Full Commitee Hearing- Renewable Fuel Standards

The purpose of the hearing is to receive testimony regarding implementation of the Renewable Fuel Standard in the 2005 Energy Bill and the future potential of biofuels such as biodiesel, cellulosic ethanol, and E85.

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Witness Panel 1

Mr. William Wehrum

Acting Assistant Administrator

Office of Air and Radiation, U.S. Environmental Protection Agency

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Witness Panel 1

Mr. William Wehrum

1
WILLIAM WEHRUM
ACTING ASSISTANT ADMINISTRATOR
OFFICE OF AIR AND RADIATION
U.S. ENVIRONMENTAL PROTECTION AGENCY
BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
JUNE 19, 2006
Mr. Chairman, and members of the Committee, I appreciate the opportunity to come before you today to testify on the status of the Environmental Protection Agency’s efforts to develop the comprehensive rulemaking implementing the Energy Policy Act’s Renewable Fuels Standard.

The Energy Policy Act of 2005

The Energy Policy Act of 2005, or EPAct, required EPA to take a significant number of specific actions that directly affect our nation’s fuel supply and quality. Some of these actions have already been proposed or have taken effect, including the removal of the oxygen standard for the federal reformulated gasoline program, proposal of new gasoline benzene content standards to control mobile source air toxics, and the recent proposed listing of boutique fuels.

However, a lot of work remains. As the Agency continues to work on all these actions, the most important and significant requirement established in EPAct is a national renewable fuels standard, or RFS. Since increasing the amount of domestically-produced renewable fuels is a key element of the President’s energy initiatives and supports his goal of reducing the country’s dependence on imported oil, the Agency has placed the highest priority in preparing this major rulemaking.

This effort will require significant resources for the necessary technical and
analytical work. EPA also understands the need to implement an RFS rulemaking that maximizes existing fuel production and minimizes impacts on the fuel distribution system.

Interest in renewable fuels has grown significantly in recent years due to concerns abouthigh fuel prices, our nation's dependence on foreign oil, and emissions of greenhouse gases such as carbon dioxide. These are some of the reasons that the RFS program garnered such strong support during its development, and why Congress continues to investigate ways to expand the use of renewable fuels. In this context, we see the RFS program as a critical first step, and as
such, it is important that it be carefully designed for the long term.

The Renewable Fuels Standard

Under EPAct, the RFS program requires that increasing volumes of renewable fuel be blended into gasoline in the continental United States beginning in 2006. With the help of our stakeholders, including renewable fuel producers and oil refiners, EPA has been able to accelerate the implementation of these EPAct provisions by making use of a default requirement provided in the Act that only applies to 2006.

Last December we promulgated a direct final rule to implement the default standard that allowed the program to begin in January without all the credit trading and compliance provisions that the full program requires. The default rule
provides us one additional year, until January of 2007, to implement the full program. Under the 2006 RFS default rule, refiners, importers, and gasoline blenders are collectively responsible for ensuring that the amount of renewable fuel volume used nationwide is at least 2.78 percent of the total gasoline used in the continental United States, as specified in EPAct. This equates to approximately 4.0 billion gallons of renewable fuel, of which both ethanol and biodiesel count. If the default standard is not met in 2006, the rule specifies that the deficit volume of renewable fuel would carry over to the RFS requirement for 2007. Based on data demonstrating ethanol use in 2005, and projections for 2006, it is expected that far greater than 4.0 billion gallons of renewable fuels will be used in 2006 in the US.

We are currently in the process of developing the full program that will apply in 2007 and beyond. EPA will propose a rule this year that would implement the comprehensive RFS program. The Agency expects to publish the proposal in September for public review and comment. We plan to complete the rulemaking early in 2007.

Although the Act prescribed many aspects of the program, including the required
renewable fuel volumes, it did not specify the structure of the credit trading program. Unlike past programs in which credit trading was used simply as a cost savings measure or a way to increase compliance flexibility, for the RFS program it will be a critical aspect of demonstrating compliance. Credit trading also differs under the RFS program because those parties that produce renewable fuels are not the same parties that must demonstrate compliance. We have been working closely with our stakeholders to design the credit trading program, and there have
been many difficult issues to resolve. These issues include defining a renewable fuel credit, what parties can generate credits, how credits are generated, when and by whom credits can be traded, the life of a credit, and the methodologies for determining the appropriate value of credits for ethanol produced from cellulosic feedstocks, as well as qualifying non-ethanol renewables, such as biodiesel. However, we continue to make progress on addressing these issues through the
concerted efforts of our technical and legal staff.

The proposed RFS rulemaking will also define the liable parties for the RFS program, establish how liable parties demonstrate compliance with their obligation, and establish the necessary compliance and enforcement provisions. Many of the issues involved have been considerably more complex than originally envisioned. For now, I will provide an overview of the extensive process EPA has undertaken to develop this important rulemaking.

EPAct establishes the years for which the RFS is in effect and the required annual
volumes of renewable fuel. While the 2006 level is 4 billion gallons, the volume increases to 4.7 billion gallons in 2007, 5.4 billion gallons in 2008 and continues to scale up to 7.5 billion gallons in 2012. EPAct requires that annually EPA is to establish the percentage requirement, which will apply individually to refiners, blenders, and importers, that will ensure use of the total volume of renewable fuels specified for that year in EPAct.

In order to implement a rulemaking of this magnitude, it was imperative for the Agency to promptly enter into close dialog with the affected parties to understand how the RFS program would impact the stakeholders in real world applications. EPA directly engaged all the major stakeholders, including the refining industry, renewable fuel providers, and the fuel marketers and distributors to gather information and suggestions which were incorporated into drafting the
various compliance and credit trading program provisions. Following extensive dialog with these stakeholders, the Agency believes we are very close to completing proposed comprehensive regulations.

Another critical component of the rulemaking is provisions to ensure compliance, such as recordkeeping and reporting. Because this rule impacts parties not traditionally affected by motor vehicle fuel regulations, namely those in the business of producing renewable fuels, there is an additional layer of complexity not found in our other clean fuel programs. The Agency continues to work with affected parties to develop an RFS program that, where possible, utilizes
existing EPA systems for collecting data and submitting records while avoiding duplicative burden.

Closing

EPA is committed to helping ensure the continued successful implementation of the national renewable fuels program. We have accelerated the process for the RFS rule and are on track to issue a final rule in early 2007.

I want to thank you, Mr. Chairman and the members of the Committee for your interest in the Agency’s progress in developing this important rule. This concludes my prepared statement.

I would be pleased to answer any questions that you may have.

Witness Panel 2

Mr. Joe Jobe

CEO

National Biodiesel Board

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Witness Panel 2

Mr. Joe Jobe

Senate Committee on Energy and Natural Resources
“State of the Biofuels Industry”
June 19, 2006

Testimony of Joe Jobe, Chief Executive Officer, National Biodiesel Board

Good morning Mr. Chairman, Ranking Member Bingaman, and committee members. It is a pleasure to be here today. We appreciate the committee holding this hearing and providing the opportunity to examine this important issue.

My name is Joe Jobe, Chief Executive Officer, of the National Biodiesel Board (NBB). The NBB is the national not-for-profit trade association representing the commercial biodiesel industry as the coordinating body for research and development in the US.

The announced purpose of this hearing is to consider the implementation of the Renewable Fuel Standard (RFS) and future potential of biofuels. Biofuels, particularly biodiesel and ethanol, are currently experiencing tremendous growth. I would like to focus my comments this morning on the factors that have contributed to that growth for biodiesel, why this growth is important to America, and what must be done to keep it on its current path of success.

