Demand-Driven Innovation

Pacific Ethanol
Written by Mark Golombek

This is a truly exciting and ground-breaking time to be involved in the ethanol industry due to the continued support from the federal government’s Renewable Fuel Standard (RFS), the low carbon profile of ethanol, the relative cost of ethanol to gasoline, and the high octane rating of the fuel. Companies such as Pacific Ethanol are on the cusp of a new era. Environmental standards are taken into consideration more and more these days, and ethanol is at the forefront of these efforts.
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The industry still battles with the oil industry for recognition, and it has been a tough slog, but that is all about to change. We spoke with Pacific Ethanol’s Chief Executive Officer, Founder, and Director Neil Koehler, hot on the heels of his interview with FOX News in October, about the latest developments in ethanol, its advantages, uses, and outlook for the industry going forward.

Neil is very passionate about this business and has been involved for his entire career in the industry, having started two other ethanol companies before Pacific Ethanol. One of them, Kinergy Marketing, even became a part of the current entity. He graduated from college in 1981, with a major in government and an emphasis on energy policy.

“That was after the oil shocks, and I travelled to the Middle East knowing that we needed to move quickly to displace oil. I started working for the Department of Agriculture in Sacramento, helping farmers use renewable fuels,” says Neil.

A combination of geothermal, hydroelectric power, wind power, methane digesters, and small amounts of ethanol were being used to help the farmers, and this process gave Neil an idea. He realized that ethanol production was just getting started and could eventually replace oil and gas in the U.S.

“I have committed my entire professional career to making this happen,” says Neil. Pacific Ethanol is part of an industry that now has more than two hundred ethanol plants throughout the country. But Neil’s foray into the industry began much earlier.

Parallel Products was the first ethanol production company in California and was co-founded by Neil in 1984. It converted waste products from the food and beverage industries into ethanol. It was a real niche business, working with trucks of waste that would come in from companies like Anheuser-Busch. Eventually that morphed into taking packaged goods that were unsellable due to bad marketing or being damaged in transit.

“We were de-casing one million cases a month that would otherwise be considered consumable beverages, recycled all the containers and converted all of the liquid into fuel-grade ethanol,” says Neil.

Parallel Products was sold in 1998, and in 2000, Neil founded Kinergy Marketing to distribute ethanol in the western United States.

Oxygenates are fuel additives that raise the oxygen content of gasoline and are required to be added to gasoline to reduce tailpipe emissions. For years the oil industry’s oxygenate of choice was methyl tertiary-butyl ether (MTBE).

The oil industry found, when added to fuel, MTBE would also meet federal air quality requirements. However, when MTBE was found to be contaminating drinking water, it was banned in California in 2002 and eventually was banned throughout the U.S.

Ethanol is another oxygenate as well as a clean burning fuel that met the earlier federal air quality requirements.

“This was a huge growth boost for ethanol, as it was now the only product that could be used to meet air quality requirements. I founded Kinergy Marketing right when MTBE was being phased out of gasoline,” says Neil.

This spurred growth in the ethanol market. With Neil’s well established relationships with suppliers in the Midwest, Kinergy brought ethanol from the Midwest to California and the other states in the Western United States, where it then distributed the ethanol to oil companies, making for a smooth transition from MTBE to ethanol.

Other than Parallel Products, there was no other entity in the state of California that was producing ethanol at this time of growth. In 2003, Neil, along with former California Secretary of State Bill Jones, founded Pacific Ethanol.

“Bill is a long-time farmer and rancher in the Fresno area. I had the ethanol expertise and a name in that world. He had good name recognition statewide and understood the local agriculture and political landscapes. Together, we formed Pacific Ethanol to take advantage of this market opportunity,” says Neil.

At that point, all the ethanol had been produced in the Midwest and consumed there. With the change from using MTBE, suddenly ethanol was being distributed throughout the entire country. Pacific Ethanol was the first company to move manufacturing to the markets where the end product would be used, rather than producing ethanol in the Midwest where the corn was growing.

