How Can Ethanol Stay Competitive in California?

December 13, 2019

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by Natasha Beilstein and Dr. Lei Zhu (EcoEngineers/Ethanol Producer Magazine) Ethanol producers need to reduce their CI score — and quickly: A low carbon fuel supply scenario analysis -- As the value of the California Low Carbon Fuel Standard (LCFS) credit lingers around $200 per credit and the U.S. Renewable Fuel Standard (RFS) Renewable Identification Number (RIN) prices are ever-reducing, the importance of carbon intensity (CI) is more relevant than ever before. Participation in the LCFS relies heavily on the CI of a renewable fuel, as it dictates the amount of credits generated. Simply put, the lower the CI score, the more credits are generated. Depending on the fuel the renewable fuel is looking to replace — either gasoline or diesel — the CI score needed to participate in the market can vary.

It is intrinsic to the design of the LCFS that suppliers are expected to take measures to increase the supply of LCFS credits if confronted with a shortfall against compliance targets. When looking at ethanol as a replacement for gasoline, it is imperative that the CI of ethanol reduces with the compliance curve as mandated in the regulation. As the CI for gasoline is required to decrease, the CI of ethanol will need to decrease as well. This analysis will show the necessary reductions in CI score needed by ethanol to remain competitive in the LCFS market; conversely, it is also the CI needed by ethanol to make credit markets whole since ethanol is, by volume, the most dominant gasoline alternative available in the market.

In 2018, 1.12 billion gasoline gallon equivalent of ethanol was consumed in California (about 12% blend level). It is unlikely that the volume of ethanol as a percentage of gasoline consumed will fall in the near future due to ethanol’s value as an oxygenate. Considering this significant role ethanol plays in the transportation fuel pool, it is imperative to seriously discuss the value of lowering its CI to levels that will make the California Air Resources Board’s (CARB) LCFS goals achievable.

EcoEngineers modeled two scenarios for 2022: a Steady Progress Scenario where deployment of non-ethanol credit generation options develops at a baseline rate that matches recent historical trends; and a High-Performance Scenario where several technologies, such as electricity and RNG, develop more quickly than in the Steady Progress case and lead to a higher supply of low CI non-ethanol fuels. Additionally, there is lower petroleum fuel use in the High-Performance Scenario leading to lower deficit generation. In both cases, the blending ratio of ethanol is held constant at 11.7% calculated based on the 2018 data.

Due to higher petroleum use and lower low-carbon fuel adoption rates, the Steady Progress Scenario results in a larger deficit in 2022 relative to the High-Performance Scenario. The larger deficit puts greater pressure on ethanol to lower its CI and generate more credits to make the credit markets whole. Therefore, an average ethanol CI of 26.51 will be need in 2022 to make credit markets whole under the Steady Progress Scenario. In the High-Performance Scenario, there is more credit generation due to higher supply of low-carbon, non-ethanol gasoline alternatives, and the pressure on ethanol is less. Ethanol with an average CI of 63.6 will be needed to make credit markets whole.

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In order to achieve the goals of the LCFS program, CARB is placing a big bet on rapid commercialization of new technologies in electricity and hydrogen and the deployment of ultralow-carbon RNG. While these are laudable goals, they are risky. Ethanol is currently 12% of the gasoline fuel mix and is expected to stay in that range for the foreseeable future. California would benefit from hedging its bet on new technologies by allowing lower carbon ethanol to be deployed. Currently, the best approach for the state is to include carbon reduction from farm practices to be counted toward the reduction of ethanol CI. Farm practices make up 28.38 CI points of the overall ethanol CI and is currently a fixed input in the CI model. Allowing ethanol producers to lower this and claim these credits would result in real reductions in emissions from agriculture and a real reduction in ethanol CI.

Ethanol producers, in the meantime, can take action of the factors they can control. Depending on the starting CI score of an ethanol facility, reaching the goal CI score of 63.6 or finding placement in an additional market that incentivizes innovation may be possible through implementation of the below items:

Upgrade from CA-GREET 2.0 to CA-GREET 3.0: There are improvements in the latest model of CA-GREET, including improvements to the electricity grid, which has led to 3-5 CI point reductions just for updating models used.
Utilize renewable energy: Energy use is a contributor to CI, and the implementation of renewable energy at an ethanol facility can result in a reduction in CI. For example, if there is a source of renewable natural gas (RNG) nearby, the RNG can be used as process energy to lower the CI.
Implement cellulosic: Despite USEPA not approving cellulosic ethanol registrations, there are more ethanol producers electing to implement cellulosic ethanol into their production. This can yield a significantly lower CI fuel that is finding placement in the California renewable fuel market.
Consider other markets: There are other markets that incentivize low CI fuels, like CI, but are still accepting fuels with higher CI scores. Even though the Oregon and British Columbia markets may have a lower capacity for fuels, they are newer and more open to fuels with higher CI scores. READ MORE

WEBINAR: Renewable Hydrogen’s Role in Securing California’s Decarbonized and Energy Resilient Future (ACT News)