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Cellulosic biofuels edging closer

The recession has hit the US biofuels industry, but government initiatives and rising oil prices are supporting development of next-generation cellulosic fuels, writes Ian Lewis

THE WEAK outcome of the Copenhagen climate summit provided little succour for the pioneers of next-generation cellulosic biofuels. But the industry's commercial viability would be greatly enhanced by progress with cellulosic processing, which enables the use of a greater variety of plants – and more parts of them – to produce fuel than is possible with established biofuels. That gives them better seed-to-wheel benefits, in terms of reducing emissions and competition with food crops, compared with first-generation bioethanol and biodiesel, which use land-intensive food crops, such as maize and rapeseed.

This advantage had raised hopes that cellulosic and other biomass-related projects could be granted generous credit allocations in prospective emissions-trading schemes, which would produce much needed funding for what remains a costly and embryonic business. But the failure at Copenhagen to reach a concrete and enforceable agreement has dimmed expectations for the rapid expansion of large-scale carbon trading beyond existing markets such as the EU.

In the US, prospects are hampered further by a recent shift in the political balance in the Senate towards the opposition Republicans, which looks set to make President Barack Obama's efforts to push through contentious climate-change legislation even tougher. A national carbon-trading scheme is now unlikely to emerge in the near-term.

This is another setback to an industry reeling from the effects of the recession on both demand for its product and project financing. "The economic crisis has probably put the development of next-generation biofuels back by 18 months, because a lot of the plants that should have been commissioned have struggled to find finance," says Harry Boyle, an analyst at energy consultancy Bloomberg New Energy Finance.

Government-set mandatory blending requirements have ensured a level of support for the US biofuels industry, but a slump in demand has still meant production targets are being missed. Environmental Protection Agency (EPA) regulations established in 2007 were introduced to foster first-generation fuels initially and cellulosic later, as the technology develops. A revision of this Renewable Fuels Standard (RFS2) was announced in February, after more than a year's delay, as the agency reassessed the sector's changing needs (see Table 1).

RFS2 requires that the total amount of biofuel used in the US should rise to 36bn gallons in 2022. Virtually all of this is derived from first-generation maize-based bioethanol at present, but the volume derived from cellulosic sources is intended to reach 16bn USG in 2022 – at which point it would outstrip biofuels production from first-generation techniques. But the difficulties launching cellulosic projects has resulted in a downward revision of the RFS2 cellulosic target for 2010 from the original target of 100m USG to just 6.5m USG.

The 2010 target of 12.95bn USG for the whole biofuels industry may also prove difficult to reach, analysts say – and that has prompted the government to provide new support mechanisms for maize-based ethanol. And as a possible further stimulus, the EPA is also considering raising the allowable fuel blend in conventional vehicles to 15% from 10%, if it decides engines can handle this higher level. Maize-based ethanol producers have been campaigning for this to remove the risk of oversupply at the pumps, given slow demand for gasoline, and it would also be beneficial for cellulosic production.

But there are signs that the US biofuels sector may be about to turn the corner, if only because commodities prices are moving in its favour. In late 2008 and early 2009, low crude and gasoline prices made the maize-ethanol business unprofitable; cash margins were negative for a while. Now, gasoline prices have picked up, while maize prices have remained fairly stable, giving a positive margin of around $0.30/USG for ethanol producers. "The margins are not great – and they are not as high they were in the golden age of ethanol in 2006 and 2007. But $0.30/USG is still very decent," says Pavel Molchanov, a research analyst at Raymond James, a financial services firm.

Better times

Better times for today's maize-ethanol producers are also good for the prospects of cellulosic biofuels, as these firms tend to be doing much of the research. And improved cash flow is also being supplemented by less onerous borrowing terms, as the economy improves.

Several small commercial and demonstration plants, using a variety of techniques, are edging closer to fruition: "A number of companies and projects appear to be poised to expand production over the next several years," says the EPA. Their success will be crucial if they are to pave the way for rapid development of the industrial-scale projects that will enable cellulosic requirements to be met.

In November, the Inbicon unit of Dong Energy, opened a cellulosic plant in the Danish coastal town of Kalundborg. The project was developed to showcase cellulosic technology ahead of the Copenhagen summit and to prepare for commercialising the technology in the US and elsewhere. The plant will convert 30,000 tonnes a year (t/y) of straw into 5.4m litres of bioethanol. An industrial-scale plant would need to be around 10 times bigger than the Kalundborg facility.

The first phase of US firm Range Fuels' delayed cellulosic plant near Soperton, Georgia is nearing completion. Using wood and wood waste from Georgia's pine forests and mills as feedstock, the plant will initially produce around 20m USG/y (76m l/d), but will be expandable to 100m USG/y. Originally due to open in 2008, the first phase is scheduled to become operational later this year.

Poet, the US' largest ethanol producer, plans to start building its long-planned, Project Liberty commercial-scale cellulosic plant this year in Iowa. The $200m facility will produce 25m USG/y of cellulosic ethanol, using corn cobs as feedstock. The firm launched a 20,000 USG/y demonstration plant in South Dakota in January 2009. In the long-term, Poet plans to add cellulosic capability to all of its existing 26 plants, the combined capacity of which is 1.5bn USG/y.

Verenium's joint venture with BP, encompassing technological development and a long-planned 36m USG/y cellulosic ethanol plant in Florida also remains a possibility. Verenium claims millions of gallons a year of cellulosic ethanol could be produced in the Gulf coast region, using energy cane, sugar-cane waste, sorghum and other sources. In February, BP extended an initial 18-month joint-development programme, established in August 2008, by a month, while terms for a further extension were discussed, says Verenium.

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