A Critical Year

Stakeholders at the 8th Annual National Biodiesel Conference & Expo in Phoenix acknowledged that 2011 might well define the industry’s future
By Ron Kotrba and Erin Voegele | March 09, 2011

Approximately 1,200 members of the biodiesel industry convened in Phoenix for the 8th annual National Biodiesel Conference & Expo. While the past two years presented numerous challenges, the overwhelmingly positive atmosphere at this year’s event clearly shows the biodiesel industry’s resilient nature.

National Biodiesel Board CEO Joe Jobe opened the conference’s general session by noting it’s time the industry got back to business. The past year has been confusing, frustrating and at times disappointing, Jobe said. “But this year was something else too,” he said. “It was a testament to this industry’s determination not to give up, no matter how hard it gets. We got through these last two years—we’ve got them behind us. We are now positioned to have the largest year ever.”

While some have wondered whether obligated parties will comply with the volume requirements of the RFS2 program, representatives of Magellan Midstream Partners, NIC Holding Corp. and Marathon Petroleum Co. LLC assured attendees that they will. “As a publicly traded company, we’ll comply with the law—period,” said Magellan spokesman Bruce Heine.

NBB’s new chair, Gary Haer, kicked off the second of two general sessions in Phoenix. He discussed the long, rough paths he and the industry have taken over the past 12-plus years to get it where it is today. “The past two years have put stress on our businesses, finances and families,” he said. “There are fewer chairs here,” but even so, biodiesel is now poised for one of biggest years on record, he said. It will play a new role in the nation’s energy complex. And even with the successes, we must look ahead to new challenges, Haer said. The renewable fuel standard began as a floor but now it’s the market driver. Existing industry capacity is well over 2 billion gallons, and producers and stakeholders should partner with the petroleum industry to further the biodiesel cause, he said. “In this environment there’s no substitute for smart businesses and innovative thinking,” Haer said. “We need to encourage strict enforcement of RIN compliance and integrity, and we must renew our commitment to produce the highest quality fuel in the marketplace.”

Another challenge Haer mentioned is availability of affordable feedstock to responsibly grow the biomass-based diesel requirement. A task force appointed by Ed Hegland, past chairman, will study feedstock supply and investigate market and economic data for feedstock availability. “Here’s what we already know,” Haer said. “We have ample feed supplies to meet the 1 billion gallon obligation, and even better, we have enough feedstock to meet the industry’s vision to supply 5 percent of distillate demand with biodiesel by 2015,” which is about 2 billion gallons. “These are realistic goals for our industry.”

“This is a critical year. Let’s stick together. We can only accomplish what we need to through a unified voice,” Haer said. “We cannot afford to split into factions, and we must avoid the temptation to move anywhere but straight ahead. We’ve faced our darkest years and we can keep together through anything. It’s not easy but it’s worthwhile. [Biodiesel] is not only how you make your living, but it’s also how you earn your legacy.”

NBB director of state policy efforts, Shelby Neal, moderated a panel during the general session on the importance of state mandates and low carbon fuel standards.

On the panel was Steven Levy with Sprague Energy, who said, “Strange bedfellows unite” in reference to New York City’s embrace of biodiesel. “It’s not often legislators, industry and environmentalists all have the same cause,” but that’s what happened in New York City. The city passed a Bioheat mandate to take effect in 2012, and Levy said he thinks it will be bumped up to B5 before the implementation date. The mandate opens the door to a 7 billion gallon a year market in the heating oil world. “When you bring the infrastructure to New York for Bioheat, you also bring the infrastructure throughout the region,” he said.

Eric Bowen, also on the panel, gave an update on California’s low carbon fuel standard (LCFS). He said California will rely on the power of the marketplace to produce the most efficient cost-effective carbon reduction, and unlike in RFS2, biodiesel will have to compete on its merits. Waste-derived biodiesel achieves the lowest carbon score of any fuel California has measured to date. “The opportunity is huge, but success is not guaranteed,” Bowen said.

