Impact of the Biodiesel Industry on the Iowa Economy

Transcription

1 Impact of the Biodiesel Industry on the Iowa Economy John M. Urbanchuk Director LECG, LLC February 28, 2008 EXECUTIVE SUMMARY In the past two years, the biodiesel industry in Iowa has experienced excellent growth and considerable challenges. Growth in production and demand has come largely in response to state and federal incentives. National demand for biodiesel increased from 75 million gallons in 2005 to an estimated 450 million gallons in According to the Iowa Renewable Fuels Association Iowa accounted for about 15 percent of U.S. biodiesel use in The Renewable Fuel Standard (RFS) included in the Energy Independence and Security Act of 2007 ( EISA 07 ) will increase demand further, requiring the use of at least one billion gallons of biodiesel by Iowa accounts for approximately 1.4 percent of all diesel fuel consumed in the U.S., with vehicle (on and off-road) and farm use comprising two thirds of total demand, and 96 percent of transportation demand. Given the assumption that Iowa diesel fuel consumption will grow at the same rate as the U.S., Iowa vehicle and farm use will increase from 771 million gallons in 2007 to 863 million gallons in While Iowa accounts for a relatively small share of U.S. diesel use, the Hawkeye state accounts for a larger percentage of the nation s biodiesel consumption. A state-level RFS was passed in Iowa in 2006, which will require 10 percent biofuel use in 2009, with annual percentage increases to reach 25 percent in Since 2006, Iowa s biodiesel industry has grown rapidly to prepare for the mandated demand. The number of biodiesel plants in Iowa increased by more than four fold, expanding from three refineries in early 2006 to 14 in February The impact that the expanded biodiesel industry has on the Iowa economy is substantial. The biodiesel industry adds nearly $1.6 billion to the Iowa State Gross Domestic Product (GSP). The industry increases household income by $27.2 million, and generates more than 12,000 jobs across all sectors of the state economy. Iowa biodiesel producers are now in a position to meet the demand growth that is anticipated in upcoming years. However, infrastructure and policy challenges still remain for not only the state s biodiesel 1 March 6, 2008

2 producers, but also for blenders, retailers, and consumers. Two proposed pieces of legislation are up for debate in Iowa that would serve to address some of these issues. The first piece would expand the retail tax credit from its current flat level of $0.03 per gallon for all biodiesel blends, to incorporate the $1.50 per B100 gallon relationship pro rata at multiple blend levels. The second piece of legislation proposes to enhance the Renewable Fuels Infrastructure program. If passed, program cost share grants would be increased for both biodiesel retail capital investments and investments at blending terminals. Both proposals, if passed, would provide significant stimulus to Iowa s biodiesel industry, and the Iowa economy. 2 March 6, 2008

3 Impact of the Biodiesel Industry on the Iowa Economy John M. Urbanchuk Director LECG, LLC March 6, 2008 Introduction The U.S. and Iowa biodiesel industries have grown at an unprecedented rate in recent years. Climate change and soaring petroleum prices are now global issues of concern that have helped to accelerate the demand for renewable fuels produced in the heartland of America. Iowa is the nation s largest soybean producer, and the second leading biodiesel producer. Iowa now has the capacity to produce approximately 318 million gallons of biodiesel per year, and when construction is completed on two new plants, that total will increase to 353 million gallons. State and federal incentives have encouraged the production and use of cleaner burning fuels, and continue to help spur demand for biofuels. The Energy Independence and Security Act of 2007 ( EISA07 ) signed into law in December 2007 created a more progressive Renewable Fuel Standard (RFS) that requires at least 36 billion gallons of ethanol and biodiesel to be used in the nation s motor fuel by Biodiesel will play a significant role in this surge in demand for renewable fuel, as EISA requires the use of at least one billion gallons of biodiesel to be used annually by At the state level, Iowa has implemented its own RFS, which will require a 10 percent biofuel mix in 2009, increasing to 25 percent by Other state level incentives for renewable fuels investments exist in the form of tax credits and cost-share grants. However, as production capacity has rapidly expanded in preparation for the increase in mandated demand, infrastructure challenges still remain. As Iowa strives to maintain its lead position in biodiesel production and consumption, it has become increasingly important that adequate incentives exist for blenders and retailers to invest in the capital equipment necessary to move biodiesel from the plant into consumers fuel tanks. The purpose of this study is to update findings from a 2006 study that profiled the impact of the Iowa biodiesel industry on the state economy. Additionally, this report will highlight the economic impact of two proposed pieces of legislation that would 1) Expand the biodiesel tax credit to adjust for multiple 3 March 6, 2008

