The Saudi Arabia of Ethanol

Iowa is to corn ethanol what Saudi Arabia is to oil. At present Iowa has the capacity to produce 3.5 billion gallons of ethanol per year, which is 26% of the nation’s total (Source). This is of course due to the large amount of corn production in Iowa, enabled by ample rainfall and rich topsoil.

But Iowa differs from Saudi Arabia with respect to energy production in one very important detail: Saudi Arabia satisfies their own energy needs with the oil they produce, and exports the excess. Iowa on the other hand exports the vast majority of the ethanol they produce while importing gasoline as motor fuel.

Gasoline consumption in Iowa is presently around 1.6 billion gallons per year (Source). This is the energy equivalent of 2.4 billion gallons per year of ethanol. Yet amazingly, Iowa does not have an E10 blend mandate that is so common in many other states. Of the 3.5 billion gallons of ethanol Iowa produces each year, only 100 million gallons is consumed in the state (less than 3%!). Perhaps even more amazing is that Iowa — seemingly the best candidate in the U.S. for biofuel self-sufficiency — ranks in the Top 10 consumers of gasoline per capita in the U.S. (Source).

Iowa is a state that by all accounts should be able to satisfy their own liquid fuel needs with ethanol, and still have some left for export. They are perhaps unique in the U.S. in that respect. Instead, petroleum continues to supply over 90% of the motor fuel in Iowa, and virtually all of the fuel used in the farm equipment for growing all of that corn. Something is wrong with this picture.

Why Isn’t Iowa Self-Sufficient?

That is a perplexing question. If ethanol is a real alternative to gasoline, why hasn’t it taken over the marketplace in Iowa? Ethanol should have a greater advantage over gasoline in Iowa than probably in any other state. And in fact, the price spread between gasoline and E85 is consistently higher in Iowa than in other states (Source). The reported price spread in Iowa as of July 2010 was 30.1%, which should be large enough to drive consumers to E85 over gasoline. So what is the problem?

There are three possible problems that I can identify: 1). Perhaps there isn’t enough E85 infrastructure in place. 2). There aren’t enough E85 vehicles on the road; 3). The price is still too high relative to gasoline.

Regarding infrastructure, as of January 2010, there were an estimated 136 service stations in Iowa selling E85 (out of 977 total service stations) and a total of 2,233 Stations selling E85 in the United States (Source). Iowa also has an incentive program in place to install new E85 infrastructure (see below), but with 136 stations across the state (and growing), availability doesn’t seem to be a major limiting factor.

The availability of E85 vehicles may be a more serious impediment. As of 2009, there are reportedly around 8 million vehicles on U.S. roads that are E85 capable (Source). Given a total vehicle population of around 250 million, that means that only around 3% of the cars on the road are E85-capable. (I could not find statistics specific to Iowa). This would seem to be a limiting factor at present for E85 penetration; E85 can’t capture 10% of the market if only 3% of the cars can burn it.

Yet even with some E85 vehicles on the road, sales of E85 in Iowa have been falling and sales of ethanol in general lag the rest of the U.S.:

Final 2009 Iowa Ethanol Sales Figures Show Step Back for State

JOHNSTON, IA – The Iowa Renewable Fuels Association (IRFA) today announced that Iowans chose E10, a 10 percent ethanol and 90 percent gasoline blend, only 73 percent of the time during 2009 according to Iowa Department of Revenue (IDR) figures. According to the Des Moines Register, Iowa ranks 32nd in ethanol sales despite being the leading ethanol producer.

“Iowa’s ethanol sales did not reach the 2009 goal of the Iowa Renewable Fuels Standard,” said Monte Shaw, IRFA Executive Director. “These are figures based on mandatory reporting of taxable gallons to the State of Iowa and the IRS – not an incomplete, voluntary report. Obviously, IRFA members are disappointed in the results. The state has also released E85 sales for the first nine months of 2009. During those three quarters, E85 sales were down 15% compared to 2008.”

The number of E85 vehicles has been slowly rising, so if E85 sales are falling then there is also apparently a cost factor that is coming into play. For much of 2008, the price differential between E85 and gasoline was 15-20% (historical pricing available at E85prices.com). For the first half of 2009, that price differential had fallen to only 10%. Clearly, if E85 is ever to become the dominant fuel in Iowa, the price differential will have to properly reflect the fuel economy difference of E85 versus gasoline. E85 contains about 25% less energy than gasoline on a volumetric basis. Owners that experience a 25% reduction in fuel economy will expect to pay 25% less for their fuel. In fact, they may expect to pay 30% less due to having to refuel more often.

But, a real game-changer could be ethanol-optimized engines such as that touted by Detroit-based automotive engineering firm Ricardo. While their engine is projected to cost more, they project that they will deliver fuel economy from E85 that is comparable to what can be achieved with gasoline. (I reported on this concept in some detail in All BTUs Are Not Created Equally). In that case, consumers may be willing to buy E85 at a lower differential. The caveats here are that the engine is still in the lab, and the higher engine cost will determine the E85 differential that consumers will expect.

Recommendations

Before making recommendations, it is important to clearly set out the objective. As I have said numerous times, corn ethanol may not be a sustainable solution that is broadly applicable across the U.S. However, I do believe that it could be a very good solution in specific regions. Ethanol made from irrigated corn and shipped to California is in an entirely different sustainability category than ethanol produced and used locally in Iowa. In fact, despite my reputation as an enemy of ethanol from people who are careless with their interpretations, I have used Iowa for years as an example of what sustainable corn ethanol could look like. I have long believed that Iowa is in a good position to lead the way forward.

So from my perspective, the objective would be to increase the sustainability of ethanol — starting in Iowa — by increasing local consumption. This would decrease U.S. dependence on foreign oil more than if we have to transport oil from the coasts inland to Iowa while transporting ethanol from Iowa to the coasts.

Pump infrastructure in Iowa does not appear to be the limiting factor. Plus, Iowa already has good incentives in place that support rolling out additional E85 pumps (See Current E85 Incentives below). Iowa also already has a tax credit in place that is specifically directed at E85 sales (which is on top of the national ethanol tax credit). Ultimately, additional incentives may be required, as evidenced by falling E85 sales in the past year. Incentives could be in the form of direct E85 tax credits or fuel tax reductions or waivers. But the real issue seems to be lack of E85 vehicles.

According to automakers, the vehicles are on the way:

US automakers on track for more ethanol vehicles

U.S. automakers also expect to meet a goal of making half their vehicle production flex-fuel by 2012, up from around 30 percent now. But they warn that they could pull back if there aren’t enough gas stations with ethanol pumps.

On the other hand comes news that people may not be interested in buying them:

Flex fuel vehicles may be on the way out

When it comes to buying cars, Americans are still using the price of the vehicle as the primary deciding factor. A well-priced, fuel-efficient vehicle is the car of choice for Americans and this is bad news for the flex fuel vehicle industry. In a survey conducted by Harris Interactive, only 5 percent of respondents said they would be extremely likely to purchase a flex fuel vehicle, even if it only added $250 to the base price of the vehicle.

So it would appear that consumers may need some convincing before they are ready to take the plunge on an E85 vehicle. There are several ways to incentivize sales of E85 vehicles. The worst is probably just to mandate that vehicles sold in the state of Iowa are E85-compatible. (I think this is the worst because mandates often have unintended consequences; hence I prefer incentives over mandates). Probably the most manageable would be rebates or expanded tax credits — at the state or federal level — for the purchase of an E85 vehicle. Instead of a Cash for Clunkers program (which I was not a fan of), we would have been better served to have a cash for E85 vehicles program.

Such a program should probably be driven from within Iowa. After all, they arguably stand to benefit from using the ethanol they produce and moving toward true energy independence. Transportation costs cited in the recent DOE study on the proposed ethanol pipeline (that I discussed here) suggested that railing ethanol costs $0.19/gallon (shipping via pipeline was cited at $0.28/gal). Imagine that only half of the ethanol produced in Iowa is used in Iowa; there is a potential shipping savings of over $330 million per year. (However, under the present system these costs are passed through to consumers out of state, so it might be hard for Iowa to justify a program on the basis of savings for Iowans).

