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http://www.ft.com/cms/s/0/b7d2320c-c3a3-11e2-aa5b-00144feab7de.html#ixzz2VGGxWIMs By Rose Jacobs In February this year, a US appeals court handed down its verdict in a case brought by the American Petroleum Institute against the Environmental Protection Agency. The API had argued that the government agency overestimated the volume of cellulosic ethanol – a second-generation biofuel made from feedstocks that are not part of the human food chain – available on the market in 2012. That, the plaintiffs said, put refining and blending companies in a bind. The targets US refiners are expected to meet for renewable transport fuel levels are tied to EPA estimates. But, while the EPA set the goal at 8.65m gallons of cellulosic ethanol last year, only 20,000 gallons were in fact produced. Surely, said the API, that shortfall should not fall on its members’ shoulders? The judges’ decision was mixed. On one hand, they found the EPA had indeed let the wish for higher output of the fuel be “the father to thought” – something the law had not intended. On the other, the judges agreed with the EPA that the target need not be lowered, since other second-generation biofuels could be used instead, if necessary. The decision underscores two strains running through the biofuel industry. First, say critics, regulation appears to be out of step with science. Deriving energy from switchgrass and orange peel is hard to do and producers will almost certainly fall short of 2022 targets set out by the US’s Renewable Fuel Standard (RFS). Yet regulators and politicians do not appear to be backing away from their ambitions. In fact, days after the appeals court decision in the API versus EPA case, the EPA increased its production estimates – and therefore volume mandates – for cellulosic ethanol to 14m gallons in 2013. The situation has investors and companies making bets on whether political will, and government funding, can force the hand of science – and often hedging those bets soon after. BP appeared to get a step or two ahead of itself in Florida, pushing forward on a plant that would produce cellulose ethanol on a commercial scale, only to cancel the plans last autumn in favour of investment in cellulosic biofuel research and development. “Given the large and growing portfolio of investment opportunities available to BP globally, we believe it is in the best interest of our shareholders to redeploy the considerable capital required to build this facility into other more attractive projects,” said BP at the time. Detlef Schoen, a managing partner at Aquila Capital, a company focused on alternative investments, argues that investment by traditional oil and gas companies in biofuels has, in many cases, more to do with managing reputational risk than real hopes for commercial scale production. He says a cold hard look at biofuels, and one unaffected by politics, would acknowledge that some “green” fuels do not offer a considerable environmental advantage over traditional fuels: “The output of energy is not higher than the input when you look at the whole life cycle of biofuels,” says Mr Schoen. Add in the problems associated with first-generation biofuels, such as ethanol made from corn – which thereby diverts human food stocks away from human mouths – and many question the wisdom of the RFS. But Ernie Shea, who heads the group 25x’25, which aims to push the biofuel portion of transport fuel to 25 per cent by 2025, believes that much of this scepticism is simply the result of entrenched interests. “It was a political decision to go to 36,” he says of the 36bn gallons that will need to be blended into transport fuel by 2022 under the RFS – up from 9bn in 2008. “But it was designed to be aggressive and it unleashed significant human capital and financial capital.” He is concerned, therefore, that new fuel economy standards, unveiled last August, “virtually eliminated” the incentives for carmakers to offer flexible-fuel vehicles. Nor does he think there are enough incentives in place to encourage the creation of the infrastructure – gas stations and pumps – that would support flexible fuels. Moreover, the appeal of biofuels as a solution to energy security in the US has been undermined by the shale gas revolution. Still, in his view, the opportunities outweigh the challenges. The next front, he says, is educating the public and politicians about the human health benefits of lower-carbon fuels, since they produce significantly lower levels of particulate matter. “At some point, we‘re going to look at the 36bn number and ask, why stop there?” he says. “We‘re on the glide path the RFS was designed to bring about.” Continue reading →