Ethanol makers shrug off expiration of key tax credit

January 6, 2012

Doom was predicted to befall Indiana’s 13 ethanol plants if Congress were to let expire a tax credit for oil companies of 45 cents per gallon of ethanol that they blended with gasoline.

Thousands would lose their jobs as perhaps two out of every five ethanol plants around the country would close, the Renewable Fuels Association warned in 2010.

Congress, however, let the Volumetric Ethanol Excise Tax Credit expire last month. But it looks like motorists, rather than ethanol makers, stand to feel the pain.

The reason is the survival of another federal measure, known as the Renewable Fuels Standard. It requires that an increasing amount of renewable fuels such as ethanol be blended into transportation fuel—from 9 million gallons in 2008 to 36 billion gallons in 2022.

So, oil companies still need to blend ethanol into gasoline. But with those blenders no longer pocketing the tax credit, look for gasoline prices to rise 4 cents to 5 cents a gallon, say experts.

“Consumers will probably see a tick-up increase,” said Greg Noble, chief operating officer of the Indiana Soybean Alliance, Indiana Corn Marketing Council and Indiana Corn Growers Association.

Corn is the key ingredient for Indiana’s ethanol plants. The expiration of the blender’s tax credit should bring only a modest decrease in the price of corn, said Noble, former manager of Poet BioRefining's ethanol plant in Portland in east-central Indiana.

Critics of ethanol have complained that rising demand for corn to make the alcohol has pushed up the price of corn, which in turn made food products more expensive.

Ethanol makers are trying to make the fuel additive from other parts of the corn plant, such as stalks. Companies such as Indianapolis-based Xylogenics Inc. are working to perfect strains of yeast that would optimize ethanol yields from corn stalks as well as other plants. Xlylogenics has licensed its yeast to a handful of firms.

Such progress in the industry, along with the continuation of the Renewable Fuels Standard, appears to have quelled the alarms sounded by the Renewable Fuels Association and other ethanol groups 18 months ago.

“The domestic ethanol industry has evolved, policy has progressed, and the market has changed, making now the right time for the incentive to expire,”  the association said last month.

The tax credit had cost taxpayers about $6 billion a year.

Union City-based Cardinal Ethanol, in a recent securities filing, also downplayed the tax credit’s expiration.

It will not have a significant effect on ethanol demand “provided gasoline prices remain high and the renewable fuels requirement … is maintained,” Cardinal said.

After a series of losses following the company’s launch by corn farmers about six years ago, Cardinal has been profitable its two latest fiscal years. In 2011, it posted a $25.5 million profit on revenue of $337 million.

Cardinal has managed to squeeze out revenue not only from ethanol but also from the sale of byproducts such as corn oil and carbon dioxide generated by the plant.

Poet CEO Jeff Broin said the tax credit was a “valuable tool that helped the fledgling ethanol industry gain traction in a market dominated by oil.”

Broin said the industry was equipped to compete without the tax credit, noting improvements in the efficiency of ethanol production. That includes cutting energy use by half and water use by 80 percent.

South Dakota-based Poet, the world's largest ethanol producer, operates Indiana plants in Alexandria, Cloverdale, North Manchester and Portland.

The biggest challenge ahead for ethanol producers might be in finding new demand for their product. Automakers in recent years have increasingly equipped their cars to burn high concentrations of ethanol–85 percent ethanol and 15 percent gasoline, known as E85.

But because ethanol has less energy than gasoline, thus lowers fuel economy, it’s not economical to use unless the price of gasoline is high relative to ethanol.

So the industry has been pressing federal regulators to allow a higher concentration of ethanol in ordinary gasoline. About 10 percent of most gasoline now contains ethanol, which became a replacement for the anti-knock additive methyl tert-butyl ether, or MTBE, which was pulled for environmental reasons.

Last year, the federal government approved a 15-percent blend of ethanol in gasoline for late-model cars, although automakers have been fighting the ruling in court, arguing that it can harm vehicles whose fuel systems are not designed to handle E85.

Alternative fuels advocates are looking for other ways to improve use of ethanol, including pumps that could dispense a blend of 30-percent ethanol, 70-percent gasoline.

Such pumps could allow flex-fuel vehicles to still burn a higher level of ethanol but incur less of a fuel economy penalty than if using E85.

“You’re going to start seeing a lot more E30 stations,” said Kellie Walsh, executive director of the Greater Indiana Clean Cities Coalition, a federally funded group that promotes alternative fuels.

Walsh said a handful of E30 pumps are being installed in Fort Wayne, and that a couple of fuel vendors in Indianapolis are kicking around the idea.

One challenge for the ethanol industry has been convincing service stations to spend extra money to install pumps and tanks equipped to dispense varying levels of the fuel.

Noble said the corn grower groups have raised money through the corn check-off program to help retailers cover ethanol pump infrastructure costs, which has already gone toward installation of at least 14 pumps in the state.

The Indiana Corn Marketing Council said the state’s ethanol industry is responsible for 3,527 full-time jobs, with an economic impact of $2.7 billion annually.

Indiana’s plants generate about 980 million gallons of ethanol per year, about 7 percent of the U.S. output. Indiana is the sixth-largest ethanol-producing state.

Also last month Congress let expire a tariff on ethanol imports that stymied competition from lower-cost Brazilian-made sugar cane ethanol in the United States.

Domestic ethanol producers aren’t wringing hands this time, as Brazil is now experiencing an ethanol shortage. In fact, the U.S. is selling ethanol to Brazil.


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