CHALLENGES AND OPPORTUNITIES
FOR BIOMASS FUELS IN CALIFORNIA

WILLIAM J. KEESE
Chairman
California Energy Commission

Fuel Ethanol in the 21st Century Conference
April 2, 1998
Sacramento, California

I. INTRODUCTION

On behalf of Governor Wilson and the California Energy Commission, I welcome you all to Sacramento. I'd also like to take this time to thank the many people here today who have worked long and hard, and continue their efforts to make biomass fuels a reality in California and throughout the country. Welcome particularly to Governor Nelson, the founder of the Governors' Ethanol Coalition and a tireless supporter of the transition toward clean fuels.

We are here at a time of unprecedented change in the electric generation industry and elsewhere. As you know, yesterday was the first day of operation of the new California electricity market. Monopoly utilities are a thing of the past, the ISO is controlling the California transmission grid, and the PX is accepting bids for generation. The good news is that the lights are on, my alarm went off and prices ranged from zero (yes, free electricity, but delivery charges and CTC still apply) from 1:00 to 2:00 a.m. to $2.44 cents/kWh at about 9:00 a.m. For those of you with the foresight to sign up for time of use rates, 2:00 a.m. would be a good time to do the laundry and set the dryer on high (but only if you have an electric dryer -- if you have a gas dryer, you'll have to wait for retail gas restructuring, coming your way soon). Seriously, so far, so good.

California is experiencing environmentally shaped changes on a broader level as well. Here in Sacramento, thanks to the Air Resources Board, my colleague John Dunlap, and many others, the air is cleaner, clearer, and healthier for our citizens. John still has some work to do on the pollen count, however.

II. CALIFORNIA'S POLICY OVERVIEW--DIVERSITY

I'm very pleased to have the opportunity to speak to you today on my assigned subject -- the challenges and opportunities for biomass fuels in California.

The Energy Commission, in partnership with the Air Board and others, has a long history of encouraging development of alternative and renewable energy sources and technologies. These programs have covered the spectrum from basic supply, to delivery infrastructure, to end use efficiency and, in the transportation sector, to the vehicles themselves.

The basic goal of these efforts is to implement State policy, as set by the Governor and Legislature: to support the research, development and commercialization of a diverse set of resources which hold the promise of reducing petroleum consumption with minimal environmental impact. It is the Commission's vision that Californians will have energy choices that are affordable, reliable, diverse, safe, and environmentally acceptable. Our primary philosophy is seeking fuel diversity to reduce risks of supply disruption and energy price spikes.

III. BIOMASS--DRIVING FORCES IN CALIFORNIA

The biomass fuels are clearly among those renewable resources of top potential, particularly given underlying forces and natural resources in California. Opportunities for resource development are driven by trends in solid waste, agriculture and forestry:

• Solid Waste. Many businesses, faced with the rising costs of waste disposal, are seeking methods of converting waste streams into useful and even valuable products such as alcohols. Mixed solid waste is also increasingly a problem with the state's municipalities, which are now required by state law to divert 50 percent of their waste streams from landfill by the year 2000. The conversion of waste biomass to useful energy may thus become an environmentally sound way to diversify our fuels mix.

• Agriculture. Traditionally, residues such as rice straw and orchard prunings have been disposed of by open field burning. Because of the air pollution caused by this practice, air quality agencies have tightened regulations on open field burning. In 1991 the Legislature established a phase-out schedule for rice straw burning. The problem of disposing of agricultural residues, which currently present many challenges, may of necessity offer an opportunity produce a clean alternative fuel. Later on this agenda you will have a detailed presentation on the Gridley Project, an innovative demonstration of rice straw to ethanol conversion.

• Forestry. A four-fold projected increase of controlled burning on public lands, as well as increasing wildfire damage, has led to projects such as that envisioned by the Quincy Library Group. This project could couple strategic forest thinning with demonstration projects to co-produce ethanol and electricity. The Secretary of the Resources Agency has also initiated a project in the Tahoe forests addressing the volume of dead and diseased trees and thinning needed to reduce the severity of fires, improve forest health, and minimize wildlife hazards.

IV. FOCUS ON TRANSPORTATION

The state's transportation sector accounts for half of our energy use, and almost all our transportation fuel is petroleum-based. This makes California the third largest gasoline consumer in the world after the US as a whole, and Japan. We consume approximately 18 billion gallons of gasoline and diesel per year.

This dependence on petroleum makes us vulnerable to cost and supply fluctuations, results in emissions which pollute our air and produce greenhouse gases, and it is permanently depleting an inherently limited supply of a non-renewable energy source. In our search for a robust transportation sector, the Commission and California Air Resources Board policies are fuel-neutral -- we do not support any one fuel type or technology over another.

While all alternative transportation fuels are candidates under an "equal opportunity" fuel neutral policy, some fuels will win out over others, depending on a variety of considerations. However, for any of those fuels to penetrate the market, three important factors must be taken into consideration:

• the price of producing these fuels in comparison to gasoline,

• the presence or absence of a compatible infrastructure, and

• the availability and acceptance of the fuel to consumers.

Without a doubt, price competition is the central force in this drama, and that competition is fierce. The Commission has done its homework in forecasting fuel price and supply for two decades. We expect the supplies of conventional fuels to remain adequate, some say abundant, and prices to stay stable with only minimal increases likely in the timeframe in which new fuels seek to compete. The challenge of moving to alternatives in the face of these relatively low oil, natural gas, and gasoline prices thus remains ever present.

V. BUILDING ON CALIFORNIA'S METHANOL EXPERIENCE: A CHALLENGE TO THE ETHANOL INDUSTRY

The Commission, the Air Resources Board, and our industries have invested tremendous resources in bringing new fuels to market. Many lessons have been learned, and the pursuit of new avenues initiated. The ethanol industry to learn from our ongoing experiences with the Commission's Fuel Methanol Program.