Beyond personal transportation, corn growers should be pushing for tractors that can run off of ethanol. They can be built. In 2006 the Saskatchewan Research Council unveiled a tractor modified to operate on 100 per cent hydrated ethanol. More on that development here:

From late December 2006 to late January 2007, the 120 horsepower ethanol-fuelled tractor clocked 60 hours of running time and got fuel mileage of 24 litres per hour. It takes about 15 bushels of wheat to create one tank of hydrated ethanol for the tractor, says Rueve, explaining that the fuel consists of 94 per cent alcohol and 6 per cent water.

As farm input costs increase, both the tractor and the truck are examples of developments that may make farm operations more sustainable in the future. Meanwhile, biofuels in general offer one option for those who are looking for ways to revitalize the rural economy.

So often we hear about how ethanol is providing homegrown fuel for automobiles, and yet the tractors that produce the homegrown corn run off of petroleum. I think it would be in the best interest of Iowa and of the country as a whole (given Iowa’s importance as a food producer) to break the petroleum dependence of Iowa’s farms by building tractors that can run off of ethanol (or biodiesel).

Conclusions

Iowa could be self-sufficient with their ethanol production if certain policies are supported. Some policies are already in place that are meant to address E85 availability and cost. However, the availability of E85 vehicles and the willingness of consumers to buy them is probably the key limiting factor. Ultimately, building up an E85 market in Iowa and eventually in the rest of the Midwest could solve a number of issues for the ethanol industry. If the Midwest adopted E85 as its flagship fuel, there would be no blend wall to be concerned about, nor would an expensive ethanol pipeline be needed to export ethanol out of the region. The potential market across the Midwest is triple the nation’s current ethanol production, giving ethanol producers an ample opportunity to grow without forcing national mandates that put E15 into cars that aren’t designed for it.

Current E85 Incentives

Iowa has tax credits in place specific to E85 sales:

E85 Retailer Tax Credit

A tax credit is available to retail stations dispensing E85 for use in motor vehicles in the amount of $0.20 per gallon for calendar year 2010, and $0.10 per gallon in calendar year 2011. After 2011, the tax credit decreases by $0.01 each year and expires after December 31, 2020. Taxpayers claiming the E85 tax credit may also claim the tax credit available for retail ethanol blends for the same gallon of fuel and tax year. (Reference Iowa Code 422.11O)

And toward blending infrastructure:

Biofuels Infrastructure Grants

The Renewable Fuel Infrastructure Program provides financial assistance to E85 and biodiesel retailers. Cost-share grants are available for up to 70% of the total cost of the project, or $50,000, whichever is less, to upgrade or install new E85 or biodiesel infrastructure. Applicants may also qualify for supplemental incentives for up to 75% of the cost of making the improvement, or $30,000, whichever is less, to upgrade or replace an E85 fueling dispenser that has not been approved by an independent testing laboratory. The supplemental incentive is available only to applicants who made the improvement no later than 60 days after the date of the publication in the Iowa administrative bulletin of the state fire marshal’s order providing that a commercially available fueling dispenser is listed as compatible for use with E85 by an independent testing laboratory.

Biodiesel distributors may apply for a cost-share grant for infrastructure upgrades and installations at biodiesel terminal facilities. Facilities blending or dispensing blends ranging from B2 to B98 are eligible for up to 50% of the total project, or $50,000, whichever is less. Facilities blending or dispensing B99 or B100 are eligible for up to 50% of the total project, or $100,000, whichever is less. The Renewable Fuels Infrastructure Board was established under the guidance of the Iowa Department of Economic Development; this 11-member board has authority to determine the eligibility of applicants. (Reference Iowa Code 15G.202-15G.204)

I began to hear rumors about a week ago that Range Fuels had started to produce some methanol from their plant in Soperton, Georgia. This week they announced that they have indeed begun to make some product:

Range Fuels Finally Gets its Cellulosic Plant Running

Georgia — After a two year delay, Range Fuels is producing methanol fuel from its commercial-scale cellulosic ethanol facility in Georgia. The company initially said the plant in Georgia would be producing up to 20 million gallons of fuel in 2008. Then it got pushed back to 2009. It is now finally operating in the second quarter of 2010.

The delay is not out of the ordinary for cellulosic ethanol producers. Because of the technical and financial problems companies have been facing, the Environmental Protection Agency scaled back its 2010 mandate for cellulosic fuels from 100 million gallons to 6.5 million gallons.

Let me first extend my congratulations to Range, and let’s hope that the start-up proceeds smoothly. Generally when trying to start up something for which there are not a lot of existing facilities, the learning curve can be bumpy because you have to figure it out as you go along. So do not be surprised to see that they are up and down a lot as they work out the kinks (not that those sorts of things make the news).

Oddly enough, a few people have e-mailed me with this news to claim that this vindicates Range from the criticisms I set forth in Broken Promises from Range Fuels. I don’t want to use this post to rain on their parade, but given these misconceptions let’s have a look at what I have said.

First, nobody ever doubted that Range could take biomass, gasify it, and produce methanol. That technology has literally existed in some form since 1923. And nobody doubts that they can make some ethanol in the same way. Again, very old technology, just not cost-effective. Range has their own particular version of the technology, but nevertheless there is nothing fundamentally new in their approach.

So that’s the first point that should be clear. My criticism was not that they can’t produce some alcohols, therefore production of alcohol doesn’t invalidate the criticism. My criticisms were based on historical claims that Range made and failed to deliver upon. These aren’t issues where the jury is still out; they are history. Range claimed they would build a 100 million gallon per year ethanol plant for $150 million and start producing in 2008. First production of methanol in mid-2010 after taking in more than double the money they claimed they would need for an ethanol plant does not invalidate my criticisms in any way.

People knowledgeable in this field knew when they started hyping this back in 2006 that they could not possibly deliver “cellulosic ethanol” via this process at the cost and on the schedule they were claiming. So when costs started to escalate, schedules started to slip, and they ended up switching to methanol, they were certainly open to criticism given how vocal they had been about hyping themselves.

Imagine if Walmart started to hype $100 Dell laptops — this week only. I go to Walmart to get one, and find that they don’t actually have any for sale. If I criticize them for the false advertising, my criticism isn’t invalidated if you go there a month later and buy a $300 VCR. Yes, Walmart would have delivered something – but that wasn’t what they said they would deliver.

As I have said before, people are accountable for what they write and say. That includes me. So my criticisms of Range are certainly fair game for discussion. Just make sure you understand what those criticisms are before you write to tell me the criticisms were wrong. Keep in mind that the criticisms revolve around costs and time delays that are historical. And contrary to what some people seem to think, I do not wish to see Range fail. If I criticize President Obama, that doesn’t mean that I hope he fails as a president.

Regarding their production of methanol instead of ethanol, a story at earth2tech missed the mark by suggesting this was the nature of my criticism. To the contrary, I favor gasification approaches to methanol (or ethanol, mixed alcohols, diesel, jet fuel, etc.) I like those processes because they don’t rely on a lot of fossil fuel inputs and can result in a higher efficiency to fuels than other approaches.

However, at present the gasification of biomass to methanol has to contend with the much cheaper method of gasification of natural gas to methanol. The latter presently sells for about $1/gallon, and Range’s methanol will struggle to compete with that. So their business plan will be to sell their methanol to the biodiesel industry, which reacts it with a vegetable oil or animal fat to produce biodiesel. Range will rely on a $1/gallon tax credit when they sell their methanol (again, only worth $1/gallon at market prices), and then the biodiesel industry will turn around and collect another $1/gallon tax credit when they sell the biodiesel (presuming this credit is extended as expected).

The path forward for Range is pretty clear. They have to get through this start-up phase and demonstrate that they can run their process consistently. We won’t know that until they have a year or so of operation behind them; any corrosion and reliability issues will take a while before they are obvious. Range will reportedly try to move production to ethanol next year, and that will present its own challenges. Given that they recently requested more DOE funding (which they did not receive), it is clear that the capital requirements for their process are high. So ultimately they must also show that they can run the process cost-effectively.

