Expiry of cellulosic biofuels tax credit to have little impact: analysts

Washington (Platts)--3Jan2014/524 pm EST/2224 GMT


The US cellulosic biofuels industry, which in 2013 began producing its first significant quantities of product, saw its $1.01/gal production tax credit expire December 31, but analysts say the impact likely will be small.

"My sense is that most companies in the cellulosic industry are building their business model around not having the tax credit," said Pavel Molchanov, an analyst with Raymond James. "Not just in 2014, but in general."

The cellulosic tax credit has expired before, in 2012, only to be reinstated by Congress retroactively when it reconvened the following year.

Congressional observers say they expect the same to happen again this year, but for the cellulosic industry, the bigger driver for growth will be the Renewable Fuel Standard, analysts said.

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Because the tax credit was granted only to production of cellulosic biofuels, which until 2013 was virtually nil, it had been little used.

"Cellulosic biofuels growth is likely to depend on RFS targets," Tim Cheung, an analyst with ClearView Energy Partners, said in an email. "EPA has expanded the cellulosic biofuels 'market' from 6 million gallons (the 2013 target) to 17 million gallons (2014 proposed target). EPA could increase the cellulosic volume in future rulemakings."

Molchanov added the prices of renewable credits, known as RINs, that fuel blenders use to demonstrate compliance with the RFS will adjust to account for the absence of the production tax credit if it is not renewed. That will help cellulosic biofuels producers maintain their profit margins.

RFS CERTAINTY NEEDED

But the entire biofuels industry has raised alarms about the EPA's proposed 2014 RFS targets, which the agency plans to finalize this spring.

Even though the cellulosic mandate has been increased, the overall biofuels mandate has been cut from 16.55 billion gallons in the 2013 rule to 15.21 billion gallons in the 2014 proposal.

Cellulosic biofuels advocates have said the drop in the overall biofuels mandate will cause investment in their next-generation technologies to dry up if investors do not have certainty that biofuels will have market access.

"What would be much more important for the advanced and cellulosic biofuel companies in general is not the tax credit, but having more clarity and certainty on the blending targets under the RFS," Molchanov said. "The RFS is a much more important, much more relevant policy [than the tax credit] in the grand scheme of things."

Nevertheless, the cellulosic biofuels industry, in addition to urging the EPA to revise its 2014 proposal, is also lobbying Congress to extend the tax credit retroactively.

Representative Scott Peters, a California Democrat, has introduced a bill (H.R. 3758) that would extend the $1.01/gal tax credit, as well as a 50% depreciation tax deduction on second-generation biofuel production plants, which also expired December 31.

But the bill has no current co-sponsors, and its prospects in the Republican-controlled House of Representatives are dicey.

Paul Winters, a spokesman for the Biotechnology Industry Organization, which represents several cellulosic biofuels companies, said the tax credit will become of greater importance as the industry continues to scale up.

"The RFS is a bit uncertain -- and not sufficient to support production scale up," Winters said. "If the tax credit is not extended and the RFS rules remain unchanged from the proposal, it would be a very tough environment for these first plants and those that are still pursuing funding for construction."

INDUSTRY ON FIRMER FOOTING

In its proposed 2014 RFS, the EPA said it expects the cellulosic biofuels industry to continue "to transition from research and development and pilot scale to commercial-scale facilities, leading to significant increases in production capacity."

It noted the first commercial-scale cellulosic biofuel facility, Kior's plant in Mississippi, in March began generating RINs. A second facility, Ineos Bio's plant in Florida, began generating RINs in July.

The EPA said it expects three more facilities to begin producing cellulosic biofuel in 2014, leading to its projection of between 8 million and 30 million gallons for the year: Abengoa's plant in Kansas, DuPont's plant in Iowa and Poet's plant in Iowa.

Kior should produce between 0-9 million gallons, Ineos Bio should make 2 million-5 million, Abengoa will make 0-18 million, DuPont will make 0-2 million, and Poet will make 0-6 million, the EPA said.

BIODIESEL TAX CREDIT EXPIRES

Meanwhile, the biodiesel industry has also cried foul over the 2014 RFS proposal, which froze the biodiesel mandate at 1.28 billion gallons. And like the cellulosic industry, biodiesel producers have been urging Congress to retroactively extend their $1/gal production tax credit, which also expired December 31.

The credit has expired three times in the last five years and the industry said it is looking at likely plant closures and layoffs if the credit is not extended and the RFS mandate remains frozen in the final rule.

"The uncertainty this creates is a major reason why we are still so dependent on petroleum," Anne Steckel, vice president of federal affairs at the National Biodiesel Board, wrote in a letter to the Senate Finance Committee and House Ways and Means Committee.

"It is incredibly disruptive, not just to biodiesel plants across the country but also to our bipartisan goals of creating jobs in new domestic energy industries and boosting our energy security by diversifying our fuel supplies," she added.

Molchanov said that if the tax credit is not extended, the RINs market will adjust, just as it will for cellulosic biofuels.

"If the biodiesel tax credit goes away, then RINs will expand to cover that," he said. "Maybe not all of it, but some of the extra margin."

--Herman Wang, herman.wang@platts.com
--Edited by Jason Lindquist, jason.lindquist@platts.com

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