A Billion-Gallon Boost

The biodiesel industry claimed several important victories in the latest Energy Bill. Fuel labeling, performance studies and an all-important specific carve-out are expected to enhance production and market confidence. However, critical issues remain as the dust settles.
By Dave Nilles | January 17, 2008
A catalyst is one of the basic components required to produce a gallon of biodiesel. It comes in many forms, but is the genesis of the reaction needed to form an end product.

Now the biodiesel industry has a universal catalyst in the form of federal legislation. The biodiesel industry scored a holiday gift in late December when President George W. Bush signed the second major Energy Bill of his administration. The Energy Independence and Security Act of 2007, includes an expanded renewable fuels standard, which-for the first time-features a specific carve-out applicable to biodiesel.

The most common response from biodiesel insiders was excitement tempered by uncertainty. After all, the industry has been hit hard with increased feedstock costs, which aren't necessarily remedied by a government fuel usage requirement. "Just because this mandate is pending doesn't make life easy," says Will Babler, risk analyst for First Capitol Risk Management LLC.

Bush's previous Energy Bill, the Energy Policy Act of 2005, required 7.5 billion gallons of renewable fuel use by 2012. Although the requirement included biodiesel, it has been largely filled by fuel ethanol. The new bill, which was widely supported, changes that. "We think it was a good day," says Iowa Renewable Fuels Association Executive Director Monte Shaw. "A carve-out for renewable diesel products like biodiesel is important for the long-term sustainability of the industry."

The bill passed the House of Representatives by a 314-100 margin. Identical legislation was approved by the U.S. Senate on Dec. 13 by an 86-8 margin. Bush signed the bill Dec. 19, and it takes effect Jan. 1, 2009, with the exception of the 9 billion-gallon volume requirement for the existing RFS program, which takes effect this year. Much of that is still expected to come from corn-based ethanol production, which topped out near 7.5 billion gallons of annualized production at the end of 2007. Another 4.1 billion gallons of capacity was under construction at that time.

Biomass-based diesel is one of several fuel categories defined in the bill (see Fuel Definitions on page 48). The carve-out begins at 500 million gallons in 2009 and tops out at 1 billion gallons in 2012. Following that, the U.S. EPA administrator, in coordination with the secretaries of energy and agriculture, shall determine the volume of fuel. "The applicable volume of biomass-based diesel shall not be less than the applicable volume for calendar year 2012," the bill says, meaning that 1 billion gallons per year is a floor following that year.

While the biodiesel industry responded favorably to the bill for the most part, it did provide some pause for concern. A provision that would have extended the biodiesel tax credit was eliminated from the final version of the bill. It also lacks closure to international trade concerns that have been voiced by domestic and international stakeholders such as the European Biodiesel Board. And, it creates a one-year gap-2008-before the mandate takes effect.

Other legislative vehicles appear ready to pick up those issues, however, and should allow the industry to focus on increasing production. "The biodiesel industry is ready, willing and able to step up and meet these requirements," says National Biodiesel Board Chief Executive Officer Joe Jobe.

The Mandate's Market Effect
The ultimate effect of a biodiesel requirement is unclear. Feedstock prices will continue to be a concern. "You can't mandate feedstock prices, but the futures market will provide incentives such that feedstock markets will respond," Babler says.

It's a similar situation to the fuel ethanol industry in 2007. Ethanol demand spiked in 2006 and farmers responded by planting a record-breaking corn crop in 2007. Ethanol and corn prices moderated as a result. The USDA's spring planting projections, which are due in late March, should paint a clearer picture of where commodity prices will settle in 2008.

The bill also contains a waiver should feedstock prices spike. If there is a significant renewable feedstock disruption or other market circumstances that would make the price of biomass-based diesel fuel increase significantly, a 60-day reduction could be enacted as long as the reduction does not exceed 15 percent of the applicable annual requirement for biomass-based diesel.

Babler says the mandate will either create more demand or ration users out of the demand side of the equation. That could include higher-cost biodiesel producers, the feed industry or export markets. "Those that don't have as durable a component of demand will get rationed out through price," Babler says. "Price will do its job."

As was seen by the explosive build-out of the fuel ethanol industry following the 2005 Energy Bill, mandates can create interesting-and sometimes unexpected-market dynamics. "On the ethanol side, it assures that the capacity being built has a home," Babler says.

On the biodiesel side, it provides a firm floor that ensures biodiesel will be produced essentially regardless of feedstock prices. "The most fundamental thing it will do is bring some confidence and stability into our industry," Jobe says. "We've got dramatic instability primarily due to unstable interplay with commodities and energy prices."

