolds told the agency the proposed biodiesel volumes show little or no growth in the next couple of years.

"There is simply no question that there are ample American feedstocks and U.S. capacity to justify a much larger biodiesel number under the law," she said.

Chris Bliley, vice president of regulatory affairs for Growth Energy, was one of several witnesses, including Nebraska Gov. Pete Ricketts, to criticize the agency for not providing certainty to cellulosic ethanol and advanced biofuels companies.

"By significantly reducing the cellulosic volumes for 2018, the agency is sending the wrong signal regarding further advancement toward meaningful cellulosic production," Bliley said. "Our members are the world's leading innovators in the production of cellulosic ethanol, developing technology that can be replicated at other existing plants throughout the industry, but they need policy certainty to continue to make those investments."

Ricketts told reporters prior to his testimony that selling advanced technologies short in the RFS creates "uncertainty and businesses don't invest."

If the agency boosts the cellulosic and advanced numbers, he said, "the industry will respond."

Grant Kimberley, executive director of the Iowa Biodiesel Board, told the agency the industry is waiting for a market signal from the EPA.

"EPA's current proposed volumes would stall biodiesel, an important Iowa manufacturing sector, at a time when it is already operating below its capacity," he said.

"The U.S. can meet production demand and has substantial room for growth, which EPA's proposal does not acknowledge."

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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