Biodiesel is a diesel fuel replacement that is made from agricultural fats and oils and meets a specific commercial fuel definition and specification. Soybeans are the primary oilseed crop grown in the United States, and soybean oil makes up about half of the raw material available to make biodiesel. The other half consists of all other vegetable oils and animal fats. Biodiesel is made by reacting the fat or vegetable oil with an alcohol to remove the glycerin in order to meet specifications set forth by the American Society of Testing and Materials (ASTM). Biodiesel is one of the best-tested alternative fuels in the country and the only alternative fuel to meet all of the testing requirements of the 1990 amendments to the Clean Air Act. Biodiesel exhibits certain premium diesel characteristics. It contains oxygen so it burns cleaner, it reduces smoke and smell, and increases cetane and lubricity, two important operational characteristics.

Beginning this month, Ultra Low Sulfur Diesel Fuel (ULSD) will begin phase-in for on-road diesel fuel. Most ULSD will require a lubricity additive in order to meet lubricity specifications. Just 2% biodiesel can provide sufficient lubrication properties to any diesel fuel. In fact, Stanadyne Automotive, the largest fuel injection manufacturer in the United States has stated that adding 2% biodiesel to all ULSD is a superior solution to the lubricity problem with ULSD. It is anticipated that a significant amount of biodiesel will be used in ULSD as a renewable lubricity additive.

Biodiesel production and sales have grown from an estimated 25 million gallons in 2004, to an expected 150 million gallons in 2006. Likewise, investment in biodiesel production has grown from 22 biodiesel plants in 2004 to more than 65 biodiesel plants currently. There are over 50 more plants currently under construction.

The high price of fuel is one of the factors contributing to increased biodiesel use. However, there are three main federal policy measures that have been extraordinarily effective in stimulating biodiesel’s increased production and use. Because of these three policy measures, biodiesel is beginning to make a small but significant impact on our nation’s energy supply. These three measures are all working extraordinarily well, but are soon scheduled to expire, and must be continued in order to keep the growth in biodiesel going strong. Although biodiesel is showing signs of success, the industry is still in its infancy, and is where ethanol was in 1982.

First, the biodiesel blender’s tax credit was part of the restructured Volumetric Ethanol Excise Tax credit or “VEETC” legislation, enacted as part of the JOBS Act of 2004. The new blender’s tax credit for biodiesel went into effect in January of 2005. It functions similarly to the ethanol tax credit, and it has been extraordinarily effective in incentivizing the blending of biodiesel into the nation’s diesel fuel supply. It has been the primary stimulant in 2005 for the dramatic increase in new plants and jobs in biodiesel, bringing economic opportunity to both rural and urban areas.

Senators Grassley and Baucus have introduced the Alternative Energy Extender Act, S. 2401. This act includes the extension of the biodiesel blender’s tax credit through 2010. It is likely that the need for this program will go beyond 2010, and it is critical that this tax credit, which has been so effective for biodiesel, not be allowed to expire.

The second policy measure that has been very effective in energizing biodiesel’s growth is the Bioenergy Program. The program was initiated by the USDA in 2000 to stimulate the use of crop surpluses for energy needs. It was extended as part of the 2002 Farm Bill. However, the program is set to expire in July of this year. This program provides a production incentive which has been highly effective in the growth of the biodiesel industry. A 2005 OMB Program Assessment Rating Tool or “PART” evaluation reported that the program did an excellent job of stimulating biodiesel growth, and indicated that the program could continue to be effective for the emerging biodiesel industry. The report stated, “Increases in the production of biodiesel indicate a rise in the supply of domestically produced renewable fuels. It’s also an indicator of the viability of the biodiesel industry and its expanded consumption of agricultural commodities.”

According to Centrec Consulting Group, if an extended 2007 Bioenergy Program for biodiesel increased soy-based biodiesel production by a very modest 40 million gallons it would be expected to increase soybean prices up to $0.07 per bushel. Based on a 3.0 billion bushel crop and given the fact that low prices are projected to result in farm program payments, this increase in biodiesel demand could reduce soybean farm program outlays by up to $210 million. This would more than offset the cost of extending the Bioenergy Program for biodiesel for FY-2007. Extension of this program for biodiesel has many positives. It will be good for farmers, good for biodiesel, and can be a net positive for the US Treasury. I ask that you please consider doing what you can to extend this important program which is scheduled to expire in July of this year.

The third program that has greatly contributed to biodiesel’s success is the USDA’s Biodiesel Fuel Education Program. This program was a part of the energy title of the 2002 Farm Bill. The program provides educational funding to support increased fuel quality measures, increased acceptance of biodiesel by engine and equipment manufacturers, petroleum partners, users, and the general public. The USDA has done a superb job in implementing this program and it has been a key ingredient to biodiesel’s recent growth. A recent survey done to benchmark the program’s progress showed that the public’s awareness of biodiesel rose from 27 percent in August 2004 to 41 percent in December of 2005. To impact the American public’s awareness that significantly on any given issue is remarkable. In addition to greater awareness from the general public, market research shows familiarity among trucking executives increased from 27 in 2004 to 53 in 2005. Also of note:

• Four-in-five consumers continue to support a tax incentive that would make biodiesel cost-competitive with regular diesel fuel.
• 88 percent of environmental group leaders and 84 percent of health organization leaders support biodiesel as a transitional fuel, because biodiesel can make an immediate impact on reducing emissions until zero emissions technology is developed.

While the program has been highly effective, the biodiesel industry is still immature, and faces enormous challenges. Continued education is needed. I ask that you please look for ways to expand and extend this program beyond 2007.

To summarize the three federal policy measures that have been very effective in the development of the biodiesel industry and should be continued:

1) Extension of the biodiesel blender’s tax credit;
2) Extension of a Bioenergy Program for biodiesel;
3) Extension and expansion of the biodiesel fuel education program.

In addition to these three primary policy measures, there is one more program that must be mentioned. The Energy Policy Act of 2005 authorized funding for engine testing with biodiesel blends. The program was proposed by this committee and passed by Congress to help fund testing of new advanced diesel technology with biodiesel blends. Recently, a letter of support for this program was sent to the Senate Energy and Water Appropriations subcommittee. The letter was signed by eight major diesel engine and auto makers and the Engine Manufacturer’s Association. The letter outlined the fact that recent regulatory changes are requiring that diesel engines be redesigned in order to meet stricter emissions targets. These redesigned engines will need to be tested with biodiesel blends if biodiesel is to play a role in future diesel technology.

Soybean farmers have committed $2.4 million dollars to help address these engine testing needs. Likewise, engine and equipment companies have also committed significant resources. It is imperative that funding for this program is appropriated, so that biodiesel blends can be included in the testing of the new engines while the engines are being tested and certified with ultra low sulfur diesel fuel, and while leveraged funding is available. We ask that you support funding of this program.

According to the findings of LECG, an economic analyst group, continued “expansion of the biodiesel industry will provide significant economic benefits in terms of additional gross output and Gross Domestic Product, household income, new jobs, and tax revenue for government at all levels.” The report assumed the extension and implementation of the four major federal policy initiatives mentioned in this testimony, and projected growth in the biodiesel industry through 2015 and the impacts of that growth. The report concluded that more than $810 million would be invested in biodiesel refineries and that the ongoing operation of those facilities would result in an increase of more than $40 billion of gross output to the US economy. It will result in the creation of more than 25,000 permanent jobs by 2015. The report further concluded that the increased economic activity would result in increased income to American households, and additional tax revenue at all levels of government. Finally, the report concluded that as a result of the displacement of imported crude oil, more than $13 billion will remain in the American economy instead of being sent abroad to finance oil imports.