However, providing a floor doesn't appear to be the problem with biodiesel right now; existing capacity already doesn't have a home. "The current RFS shows that certainty of demand doesn't mean certainty of profits," Shaw says.

Understandably, the bill's economic impact on biodiesel production remains to be seen. Another facet of the bill is also unclear. The new bill credits renewable fuels based on their lifecycle greenhouse gas emissions.

The term "baseline lifecycle greenhouse gas emissions" means the average lifecycle greenhouse gas emission for gasoline and diesel sold and distributed as transportation fuel in 2005. Biomass-based diesel is defined as biodiesel that has lifecycle greenhouse gas emissions that are at least 50 percent less than the baseline lifecycle greenhouse gas emissions. The bill specifically states that renewable fuel derived from coprocessing biomass with a petroleum feedstock is eligible to be an advanced biofuel, but it cannot be a biomass-based diesel.

How fuels will be tracked is another critical issue. The current system, which uses renewable identification numbers, hasn't been the most user-friendly system. "We're trying to work with EPA to make that system more user-friendly than the existing system," Jobe says. "We're getting a significant amount of input on the onerousness of it."
Clayton McMartin, president of Clean Fuels Clearinghouse, says the value of RINs will increase due to the updated RFS. "The big thing is that up until now, RINs have been seen as a necessary evil," McMartin says. "Starting today, there is a new value being established."

Future Still Hazy
While a catalyst drives biodiesel production, it also carries divisive characteristics, essentially splitting oil into glycerin and biodiesel. So too can a legislative act that imposes what fuel can be used. While the Energy Bill did provide the first RFS carve-out to support the biodiesel industry, several key provisions were axed during Congressional conference proceedings.

In early December, the House passed a version of the Energy Independence and Security Act that included an extension of the biodiesel tax incentive through Dec. 31, 2010. It also included language that would have closed the so-called "splash-and-dash" loophole that allows foreign-produced biodiesel to be transshipped through the United States for the sole purpose of claiming the biodiesel tax incentive. One industry source tells Biodiesel Magazine they expect splash-and-dash to be the "biggest wild card going forward in 2008."
The extension to the biodiesel tax credit didn't make it into the final version of the Energy Bill, but it was part of the Senate's Farm Bill at press time. Conference talks on the Farm Bill were expected to begin in January. "We were disappointed the biodiesel tax exemption didn't make it into the Energy Bill," says John Hoffmann, president of the American Soybean Association. "That's the reason the biodiesel industry has taken off in the past three years."

Hoffmann, like others, says he expects language to extend the credit to appear in the Farm Bill discussions. "In light of $3 diesel fuel and $90 to $100 per barrel crude oil prices, the time is right for the RFS and the time is right for extending the biodiesel tax credit," he says.

The biodiesel tax credit runs through 2008, providing support to blenders wishing to use the fuel. However, until the mandate takes effect in 2009, blenders will have little motivation to use biodiesel if it's priced higher than diesel. Therefore, Shaw says his constituents were disappointed the biomass-based diesel carve-out starts in 2009 and not in '08.

While it appears options exist for the tax credit extension, another item looms large on the horizon for some in the industry. "To bridge the '08 gap before the RFS kicks in, a properly structured, fully-funded (Commodity Credit Corp.) bioenergy program is vital to producers," Shaw tells Biodiesel Magazine.

Jobe lists the renewal of the bioenergy program as one of the industry's top-three priorities. He says it would provide additional incentives for producers faced with inordinately high feedstock prices.

The form of a renewed bioenergy program is also unclear. Shaw says the program would be most effective if all gallons are eligible for funding, instead of the incremental new gallons that received funds under the program's previous version that expired in 2006. "Incentives for new capacity are not the problem," Shaw says. "Keeping existing capacity operating is what we need."

Shaw says he would also like to see the program not offset other programs such as the small producer incentive. "The bioenergy program in 2008 could be the vital cog to keep the biodiesel machine rolling," he says.

While many in the industry were pleased with the late December gift, additional work clearly needs to be done to create a successful biodiesel market. "[The bill] provides a guaranteed market and gives certainty to investors and the marketplace," says Sara Taylor, executive director of corporate affairs for Renewable Energy Group Inc. "This is an important catalyst to jump-start the industry domestically."

Dave Nilles is the Biodiesel Magazine contributions editor. Reach him at dnilles@bbibiofuels.com or (701) 373-0636. Staff writers Susanne Retka Schill and Anduin Kirkbride McElroy contributed to this feature.
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