Navigant Research Blog

In Ethanol, Cellulosic Coming to Push Out Corn

— October 20, 2014

The last few months have been big for cellulosic biofuels in the United States.  The first of three commercial-scale cellulosic ethanol plants to come online this year, Project Liberty, opened in Iowa in September.  In July, the U.S. Environmental Protection Agency (EPA) expanded the definition of the cellulosic biofuels pathway to include biogas used for transportation via compressed natural gas (CNG), liquefied natural gas (LNG), or electricity.  At full capacity, Project Liberty will produce 25 million gallons annually; the two other plants scheduled to open this year will run at 25 and 30 million gallons, respectively.  If the plants are successful, this could be the beginning of cellulosic ethanol supplanting corn-based ethanol’s hold in the U.S. biofuels market.

Cellulosic ethanol’s major advantage over corn-based ethanol is that its feedstock is organic material waste rather than food/grain.  This avoids controversial issues regarding food vs. fuel and minimizes the conversion of arable land to farm land, which experts contend makes cellulosic ethanol far more environmentally sustainable and less politically divisive than corn-based ethanol.  The disadvantage of the fuel is that it’s ethanol.

Flat Gas

Ethanol’s end market is gasoline, primarily used for light duty vehicles in the United States and Brazil.  It can only supply up to 10% of the fuel in a vast majority of the vehicles in use in the United States due to regulatory constraints and reluctance on the part of automakers and fuel retailers to adopt higher ethanol-gasoline blends.  If gasoline consumption in the United States was growing, this aspect wouldn’t be a problem, but it’s not.

In Navigant Research’s reports, Global Fuels Consumption and Light Duty Vehicles, it is estimated that light duty vehicles account for 94% of gasoline consumption in the United States.  Over the next 10 years, the light duty vehicle fleet will become far more energy efficient, thanks to vehicle electrification, vehicle lightweighting, and engine downsizing.  The end result is that the amount of gasoline-ethanol blends consumed in 2023 will likely be 12% less than 2014 levels.

The Cellulosic Edge

Consumption of ethanol is driven by the Renewable Fuel Standard (RFS), which mandates specific volumes of biofuels be blended into the fuel supply.  The standard is adjusted each year to reflect anticipated industry production volumes by biofuel pathway, so that biofuels producers can be assured their product will be purchased by blenders.

Given cellulosic ethanol’s sustainability appeal over conventional ethanol, and the limited market in which these pathways compete, and despite the high cost of cellulosic compared to conventional ethanol, it’s likely that annual adjustments to the RFS will ensure that cellulosic production feeds into the U.S. fuel pool at the expense of conventional ethanol.  That means that the EPA may be inclined to lower conventional ethanol mandates against increases in cellulosic capacity – making cellulosic more valuable to blenders than conventional ethanol.  As a result, conventional U.S. ethanol will likely become an export fuel, going to foreign markets that currently make up a little over 45% of the global market.


EPA’s RFS Cuts Limit Ethanol Growth

— February 6, 2014

The public comment period on the EPA’s proposed rule change to the 2014 renewable fuel standard (RFS) – which would reduce oil refinery biofuels volume blending requirements by roughly 3 billion gallons – closed last Tuesday.  Understandably, the biofuels industry has been aggressive in its campaign against the proposal.  From the beginning of the public comment period in late November 2013 to its end, more than 15,500 comments have been filed, the majority by biofuels industry stakeholders.  The RFS covers a number of biofuels and the EPA has proposed cuts to all  – with conventional ethanol taking a cut of 1.4 billion gallons from the original 14.4 billion gallon target.

The crux of the EPA’s rule-making hinges on the agency’s estimate of what is realistic in terms of biofuels supply and demand given certain limitations; the most significant limitation being the E10 blend wall.  Given the recent plateau in annual U.S. gasoline consumption and anticipated declines in gasoline consumption as fuel economy rises and more alternative fuel vehicles are sold, the EPA estimates demand for ethanol will not meet the original 2014 14.4 billion gallon target set by the RFS.

Other Avenues

Although the EPA’s reasoning makes sense, ethanol industry advocates point to higher ethanol blend levels of E15 and E85 as possible avenues by which the original mandate could still be achieved.  E15 has been slow to emerge, as automakers have been hesitant to announce vehicle compatibility with any vehicle of model year 2012 or earlier.  As such, few refueling sites have been installed and E15 is unlikely to drive ethanol demand in 2014.