4 blending levels and 2) Increase the limits on cost-share grants for biodiesel terminal and retail station capital investments. U.S. and Iowa Biodiesel Demand The expansion of the biodiesel industry in Iowa over the past two years has produced significant economic benefits in the form of increased Gross Domestic Product, household income, the creation of new jobs, and increased state tax revenue. Fiscal incentives and the Iowa biofuels mandate embodied in the RFS are designed to facilitate growth in the Iowa biodiesel industry and will improve Iowa s competitive position relative to other soybean and biodiesel producing states. With expanded incentives for retailers to sell biodiesel blended fuels and increased consumer access to the fuel at retail stations; demand for biodiesel will increase in Iowa, providing a consistent local market for the product that benefits the entire state. Demand also will increase nationwide as other states implement mandates and incentives. When combined with the new federal RFS and existing federal incentives, U.S. biodiesel consumption is projected to more than double between 2007 and As shown in Table 1, national demand for biodiesel fuel is projected to increase from 450 million gallons in 2007 to one billion gallons by 2012, as the nation s highway motor fuel supply incorporates more renewable fuels. Transportation use accounts for nearly 70 percent of total U.S. diesel fuel use. 4 March 6, 2008

5 Table 1 U.S. Diesel Fuel and Biodiesel Assumptions EIA EIA Transportation Transportation Biodiesel Biodiesel Soybean Diesel Diesel Biodiesel B100 from from Oil Soybean Use /1 Use /2 Share Volume Soybeans Soybeans Equiv /3 Equiv /4 (Quad btu) (Bil gal) (Pct) (Bil gal) (Pct) (Bil gal) (mil lb) (Mil Bu) % % , % % , % % , % % , % % , % % , % % , % % , % % , % % , % % , % % , Notes: 1. Annual Energy Outlook 2008 (Early Release), Table 2. December 2007 Transportation use includes all modes of transportation including on and off-road 2. Converted at 138,690 btu/gal (5.525 mil btu/bbl) 3. Converted using 7.5 lb soybean oil = 1 gal biodiesel 4. Converted at 11.2 lbs SBO per bu of soybeans As previously indicated, the RFS provisions in the 2007 Energy Bill will be the primary driver for increases in biodiesel consumption. An extension of the federal biodiesel blender tax credit, which is scheduled to expire at the end of 2008, would also stimulate further investment. The 2007 Energy Bill did not provide significant changes for current biodiesel producer or blender incentives. The current federal incentives include: The Biodiesel Tax Credit allows blenders to claim $0.01 for each percentage point of agribiodiesel used or $0.005 for each percentage point of waste-grease biodiesel used. The Alternative Fuel Infrastructure Tax Credit provides tax credit equal to 30 percent or a maximum of $30,000 for the cost of alternative refueling investments, which includes biodiesel blends of B20 or higher. The credit expires at the end of March 6, 2008

6 The Small Agri-biodiesel Producer Tax Credit allows producers to claim $0.10 per gallon on up to 15 million gallons per year. Eligible producers must make less than 60 MGY. Iowa accounts for approximately 1.4 percent of all diesel fuel consumed in the U.S., with vehicle (on and off-road) and farm use comprising two thirds of total demand, and 96 percent of transportation demand. Assuming that Iowa diesel fuel consumption will grow at the same rate as the U.S., Iowa vehicle and farm use is projected to increase from 771 million gallons in 2007 to 863 million gallons in In 2007, Iowa accounted for approximately 14.6 percent of all biodiesel consumed in the U.S. Table 2 Iowa Diesel Fuel and Biodiesel Assumptions Vehicle Vehicle Farm Farm Vehicle Farm Total Diesel Biodiesel Diesel Biodiesel Biodiesel Biodiesel Hwy & Farm l (Mil Gal) Share (Mil Gal) Share (Mil Gal) (Mil Gal) (Mil Gal) % % % % % % % % % % % % % % % % % % % % % % % % Sources: Iowa Renewable Fuels Association, Energy Information Administration The combination of state and federal incentives for biodiesel will accelerate growth in biodiesel use over the next several years in Iowa. It is anticipated that biodiesel demand for on and off-highway and farm uses will grow from 66 million gallons in 2007 to nearly 218 million gallons by 2012 and 247 million gallons by Soybean Production Iowa is the nation s leading soybean producer, and is rivaled only by Illinois in crop production and value. As shown in Table 3, over the past five years Iowa production has averaged 463 million bushels 6 March 6, 2008

