Biofuel Economics: 2007 Energy Act charts a new biofuel roadmap

By Cole Gustafson, Biofuels Economist
Thursday, June 19, 2008 1:39 PM CDT

NDSU Extension Service

During my last column, I discussed the original renewable fuels legislation called the Renewable Fuel Standard. The bill was signed by President Bush in August 2005. The bill set a national goal of producing 7.5 billion gallons per year (bgy) of biofuel (primarily ethanol) by 2012.

The legislation provided tax credits, tariffs on imported ethanol and a requirement to use ethanol in place of methyl tertiary butyl ether (MTBE) in major metropolitan areas.This legislation has been so successful that the ethanol industry surpassed the original goal four years early. Refineries will produce 8 to 9 bgy of ethanol in 2008.

Consequently, our country needed a new renewable fuel goal to strive for, so the Energy Independence and Security Act of 2007 was passed last December. The bill also is commonly known as the Renewable Fuel Standard II or RFSII. This legislation raises the original goal from 7.5 bgy to 36 bgy, but extends the time frame to 2022. The economic ramifications of this legislation are considerable because it sets the biofuel industry on an entirely new course of action.

First, RFSII increases the national production goal by a factor of four.

Consider all of the economic adjustments that already have transpired in the agricultural sector to produce 8 bgy of ethanol today. These adjustments changed commodity prices and land values. The bill also caused a shift in acreage from one commodity to another. Now, consider increasing the scope and magnitude of these changes by a factor of four as we embark on producing 36 bgy.

Second, RFSII mandates that 21 bgy of the 36 bgy of biofuel produced in 2022 must come from feedstocks other than corn starch. These new feedstocks include an incredibly wide array of sources, such as crop stovers, grasses, trees, sugar and other starch crops. It also includes potential exotic crops, such as algae.

As such, this new legislation essentially places a cap on the traditional corn- based ethanol industry. If one takes the new national goal of 36 bgy and subtracts the 21 bgy that must come from noncorn feedstock sources, that leaves 15 bgy from traditional corn sources.

At present, we have 140 ethanol plants producing 8 to 9 bgy and another 60 plants under construction that should produce an additional 4 bgy. Therefore, we are close to reaching the top of the corn ethanol industry capacity. Future corn ethanol investors should carefully evaluate financial opportunities in this setting.

Finally, concerns over global warming figure prominantly in the new legislation. RFSII now specifies different types of biofuels, such as conventional, advanced, cellulosic and biodiesel.

Convential biofuel is traditional corn ethanol. With a greater emphasis on global warming, any new corn ethanol plant must document at least a 20 percent reduction in greenhouse gas (GHG) emissions.

Advanced biofuels are those types of biofuel that reduce GHG emissions by at least 50 percent. Cellulosic biofuels are those that reduce GHG emissions by at least 60 percent. Advanced biofuels are sugar-based ethanols (sugar beets and cane) that uniquely fit this GHG emission criteria. Both the advanced and cellulosic biofuel industries are expected to grow at a slow rate during the next few years before producing from 3 to 21 bgy in 2022.

The prominance of GHG emissions and the unique category of advanced biofuels have significant implications for crop acreages. There also will be different prices for ethanol. Prices will depend on the feedstock source and biofuel refinery heat sources. These will be discussed in future columns.

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