The Digest’s 2018 Visual Guide to the Economics, Politics of Renewable Fuels

March 16, 2018

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by Jim Lane (Biofuels Digest) Have you ever wondered why corn farmers march for the RFS, but Wall Streeters don't? Or why merchent oil refiners want the US Renewable Fuel Standard repealed but major oilcos generally support RFS reform?

Why are biodiesel producers so focused on tax credits and trade? Why are there cellulosic ethanol projects aiming at the US but not more corn ethanol plants? Why do some oilcos support E5, are OK with E10, but go ballistic about E15? Why is E30 is a sweet spot for ethanol but you can hardly find it? Why are there are so many flex-fuel cars and not so many E85 customers? Why is renewable diesel so popular? And what's the enthusiasm for California all about?

In today's Digest, we've prepared a visual guide that in a bright and easy-to-follow manner answers a lot of questions about the quirky economics and politics of renewable fuels.

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In this illuminating graphic from the Center for Agricultural & Rural Development at Iowa State, you see right away that the bulk of the money in the ethanol business goes ultimately back into the corn supply chain. Now, that’s far more than growers — it’s the seed business, crop protection, land values (and the state tax revenues that depend on high property values), farm machinery, water, fuels, rural energy and more.

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It’s big business, those 15 billion gallons of ethanol and the associated DDGs, corn oil and CO2 which is produced at these biorefineries. Although more bushelage goes to DDGs and CO2 than to ethanol, some 5.6 billion bushels of corn go to the biorefinery and if the RFS were to go away — Lord knows what would become of corn prices and the Midwestern economy but no one thinks of anything except of a point between recession and a return to the days of Farm-Aid.

In the end, the corn, the dirt, the fossil fuels, the sun and the rain — they all work for free — this money goes back to people: for their assets in IP and real property, or for their labor. And, it goes in a knock-on effect to all the people who depend on the farm system And that’s why the RFS has a staying power way above the number of actual farmers. The RFS floats an entire regional economy and is creating a modern, sustainable Midwest at the expense primarily of fossil petroleum.

About those Wall Street activists. You can see that the returns from the ethanol business rain economic sunshine on the supply chain, but investors have been getting the short end of the stick for a long time. That’s one reason that there’s not too much ethanol plant construction going on (demand constraints are another). You can see in that black line the profitability point at which new plant construction might begin to become feasible, and the industry doesn’t cross it on a consistent basis.

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As with ethanol, you see that the overwhelming amount of the revenue generated by biodiesel goes back into the feedstock supply chain. These can be soy farmers (or growers of other oilseeds), or ethanol operators selling corn oil, or suppliers of waste fats and greases from rendering operations or recycling. You’ll never see the nation’s leading rendering business, Darling, marching against the RFS even though they manage a very profitable JV (Diamond Green Diesel) with one of the RFS’s most ardent critics, Valero. Why’s that? Follow the money.

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One thing you’ll note about biodiesel is that it has an incredibly spotty record in terms of generating high returns for investors, and that’s one reason you’ll find so much focus in the biodiesel business on trade and protectionism (protected markets generate higher prices, and returns), and on tax credit issues.

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Other options for biodiesel producers to change their circumstances and unlock value? New technology that handles high free fatty acid feedstocks that come at lower costs, for one. And, higher blending mandates offer opportunities for greater economies of scale. California’s Low Carbon Fuel Standard helps a lot — and a national LCFS or more states adopting them would be a boom for biodiesel.

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....(C)ellulosic ethanol can be five times more expensive per gallon in terms of capex — at the capacities that are being deployed now — as conventional corn ethanol. In fact, the Aemetis project, amortized over 20 years, will cost 72 cents per gallon just for the equipment — and some lenders would want this amortized over 15 years which would raise the capex costs (per gallon per year) to 95 cents.

Given that ethanol wholesales for $1.45 per gallon, that’s a daunting beginning. Yes, a 25 cent per gallon cost for almond waste feedstock (assuming $20 per ton and a process yield of 80 gallons per ton) does help offset that high capex — in fact, it helps a lot. But wholesale ethanol is not what cellulosic ethanol is all about.