Bowen mentioned three things to maximize opportunities. One is infrastructure. “There’s no rack blended biodiesel available in California today,” he said. Two is the issue with underground storage tanks, which is currently being worked on by Underwriters Laboratories, albeit moving at a slower pace than anyone would like. The California Biodiesel Alliance and NBB worked to create a three-year grace period, but a longer-term UST solution is needed. Three, the state is now working on its own definition of biodiesel, and “it’s important we get that definition right,” Bowen said. There’s a billion gallon a year opportunity in California for biodiesel if these issues can be worked out in Sacramento.

Levy said, “Our task is directly related to work being done in California. If we can have simple definitions of biodiesel and LCFS, it makes our jobs easier—and quicker. The Northeast follows California quite frequently.” For predictions, Levy said New York City will go to B5 by 2015 for Bioheat, and there will be an LCFS in 11 states in the next couple of years. “It’s coming, it’s happening, not just in the Northeast,” Levy said.

Rebecca Richardson, senior consultant to the NBB, discussed Illinois’ two-tiered incentive that offers a 20 percent discount on sales tax for B10 blends and lower, and total sales tax forgiveness on blends higher than B10. “It has spearheaded interest in industry growth in the state,” she said. It’s made diesel fuel cost-competitive with fuel to the east and west of Illinois, and actually increased diesel fuel sales in the state. 

 “This industry is not for the faint of heart,” said Manning Feraci, NBB vice president of federal affairs. He said elected officials are looking in every nook and cranny to find savings, which is why we must remain vigilant, he said. “We have a great story to tell, but in this political environment we can’t take anything for granted.” Feraci’s efforts this year will be focused on pushing for a longer term (producer) credit and protecting the integrity of the RFS2 program.

More Policy Bytes

Several breakout panels at the show addressed federal, state and some international policy. Canada’s B2 mandate implementation date was announced for July 1 just after the conference, and during the show Gordon Quaiattini, head of the Canadian Renewable Fuels Association, said, “There’s a home in Canada for U.S. biodiesel.” The federal B2 mandate will create a 600 million liter (158.5 million gallon) a year market, but Canada’s production tops out at 160 million to 200 million liters. U.S. biodiesel sent to Canada can also garner excise tax exemptions, such as the 14-cent-per-liter excise tax exemption offered in Ontario or the provincial mandates in Manitoba, British Columbia and Alberta.

Gordley & Associates spokesman Tom Hance spoke to attendees about the Section 9005 Bioenergy Program established by the most recent Farm Bill. That program, he said, authorized $300 million in mandatory funding over four years. “Payments go to eligible producers of advanced biofuels,” Hance said. Under the bill, advanced biofuels are defined as nearly any biofuel other than corn-based ethanol.

The program got off to a somewhat rocky start, and some revisions had to be made to the program last year, which were published after the conference concluded.

Larry Schafer, spokesman for The Diamond Group, spoke about the RFS2 program. He noted that the National Petrochemical & Refiners Association and American Petroleum Institute are pursuing an appeal of the recent court decision that denied the organizations’ original challenge to the RFS2 program. Three judges issued a unanimous decision denying the original lawsuit, and the NPRA and API are now asking a larger panel of judges to consider the issue. Schafer noted that the court is unlikely to agree to hear the repeal, however. Schafer also spoke to attendees about the upcoming U.S. EPA rulemaking that could set the stage for the future of the biodiesel industry. While the RFS2 sets a minimum 1 billion gallon requirement for biomass-based diesel in 2013 and beyond, Schafer said that the agency can elect to increase that volume requirement. “At some time this year EPA is going to tell us what they expect will happen in 2013 and beyond,” he said.

In a breakout panel on state policy, NBB’s Neal said no policy can impact biodiesel like low carbon fuel standards can, and if all states considering LCFS policies were to implement them, a 3 billion gallon annual biodiesel market would be created. Brian Woods, an environmental analyst at the Vermont agency of natural resources, discussed the Northeast and Mid-Atlantic LCFS initiative. In December 2008, 11 states signed on to participate in the initiative, and a year later the governors of those respective states signed a memorandum of understanding in the development of a multistate LCFS.

By the end of the first quarter this year, an economic analysis is targeted for completion. The goal is to “harness market forces to drive low carbon technology innovation and deployment, and to influence national policy,” Woods said. “A national program would really make a lot more sense though.” The draft program framework document is being finalized now. The next steps in this multistate LCFS initiative, Woods said, are to review the draft framework, complete the economic analysis and review and make a decision on developing a model rule.