First production of methanol is a noteworthy achievement, but there is a long road ahead. Just ask Changing World Technologies, who also once started up a plant and began to produce some fuel. But instead of being remembered as an innovative biofuel company, CWT went bankrupt and is the poster child for the “over-promise and under-deliver” strategy. Let’s all hope for a better outcome for Range Fuels.

In my recent post Thoughts on an Ethanol Pipeline, I described what I feel would be a more rational approach to ethanol policy than some of the policies that have been pursued over the years. This gist is that the Midwest currently produces about 95% of the ethanol in the U.S. (12.5 billion gallons), but they export 70% of that ethanol out of the Midwest. At the same time, they import gasoline that is the energy equivalent of 37 billion gallons per year of ethanol.

It would seem to be a more sensible energy policy to utilize ethanol production closer to the source of production — especially given that the motor fuel demand in the Midwest is far greater than the volume of ethanol produced there. Many readers agreed, and following that essay, they provided a number of excellent comments. I drew on those comments in my latest essay for Forbes: The Midwest Should Use Its Own Ethanol.

Here I want to continue to develop policy recommendations around this theme. Reader Paul Nash came up with a specific plan, which I share below (here is the link to the original comments).

The Rationale for a Policy Change

• The industry wants a pipeline to support a greater market on the east coast.
• This market will likely only grow by either raising the blend mandate, or exporting ethanol
• From a national energy use point of view, it is much better to have the ethanol being used near to where it is produced (Midwest).
• Presently, this is only happening to the extent required by the blend mandate – there is relatively little E85 usage.
• Other than raising the blend mandate, the only real way to grow ethanol use is by E85.
• Many/most flex fuel drivers (today) do not run on E85 because it is either hard to find and/or there is little financial benefit to doing so.
• Some new flex fuel vehicles are optimized for E85, and their drivers will get a financial benefit, but they will only be a small portion of the market.

Specific Recommendations

1. Scrap the VEETC (since there is a mandate already and the VEETC is scheduled to expire at the end of 2010).
2. Maintain a producer’s credit for cellulosic ethanol, until 2015.
3. Double the VEETC credit for E85 sales (as well as for 85% blends of methanol and mixed alcohols).
4. Pay this credit to the retailer, not the fuel blender (if it is a different party).
5. Place an export tax on ethanol equal to all the producer credits (including corn grower’s credit).
6. Do not give any government subsidy for the pipeline – let the industry decide if they want to spend that money, or develop the market in their own backyard.
7. Relax law allowing drivers (not retailers) to blend any amount of ethanol they like into their fuel.  i.e. mix E85 with regular gasoline in any proportion they want.

Projected Consequences

So, with a $0.90 tax credit on E85, drivers will have a real, immediate, and obvious monetary incentive to use it. Retailers, faced with making good margin on E85, will have good incentive to install pumps. The ethanol industry might even choose to partner with them to help pay for said pumps. The ethanol producers might even set up their own E85 stations at the distillery gate, just like wineries sell at the cellar door.

Fueling stations selling E85 and nothing else, supplied directly by the distilleries, will begin to appear, and would be VERY easy and cheap to set up, and would, of course, be within easy trucking range of said distilleries.

Drivers are legal to use higher mixes, but are not being forced to, and no one is selling higher mixes. The responsibility is purely with the drivers who decide to use higher mixes, or not, so the retailers/oil companies and ethanol industry are not liable for any engine problems (unless, of course, if the ethanol industry claims there won’t be problems).

Now, doubling the credit on E85 to $0.90 is a huge subsidy to the E85 users, but there are not that many of them (presently) so the total amount spent on this subsidy will be far smaller than the $6 billion/yr presently.

This plan leaves the oil refiners out of the ethanol subsidy business, but that is OK as they are mandated to blend x amount of ethanol, this is not destroying their business in any way – it is merely promoting an alternative fuel that they (to date) have refused to promote.

If the retailers and drivers “follow the money”, we would see a rapid increase in E85 usage, and I’ll bet it gets used more in corn country first, which is as it should be.

Conclusions

I agree with most of what Paul suggests, and believe it would create huge new opportunities for the domestic ethanol industry without the need for an E15 mandate. These policies would also move the industry closer to the generally accepted purpose of U.S. biofuel policy, which is to use biofuels to reduce demand for petroleum. The farther biofuels are moved from the point of production, the less petroleum they are able to offset due to the energy cost of moving the biofuels.

However, I don’t believe the subsidy would need to be as high as $0.90 per gallon. I certainly think such a high subsidy would result in explosive growth for the E85 industry, but then we would once again have to contend with a $6 billion ethanol subsidy in just a few years. I think the same goal could be accomplished with a subsidy of around $0.50/gallon.

According to E85.com, over the past year E85 has been anywhere from 10% cheaper to 22% cheaper than gasoline. Given an observed E85 energy penalty of 25-30%, it is likely that E85 would need to be consistently 30% cheaper than gasoline to build a substantial market. (Another possibility is the continued development of engines that can reduce the E85 energy penalty by using higher compression ratios; if you only lose 10% fuel efficiency on E85 then you will happily buy E85 at only a 15% discount to gasoline).

The narrowest spread between E85 and gasoline over the past year occurred in December 2009 when gasoline was $2.56 per gallon and E85 was $2.30 per gallon. To increase that narrowest price spread back to 30% would require an additional E85 subsidy of $0.51 per gallon. At the widest spread over the past year in May 2010, this level of subsidy could have had E85 undercutting gasoline by more than 40%. At that price spread, E85 demand would grow rapidly.

Given the meager level of E85 sales in the U.S. today, this level of subsidy would be far lower than present ethanol subsidies, while providing strong incentives to build out E85 infrastructure and E85 vehicles. Further, it would actually strengthen the energy security of the Midwestern states well beyond the status quo.

Local Production for Local Needs

I currently live in Hawaii, and one thing I hope to help facilitate is for Hawaii to become more sustainable in food and energy. We have the natural resources here to be largely sustainable, but we depend on outside sources for around 90% of our food and energy. Currently, fuel and power in Hawaii are provided by Southeast Asia and from as far away as the Middle East.

Of course we do this for the same reason many countries are dependent on imports for their food and energy: That is cheaper than the alternative of self-sufficiency. But from the perspective of risk, regions with such high dependence on others for their basic needs can quickly find themselves in an uncomfortable position. The U.S. first found out the implications of dependence during the OPEC oil embargo of 1973. Today, the level of dependence in the U.S. is much higher than in 1973, so those risks continue to hang over our heads.

This is why I advocate — to the greatest practical extent — local production and usage of food and energy. As long as production can be done in a relatively efficient and economic manner, there are many potential benefits to communities that produce their own food/energy: Supply disruption risks can be managed, fossil fuel consumption from transporting food and fuel are reduced, and local jobs are created. Further, countries that are self-sufficient in food and energy can’t be held hostage by other countries withholding these things (which has often resulted in war).

In fact, this is a major factor generally given for broad adoption of renewable energy standards (with climate change concerns another major factor). To the extent that renewable energy is truly making a region more self-sufficient, I am highly in favor of incentives and programs to accomplish this goal.

A More Sustainable Midwest

One reason I have often spoken out against ethanol subsidies is that I didn’t see regions actually becoming more self-sufficient as a result. What I saw was a delusion of self-sufficiency. Yes, more ethanol was being produced, but the oil dependence of those producing communities continued to be very high (in some cases growing even as ethanol production soared).

Take the Midwest of the U.S. as an example. The United States is divided into five Petroleum Administration for Defense Districts (PADDs). These districts were created during World War II, and the Energy Information Administration (EIA) currently collects and reports statistics for the different PADDs. PADD 2 is essentially the Midwestern states. The states in PADD 2 are Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Wisconsin. (See this PADD map for a full breakdown of all five districts).

PADD 2 is responsible for approximately 95% of all ethanol production in the United States (production is actually more concentrated than that, as some PADD 2 states produce little or no ethanol). Ethanol production in PADD 2 has grown from 1.6 billion gallons in 2000 to 3.9 billion gallons in 2005 to almost 12.5 billion gallons in 2010. The region has clearly been successful in rapidly boosting ethanol production.