7 per year, to account for 15 percent of U.S. production. In 2007, soybeans generated nearly $4.8 billion in revenue for Iowa farmers. Illinois is the nation s second largest soybean producer, accounting for the production of 14 percent of the U.S. crop. Table 3 Soybean Production and Value, Selected States Production (Mil bu) Yr Avg IA IL MN IN NE MO OH SD ND U.S. 2, , , , , ,086.4 Value of Production (Mil $) Yr Avg IA $2,640.1 $2,864.7 $2,908.5 $3,187.8 $4,782.7 $3,276.8 IL $2,850.9 $2,890.8 $2,531.1 $3,087.4 $3,855.0 $3,043.0 MN $1,730.8 $1,372.6 $1,692.2 $1,898.1 $2,546.7 $1,848.1 IN $1,565.1 $1,609.0 $1,523.7 $1,789.2 $2,211.3 $1,739.7 NE $1,279.4 $1,210.5 $1,306.1 $1,478.0 $1,894.3 $1,433.7 MO $1,098.1 $1,254.4 $1,030.1 $1,223.3 $1,767.7 $1,274.7 OH $1,186.4 $1,192.4 $1,157.2 $1,357.1 $1,960.5 $1,370.7 SD $803.9 $781.7 $726.3 $746.1 $1,308.9 $873.4 ND $585.5 $472.1 $560.6 $701.8 $1,025.6 $669.1 U.S. $18,013.8 $17,894.9 $17,269.1 $19,693.9 $26,752.2 $18,211.8 Biodiesel Incentives Iowa currently has several State-level incentive programs to encourage the production, sale, and use of biodiesel. Iowa s state-level RFS was signed into law in May 2006, and will take effect in 2009, with the aim of replacing 25 percent of conventional motor fuel with biofuels (ethanol or biodiesel) by the year 7 March 6, 2008

8 2020. The RFS mandates the use of 10 percent biofuels in 2009, with one percent increases through 2014, and two percent increases thereafter until 25 percent biofuel use is achieved in The Renewable Fuel Infrastructure Program provides up to 50 percent or $30,000 cost-share grants for installing E-85 and biodiesel retail pumps, and up to 50 percent or up to $50,000 for biodiesel blending terminals. The Biodiesel Tax Credit allows retailers whose diesel sales are composed of at least 50 percent biodiesel (B2 and higher) to receive a $0.03 per gallon tax credit on each gallon of biodiesel sold. The Alternate Energy Revolving Loan Program provides no interest loans for up to half the cost of biomass or alternative fuel related production projects. Loans are capped at $250,000 per facility. A biodiesel fuel revolving fund also exists to finance the purchase of biodiesel fuel for use in Iowa Department of Transportation (IDOT) vehicles. The fund consists of money received from the sale of Energy Policy Act (EPACT) credits banked by IDOT as of April 19, 2001, and other money obtained or accepted by IDOT for deposit in the fund. Several neighboring states have also expanded their incentives for biodiesel production and use in recent years. Illinois Alternative Fuels Rebate Program The Illinois Rebate Program provides a rebate for 80 percent of the incremental cost of purchasing biodiesel (B20 and higher blends), as compared to conventional diesel. The program is open to all Illinois residents, businesses, government units (except federal government), and organizations located in Illinois. Partial Sales Tax Exemption for Biodiesel Sales and use taxes apply to 80% of the proceeds from the sale of biodiesel-blended fuels (containing between 1% and 10% biodiesel) made between July 1, 2003 and December 31, However, if these taxes are ever imposed at a rate of 1.25%, then the tax on these biodiesel blends will apply to 100% of the proceeds of sales. These taxes do not apply to the proceeds from the sale of biodiesel blends containing more than 10% biodiesel made. The taxes apply to 100% of the proceeds from sales made thereafter. 8 March 6, 2008