Fuel, Processes

Defining what the best biodiesel is depends on who is asked, according to a panel of experts who spoke on optimizing biodiesel. Bob McCormick, a principal engineer in the fuels performance group at NREL, said, “Today biodiesel is a fuel with properties of convenience. In this narrow universe of C16 to C18 fuels, there’s quite a range of properties,” he said. If an ester group is put in the middle of a branched molecule like methyl palmitate, for instance, rather than at the end of the unbranched chain, there are advantages. The melting point of methyl palmitate is 29 C, but if it’s branched at the end, the melting point is lowered to 17 C. Move that up the chain and the melting point plummets to minus 13 C. “While you lose some cetane, it’s still adequate,” McCormick said. McCormick also talked about esters from biomass, such as pentyl pentanoate. Conventional lipid sources can sustain about 2 billion gallons per year of biodiesel production, but 1.3 billion tons of sustainable biomass are produced in the U.S. annually.

Timothy Jacobs with Texas A&M’s mechanical engineering department discussed low temperature combustion and how biodiesel fits in with it. Conventionally, there has always been a trade-off between NOx and particulate matter, but low temperature combustion simultaneously decreases both.

He noted, however, that efficiency issues and higher carbon monoxide and hydrocarbon emissions emerge. Biodiesel could be the answer to those issues, he said. In testing, biodiesel did reduce CO and HC emissions—albeit not to levels low enough to meet regulations—and it also increased efficiency of the engine during low temperature combustion. Regarding why or how biodiesel increased the efficiency performance under these conditions, Jacobs said he’s not really sure at this point. “It’s related to what combustion with biodiesel looks like,” he said. Biodiesel’s peak rate of heat release is sooner, so in terms of efficiency, it is desirable for combustion to occur as close to top dead center as possible. 

Rachel Burton, Piedmont Biofuels research director, spoke about the research collaboration between Piedmont and Novozymes during a panel on production innovations. The enzymatic research began in 2008 and the pilot unit began running last year. Piedmont’s enzymatic R&D has been focused on both esterification and transesterification, and began with asking questions such as, can we hit the bound glycerin spec, can we hit acid value spec and how much water can we handle? The two specific enzymes being used in this research, Burton said, are CAL-B (Novozymes 435) and TL-IM. “CAL-B works well with and without water for esterification, and TL-IM works well in transesterification,” she said. Glycerin coming off the process is 99.6 percent pure. For bulk esterification, Piedmont is seeing an FFA reduction from 100 percent down to 20 percent with feedstocks such as brown grease and palm processing residues in 80 minutes. The FFAs are converted directly to esters, she said, and in 60 minutes the 2 to 20 percent FFA feedstock with higher moisture is brought down to an acid value within specification, 0.22, along with low moisture. Six to 12 times less methanol is necessary with enzymatic processing versus that needed with acid chemical esterification. “This can be a direct replacement for sulfuric acid esterification,” Burton said. “We call it the FAeSTER process—fatty acid esterification.”

She said Piedmont is rapidly moving from pilot work on this to developing bolt-on commercialization units. The commercial target is to drive costs down to 15 to 25 cents a gallon. There is a significant difference in capital costs between of enzymatic processing and acid esterification. For a 3 MMgy plant, an acid esterification system would cost $900,000 versus about $300,000 for an enzymatic system. “This is scale neutral, and it eliminates the need for chemical acids for esterification,” Burton said, “and there’s no excess methanol rectification.” Ultimately the process can help make a biodiesel plant more Earth-friendly since enzymes are natural proteins.

RINs, Markets

Biodiesel producers are currently dealing with extreme volatility in both the agricultural and energy markets. In order to minimize risk, many companies are turning to hedging strategies. During a RIN panel, First Capital Ag spokesman Will Babler said, “A RIN is a piece of paper—not even—it’s just a couple of digits on an EPA system somewhere. They came into existence because a policy maker wanted them to be there, and they can go away just as easily. That creates some additional volatility.”
RINs are nothing more than a tool to manage RFS2 compliance for obligated parties, he said.

