Ethanol: The Good, the Bad, the Ugly, the Beautiful

The Good

The 9 billion gallons of ethanol that Americans used last year helped drive down oil prices. For those of us who fuel our vehicles with gasoline, as much as 10 percent of that gasoline is ethanol. The Energy Independence and Security Act of 2007 requires that more biofuel be used every year until we reach 36 billion gallons by 2022.

Reduced oil prices are good. We can go from good to great, if we move past fuel from food and haste to fuels from wood and waste. Although the economics do not yet favor major production, pilot plants are taking wood and paper waste and converting it to fuel.

Other cellulosic material is even more promising. Some grasses, energy crops, and hybrid poplar trees promise zero-emission fuel sources. These plants absorb CO2 and sequester it in the soil with their deep root systems. These plants often grow in marginal lands needing little irrigation and no fertilizers and pesticides, standing in sharp contrast to the industrial agriculture that produces much of our fuel.

Cellulosic biofuels are becoming economic reality. Norampac is the largest manufacturer of containerboard in Canada. Next generation ethanol producer TRI is not only producing fuel, its processes allow the plant to produce 20% more paper. Prior to installing the TRI spent-liquor gasification system, the mill had no chemical and energy recovery process. With the TRI system, the plant is a zero effluent operation, and more profitable.

A Khosla Ventures portfolio company is Range Fuels which sees fuel potential from timber harvesting residues, corn stover (stalks that remain after the corn has been harvested), sawdust, paper pulp, hog manure, and municipal garbage that can be converted into cellulosic ethanol. In the labs, Range Fuels has successfully converted almost 30 types of biomass into ethanol.

While competitors are focused on developing new enzymes to convert cellulose to sugar, Range Fuels’ technology eliminates enzymes which have been an expensive component of cellulosic ethanol production. Range Fuels’ thermo-chemical conversion process uses a two step process to convert the biomass to synthesis gas, and then converts the gas to ethanol.

Range Fuels in Georgia is building the first commercial-scale cellulosic ethanol plant in the United States. Phase 1 of the plant is scheduled to complete construction in 2010 with a production capacity of 20 million gallons a year. The plant will grow to be a 100-million-gallon-per-year cellulosic ethanol plant that will use wood waste from Georgia’s forests as its feedstock.

The Bad

Over one billion people are hungry or starving. Agricultural expert Lester Brown reports, “The grain required to fill an SUV’s 25-gallon tank with ethanol just once will feed one person for a whole year.”

Corn ethanol that is transported over 1,000 miles on a tanker truck, and then delivered as E85 into a flexfuel vehicle that fails to deliver 20 miles per gallon is bad. GM and Ford (F) have pushed flexfuel vehicles that can run on gasoline or E85, which is a blend with as much as 85 percent ethanol. For the 2009 model year, the best rated car running on E85 in the United States was the Chevrolet HHR using a stick-shift, with a United States EPA gasoline mileage rating of 26 miles per gallon, and an E85 rating of only 19 miles per gallon.

In other words, if you passed on using E85 and drove a hybrid with good mileage, you would double miles per gallon and produce far less greenhouse gas emissions than any U.S. flexfuel offering. (See Top 10 Low Carbon Footprint Four-Door Sedans for 2009)

The problem is not the idea of flexfuel. You can get a flexfuel vehicle with good mileage in Brazil. The problem is that GM and Ford used their flexfuel strategy as an easy way out, instead of making the tougher choices to truly embrace hybrids and real fuel efficiency. Flexfuel buying credits and ethanol subsidies have created incentives to buy cars that fail to cut emissions.

A new paper documents that the cost and emissions from transporting ethanol long-distance is much higher than previously thought. Ethanol is transported by tanker truck, not by pipeline, although Brazil will experiment with pipeline transportation.

The Ugly

It’s a tough time to make money with ethanol. Major players, like Verasun, are in bankruptcy. For the industry, stranded assets are being sold for pennies on the dollar. With thin margins, low oil prices, and high perceived risk, it is difficult to get a new plant financed.

Activists worry about oil refiners, such as Valero (VLO), offering to buy ethanol producers such as Verasun. But oil companies can bring needed financing, program management, and blending of next generation biofuels with existing petroleum refined gasoline, diesel, and jet fuel.