Despite this success, demand for conventional gasoline has remained strong. In 2000, demand for conventional gasoline in PADD 2 was 2.1 million barrels per day (bpd). Demand increased slightly by 2004-2005 to 2.2 million bpd before declining to the present demand value of 2.14 million bpd. (Source). In other words, even though ethanol production soared in the Midwest by some 700%, demand for conventional gasoline in the Midwest remains within 5% of the all time high set in 2004. (True gasoline demand is somewhat higher, because I am not considering the gasoline contained in approximately 400,000 bbl/day of reformulated gasoline).

Why Export When You Don’t Produce Enough to Sustain Yourself?

With a present conventional gasoline demand of over 2.1 million barrels per day against ethanol production of 0.8 million barrels per day, it is puzzling that an ethanol pipeline is being discussed. If gasoline demand in the Midwest was converted to demand for E85, every drop of ethanol produced in the Midwest could be consumed in the Midwest instead of using fossil fuels to transport it across the country.

Consider the following thought experiment. Let’s suppose that instead of 2.1 million barrels per day of gasoline, we could convert that demand to E85. Given a fuel efficiency penalty of 25%, it would require 2.1/0.75 = 2.8 million barrels per day of E85 to replace conventional gasoline in the Midwest. That breaks down to 2.4 million bpd of ethanol blended with 0.4 million bpd of gasoline (an 80% reduction in gasoline consumption). To put that into perspective, 2.4 million bpd of ethanol would be an annual demand of 37 billion gallons of ethanol versus the current 12.5 billion produced in the Midwest. Or, to put it another way, if E85 could only reach 34% market penetration in the Midwest, all ethanol produced in the Midwest could be used locally in the Midwest and oil imports could be backed out of the region.

But instead of a strategy in which we try to consume ethanol locally, we are trying to supply a little bit of ethanol all over the country, inefficiently transporting it from the Midwest to coastal states. At the same time, oil imports continue to flow into the Midwest. While most oil imports into the Midwest come from Canada, oil from Venezuela and the Middle East also makes its way into Midwestern gasoline. My view is that instead of exporting ethanol from the Midwest to New York (or even out of the country) we should make sure that E85 dominates the local markets and backs out Venezuelan crude, rendering hollow Chavez’s threats to cut off our crude supplies.

I was asked on a recent radio program about my thoughts on the proposed $4 billion pipeline to transport ethanol to the Northeast states. Because of the arguments I have laid out here, I said that I did not favor that. I think it would make far more sense to push the Midwest — also where much of the country’s food is grown — much further along the path to energy independence.

In fact, a Department of Energy study on the pipeline suggested that it may not even be economically viable:

Study casts doubt on ethanol pipeline

The study’s findings indicate that the ethanol pipeline would need to carry 4.1 billion gallons of corn-based ethanol annually to be feasible without major financial incentives.

That volume is nearly 50 percent higher than the volume for the pipeline being proposed by Poet, the world’s largest producer of ethanol, and Tulsa, Okla.-based Magellan Midstream Partners LP.

Poet and Magellan had been courting support in Congress to amend an alternative energy loan guarantee program that would back up 80 percent of the debt the companies plan to spend installing the ethanol pipeline.

I simply fail to see the logic of spending those kinds of dollars — including taxpayer dollars — to send ethanol outside a region that is still heavily dependent upon gasoline. A mere 10% penetration of E85 into the Midwestern gasoline market would consume even the 4.1 billion gallons mentioned above.

The report further notes:

But according to the DOE report, moving ethanol through the pipeline would cost shippers 28 cents per gallon at projected demand levels, well over the 19 cents per gallon average rate for the rail and barge transportation currently used.

So why not save that 19 (or 28) cents per gallon added costs from shipping it out of the Midwest and make E85 the fuel of choice there? If that strategy were successfully executed, there would be no need for ethanol pipelines or mandates for E15 or E20. The Midwest alone could consume three times the ethanol they currently produce, backing out oil imports into the region and eliminating the fossil fuel consumption from currently shipping ethanol around the country.

It would be far more efficient (i.e., fossil fuel savings and greenhouse gas reductions) to maximize local usage before trying to build an export market. Imagine that Hawaii followed the same model: Develop an alternative energy industry that ships the product to California, while continuing to import crude from Saudi for local needs. I think we would agree that this would be silly, and yet that is what is happening right now with ethanol in the Midwest.

Previously, I described a portion of my role in the early development of the MixAlco Process. Developed in the laboratories of Professor Mark Holtzapple at Texas A&M University, the process has undergone significant further developments, which I report on in this essay.

Details of the MixAlco Process

Here I will describe the process in a nutshell, but Wikipedia describes the process in significant detail. In fact, the details there are so thorough I suspect it was written at least in part by Professor Holtzapple’s graduate students.

The MixAlco process utilizes naturally occurring microbes to convert cellulose into chemical intermediates and fuels. The focus of the early work was to identify organisms that utilize cellulose as an energy source, and then to select microbes that are hardy and efficient for use in industrial fermentation. Unlike a conventional cellulosic ethanol process, the MixAlco Process does not add enzymes to break down cellulose. Cattle, for instance, host a mixture of microbes that produce their own enzymes that break down cellulose and convert it into primarily acetic acid. Think of a cow’s stomach as an industrial reactor, and you start to get the picture of what the process is attempting to accomplish.

From an economic point of view, the process has several advantages over conventional cellulosic ethanol. First, as noted, the process requires no enzyme addition. Second, because a mixed culture of hardy microbes is used, the process does not require sterile conditions. As you might imagine, the rumen digestive system is not a sterile environment. Finally, the process ultimately yields mixed alcohols or hydrocarbons, which have a higher energy content than does just ethanol.

The Present Status of the MixAlco Process

A company called Terrabon was formed in 1995 to commercialize the MixAlco process (and two other technologies). I graduated that same year, and plans were being formulated to construct a pilot plant based on the process. Construction of the pilot plant, designed to process up to 200 pounds of biomass per day, started in 2000. Because funding was scarce in those early days, it took several years to complete the pilot plant, but it has been in continuous operation since 2006.

Construction of a larger demonstration plant began in 2008, and was started up less than one year later. The demonstration plant is designed to process up to 10 tons of biomass per day, and has been in continuous operation since early 2009.

In 2009, the company attracted two large strategic investors. Valero invested in Terrabon in April 2009, and Waste Management followed in August. These investments bring together the technology in Terrabon, a refining and distribution capability with Valero, and lots of municipal solid waste to feed the reactors from Waste Management.

The Hard Questions

To evaluate this process objectively — admittedly more of a challenge than normal because of my history with the process and with Professor Holtzapple — I have to ask tough questions around the energy balance, conversion efficiency, capital costs, etc. If I look at the process completely objectively, it has characteristics that I do like, but also some that I don’t. One of the things I don’t like is the large quantities of water in fermentation processes that must be dealt with. That isn’t a show-stopper; after all Brazilian ethanol is a fermentation process that contains a lot of water. But they remove that water by using very low-cost biomass as fuel. Still, if the water wasn’t there in the first place, the energy efficiency could be a lot higher.

Professor Holtzapple sent me a number of presentations and papers (some linked below), which I have slowly worked through. These answered some questions — and triggered many more — so I have exchanged several e-mails with Professor Holtzapple in order to gain better insight into some areas. I present portions of the exchanges below.

Q&A with Professor Mark Holtzapple

RR: We were talking about a pilot plant in 1995, the year I graduated. What took so long to get it built?

MH: The pilot plant was started with seed funding of about $300,000. The funding was VERY welcome and resulted from initiatives taken by Jack Hopper at the Texas Hazardous Waste Research Center, which got its money from EPA. Unfortunately, this was not sufficient to build the entire pilot plant. We got some free equipment (e.g., steam-jacketed kettles) when Texaco shut down its research facility. Terrabon also provided major pieces of equipment over the years (e.g., vapor-compression dewatering system) and support structures. Recently, the pilot plant was upgraded for the DARPA project, the goal of which is to produce 100 L of jet fuel. We have added a centrifuge and driers, so the pilot plant is an evolving facility. It took a long time to build it because funding was hard to get, particularly in the early years when oil prices were low.

