Reinstated: The Buck is Back
Almost a full year after it expired, the $1 per gallon U.S. biodiesel blender tax credit is back, reinstated in the 11th hour by a lame-duck Congress in a giant $850 billion tax package. After a year without its driving subsidy, which caused major uncertainty and disruption in the market, industry reaction is mixed: many are excited to recoup a retroactive check and survive another year, even grow; yet those same individuals express concern over short-term relief with no real long-term certainty. “The debate and delay has caused a lot of damage for us,” says Bernie Crowley Jr., vice president of Delta American Fuel LLC, a 40 MMgy biodiesel plant in Helena, Ark. Even though capital dried up in the past year, the tax credit’s retroactive reinstatement “might be a light at the end of the tunnel,” Crowley says. “I think we’ll see biodiesel start to grow again.”
Administrative Manager with Minnesota Soybean Processors Kim Collin tells Biodiesel Magazine that the company produced most of last year, albeit at a much lower rate, but in November it was forced to shut down biodiesel production altogether. Now, employees reassigned to other operations at the complex are shifting back to making methyl esters. “We’ve seen an increase in orders,” she says, adding that the plant will be at full production in a month or two.
“We’re going to be busier than ever before,” says Chris Peterson, vice president of Hero BX in Pennsylvania. “The tax credit coming back will bring back some of the small, second-tier oil companies, blenders—not obligated parties—that just weren’t able to finance biodiesel without the dollar.”
Interestingly, 2011 will be the first time the tax credit and the implemented biomass-based diesel mandate under RFS2 will coexist. And RFS2, along with its renewable identification number (RIN) credits, provided the only real lifeline for much of the industry in the past year, initiating a near revolution in the business model of biodiesel companies. Before the tax bill passed, RIN prices rose to surpass the value of the credit, keeping plants alive as they adjusted to what seemed to be a new era.
“One of our biggest deals was education in terms of RIN markets,” Peterson says, adding that Hero BX’s education then spilled over to its customers, many of whom are not obligated parties. “Essentially what we had to do is go through and model—okay, petroleum diesel or heating oil is at this price, biodiesel is at $1.10 more, but the RINs are worth 65 cents and you get 1.5 RINs per gallon, and then you can sell those RINs so you are actually buying biodiesel with the RIN value at a 5- or 10-cent discount to petroleum.”
Hero BX began 2010 by selling B99, in hopes of a quick extension, only to switch to selling B100 after a few months passed. “We essentially just transferred that liability, that risk, onto our customer,” Peterson says. Crowley tells Biodiesel Magazine, “We stayed scared about this, because we sold a lot of B99 on good faith.” Klaus Ruhmer, North American business developer for the major biodiesel technology provider BDI BioEnergy International AG, acknowledges an issue some in the industry are concerned about: companies that receive the retroactive payment may not be the companies that deserve it, and that time will tell whether “gentlemen’s agreements” between parties on the disbursement of funds will be honored.
“On the blenders credit, our reaction is mixed,” Ruhmer says. “On the one hand, it’s good—and very important—for our customers, existing producers. For them we are glad. But by renewing it for only one more year, we’re insuring that there won’t be any investments. People interested in investing need stability in the market place.”
Leif Forer, general manager of the 1.4 MMgy Piedmont Biofuels in Pittsboro, N.C., holds mixed reactions too. “I feel like it’s created a bunch of instability in the market and that has done a lot of damage,” he says. “I know that people will be investing in plants again, which will help the industry and us. But, I know that it’s scheduled to go away again, and that’s going to hurt just as bad as it did this last time when it lapsed. It’s such a wild card that I sometimes wonder if we’d be better off without the darn thing. I know it’s crazy to say that, because it’s not what conventional wisdom says.”
As a member of the National Biodiesel Board’s RFS2 Working Group, Forer says he is working hard to push EPA to increase biomass-based diesel volumes required in the federal standard, helping stabilize the market and increase RIN prices, which are expected to bottom out with both the credit in place and the beginning of the new annual reporting period. Forer also says we can expect feedstock prices to rise with the reinstatement. “When we first started production, when the tax credit first came into existence, we started using soy oil, and it didn’t take long of course before soy started trading a dollar more a gallon,” he says.
And while producers who survived the past year are ramping up production, they all believe if a tax credit is to exist at all, it must be a long-term, multiyear plan to bring investment and stability back.
Lisa Mortenson, CEO of the 10 MMgy Community Fuels plant in Stockton, Calif., says, “What we need is a certain framework for 2012. There are mechanisms in the market that can adjust and compensate for the lack of a tax credit, but the market needs to have that information so it can react.” She adds, “One year is a very short horizon for business planning.”
Crowley says, “I just wish the political process would give us a clear message for some sort of period of time, and we would find a way to deal with it.”