(Iowa Renewable Fuels Association/Decision Innovation Solutions) Iowa currently has 42 ethanol plants with listed annual capacity of 4.669 billion gallons per year. Iowa’s ethanol plants produced an estimated 4.5 billion gallons of ethanol in 2022. There are several wet mill plants, but most of them are dry mill plants. Iowa’s ethanol production currently is very competitive with ethanol production in other states and even in other countries. Iowa’s ethanol plants have great access to corn as a feedstock for ethanol production and relatively good access to truck and rail distribution of ethanol to end markets. In addition, Iowa has significant feed demand for the dried and wet distiller’s grains that are co-products of ethanol production and has good demand for the corn oil and distiller’s corn oil co-products of its ethanol plants. Iowa currently has four ethanol plants that capture CO2 for utilization (beverage, dry ice, refrigeration, etc.). Iowa has 34 ethanol plants representing 3.892 billion gallons per year of ethanol production that are on the announced CO2 pipeline projects that are expected to service Iowa.
The recently enacted Inflation Reduction Act contains provisions in Section 45Z that create tax credits for clean fuel production. These credits apply to clean fuels produced after 2024 and generally sold before 2028. It is a new general business credit for clean transportation fuel that is produced at a qualifying facility and sells for qualifying purposes.
These fuels must meet certain emissions standards.
For ethanol, the credit-per-gallon amount can be up to $1.00 if wage and apprenticeship requirements are met. The credits are based on the fuel’s carbon intensity score with a CI score of 50 (based on the GREET model) being the trigger point, and the credit potential increasing as the CI score declines toward zero. So, essentially, each reduction in the CI score of the fuel below 50 generates a 2 cents per gallon production tax credit with the tax credit being maximized at $1.00 per gallon if the CI score is zero. The estimated average CI score for Iowa’s dry mill ethanol plants is in the mid-50s and it is widely believed that the CI score for Iowa’s ethanol plants can be reduced by 30 CI points through carbon capture and sequestration via a pipeline to secure underground storage facilities. Two of the proposed CO2 pipelines that would service Iowa transport the CO2 to storage facilities in Illinois. The other CO2 pipeline would transport the CO2 from Iowa ethanol facilities (and some other facilities such as nitrogen fertilizer production) to a storage facility in North Dakota.
The production tax credit for clean fuels production referred to as the 45Z credit has the potential to be a “game-changer” for the location of ethanol production. The incentive to capture up to 60 cents per gallon of tax credit incentive ($60 million per year for a 100 million gallon per year production facility) by implementing CCUS strategies could stimulate new plant development at locations that enable implementation of CCUS strategies but could also stimulate expansion of ethanol capacity at existing plants that would have access to CCUS capability.
Over the past 13-plus years, gross operating margins for Iowa’s ethanol plants have varied from a high of $1.35 per gallon to a low of -$0.06 per gallon. The average gross operating margin over the past 13.5 years has been $0.31 per gallon. Operating margins have declined over the full 15-year period of 2007-2022 but have shown a flat trend since the middle of 2014 with quite a bit of variability during that period. The most recent calculated gross operating margin based on data from January 2023 indicates a gross operating margin of $0.147 per gallon.
...
But there is a downside to the 45Z tax credits. The credits are available to clean fuel production anywhere in the United States. As many as 65 ethanol plants in the U.S. have access to carbon capture and sequestration through direct injection at the ethanol plant site and need no pipeline for transportation. A number of ethanol plants are already doing this, such as the ADM ethanol plant in Decatur, Illinois. In addition, there are 38 ethanol plants outside of Iowa representing 3.3 billion gallons of ethanol per year that are on the CO2 pipelines that have been announced.
The 45Z tax credits create a tremendous incentive for ethanol plants to capture and sequester CO2. It is estimated that the additional gross margin that can be generated by accessing the full value of 45Z tax credits through CO2 sequestration via pipeline will enable existing ethanol plants that will have pipeline access to expand production by 30% with a payback period of 1.5 to 2.5 years and new construction of ethanol plants to have a full payback within 5 to 7 years. If Iowa’s ethanol plants are not able to get access to CO2 capture and sequestration via pipeline, then the scenario in which 75 percent of Iowa’s ethanol production is displaced by ethanol production in states outside of Iowa that have access to carbon capture and sequestration via pipeline could occur within 5 to 10 years.
Iowa ethanol plants are competitive within the current market structure of energy and ethanol markets and are well positioned to provide feed byproducts of ethanol to local livestock and poultry feeders. But long periods of potentially negative operating margins due to competitors having access to the 45Z tax credits and Iowa’s ethanol producers not having access would eventually “right-size” the ethanol market by forcing producers with negative margins to shutter their plants and reduce the supply of ethanol produced in Iowa.
Loss of 75% of the Iowa ethanol industry would result in an eventual decline in revenues from ethanol plants (ethanol, DDGs, and DCO) of more than $10.3 billion per year. These losses would reverberate throughout the Iowa economy as corn prices would adjust downward, costs to get DDGs delivered to Iowa feeders would increase and DCO would be less available (or more costly) to Iowa-produced biodiesel and renewable diesel production facilities and for feed use. READ MORE
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