September 12, 2007 — Fill 'er Up

With ethanol production rapidly expanding and reaching beyond the Corn Belt to places like Chesapeake, Va., will markets be able to absorb all of this new supply?
By Charles Gerena

International Bio Energy Virginia plans to build America's largest ethanol production plant in Chesapeake, Va., by the end of 2009. The facility could employ as many as 150 people to produce 216 million gallons of ethanol annually from corn, more than what was produced by all U.S. plants in 1981. The company is also eyeing Charleston, S.C., which has reportedly been in the sights of other ethanol producers.

Biorefinery capacity has tripled over the last seven years and more ethanol plants are on the drawing board. Several factors have increased the use of ethanol — from higher oil prices to government mandates for clean air and greater use of renewable fuels — so some industry observers say supply is merely catching up to demand.

However, all of this new capacity may not be needed. Howard Gruenspecht, an economist and deputy administrator at the federal Energy Information Administration, says plants are being built under the assumption that producers' projections of market demand for ethanol will be fully realized. "It's not clear that could really happen [in] big parts of the country."

While ethanol plants are concentrated in Ohio, Indiana, and other states in the Corn Belt where they get their raw material, producers are looking beyond that region to build new capacity. The Fifth District is seen as a good home base for ethanol producers targeting fuel suppliers along the East Coast. It has major ports that can receive shipments of corn by barge. The region also has intermodal facilities that can send shipments of ethanol by rail or truck.

Rick Starnes, senior vice president of Industrial TurnAround Corporation in Chester, Va., says the plant it is helping to engineer for International Bio Energy Virginia will be located in Chesapeake for these reasons. Starnes claims that the cost per gallon of producing ethanol is lower if it's done locally and shipped to nearby fuel distributors than it is making ethanol in the Midwest and shipping it back east.

If ethanol producers figure out how to economically make their product from wood chips and other waste from lumber and paper product plants, the Fifth District's forest resources and related industry would make the region even more appealing. However, there are many hurdles to making ethanol from wood industry waste, as well as from agricultural waste like cornstalks, switchgrass, and other cellulosic material.

"The capital requirement per gallon of ethanol is much higher for ethanol produced from cellulose than for corn ethanol," noted Keith Collins, chief economist at the U.S. Department of Agriculture, in his testimony at a Senate committee meeting last January. "Ethanol yield is lower per ton of feedstock and conversion is complex, requiring enzymes that cost substantially more than for corn ethanol. Harvesting, bailing, storing, and transportation of biomass are expensive compared with corn."

The question is whether demand for ethanol will continue to grow at current rates, justifying investment in new technology to produce ethanol from other sources. Gruenspecht outlines three distinct markets for ethanol.

First, it can be blended in small quantities with unleaded gasoline to increase its oxygen content (which makes the fuel burn more completely and produce less pollution) and to increase its octane rating (which reduces "knocking," the spontaneous ignition of gasoline within an engine). Roughly one-third of the gasoline sold in the United States is reformulated with ethanol to help states meet Clean Air Act requirements.

Gruenspecht notes demand for ethanol isn't very sensitive to price changes in this market since it is a "must have." However, he agrees with other observers that the market has already been well penetrated by ethanol producers since the petroleum products industry stopped using another additive called MTBE in 2006.

Second, ethanol can be used as an extender to increase the volume of gasoline. Gruenspecht compares it to adding Hamburger Helper® to make a pound of ground beef stretch further.

Such use of ethanol has been more attractive for fuel blenders. Oil and gas prices have reached record levels, while a per-gallon credit for federal excise taxes on ethanol was renewed and expanded in January 2005.

Of course, if wholesale gas prices slip, the tax credit goes away — it's set to expire in 2010 and is facing increased scrutiny — and the price of corn stays high, "it would be a pretty unpleasant world" for ethanol producers, Gruenspecht notes.

Third, ethanol can be mixed with gasoline at higher proportions to create alternative fuels, such as E85 which contains 85 percent ethanol. This is the market with a big question mark written across it.

Gruenspecht says there are already automobiles that can run on E85, but the infrastructure isn't in place to widely distribute the fuel. "You might have to have a different pump. Some of the hardware may not accommodate the fuel very well," he explains. Less than
1 percent of fueling stations nationwide pump E85, even though it can be cheaper to buy than gasoline.

More importantly, E85 cannot be transported in standard pipelines. The ethanol would be pulled out of the fuel stream by moisture in the lines. Instead, ethanol has to be blended with gasoline at the terminal as it is loaded into a tanker truck.