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Energy bill a boon for ethanol, and a challenge

By mandating a boom in ethanol output from sources other than corn, the energy bill President Bush is expected to sign presents a huge opportunity for fledgling biofuel market.
Images: Corn cob ethanol
“In this industry, they always say cellulosic is five or six years away, but they’ve been saying that for the last 15 years,” says scientist David Swenson. Until then, most ethanol will come from corn.Dirk Lammers / AP file
/ Source: The Associated Press

By mandating a boom in ethanol output from sources other than corn, the energy bill President Bush is expected to sign presents a huge opportunity for the fledgling biofuels market — and considerable uncertainty.

The commercial viability of making ethanol from grasses and agricultural waste is unproven, and if industry can’t meet the challenge, consumers could end up paying the price.

The U.S. currently produces nearly 7 billion gallons of ethanol, all of it made from corn, thanks in large part to government mandates and subsidies included in the 2005 energy bill. The 2007 bill, which passed the House Tuesday and the Senate last week, mandates 36 billion gallons by 2022, with 21 billion gallons coming from so-called cellulosic ethanol.

There are significant obstacles to meeting this goal, however, not least of which is devising a profitable method of producing cellulosic ethanol.

Other challenges include: growing enough feedstock without harming the environment and efficiently transporting it to ethanol refineries; delivering the finished fuel to pumps nationwide; and bolstering consumer demand. The lack of an adequate transportation system for biofuels and limited demand already have squeezed ethanol producers’ profits this year.

It is unclear how government or industry will respond if the country’s ambitious cellulosic ethanol goals cannot be met, though one potential unintended consequence is higher pump prices if fuel supplies fail to match rising demand.

“In this industry, they always say cellulosic is five or six years away, but they’ve been saying that for the last 15 years,” said David Swenson, an associate scientist in economics at Iowa State University.

Renewable Fuels Association President Bob Dinneen heard similar concerns two years ago when critics questioned how the industry would produce a previously mandated 7.5 billion gallons by 2012 “and we will do that by next month.”

It’s not a technological issue, Dinneen said, but “it’s really a question of the marketplace and the economics ... and the bill is clearly empowering the marketplace to resolve those issues.”

Farmers in Iowa, a top ethanol producer, say the goals are achievable.

“It will take a lot of research money, a lot of coordination and cooperation but I honestly believe we can do it just like we were the first to put a man on the moon,” said Craig Lang, president of the Iowa Farm Bureau Federation.

The bill doesn’t specify who would be punished if ethanol-production mandates aren’t met, but one potential loser in that scenario is motorists.

With the government heavily promoting an alternative to gasoline, this acts as a disincentive for oil refiners when it comes to long-term planning about increasing their own capacity.

“It introduces an enormous amount of uncertainty,” said John Felmy, chief economist at the American Petroleum Institute. If the ethanol industry is unable to produce as much fuel as is mandated, it very well could fall on the shoulders of oil refiners to make up the difference — but the industry might not be able to add capacity quickly enough to avoid supply imbalances that drive prices higher.

Another possibility is that biofuel refineries of the future will be able to make ethanol from a variety of feedstocks, said Roya Stanley, director of the Iowa Office of Energy Independence.

While questions remain about how the country’s next wave of ethanol expansion will play out, the message to industry is crystal clear: grow.

To that end, privately held Poet, which has been investing in cellulosic for seven years and is the nation’s largest ethanol producer, plans to expand its existing plant in Emmetsburg, Iowa, to produce ethanol from the corn cobs and stalks normally left behind in the fields, said Jeff Broin, the company’s president and chief executive.

But farmers, who have been pinched recently amid rising costs for fertilizer and fuel, are embracing the push for cellulosic ethanol with some reservations. For example, they have mixed feelings about using parts other than the kernels for ethanol.

“I’m not against it if we make ethanol out of cellulose,” but soil erosion and other environmental concerns must be addressed, said 76-year-old Harlan Meier, a corn farmer in Davenport, Iowa. “The fertilizer content in corn stalks is very important for the next year’s crop.”

A more than five-fold increase in ethanol production over the next 15 years means the government and industry must also lay the groundwork for stimulating consumer demand.

Currently, ethanol is blended with gasoline, making up no more than 10 percent of any gallon pumped into vehicles while accounting for roughly 5 percent of the nation’s vehicle fuel mix. At 36 billion gallons in 2022, ethanol would account for about 22 percent of the country’s vehicle fuel mix, and the expectation is that the auto industry will produce many more vehicles that run on E85, or fuel that is 85 percent ethanol.

“The reality is that we are a long way from being able to market that much ethanol,” said Wallace Tyner, a professor of agricultural economics at Purdue University.

The ethanol roadmap does contain some off-ramps, whereby the head of the Environmental Protection Agency can reduce cellulosic ethanol requirements beginning in 2016, if feedstocks aren’t plentiful enough or prices rise significantly.

In the meantime, corn ethanol leaders Archer Daniels Midland Co., Verasun Energy Corp. and Poet will continue to focus on growing market share. Several Wall Street analysts raised their profit predictions on the large ethanol producers based on the energy bill’s mandates.

Broin remains confident the industry will meet the new mandates, noting corn ethanol production will rise to up to 13 billion gallons next year from 2 billion in 2002. Poet alone has 375 million gallons of capacity under construction including a pilot cellulosic facility in South Dakota and the expanded plant in Iowa partially funded with an Energy Department grant.

There always will be peaks and valleys in any rapidly expanding industry with “price fluctuations and boom and bust scenarios,” he said. “But when the dust settles, we had a highly successful industry and we will continue to have a highly successful industry.”