“The Song That Never Ends” – Cellulosic Biofuels

By Elizabeth Hilbourn and John Auers

“This is the song that never ends, it goes on and on my friends, some people started singing it, not knowing what it was, and they continued singing it forever just because this is the song that never ends, it goes on and on my friends…”

Today we revisit a topic which we first blogged about back in 2012 – the cellulosic biofuels program.  Just as we did 6 years ago, we again use the popular children’s tune, The Song That Never Endsas an apt representation of the nature of the RFS regulations promoting their usage.  As with children’s songs and computer programming, the Infinite Loop.  concept fits the cellulosic biofuels program well, being something which results in a continuous and repetitive action, either due to the loop having no terminating condition, having one that can never be met, or one that causes the loop to start over.  Cellulosic ethanol has been pushed for years, particularly since the start of RFS2 in 2010, and yet there are essentially just drops of it in the market in comparison to other renewable fuels.  Cellulosic RINs currently comprise barely over 1% of total RIN production, while cellulosic ethanol RINs comprise only 0.05% of the total.  Cellulosic ethanol is given government money, tested on a bench-scale basis, pushed annually in the renewable fuel standards, then given more government money, tested on a larger pilot plant basis, and on and on in the Infinite Loop which continues to this day and the foreseeable future.

If EPA reduces the required volume of cellulosic biofuel according to the waiver provisions in EISA, EPA will offer a number of credits to obligated parties no greater than the reduced cellulosic biofuel standard.  These waiver credits have certain restrictions such as no trading or banking and nesting. Congress also specified the price for such credits: adjusted for inflation, they must be offered at the higher price of higher than either 25 cents per gallon or the amount by which $3.00 per gallon exceeds the average wholesale price of a gallon of gasoline in the United States.  When the wholesale price of gasoline rises, the CWC falls.  Gasoline prices were higher in the first half of 2018 than the first half of 2017, so the 2019 CWC is lower than the 2018 CWC.  The EPA typically publishes the price of the CWC in December for the following year; however, the data that factors in the credit price is published well in advance.  D3 RIN prices are set at the CWC price plus the D5 RIN price since the D3 RIN is nested and can be used to satisfy the cellulosic, advanced biofuel and total renewable fuel mandates.  Starting in July of each year, Platts publishes a following year D3 RIN price.  It really doesn’t matter what EPA sets for the cellulosic biofuel obligation or what the cellulosic biofuel waiver price is except for it is money directly back to the government.  The cellulosic biofuel RIN (D3) price equalizes to the price of advanced biofuel RINs (D5) plus the cellulosic biofuel waiver price.  Table 1 lists the number of cellulosic RINs retired and cellulosic biofuel waiver credits used each compliance year.

In 2014, the EPA also determined that compressed natural gas (CNG) and liquefied natural gas (LNG) produced from biogas from landfills, municipal waste-water treatment facility digesters, agricultural digesters, and separated municipal solid waste (MSW) digesters were eligible to generate cellulosic RINs. This determination led to a significant increase in cellulosic RIN generation beginning in late 2014, as fuel that previously had been qualified to generate advanced biofuel RINs could now generate cellulosic RINs.  Consequently, less than 3% of cellulosic RINs to date have been produced from ethanol as shown by the blue bar in Figure 1.

EPA must annually determine the projected volume of cellulosic biofuel production for the following year.  EPA’s projected cellulosic volume in 2019 is 381 million gallons.  In part, the EPA incorporates year-over-year change in past production.  EPA also has renewable fuel facilities file an annual production outlook report of which they can use to support future volumes.

When the RFS2 regulations were written, they believed that pushing cellulosic RIN generation would push technology.  Figure 2 and Table 2 show the statuary cellulosic volume which is significantly higher than the final rulemaking.  In 2019, the statuary amount of cellulosic was 8.5 billion gallons while the final rulemaking was less than 5% of that amount at 381 million gallons.  In fact, as shown in Figure 1, in 2017 only 1.3% of all RINs generated were cellulosic RINs with only 0.05% coming from cellulosic ethanol or cellulosic diesel.  The majority of the rest were from CNG or LNG.

The EPA believes that the majority of cellulosic ethanol production in 2019 will be produced from corn kernel fiber and that the CNG/LNG limit is the number of vehicles capable of using this form of fuel.  The cellulosic ethanol production process starts with the distillers dried grains with solubles plus an enzymatic hydrolysis process with cellulosic enzymes to break down the cellulosic components of the distillers grains.  The CNG/LNG mainly comes from landfill gases.  Back in the early days of RFS, EPA utilized data provided by the National Renewable Energy Laboratory (NREL) on both biochemical (enzymatic) and thermochemical processes with corn stover, switchgrass, and forestry thinnings and waste as feedstocks for cellulosic ethanol and the Fischer-Tropsch process for cellulosic diesel.  In fact, the list of potential cellulosic ethanol feedstocks originally studied is quite extensive and shown in Table 3. Besides the corn kernel fiber, sugarcane straw is utilized at some Brazilian sugarcane ethanol plants and straw is utilized at the European cellulosic ethanol plants.  Cellulosic ethanol plants that are in operation are running well below design rates because of high operating costs.

TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for all petroleum products.  Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook, and this subject is discussed in this publication which was released mid-August.  For more information on this report or on any of our other analyses or consulting capabilities, please send us an email or give us a call.