The demonstration plant was started in early 2008 and first became operational in early 2009…LESS than one year after construction began. To me, this is quite remarkable because it is quick for the first plant of any process. The detailed engineering was done by a company that designs waste water treatment plants and it was built by a general contractor that constructs buildings on campus and elsewhere. Much of the equipment was purchased from Grainger and McMaster-Carr. The reason I mention these points is that the design skills, construction skills, and equipment are commonly available, which makes scale-up easy. In contrast, biological processes that require sterility require specialized skills more commonly found in the pharmaceutical industry. They need sanitary valves, pumps, heat exchangers, and tanks, all of which are specialty items. Further, there are only a limited number of engineering and construction companies who have the skills…this makes scale up expensive and difficult.

The demonstration plant continues to evolve. Initially, it was only capable of doing pretreatment and fermentation. This summer, they are installing equipment that can do downstream processing. If you want more details, it is best to ask the Terrabon folks.

RR: Do you have a good idea of the energy returns of the process? I presume you will burn lignin (but probably aren’t in the pilot plant), but am curious about the fuel output/fossil fuel input ratio.

MH: The attached paper (Reference 2) shows the energy return can be as high as 18:1.

RR: OK a follow-up to that. I believe the 18:1 you mentioned is theoretical, but am really interested in what you have actually observed to date. My biggest concern is the amount of water that has to be removed from the process, and while I could envision scenarios that would yield a very high energy return, it would be at the expense of yield of final product (because I would have to burn much of the biomass for process heat).

MH: The main purpose of the demonstration plant is to prove that the fermentation works.  Most engineers who have reviewed our process believe the downstream processing steps will work.  Most of the uncertainty involves the fermentation, which is reasonable because no one has ever operated a mixed-acid fermentation for this purpose.  As much as possible, Terrabon wants to use conventional, off-the-shelf technology for the downstream steps.  The philosophy is to pursue one invention at a time.  At the moment, the fermentation is the “invention” being pursued.

Currently, the demonstration plant does not employ our advanced vapor-compression desalination technology. Instead, Terrabon opted to use a less sophisticated, off-the-shelf technology that can be put in place rapidly.

Terrabon has built a large advanced vapor-compression distillation (AdVE) system for the City of Laredo, which be used to desalinate brackish water. It is still in the debugging stage, but will be shipped in late July.

We have put a LOT of effort into dewatering.  This step can be very energy and capital intensive if not done properly.  We have made some remarkable breakthroughs (in my opinion) that related to promoting dropwise condensation on the heat exchanger surface.  In our laboratory apparatus, we have measured heat transfer coefficients as high as 42,500 Btu/(h ft² F).  For comparison purposes, a conventional heat exchanger at the same operating conditions would have a heat transfer coefficient of 3000 Btu/(h ft² F).  I am in the process of preparing the patent application, so the patent has not yet been filed.  Unfortunately, I cannot give more details at this time.

RR: I generally view water as something I would rather exclude from my process, due to the energy required to remove it. In a conventional ethanol process (e.g., corn or sugarcane) a lot of the process energy is devoted to removal of water. There is also the issue that water resources are a problem in many areas. Can you comment?

MH: Regarding the water issue:

1. The fermentation water is recycled, so the process does not consume much water (other than for cooling towers).

2. If the feedstock is wet, water must be purged from the system. Because we distill water from the salt, we can purge distilled water from the system, which can be used for irrigation or industrial purposes.

3. All biological processes involve water in the fermentation. Critical issue are (1) concentration and (2) ease of separation. Brazilian ethanol tends to be pretty concentrated (~10%) whereas we tend to be more dilute (2 to 5%).

4. Although we must separate more water per unit of product, our separation process is easier. With ethanol, both water and ethanol are volatile, so multiple-stage distillation with reflux is required. Further, they have an azeotrope, which creates a complex separation step to reach purity. In contrast, we are separating a volatile component (water) from a nonvolatile component (salt). This allows the separation to occur in a single stage, rather than the multiple distillation stages needed with ethanol. In our process, because the temperature of the condensing steam and boiling salt water are very similar, it is amenable to heat pumping, which dramatically lowers the energy input. In contrast, with ethanol, the boiling and condensing occur at widely different temperatures, so heat pumps are not as effective.

RR: What have been some of the biggest challenges to overcome in the piloting?

MH: I think anyone who works with biomass will say that solids handling is a big challenge. Also, mixing is an issue. I believe these issues are tractable when scaling up.

We do NOT have any issues with maintaining sterility…all bugs are welcome to the table…may the best bugs win!! Our process is driven very close to the low-energy state (acetic acid) whereas sugar or ethanol are reactive intermediates that want to become acetic acid. The only other product of a lower energy state is methane + carbon dioxide, which are produced by methanogens. Fortunately, methanogens are ‘fragile” microorganisms… they are strict anaerobes so small amounts of oxygen wipe them out. Also, they do not grow well at low pH or at high ammonia concentrations. We put inhibitors into the system to kill the methanogens. We have had good luck with iodoform, but there are MANY other known inhibitors such as monensin, BES (bromoethanesulfonic acid), chloroform, etc.

RR: What is the yield of product from a ton of biomass? (e.g., gallons of alcohols, ketones, acids)

MH: The yield depends upon the route taken.

Using the acid route (see Reference 2), the reported yields are

Mixed alcohols = 141 gal/tonne = 127 gal/ton (from Table 1)

Hydrocarbons = 0.635 × mixed alcohol = 89 gal/tonne = 80 gal/ton from Page 551

Using the ketone route (see Paper submitted version)

Hydrocarbons = 81 gal/tonne = 73 gal/ton (from Table 1)

Mixed alcohols = 0.8 lb digested/lb fed × 0.65 lb acid/lb digested × 0.583 lb ketone/lb acid × 1.0225 lb alcohol/lb ketone × gal/6.6 lb × 2000 lb/ton = 94 gal/ton = 104 gal/tonne (from Table 1)

(Note 1: tonne = 1000 kg, ton = 2000 lb)

(Note 2: yields are quoted on an ash-free basis)

(Note 3: Yields are based upon laboratory studies. They must be confirmed at industrial scale.)

RR: Related to the above, have you used the leftover lignin in a biomass boiler? I have glanced through various information on the demo plant, but haven’t see whether this piece in integrated.

MH: The boilers in the demonstration plant are gas- or propane-fired. This reduces capital and hassle. In my opinion, biomass boilers only make sense at large scale.

RR: What are you doing with the product coming out of the pilot/demo plants?

MH: The product from the early runs has been stored for later processing. The stored product and the currently produced product will be converted into ketones using newly installed downstream equipment.

Conclusions

As always, readers are strongly encouraged to ask their own critical questions before forming strong opinions on a particular technology. As I have stressed many times, there are no silver bullets in the world of energy. Every energy production process comes with baggage of one sort or another. The key to successfully transitioning away from fossil fuels in the most sustainable manner will be to develop technologies in which the excess baggage is minimized.

The MixAlco technology discussed here does address many of the negative aspects related to certain other cellulosic technologies. I think the keys to their success in the long run will be how well they are able to integrate the combustion of leftover biomass for process heat into their process. If that aspect is successful, then the process should be able to produce liquid fuels with relatively low fossil fuel inputs.

Additional Resources

There are numerous resources that describe the MixAlco process. Professor Holtzapple has made a couple of presentations available:

MixAlco Presentation at the Indo-US Conference on Bioprocess & Bioproducts – Technology Trends & Opportunities (3.5 meg PDF)

MixAlco Presentation at the 32nd Symposium on Biotechnology for Fuels and Chemicals (7.5 meg PDF)

Terrabon’s site has a detailed process description:

Process Description from Terrabon Site

The Wikipedia site is also very informative:

Bioconversion of biomass to mixed alcohol fuels

Finally, one can go to the Professor Holtzapple’s lab website to read about the latest developments:

Holtzapple Research Group

References

1. Granda, C., Holtzapple, M., Luce, G., Searcy, K., and Mamrosh, D. (2009). Carboxylate Platform: The MixAlco Process Part 2: Process Economics Appl Biochem Biotechnol, 156:537–554.

