What’s Next For Cellulosic Biofuels and the D3 RIN Part 2 – prospects for volume growth
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A main objective of the Renewable Fuel Standard (RFS) in 2007 was to trigger development of at least 16 billion gallons/year of transportation fuel made from cellulosic biomass. Cellulosic biomass consists of non-food crops and waste biomass such as corn stalks, corncobs, straw, wood, and wood byproducts.
But high costs and other barriers to large-scale production of liquid fuels from these feedstocks proved much higher than had been anticipated when the Renewable Fuels Standard was enacted. As a result, the targeted 16 billion gallons per year of cellulosic biofuel never materialized.
Because this market never got off the ground, from 2010-2022, EPA reduced the mandated minimum volume of cellulosic biofuel to a small fraction of the statutory volume and set up a special credit called a cellulosic waiver credit (CWC). The CWC was an effective workaround for refiners to comply with the cellulosic biofuel volume mandate despite there being very little cellulosic biofuel production.
See Part 1 of this series for an explanation of the CWC including details on how its price set up an interplay with the advanced (D5) RIN and the cellulosic (D3) RIN, and for how the suspension of the CWC has caused new stresses in the biofuels world.
Meanwhile, while efforts to grow cellulosic liquid fuels kept fizzling, there was some growth in production of compressed natural gas and liquefied natural gas (CNG/LNG) derived from biogas that comes from landfills, sewage and waste treatment plants, and manure digesters.
In response to input from industry and other sources, EPA added a pathway for CNG/LNG derived from biogas coming from landfills, municipal wastewater treatment facility digesters, agricultural digesters, and separated municipal solid waste digesters, as well as biogas from the cellulosic components of biomass processed in other waste digesters, to generate cellulosic biofuel (D3) RINs when used as a transportation fuel.
As things developed over time, this route to making CNG/LNG from biogas became the dominant means to generate D3 RINs.
As described in Part 1 of this series, the expiration of the CWC has now changed the game for pricing of the D3 RIN. Figure 1 shows the recent interplay between the prices of the D5 RIN (red) a theoretical minimum, the D3 RIN, (blue) and the sum of the prices of the D5 RIN and the currently suspended CWC (green), a theoretical maximum, for the D3 RIN.
As things stand, if the rate of cellulosic biofuel production is below what’s required to meet the cellulosic volume mandate, then, in theory, the D3 RIN price will increase to stimulate increased production until the production rate of cellulosic fuels reaches the rate required to meet the mandate.
Where will that new volume come from, and how high must the D3 RIN price rise to stimulate its production?
95% of cellulosic RINs are generated by production of biogas from landfills. There are over 2000 landfills in the United States that could theoretically produce biogas, to be upgraded to pipeline quality natural gas, that would be eligible to earn D3 RINs. A key question for D3 RIN pricing is how large and how fast could production from those sources increase?
D3 RINs are also generated by producing biogas from anaerobic digestion of animal manure. Large dairy firms are the top source of this biogas. That business is also ripe for expansion. Aemetis, Inc., California’s largest biofuel producer, has a business segment producing and transporting dairy biogas from a network of 9 dairy farm digesters. This business segment started producing positive cash flow in the 2nd quarter of 2024 and is expecting to realize substantial increase in cash flow in 2025.
Aemetis has aggressive long term plans to expand this network to capitalize on subsidies from California’s low carbon fuel programs, the federal producer tax credit and RINs in coming years, supported by United States Department of Agriculture loan guarantees.
Implementation of the 45Z Clean Fuel Production tax credit, scheduled for introduction in 2025, and coming changes in the California state low carbon fuel credit subsidy will support volume growth from Aemetis and others pursuing this route..
Forest product residues remain a desirable feedstock source for D3 RIN production. Arch BioEnergy LLC plans to produce cellulosic renewable diesel from forest products that previously fed a (now shrunken) paper industry. Their business strategy enables capturing this feedstock at very low delivered cost. It will be converted to renewable diesel, sustainable aviation fuel, and valuable byproducts using innovative, commercially proven patented technology.
Higher D3 rin prices would help accelerate such innovation and could (finally?) make cellulosic liquid fuels a reality.
As with all renewable fuels, delivered feedstock costs, conversion cost, logistics and product off-take possibilities all weigh into estimating the supply cost curve for cellulosic biofuel and the theoretical price of the D3 RIN.
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