Ethanol Profile
By Connie Hardy, content specialist, AgMRC, Iowa State University, chardy@iastate.edu.
Profile revised July 2011.
Production and Demand
The U.S. fuel ethanol industry has grown to a total annual production capacity of 13.5 billion gallons and an estimated 13.23 billion gallons per year (bgy) of actual production, according to recent figures collected by the Renewable Fuels Association. There are 204 ethanol plants operating in 29 states and 10 plant expansions are underway. Plant expansions are estimated to add more than 500 million gallons of annual production, bringing U.S. production capacity to 14 bgy and requiring nearly 5.2 billion bushels of corn.
Though corn is still the primary feedstock for ethanol produced in the United States, seven plants use milo and barley along with corn as feedstock, and four others use beverage/brewery waste, cheese whey or potato waste as feedstocks. Two plants use primarily wood waste (< 20 million gallons per year of ethanol production), and a plant in Louisiana will use sugarcane and bagasse (1.5 million gallons per year of ethanol production).
POET Refining, the nation's largest dry-grind ethanol producer using corn as a feedstock, is jointly funding, along with the U.S. Department of Energy, the development of a cellulosic ethanol production facility at Emmetsburg, Iowa. The Emmetsburg plant began operations in March 2005 as a 50 million gallons per year (mgy) dry mill facility using corn as a feedstock. Project LIBERTY at the plant is slated to open in 2012. The facility will turn corn cobs into 25 million gallons of cellulosic ethanol per year. Additionally, it will create 80,000 tons of POET's branded Dakota Gold Corn Germ Dehydrated™ and 100,000 tons of Dakota Gold HP™ produced annually as animal feed co-products.
Corn Fractionation
As ethanol production grows to meet the requirements of the December 2007 Renewable Fuels Standard (RFS), production improvements are being adopted to use corn more efficiently and improve the economics of ethanol production. The general term "fractionation" refers to the process of separating a corn kernel's endosperm (starch-rich portion), germ (protein-rich and oil-rich portion) and bran (fiber-rich portion). This system of separation has been a part of corn dry-milling and corn wet-milling for many years. Currently, most dry-grind ethanol plants move the entire corn kernel through the process, allowing the fermentation step to use the starch portion of the corn and the remaining protein, oil and fiber are part of the co-product called "distillers grains." When ethanol plants incorporate fractionation equipment, plant managers can control the separation and use of the parts of the corn kernel, thereby realizing efficiencies in ethanol production and the ability to sell several co-products into food and feed markets. In this way, fractionation can allow plant managers a greater ability to hedge against rising corn prices.
Historical Summary
Although ethanol has been around for hundreds of years and used in automobiles dating back to Henry Ford’s Model A, it has never generated as much attention as it has during the past decade. Historically low corn prices coupled with relatively high gasoline prices provided an environment that was favorable for rapid growth of the ethanol industry. These pricing dynamics, along with favorable margins in the industry, attracted considerable investor interest, resulting in a surge of plant development based on favorable indicators for the industry.
Perhaps the most critical variable to jump start the industry was the 2005 RFS. The RFS mandated a minimum of 7.5 bgy of renewable fuels to be used annually in the United States by 2012. The new RFS passed in the 2007 Energy Bill requires 36 bgy of fuel to be produced from renewable resources by the year 2022.
In 2005, a federal tax credit of 51 cents per gallon of ethanol was initiated to encourage fuel blenders to use ethanol as an oxygenate in blended fuels. Most ethanol blends are E10, meaning that 10 percent of the fuel is ethanol; at this level, most passenger vehicles and small engines could use the blended fuel. The blender received 5.1 cents as a tax credit. Flex-fuel vehicles can use E85, an 85 percent ethanol blend, for which blenders receive 43.4 cents per gallon of blended fuel.
Initial growth in the domestic ethanol industry was a result of farmer ownership and investment in dry-mill ethanol facilities. These highly efficient dry-mill plants typically go from the drawing board to production in less than two years. Favorable returns attracted significant investment from outside the farm communities, so in 2008 farmer-owned facilities represented 39 percent of the total production capacity currently operating and only 11 percent of the capacity currently under construction.