2. *Granda, C., Zhu, L., and Holtzapple, M. (2007). Sustainable Liquid Biofuels and Their Environmental Impact. American Institute of Chemical Engineers. Environ Prog, 26: 233–250.

3. Holtzapple, M., and Granda, C. (2009). Carboxylate Platform: The MixAlco Process Part 1: Comparison of Three Biomass Conversion Platforms Appl Biochem Biotechnol, 156:525–536.

Last December, I received an intriguing request from the Public Relations Director at the world’s largest ethanol producer. Nathan Schock asked if I would be interested in posing a video question that would be answered by POET CEO Jeff Broin. He said that any topic was fair game, except for questions dealing with proprietary information.

I considered a number of questions, and wrote an essay detailing my thought process as I ran through a list of potential questions: The Questions I Didn’t Ask. But I had one question that had been weighing on my mind more than any other, and I posed that one in the video I sent in.

Since then, Nathan and I have exchanged a number of e-mails about the status of the question. As the months went by, I began to suspect that even though anything was supposed to be fair game, the particular question I did ask was a bit tricky for them to answer. But today, they answered that question and issued a press release calling for a change in direction on the nature of the ethanol tax credit:

Ask POET Episode 3: the Ethanol Tax Credit

I have long maintained that with the Renewable Fuel Standard (RFS) in place, the ethanol tax credit (the VEETC)  is redundant. I have made this argument many times on my blog (see Strategizing for the Ethanol Industry), and I made the argument at Forbes.

My argument has been that we don’t need the tax credit with the RFS in place, but if we do have a tax credit it should be directed at building out incentives and infrastructure for E85 – particularly in the Midwest close to the source of the ethanol. The current nature of the VEETC is to pay oil companies for complying with the law requiring them to blend specific quantities of ethanol.  This was the gist of a plan announced today by Growth Energy:

Growth Energy Proposes Fundamental Shift in America’s National Fuel Policy

The “Fueling Freedom” plan calls for the phasing out of current ethanol supports over time, by redirecting a portion of those funds to build out the infrastructure for the distribution and use of ethanol, and shifting the remaining portion away from the oil companies to opening the market. The primary elements of the plan include:

* Funds currently going to the oil industry as an incentive for blending ethanol into gasoline (the VEETC) would be redirected to provide backing for the build out of distribution infrastructure for ethanol – such as tax credits for retailers to install 200,000 blender pumps and federal backing of ethanol pipelines. This will provide Americans the access to choose ethanol in an open and free market, and would allow for the elimination of the tax supports over time in exchange for that level playing field.

* Requiring that all automobiles sold in the U.S. be flex-fuel vehicles – as many as 120 million. This requires no additional cost to taxpayers and a minimal cost (about $120 per vehicle) to vehicle manufacturers.

Growth Energy’s Fueling Freedom plan, once implemented, would build out the infrastructure in the United States to create a path that leads to a genuinely free market – an open market that is free of government supports. Redirecting monies currently paid to oil companies to blend ethanol into gasoline toward infrastructure improvements would enable consumers to choose between gasoline and renewable, homegrown ethanol.

POET also issued a release voicing support for the plan:

POET voices support for Fueling Freedom Plan proposed by Growth Energy

I was told that the development of this plan is why it took longer for my question to be answered; that they didn’t want to answer it when it anticipated the change in strategy that they were working on.

I will note a couple of things related to the announcement. First, I don’t think the fact that it will cost the auto industry an additional $120 to produce E85 vehicles means there will be “no additional cost to taxpayers.” Someone will pay for that, and I don’t think it will be the car manufacturers. I am not suggesting that it is a bad idea (I actually support this) but the cost will be borne by taxpayers in one form or another.

Second, there are phrases in there like “phasing out of current ethanol supports over time” and “eventual phasing out of government support for ethanol.” Those comments will require significant clarification. What exactly does that mean? A cynical person might suggest that the ethanol industry could see that the government was losing an appetite for the subsidies, and by embracing a strategy of “eventual phasing out” they might be able to keep the bulk of the subsidies for many more years. So right away the question becomes “What does your time-line look like for the phase-out?”

We know that the VEETC expires at the end of 2010. We have been hearing for quite some time now that ethanol is competitive with gasoline. We know that the oil industry is the recipient of the VEETC payments. Why then is an “eventual” phasing out required? I think it is time to move on to the question of “What would be the impact if the tax credit is not renewed at the end of 2010?”

In fact, in the answer to my question, Jeff Broin calls on the oil industry to walk away from their subsidies. Given the recurring argument that the VEETC is really an oil company subsidy since they receive the payments, wouldn’t allowing the credit to expire this year mean they are walking away from a subsidy?

In any case, I do thank POET for taking on the question. I believe their answer is a step in the right direction, and I appreciate the opportunity to be involved in the debate.

I have had family visiting me for the past two weeks, which has slowed my posting down a bit. I am trying to finish up the followup story to the essay on the MixAlco process, but it will probably be early next week before that one is ready. Until then, here is a 12-minute radio interview that I did this week for a Midwestern radio program called Farm Talk:

RR Interview on the USDA Report and Future of Renewable Energy

We covered the implications of the USDA report covered in the previous essay, the future of cellulosic ethanol (I mentioned POET in the interview), the proposed ethanol pipeline, and what characteristics I look for in a renewable energy project.

I just listened to the interview, and I did misspeak at one point. I said that the report implies that you could take 1 BTU of fossil fuel and make 1 BTU of ethanol. What I meant to say was “the report implies that you can take 1 BTU of ethanol to make 2 BTUs of ethanol, but this is in fact not true.” Other than that, regular readers will find an emphasis on many of the themes often discussed here.

In this essay, I am going to talk about my graduate school work at Texas A&M. Since leaving A&M there have been a lot of developments related to the technology I worked on, so in the essay following this one I will discuss more details on the nature of the technology and the developments toward commercialization.

My Ag Background

I may have mentioned once or twice that I grew up on a farm in Oklahoma. Farming is still very much a major activity within my extended family, and needless to say I have had a lifelong interest in agriculture. After receiving undergraduate degrees in chemistry and mathematics, I decided to attend graduate school at Texas A&M University. For those who may not know, “A&M” is short for “Agricultural and Mechanical.” Based on my background and the fact that I wasn’t far-removed from the farm, I felt more at home at Texas A&M than at other campuses I visited.

There were two fundamental areas that I was interested in for my graduate school research: Sustainable agriculture and sustainable energy. Within the Department of Chemical Engineering, there wasn’t much going on in the area of sustainable agriculture, but there was some interesting work going on in sustainable energy. There were three professors I was interested in possibly working with: Professor Bruce Dale, now at Michigan State University, Professor James Liao, now at UCLA, and Professor Mark Holtzapple. After looking at the nature of the research and speaking with the professors and their students, I chose Professor Holtzapple as my research advisor.

Life in the Lab

I spent many hours over the following two years in Professor Holtzapple’s labs, working to develop a process called the MixAlco Process. I will get into more details of the process and provide links to background information in the next story. In a nutshell, we were using naturally occurring microbes that could efficiently convert cellulose into chemical intermediates that could be turned into fuels. Our focus when I was there was on the rumen digestive system. Cattle are efficient digesters of cellulose; they eat grass – largely cellulose – and in their digestive system a combination of microbes works to turn the cellulose into acetic, propionic, and butyric acid that the cattle then use for energy. But those acids can also be converted into mixed alcohols – ethanol, propanol, and butanol (and trace amounts of higher alcohols).

Our goal was to replicate the rumen digestive system in the lab, and potentially modify it to optimize the yield of desired products. We collected microbes from a pair of fistulated steers on campus. Somewhere out there is a photograph of me with my  arm up to my shoulder in one of those steers collecting fluid for the reactors. There is another of me in a white lab coat running from ostriches, which were being raised in the same area as the steers. You had to be really careful around those ostriches, because they could really hurt when they pecked you. But I digress.

