Market News

 September 08, 2006
US proposes Renewable Fuels Standard

 Washington, D.C., USA (GLOBE-Net) -- The US Environmental Protection Agency has released a proposed strategy to create a national Renewable Fuels Standard that will set a minimum requirement for blending of ethanol in gasoline. As well, the US Department of Energy has announced an upcoming application process for $2 billion worth of loan guarantees for energy projects that reduce greenhouse gas emissions or air pollution, including ethanol and cellulose biofuels.

The blending percentage required in the United States will be determined by market conditions, but is projected to more than double ethanol consumption in the country by 2012. With a similar standard to be applied in Canada by 2010, North American ethanol production will be expected to increase sharply to meet demand.

The EPA proposes a gradually increasing minimum blend of ethanol in gasoline, starting with a 3.71 percent standard in 2007, increasing to 4.85 percent by 2012. The actual standard will be calculated annually based on projected consumption of gasoline and renewable fuels.

A trading system would also allow refiners and importers of fuel to meet the requirement by purchasing credits from those who exceed minimum levels. Fuels that are not blended into gasoline, such as biodiesel, will be involved in the trading program, spurring demand for all renewable fuels.

The EPA predicts that the use of renewable fuels will decrease overall emissions of carbon dioxide and air toxics such as benzene, but may actually increase smog-forming pollutants such as hydrocarbons and nitrogen oxides.

The EPA proposal supports renewable fuels targets set by President Bush in the Energy Policy Act of 2005. The minimum volume of renewable fuel consumed by motor vehicles in the United States in 2012 is required to be at least 7.5 billion gallons, compared to around 4.5 billion gallons in 2006. Based on US government market projections, the US EPA reference case predicts consumption of renewable fuels will be nearly 10 billion gallons.

By comparison, renewable fuel consumption in Canada is quite low -- just 250 million litres was used in 2004. That figure will rise to at least 3.1 billion litres annually by 2010, under a federal government plan to require a minimum 5 percent blend of renewable fuels in all gasoline and road diesel sold in the country. Several provinces have already implemented or are planning similar standards.

The proposed US legislation is billed as supporting the nation's goals of reducing dependence on foreign oil, and creating increased demand for domestic crops such as corn and soybeans.

The policy could also spur demand for new technologies for the production of cellulosic ethanol, which can be processed from agricultural waste or non-food crops and is considered to be more energy-efficient that corn-based ethanol.

Before 2013, cellulosic ethanol or ethanol derived from waste will be considered equivalent to 2.5 gallons of conventional renewable fuel when determining blending levels; beginning in 2013, a minimum standard for cellulosic ethanol will be set, with a 0.16 percent level in the first year. A gallon of biodiesel will also be calculated at a value of at least 1.5 gallons of renewable fuel.

US ethanol production has doubled in the past three years, partly due to high crude oil prices, producer tax incentives, and state bans of the fuel additive Methyl Tertiary Butyl Ether (MTBE), which can be replaced by ethanol to meet fuel content requirements.

Read the EPA proposed regulations, including analysis of the potential impacts on oil, agricultural and renewable fuels markets, here (PDF).

The solicitation for applications for loan guarantees will be issued shortly, says US Energy Secretary Samuel Bodman. A wide range of projects will be eligible, provided they "employ new or significantly improved energy technologies that avoid, reduce, or sequester air pollutants and greenhouse gases".

Bodman also said that he expects commercial cellulose ethanol plants to be operating within five years. The Energy Department estimates that it still costs $2.20 a gallon to produce cellulosic ethanol, double the cost of making ethanol from corn. Bodman said that some companies have already lowered this cost to $1.50, with a goal of making it competitive with corn-based fuel.

Can Canada meet ethanol demand?

A key issue for Canada in the coming years will be the availability of feedstock and refining capacity for renewable fuels, and ethanol in particular.

With ethanol demand in the United States expected to continue increasing, Canadian fuel producers will have to compete for corn and grain supplies. The US currently imports only a small fraction of its total ethanol consumption, as a high import tariff of 54 cents per gallon on sugar cane ethanol prevents access to the world's largest ethanol producer, Brazil.

This means that the US will meet the majority of its demand with grain-based ethanol, produced from domestically grown corn. The agricultural lobby and corn producers hold significant political influence to preserve incentives and tax breaks for the industry, and investments in ethanol plants have soared in recent years.

The US Department of Agriculture says that between the food, livestock and ethanol industries, corn demand in the United States will exceed supply and will deplete stockpiles by 2008 unless planting rates increase. "In only very few countries is the required feedstock available at prices that would presently allow ethanol and biodiesel production to be competitive with transport fuels from crude oil without government support," says the OECD-FAO Agricultural Outlook: 2006-2015 (PDF).

Recent investments by Canadian energy firms will significantly increase the country's ethanol input, drawing on local agriculture for feedstocks. While producing all of the ethanol required in the country by 2010 would take half of the domestic corn crop, Canada can produce ethanol from other grains as well. Cellulose ethanol, which can be produced using world-leading Canadian technology, could also represent a growth area if commercial-scale production can be economical.

  • See article: Big Energy Invests in Ethanol
  • The announcement of a Renewable Fuels Standard to boost ethanol consumption in the United States is hardly a surprise; the country increasingly is favouring domestic energy sources over foreign oil imported from politically unstable regions, and seeks to provide stimulus for the huge corn industry.

    What the US policy confirms is that Canada, as well as the United States and Europe, will need to spur large investments in the biofuels industry to meet the demand that will be created with the introduction of renewable fuels blending requirements.

    The demand for biofuels will be created legislatively, but it is up to energy producers and the agricultural industry to increase supply. The result could be an economic windfall to Canadian farmers, and a boost for the development of innovative biofuels technologies such as cellulosic ethanol production.