With the partial sunsetting of the Renewable Fuel Standard (RFS) in 2022 and the rise of electric vehicles (EVs), sorghum farmers might be wondering about the future of liquid transportation fuels and whether ethanol will still be relevant in the future. The short answer? Absolutely.
According to ethanol and agriculture veterans Matt Durler and Paul Bertels, the future of ethanol is as bright as it has ever been, boasting a myriad of market opportunities. Low carbon fuel markets, sustainable aviation fuel (SAF) markets as well as food and industrial grade alcohol markets are paving the way for new opportunities for U.S. ethanol plants. With ethanol producers accounting for 20-30% of U.S. sorghum demand, the continued health of this industry remains paramount for sorghum farmers.
“It is an exciting time for the ethanol industry with regard to carbon and sustainability,” said Matt Durler, National Sorghum Producers managing director for climate-smart sorghum. “There have never been more opportunities for ethanol producers, and ultimately farmers, to capitalize on the sustainability benefits they are delivering to society.”
A low carbon fuel market is different than a carbon credit market. Durler noted the latter prioritizes trading credit for carbon sequestered below ground, while the former looks at the entire spectrum of emissions.
“A low carbon fuel program is based on reducing CI as measured across the complete lifecycle,” said Durler. “In other words, sorghum production has carbon emissions associated with it because of fuel and fertilizer usage, and ethanol production from sorghum has emissions associated with it, as well. In low carbon fuel markets, all such emissions are taken cumulatively, and ethanol producers are incentivized to reduce these cumulative emissions.”
The shift toward low carbon fuels is evident from the policies being adopted across the globe.
“Worldwide, there are 66 countries that have adopted some type of sustainability target for fuels,” said Durler, highlighting the U.S. as a notable example where states like California, Oregon and Washington are pioneers in low carbon fuel programs. Accordingly, the market potential is considerable.
“In many cases, it could be as much as $0.10-$0.20 per gallon,” said Durler, adding that even higher premiums are attainable for ethanol producers, such as those in the Sorghum Belt, who are capturing and sequestering the carbon emitted during ethanol production (a process called CCS) and depending on whether farmlevel CI scoring is allowed in the low carbon fuel program of tomorrow.
Beyond low carbon fuel programs, the future looks bright.
“While the RFS historically provided a floor for ethanol demand, economics drive baseline demand today,” said Durler. “Removing regulatory barriers to year-round E15 will expand this baseline. Today, there are other incentives for companies, in particular publicly traded companies, to blend more ethanol to lower CI. However, the biggest potential opportunity on the horizon comes from the Inflation Reduction Act (IRA), which will create an incentive of $0.02 per gallon for each point of CI reduction over 50%. The rules are still far from being finalized, but this could create disruptive incentives for ethanol producers and potentially even farmers to take drastic steps to reduce CI.”
As the move toward low carbon fuels continues on the ground, a parallel shift has begun in the air, with SAF promising to change the landscape of aviation and unlock significant, and completely new, demand for ethanol.
“SAF is renewable jet fuel, which is the same as kerosene,” said Paul Bertels, principal of Farmgate Insights, a consulting firm designed to bring farmers’ perspectives to agricultural markets. “It is structurally the same as jet fuel, so it can be dropped in, although it is currently limited to a 50% blend.”
“The current U.S. jet fuel market is 25 billion gallons,” said Bertels, noting the vast scope of the opportunity. “This is projected to increase to 35 billion gallons by 2050. The White House has set a goal of three billion gallons of SAF by 2030 and 100% by 2050. Global demand is expected to be around 170 billion gallons by 2050.”
What does this mean for U.S. ethanol producers? Bertels—who together with colleague and BioCognito principal Nathan Danielson have been barnstorming the Midwest promoting knowledge of SAF and its potential—contends the potential for ethanol could be profound.
“Converting lipids like soybean oil to jet fuel will be the first method employed, but the global lipid market is getting incredibly tight,” said Bertels. “Ethanol is the next most readily available feedstock, but for ethanol to capture the bulk of the 2030 target, a 15% expansion in current capacity is needed. Long term, the market potential is huge. Thirty-five billion gallons is more than twice the current demand for ethanol in the U.S.”
Bertels added that aviation is the one mode of transportation that cannot be electrified, so in addition to creating new demand, SAF provides a natural hedge against EVs.
It is still unclear how much of existing ethanol production capacity will directly benefit from producing SAF versus reaping indirect benefits of greater overall demand for ethanol.
“Several [oil refiners] are already converting to make renewable diesel or SAF by hydrogenating lipids, while the ethanol-to-SAF process will require additional capital,” said Bertels. “Furthermore, to qualify for expected incentives, SAF must show a 50% reduction in CI compared to petroleum-based jet fuel. This is why processes like CCS become so important. Ethanol producers that can implement CCS are close to the threshold and thus could be in a position to directly participate.”
Echoing Durler, Bertels emphasized the importance of the IRA, noting that the legislation created a SAF credit of $1.25 per gallon for fuel that meets the 50% CI reduction threshold and an additional incentive of $0.01 per gallon for each point of CI reduction over 50%, and noted the expanding footprint of SAF incentive programs.
“Over the last year, states like Illinois, Washington and Minnesota have passed additional credits for SAF,” said Bertels, adding that some programs target producers while others target the end-users. “Globally, the European Union has adopted a mandate requiring an ever-increasing amount of SAF to be consumed, and the international body that governs air traffic is currently working on a system to determine how international flights will be assessed CI reduction targets.”
In any case, SAF will be a major contributor to this and similar systems.
Like SAF, several other previously unexplored markets for ethanol have surfaced in the years following the global outbreak of COVID-19. In an unexpected twist, the pandemic brought to light adaptability and versatility in the ethanol industry.
“The short supply of hand sanitizers resulted in many ethanol producers shifting their focus to cater to this immediate need,” said Durler. “The industry’s foray into food grade alcohols and other niche markets, albeit on a small scale, speaks to the expansive horizons and potential avenues of growth.”
Durler emphasized the demand opportunity is much smaller than that created by low carbon fuel or SAF markets but noted the importance of the diversity even niche opportunities can provide.
“The rapid response to fill a need during the pandemic shows the entrepreneurial nature of these businesses and the adaptability of production processes to provide higher value products and expand market opportunities,” said Durler. “And in the end, more markets for these products directly creates more demand for U.S. sorghum.”
For sorghum farmers and their partners in the ethanol industry, the road ahead is lined with promise and potential. Whether tapping into low carbon fuel markets, pioneering the growth of SAF or diversifying into other niches, ethanol producers will be key partners for U.S. agriculture well into the future.
This story originally appeared in the Fall 2023 Issue of Sorghum Grower magazine.