Time To Sync Things Up

Despite Minnesota's bumpy start with B2, several states are pushing for similar low-blend biodiesel requirements this legislative season. With everything on track-and on spec-in the Land of 10,000 Lakes, the focus of industry leaders has shifted to discouraging inconsistent biodiesel requirements and incentives among states. Nationwide coordination has become an instant necessity.
By Anduin Kirkbride McElroy | April 01, 2006
While the industry is abuzz with talk of what might amount to a biodiesel-specific addendum to the U.S. energy bill's renewable fuels standard (RFS), a myriad of specialized legislative battles are being waged in states across the country. Representatives from Washington to Missouri are displaying their commitment to biodiesel-and their constituents-by supporting measures to increase in-state production and use. These policy-makers are meeting some success, but in some states, they appear to be employing a sort of advance-and-retreat strategy coupled with legislative tactics that resemble a "whatever sticks" approach.

The sheer number of biodiesel-related bills introduced in state legislatures this year and last speak volumes-literally. In 2005, the National Biodiesel Board (NBB) tracked approximately 170 biodiesel-related bills in 36 states. This year it has already identified over 100 biodiesel-related bills introduced in 28 states (as of press time in mid-March).
So what, if anything, should industry stakeholders be mindful of as this busy legislative season moves forward?

On one hand, state legislation can serve as a foundation-along with the federal biodiesel excise tax credit and possible biodiesel-specific add-ons to the RFS-on which the U.S. biodiesel industry will grow. On the other hand, however, state biodiesel legislation can sometimes be uncoordinated and inconsistent from one state to the next. That is, experts say the U.S. biodiesel industry could encounter a major backlash, similar to what ethanol experienced in the 1980s, if it doesn't synchronize policies nationwide and create legislation that emphasizes quality above quantity at any cost. It's something NBB CEO Joe Jobe recently referred to as "managed, but aggressive growth."

A brush with the type of backlash that is possible when things go awry were exhibited when Minnesota went through some growing pains after implementing its statewide B2 requirement, the first in the nation. Problems, despite actual culpability, led some to wonder if the U.S. biodiesel industry was ready for mandates at all. What became painfully clear was that any public hiccup has the potential to mar biodiesel's reputation nationwide.

At press time, Minnesota's B2 requirement was effectively running without a hitch. However, the state's trying start with B2 certainly had an impact on legislative efforts in other states. "Almost every state in the Midwest was prepared to have a serious debate [about requiring low blends of biodiesel] until the Minnesota problems happened," says John Kerekes, central region director for the American Petroleum Institute. "Then almost everyone said, let's step back. Most legislators don't mind Minnesota being the guinea pig."
Being the proverbial guinea pig-the crash test dummy, so to speak-of biofuels implementation is something Minnesota is used to though, and it's a role legislators and biodiesel stakeholders there knew they were taking on when the B2 legislation was created three years ago. Ralph Groschen, agricultural marketing specialist for the Minnesota Department of Agriculture and liaison to the state's biodiesel task force, says, "They say the pioneers get the arrows, and the settlers get the land. Well, we're taking some arrows."

Still, some say the "land" is still not ready for settling-and those politically incorrect arrows are still flying. That's why industry leaders say it is imperative that the industry learns from its mistakes quickly, and stays unified in its many grassroots campaigns for responsible, consistent legislation.

Are state legislative mandates the answer?
Despite the state's highly publicized flaps, the Minnesota B2 requirement has not been particularly bad for biodiesel, either inside or outside the state. In fact, the use of B10 and B20 has been on the rise in Minnesota because the B2 requirement effectively increased the availability of biodiesel supplies statewide, Jobe tells Biodiesel Magazine.
Many assert that the early implementation of the mandate, in relation to the age of the industry, actually helped resolve potential issues more quickly by forcing a steep learning curve. "Minnesota learned within literally days that there was a problem, and that problem was quality control," says David Morris, vice president of the Institute for Local Self-Reliance. "It's very good to have learned this lesson. It's not a lesson that's inherently a problem. It's just [part of] the growing experience of an industry."

Jobe echoed that sentiment at February's National Ethanol Conference, where he said, "Ethanol experienced this [fast growth] in the '80s. Because we are growing so fast, it is of extreme importance that fuel quality is emphasized."

With a handful of low-blend biodiesel requirement bills going through state legislatures this year (see table, page 45), Jobe also emphasizes the need for unity within the industry in regards to policy. "We do need to look at a comprehensive energy strategy and not have a patchwork quilt of mandated biodiesel blends from state to state," he says, adding that it's already starting to happen. For example, Washington passed a mandate in March that starts the state at B2 but will go up to B5 when the state meets feedstock and capacity requirements. That alone will begin to establish a biodiesel requirement discrepancy among at least Washington and Minnesota.

Kerekes says the petroleum industry is "very concerned that these state efforts create unique fuel characteristics for smaller marketing areas." He says a lack of fungibility, in addition to any quality or supply issues, position the marketplace for price spikes and supply shortages. In the end, the burden to supply quality fuel to the customer is on the petroleum industry and that results in unique infrastructure expenses. "One company spent at least $2 million in gearing up for the B2 mandate that would not have been spent otherwise," Kerekes comments. Not surprisingly, the petroleum industry is generally opposed to all fuel mandates as an unnecessarily restrictive measure.

Incentives also have the potential to create boutique fuels. For example, Illinois has a large demand for B11 due to a sales tax break on any blend over B10. Nevertheless, incentives rarely encounter opposition like mandates do. Even the NBB, which widely backs and lobbies for biodiesel incentives, is cautious to cast a blanket of support over proposed mandates, preferring instead to support blend requirements on a case-by-case basis.

"Yes, there are about a half-dozen other states that have filed Minnesota-like biodiesel bills this legislative session, and we are looking at those very closely," Jobe says. "We have said, let's get Minnesota under control and then move forward. However, other states see it differently. They want to see biodiesel brought to their state. They want the plants built, they want the jobs, and so they're moving forward."

An agreement on the issue would probably settle on B2 mandates. Morris' recommendation is to start and remain small, as there is probably enough feedstock to meet a low-blend standard on a national basis, but even that's in question.

The best method to ensure a nationally accepted biodiesel blend would be through a federally designated requirement or standard. Many agree that it has potential, but not before the industry can successfully meet existing B2 mandates in several cold-weather states. Jobe tells Biodiesel Magazine that the industry should focus on growth management and fuel quality before it discusses a nationwide mandate at any blend.

Morris is optimistic about federal progress. "If two years from now you no longer have any problems and you have hundreds of thousands, if not millions, of miles of operating experience, then we may do it as a nation," he predicts. "I think the major thing that would hold [a federal B2 requirement] back right now would be the premature corporate experience and distribution network. Eventually, what might prevent it would be opposition from existing industries."

However, the question bears asking, is it possible for the marketplace to develop without help from the state legislatures? The market is currently strong, and the current capacity build-out is being mostly fueled by federal incentives and/or national market appeal. These and other questions are just starting to flow. For instance, where do other renewable fuels come into play when specific biofuels are mandated nationwide? How would it impact existing federal legislation? Will the ultra-low-sulfur diesel requirement be an asset or a liability to biodiesel's cause? Should incentives be coordinated along with mandates? And who's coordinating it all?

One thing is certain. The growing biodiesel industry still has the opportunity to harness the positive attention and take control of its growth.

Anduin Kirkbride McElroy is a Biodiesel Magazine staff writer. Reach her at [email protected] or (701) 746-8385.
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