Published on
Thursday, October 13 2022
Authors :
Philip Guillemette
Last month, EPA posted updated technical guidance (EPA-420-B-22-041) on qualifying an analytical method for determining the amount of corn kernel fiber converted to cellulosic ethanol when co-processed with corn starch in a conventional corn ethanol plant. On the surface, this guidance seems very technical, and you may be wondering, “Is it a BIG DEAL?” So, let’s wade into the murky waters.
Background
Ethanol manufacturers have been patiently waiting several years hoping to upgrade their corn ethanol RINs from D6 to D3 for at least a portion of their ethanol production derived from cellulosic corn kernel fiber that is co-processed with corn starch. Afterall, EPA finalized a Renewable Fuel Standard (RFS) fuel pathway and associated regulations during July 2014 providing for the generation of cellulosic D3 RINs for corn kernel fiber converted to cellulosic ethanol (aka cellulosic converted fraction). At the time, however, only proprietary nonvoluntary consensus standard body (non-VCSB) analytical methods were available to measure cellulosic converted faction, which did not provide for widespread registration of fuel pathways. Furthermore, EPA later expressed concern[1] about the lack of a benchmark to evaluate non-VCSB results and issued guidance during May 2019 stating that “reasonably accurate calculations” for cellulose conversion could only be accomplished by directly comparing non-VCSB results to a representative reference material, which did not exist until made publicly available by the National Institute of Standards and Technology (NIST) during June 2021. Now that the history lesson is done, let’s look at what EPA just announced.
New Publicly Available Method and Two More Options
In short, EPA describes three options to determine the cellulosic converted fraction and satisfy RFS RIN generation requirements[2]: 1) adoption of the publicly available Department of Energy’s (DOE) National Renewable Energy Laboratory (NREL) method[3], 2) use of a non-VCSB method demonstrated to return cellulose values comparable to NIST reference materials, or 3) use of advanced analytical techniques identified by DOE/NREL (e.g., mass spectrometry (MS) and nuclear magnetic resonance spectroscopy (NMR)).
Turner, Mason & Company’s Initial Feasibility Assessment
So, let’s take a deeper dive to see if this could be a BIG DEAL. We evaluated the following key questions to frame-up the situation:
Who may be eligible to generate cellulosic D3 RINs?
As discussed above, the corn kernel fiber/cellulosic ethanol pathway combined with the new analytical method is now available for use by any corn ethanol plant co-processing corn kernel fiber and corn starch through ethanol fermentation. As a practical matter, most if not all dry-mill corn ethanol plants have been co-processing these two feedstocks since start-up several years ago, and therefore, this new guidance fits squarely within their wheelhouse. According to the DOE Alternative Fuels Data Center[4], nearly 90% of ethanol plants are dry-mill ethanol plants, and Ethanol Producer Magazine reports[5] that 195 are currently operating in the U.S. So, let’s assume that about 175 ethanol plants may be eligible to register for this cellulosic fuel pathway.
What would be a rough estimate of the potential for additional cellulosic D3 RINs?
According to USEPA’s EMTS Data[6], about 14.1 billion gallons of ethanol was blended into gasoline during 2021. Although not completely accurate, let’s also assume that 90%, or about 12.7 billion gallons, of the fuel ethanol consumed in the U.S. was also produced by dry-mill ethanol plants. Based on a quick literature survey and other public sources, the theoretical maximum ethanol plant yield uplift from corn kernel fiber conversion is about 12-13%[7] [8]. However, these sources also indicate that this degree of yield improvement is likely to be achieved only when corn kernel fiber is separated from other portions of the corn kernel either pre- or post-corn starch fermentation and further pretreated and hydrolyzed prior to fermentation, which would require a significant capital investment. For in-situ co-processing of corn kernel fiber and corn starch, a more reasonable estimate of yield improvement may be around 1.8-3.5%[9] [10]. So, a rough estimate of the potential for additional RINs would be about 230-440 million cellulosic RINs. With current D3 cellulosic RIN generation coming-in at about 600 million RINs per year, we roughly estimate that D3 RIN generation may increase 40-70%, if all dry-mill ethanol plants were to wade into these deep regulatory waters and apply this guidance.
Are there any remaining constraints that may cause further delays?
An attempt to achieve this D3 RIN upgrade could be delayed by potential constraints that we don’t yet have a good handle on. First, we are uncertain of the availability of laboratories to perform the DOE/NREL method or the sufficient availability of NIST reference materials. Please note that EPA will require confirmation testing prior to approving a facility registration and additional retesting annually for low volume producers and every 500,000 gallons of cellulosic RINs generated for larger volume producers[11]. For example, a nominal 100 million gallons per year ethanol plant with a cellulosic ethanol yield of 3% would have to test six times per year. Second, we are not sure how long the registration approval process will take since we don’t know if EPA staff is available to quickly process what could be up to 175 facility registrations.
Could it be economically feasible?
Economic feasibility is a great question that we’ve got some insight into, but there could be other facility-specific circumstances that may make it a sinker or swimmer. Let’s talk first about marginal revenue and later marginal costs. First, if an ethanol plant is currently converting some corn kernel fiber to ethanol, with confirmation testing and registration, they would be able to start generating D3 RINs in-place of D6 RINs for the cellulosic gallons. Furthermore, the IRS provides a tax credit to produce second generation (cellulosic) biofuels[12]. With D3 RINs trading at about $1.5 over D6 RINs[13] and with a tax credit of $1.01, ethanol producers could realize up to $2.51 per gallon, or about $7.5 million per year for a nominal 100 million gallon per year ethanol plant with a cellulosic ethanol yield of 3%. Second, if the ethanol plant is not currently converting corn kernel fiber to ethanol, the revenue could be even higher with the increased ethanol yield; however, in either case, a question remains as to whether, or not, the ethanol facility must modify its hydrolytic enzymes to convert cellulose to sugar, which leads us to a discussion about marginal costs. Again, based on a brief review of public information sources[14], we have found that enzymes are available to convert corn kernel fiber to ethanol, but we are uncertain of the availability or cost for these enzymes. Of course, these costs, if incurred, would also be on top of the costs associated with any potential capital improvements, testing, registration and maintaining a good compliance management system. For the example provided above, we think it would be unlikely that all these costs would exceed $7.5 million per year, but if it did or if yields were less than 3%, this opportunity could be a “sinker.”
In summary, we think that this new EPA guidance, although very technical, could be a BIG DEAL by having a potentially significant impact on cellulosic D3 RIN generation in the coming years, which would be of key importance to both ethanol producers and RFS obligated parties. Of particular interest, would be whether EPA would take into consideration the potential production of cellulosic ethanol using this new guidance, when setting future cellulosic Renewable Volume Obligations (RVOs) and percentage standards.
TM&C’s Fuels Regulatory Practice will continue to monitor both legislative, regulatory, and other activities related to EPA’s Renewable Fuels Standards. Please let us know if you would like us to dig deeper into this latest guidance and its potential impact on your business.
