When the U.S. Senate failed to extend the $1 per gallon U.S. biodiesel blender tax credit at the end of 2009, it also failed to factor in the impact it would have on the industry in 2010. Left in its wake was an industry of producers running their plants at reduced rates, furloughed personnel, stockpiles of fuel inventories, and production facilities shutting down operations left and right. To put it lightly, 2010 was a year the biodiesel industry would like to forget.

Despite the plight suffered, however, the industry scored two big victories in late December that put it in a stronger position heading into this year. First, President Barack Obama signed an $850 billion tax package that included an extension of the U.S. biodiesel blender tax credit through 2011, which also made the credit retroactive for blended biodiesel sold in 2010. Shortly after the tax credit was reinstated, the industry received more good news when the U.S. District Appeals Court for the District of Columbia rejected a petition filed by the National Petrochemical Refiners Association and the American Petroleum Institute in March on the U.S. EPA’s combined RFS2 volume requirements for 2009-‘10.

While many were ecstatic to see the tax credit back for another year, the majority of industry reaction was mixed. Some expressed short-term relief with ambitions of potentially restarting operations, upgrading processing equipment or even expanding staff. “We continued to blend fuel through 2010 so we were actually very happy that they extended the tax credit retroactively, because we had a lot of blended fuel we were able to cash in on,” says Donna Belcher, spokeswoman at Rio Valley Biofuels LLC, a 1 MMgy plant in Anthony, N.M.

Conversely, some believe the extension is simply too short a timeframe to build any long-term investment beyond this year, according to Ben Wooten, president and owner of Keystone Biofuels Inc., a 20 MMgy facility in Shiremanstown, Penn.

“The inconsistency of that federal policy hurt us [in 2010] and it continues to hurt us,” Wooten says. “With the inconsistency of that public policy, it’s not really helping us long-term by attracting confidence from investors or from the banking industry, especially for the banking industry to secure the necessary capital that we need to do what we do here in the country.”

Todd Hill, managing principle and founder of Promethean Biofuels Cooperative Corp., a 1.5 MMgy facility in Temecula, Calif., believes the reinstatement of the tax credit may be more burdensome for the industry than beneficial. “We feel that the real economic struggle is just beginning,” Hill tells Biodiesel Magazine. “If feedstock prices remain constrained and we as an industry forget how many plants stood idle even when the tax credit was in place, speculation may hurt the industry more than help it.”

While 2010 was a year that financially strapped a majority of biodiesel operations, the unfavorable economic climate brought with it the value of the renewable identification number (RIN) credit price. Not only did producers find RIN credits to be an effective market mechanism for generating incremental value for their product and offset cost for customers, but they also became financially savvy in the process, having to understand the entire supply chain dynamic in order to survive in 2010.

RIN Around the Market

Prior to the reinstatement of the tax credit, RIN prices traded at all-time highs, hitting 96 cents per RIN at one point, effectively providing a snapshot of what a biodiesel market would look like absent the tax credit. Since each gallon of biodiesel produced generates 1.5 RINs, that translated into $1.44 per gallon, which more than offset the lost value of the expired tax credit. Many trace the spike in RIN prices back to the RFS2 standard that went effective in July, which requires 1.35 billion gallons of advanced biofuel to be consumed this year. Of that number, 800 million gallons must be biomass-based diesel. Obligated parties, the petroleum refiners, are required to retire a specified amount of biodiesel RINs, proving that the fuel has been used. They can do this either by blending it themselves or by paying nonobligated parties who use biodiesel on their behalf.

Although RINs are characterized by volatility against other commodity prices, such as feedstock prices, RIN prices aren't expected to bottom out in 2011, according to Sam Gray, a renewable fuels trader with Ft. Worth, Texas-based VICNRG LLC, a leading marketer of biodiesel blends, glycerin and refined petroleum products. Gray notes that RINs stood at a low of about 45 cents per RIN shortly after the credit was extended, but then jumped to 75 cents not long after.

“High-priced feedstock is going to put pressure on RIN prices,” Gray says. “Without feedstock taking a U-turn, it’s not anticipated that this pressure is going to ease, which means you can’t really count on a RIN price increase that’s independent of feedstock prices.”

Prior to when the tax credit was reinstated, prices for yellow grease and tallows hovered around 33 to 34 cents per pound. Shortly after the tax credit extension, yellow grease prices increased about 10 cents per pound, according to Gray.

“It appears that feedstock prices have taken a large percentage of the dollar, exerting even more pressure on the 2011 biodiesel RIN value based on the higher prices for feedstock,” Gray says. “Since the announcement that the credit was coming back, commodities in general, especially the lower-priced commodities like yellow grease and tallow, have rallied to about 70 cents per gallon.” Gray continues, “It’s going to be a very interesting year to see how this debate goes with the tax credit, but the evidence is indisputable, that feedstock prices have eaten about 70 percent of that dollar so far.

Many that are against extending the credit after 2011 will have that evidence to point to and say that the market purely functions with the RINs. Only that should be how we keep score in the RFS2 rather than just having both the tax credit and the 1.5-RIN for biodiesel.”

Like other producers, relying solely on the RIN market was one of the factors that forced Seattle-based General Biodiesel Inc. to become much more financially savvy and gain a better understanding of the entire supply chain dynamics, according to president Cameron Hewes. “For us, the key comes down to being vertically integrated into the feedstock business,” Hewes says. “We’ve always had that approach. That was helpful to us in 2010 given where the tax credit came out. That just underscored for us the importance of that strategy going forward.”

Likewise, Chris Glynos, president and general manager of Bio-Pur Inc., a 1 MMgy facility in Bethlehem, Conn., credits the RIN market for not only helping it maintain operations, but also for securing its waste cooking oil feedstock. “Unless you become your own customer, your own producer and own supplier, it’s hard to be at the whims of the market,” Glynos says.

Building a New Wave

The extension of the tax credit is expected to draw additional upgrade and retrofit activity from engineering firms and technology providers. According to Mike Shook, co-owner of Stuttgart, Ark.-based Agri Process Innovations, existing and previously idled plants already sought API’s services to restart their plants or increase their output capacity. API can conduct affordable assessments for clients that are considering restarting a plant. Depending on the size of the facility, Shook says, cost estimates for an assessment typically range between $15,000 and $25,000.

“From there, we provide a detailed report describing what we recommend along with an estimate for a budget to do it,” Shook says. “Then, the customer can take that and get the financing to do it. Depending on the specific upgrades they need, the total capital cost can be between $50,000 and $1 million. We’ve had some plants get back up for as little as $50,000. A lot of the [plants] lost their key maintenance staff, so they just need training and parts, and they’re ready to go.”

Given that the credit is only extended until the end of the year, many wonder if it’s worth it for plants that have been mothballed in the past year to try and come back online. According to Raj Mosali, CEO of Miamisburg, Ohio-based biodiesel producer and technology provider Jatrodiesel Inc., the company is not only getting orders from potential clients to upgrade existing biodiesel assets, but it’s also getting requests from would-be biodiesel companies looking to Jatrodiesel’s novel technology that is capable of converting inedible oil crops like pennycress or camelina into biodiesel. “We did a lot of assessments in October last year,” Masoli says. “It kind of surprised us to see that.”

Author: Bryan Sims
Associate Editor, Biodiesel Magazine
(701) 738-4974
bsims@bbiinternational.com