During the 2006 State of the Union speech, President Bush outlined his Advanced Energy Initiative, which stated the goal of reducing petroleum imports from the Middle East by 75 percent by the year 2025. Biodiesel and ethanol can be the first tools used to begin reaching that goal, because they are liquid renewable fuels that are available right now, ready for blending into our existing fuel supply and used in our existing vehicles. As an illustration of how biodiesel can play a role in that effort, please note that Iraq is the second largest provider of crude oil into the United States from the Persian Gulf region. Of the crude that comes from Iraq, approximately 1.85 billion gallons of diesel fuel is refined for the US market. If long-term, America were to replace just 5 percent of its 37 billion gallons of on-road diesel fuel with biodiesel, it would equal 1.85 billion gallons – the same amount of diesel fuel that we get from Iraq.

In addition to the significant benefits that biodiesel offers to increase our domestic refining capacity and overall energy supply, biodiesel offers enormous benefits to our agricultural sector. Biodiesel does much more than just utilize surplus agricultural commodities; it adds multiple layers of value to agricultural economics. There have been five major comprehensive economic studies evaluating biodiesel in the last four years. All of these studies, using different economic models, had similar conclusions: that increased utilization of fats and oils for biodiesel increases the value that farmers receive for their crops, while making protein meal less expensive as a feed for our domestic livestock producers and more competitive in international protein markets for food and feed. Not only does this allow farmers to more profitably supply global food markets, it may have the effect of increasing agricultural processing in the United States. Additional biodiesel production further increases domestic chemical processing from renewable by-products.

Finally, I would like to point out that during this period of growth and expansion of the biodiesel industry, fuel quality has become a paramount priority of industry stakeholders. Based on the experience of the introduction and expansion of the ethanol industry in the 1980s, the biodiesel industry has tried to anticipate fuel quality issues and address them. In 2000 the NBB established the National Biodiesel Accreditation Commission or NBAC which developed BQ-9000, the industry’s voluntary quality assurance program. This program accredits biodiesel producers or certifies biodiesel marketers based on quality assurance in the production and handling of fuel. BQ-9000 was modeled after other industry quality assurance programs such as ISO-9000, and will serve as a mark of quality to enable customers and distributors to better insure quality in their purchasing.

ASTM is the recognized standard-setting body for fuels and additives in the United States. ASTM has adopted a specification for biodiesel, ASTM D 6751. When biodiesel that meets its specification is blended into on-spec diesel fuel, and is handled according to proper fuel management techniques, the result is a high quality fuel. Quality biodiesel blends have been shown to perform well in virtually any unmodified diesel engine. However, use of any fuel that does not meet its quality specifications could cause performance problems or equipment damage, and this includes biodiesel.

The National Biodiesel Board believes strongly that rigorous adherence to D 6751 is important in order to protect consumers from unknowingly purchasing substandard fuel, in order to maintain the integrity of the nation’s fuel supply, and in order to protect the reputation of biodiesel as a high quality, high performance fuel. Several federal and state government agencies are responsible for the regulation and enforcement of fuel quality in the United States. Rigorous enforcement of fuel quality and compliance measure are very important, especially during this period of rapid industry expansion.

Mr. Chairman, members, we appreciate the opportunity to come before you today on this most critical issue. On behalf of the biodiesel industry, I want to thank you for all of the support you have given not only to the biodiesel industry, but the development of the biofuels industry overall. We look forward to continue working with you in this important endeavor. I would be happy to answer any questions you may have.
Mr. Charles Carey

Chairman of the Board

Chicago Board of Trade

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Witness Panel 2

Mr. Charles Carey

Testimony of Charles P. Carey
Chairman of the Board, Chicago Board of Trade
Before the Senate Committee on Energy and Natural Resources
June 19, 2006

Mr. Chairman and Members of the Committee, on behalf of the Chicago Board of Trade, I thank you for the opportunity to appear before you today.

Founded in 1848, the Chicago Board of Trade has a more than 150-year history of providing critical risk management markets and price discovery for a variety of industries. Our experience in providing customers with open, transparent, liquid markets and our commitment to the integrity of those markets has allowed the CBOT to grow dramatically from its founding to become a global, publicly-traded exchange with a total volume of nearly 675 million contracts traded last year. The CBOT offers open outcry and electronic trading of futures and options contracts on a wide variety of agricultural, interest rate, stock index and metals products. Among our most recent offerings are CBOT ethanol futures contracts, introduced in March of last year, and we are pleased to be providing our world-class risk management markets and transparent price discovery to this growing and vital industry.

The CBOT commends Congress and members of this Committee for enacting policies to encourage research, production and use of renewable fuels in the U.S. As you know, the Energy Policy Act of 2005 included a national Renewable Fuels Standard (RFS), which created a baseline renewable fuel use requirement of 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012. The CBOT supported the establishment of the RFS, and believes its implementation will continue to foster development of the U.S. renewable fuels industry, ultimately establishing a more self-sustainable energy supply and providing a key source of potential revenues for farmers and rural economies in the U.S.

The rate of growth in the ethanol industry has increased dramatically over the past few years. From its modest beginnings in the late 1970s to around 1980, it took over 12 years for the U.S. ethanol industry to reach an annual production level of 1 billion gallons. A decade later, in 2002, the U.S. reached the 2 billion gallon annual production level. It was at this point, however, that ethanol production truly began to accelerate. It took just 2 more years to reach 3 billion gallons of production and only 1 year after that to reach 4 billion gallons of production in 2005. Today, the U.S. ethanol industry has production capacity of approximately 4.8 billion gallons per year with nearly another 2 billion gallons of production capacity under construction.

The Chicago Board of Trade began to study the ethanol industry in the spring of 2002. At that time, the U.S. had annual ethanol production capacity of just over 2 billion gallons. While many of our existing customers trading corn futures and options contracts supported development of an ethanol contract to enable ethanol producers to protect their processing margin in much the same way that soybean processors use soybean, soybean meal and soybean oil futures to protect their processing margins, the Exchange determined that the ethanol industry was not yet large enough to generate the liquidity needed to support a viable futures contract. However, in our research, we learned some interesting facts about the ethanol cash market trade that prompted us to revisit the ethanol industry in a couple of years, when production and the size of the industry had increased. Of particular interest, in 2002 we learned that the industry lacked reliable price discovery and viable price risk management tools. At that time, ethanol price risk, if hedged, was typically hedged using Unleaded Gasoline futures. That strategy worked in some instances but was problematic in others since gasoline futures prices did not always correlate well with ethanol cash prices. Also, many new entrants to the ethanol industry were frustrated by a lack of reliable price data. Most of these new entrants believed their product was priced fairly, but many were not certain.

Part of the Board of Trade’s mission is to provide transparent risk management tools of the highest integrity, and to provide a price discovery mechanism and disseminate publicly the prices at which transactions occur on our exchange. Therefore, in 2004, the CBOT reexamined the feasibility of an ethanol futures contract. By that time, annual ethanol production in the U.S. had increased to above 3 billion gallons. The U.S. still did not have a viable risk management tool or a transparent pricing source for domestic ethanol producers and users. Moreover, U.S. market participants were even more enthusiastic about obtaining these tools than they were in 2002 since the additional production naturally created additional risk. The Chicago Board of Trade designed a corn-based ethanol futures contract in 2004, and launched it for trading in March 2005. The exchange offers the ethanol contract for trading both via open outcry and electronically on our e-cbot platform, and we now have more than a year of successful delivery cycles in the contract under our belt.

The CBOT Ethanol futures contract has demonstrated steady growth over the past year. Today, market participants have open interest positions in CBOT ethanol futures contracts going out one year into the future and representing over 24 million gallons of ethanol. Average daily volume, while variable, continues to grow. More importantly, perhaps, the industry has begun to use CBOT Ethanol futures prices as a barometer for domestic prices. By disseminating the prices discovered through transactions on our exchange, the CBOT is providing the industry with transparent pricing for the first time, and the results are encouraging. Since all market participants now have a reference for pricing, the way ethanol is traded in the cash market has evolved as well. Having a pricing benchmark has enabled the development of more varied and flexible cash contracts that have readily been available in the U.S. grain and energy markets, but have not been available in the ethanol market until recently. The end result of these developments is more efficient trade that results in both higher prices for ethanol producers and lower prices for ethanol blenders (i.e., a tighter bid-ask spread).