9 Biodiesel (B2) Use Requirement Beginning July 1, 2006, the following entities are required to use a biodiesel blend that contains at least 2% biodiesel (B2) when refueling at a bulk central fueling facility: any diesel powered vehicle owned or operated by the state, county or local government, school district, community college or public college or university, or mass transit agency. These entities are required to use B2 where available, unless the vehicle engine is designed or retrofitted to operate on a higher percentage of biodiesel or on ultra low sulfur fuel. Minnesota Biodiesel Blend Mandate As of September 2005, all diesel fuel sold or offered for sale in the state for use in internal combustion engines must contain at least 2% biodiesel fuel by volume. Missouri Alternative Fuel Tax The $0.17 per gallon motor fuel tax does not apply to passenger motor vehicles, certain buses or commercial motor vehicles that are powered by an alternative fuel. Instead, the owners or operators of such vehicles shall pay an annual alternative fuel decal fee. Biodiesel Producer Incentive The Missouri Qualified Biodiesel Producer Incentive Fund provides a monthly grant to qualified Missouri biodiesel producers, provided that 1) at least 51 percent of the production facility is owned by agricultural producers who are residents of the state and who are actively engaged in agricultural production for commercial purposes or 2) at least 80 percent of the feedstock used by the facility originates in-state. All of the feedstock must be produced in the U.S. The value of the grant is $0.30 per gallon for the first 15 million gallons produced in a fiscal year and $0.10 per gallon for the next 15 million gallons produced in a fiscal year, up to a total of 30 million gallons and for 60 months maximum per producer. Biodiesel Fuel Use Incentive Through the school year, school districts are allowed to establish contracts with nonprofit, farmer-owned new generation cooperatives to purchase biodiesel (B20 blends or higher) for use as bus fuel. Every school district that contracts with an eligible new generation cooperative for biodiesel will receive an additional payment through its state transportation aid payment, to offset the incremental cost of purchasing the biodiesel. 9 March 6, 2008

10 Fleet Biodiesel Fuel Use Incentive The Biodiesel Fuel Revolving Fund uses the money generated by the sale of Energy Policy Act (EPAct) credits to cover the incremental cost of purchasing fuel containing B20 or higher biodiesel blends for use by state fleet vehicles. Alternative Fuel Use Requirements Fuel purchases for state fleet vehicles must consist of 30 percent alternative fuels (includes biodiesel). Biodiesel Use Requirement At least 75 percent of the Missouri Department of Transportation vehicle fleet and heavy equipment that uses diesel fuel must be fueled with biodiesel (B20 or higher blends) if such fuel is commercially available. The biodiesel will be considered commercially available if the incremental cost of biodiesel does not exceed $0.25 as compared to conventional diesel fuel. Nebraska Biodiesel Production Investment Tax Credit Investors in Nebraska biodiesel production facilities are eligible to receive a tax credit of up to 30% of the amount invested in the facility, not to exceed $250,000 dollars. The credit is only available for facilities that produce B100, perform all processing in Nebraska, and are at least 51% owned by Nebraska individuals or entities. The tax credit may be reclaimed if the biodiesel production facility remains in operation for less than three years. Alternative Refueling Infrastructure Loans The Nebraska Energy Office administers the Dollar and Energy Saving Loans Program, which makes low-cost loans available for a variety of alternative fuel projects. The maximum loan amount is $150,000 per borrower, and the interest rate is 5 percent or less. Ethanol and Biodiesel Tax Exemption Motor fuels sold to an ethanol or biodiesel production facility and motor fuels manufactured at an ethanol or biodiesel facility are exempt from certain motor fuel tax laws. Alternative Fuel Use All state employees operating state fleet flexible-fuel or diesel vehicles are required to use E-85 or biodiesel blends whenever reasonably available. 10 March 6, 2008