E85, however, has been around since the beginning of the 2000s.  There are nearly 2,400 E85 refueling sites in the United States, and in the report Biofuels for Transportation Markets, Navigant Research forecasts that the number of flex-fuel vehicles (FFVs) on U.S. roads will grow to about 13 million in 2014.  However, E85 has failed to make significant contributions to ethanol demand, as data on historic FFV fleet size and E85 consumption in the United States indicate that E85 fuels less than 4% of the addressable market, which will be more than 7 billion gallons in 2014.

Gas Up, Ethanol Down

Given the existing U.S. vehicle fleet size and characteristics, Navigant Research forecasts that ethanol consumption from the road transportation sector will reach 13.9 billion gallons in 2014, with E85 accounting for about 1.5%.  To meet the original 2014 RFS volumetric requirement, E85 consumption would have to grow to account for over 14.5% of its 7 billion gallon addressable market, which would be more than 900 million gallons.

Some analysis indicates that E85 is likely to show a marked increase in consumption this year due to falling prices of ethanol against gasoline on a per-gallon basis.  Though E85 should be compared to premium gasoline blends due to its high octane rating, E85’s market acceptance has long been stunted by the fact that it is not significantly cheaper and has been more expensive than regular unleaded gasoline on a per-mile basis.  A marked price drop in E85 against gasoline would drive greater consumer awareness and acceptance.  However, even with a significant price drop, it is unlikely that E85 will reach the levels necessary to meet the original 2014 RFS.  While it’s apparent that some reduction to the conventional ethanol requirement is necessary, cutting the original target by 1.4 billion gallons is an over-correction that will hinder the ethanol supply chain.


Ethanol Growth Lies in Optimization, Not Mandates

— January 31, 2014

The last 2 years have been punishing for the ethanol industry.  In August 2012, the Environmental Protection Agency (EPA) and National Highway Transportation Safety Administration (NHTSA) revised the treatment of flex-fuel vehicles (FFVs) under CAFE standards so that manufacturers will no longer receive credit for FFV sales beginning in 2017 if they cannot provide data proving E85 (gasoline with up to 85% ethanol) use by the FFV.  Then, in November 2013, the EPA proposed a reduction of an estimated 3 billion gallons of biofuels blending quotas for 2014 under the Renewable Fuel Standard (RFS).  Additionally, while the EPA has approved the use of E15 (gasoline with up to 15% ethanol) in model year (MY) 2001 vehicles and newer, major automakers have been hesitant on the fuel, in some cases approving its use only in MY 2012 vehicles and/or newer.  As a result, there are few stations that supply E15.

All of these setbacks mean that the market for ethanol in the United States has peaked at 10% of retail gasoline consumption and has flatlined in recent years.  Additionally, Navigant Research forecasts in a forthcoming report, Biofuels for Transportation Markets, that retail gasoline consumption will fall before 2022 thanks to increasing fuel economy standards and interest in alternative fuel and light duty diesel vehicles.

Despite ethanol’s recent tribulations, though, there are opportunities for sustainable growth.

E30 = $

A report developed by researchers at Oak Ridge National Laboratory (ORNL) finds that the use of E30 (gasoline with up to 30% ethanol) can significantly improve vehicle efficiency in optimized engines, compared to a conventional internal combustion engine fueled with regular gasoline.  Efficiency gains are achieved through the high-octane properties of ethanol, which improve combustion, thus mitigating engine knocking and allowing for greater downsizing of the vehicle engine.

The findings are important because they identify an opportunity for ethanol to become an economic product for end consumers.  To date, E85 has failed to catch on in the United States because the fuel shows no significant improvement in reducing fuel costs due to the lower energy density of ethanol compared to that of straight gasoline.  While there are currently many FFVs on U.S. roads, on average FFV drivers rarely fill up with E85.  Reasons include a lack of available infrastructure and low driver awareness.  However, those reasons would evaporate if the cost of driving on E85 were significantly less than driving on E10.  If the latter were the case, E85 compatibility would be a more valuable selling point for automakers than it is now, consumers would be well aware of the cost savings, and demand for E85 would be robust and drive infrastructure development.

If it’s true that an ethanol blend above 10% can improve fuel efficiency given the right engine, then the cost savings to the end consumer will spur growth in a market that has stagnated.  Realizing this opportunity, though, requires significant buy-in from automakers that would have to develop the optimized engines and the assurance that fuel retailers will have the optimized blends available.  Those factors will likely require government support.