Government mandates for more ethanol do not match today’s reality. Subsidies to industrial corn agriculture are not good uses of taxpayer money. Encouraging federal, state, and local governments with their 4 million vehicles to give priority to flexfuel vehicles with lousy mileage is government waste.

Not all government help is misplaced. Range Fuels large-scale cellulosic ethanol production was helped with an $80 million loan guarantee. The loan guarantee falls under the Section 9003 Biorefinery Assistance Program authorized by the 2008 Farm Bill, which provides loan guarantees for commercial-scale biorefineries and grants for demonstration-scale biorefineries that produce advanced biofuels or any fuel that is not corn- based.

The Beautiful

Beautiful is the transition to electric drive systems and the development of next generation biofuels. Last year, Americans rode electric light-rail in record numbers. In 2008, Americans drove 100 billion miles less than 2007. Americans also drove 40,000 electric vehicles.

Critics and special interests try to stop the shift to electric vehicles by wrongly stating that if there is coal power used, then there are no benefits. Mitsubishi (MTU) estimates that its electric vehicle is 67 percent efficient, in contrast to a 15 percent efficient gasoline vehicle. Efficient electric drive systems lower lifecycle emissions. With the growth of wind, solar, geothermal, and other renewables, lifecycle emissions from electric transportation will continue to fall. For example, my main mode of transportation is electric buses and rail that use hydropower. My backup mode is a Toyota (TM) Prius that I share with my wife.

Long-term we will continue to see the growth of electric drive systems in hybrid cars, plug-in hybrids, battery electric, fuel cell vehicles, light-rail, and high-speed rail. Over decades, the use of internal combustion engines will decrease, but the transition will take decades, especially for long-haul trucks. During these decades we can benefit from next generation biofuels that will replace corn ethanol and biodiesel from food sources.

Shell (RDS) has a five-year development agreement with Virent, which takes biomass and converts it to gasoline - biogasoline. Gasoline, after all, is a complex hydrocarbon molecule that can be made from feedstock other than petroleum. Unlike ethanol, biogasoline has the same energy content as gasoline. Unlike cellulosic ethanol alternatives, Virent produces water using a bioforming process, rather than consuming valuable water. Virent has multi-million dollar investments form from Cargill, Honda (HMC), and several venture capital firms. Biogasoline will be its major initial focus. Its technology can also be used to produce hydrogen, biodiesel, and bio jet fuel.

Sapphire is an exciting new biofuels company backed with over $100 million investment from firms such as ARCH Venture Partners, the Wellcome Trust, Cascade Investment, and Venrock. The biotech firm has already produced 91-octane gasoline that conforms to ASTM certification, made from a breakthrough process that produces crude oil directly from sunlight, CO2 and photosynthetic microorganisms, beginning with algae.

The process is not dependent on food crops or valuable farmland, and is highly water efficient. “It’s hard not to get excited about algae’s potential,” said Paul Dickerson, chief operating officer of the Department of Energy’s Office of Energy Efficiency and Renewable Energy “Its basic requirements are few: CO2, sun, and water. Algae can flourish in non-arable land or in dirty water, and when it does flourish, its potential oil yield per acre is unmatched by any other terrestrial feedstock.”

Scale is a major challenge. Producing a few gallons per day in a lab is not the same as producing 100 million gallons per year at a lower cost than the petroleum alternative. Yet, some of our best minds are optimistic that it will happen in the next few years. We will see fuel from marginal lands, from crops and algae that sequester carbon emissions. The fuel will blend with existing gasoline, diesel, and jet fuel, and run in all engines, not just those with low mileage.

Some think that such a transition is as impossible as an interception with a 100 yard run for a touchdown in a Superbowl. It is exciting when the impossible happens.

Comments

[SubsidyEye:]

Some of the stuff in the article about technological progress (or lack there of) is usfually sumarized, but the frequent reference to Range Fuels turns the piece into an informercial.

Also, how can one talk about the status of ethanol without discussing all the subsidies and regulatory favors it enjoys -- notably the renewable fuels standard and the $1.01 producer tak credit? The only mention that "government help" (of the "not misplaced" variety) gets is, again, in reference to Range Fuels, and then only relating to loan guarantees.