Our feedstock was a combination of municipal solid waste (MSW) and sewage sludge. The sewage sludge provided nutrients for the microbes that were consuming and converting the cellulose in the MSW. One of the themes of my research was to determine optimal sewage sludge inoculation levels for the reactors. I spent an entire Saturday morning once at the city wastewater treatment plant shoveling sewage sludge into my pickup, which we then later spread on Professor Holtzapple’s lawn to dry. (I never did ask how his neighbors reacted to that).

Bio When Bio Wasn’t Cool

We made progress while I was there; the kind of progress that these days would generate multiple press releases. But things were different way back in the ancient days of the early 90’s. The link above on the MixAlco process noted that “Dr. Holtzapple was doing bio when bio wasn’t cool.” So there were no reporters sniffing around asking what we were doing (although that would come later), because the clean tech industry wasn’t like it is today.

We were being partially funded at the time by Hoechst Celanese (who I would go to work for making butanol after graduation) and progress was reported to them – not through press releases. We managed to push the concentration of organics in our reactors up to a higher level than had been reported in the literature, and made good progress on many fronts. I also had the idea at one point to try out termite microbes. It occurred to me that the termite digestive system is one of the most effective at digesting cellulose, and thus mining termite guts seemed promising.

I had mixed success with the termite experiments. I realized afterward that trying to replicate a termite digestive system is probably an extensive research project in itself. At the time, I couldn’t find anything in the literature indicating where anyone had tried it before, so I didn’t have anything to guide me. Maybe I was just ahead of my time with the termite experiments, because fifteen years later I started reading news stories like this one:

Termites may hold the answer to cheap, efficient ethanol fuel production

Moving On

I defended my thesis and graduated in 1995. The title of my thesis was Volatile Fatty Acid Fermentation of Lime-Treated Biomass by Rumen Microorganisms. I left Texas A&M to go to work for Hoechst Celanese, but joined my research group the following year in Washington D.C. when we won the 1996 Presidential Green Chemistry Challenge Award.

Since I left Texas A&M, Professor Holtzapple and I have had sporadic contact, but I was mostly out of the loop with the continued development of the process. However, he recently contacted me and sent me some presentations and literature on their current status. I asked him if he would mind if I wrote a story about what they are doing – drawing on the information he sent me – and he agreed.

The technical details and progress toward commercialization will be addressed in the follow-up to this essay.

Everyone who thinks Big Oil should get $31 billion from U.S. taxpayers, please sign on the dotted line. That’s the message of a new ad running today in Congress Daily sponsored by NRDC, the Union of Concerned Scientists, Friends of the Earth and the Clean Air Task Force. The ad highlights the wastefulness and redundancy of the Volumetric Ethanol Excise Tax Credit (VEETC), which amounts to little more than a massive government bribe to oil companies to get them to buy and blend gallons of corn ethanol they are already required to purchase under the Renewable Fuel Standard.

As I’ve discussed here and here, corn ethanol is a mature technology that has been commercially viable for decades and today provides nearly 10 percent of light-duty vehicle fuel in the United States. Though the ethanol industry argues that the VEETC is critical to its survival, the reality is that most of the VEETC value ends up in the pockets of oil companies as profit.

So why has Old Ethanol mounted a massive lobbying campaign pushing Congress to extend the VEETC?  Multiple independent analyses (see the blogs above) show that the ethanol industry will continue to grow without the tax credit, just at slightly slower rates. But corn ethanol producers have built out their industry to supply the additional gallons of ethanol oil companies purchase beyond RFS mandates as a result of the tax credit. So now this mainstream industry is asking American taxpayers to continue spending billions per year just so they can keep their market a little tighter and their profits a little higher.

And what do we tax payers get in exchange for these billions of dollars? Not much besides more greenhouse gas emissions, more of the water pollution that has caused a dead zone in the Gulf of Mexico as large as the BP oil spill, higher prices for the corn soil in our stores and fed to our livestock, and more deforestation, as I discussed here. The ad drives this point home by telling taxpayers not to be fooled by the name of the subsidy: it’s not about creating new or cleaner ethanol. The VEETC almost exclusively supports ethanol from corn, which, when all direct and indirect costs are added, creates more global warming pollution than the oil it is supposed to replace!

No matter how you slice it, the VEETC is a massive giveaway to Big Oil for obeying the law that buys us little to nothing in terms of new jobs, environmental performance or even additional domestic ethanol production beyond the quantities already mandated by the RFS. And by subsidizing the best and worst gallons of ethanol, the tax credit comes at the expense of developing new and cleaner biofuels, such as those made from dedicated “energy crops” like willow and switchgrass, which I’ve talked about here.

We can and should support ethanol producers who open new plants, create new jobs, produce more advanced biofuels more efficiently and deliver real environmental benefits—but not by continuing to use scarce taxpayer dollars to pay for every single gallon of ethanol produced at decade-old plants. We can do better by supporting emerging and more competitive energy technologies in non-polluting wind, solar, geothermal and advanced biofuels that create many more times the green jobs we need and far less pollution. Now is the time for Congress to stop subsidizing Big Oil and Old Ethanol and allow the corn ethanol tax credit and tariff to expire at year-end.

That title appears to be reserved for me, even though I did not set out to earn it. It all started with the first story I wrote on Range Fuels in which I pointed out that their progress does not remotely align with their early promises. Since that initial story was published I have been frequently contacted to provide a skeptical side of the Range story. Below I report on another story on Range that has just come out that reiterates my skepticism – not on the nature of the technology but on the disconnect between the intial claims and actual progress to date.

One person recently e-mailed me and said “I bet (Range backer) Vinod Khosla and (Range CEO) David Aldous don’t like you very much.” Well, that may be (although I have had quite a lot of cordial correspondence with Khosla). I have also said before that I believe Vinod’s heart is in the right place. But this is not personal. I am far more worried about the future and the impact false promises may have on that future than whether I win popularity contests.

What Harm is Done?

Of course some ask “What harm is done? So someone fell short of expectations. Big deal.” In this case I think it is a very big deal. Here’s an analogy to illustrate why. Assume for a second that your house is on fire. Some people show up, dressed as firemen, and start to go through the motions of putting out the fire. To your untrained eye, they appear to be firemen, but you can’t help but notice that the fire continues to burn. After a while, it becomes obvious that these are not really firemen, and don’t know how to put out a fire. Meanwhile, the house burns to the ground. The real firemen never showed up, though, because they had gotten the message that firemen were already on the scene and had the situation under control.

I view our energy crisis as a house on fire, and biofuel hypesters as the faux firemen who lull the public into a false sense of security. They also pose a threat to the real fireman out competing for the same sources of funding. So I want some accountability from biofuel hypesters who go out and make outrageous claims and then fail to deliver on them.

Vinod Khosla on Skepticism

I believe the issues I have raised are fair, especially for Khosla. He made some bold statements about what they would do, and took taxpayer money to do it. The flip-side of that is you have to be prepared to accept responsibility when things don’t go as planned. I have yet to hear anyone from Range or within the government say “Yes, we screwed up a bit.” But all you have to do is read the February EPA report on what Range told them about their progress and contrast that with earlier claims that were made to see that things have not gone according to plan.

And while some have criticized me as the skeptic, note that Vinod has never been shy about expressing his skepticism about certain biofuel technologies. Indeed, Mr. Khosla warned investors to steer clear of clean tech IPO’s that rely too heavily on government funding and lack a clear technological advantage. “There will be Googles in this business, but before there is a dot-com rush, investors should ask questions,” Khosla told Bloomberg in an interview. “My objective is that good companies get funding and that, with the bad ones, people know what questions to ask.”

In response to my criticisms, Range apologists invariably say something like “That guy doesn’t know the big picture.” Actually I know a whole lot more than what I have written. For example, Range laid off a number of employees last year, including employees who were trying to develop a catalyst that could efficiently produce ethanol from synthesis gas. That is pretty key to Range’s claims, and my inference from these lay-offs is that Range couldn’t see any light at the end of that tunnel. That’s not all I know (e.g., a direct quote from a Range insider “There is nothing special about Bud’s (Klepper) gasifier“), and based on what I know, I stand behind my charge that Range has failed to deliver what they promised.