There is now a huge ethanol market in California, and what many people do not know is that when corn is made into ethanol, the by-product is a high-quality product called distillers grain that is fed to beef and dairy cows. “The corn is turned not only into ethanol but high-protein feed. In addition, producing our own ethanol and combining it with the oil that we produce in the U.S. to become self-sufficient is a lot better than supporting oil imports from the Middle East,” says Neil.

California has the largest dairy industry in the U.S.; it also has the largest concentration of dairy cows in the world, so corn was already coming to California as feed.

“We just decided to come into that market and got the opportunity to take the corn, remove the energy for conversion into ethanol, and concentrate the balance of the corn into high protein feed. The model is wherever there are lots of cows and cars, that’s where we built the ethanol plant,” says Neil.

One plant was built in Idaho, one in Oregon, and two in California. These four plants have a combined capacity of over 200 million gallons. Kinergy Marketing was purchased by the new company that Neil founded and was integrated into the production side. It was unique to incorporate a significant marketing and distribution company with a production company, and it was also rare to find an ethanol producing facility outside of the Midwest. Pacific Ethanol went public in 2005.

The industry was supported for its agricultural economic development, energy, security, and environmental protection. These and other reasons drove additional policies that in 2005 and again in 2007 resulted in the federal Renewable Fuels Standard. These went beyond simple air quality regulations.

“RFS requires oil companies to be increasing amounts of renewable fuels (ethanol, biodiesel and others) into the mix nationally. That’s been a huge policy driver, and the corn farmers have stepped up by producing incremental corn. Producers have done the same by expanding ethanol production,” says Neil.

A relevant strength of the California market is the carbon pricing built into the gasoline markets in that state. In 2007, Governor Arnold Schwarzenegger directed the California Air Resources Board (CARB) to create California’s Low-Carbon Fuel Standard (LCFS). This program was created to encourage the production and use of cleaner, low-carbon fuels to address climate change, lower greenhouse gas emissions and reduce the state’s dependence on fossil fuels.

The initiative aims to decrease the carbon intensity of California’s transportation fuels. These reductions include vehicle emissions as well as all related emissions from production, distribution, and fuel used for transport. Pacific Ethanol has invested in many low carbon technologies to reduce the carbon intensity of the ethanol it produces. For instance, Pacific Ethanol took what was arguably already a clean grid in California and built a five-megawatt solar powered system which has zero CO2 emissions for production of electricity, making it the first ethanol company in the world to incorporate a commercial solar system in a plant.

“If you look at the cost of producing ethanol, the number one expense is the price of corn, followed by the cost of energy, and finally, labor. Energy is a big deal. Natural gas and electricity can affect the bottom line,” says Neil.

In California, the sun shines, generating electricity, so Pacific Ethanol’s electricity requirements are being taken care of while it saves $1 million per year in its electricity costs and gives itself a lower carbon score after installing 5 MW of solar electric production at its Madera, CA facility.

“It’s about the value generated in the lower carbon score and the ability to charge a premium price because of that. The solar system just went online and it is operating at its full capacity, though of course at lower total production during the winter months,” says Neil. When the sun is shining during the summer, it will displace forty to fifty percent of the electricity used.

Initially, the plan was that by 2020, California refineries must reduce the carbon intensity of their fuel by ten percent. CARB recently extended goals to 2030; by that date, it wants to lower the carbon intensity by twenty percent. If you look at what it takes to reduce carbon intensity, these are significant numbers and will shift the way fuels are made and distributed in California.

Adding ethanol is what refineries have been using to meet these requirements. “We are thirty percent to forty percent lower carbon than gasoline, and the refineries buy our ethanol, blend it at ten percent with their gasoline, and that generates the credit. The same is happening on the diesel side, with biodiesels, renewable diesel, and cars that are becoming electrified with plug-in hybrids,” says Neil.

Biogas from dairies is going into compressed natural gas vehicles, resulting in world-leading policy for carbon reduction in transportation. Ethanol plays a very significant role. Pacific Ethanol saw this early on, especially when standing next to Arnold Schwarzenegger as he directed the California Air Resources Board through an executive order to establish the world’s first low-carbon fuel standard.

