Biofuels Slump Deepens

By Published On: December 14, 2007

Pacific Ethanol’s suspension of construction work on an ethanol plant in Imperial Valley this week comes amid a major shakeout in the biofuels industry that has been building across the nation this year. Squeezed between higher feedstock costs and falling ethanol prices at the pump companies are canceling construction plans. “The economics are just not sustainable right now,” said Michael Zimmer, Thompson Hine partner in Washington, D.C. “The economic curves are all going in the wrong direction.” Pacific Ethanol is just the latest casualty in an industry where the sky seemed the limit a year ago. The company was building two 50 million gallon a year ethanol production plants in California. It announced December 10 that it was suspending work on one near Calipatria in the low desert farmland of the Imperial Valley. The company halted work after grading land for the plant. “Given current ethanol market conditions, we feel it is prudent and strategic to suspend construction until the market improves,” stated Neil Kohler, company chief executive officer. Pacific Ethanol added that it is continuing construction of a planned production plant in Stockton and continues to operate its plant outside Fresno. Eventually, things may improve for Pacific Ethanol. In Washington, the House has passed energy legislation that would dramatically increase the mandated sale of ethanol and other biofuels in a bid to help the U.S. become energy independent. H.R. 6, passed last week, would lift the currently mandated level from 7.5 billion gallons in 2012 to 36 billion gallons by 2022. Meanwhile, the company’s pull back comes in an industry hampered by a growing credit crunch and a number of other factors, according to an Ernst & Young report. These include higher prices for the corn and other agricultural commodities used to make ethanol and bio-diesel, as well as a rapid expansion of production capacity that is running ahead of demand and causing ethanol prices to decline. Little more than a year ago, ethanol at the pump was almost $4 a gallon. Today, it goes for around $2.50/gallon, according to the U.S. Department of Energy. Meanwhile, Chicago Board of Trade data show that corn–the most common feedstock for producing ethanol–costs twice what it did in summer of 2006. As a result, the industry is going through a period of shake out and consolidation, stated Jonathan Johns, Ernst & Young renewable energy head, in releasing the firm’s report November 29. Only well-financed, low-cost producers with “significant control over parts of the supply chain” have a good chance of weathering the market downturn, he said. To avoid fits and starts in the industry in the future, Johns urged the government sector to get more involved in planning the expansion of biofuels to meet legislative and environmental objectives for low carbon fuels. He further urged governments to coordinate their policies on an international basis. Zimmer noted that bottlenecks in the distribution chain–from a lack of ethanol pumps at service stations to a lack of upstream receiving terminals for bulk ethanol deliveries–also are hampering industry expansion. He suggested lifting the ceiling on ethanol sales, as proposed in pending federal energy legislation, as well as developing an export market to help restore credit to the industry and get its expansion back on track. The Senate has agreed to the increase. Meanwhile, analysts expect further holds on growth plans. The problems gripping the industry have caused cancellation of both ethanol and biodiesel production plants across the nation. Editors’ note: For more on recent developments in biofuels, please see our sister publication E=MC2, Energy Meets Climate Challenge, www.energymeetsclimate.com

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