RE: MTBE & ETHANOL
Dear Senator Smith:
Thank you for the opportunity to provide testimony for consideration by your full Committee on April 23, 2001 in Salem, NH. My firm has been actively involved in ethanol and biomass ethanol development in New England for the past three years. We are currently participating in a U.S. DOE/NREL-funded feasibility study to locate an ethanol plant in Northern Maine. For the past two years, I have been a participant in NESCAUM's MTBE Task Force that covers New England and the Mid-Atlantic States. We are also founders and principals of Northeast BioEnergy, LLC ("NEB"), an ethanol plant developer.
NEB has been formed in response to the expected phase down of MTBE and the need to replace it with ethanol. Unlike the mid-West which has over the past 25 years developed a corn ethanol industry that now produces in the order of 1.5 billion gallons of ethanol per year as an oxygenate without MTBE, Eastern and Western states each consume in the order of 1.5 billion gallons of MTBE per year. Because corn does not grow well in the East or the West, mid-Western corn producers will be hard-pressed to meet timely demand for an additional 3 billion gallons per year of ethanol.
In response to the opportunity to develop an ethanol industry in the Northeast, NEB has adopted a three-phase approach to developing regional ethanol and biomass ethanol resources and supplies:
Phase One: Start with known and available proven conventional tuber/grain processing technology; import corn and other grains from the mid-west; this is necessary primarily for project finance. Because of existing infrastructure at candidate plant sites, it may be (net) less expensive to bring in grain v. corn ethanol; feasibility for this is being evaluated this Spring.
Phase Two: Add E-10, a dedicated energy crop; this proprietary tuber/cellulose combination has been developed in cooperation with the University of Idaho; we're bringing in seed for trails in Maine this spring; it will take 2-3 seasons to produce any significant volume; tuber will be processed using Phase One technology; cellulose will be used as a soil additive or animal feed supplement pending Phase Three - conversion to biomass ethanol. E-10 projects 1000 gallons per acre from the tuber; plus an additional 500 gallons per acre from the cellulose stock. This compares very favorably against corn -- about 325 gallons per acre. There is no difference between ethanol produced from corn and ethanol produced from biomass.
Phase Three: Add cellulose (biomass wood residue) technology; the incremental cost of adding emerging cellulose technology to a conventional tuber/grain processing plant is expected make the cellulose increment financeable; starting up with Phase Three technology cannot be financed at this time because it is unproven. Significant biomass resources in the Northeast, combined with E-10 and mid-West grain supplements could eventually meet the demand for an estimated 1 + billion gallons per year MTBE replacement in the New England states.
In the context of our support for a national domestic renewable fuels program that includes ethanol from both corn and biomass resources, Northeast legislators and regulators should be aware of the need to support this phase-in approach to ethanol production in the Northeast as MTBE is being phased out.
NEB is pleased to be working with a major regional oil refiner and distributor for ethanol offtake agreements. This company has for many years had a strategic interest in the introduction of new fuel formulations that provide environmental benefits. Their recent introduction of an ultra low sulfur gasoline is a recent example.
The geopolitical, environmental, and economic merits of producing domestic renewable fuels from corn and other emerging energy crops have been well documented by others. Nevertheless, here are a few target points for you to consider:
1. Henry Ford's proposed and preferred choice of fuel for his cars was ethanol. Unfortunately, Mr. Ford didn't have the muscle to take on the Oil Trust. Congress imposed a heavy tax on ethanol; petroleum interests won over agricultural interests.
2. In the 1920's, American engines required more octane. We had a choice to use either ethanol or lead to meet the demand for higher octane. Lead was patented; ethanol was not; commercial considerations won over agricultural interests. Use of lead was the first petroleum strike against U. S. public health.
3. In the 1970's, we had a choice to replace lead with ethanol for U.S. public health reasons. In the name of free market, benzene won. Use of benzene was the second petroleum strike against U. S. public health.
4. In the 1980's, American engines required more oxygen. We had a choice to use either ethanol or MTBE to meet the demand for higher oxygen. In the name of free market and foreign oil interests, MTBE won. Use of MTBE was the third petroleum strike against U.S. public health. Lead, benzene, MTBE -- three petroleum strikes and you're out!
5. While I fundamentally believe in the free market, I've come to accept that when it comes to U.S. public health and foreign oil, we should learn from our so-called free market mistakes. We should recognize there's no free market and little if any free choice when we mobilize to protect U.S. petroleum interests in the Middle East.