The Chicago Board of Trade held an ethanol industry meeting in early June to gather feedback from market participants representing both the buy and sell sides of the ethanol market. Over 40 market participants came to Chicago to offer their support and ideas to grow the CBOT Ethanol futures contract. They know that for their industry to continue to grow, greater efficiencies in trade will need to be realized. They also understand that a transparent and fair futures market plays in important role in developing these efficiencies.

We at the CBOT are proud of our part in this dynamic industry, and we look forward to its continued development. Once again, we appreciate the opportunity to participate in this dialogue.

***

Forward Looking Statements
In this release, our use of the words “may,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or other comparable terminology is intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in filings made by CBOT Holdings, Inc. with the Securities and Exchange Commission, which can be obtained at its website at www.sec.gov. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Mr. Daniel More

Managing Director and Head of Renewable Energy Investment Banking

Morgan Stanley

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Witness Panel 2

Mr. Daniel More

June 19, 2006
Testimony to the Committee on
Energy and Natural Resources

Morgan Stanley is a global financial services firm and a market leader in securities, asset management and credit services. Morgan Stanley has a market capitalization of approximately $60 Billion, with more then 600 offices located in 30 countries around the globe.

My name is Daniel More. I am a Managing Director and Head of the Renewable Energy Effort within Investment Banking. I have been an investment banker for 28 years and have focused on the Energy Sector for the last 20 years. I have worked on equity and debt financings, restructurings, privatizations and mergers & acquisitions for clients in the Energy Sector on six continents. I received my undergraduate degree from Colby College and an MBA from The Wharton School of Finance. I have been invited to testify on how Wall Street views the Renewable Energy sector, specifically focusing on investments in the biofuel sector.

Recent History

As recently as one year ago, discussion of public market equity investments in the
bioenergy sector and ethanol space was seen by most as being somewhat premature. The ethanol investments were primarily sourced from venture capitalists, private equity investors and wealthy individuals. These investors were making relatively small investments in the sector while facing a high level of risk given the uncertainties facing the industry. The investments these private investors made in the Ethanol industry were characterized by little or no liquidity. Because the Ethanol producers were using the investment proceeds to build plants and to start up production there were often no dividends paid. And in addition to the riskiness of this type of early stage investment the Ethanol business remained highly volatile. Volatile margins and fears of oversupply made it difficult for the Ethanol producers to obtain these investments. Not surprisingly the “cost” of this capital was relatively high. These early stage investors needed to be
compensated for the risks they were taking.

Volatility

Volatility in the Ethanol space, as has been widely recognized, has been extremely high. (See Exhibit 1). Over the last 10 years the margins (defined as the difference between the cost of producing the Ethanol and the price for which it can be sold) have ranged from robust to negative. Such volatility in a commodity product will always make financing difficult and relatively expensive. Investors will gain greater comfort for investing in producers of a commodity/product when they perceive that the inherent volatility in a commodity product is outweighed by fundamental need for the product and steady growth in the need for such commodity. In the past, that was not necessarily the case for Ethanol. There have been several drivers which have made Investors (both Debt and Equity) more comfortable with taking the risk on Ethanol and other Biofuels.

Recent Events - Debt Financing

Traditionally Ethanol plants were financed through bank financings, very often with the lead role being played by lending institutions which had a strong background in agriculture based lending. In order to obtain construction financing Ethanol developers had to pledge the plants as collateral. Oftentimes there were restrictions on dividends to owners and interest rates were relatively high due to the scarcity of lenders willing to make what was often perceived to be a risky loan.

Recently, however, the more traditional capital markets for debt financing have been more willing to make investments to the Ethanol industry. These financings are often at a lower all in cost and generally have fewer restrictions and covenants than traditional construction based bank loans. Public Market Financings have been completed for Ethanol plants for several producers. The rating agencies (S&P and Moody’s) still rate all the Ethanol producers as below investment grade. A list of debt financings for Ethanol producers is attached as (Exhibit 2 - At-Issue Bond/Bank Comparables)

Recent Events - Equity Financing

Over the last twelve months, the interest in investing in the Ethanol industry has certainly caught the attention of Wall Street and of the Institutional Investors who drive the investment discussion in the United States and abroad. Investors have suggested to us that a realization that the U.S. dependence on high price foreign oil and the unreliability of such supplies have led such investors to take a fresh look at the Ethanol industry. In the past twelve months several Ethanol companies have “tapped” the public equity markets. Most recently VeraSun Energy raised $483 mm in an IPO that was very well received. Other Companies currently in the process of raising equity financings in the public markets include Aventine Renewable Energy which is currently “on the road” having filed a prospectus to raise $302 mm and Hawkeye Holdings which has filed a prospectus to raise $500 mm. (See Exhibit 3 - Prospectus Cover for VeraSun Energy).

Equity Investor Concerns

Institutional investor acceptance of new capital markets issuances is critical to the long term success and stability of a company’s IPO and share price performance. On the Verasun roadshow many institutional investors were not entirely familiar with the Ethanol industry and the economics of investing in Ethanol. The VeraSun Energy IPO as a success because Management was able to allay the concerns of the Institutional Investors they met and to convince them of the viability of the economic model and to convince them of the potential growth in the industry. (See Exhibit 4 - Case study of VeraSun Energy IPO) The chief concerns that Institutional Investors had with investing in the Ethanol industry
include:

1) Blenders Tax Credit: Continued existence of the $.51 per gallon blenders’ tax credit provided to gasoline refiners. Uncertainty regarding the continued existence of this tax credit introduces a degree of volatility and risk into investments in the Ethanol industry.

An extension of the existing tax credit would serve as an important risk mitigant to
investing in the Ethanol sector, and would likely result in the infusion of additional
capital into the sector, thereby increasing the supply of ethanol in the United States.

2) Foreign Imports: The threat of imports from foreign ethanol producers. The
Ethanol industries in countries such as Brazil have received substantial governmental support over a long time period. The existing tariff on imported ethanol provides U.S. ethanol producers with the support required to ensure that the U.S. Ethanol industry has the ability to mature and compete effectively.
3) Volatility: The volatility of ethanol prices. As I previously discussed, the pricing
environment for ethanol has been characterized by extreme volatility. The continued existence of the blenders’ tax credit is an important mitigant to this volatility.

4) Corn Production: Sufficiency of U.S. corn production at reasonable costs is critical to the long-term success of the Ethanol industry. Investors will continue to invest in the Ethanol sector so long as they are comfortable that the price of corn (which is the largest cost component in the Ethanol process) remains relatively stable.

5) Logistics: Investors are concerned with the logistics of moving the final product to the markets where it is sold. In most cases, the most economical mode of transportation is rail. The ability to have access to rail, to obtain competitive rail rates and lack of congestion to transport Ethanol efficiently is a critical component in Investors’ minds.

6) MTBE Phase-Out: One important use of Ethanol is to replace MTBE in the U.S.
fuel stream. Certain Investors were concerned that the current governmental movement in the U.S. away from MTBE would somehow be reversed. This could have negative effects on the investments in the Ethanol sector.

7) E-85: One area Investors viewed as a positive factor in the current Ethanol space is continued growth in E85 Products. Fuel made up of 85% Ethanol and 15% gasoline currently can be used in approximately six million U.S. autos. Support for the auto manufacturers who produce E-85 “capable” cars and trucks would continue to benefit the industry.

8) RFS minimum levels: Some Investors were concerned that the RFS minimum levels of renewable fuels included in gasoline could be waived by the U.S. EPA. This would cause uncertainty in the industry and would have a negative effect on Ethanol investments.

