The 2011 U.S. Biodiesel Market

Feb. 7, 2011 - PRLog -- As everyone in the industry is painfully aware, U.S. biodiesel production came to a virtual standstill with the expiration of the federal tax credit on December 31, 2009, which in turn caused 2010 to be a very difficult year for the industry. But the future looks bright according to the head of the nation’s largest biodiesel consulting group.  

Wayne Lee, principal of Lee Enterprises Consulting, Inc. of Little Rock, Arkansas, says the new Renewable Fuels Standard (RFS2), the extension of the biodiesel tax credit, and the current price of Renewable Identification Numbers (RINS) have caused many plants to seriously consider restarting.  “We are getting quite a volume of calls from plants contemplating restarting, people wanting to buy or sell plants, and refiners and importers of biodiesel” says Lee.  “Plant owners seem to be looking at restarting, taking on investors, or outright selling their plants” he says, “while the refiners, obligated parties under RFS2, seem to be deciding between buying and building their own facilities or simply purchasing biodiesel from third parties”.  Lee also notes that foreign biodiesel interests appear to be closely monitoring opportunities in the U.S. biodiesel market.  “I think that with the Gulf oil spill, the problems in OPEC nations,  and the other factors causing rising oil prices, the country may finally see what the industry has been saying for a long time – that we better do something and we better do it soon.”

Lee observes, however, that restarting operations still carries risk.  “Our group sees this industry in action on a daily basis” he explains.  “We know that financial considerations were certainly enhanced by passage of the tax credit, but we also know that the ‘one year at a time’ passage of this legislation still creates a difficult lending environment”.  Lee says that Congress must take a longer term approach, if they want to do more than give ‘lip service’ to the industry.  But RFS2 is a different story according to Lee.  “The EPA has mandated blending certain amounts of biodiesel into the petroleum fuel, and the refiner obligations are tracked by RINS,” he explains.  “While there are some fairly complicated rules that allow refiners to defer those obligations temporarily, noncompliance carries a fine of $37,500 a day,” he continues.  The only way to produce biodiesel RINS is to produce biodiesel and Lee observes that simple supply and demand will dictate that if the supply of existing RINS dwindles, the price will climb.  “It is in everyone’s best interest that biodiesel production comes back strong and soon” says Lee.  He notes that the EPA has a three month waiting period from application to the granting of permits, and RFS2 certification to produce RINS and that there is a time element involved in becoming eligible for the blenders’ credit – both of which add significantly to a company’s bottom line.

What advice does the group gives its clients contemplating starting, restarting or even buying a plant?  First, make sure the financials make sense.  Make certain the numbers represent the real costs in today’s prices.  Second, Lee says that the owner must troubleshoot the plant from an operational standpoint.  “You simply have to know what it’s going to cost to get the plant operational,” he observes.  Next, he says to review yields carefully and realistically because lower than expected yields, most often caused by either feedstock quality or operating conditions, are the ‘silent killers’ of a plant.

Lee also notes that there are several other areas that must be addressed by all plants before beginning operations.  An area of potential confusion is Renewable Identification Numbers (RINS).   “Done within the proper guidelines, the production of biodiesel creates RINS, which are often transferred to the blender upon purchase,” he says.  “These RINS have a value of their own and under certain circumstances can be detached and traded.”  Lee notes, however, that the EPA only allows producers to detach and trade these RINS in two specific ways, which must be followed precisely.  Last year, the consulting group added an expert in the field to ensure that its clients fully understand RINS, are protected, and use RINS to their maximum potential.  “Some people don’t realize that you can produce biodiesel that does not qualify for either the separation of RINS or even the dollar tax credit” he says.  “If a producer separated and sold such a RIN, a rejected trade could follow and this would be bad for all concerned”.

Another priority for plants is Process Safety Management (PSM), including safety assessments and safety training. These OSHA guidelines are strict and carry substantial fines for non-compliance.  Lee believes that some biodiesel plant owners may be operating under the assumption that they are not governed by these standards.   “We have checked with our alternative fuels attorneys and OSHA, and it’s pretty clear that commercial biodiesel facilities are covered by PSM standards” says Lee.  Failing to have written, delineated PSM standards is much like electing not to have insurance.  The fines could financially devastate the plant.

Quality Assurance is a third area that needs to be addressed.  Today’s biodiesel buyers demand a consistent level of quality. Lee’s group has consultants dedicated to quality assurance, cold soak, filtration, and preparation for BQ-9000 accreditation.  “We have folks that know what is required to implement a successful quality assurance program that will give comfort levels to buyers, and consistency is the lifeblood of every biodiesel plant” Lee says.  “The money spent in doing things right in the first place is always going to be considerably less than the cost of correcting problems.”

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Lee Enterprises is a biodiesel consulting firm specializing in project oversight & management, feasibility studies, grants, business plans, and assistance with planning, market analysis, site evaluation, feedstock selection and procurement, process technology, evaluation, offtake distribution, RINs, financing, capital budgeting, cold soak, filtration, personnel, and contract negotiations (for feedstock, off-take, transportation, construction, site purchase/lease, and plant management). The group also owns National Business Brokerage, Inc., a full service business brokerage firm specializing in the buying and selling of biodiesel plants. Lee Enterprises, 1503 East Kiehl Ave., Sherwood, AR 72120. (501) 833-8511. www.lee-enterprises.com.