Mar 08 09:02 AM

[mediapro:]

Since you have an "eye" on "subsidies", please consider the following:


1. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

The attempted movement away from an oil-based economy is long overdue. Eliminating these subsidies and replacing them with a carbon tax and offsets would be a dandy replacement for current outlays while returning the investment towards modernizing the electrical grid and smart energy technologies while contributing towards deficit reduction. Even an oil guy as purile as T. Boone Pickens has attempted to wake up and smell the coffee.

2. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck. If one wants to make the small farmer argument, then set resdiency, gross receipts and size requirements on farm subsidies. This reward for planting inefficient crop supply and for NOT PLANTING crops drawfs even the oil subsidies.

3. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

4. Finally, would someone please explain to me why there is a ~$100 K cap on wage contributions to Social Security?



On Mar 08 09:02 AM SubsidyEye wrote:

> Some of the stuff in the article about technological progress (or
> lack there of) is usfually sumarized, but the frequent reference
> to Range Fuels turns the piece into an informercial.
>
> Also, how can one talk about the status of ethanol without discussing
> all the subsidies and regulatory favors it enjoys -- notably the
> renewable fuels standard and the $1.01 producer tak credit? The only
> mention that "government help" (of the "not misplaced" variety) gets
> is, again, in reference to Range Fuels, and then only relating to
> loan guarantees.

Mar 08 08:09 PM

[Douglas Hvi...:]

In the field of stored energy vehicles, look at the air car. A search on "zero pollution motors" will provide the basic information.

A reason why really free economies tend to do well is "creative destruction." Those pesky entrepreneurs come up with businesses using disruptive technologies - hard on the ones who use the old methods of gaining by controlling the peasantry.

Suggest getting and studying "The mystery of Capitalism" by Hernando de Soto. He got curious about why some communities do well, and others are poor, when the people and resources are much alike.

Mar 09 09:10 AM

[John Petersen:]

With Secretary Chu saying things like "Corn ethanol is not a sustainable or scalable solution," it's clear that the days of ethanol from food crops are numbered. Other options mentioned have strong governmental support and should do quite well as the underlying technologies develop.

Mar 09 09:25 AM

[SubsidyEye:]

Media Pro,

I am not defending subsidies to the oil and gas industries, but there is something screwy in your calculations.

1. First, the estimates of tax and other direct subsidies to the oil industry that I have seen are on the order of $30 billion (actually, $32.9 billion) over FIVE years -- e.g., the recent study by Friends of the Earth (not exactly Friends of Big Oil):

foe.org/pdf/FoE_Oil_Gi...

That comes to $6.6 billion per year. Divide that by the 78 billion gallons of crude petroleum (i.e., not even counting the natural gas) produced each year:

tonto.eia.doe.gov/dnav...

and that comes to 8.5 cents ($0.085) per gallon.

Some people have added to the $6.6 billion dollars per year the cost of defending supply lines (in the Middle East, in Alaska and along the coasts.) and come up with figures in the neighborhood of $30 billion to $40 billion per year. Dividing $30 billion per year by the 317 billion gallons that the United States consumes each year comes to slightly than 10 CENTS per gallon, not 10 DOLLARS per gallon. On an oil-equilant basis, subsidies for corn ethanol are close to $1 per gallon. Those for cellulosic ethanol are over $1.50 per gallon.

Otherwise, I agree that moving away from an oil-based economy is long overdue. What I disagree with is the means: subsidizing the production of biofuels to compete with petroleum products is not exactly encouraging conservation, nor ending dependence on liquid fuels.

Eliminating subsidies to fossil fuels and to biofuels and replacing them with a carbon tax would indeed be a dandy way to help spur investments in modernizing the electrical grid and in smart energy technologies while contributing towards deficit reduction.

2. I agree with you, too, that removing sugar tariffs would be a good idea. But don't expect U.S. sugar-based ethanol to be able to compete very well with Brazilian sugar-based ethanol.

I'll let somebody else answer your points 3 and 4.

Mar 09 11:51 AM

[wheels14:]

Please keep in mind that their are large parts of our country where Ethanol has lower shipping cost than gasoline. The solution in Texas or New Mexico is not the solution in NE, IA, IL, MN, SD, IN, KS,or MO where ethanol production is just a stones throw away.

Also, Blender pumps that distribute E30 instead of E85 produce Gas mileage as good as or better than gasoline in flex fule vehicles. Promote the instillation of blender pumps! Dr. Chu still works for Mr. Obama, an ethanol supporter from a state that grows corn.

Mar 17 02:50 PM