Summary

Institutional Investors have recently gotten comfortable with the significant risks inherent in investing in the Ethanol and Bio-fuel industry. The framework in which the Ethanol Industry is currently operating seems to be working. Investors crave stability - the biggest risk they face are major changes in the underlying rules under which the current industry is operating.
Dr. Michael Pacheco

Director of the National Bioenergy Center

National Renewable Energy Laboratory

Read statement

Witness Panel 2

Dr. Michael Pacheco

Invited Testimony for the U.S. Senate Committee on Energy and Natural Resources
Prepared Statement of
Dr. Michael Pacheco
Director, National Bioenergy Center
National Renewable Energy Laboratory
Golden, CO
June 19, 2006
Mr. Chairman, thank you for this opportunity to discuss how biofuels can provide our nation with an abundant, renewable source of energy, and in particular, help reduce our dependence on imported oil. I am the director of the National Bioenergy Center at the National Renewable Energy Laboratory in Golden, Colorado. NREL is the U.S. Department of Energy’s primary laboratory for research and development of renewable energy and energy efficiency technologies. I am honored to be here, and to speak with you today.
The committee is to be commended for your hearing on the Renewable Fuel Standard and the future potential of biofuels such as biodiesel, cellulosic ethanol, and E-85. Researchers at NREL are dedicated to helping our nation develop a full portfolio of renewable energy technologies that can meet our energy needs. Given the seriousness of the energy challenges we face as a nation, there is a lengthy list of renewable and conventional energy options that must be pursued. If we narrow our focus, however, and consider specifically just those things we can do to create a viable alternative to oil – then our choices become more limited. Developing an industry to maximize the production of biofuels like ethanol, biodiesel, and other biofuels must be a priority – because biomass is the only renewable option we have for liquid transportation fuels.
Among the many benefits of biofuels are some significant advantages regarding air emissions. Both ethanol and biodiesel are oxygenates and hence can reduce the hydrocarbons, carbon monoxide and soot emitted from the tail pipes of gasoline and diesel vehicles. Biodiesel and ethanol can significantly reduce toxic compound emissions. Ethanol additionally can cut by 25% the emissions of smog forming hydrocarbons from fuel evaporation.
The emerging biofuels industry
Biomass is plant material – most commonly trees, grasses or agricultural wastes – that can be turned into energy. There are a lot of ways biomass can provide energy, and for decades there has been a valuable biopower industry in this country that produces electricity from biomass. Your hearing this afternoon on the future potential of biofuels is timely and appropriate. We only recently have come to fully comprehend just how valuable a contribution biofuels can make, and how we can mobilize the technology and the entrepreneurial wherewithal to make it happen.
I strongly believe that the goals set forth in the Renewable Fuel Standard are not only achievable, but that they represent a minimum of what is needed. Accelerated development of a cellulosic ethanol industry is a goal that I believe is required and can realistically be accomplished – if we put adequate resources behind the effort. And, accelerating the adoption of E-85 is critical to displacing a large fraction of petroleum with ethanol.
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When President Bush came to our laboratory earlier this year, he talked about a national goal of replacing more than 75% of our oil imports from the Middle East by 2025. And he affirmed that the best way to do that is through increasing our research on advanced energy technologies.
NREL’s Director, Dr. Dan Arvizu, and I were privileged to take the President through one of our key research buildings, the Alternative Fuels User Facility. We toured our process development equipment in this facility and I explained what goes on there – the research needed to accelerate the growth of a vital bioenergy industry in the United States.
Our goal is to make renewable biomass-derived fuels and chemicals the solution for ending, as President Bush himself memorably put it, our nation’s “addiction” to oil. And with the President’s Advanced Energy Initiative, we are on course to bring the nation’s first commercial cellulosic ethanol production facilities into existence by 2012.
Biomass: A plentiful resource
While much remains to be done, we as a nation start with some significant strength. The biomass resource in the country is huge, and the potential for it to grow is significant.
The Department of Agriculture and the Department of Energy recently looked at the question of whether the nation’s biomass resource could foster a biofuels industry large enough to meet a significant portion of our nation’s future fuel needs. The report, now commonly referred to as “The Billion Ton Study,” for the first time confirmed that the U.S. could yield more than a billion tons of biomass annually for energy needs. And, importantly, we could do this without negatively affecting the nation’s ongoing needs for food or fiber. This is significant because the 1.3 billion tons of biomass that was forecasted contains as much energy as 3.5 billion barrels of oil.
Let me provide some perspective on that. These 3.5 billion barrels are about 60% of the 6 billion-plus barrels of oil the U.S. consumes each year. Domestically, the United States, including Alaska, currently produces about 2 billion barrels of oil per year. That’s only 67% of the potential we see from biomass. U.S. oil production peaked in the early 1970s at the same level of production, about 3.5 billion barrels per year. The U.S. has never produced more than 3.5 billion barrels a year of oil.
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I should emphasize that such a transition to biofuels will not happen overnight. It will take a significant and sustained national effort to get us there. Still, “The Billion Ton Study” clearly demonstrates the biomass resource is real, and large enough to ultimately replace a large fraction of the petroleum-derived fuels we depend on today. DOE is in the midst of developing a vision for replacing 30% of current motor gasoline with ethanol by 2030 and this should help guide us in realizing the potential of biofuels.
Moreover, the resource is regionally diverse. We envision that every state in the nation could produce biomass and could benefit economically from an expanding biofuels industry.
We also are encouraged by the fact that there already exists a strong and growing ethanol fuels industry in this country. The U.S. currently produces more than 4 billion gallons a year of ethanol, almost exclusively from corn grain, and the industry is growing 30% annually.
To understand where we are today and where we need to go, we need to see ethanol technology issues and biomass resource issues as interrelated. To move the ethanol industry to where we need it to be, we have to move beyond corn grain as the primary biomass resource. One of the most abundant potential resources we have is corn stover, the non-food parts of the corn plant, including the stalks, leaves and husks. Other resources are forest thinnings, hardy grasses like switch grass, and fast growing trees.
To use these and other resources we need to perfect new technologies that convert the cellulosic materials of the plants into fuel.
Breaking down the economic barriers
So, why aren’t we producing ethanol from cellulosic biomass today? Simply put, the cost is too high. If we were to build a facility today for converting cellulosic biomass to ethanol, it would produce ethanol at about twice the price of one of today’s existing corn grain ethanol facilities. But we are making steady progress. The focus of the DOE Biomass Program and the National Bioenergy Center is to make cellulosic ethanol as cheap as corn ethanol within the next 6 years. Longer term, DOE and NREL are targeting a cost of cellulosic ethanol
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as low as 60 cents per gallon, but this will require revolutionary approaches for producing, collecting, and converting biomass.
The targets we have set to accomplish this are ambitious, but we believe they can be met with adequate research support. Our goal is to reduce the cost of producing cellulosic ethanol from $2.25 a gallon in 2005, to $1.07 in 2012. To get there we are working to greatly increase production efficiencies, and boost the average yield from 65 gallons per ton as it is today, to 90 gallons per ton in 2012.
One of the reasons I’m optimistic that we will meet these targets is our encouraging progress to date. Over the past 5 years, we’ve been able to drastically cut the cost of ethanol from cellulosic biomass, corn stover in particular, by reducing the cost of enzymes in partnership with two major enzyme manufacturers, and improving the biomass conversion process.