On the other hand, I want to make it clear again that my issue is not with the risk that they may fail. Of course new ventures are risky. Of course there will be unexpected problems. That is exactly why you don’t go out and make a lot of boasts about what you will do and how cheaply you can do it. But if you think I am just trying to belittle someone who took a risk that didn’t pan out, you have it completely wrong. Had they not gone out and made the claims they did – claims that at the time I thought were highly irresponsible and naïve – while chasing tax dollars, this wouldn’t be the same issue.

The Latest Range Story

Back to the new Range story I mentioned in the opening paragraph:

Range Fuels Fights Criticism, Technological Challenges

Let me address some specific bits from the article:

OMAHA (DTN) — Between 2006 and 2009, more than 100 news stories and press releases touted a cellulosic-ethanol-technology developer as a leader in a promising industry.

Many of those 100+ stories were hyped up puff pieces that the company encouraged. This hype created a buzz around the company that had them winning accolades long before they delivered. Shouldn’t they now be accountable for wasted tax dollars, and lost opportunities for companies that were denied funding that went to Range? Shouldn’t some of the writers of these puff pieces be taking a second look now? One thing is crystal clear. Range has not lived up to the expectations they created. No amount of dissembling can change that. They have taken in well over $300 million. That’s a lot of money. What do they have to show for that?

Construction on Range Fuels’ Soperton, Ga., cellulosic ethanol plant has stopped while the company continues work to improve its gasification technology. (Caption below a picture of the construction site).

Range Fuels claimed in 2007 it would produce commercial cellulosic ethanol using wood and other biomass at a 20-million-gallon plant in Soperton, Ga. — by 2008. However, the plant remains in development. Now, Range Fuels CEO and former Royal Dutch Shell executive David Aldous said his company has been honing its gasification/catalyst technology and plans to restart construction on the Soperton commercial plant in 2011.

“We have to do an equity raise before we get into the construction phase of that,” he said.

Note that the above implies that construction has stopped, but another story that came out a few days later quotes Range CEO David Aldous as saying the plant will start up producing methanol within the next couple of weeks – and ethanol at some future date (assuming they get more money).

“They were never going to be a cellulosic ethanol producer,” he (Rapier) said. “Can they do this in a cost-effective manner? No, not in my opinion.

Let me provide two additional pieces of information to put that in clear context. First was the fact that historically “cellulosic ethanol” has referred to the process by which cellulose is hydrolyzed to sugars, and then the sugars are fermented to ethanol. With the influx of the venture capitalists into the sector in the past few years, “cellulosic ethanol” suddenly became a catch-all definition for all sorts of processes involving biomass and some type of fuel product. For someone who is familiar with the long history of cellulosic ethanol in this country, this is very annoying. It would be as if we suddenly decided that calling bicycles “cars” is OK, when in fact that would confuse a great number of people.

So the first reason I said they would never be a cellulosic ethanol producer is that their process isn’t cellulosic ethanol except by the colloquial definition. But the second reason is that their process is gasification, and when you produce alcohols in this way you produce methanol or mixed alcohols. So I saw a process that was gasification to mixed alcohols, not a cellulosic ethanol process. Hence, my comment that they were never going to be a cellulosic ethanol producer (not that they could never be successful with their approach) – their process was only going to be gasification to mixed alcohols (including ethanol).

Unfair Criticism?

The criticism leveled at Range Fuels is “unfair,” Aden said, and the company likely will be commercially successful at some point. Several things make Range Fuels’ technology “fairly unique,” he said.

The Range gasification technology is a two-step process that includes volatilization. Volatilization is a chemical process that rapidly converts nonvolatile solids and liquids (biomass in Range Fuel’s case) into volatile compounds by thermal decomposition. The company then follows that with steam reforming, Aden said.

I don’t know what Aden means when he says the criticism is unfair. What I have done to this point is contrast what Range is now saying they will deliver with their earlier public statements. If you say you are going to build a plant for $120 million and start it up in 2008 producing ethanol, I think by 2010 you have some explaining to do when you have taken over 3 times that much cash, substantially reduced the capacity, still don’t have a completed plant, and are now saying you need more money to continue. Public statements have been made about deliverables. No amount of spin will make them vanish, and I have a right as a taxpayer to question how my money is being spent. So what is unfair about asking for some accountability for how our tax dollars are being spent?

One of the issues could be that the people within the government who are supposed to be looking after our tax dollars are a little too close to Range to remain objective. After all, Range has a fair share of cheerleaders within the government agencies doing the funding, but those cheerleaders need to take a step back and apply some objectivity with respect to what taxpayers are getting for the money they have been forced to spend.

Second, “fairly unique” is a bit generic, isn’t it? All of these processes are “fairly unique.” They have some subtleties that differentiate them from other processes, but not too many of them are “very unique” – which is how Range sold their process. In fact, Aden describes a two-step process in which the 1st stage process is a pyrolysis step. That part certainly isn’t unique, as I know a company that has been doing that sort of two-stage process for 10 years.

That’s what I mean when I say what Range is doing isn’t unique. (I think they aspired to do something relatively unique, but those aspirations were derailed by technical challenges they underestimated). There are numerous off the shelf technologies that can take a gasifier and couple it to a catalyst for producing methanol or mixed alcohols. People just don’t do it because it isn’t economical to do it. But the technology has existed – for decades – to do it (as I explained to a Range contractor who couldn’t understand why I was criticizing this revolutionary technology).

Why Range’s Initial Plans Derailed

I think two things happened with Range on the way from the lab to a demonstration scale. First, I think they had trouble scaling up their gasifier (in fact I have heard this from numerous sources). These can be notoriously difficult to scale because all kinds of temperature issues can give trouble at larger scale. The inability to scale their gasifier will make it very difficult for them to make their economics work; simply stacking up smaller gasifiers is much more expensive than just building one large one.

Second, I think they thought they could develop a catalyst that could produce ethanol for them in high yields. As Aldous admitted above, they get equal amounts of methanol and ethanol – which is what some of us were suggesting all along would happen. Methanol is cheaply produced from natural gas, so the only way they can compete with that is to get very generous subsidies and then sell to biodiesel producers – who will then presumably collect their own subsidies. So for Range to be successful here is going to take a dual biofuel subsidy and involve methanol which we can already cheaply produce in abundance.

The process itself is not necessarily a bad process: Gasify biomass and produce methanol and ethanol. The problem was that they had a number of bad assumptions to start with, and they have had to spend a lot of money getting to the point they are at. If I started out to design a process for producing mixed alcohols from biomass, I could do it for a fraction of Range’s capital expenditure.

A Skeptic and a Cynic

It’s easy to be skeptical or cynical, Aldous said. The question he would ask of those who are skeptical or cynical is, what are they doing to take on the challenges of achieving energy independence?

OK, I am skeptical and cynical, but I can answer the question. I am doing plenty, but we don’t issue press releases about what we are working on. Don’t confuse making lots of press releases about your plans and goals – very typical of many biofuel companies – with concrete actions. But it is possible – as illustrated in the fireman analogy – to actually do more harm than good even though you are trying to take on the challenge. If in the process you sour the public on the biofuel sector, then I would argue that it would have been better to remain on the sidelines.

I will say again that my criticism has never been directed at Range CEO David Aldous. I think the original management recognized a train wreck in progress (of their own making) and decided to get someone who really knew the energy business. (I think their original view was that they were smarter than all of those dinosaurs in the energy business, but finally concluded that maybe they better get someone who knew the business). Thus, they tapped former Shell executive Aldous. I think he has come in and reeled in most of the irresponsible statements. I can’t think of much he has said that I would have much of a problem with, and I realize as the CEO he has to attempt to defend his company against some of the things I am saying.

Conclusion

To conclude, I am not suggesting that Range can’t succeed technically at what they are attempting. I am only saying that what they are now doing is quite different (and has been far costlier) than what they initially claimed, and it will be very difficult for them to produce economical alcohols via this process. Ultimately, this is a cautionary tale about applying a bit more skepticism and a bit less cheerleading for some of these biofuel companies who promise the solution to all of our energy problems. Sort of like the kind of skepticism Vinod Khosla applies toward prospective algal biofuel producers.