What do cellulosic ethanol and corn-based ethanol have in common? For both of these closely related industries, 2013 might be a make-or-break year for many of the stakeholders who have invested millions, if not billions, to help the U.S. strive toward energy independence. While one industry faces a mandated ceiling, another continues its long journey to becoming a reality.
Despite the stark market difference, both are challenged by capital deprivation, high feedstock prices, government mandates and legal challenges. Daunting, no doubt, but the demand for fuel and the relentless entrepreneurial nature of our country seems to suggest that the industry will overcome these challenges and continue to grow.
Corn-based ethanol is perhaps one of the most interesting industries this country has seen. Born out of a need to add value to corn, the industry blossomed in the last decade, seemingly overnight.
Wall Street eventually flooded the industry with capital, spurring unbelievable growth and hyper-inflated valuations. Ultimately the market collapsed, leaving an aftermath of plants to be gobbled up at much lower values and slowing the unsustainable growth. Although the industry changed in 2008, there is no doubt that corn-based ethanol laid the foundation for other combustion- and compression-based fuels. What came next was a series of events that should be a lesson learned for all types of newer generation fuels, otherwise known as “advanced fuels.”
Feedstock price lessons
Between January 2006 and May 2008, corn prices jumped from $2 per bushel to nearly $7 per bushel. After falling for the next two years back to about $3.50 per bushel, it climbed back up to $8 per bushel in 2012. During the same time period, ethanol production increased from 2 billion gallons to approximately 14 billion gallons. It would be easy to blame ethanol for the upward spiral in corn prices, but the fact is there are many other factors that impact corn price, including the cost of petroleum oil and production conditions. A barrel of oil increased from $30 per barrel to nearly $95 per barrel between 2002 and 2012. The unexpected drought in 2012 also has contributed to much higher corn prices. So what is the lesson to be learned from the corn-based ethanol industry?
Growth and uncontrollable factors, some predictable and some unpredictable, will significantly impact our industry, so be prepared for volatility – it will come.
There are many lignocellulosic feedstocks that can be used for biomass products and cellulosic ethanol, including agricultural crop residues, perennial grasses, woody crops, logging residues and others. These range from corn stover to corn bran, to hardwoods, switchgrass and miscanthus.
Corn stover and corn bran are becoming popular feedstocks because of their proximity to the ethanol plant and their relatively low value, currently $30-$60 per ton. As the cellulosic ethanol industry grows, expect all of these feedstocks to increase in value based on the factors described above. This is critical to understand when preparing financial projections and making project economic assumptions.
Market penetration
Another barrier to success is the ability to penetrate the market. The U.S. fuel industry is very well-established and has been dominated by the petroleum industry for more than 100 years. The Renewable Fuel Standard, first introduced in 2005 as part of the Energy Policy Act, helped to level the playing field by mandating the usage of renewable fuels. Although not binding, the stage was set for the second version, known as RFS2, which is binding and actually “carved out” levels based upon the specific fuel type. Although it guarantees a market for renewable fuels, it also limited the amount of specific fuels, such as corn-based ethanol. As one of the very few industries actually capped by the U.S. government, corn-based ethanol cannot grow beyond 15 billion gallons per year (which we are expected to reach in 2015). There also is no guarantee that other fuels won’t be “capped” at some point in the future if Congress decides to do so. Therefore, the RFS2 is both a blessing and a curse: at one point creating a market, and ultimately capping it — but in the process rankling stakeholders such as the petroleum industry.