In the late 1990s, the high cost of cellulase enzymes forced the use of an entirely different biomass conversion process called acid hydrolysis, even though the acid hydrolysis process has inherent limitations in what it can yield. That has changed because of a partnership between DOE and two of the world’s largest biotechnology companies – Genencor and Novozymes. The consequences of that research collaboration have been impressive. The cost of enzymes for producing cellulosic ethanol has been reduced more than tenfold. As a result, all major process development work on cellulosic ethanol production is now focused on the more efficient enzymatic hydrolysis process – proof that the nascent industry is already benefiting from these scientific breakthroughs. We continue to work toward further reductions in the cost of these enzymes.
Integration of biorefineries into existing industries
Another exciting area of work is in the development of what are coming to be called “biorefineries”. Our scientists at NREL, together with those at other DOE national laboratories, universities and corporations, are leading the development of fully integrated refineries that use biomass, instead of petroleum, to produce fuels, chemicals, synthetic materials – virtually all of the products we use from a conventional oil refinery today. Biorefineries utilize a complex array of processing facilities to break down, convert and recombine a wide range of biomass components into fuels and chemicals, in a manner similar to how petroleum refineries convert petroleum crude oil. We envision that future biorefineries will utilize a wealth of resources we either underutilize or don’t use at all today. That includes agricultural residues, forestry residues, dedicated energy crops, municipal solid waste, algae and by-products of the food and grain industry.
A range of biorefinery R&D work is underway in partnership with industry. DOE’s biomass program is partnering with a number of the major ethanol technology providers and ethanol producers, including Abengoa, ADM, Broin and Cargill, to increase the yield of ethanol from existing corn ethanol facilities and expand the slate of feedstocks. In many ways, a cellulosic biorefinery can be viewed as an expansion of a corn ethanol facility. That’s why we believe tomorrow’s cellulosic ethanol industry will not replace today’s corn grain ethanol industry, it will evolve from it.
At the same time, DOE is partnering with chemical industry leaders, such as DuPont, to develop new opportunities for producing both fuels and chemicals from biomass. DOE is partnering with the forest products industry to explore and develop biorefinery concepts that can integrate into existing forestry operations. And, most recently, NREL is partnering with oil industry technology 4
developers to explore novel options for integrating biomass streams into existing petroleum refineries. These and other partnerships are speeding the progress of new technologies to the marketplace, and may uncover new options for producing fuels from biomass.
Thermal technologies such as gasification, pyrolysis and hydrothermal systems are all worthy of further research and development to determine how these technologies and the respective biofuel products impact the cost, efficiency and integration into existing fuels infrastructure.
Ethanol reduces use of petroleum
You may have heard some discussion about the energy efficiency of ethanol. The first ethanol plants built in the late 1970s were costly and energy intensive, and that sparked a debate about whether it made good “energy sense” to replace gasoline with ethanol. Today’s ethanol industry is considerably more cost effective and energy efficient. Researchers at DOE, USDA and elsewhere have shown that the net energy benefits of fuel ethanol are clear and considerable.
The figure below summarizes results from the “Well to Wheels” study conducted by Argonne National Lab, General Motors and several other partners including two major oil companies. As shown in the figure, the energy contained in ethanol made from corn is about 1.4 times the fossil energy used to produce the ethanol, and 10 times the petroleum used. For cellulosic ethanol, the ratio of energy in the ethanol to the fossil energy used also increases to about 10 Btu in the ethanol for every 1 Btu of fossil fuel used. From the perspective of science, at least, this debate has been decided in favor of continued development of ethanol. Ethanol is proving to be a very effective option for reducing our dependence on petroleum – regardless of whether it is made from corn or cellulosic materials.
There is little doubt that ethanol will be, and should be, the first biofuel that we can use to reduce our dependence on petroleum. However, NREL and the National Bioenergy Center recognize that other biofuel options need to be developed as well.
Biodiesel and other derivatives of fats, oils and greases can make a significant contribution. Researchers at DOE and USDA have shown that the energy contained in biodiesel is 3.2 times the fossil energy used to produce the biodiesel. A wide variety of seed oils, animal fats and waste oils from all parts of the country can be converted to biodiesel. Aquatic species such as algae can also play a major role in the long term because they do not require fertile soils, can grow in brackish water, and yet
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algae can produce very high yields of oil. Considerable research and development will be required to realize the potential of algae as a source of oil feedstock.
There is a small but rapidly growing biodiesel industry in the United States. The growth of this industry is currently limited by a number of barriers to market penetration, including the need to develop new fuel quality standards, uncertainty regarding impact on NOx emissions, and by lack of understanding of how this new fuel affects engine performance and durability. This is especially true for new diesel engines equipped with advanced emission control technologies that will be introduced beginning next year. NREL’s Center for Transportation Technologies and Systems is working to address these issues in partnership with biodiesel producers and engine manufacturers. We, along with industry, believe additional engine testing is needed to better understand the performance of B20 (20% biodiesel) and lower blends in the advanced emission control diesel engines that will enter the market in the 2007-2010 time frame in response to EPA regulations. This engine test work would advance biodiesel technologies by ensuring compatibility with these new (and much different) engines.
Other NREL vehicles and fuels research
I would be remiss if I did not note the other important research being conducted at NREL which also is contributing to the next generation of vehicles and fuels. NREL’s Center for Transportation Technologies and Systems is working to address the biodiesel utilization issues noted above. Similar R&D is needed to more accurately quantify the air quality benefits of ethanol and develop engines that are optimized to operate on ethanol as well as on gasoline. A number of vehicle efficiency improvements are also being investigated including technologies to dramatically reduce fuel use for air conditioning. Other promising answers to our future transportation needs are gasoline-electric and diesel-electric hybrid systems and so-called “plug-in hybrids”. Plug-in hybrid vehicles use both a gasoline engine and the electric outlet of your home to eventually achieve fuel economy of more than 100 miles per gallon.
Continued research hastens fuels development
In conclusion, let me review some key points. Biomass is the only renewable option for producing liquid transportation fuels. The U.S biomass resource can supply a large portion of demand for gasoline and we can greatly expand the resource base when world petroleum production begins its decline. The biofuels industry can use resources from every region of the country and could become a needed stimulus for ailing rural economies. Ongoing research, like research into biorefineries, will create many new products beyond the biopower, ethanol and biodiesel we are producing today.
The President’s Advanced Energy Initiative holds the promise of accelerating our work so that we can help get this industry up and running, to benefit the American people, even sooner. The initiative envisions a more aggressive research effort in all key areas: further reductions in enzyme costs, advances in process technology to reduce capital and operating expenses and advances in feedstock R&D that will reduce the cost of production, collection and transportation of biomass to the biorefinery.
As director of the nation’s research center for bioenergy, I can assure you that a sustained, high level of investment for research in bioenergy will provide major benefits for future generations. We need to keep apace with this work because biofuels are an environmentally and economically beneficial way to bridge the gap between rising energy demand and peaking oil production, while reducing U.S. dependence on imported oil. Thank you. 6
Mr. Chris Standlee

