(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON, July 5 Biodiesel could in future ease so-called ethanol "blend wall" concerns facing the U.S. transportation fuel industry, whose capacity to blend corn ethanol in gasoline is nearing its physical limit.
The biodiesel industry has ample production capacity and has considerable feedstock flexibility while diesel fuel faces no looming blending limits.
Those advantages seem to assure a growing role for U.S. biodiesel in the long-term.
The debate on how to solve the near-term ethanol blend wall problem is polarised between continuing as normal (as supported by corn growers and ethanol producers) or temporarily waiving all or part of the ethanol mandate (supported by the refining industry).
It is unclear whether the implementing Environmental Protection Agency (EPA) has the authority to use biodiesel to head off the present problem, by substituting for corn ethanol.
Certainly it used biodiesel this year to make up for a shortfall in advanced, cellulosic ethanol.
And in the longer term, EPA has projected a rapidly rising role for biodiesel.
That may head off, or at least delay, a recurrence of future gasoline blending walls.
The expanded targets for biodiesel this year will represent about 2.9 percent of all U.S. diesel fuel, according to EPA, while all engine warranties allow at least 5 percent blends, and non-road uses allow much more.
The United States is nearing the point where the law requires the use of more ethanol than can be physically blended into gasoline at the most prevalent level of 10 percent ethanol.
A recent run-up in the price of compliance credits, or renewable identification numbers (RINs), suggests that a blend wall is nearing.
Refiners concerned that they will be unable to blend physical product can buy RINs instead on a secondary market to meet their obligation.
The RIN price spike has also increased the urgency to address the problem, because of possible knock-on impacts on refining costs and gasoline prices. ID:nL1N0C6AJ2]
The medium-term solution is to supply a 15 percent blend, as authorised by EPA for vehicle models manufactured since 2001, but that will take time given industry resistance and an infrastructure lead-time.
The Energy Independence and Security Act in 2007 created expanded mandates for particular types of biofuel within a more general target, to drive a shift away from corn ethanol to less carbon-emitting alternatives which did not compete with food.
The main sub-category is "advanced biofuel" which excludes corn ethanol but includes almost everything else.
There are two further carveouts within advanced biofuels. (See Chart 1)
First, there is a mandate for cellulosic biofuel, defined as "renewable fuel derived from any cellulose, hemicellulose, or lignin that is derived from renewable biomass".
Second, there is a target for biomass-based biodiesel made from soy oil, algal oils, waste oils and animal fats.
EPA sees a rapidly growing share of biodiesel (under its "primary control case"), accounting for nearly two fifths of all biofuel by volume by 2022 from about a tenth now. (Chart 2)
That assumes biodiesel in future accounts for a big share of the rapidly rising cellulosic biofuel category.
Biodiesel would qualify as cellulosic biofuel if manufactured through a biomass-to-liquid conversion process called Fischer-Tropsch. (Chart 2)
Chart 1: (page 6) goo.gl/2ixRP
Chart 2: (page 95) goo.gl/2ixRP
Chart 3: (page 73) goo.gl/2ixRP
Chart 4: goo.gl/JJF6i
EPA has already used its authority to cut the cellulosic ethanol mandate (because of under-supply) and increase biodiesel, while keeping the overall advanced biofuel target unchanged.
That has directly substituted biodiesel for ethanol.
This year EPA cut the cellulosic target to 14 million gallons from 1 billion gallons as required in the 2007 act, and increased biodiesel to 1.28 billion gallons, also from 1 billion.
The U.S. National Biodiesel Board estimates record output of more than 1.2 billion gallons this year, roughly half of which will be made from soyoil with the rest a mix of recycled cooking oil, animal fats and other products.
EPA talked up the ability of the U.S. biodiesel industry to take an increasing role, in its ruling last year setting the biodiesel target.
"We believe that it is appropriate that biomass-based diesel play an increasing role in supplying advanced biofuels to the market between 2012 and 2022," it said. ("2013 Biomass-Based Diesel Renewable Fuel Volume; Final Rule")
"Production capacity as well as more recent data on actual production volumes does in fact demonstrate that the industry is capable of significant increases in production when demand for it exists," it said, reporting U.S. production capacity nearly double the new 2013 target.
Regarding substituting biodiesel for corn ethanol, to ease the immediate blend wall problem, EPA has no authority to increase the advanced biofuel category beyond the target stated in the 2007 act.
However it does have the authority to waive the total volume of renewable fuel, on the basis of inadequate renewable fuel supply or expected severe harm to the economy - a power it has not yet wielded.
It is unclear whether it could reduce the overall renewable fuel target (mostly corn ethanol), using such a waiver, while maintaining the advanced biofuel carveout, and by implication raise the share of biodiesel.
Biodiesel does have some concerns, some of which it shares with the corn ethanol it would replace, including price compared with conventional diesel (presently pure biodiesel has a 20 percent premium - Chart 4); as well as its possible impact on carbon emissions and food prices.
But it offers a possible, partial solution to mitigate the blend wall worries facing gasoline. (Editing by David Cowell)