6. In the name of U.S. public health, we've now mandated lead, benzene and MTBE out. In the name of U.S. public health and domestic renewable fuels, maybe it's (finally) time to remember Henry Ford and mandate ethanol in. After all, we've had at least 6,000 years of experience learning how to manage and control interactions between alcohol (ethanol) and the human body, far longer than we've been trying to control interactions between automobiles and fuel. Wouldn't we rather deal with something as familiar as a .08 federal alcohol standard, especially when compared to the unknown, unforeseen, unpredictable consequences of whatever is to be the next petroleum-derived lead, benzene or MTBE type solution?
7. Just as it could have been a U.S. public health and domestic renewable fuels winner against lead and benzene, ethanol is still the most cost-effective, environmentally friendly U.S public health alternative to MTBE. There are volumes and volumes of technical information that can be provided by the Renewable Fuels Association (RFA) and many others to support this statement.
8. Ethanol is certainly the least toxic of all alternate options to MTBE. For example, substitution of iso-octanes frequently results in lower octane numbers and the addition of BTX which means higher toxics and a backslide in air quality levels that have already been achieved. On a toxics-weighted basis, ethanol is clearly a safer alternative for a large-scale public use such as transportation fuel.
9. A Renewable Fuel Standard that does not specify ethanol could open the door for unproven and potentially risky alternatives. Ethanol is a fully proven renewable.
10. Ethanol can be transported by pipeline. It is being done in commercial applications today.
11. Use of ethanol in summer months need not be harmful to the environment. All RFG must meet the same VOC performance requirements, whether MTBE or ethanol is used as the oxygenate. Because ethanol slightly increases the volatility of the resulting blend when mixed with gasoline, refiners have to produce a lower volatility blendstock when ethanol RFG is used. Thus, evaporative emissions are the same.
12. Use of ethanol would not (alone) cause consumer costs to increase. Midwest gas prices rose last summer primarily because of an inability to provide just-in-time supply due to a pipeline failure. This caused regional shortages and the resulting supply/demand price response. Prices went up for both RFG and conventional gasoline (where ethanol is not used and no volatility adjustment is made). Midwest ethanol RFG still averaged 5-10 cents below RFG in other areas of the country, including the Northeast.
13. According to energy experts, a primary cause of price volatility is limited U.S. refining capacity - now nearing a "maxed-out" state. With no new refineries added since the 70's, use of ethanol in the fuel supply would be a welcome extender to the limited ability of the industry to respond to summer demand, and in fact could reduce the upward pressure on prices.
14. Oxygenates are required to produce reformulated gasolines that meet the performance requirements of the Clean Air Act. In the absence of oxygenates, refiners could again dramatically increase the use of aromatics, such as benzene, toluene and xylene. This would mean significant backsliding from the toxic benefits currently provided by RFG.
15. If you remove 11% of the Northeast's gasoline supply because of the MTBE ban, it would be wise to replace that volume with something other than additional petrochemicals derived from imported crude oil.
16. From a financing perspective, it will be more difficult to finance ethanol projects in the Northeast if there is regulatory uncertainty. A change in the status quo could not only diminish environmental quality; it would not be good for business.
17. The development of a corn ethanol industry in mid-Western states over the past 25 years from 20 million gallons ethanol per year in 1978 to more than 1.6 billion gallons ethanol in 2000 provides tangible, viable evidence for the environmental and economic value of domestic ethanol. New England would be wise to follow the example of mid-Western states and adopt domestic ethanol as a replacement for MTBE. This may require subsidies at the state level similar to those in mid-Western states as shown below:
Alaska 6-8 cents/gal excise tax exemption (60 to 80 cents/gal ethanol)
Connecticut--1 cent/gal excise tax exemption (10 cents/gal ethanol)
Hawaii--4 percent sales tax exemption
Idaho--2.1 cents/gal excise tax exemption (21 cents/gal ethanol)
Illinois--2 percent sales tax exemption
Iowa--1 cents/gal excise tax exemption (10 cents/gal ethanol)
Minnesota--20 cents/gal producer payment
Missouri--20 cents/gal producer payment
Montana--30 cents/gal producer payment
Nebraska--20 cents/gal producer payment
Ohio-- 1 cent per gallon of E10 income tax credit
South Dakota--20 cents/gal producer payment
Wyoming--40 cents/gal producer payment
From a regional as well as a national perspective, encouragement of domestic renewable fuels such as ethanol is in our best interest. At this time, ethanol represents the most market-ready alternative to MTBE. With ethanol as the substitute, there is no need to backslide in either air or water quality.
Respectfully Submitted,
Hayes Gahagan Principal & CEO