The value of cellulosic fuels has reached $4.33 per gallon in the California market. That’s real-world, today, including the energy and the low-carbon attributes, and not based on speculation. The value has risen 59 cents, or 15.7 percent in the past 17 months.
The soaring fuel values are prompting at least two companies to substantively re-evaluate plans to de-emphasize, or even abandon renewable fuels as too costly to produce. Virent (now a subsidiary of Tesoro) and Velocys are two companies which have, subtly or more overtly, put fuels right back into the bullseye of their ambitions. And some highly-regarded first-gen ethanol operations, like Siouxland, are deploying Edeniq’s wonder tech to produce cellulosic ethanol from corn kernel fiber.
Over at Velocys
Confirming news arrived from Velocys this week when the company revealed the selection of IHI E&C International Corp to carry out the pre-FEED engineering for its first biomass-to-liquids plant. IHI E&C is working with Velocys and its technology partners to support the rapid deployment of the BTL plant offer to the renewable fuels sector. The engineering study will be completed in the second half of 2017.
What was most interesting was this note from Velocys:
This aligns with both Velocys’ and IHI E&C’s strategic intent to enter the US renewable transportation fuels market.
Keep in mind that just a few years ago Velocys was one of the earlier companies to pivot towards the natural gas market — seeking the opportunities via a shift from biomass to natgas as a feedstock. The crack (or “crush”) spread in natgas had, with the plunging natural gas prices, outstripped the opportunities in biomass. But now, oil prices have plunged, fuel margins have compressed, and the importance of low-carbon fuels in the real-world, operating markets that have carbon pricing is gaining quickly.
Cellulosic ethanol’s fast-rising value
In the March Madness webinar series in 2016, noted industry consultant Michele Rubino outlined the growing real-world value of cellulosic ethanol with this illuminating chart.
That was then, this is now. That value has changed substantially. Let’s place the latest values from our friends at PFL (RIN and ethanol prices), the California Air Resources Board (LCFS credits) and the EPA (the Cellulosic Waiver Credit).
We might point out that LCFS credits are at a cyclical low — down almost 40 percent from last year’s peaks. One reason for that is that numerous renewable fuel producers are singing “California, here I come”.
Over at Siouxland Energy and Edeniq
Late last week, the U.S. Environmental Protection Agency approved Siouxland Energy’s registration of its 60 million gallon per year corn ethanol plant for generation of D3 RINs from cellulosic ethanol.
Siouxland Energy is the fourth plant to receive a cellulosic ethanol registration from the EPA after deploying Edeniq’s Pathway Technology. Edeniq’s registered customers now total 400 MGPY of nameplate ethanol capacity and are averaging 1% cellulosic ethanol.
Over the next year, Edeniq said expects to significantly increase average customer cellulosic ethanol production through ongoing technology enhancements that are being refined and introduced to customers as early as the third quarter of 2017.
That’s a good thing because Edeniq generally has guided markets in the direction of 2.5 percent yields from cellulosic ethanol.
So, think 4 million gallons today, more to come. We expect that, like corn oil, we’ll see a major shift over to cellulosic ethanol from kernel fiber. Right now, as has been typical with new equipment, the big ethanol fleets have adopted a wait and see while the smaller co-ops and single plant owners have forged ahead — for sure, when we see 2.5% cellulosic yields and payback in 203 years, the big fleets will jump in.
Based on current US capacity, that would add as much as $375 million in sector value. And, for a 100 million gallon corn ethanol reference plant, the lift right now would be up to $10 million. Which is a 10% lift compared to last year.
Over at Virent
Over at Virent, we’ve seen a shift. The company’s site says very much what it always has said, “Using patented catalytic chemistry, Virent converts soluble biomass-derived sugars into products molecularly identical to those made with petroleum, including gasoline, diesel, jet fuel, and chemicals used for plastics and fibers.” And Virent is part of a strategic consortium whose members have divergent interests — both chemicals (Coca-Cola, Toray) and fuels (Tesoro).
But it was Tesoro who stepped up to buy the company, and new CEO Stacey Orlandi has noted that, in technology development, it is economics that will dictate the optimal product slate. And what’s been happening in the price environment? Generally, price declines in renewable chemicals. This lift in carbon prices is propelling a vastly improved margin in low-carbon fuels. Viva Virent fuel (and cool Coca-Cola plant bottles, and snappy biobased t-shirts).
How long can the bull market in cellulosic fuels go on?
Generally speaking, the EPA is required through 2022 to, more or less, establish a cellulosic fuels market as Congressionally-mandated levels, so long as the production is in place. So, theoretically, market capacity could expand by more than 10 billion gallons over the next five years (which it won’t) without reducing the carbon values we are seeing at the US federal level. Should cellulosic capacity expand by more than 500 million gallons, we’d expect to see the California low carbon premium begin to climb down.
But. Canada’s. LCFS. Is. Coming. So, keep in mind that another major LCFS market will be opening up soon across Canada (B.C. already has one, but this would be 7-8X as large), and Canada is only about 30 percent smaller than the California market.
And, there continue to be rumors about a US East Coast LCFS. And we keep looking at the EU, and wonder when those guys will stop talking up a big carbon game and get a low-carbon transport policy together that grows a market instead of scaring it out of existence.
Bottom line, there’s plenty of room for cellulosic to grow before the value drivers lose their pricing power.
The Velocys backstory
We reported in January that Velocys and ThermoChem Recovery International signed a strategic alliance under which TRI will be Velocys’ preferred supplier of gasification systems for its biomass-to-liquids plants. The agreement will see the alliance partners rapidly deploy an integrated biorefinery offering that combines Velocys’ Fischer-Tropsch (FT) technology with TRI’s proven gasification technology.
The partners have already started a joint development of the engineering design for a 1,400 barrel per day BTL plant to produce renewable diesel and jet fuels from woody biomass. TRI will support Velocys and its partners to further optimize overall plant cost and the financing of BTL plants through, for example, accessing governmental loan guarantee processes and securing independent engineering reviews.
A key next step will be an integrated technology demonstration; Velocys will relocate its skid-mounted pilot plant from Ohio to the TRI facility in North Carolina. The joint demonstration has been selected for support as part of a competitive award granted by the US Department of Energy for the development of smaller scale integrated biorefineries.
This is the second strategic partnership that has been agreed since a review of Velocys’ strategy was completed in 4Q 2016. A core theme of the new strategy is to deliver, jointly with partners such as TRI, a “one-stop-shop” offer to customers – a fully integrated and financed, cost effective and operations-ready plant solution.
The Bottom Line
We’re seeing a slow but accelerating shift to cellulosic, despite the pains with enzymatic hydrolysis — and there are big values to be captured. Expect to see more bolt-ons and smaller-scale plants (like Velocys’s first commercial) until players like POET-DSM, Beta Renewables and DuPont have their technologies ready for broader deployment.