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... Wall Street has been leery of financing cellulosic ethanol — they just don’t trust Washington, or California, to stay with the RFS.

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What you see in this chart is a value for octane, and the average value of it is around 6.5 cents per octane point. Now, wholesale baseline gasoline is typically 85-octane (it’s boosted to 87 because high-octane ethanol is added), and wholesale baseline ethanol is 105-octane. So, you have 1.30 in octane value in ethanol (that’s 6.5 cents per point, times 20 points), seen strictly from that point of view. But, you also have the RIN value, which for corn ethanol checks in this week at 48 cents according to our friends at PFL.

That means, if you are an oil refiner with a downstream market where you can market high-octane fuels, you might see as much as $1.78 in value per gallon of ethanol. That’s $1.30 in octane and 48 cents in RIN value (which you’d otherwise have to buy to comply with RFS obligations).

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It suggests why the petroleum industry is sometimes ambivalent about ethanol as an octane-laden additive, although adamantly against higher blending mandates or E85 which might cut into gasoline’s market share and upset refinery economics which are generally tuned around making as much gasoline as possible.

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If the RFS goes away, there’s still business for corn ethanol, but at much lower values as indicated by octane value.

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The whole point of higher octane is that engines can run at higher compressions and efficiencies without damaging engine knock, if they have higher octane levels. You get more power and fuel efficiency that way ....

So, E30 engines can operate under certain conditions at almost parity to 85-octane gasoline, and that changes the value of fuels. (more on that here) E30 has been described as the “sweet spot” for ethanol blending, and you might wonder why we have so little of it. The answer is that petroleum companies want something in the E5—E10 range because they see ethanol as a valuable oxygenate and octane source and nothing more, and ethanol producers want E85 because they would like to have another big volume market open for them to spur growth.

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E85 engines are modified to accept ethanol, but they are almost invariably not modified to optimize for ethanol and fully utilize its properties.

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Car makers could tune engines to optimize for ethanol, but they don’t.

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So, drivers are left with energy values ....

That means, drivers are getting a 20 percent price discount for R85, but the energy value is around 25 percent lower. In other words, you pay more to drive E85 on a per-mile basis.

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Oilcos are laughing, because the markups on ethanol are huge, and that’s why the per-mile is higher. Based on wholesale prices, it ought to be cheaper. Thanks to our friends at the Iowa Renewable Fuels Association, we see that you can buy wholesale E85 in Iowa for as little as $0.98 per gallon.

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So, that’s a 43 percent discount for a 25 percent energy loss. If E85 were priced according to its wholesale cost, it would beat E10 fuel on energy value every time.

Price-gouging? You be the judge. But sometimes it feels a little like Samsung getting worldwide exclusive to retail Apple products and pricing iPhones at a million dollars each. READ MORE

US ethanol remains 35% cheaper than Brazilian, prompting exports (Biofuels Digest)

RIN Volatility Due to Regulatory Uncertainty (ACT News)

Tags

Agricultural Policy biodiesel biodiesel prices biodiesel tax credit BioRefineries/Renewable Fuel Production California Cellulosic ethanol Cellulosic Tax Credit co-products corn/maize corn ethanol E15 pumps E30 E30 optimized E30 pumps E85 E85 optimized engines E85 pumps Engine Development Engine/Fuel Co-optimization ethanol/bioethanol Financing flex-fuel vehicles (FFV) High Octane Fuel (HOF) history High Octane Vehicles (HOV) internal combustion engine (ICE) Investing LCFS (Low Carbon Fuel Standard) octane octane price/value Regulations-Federal Renewable Diesel/Green Diesel price Renewable Diesel/Green Diesel/HVO/Paraffinic Diesel Renewable Fuel Standard (RFS and RFS2) Renewable Fuel Standard (RFS2) revisions/repeal RINs (Renewable Identification Numbers) RINs price supply chain tax credits Transportation Fuels Policy Transportation Fuels Policy--State

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