Subsidy cuts make tough time tougher for ethanol industry
Back in 2002, ethanol — a renewable fuel made from corn, wheat or other plant residue — was going to be the next big thing, as governments touted the biofuel as one of the keys to reducing our greenhouse gas emissions and carbon footprint.
“Ethanol production is expected to diversify the economy, contribute to the health of our environment and provide by-products to support an expanded cattle feedlot industry,” then-finance minister Harry Van Mulligen said in the 2004-05 budget, referring to the NDP government’s 2002 Greenprint for Ethanol Production in Saskatchewan.
Just over 10 years later, federal and provincial governments are reducing subsidies and phasing them out over the next couple of years. Manitoba and Alberta have reduced their subsidies from 15 cents to 10 cents per litre and announced the phasing out of their programs by 2014-15 and 201516, respectively. The feds have reduced their subsidy to six cents a litre, and plan gradual reductions to zero by 2016-17.
In Wednesday’s budget, Finance Minister Ken Krawetz announced the province would follow suit, reducing its subsidy to 10 cents a litre from 15 cents, with the view to eventually phasing out the program.
So what happened? First of all, ethanol content in gasoline is fixed at 7.5 per cent, the ethanol industry is up and running, with five plants operating producing 235 million litres per year, with surplus capacity exported outside the province. “The objectives of the program had been largely met,” said a recent Saskatchewan government review.
Secondly, nobody figured that the price of ethanol feedstock — wheat — would virtually double in price, while ethanol prices would tank, especially when compared with skyrocketing gasoline prices.
The resulting cost-price squeeze is making the economics of ethanol production marginal at best. Now facing a further reduction in subsidies and eventual elimination in a few years, ethanol producers are taking a long, hard look at their operations.
The $8-million decrease in the Ethanol Fuel Tax Rebate from $24 million to $16 million annually barely rated a mention in the budget speech. “The ethanol industry is a very stable industry as far as production (is concerned) right now,’’ Krawetz said the day after the budget was released.
“We’re actually using a subsidy to produce ethanol that is being exported. We’re reducing the subsidy from 15 to 10 cents (per litre). That’s going to mean millions of dollar less in subsidies,” Krawetz said, referring to the $140 million in total subsidies paid out to the end of March.
Krawetz added there would be “continued negotiations’’ with the industry “as to how quickly the phaze-out occurs,” but admitted the phase-out would probably negatively impact the industry. “Like any industry, you provide subsidies to get the industry up and rolling. But ... we’re not going to continue to subsidize an industry that is already on a sound footing.”
While the announcement of the phase-out came in the budget, the handwriting was on the wall when the province undertook a 10-year review of the program last year following a MNP study in 2009. A committee of senior government officials looked at goals of the Greenprint for Ethanol Production in Saskatchewan and determined that the program had largely met its objective.
“While some economic objectives have fallen somewhat short of the original target, it appears that some targets may have been overly optimistic or unrealistic and therefore unlikely to be met.”
For example, the Greenprint set out an economic output target of $346 million per year from about 400 million litres of production. “If one considers that the 285 million litres of actual production generates $232 million of annual impact on GDP,’’ the program achieved most of its economic target. “However, market demand or competitiveness may be the challenge.”
If measured solely by increased ethanol production, the program was a runaway success. From 12 million litres a year from one plant (Pound-Maker at Lanigan), the five ethanol plants (three small producers, PoundMaker at 15 million litres, NorAmera at Weyburn and North West Terminal at Unity at 25 million litres each, and two large plants, Husky Energy’s plant at Lloydminster at 130 million litres and Terra Grain Fuels at 150 million litres), the industry has a production capacity of 345 million litres per year.
Th e industry also achieved its target of creating 450 jobs, with ethanol plants employing 134 directly and 356 jobs indirectly for a total of 490 jobs, as of 2009. And the Greenprint’s investment target of $272 million was more than achieved with a total of $441 million in investment to date.
And ethanol’s environmental benefits are estimated to be 321,861 tonnes of CO2 — equivalent to taking more than 63,200 cars off the road annually — at a cost of $74 a tonne.
In fact, the Greenprint was probably too successful by generating far more ethanol than the province consumes. “Saskatchewan has successfully created ethanol production capacity that exceeds inprovince consumption rates,’’ the study said. In 2011, production was 285 million litres, of which 62.9 million litres were exported.
“By design, operating incentives like the one in Saskatchewan are meant to attract investment to build production facilities,’’ said Scott Thurlow, president of the Canadian Renewable Fuels Association. “We have seen the success of such incentives across our country. Today, Canada’s ethanol industry has numerous commercial plants producing around 1.6 billion litres of ethanol a year.
And Thurlow suggested that subsidies for ethanol production were never meant to be permanent. “Generally speaking, programs, such as the incentive in Saskatchewan, are intended to follow a prescribed timeline. In terms of our ethanol industry, when such programs expire, the ethanol projects continue to have other streams of income — including next generation biofuels which can create cellulosic ethanol, as well as many other value added agricultural and biobased products.”
Thurlow added that the phasing out of subsidies in no way signals the decline or even the demise of the ethanol industry. “In Canada, our ethanol industry is hard at work and well positioned. Ethanol is an excellent fuel, a strong octane enhancer and less expensive than gasoline, lowering gas prices for consumers at the pump.
“Working with local farmers, our domestic ethanol industry is an important part of Canadian economy and — given the numerous and proven benefits of its use as a transportation fuel — it will continue to be.”
But the real problem for ethanol producers is price — both the price of feedstock and price of ethanol.
Owen Mitchell, vice-president of capital markets for Just Energy, which owns Terra Grain Fuels, said ethanol was selling for 58 cents per litre at the end of December, compared with 76 cents at the end of December 2011, while wheat was selling at $258 per tonne in December 2012 versus $207 in December 2011.
“The stark reality of the situation is that the entire industry is struggling very badly,’’ Mitchell said. “At current ethanol prices and current wheat prices, it’s very difficult for the company to service its own debt, much less make any money. So, it’s in a bind.’’
Removing part or all of the subsidy will make the already tough economics of ethanol production even tougher, Mitchell added. “The subsidy doesn’t drive the business, but to the extent that the subsidy is five cents less than it was before, it is going further damage the financial condition (of the industry), which is precarious anyways.”
Mitchell said Terra Grain Fuels Belle Plaine plant employs 45 people and buys considerable amounts of grain from local producers. “All those people are the ones who are going to suffer if this business is made uneconomic.”
Mitchell agreed that “industries shouldn’t necessarily run on subsidies, but the subsidy was there. Given that now times are tougher than they’ve been at any time in the past for the plant, it’s a difficult time for the subsidy to be reduced.”