11 South Dakota Reduced Biodiesel Tax Biodiesel and biodiesel blends are defined as 'special fuels' and are taxed at the special fuel excise tax rate of $0.22. Biodiesel Production Facility Tax Refund A tax refund is available for contractors' excise taxes and sales or use taxes paid for the construction of a new agricultural processing facility, which includes an expansion to an existing soybean processing facility if the expansion will be used for the production of biodiesel. The project cost must exceed $4.5 million in order to qualify for the refund. Biodiesel Fuel Use The South Dakota Department of Transportation and state employees using state diesel vehicles are directed to stock and use a minimum of 2 percent biodiesel blended fuel. Wisconsin Biodiesel Fuel Use Incentive The Wisconsin Department of Public Instruction may provide financial aid to school districts that use biodiesel fuel for school bus transportation to cover the incremental cost of using biodiesel, as compared to conventional diesel fuel. Iowa Biodiesel Production and Economic Impact Iowa currently has 14 existing plants with the capacity to produce million gallons of biodiesel. Two additional plants are under construction, which when completed, will add another 35 million gallons of capacity. At that time, Iowa will have the capacity to produce million gallons of biodiesel annually. Based upon estimates from the Iowa Renewable Fuels Association, we project 2008 biodiesel production for the state of Iowa to be approximately 85.4 million gallons. To achieve that level producers will spend approximately $321 million this year on raw materials and other goods and services. Producers will spend an additional $21.4 million to transport the biodiesel from the plant to the terminal where it is blended with conventional diesel fuel. Since the largest cost of producing biodiesel is for soybean oil and other fats and oils used as feedstocks which are produced in Iowa, the majority of the dollars spent to produce biodiesel stay in the Iowa economy. The biodiesel industry in Iowa will consume about March 6, 2008

12 million pounds of soybean oil valued at $235 million and 190 million pounds of other fats and oils valued at $49 million. Virtually all of the oils and fats used in Iowa to produce biodiesel are procured locally. Other production input spending includes industrial chemicals, electricity, natural gas, water, and labor. Service expenditures include maintenance, insurance, and general overhead. Spending for these goods and services represents the purchase of output of other industries. The two biodiesel plants currently under construction represent additional expenditures in construction costs of approximately $25 million. The spending for goods and services by the Iowa biodiesel industry goes beyond the initial purchases made, and circulates throughout the entire Iowa economy. The additional spending that is created stimulates further demand for other goods in Iowa, supports and creates jobs, generates additional household income, and creates new tax revenue. The following highlights the economic impact that the Iowa biodiesel industry is projected to have in A more detailed illustration of these impacts is exhibited in Table 4. The biodiesel industry will add $655 million to the Iowa GDP in This impact is provided by the total effects of the spending to produce and transport 85.4 million gallons of biodiesel. Biodiesel will create permanent new jobs for Iowans. The increase in final demand resulting from ongoing biodiesel production supports 3,751 permanent jobs in all sectors of the Iowa. Increased economic activity and new jobs result in higher levels of income for Iowans. The ongoing production of biodiesel will generate $17.4 million of household income for Iowans this year. 12 March 6, 2008

13 Table 4 Economic Impact of Biodiesel on Iowa: 2008 Local Impact Purchases GDP Earnings Employment Industry (Mil $) (Mil) (Mil $) (Jobs) Soybean Processing $211.9 $333.1 $1.3 2,668 Fats and oils refining & blending $43.4 $62.4 $ Other basic organic chemicals $0.0 $0.0 $0.6 0 Power generation and supply $0.4 $0.4 $0.5 3 Natural gas distribution $4.7 $3.8 $ Water, sewage $0.4 $0.4 $0.8 5 Wholesale Trade $10.2 $10.2 $ Facilities support services $2.1 $2.1 $ Office administrative services $1.1 $1.1 $ Rail Transportation $5.4 $5.1 $ Truck Transportation $16.0 $17.8 $ Earnings paid to households $2.4 $1.7 $ Subtotal $298.2 $438.1 $14.9 3,751 Plus value of industry output Biodiesel $208.2 $2.4 Glycerin $8.9 Total Annual Operations $655.3 $17.4 3,751 The Iowa Treasury also will benefit from an expanded biodiesel industry as revenues from sales and use taxes and corporate income taxes increase in line with higher economic activity. Revenues from personal income taxes and motor fuel excise taxes also will increase. Expansion of the Iowa biodiesel industry as described above can be expected to generate an estimated $2.3 million of additional tax revenue this year. Methodology The impact of the biodiesel industry on the Iowa economy was estimated by applying the appropriate final demand multipliers for output, earnings, and employment for the relevant supplying industry calculated by the U.S. Bureau of Economic Analysis (BEA) to the estimates of spending described above. 1 The final demand multipliers for output, earnings, and employment for the selected industries are shown in Table 5. 1 The multipliers used in this analysis are the detailed industry RIMS II multipliers for Iowa prepared by the Regional Economic Analysis Division, Bureau of Economic Analysis, U.S. Department of Commerce. 13 March 6, 2008