Vice President

Abengoa Bioenergy

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Witness Panel 2

Mr. Chris Standlee

ABENGOA BIOENERGY
ABENGOA BIOENERGY CORPORATION
The United States Senate Committee on
Energy & Natural Resources
Hearing on the implementation of the Renewable Fuel Standard in the 2005 Energy Bill and the future potential of biofuels such as biodiesel, cellulosic ethanol, and E85.
Testimony of
Chris Standlee
Executive Vice President & General Counsel
Abengoa Bioenergy Corporation
and
Vice Chair of the Renewable Fuels Association
June 19, 2006
Good morning, Mr. Chairman and Members of the Committee. My name is Chris Standlee, and I am the Executive Vice President and General Counsel for Abengoa Bioenergy Corporation, which in the United States, is headquartered in Chesterfield, Missouri. I also serve as Vice Chairman on the Board of Directors for the Renewable Fuels Association, the national trade association representing the U.S. ethanol industry. I am here today to represent both Abengoa Bioenergy and the Renewable Fuels Association, and I am pleased to be here this morning to discuss the fastest growing energy resource in the world – the U.S. ethanol industry.
Abengoa Bioenergy
First, I must point out that Abengoa is a technology driven, highly diversified company committed to sustainable development. Abengoa Bioenergy primary business is the production of ethanol; we own and operate ethanol production plants in the United States and Europe. In the US we own and operate three plants, with a fourth under construction: one in New Mexico, two in Nebraska, and one in Kansas. We are also a world leader in the research and development of new ethanol technologies (both traditional starch based and cellulosic). This research commitment includes building the world’s first commercial demonstration cellulosic ethanol plant in Salamanca, Spain, which is now under construction and is expected to begin operation in mid 2007.
Our commitment to research is significant. First, we have formed a separate research company called Abengoa Bioenergy R& D, Inc. Second, we have committed over $100 million to research that will be spent over the next four years to help form cellulosic ethanol plants more practical and feasible. Finally, that company has formed partnerships with universities and federal research facilities such as Washington University in St Louis, Auburn University, Kansas State University, the National Renewable Energy Laboratory, and companies such as Novozymes, Syngenta, NatureWorks, LLC and UOP.
Currently, we are the largest ethanol producer in Europe, where we operate three ethanol plants, and have a fourth in the final stages of development. We are now constructing the commercial demonstration cellulosic ethanol plant in Salamanca, Spain where we expect to be producing ethanol from cellulose by June 2007. This plant should provide significant insight into efficiencies and technologies for biomass ethanol production that we can incorporate into a new cellulosic plant here in the U.S.
Abengoa is committed to making the cellulosic industry work in the U.S. As mentioned, our company is a world-wide leader in research and development and has committed to investing significant resources to produce biomass ethanol at a cost competitive price with gasoline, as well as DOE’s goal of producing 60 billion gallons of ethanol from cellulose by 2030. We expect to submit an application to compete for one of the three cellulosic demonstration plants the President proposed in the State of the Union address.
Abengoa became interested in ethanol in the mid-1990 and shortly thereafter built its first ethanol plant in Spain. To become a world leader in the renewable fuels industry, Abengoa targeted and completed the acquisition of High Plains Corporation in February 2002. High Plains Corporation was a U.S. public company and a pioneer in the ethanol industry, building its first plant in the early 1980’s. After the acquisition, High Plains Corporation changed its name to Abengoa Bioenergy Corporation in early 2003.
Senator Talent thank you for the opportunity to testify and Chairman Domenici and Senator Bingaman, it is good to see you again. I have had the honor of hosting both of you at our plant in Portales, New Mexico, and as you are aware, Abengoa Bioenergy is the only ethanol producer in New Mexico. Like so many other companies in our 2
industry, we have recently doubled the size of that plant. We are also developing at least two additional U.S. ethanol facilities which will almost triple our current capacity within the next few years. That growth is due largely to the passage of the Renewable Fuel Standard (RFS) in the Energy Bill. Our industry in general has accepted the responsibility you have given us and we are committed to diversifying our domestic energy transportation fuels supply to include substantial quantities of home grown renewable fuels.
My testimony today includes a review of EPA’s implementation of the Renewable Fuels Standard and the cellulosic industry. But first, I need to update you on the renewable fuels industry, since it is changing so rapidly.
Today’s Ethanol Industry
Today’s ethanol industry consists of 101 biorefineries located in 19 different states with the capacity to process more than 1.7 billion bushels of grain into nearly 4.7 billion gallons of high octane, clean burning motor fuel and 9 million metric tons of livestock and poultry feed. It is a dynamic and growing industry that is revitalizing rural America, reducing emissions in our nation’s cities, and lowering our dependence on imported petroleum.
Ethanol has become an ubiquitous component of the 140 billion gallon U.S. gasoline marketplace. Today, ethanol is blended into more than 40% of the nation’s fuel supply, and is virtually sold from coast to coast and border to border.
In 2005, the U.S. ethanol industry consumed more than 1.4 billion bushels of corn in the production of 4 billion gallons of ethanol. This represents approximately 12% of last year’s 11 billion bushel crop. The industry also used 55 million bushels of sorghum, or about 14% of that crop. Finally, ethanol is produced from a variety of agricultural waste products, including cheese whey, beer and beverage waste.
The 4 billion gallons of ethanol produced and sold in the U.S. last year significantly contributed to the nation’s economic, environmental and energy security. According to an analysis completed for the RFA, the 4 billion gallons of ethanol produced in 2005 resulted in the following impacts:
• Added $32 Billion to gross output;
• Created 153,725 jobs in all sectors of the economy;
• Increased economic activity and new jobs from ethanol increased household income by $5.7 Billion, money that flows directly into consumers’ pockets;
• Contributed $1.9 Billion to tax revenue for the Federal government and $1.6 Billion for State and Local governments; and,
• Reduced oil imports by 170 million barrels of oil, valued at $8.7 Billion.
But we are not finished yet. There are currently 32 plants under construction. Twenty-one of those have broken ground just since last August when Congress passed and
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President Bush signed last year’s Energy Policy Act into law. With existing biorefineries that are expanding, the industry expects more than 2 billion gallons of new production capacity to be in operation within the next 12 to 18 months.
The potential for the ethanol industry to continue to build infrastructure and become a substantial volume of our domestic motor fuels supply is enormous and if we truly are working towards energy independence, then we must continue moving forward. In 2006 alone, we will add more than 1.1 billion gallons of new ethanol to the marketplace, which means that without any new technological breakthroughs the industry already has the potential to grow to more than 11 billion gallons by 2012.
Renewable Fuels Standard Implementation
Our company and in particular our CEO Javier Salgado, is extremely excited about the opportunities for ethanol and the commitment to the industry shown by Congress in creating the RFS. It was only a few short months ago, when this Committee worked with Senator Talent from Missouri and others on a bipartisan basis to accept an amendment that created an 8 billion gallon (RFS). The President added to my CEO’s enthusiasm when he proposed three demonstration plants in his State of the Union earlier this year.
The RFS has done exactly what Congress intended. It has provided our industry with the stimulation to grow and expand, and to attract federal and private funds for the all important research and development. It convinced the petroleum industry that ethanol would be a significant part of future motor fuel markets and moved them toward incorporating renewable fuels into their future plans. It persuaded the financial community that biofuels companies are growth market opportunities, encouraging significant new investment from Wall Street and other institutional investors. While farmers have been and will continue to be the foundation of this industry, teachers, truck drivers, police officers and now all Americans have the opportunity to invest in our nation’s energy future.
The Environmental Protection Agency has been working diligently to promulgate the rules implementing the RFS. The RFA and Abengoa, along with every other stakeholder, supported the Agency’s interim rule, which allowed the RFS to move forward in the absence of final rules for credit banking and trading on the assumption that more than the required 4 billion gallons of renewable fuels would most certainly be used in 2006. Indeed, the industry anticipates that more than 5 billion gallons of ethanol will be sold this year, and with a projected 200 million gallons of biodiesel sales, the biofuels industry will be more than 25% over the required RFS level in 2006.
The RFA has been meeting regularly with EPA and other stakeholders to craft final credit banking and trading program. We are confident the Agency will be in a position to promulgate a rule in time for the 2007 program, and we give you our commitment that we will work with the Agency to complete this rule in a timely manner since it is vital to the future development of this infant industry. We are also confident, given the
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Agency’s yeoman’s work to include all stakeholders in this discussion, that the rule will be supported by all.
E85