Obligated parties can meet their RFS2 obligation through the physical market or through the RIN market. The price of RINs is currently high, making them an attractive option to hedge some risk. Babler also provided attendees with an overview of two primary hedging strategies: merchandising and crush hedging. Considering the significant volatility biodiesel producers must deal with right now, Babler said it’s foolish to try to pick the tops and the bottoms of markets. The major problem with most companies’ hedging strategies is that they start with the best intentions, but don’t quite manage to follow through. “They don’t pull the trigger, and it’s apparent everywhere we look in the industry,” Babler said.

Mercuria Energy Trading spokesman Paul Oesterreich also spoke during the panel. Regarding RINs, he noted that obligated parties are really the key in determining who will actually blend biodiesel into fuel. While the obligated parties are the ones who need to be holding RINs at the end of the year for compliance purposes, they may not be the ones who actually blend the fuel. According to Oesterreich, one reason obligated parties might elect to achieve RFS2 compliance through the RIN market rather than physical blending is that biofuel represents a miniscule fraction of most obligated parties’ business, and they may not want to dedicate capital resources to installing blending infrastructure to handle that small a fraction of business.

Richard Nelson, who contracts with the NBB, spoke to attendees about the goals and intentions of EPA’s moderated transaction system (EMTS). Unintentional errors were a primary motivator in the EPA’s development of the EMTS. Nelson also spoke about the four ways that RINs generated by the EMTS system can be separated from gallons of biomass-based diesel. “[The] most common [way] is when the biodiesel is mixed with diesel or it creates a blend of B80 or less,” Nelson said. “At that point, once it’s blended, those RINs have been separated and they are ready for sale.” RINs are also separated from product when it’s sold for use as a neat product. Upward delegation is the third method by which a RIN can be separated. This often happens when product is sold to small blenders who don’t want to deal with RINs. The RINs are effectively transferred back to the producer. Finally, exporters separate RINs from product when fuel is shipped overseas. In this case the RIN is retired, Nelson said.

Bioheat is becoming big business in the Northeast, and the conference included much discussion on biodiesel-blended heating oil. Oilheat dealers themselves seem to be driving a significant expansion of the market and the oilheat industry has been in need of a new opportunity to help rebrand the fuel its sells, said NBB Petroleum Liaison Paul Nazzaro. “What’s in it for them is a new lease on life—to save their businesses, frankly,” he said. In fact, Earth Energy Alliance CEO Michael Devine noted that more than 900,000 homes in the Northeast switched from oilheat to a different fuel source between 2000 and 2007. Many of these customers switched to natural gas, a fuel that has been branded as cleaner and more environmentally friendly. Over a 20-year period, Devine estimates that those lost homes will cost the oilheat industry nearly $53 billion in lost sales. When blended with more than 11 percent biodiesel, ultra low sulfur heating oil actually burns cleaner than natural gas with the added bonus of containing a percentage of renewable content.

Oilheat dealers positioned to benefit most from Bioheat marketing are the ones that Michael Cooper, Ultra Green Energy Services LLC’s vice president and director of sales and trading, refers to as “maverick marketers.” Although the entire oilheat industry is rebranding itself as the Bioheat industry, many marketers will supply minimal Bioheat blends to meet mandate obligations. However, maverick fuel dealers who really push to supply higher blends of biodiesel-blended heating oil will give themselves and environmental edge to better compete with natural gas.

Devine also outlined some of the ongoing actions the NBB is pursuing with the National Oilheat Research Alliance  to help develop new ASTM standards for Bioheat blends that contain more than 5 percent biodiesel. “The Bioheat Technical Steering Committee is currently working with Penn State University on three types of certifications for higher biodiesel blends,” he said. The first is a legacy blend, which would be the highest percentage of biodiesel that could be included in heating oil without making any modifications to existing legacy heating systems. The second is testing to support certification of a B20 blend of Bioheat. Finally, the groups are also working on a B100 oilheat specification.

Authors: Ron Kotrba, Erin Voegele
Editor, Associate Editor, Biodiesel Magazine
(701) 738-4942
[email protected]
[email protected]

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