An ethanol plant in Iowa.

Yesterday the administration issued an important set of new rules and proposals relating to energy, mainly dealing with expanded biofuel production and the biomass supply chains that must be developed to sustain it, as well as addressing carbon capture and storage (CCS.) There's far more here than I could cover in one posting, so I've chosen to focus on the EPA's finalized Renewable Fuels Standard (RFS) rules, which were first proposed last May and have been the subject of intense study and considerable controversy ever since. While the print edition of the Washington Post characterized these as "A boost for corn-based ethanol" I'm not so sure. In the process of laying out a roadmap for how new corn-based ethanol facilities can contribute to the expansion of biofuel in the US, the EPA effectively froze the output of a large number of older facilities, unless they invest in significant upgrades. It also raised big questions about the future of E85, a blend of 85% ethanol and 15% gasoline that has so far failed to attract much interest from consumers, while suggesting that ethanol might have to share the ultimate 36 billion gallon per year biofuel target for 2022 with large volumes of other, more advanced biofuels.

At the heart of the new biofuel rules, which are designed to implement the goals established by the Energy Independence and Security Act of 2007, is the assessment of lifecycle greenhouse gas emissions from biofuels, including the highly-controversial "indirect land-use impacts" first highlighted in a landmark paper published in Science two years ago and confirmed by subsequent research. Although the EPA's final interpretation of the science has not turned out to be quite the catastrophe that the corn ethanol industry feared--and based on the quote in the Post from the lead author of the relevant research, Dr. Tim Searchinger, might have gone easy on them--it nevertheless constrains the future role of ethanol produced from this source. While clearly stating that facilities producing ethanol from corn starch using natural gas or biofuel for process heat and employing other efficient technologies would qualify for the least-stringent category of renewable fuel, many existing facilities would qualify only under grandfathering that restricts their output to historical levels. That includes newer facilities that started construction by 12/19/07, and essentially all that use coal for heat or dry all their distillers grains byproduct.

In contrast the biodiesel industry, which has been suffering recently, got a shot in the arm with a ruling that qualifies most biodiesel produced from soy oil or waste cooking oil or grease

for the tougher "biomass-based diesel" category, consistent with a 50% reduction in emissions. And the specific RFS quota for 2010 carves out a healthy 1.15 billion gallon target for biodiesel--including retroactive volumes from 2009 that could cause no end of confusion.

Perhaps the most urgent aspect of the requirements for 2010 was the EPA's concession to reality on its cellulosic ethanol quota. The original targets set by Congress called for the use of 100 million gallons of biofuel produced from cellulosic sources this year, but as I've pointed out frequently, bleeding edge technology doesn't just appear on command. The EPA's estimate of how much cellulosic biofuel will actually be available in 2010--and thus mandated for use--is just 6.5 million gallons. And if fuel blenders aren't able to acquire even that much, EPA has provided the alternative of paying $1.56/gallon in penalties, instead. That sounds cheap until you realize that this only pays for an attribute; they still have to buy the gasoline or conventional ethanol on which to apply this Renewable Identification Number, or RIN. Based on current prices, the total cost for such virtual cellulosic ethanol could thus exceed $3.50/gal., compared to around $2.00 for wholesale (untaxed) gasoline.

I confess I didn't make it through the entire 418 page "preamble" to the regulation, but what I found there was a fascinating picture of how much the official view of biofuels has evolved since the Congress set us on this path at the end of 2007. Then, hopes for E85 powering many millions of "flexible fuel vehicles" (FFVs) ran high. Today, reading between the lines, there are hints that EPA might regard E85 as a failed product that may no longer be necessary for pushing biofuel into the market. Their statistics on E85 paint a bleak picture. According to EPA, out of a total retail gasoline market of 138 billion gallons in 2008, E85 accounted for just 12 million gallons. Such low volumes are partially attributable to the fact that there are still only 2,100 retail facilities in the US with an E85 pump, and only 8 million FFVs on the road, out of a US vehicle fleet of 240 million or so. Yet after taking these constraints into account, the EPA calculated that FFV owners bought E85 just 4% of the time. They offer a variety of reasons for this, including concerns about reduced range on the lower-energy fuel, but mainly point to the much higher average price of E85 compared to unleaded regular on an energy-equivalent basis. In other words, consumers are choosing value and maximizing their miles per dollar. So it wouldn't just require a big increase in the number of E85 pumps and FFVs to make E85 successful; the product must be priced a heck of a lot cheaper than it has been, reducing the incentive for dealers to sell what today is a very low-volume product. Catch-22?

How much of a problem this poses for ethanol producers depends on whether the EPA relaxes the 10% limit on ethanol blended into normal gasoline, as the ethanol industry has petitioned them to do, against most auto industry advice. It also depends on how quickly non-ethanol biofuels such as biobutanol and biomass-derived hydrocarbons--gasoline or diesel from algae, bacteria, or gasification--that would be fully compatible with current cars and infrastructure take off. It's worth noting that the new rules explicitly qualify biobutanol from corn starch in the same category of renewable fuel as the best corn ethanol pathways, and leave the door open to qualify these other fuels if they satisfy EPA's emissions framework. The preamble includes one scenario in which such fuels account for nearly as much of the 2022 biofuel target as corn ethanol.

Needless to say, I haven't had time to go through all the intricate details of the EPA's new RFS regulations. Their ultimate impact may depend as much on some of those nuances as on the big-picture elements I spotted in my cursory review, and I can easily picture a host of law firm, trade association, and energy company personnel poring over them for the next couple of weeks. Still, although what I saw was hardly the death-knell for the existing corn ethanol industry that some might have expected or hoped for, in the process of codifying the means for implementing the intent of Congress in its 2007 legislation the agency has laid out a vision of a much more diverse and competitive biofuel industry than the architects of that bill could have guessed just a couple of years ago.