A Tale of Two Commodities

— March 14, 2012

Dominated by sugarcane in Brazil and corn in the U.S., the global ethanol industry was worth $66 billion dollars in 2011.  While it was the worst of times for the Brazilian sugarcane ethanol industry, for U.S. corn ethanol, it was the best of times.

According to estimates compiled by Pike Research in our report Biofuels Markets and Technologies, U.S. ethanol production reached 13.6 billion gallons per year (BGY), up from 13.2 BGY in 2010.  Brazil, a biofuels pioneer that turned sugarcane-derived ethanol into a mainstream automotive fuel in the 1970s, saw production drop from 6.9 BGY in 2010 to 6.4 BGY last year.

But all this may be changing.  Although collectively, the two leading biofuel markets accounted for 85 percent of global ethanol production, policy momentum suggests that history will not be repeating itself.

Brazil Sticks to its Guns

Looking to reverse a relatively dismal 2011 for the industry in which diminished output resulted in the importation of U.S. ethanol for the first time ever, the Brazilian government recently announced a $38 billion subsidy program to drive expansion through 2015.  The government hopes to stimulate private sector investment and increase ethanol production to the tune of 50 to 55 percent of its overall gasoline market.

For the global biofuels industry, there is much riding on this expansion.  A forthcoming Pike Pulse report, which looks at Big Oil’s impact on the commercialization of biofuels, estimates that Royal Dutch Shell, BP, Total, and Petrobras have collectively sunk nearly $20 billion into the market in a race for dominance in the most efficient ethanol market in the world.

Raizen, a joint venture between Shell and Cosan Industria & Comercio in Brazil, is projecting to process 9 percent more sugarcane this season in April than a year earlier, according to a company spokesman.  Petrobras, meanwhile, has committed $1.3 billion to deliver 1.5 billion gallons of ethanol to the market by 2015.

Pike Research expects production within the country to more than double by 2021, reaching at least 16 BGY, with exports meeting expanding demand in other markets as well.

U.S. Charts a New Course

North of the equator, meanwhile, a paradigm shift has rewritten the rules for an industry that has enjoyed unparalleled success over the past decade.  Riding $6 billion worth of subsidies, strong mandates, and sheer grit, ethanol derived from corn starch grew into the most dominant biofuels pathway by volume in world.  But more recently, corn starch ethanol’s association with rising food prices and environmental maladies has tarnished its reputation.  Even leaving these concerns aside, most now agree that corn starch ethanol is one of the least efficient pathways to biofuels at scale.

Nor is it the panacea to energy security as many proponents argue.  Last month, Bloomberg reported that the price of ethanol in the United States was following the price of oil higher.  Although a number of variables may lead to higher ethanol prices – improving economic conditions in the U.S. and increasing import demand from China, for instance – a heavy reliance on petrochemical-based fertilizer amendments for growing corn and for shipping the finished product exposes biofuels production to the whims of the oil markets.

Responding to these difficult realities, policymakers have replaced the foundational policies that led to corn starch ethanol’s decade-long ascent with strong support for advanced biofuel pathways from cellulosic, waste, algae, and other non-food feedstocks.  This trend is at least partly responsible for the scrapping of Volumetric Ethanol Excise Tax Credit (VEETC) – a key credit extended to ethanol producers – as part of a political gamble in favor of policies expanding ethanol’s broader market potential.

E10 (a blend of 10 percent ethanol and 90 percent gasoline), which is currently distributed at the majority of gas stations in the continental U.S., is fast approaching a so-called “blend wall,” in which production exceeds the volume of fuel that can legally be blended into the U.S. gasoline market.  Advocates are currently pushing for E15, which if approved by the EPA, would allow producers to expand production to keep pace with the Renewable Fuel Standard’s (RFS) 15 billion gallon per year cap on ethanol derived from corn starch.

Outside of that, there are currently few options available to soak up extra ethanol production.  Unlike Brazil, flex fuel vehicles (FFV) have struggled mightily in the U.S.  Less than 1 percent of refueling stations nationwide currently carry E85 (a blend of 85 percent ethanol and 15 percent gasoline) pumps, with most vehicle owners refueling with gasoline or E10.

If that sounds confusing, that’s because it is.  U.S. biofuels policy is piecemeal and fragmented.  Meanwhile, the industry is currently caught in a production bind.  Between blend walls and disappointing advanced biofuels production volumes, even the industry’s backbone, the Renewable Fuel Standard (RFS), is at risk of being scrapped.

Despite advanced biofuel’s long-term promise, Pike Research expects ethanol production to stumble mid-decade in the U.S., achieving more modest growth than its counterpart in Latin America through 2020.


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