Valero Dumps Cellulosic Ethanol Project

A company that received lavish subsidies to build a cellulosic ethanol plant in Michigan recently lost a major private-sector investor.

Mascoma Corp.[i] must now look elsewhere for funding its ethanol facility in Kinross, Michigan, after news that Valero Energy Corp. is withdrawing its $50 million dollar investment. Mascoma, a New Hampshire-based renewable fuels company, received nearly $120 million in federal and state grants for its $233 million project[ii], yet construction of the plant remains far behind schedule.

Plans for the plant began in 2008 when Mascoma joined with J.M. Longyear, a Michigan-based natural resources company, to form Frontier Renewable Resources LLC. Frontier was expected to build a facility that could initially produce 20 million gallons of ethanol per year from hardwood pulpwood[iii] and eventually produce 40 million gallons of cellulosic ethanol annually.[iv] This is a lofty goal considering the entire industry produced just 20,069 gallons of cellulosic ethanol in 2012, even though the EPA mandated 8.65 million gallons under the Renewable Fuel Standard (RFS).[v]

Prior to Valero’s investment, Mascoma received a $20 million grant from the State of Michigan and nearly $100 million from the U.S. Department of Energy (DOE). In December 2011, Mascoma, through its subsidiary Frontier, established a joint venture with Valero to construct the facility. Construction was scheduled to start in 2012 and be completed by the end of 2013. Highlights from the deal include[vi]:

• Valero would provide project management to build and operate the facility and hold majority interest.
• Mascoma, through its subsidiary Frontier, would hold a minority interest.
• Mascoma would contribute the proceeds from its DOE cooperative agreement award and its State of Michigan grant to the joint venture, while Valero would provide additional financing.

Despite funding from Valero and generous government subsidies, construction has yet to begin. Additionally, Mascoma promised to create 70 jobs by the end of 2012, but the company has thus far created just three new jobs.[vii] With the loss of Valero’s investment, it is likely that the project will be delayed even longer.

While the Kinross facility falls even further behind schedule, Mascoma plans to move forward with the development of a second project in Drayton Valley, Alberta. Mascoma predicts that this facility, which is partially funded by the Canadian government, will produce 19 million gallons of cellulosic ethanol annually.[viii]

Mascoma’s Kinross project is just the most recent example of the struggles the biofuel industry has faced in producing cellulosic ethanol. As the following chart shows, EPA has a history of grossly overestimating cellulosic ethanol production. Moreover, EPA levied $6.8 million in penalties against oil refiners for failing to purchase cellulosic ethanol that does not exist.

 

The EPA lowered the cellulosic mandate to 6 million gallons for 2013, but it appears that production will fall well short once again. As we mentioned in a previous post, the Kior cellulosic ethanol plant in Columbus, Mississippi, which was supposed to fulfill the bulk of EPA’s mandate for 2013, fell 75 percent short of its volumetric estimates in the second quarter of this year.

Despite a combination of federal grants and mandates, cellulosic ethanol remains essentially non-existent. Valero’s departure from with the Mascoma deal delivers a serious blow not just to the Kinross facility, but also to the industry as a whole. If the industry cannot even manage to build the facilities necessary to produce cellulosic ethanol, then refiners should not be expected to blend unrealistic amounts of it into the fuel supply.

IER Press Secretary Chris Warren authored this post.