U.S. agency overestimates output of advanced biofuels: Wynn

LONDON Tue Apr 9, 2013 11:21am EDT

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LONDON (Reuters) - The U.S. Environmental Protection Agency has consistently over-estimated the prospects for production of advanced biofuels from non-food crops, adding to the impression of a biofuel policy that is out of step with reality.

The U.S. renewable fuel standard requires fuel producers to blend a certain portion of biofuels with gasoline; the standard originated under the Clean Air Act and was expanded under the Energy Independence and Security Act (EISA) of 2007.

The law divides biofuels into advanced and non-advanced, the latter comprising mass-produced U.S. corn ethanol.

Refiners have the choice either to blend the mandated quantity of each type of biofuel, or else buy compliance credits called Renewable Identification Numbers (RINs) which biofuel producers earn per gallon of manufactured fuel.

The trouble with cellulosic biofuel, made from woody fiber and classed as advanced biofuel, is that production is still in a test phase with negligible commercial sales.

EPA can downgrade the cellulosic biofuel target where output is expected to fall short, but it has still, perplexingly, consistently over-estimated volumes.

It seems plausible that EPA wants to provide an extra support for cellulosic ethanol producers by driving demand for cellulosic biofuel RINs from refiners.

The over-estimate only inflicts a small penalty on the U.S. refining industry (less than $5 million in 2011), but more importantly it adds to the impression of a policy lagging reality, where the separate corn ethanol mandate is on the cusp of exceeding distribution capacity at filling stations.

That so-called blend wall has been blamed for driving up gasoline prices.

OVER-ESTIMATE

Under the Clean Air Act the EPA is required to set the renewable fuel standards each November for the following year.

In general, the standards are meant to reflect the applicable volumes in the Act.

However, in the case of cellulosic biofuel, the statute specifies that EPA must base the standard on projected volumes, if the latter are less than the original mandated volume.

Accordingly for 2010, EPA downgraded the target to 6 million gallons of cellulosic ethanol from the 100 million gallons anticipated under the energy act.

In the end there was zero commercial production.

Notwithstanding, EPA anticipated 6 million gallons again in 2011, down from an EISA mandate of 250 million gallons.

Again, there was no output.

EPA cut the mandate again in 2012, this time to 10.45 million gallons from an original EISA target of 500 million gallons.

For the first time, the industry produced some commercial volume, but only 20,069 gallons, as recorded by the cellulosic RINs the industry generated last year. (See Chart 1)

EPA has targeted 14 million gallons this year, a volume which again appears hopelessly optimistic. (See Chart 2)

PRODUCTION

The EISA bill defines cellulosic biofuel as: "renewable fuel derived from any cellulose, hemicellulose, or lignin that is derived from renewable biomass and that has lifecycle greenhouse gas emissions that are at least 60 percent less than the baseline lifecycle greenhouse gas emissions".

Conventional biofuel is produced in a relatively simple process which involves extracting sugar from a food crop, fermenting this and distilling the resulting ethanol, pretty much following the time-honored process of making beer and wine.

Cellulose, however, is sealed away inside a tough network of lignin within the cell walls of plants. To produce biofuels from these materials lignin must be removed through an expensive pretreatment process. Enzymes can then break cellulose down into sugars for conversion into ethanol.

The advantage of the process is that it may compete less with food crops, consume less energy and emit less carbon, all central objections to conventional biofuels.

EPA based its projection for production of 14 million gallons of cellulosic biofuel for 2013 on the plans of four companies: Abengoa; Fiberight; INEOS Bio; and KiOR.

"If these facilities are able to operate as anticipated, the uncertainty associated with commercial-scale cellulosic biofuel production will decrease, and the expansion of the industry could be rapid," EPA said in its rule published in February.

However, EPA made similar estimates for similar companies in 2012, estimating that Fiberight, INEOS Bio and KiOR would produce 2 million, 3 million and 4.8 million gallons, over-estimates compared with all but zero sales.

EPA is correct that the industry is in a transition from technology development to commercialization, but this shift of focus is happening much more slowly than it anticipates.

COST

When EPA reduces the required volume of cellulosic biofuel below the applicable volume specified in the statute, it is required to offer biofuel waiver credits to obligated parties (refiners) that can be purchased in lieu of acquiring cellulosic biofuel RINs, in case the latter are unavailable.

EPA charges for cellulosic biofuel waiver credits were set at $1.13, $0.78 and $0.42 per credit in the years 2011-2013.

Such waiver credits appear to set an effective floor price for cellulosic biofuel RINs in the event of actual production, and are therefore a potentially valuable subsidy.

Total purchases of such waiver credits were worth $4.8 million in 2011, with no EPA data available yet for succeeding years. (Chart 3)

That is a negligible penalty to the refining industry for EPA's over-estimate of production.

The larger damage may be to a biofuel policy which appears out of touch: it also contributed to higher corn prices following a major U.S. drought last year, and has failed to anticipate an impending ethanol blend wall at the gas pump.

(The author is a Reuters market analyst. The views expressed are his own.)

(Reporting by Gerard Wynn; Editing by Anthony Barker)

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