The Senate Environmental Resources and Energy Committee was told this week the federal biofuels mandate will drive production of biofuels and that a state-only mandate as the Governor proposed would unnecessarily complicate delivery of fuel products to consumers.

In this second hearing on setting a biofuels policy for Pennsylvania, the Committee heard from representatives of the petroleum industry, biofuels producers, an environmental group, fuel distributers, an Agriculture Economics Professor from Penn State and retail food merchants.

John Nikoloff, Pennsylvania Energy Resources Group, a company that works with biofuel producers, said they talked to nearly 50 biofuels companies and concluded the market for biofuels, biodiesel in particular, will grow with or without a state mandate. He noted that plants are now being built in the state with private investment.

Instead, PERG recommended more traditional economic development incentives for the development of production and rail transportation facilities like targeted seed capital, loan guarantees and an increase in the per gallon biofuel subsidy now offered through the Alternative Fuel Incentive Program.

“Pennsylvania’s state economic development programs were designed to create jobs on site, and are not set up to consider jobs created by these firms, and frankly, they don’t currently provide the resources that are essential to financing biofuels operations,” said Nikoloff.

He noted a 100 million gallon per year biodiesel plant would employ less than 40 people and that Pennsylvania could support no more than four or five large biofuels plants.

Michael Leone, Clean Air Council, told the Committee the Governor’s energy plan “is focused more on economic development and energy security than environmental progress. Unfortunately, it falls short on all counts.”

He said the E10 fuel (gasoline with 10 percent ethanol) mandated in the proposal “produces more emissions of key air pollutants, particularly precursors to ozone, than conventional gasoline… (and)… increased use of E10 may therefore make it more difficult for some areas of the Commonwealth to achieve and maintain air quality at the standards set by the EPA.”

The Council recommended mandating E85 fuel (85 percent ethanol), but recognized there would be siginificant infrastructure challenges to delivering this fuel. They opposed including coal-to-liquid fuels in any biofuel mandate.

Rolf Hanson, Associated Petroleum Industries of PA, said his industry is now under a federal mandate to increase use of biofuels and a dramatic increase in that mandate is now being considered in conference committee by Congress and would be finalized soon.

The federal Renewable Fuels Standard program now requires that at least 7.5 billion gallons of renewable fuel be blended into motor vehicle fuel sold in the United States by 2012. It also requires the use of a minimum volume of renewable fuel each year between 2007 and 2012.

But refiners exceeded the goal for 2006 by over 25 percent using over 5.4 billion gallons of renewable fuels. The U.S. Energy Information Administration predicts that by the end of 2007, refiners will surpass the 2012 goal of 7.5 billion gallons.

Members of the Congressional conference committee are considering an increase from 7.5 billion to 30 billion gallons.

Hanson said the federal mandate is driving investment in biofuels facilities and that a state mandate is not needed and could potentially interfere with and complicate delivery of biofuels to consumers.

Bob Leidich, BP Products of North America, Inc., pointed to the need to address a problem with Pennsylvania’s clean air regulations that could short-circuit efforts to bring biofuels to the 7-county Pittsburgh region.

State regulations require the sale of a special gasoline with a low 7.8 reid vapor pressure in the Southwest to help reduce ground level ozone pollution. Blending 10 percent ethanol in with gasoline there will increase the RVP above that limit. He noted federal clean air regulations allow a waiver to be issued to allow ethanol in gasoline, but Pennsylvania’s rules do not include a waiver provision.

Because adopting a 10 percent ethanol content requirement will increase emissions of ozone-causing chemicals, Leidich also cautioned that Pennsylvania may need to reduce emissions from other sources to make up for increases in this area.

James Dunn, Professor of Agricultural Economics at Penn State, told the Committee making ethanol from corn in Pennsylvania “is a bad idea,” primarily because the corn needed for these plants would have to be shipped in from out-of-state. He also noted that in 2006 ethanol was not a profitable business anywhere without the 51 cent per gallon federal subsidy that is due to expire in 2010.

John Kulik, PA Petroleum Marketers and Convenience Store Association, noted his members pioneered the delivery of biodiesel and bio-heating oil to their customers over the last several years and invested in advanced blending equipment and production facilities.

Kulik, however, raised several caution flags for Senators in their efforts to put together a biofuels policy for Pennsylvania.

He noted ethanol has to be handled separately in terminals, storage facilities and by railroad and trucking firms because of its corrosive nature, requiring a significant investment in new distribution facilities.

“Much attention has been given to development of production facilities, but if the network for delivering the product is not adequate to meet demand, the potential for serious disruption in the markets is obvious,” said Kulik.

He said his members were also warry of “high profile government requirements that changed with the political winds, leaving millions of dollars of investments in the dust,” like recent regulations mandating reformulated gasolines in certain areas.

As an example of creating fuel marketing areas by regulation or law, he pointed to Pittsburgh and noted Pennsylvania already is required to have three different kinds of gasoline during the summer months.

Tim Reardon, Giant Food Stores, LLC, said rising corn prices driven by the demand for ethanol have increased beef, pork and poultry prices by from 4.8 to 27.2 percent from May 2006 to May 2007, which tracks corn price increases during the same period.

“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs, it will also most likely mean higher food prices for consumers,” said Reardon. “Retail price increases for red meats, poultry and eggs are projected to exceed the general inflation rate in 2008-2010 as the livestock sector adjusts to higher feed costs.”

At the end of the hearing, Sen. Dinniman (D-Chester), prime sponsor of the Governor’s PennFuels Initiative in the Senate, said they were dividing consideration of the biofuels issues looking separately at ethanol and biodiesel since they both have different issues and opportunities for Pennsylvania.

Gov. Rendell's biofuels proposal is included in House Bill 1202 (Gerber-D-Montgomery), Senate Bill 789 (Dinniman-D-Chester), both of which are in the Senate Environmental Resources and Energy Committee, and Special Session House Bill 2 (Gerger-D-Montgomery) that is in the House Environmental Resources and Energy Committee which is scheduled to consider it next week..

Sen. Mary Jo White (R-Venango) serves as chair of the Committee and Sen. Ray Musto (D-Luzerne) serves as Minority chairman.

Copies of testimony and an online video of the hearing are available through the Senate Environmental Resources and Energy Committee webpage.

NewsClips: Ethanol Demand Raises Corn Prices for Farmers

Biodiesel Fuel Incentives Essential

$15 Million Biodiesel Facility Opens in Beaver County

State Subsidy Would Help Biofuel Compete, Makers Say

Biofuel Options Increase for Home Heating

Link: September 19 Senate Committee Hearing on Biofuels Policy

9/28/2007