Started during the 1980's, this program, while technically successful, and largely responsible for the push for reformulated gasoline, did not result in the expected penetration of methanol into the transportation fuels market. Methanol usage peaked in the summer of 1993 and has continued to decline since that point for a variety of reasons. Some of the causes of the decline include the inconvenience of fuel access, too few stations, the requirement of unique and expensive motor oil, lack of appropriate models for fleet applications, and other issues having to do with the difficulty of establishing a transportation fuel in competition with petroleum.

However, the two most important barriers to widespread use are the relative low price of gasoline and the reluctance of the petroleum industry to actively market this fuel to consumers. If ethanol fuels and infrastructure are to prove workable in the future, industry must address those barriers head on. My challenges to you are the following:

First and foremost, you need to continue to bring down the cost! In order for ethanol to be viable, it must be competitively priced. To reduce the price to consumers -- biomass harvesting, collecting, processing, and transportation costs must first be lowered. One way to do this is to co-locate ethanol production facilities with an existing biomass power plant. This type of synergistic integration can significantly improve the economics of ethanol production.

Second, you must overcome the current technical barriers which hinder biomass to ethanol production, by:

• Reducing the costs of enzymes, which can be achieved through improvements in enzyme production processes,

• Proving the feasibility of on-site enzyme production and concentrated hydrolysis, (Several companies are currently involved, including BC International, Masada Resource Group, Arkenol and Iogen-Petro Canada.)

• Making improvements in the hydrolysis process,

• Supporting identification of co-product potential in the biomass conversion process,

• Developing improved conversion technologies.
  

Third, it is important for the ethanol industry to identify a retail champion to market this fuel to consumers. Experience with the methanol program in California has shown that while partnerships can be forged with major oil companies to provide a network of fueling stations, a commitment to make a business out of marketing and selling the fuel is what is really needed. My challenge to the ethanol industry is to find a private partner or partners to aggressively market the fuel to consumers.

Fourth, infrastructure development is crucial to the development of ethanol as a transportation fuel. The challenge is to take advantage of existing infrastructure by making it compatible with the new fuel. California's methanol infrastructure experience has in many ways laid the groundwork for biomass-based fuels such as ethanol. We believe that our industry partners know that most materials compatibility issues associated with pumps, tanks, dispensers and piping have been resolved. To my way of thinking, technology is now on the shelf to be used in storing and dispensing new biomass-derived liquid fuels that may emerge. However, we believe that to be successful, an adequate fuel infrastructure needs to be in place to support the successful introduction of candidate fuels.

Fifth, opportunities exist to accelerate development of alternative fuel vehicles and engines, even if one or more retail market champions don't immediately emerge. Fuel flexibility is a vehicle concept that the Commission has supported since the mid 1980s. Auto manufacturers have actively pursued the development and sales of ethanol flexible fuel vehicles (FFVs). Ford and Chrysler have recently announced their intention to sell hundreds of thousands of FFVs nationwide. The challenge to automakers is to make these vehicles perform as cleanly as possible, and as fuel flexible as possible. We are gravely concerned, however, that E-85 vehicles introduction into California will occur without adequate infrastructure plans to supply E-85.

VI. THE OXYGENATE DEBATE

You are no doubt aware of the studies currently being conducted on MTBE and discussions of the possible ban of this gasoline additive. Chairman Dunlap is going to go into reformulated fuels in substantial detail, so I will not discuss those issues. I do want to briefly highlight one crucial piece of the fuels oxygenates puzzle for which the Commission is responsible.

In legislation signed last year, the Commission was directed to conduct a comprehensive assessment of the availability and price of oxygenate alternatives. Although this study will not be completed until mid-May, I would like to share with you some of the preliminary draft findings, specifically, with regard for ethanol's role as a potential replacement to MTBE in gasoline:

• Demand for ethanol could be significant if MTBE were to be banned and ethanol became the oxygenate of choice. At 2 percent reformulated gasoline by weight, California would require over 50,000 barrels per day of ethanol which is almost half of the nation's current output. Gasoline blends containing 10 percent ethanol for California would require nearly all the production capacity in the United States.

• In the near term, supplies of ethanol would probably come from corn-based production sites in the Midwest. In the longer term, it may be possible that a portion of these ethanol supplies from the Midwest could be displaced by ethanol derived from biomass in California.

• As for the fuel distribution infrastructure, capitol expenditures to upgrade terminals in California to allow for the blending of ethanol into gasoline may be much lower than for other alternatives. Early results suggest that the improvements will require less than $100 million or about 1 penny per gallon if the costs were passed along and recovered in one year's time. (We realize that for some companies and facilities these expenditures can be a significant financial burden.)

• Even though the costs may seem quite minimal to upgrade for ethanol, the major challenge appears to be the time that may be required to successfully transition to ethanol blending capability. That work could take up to two years to complete.

• The major costs of using an alternative oxygenate are expected to be in the areas of higher refinery operating expenses, costs of alternative oxygenate supplies, and more expensive gasoline imports. It is likely that these other costs will be greater than those associated with terminal modifications. These other portions of the study are nearing completion and are expected to be released for review next month.
  

VII. CLOSING

In closing, I would like to invite all of you to attend the 2:30 session, entitled 'New Uses: Market Opportunities for Ethanol in the 21st Century.' Tom Glaviano and Bill Blackburn of the Energy Commission staff will be two of the featured panelists. They will be presenting a more in-depth technical discussion on the alternative oxygenates study as well as our on-going work to assess life cycle costs of biomass fuels.

I thank you again for your time and attention. I sincerely hope that you can meet the challenges I have brought before you today in your efforts to successfully produce and sell biomass fuels in California.