“This has been a part of our vision. We saw this policy was critical and wanted to develop new policies to supplement policies developing at the national level. The policies had to be more appropriate for our business model,” says Neil. Oregon, British Columbia, and states in the Midwest have adopted or are considering low-carbon fuel standards.

Another example of low-carbon initiatives at Pacific Ethanol was incorporating some membrane technology that reduced its natural gas use by five percent, and it is looking at mechanical vapor recompression (MVR) that could cut natural gas use in half. Natural gas has been relatively cheap, but it has been used more in the ethanol plants than electricity, so reducing its use would make sense. All these initiatives require significant capital.

“We wouldn’t have any reason to invest in these technologies if we were not able to monetize the carbon reduction, and that’s where the low-carbon fuel standard plays a big role. By extending that investment horizon to 2030, we can make larger, more fundamental investments to lower our carbon score. The program is giving us the incentive and security to do it. It’s a policy that is resulting in significant innovation and technological change,” says Neil.

This is an achievable goal, but the U.S. is still importing oil. Ethanol production is a huge issue for the Midwest because corn and soybean crops are grown there and are a huge driver of the economy. It is one of the only growth stories for corn farmers as they are getting more efficient in the production of corn and need new markets. Ethanol support is critical, and if you look at presidential politics, being able to gain the support of the Midwest in the Iowa caucus is a critical component of a successful national campaign.

“Since ethanol is a threshold issue, it makes sense politically that you should be in support of ethanol if you are a true patriot,” says Neil. Ethanol is cheaper than gasoline and fifty percent cleaner.

Early on when Trump was campaigning, he made significant commitments and promises to the ethanol industry. One of these was to liberate the market to higher ethanol blends. On the same day as Neil’s FOX interview, October 9, 2018, an anticipated announcement came out from the federal government that directed the Environmental Protection Agency (EPA) to change the rules and regulations to allow for the year-round blending of E15 – the fifteen percent ethanol fuel.

Now, the industry is producing a great deal of ethanol and exporting it at a rapid pace. “As I also mentioned in the interview, with the trade wars, China is becoming a great new market opportunity,” says Neil.

Nearly half of all gasoline in the world is consumed by the U.S., so there is also a great need for all this ethanol at home. The move could result in a thirty percent ethanol blend. Ultimately, what car companies want is to design much higher compression engines that require a higher-octane fuel that only higher blends of ethanol can deliver.

The main challenge is the largest, most powerful single special interest in the world: the oil industry has resisted yielding market share to the ethanol industry but with policy support and because of the positive attributes of ethanol, the oil industry has adapted the way it makes gasoline.

“They produce gasoline that frankly is off spec from an environmental and octane standpoint, until they add the ten percent ethanol. After incorporating the ten percent blends the refining industry drew a line in the sand to say, ‘That’s it, no more market share for you. We have had one hundred percent for over one hundred years, but you can only have ten percent!’ It’s an interesting story from an overall energy perspective,” says Neil.

The oil industry is not happy about the E15 announcement. The American Petroleum Institute (API) voiced its opposition to the proposal, saying the fuel “has been shown to damage vehicle engines and fuel systems, and most cars on the road today are not designed to run on E15.”

“It is patently false and serves to confuse consumers, which slows our efforts. Politically, they are so powerful and are big supporters of Trump, who wanted a deal to be brokered. All we are asking for is equal and fair access to the market,” says Neil.

With open access, consumers buy a product that is cheaper and better. After the sessions were completed, oil companies were asking for more restrictions to keep ethanol out of the market and destroy demand for the product. Prior to the midterm elections, the president backed ethanol. The oil representatives are now deciding what legal recourse they have and are threatening to go through with litigation. The fight is not over.

Solar, hydroelectric, and other sources of renewable energy have not been as successful as ethanol in getting ten percent of the hydrocarbon market. This is a reason to celebrate for Pacific Ethanol, but more can be done. “The hard work continues, but we will get there because of the elegance and the advantage of ethanol to the many farmers, consumers, and the environment,” says Neil.

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