E85 (an 85% ethanol to gasoline blend) is a true alternative fuel that shows a great deal of promise. While still a relatively small part of the nations fuel supply, it has the capacity to replace more gasoline than the standard 10% blend, and further lessen the country’s dependence on imported oil. Abengoa Bioenergy believes there is a strong future for E85, and recently announced a partnership with General Motors, Kroger Stores, and the State of Texas to bring E85 fuel to the Dallas and Houston markets. General Motors, Ford and other automobile manufacturers are steadily increasing the number of vehicles that can burn E85 (Flexible Fuel Vehicles, or FFV’s) and incentives provided by the Energy Bill and the Jobs Bill, as well as legislation being considered in several states, are promoting the expansion of the fueling infrastructure which will make E85 a more prevalent and viable fuel option.
Cellulosic Biomass
To date, the ethanol industry has developed almost exclusively from fermentation of grain starch, and this production of ethanol from grain fermentation will continue to grow. However, in the near future ethanol will need to be produced from other feedstocks, such as cellulose, to provide greater variety and volumes of feedstock and to sustain continued industry growth. Abengoa believes in the future of cellulosic ethanol and is committed to that future.
Cellulose is the main component of plant cell walls and is the most common organic compound on earth. However, it is much more difficult to break down cellulose than starch and convert it into usable sugars for ethanol. Yet, making ethanol from cellulose dramatically expands the types of material, the geographic region those materials are produced, and the amount of available material for ethanol production. At some point in the future, the materials now regarded as wastes that require disposal, as well as corn stalks, rice straw sorghum stalks and wood chips or "energy crops" of fast-growing trees and grasses will be feed stocks. Cellulosic ethanol production will augment, not replace, grain-based ethanol, and ultimately will exponentially expand potential ethanol supplies.
Abengoa plans to be a leader in the commercialization of ethanol production from cellulosic materials. Our commitment to cellulosic technology was first made at the end of the 1990s, with our first investment in an emerging cellulosic ethanol company. Soon after the acquisition of High Plains Corp in 2002, we incorporated Abengoa Bioenergy R&D, Inc. to further the development and commercialization of the cellulosic biomass technology. Our objective is to have the first commercial operating facility by 2011. This facility will use agricultural residues and switchgrass to manufacture cellulosic biomass ethanol. Like Abengoa Bioenergy, many other ethanol companies in the U.S. are working to commercialize cellulosic ethanol production: first, because we already have cellulose materials coming into the plant and second, because we are working to meet the goals of the 250 million gallons of ethanol from cellulosic feedstocks by 2013, as established by the Energy Bill.
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The cornerstones of Abengoa Bioenergy’s efforts are the two biomass ethanol facilities which are presently under construction, one in Spain and the other here in the U.S. Our goal is to enable the commercialization of the technology by 2011. The engineering and research pilot plant facility in York, Nebraska will demonstrate our new biomass fractionation and fermentation technology. This facility will be operating by the end of the year. The biomass demonstration facility being constructed in Salamanca Spain will demonstrate the enzymatic hydrolysis technology at the commercial scale. This facility will use wheat straw as the primary feedstock and will have the capacity to produce approximately 2 million gallons of ethanol annually. The knowledge gained and lessons learned from these two facilities will be the basis for the design of our first commercial scale biomass ethanol facility which will be located in the U.S. grain belt. The site for this facility is being finalized and will be announced later this summer.
Research Needs
The only thing more astonishing than the growth of the ethanol industry is the technological revolution happening at every biorefinery and every ethanol construction site across the country. Technology is moving ahead at a very rapid pace for the companies that are conducting the research. Abengoa believes in the future of cellulosic ethanol. It is vital to the future of the renewable industry and because of that important role, Abengoa Bioenergy has committed over $100 million to be spent over the next four years to research that will be important to making cellulosic ethanol more practical and feasible.
In 2003, Abengoa was awarded a $35 million competitively awarded cost share project by the DOE to improve efficiencies of traditional ethanol production from grains, and to evaluate and develop new biomass ethanol technologies. Because of the DOE grant, we were able to form partnerships and look into new ventures with companies like Nature Works to develop a new pentose fermenting yeast, essential for the biomass technology. In addition, we have partnerships with several other companies that will assist in the development of ethanol synthesis technology.
Historically, DOE's competitively awarded grants, funded through the Biomass and Biorefinery Systems research and development program have been essential to the industry developing new technologies that will move the industry forward. Some of the previously mentioned partnerships were competitively selected projects to be funded by the DOE, but are on hold due to lack of funds.
Recently, the DOE has informed our industry that it intends to cancel many of these competitively awarded research programs, while simultaneously proposing new solicitations to fund similar research. We believe that both the DOE and the industry are frustrated with this situation because it sends the wrong message to the winners of those competitive awards.
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This DOE program is an excellent way to provide federal cost-share funds to the most promising and innovative technologies to move the renewable fuels industry forward. The program has allowed Abengoa Bioenergy to build a pilot plant near our York, Nebraska facility that promotes research to increase the efficiencies of both the traditional starch fermentation process and the cellulosic ethanol production. We believe that competitively awarded programs are one of the most efficient ways to encourage development of new and unproven technologies that cannot be financed in traditional ways, and to facilitate growth in a new industry. We have asked Congress to continue to allow for additional funds for competitive solicitations. This money will provide very valuable research if the DOE is able to fund new awards and continues funding the previously awarded grants.
Next Step
It is our belief that biofuels will play a vital role to reduce carbon emissions in the transportation sector in the near to mid term (the longer term may have additional options such as hydrogen).
The cellulose ethanol industry will develop in the Midwest around the existing starch ethanol industry, but biomass exists in vast quantities everywhere, and we expect significant geographical expansion after it is initially established. As documented by the USDA. There is sufficient biomass resources to make over 50 billion gallons per year of ethanol, in addition to traditional fermentation gallons.
After construction of a full commercial scale cellulosic ethanol facility, our deployment plan calls for the addition of cellulosic biomass processing capacity to our existing production facilities in both the U.S. and Europe. The plan also calls for the geographical expansion of ethanol by constructing greenfield cellulosic biomass facilities in the eastern and western parts of the U.S. where biomass is abundant.
Abengoa Bioenergy also intends to license its technology to qualified partners to further expand biomass technology.
With the incentives, biomass ethanol could quickly grow to 20 or 30 billion gallons of production in the mid-term, replacing a significant amount of our imported oil needs, and approaching DOE’s goal of 60 million gallons. While biomass ethanol is competitive with oil even as low $50 per barrel, the industry needs incentives to insure growth and to protect against the possibility that oil prices could temporarily dip below $50 per barrel. Without these incentives, private new technologies and unproven plant designs are difficult to finance.
One of the main obstacles facing a new industry is securing capital from the financial markets to invest in the physical infrastructure needed to determine what technology works in the plant. Financial markets look for signals from the federal government to show that it is serious about developing a new industry. The RFS was a significant step in the right direction, but more needs to be done to meet the goals set forth in the Energy bill and the goals set by the Administration. Another important signal is 7
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funding the biorefineries commercial demonstration, the biomass production credits and the loan guarantee program in a manner so that they can complement each other and provide the necessary support and resources for the industry to grow. Of course, we would ask that you fully fund those programs; however, we also understand the realities of the current budget situation. The President’s Energy Initiative has recommended a $150 million investment over three years to fund the construction of three commercial demonstration biomass biorefineries in partnership with industry and we support that recommendation.
Conclusion
In the State of the Union Address, President Bush acknowledged the nation “is addicted to oil” and pledged to greatly reduce our oil imports by increasing the production and use of domestic renewable fuels such as ethanol and biodiesel.
Due to the vision and hard work of this Committee, the Energy Policy Act of 2005 clearly put this nation on a new path toward greater energy diversity and national security through the RFS. We appreciate your commitment to the hardworking men and woman across America who are today’s newest energy producers and we understand our responsibility as we work to diversify our energy supply.
With that in mind, additional and more focused research and the continued commitment of this Committee will make the President’s vision of a more energy secure America a reality.
Thank you.

Hearings and Business Meetings

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