Although ethanol can be produced from a variety of feedstocks, the majority is made from corn. More than 82 percent of U.S. ethanol is produced by dry-mill plants and the remainder by wet mills. The size of new dry-mill plants is increasing. In 2003, typical production capacity of new dry mills was 20 to 50 mgy. Today’s dry mills are 100 mgy or larger, and some 50-mgy plants have recently doubled their original size. Production capacity is determined primarily by expected access to raw materials (corn) and water in a given location but also by proximity to markets, particularly for the distillers grains.
The main factors that have driven demand for ethanol are as follows:
- High oil prices
- National energy security
- Ethanol tax incentives
- Lower ethanol production costs with improved technology
- Climate change concerns
Ethanol has become the fuel of choice for many consumers for one or more of the following reasons: either as an oxygenate, an octane booster, an extender or as an alternative fuel supporting energy independence. Ethanol is predominately used as an oxygenate to help gasoline burn cleaner. Typically sold as a 10 percent blend of ethanol with regular petroleum grade fuel, it is commonly referred to as E10. At this 10 percent blend, ethanol also improves the octane rating of the fuel, improving its performance by resisting early ignition. Recent studies have shown that ethanol can be used successfully in most vehicles in blends containing up to 30 percent ethanol. Ethanol has gained favor with owners of flex-fuel vehicles that can use the E85 blend.
MTBE, a petroleum-based oxygenate, was banned in California, New York and Connecticut, which resulted in a complete transition from MTBE to ethanol. As a result of a MTBE ban in California, the state quickly became the largest consumer of ethanol in the country. Following California, the next largest consumers of ethanol are Illinois, Iowa, Minnesota, Ohio, Indiana, Michigan, Missouri, Wisconsin and North Dakota.
Ethanol use has seen continued growth since the late 1970s when it was first introduced as a product extender during OPEC oil embargos and gasoline shortages. In the mid-1980s, ethanol began to see widespread use as an octane enhancer and grew even more rapidly as an oxygenate with the passage of the 1990 Clean Air Act Amendment, which required the addition of oxygenates, such as ethanol, to gasoline in heavily polluted regions of the country.
Internationally, ethanol has seen similar but not as rapid growth in countries such as Brazil, Argentina, United Kingdom, Canada, China and Thailand, which have all implemented some form of ethanol requirements to address either environmental or fuel dependency concerns.
Competitive Products
In major metropolitan areas that require a reduction in automobile pollution, ethanol is currently the only oxygenate that can reduce emissions sufficiently to meet U.S. EPA clean air standards. MTBE was its primary competition but was eliminated from the market due to health risks. The California, New York and Connecticut MTBE bans have resulted in unprecedented growth trends for ethanol usage in those states.
Although competitive ethanol production depends on an ample and affordable supply of grain, it is important to note that ethanol prices historically follow gasoline prices rather than corn prices. However, incorporating fractionation systems in dry-grind ethanol plants could potentially yield increased revenue from corn-based co-products, thus relating a larger share of the plant's revenue to the price of the initial feedstock, corn.
Supply Chain Elements
Interest in the rapid growth of farmer-owned facilities has raised many questions as to the proper location and placement of new facilities in order to be competitive in the marketplace. Major areas of consideration for inputs are consistently the cost of feedstock, access to natural gas lines and electricity. On the output side, consideration must be given to the proximity of a plant to expanding ethanol markets and outlets for byproducts, such as carbon dioxide and distillers grains. From an infrastructure side, access to quality roads, rail and utilities are critical to a plant's success. Approximately 75 percent of ethanol is moved by rail and 25 percent by truck. Creation of a new ethanol pipeline is under consideration. Continued profitability and growth in the industry will be highly dependent on efficiencies of production and favorable economic scenarios that keep the country focused on energy independence and a cleaner environment.
Sources
Biomass, Energy, Efficiency & Renewable Energy, U.S. Department of Energy.
Ethanol and the Changing Agricultural Landscape, Economic Research Service, USDA, 2009.
Iowa Grain Quality Initiative, Iowa State University.
National Corn Growers Association.
POET.