14 Table 5 Iowa Final Demand Multipliers NAICS Code Supplying Industry Output Earnings Employment Soybean Processing Fats and oils refining & blending Other basic organic chemicals A0 Power generation and supply Natural gas distribution Water, sewage Wholesale Trade Facilities support services Office administrative services Rail Transportation Truck Transportation Earnings paid to households The most significant impact for the Iowa economy is provided by the ongoing annual operations of the biodiesel plants. The annual expenditures for biodiesel production were estimated by applying current prices for inputs to a process model for a new 10 million gallon plant developed by USDA/ARS and are detailed in Table Haas, Michael J., Andrew J. McAloon, Winnie C. Yee, and Thomas A. Foglia. A process model to estimate biodiesel production costs. Bioresource Technology March 6, 2008

15 Table 6 Annual Operating Cost Iowa Biodiesel: 2008 Units Cost Cost Units Per Gal $/Unit Mil $/yr $/gal Raw Materials Soybean oil Lb $0.53 $234.8 $2.748 Other fats and oils Lb $0.26 $49.4 $0.578 Methanol Lb $0.31 $19.9 $0.233 Sodium methoxide Lb $0.44 $3.5 $0.041 Hydrochloric acid Lb $0.17 $0.8 $0.009 Sodium hydroxide Lb $0.28 $0.9 $0.010 Electricity kwh $0.05 $0.4 $0.005 Natural Gas MCF $7.84 $4.7 $0.055 Water/wastewater ThouGal $1.85 $0.4 $0.005 Direct labor $2.4 $0.03 Benefits $0.8 $0.010 Maintenance $2.1 $0.025 Insurance and taxes $0.6 $0.007 GS&A $0.5 $0.006 TOTAL OPER COSTS $321.3 $3.760 Co-Product Credits Glycerin Lb $0.25 $16.4 $0.193 NET OPERATING COST $304.8 $3.567 As shown in Table 6, feedstock costs are the largest component of operating costs, accounting for about 80 percent of production costs. Based on discussions with the Iowa Renewable Fuels Association we assume that about two-thirds of Iowa biodiesel is produced from soybean oil and the remaining one-third from other fats and oils all processed in Iowa. 15 March 6, 2008

16 Impact of Expanding the Iowa Biodiesel Tax Credit Under the current Iowa biodiesel tax credit program, retailers whose diesel sales are comprised of at least 50 percent biodiesel are eligible to receive a three cent per gallon tax credit on each gallon of B2 or higher blend sold. This equates to a $1.50 tax credit for each gallon of B100 sold. As shown in Table 7 under the current tax credit system, B2 was slightly less expensive than conventional diesel nine of the past 11 months. However, biodiesel was priced higher than conventional diesel at all other blend levels. Table 7 Estimated Retail Price of Biodiesel Blends Under the Existing Iowa Biodiesel Tax Credit (Cents per gallon) Spot Retail Spot Retail Retail Retail Retail Biodiesel Difference No. 2 Diesel No. 2 Diesel B100 B2 B5 B10 B20 B2 B5 B10 B20 Gulf Iowa Iowa Iowa Iowa Iowa Iowa Iowa Iowa Iowa Iowa Tax Credit Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Average Source: EIA; OPIS; National Weekly Ag Energy Round-up. USDA Livestock & Grain Market News The biodiesel blend prices in Table 7 were estimated using actual retail Mid-west No. 2 low sulfur diesel prices reported by EIA; Iowa spot B100 prices reported by USDA; and Gulf coast spot No.2 diesel prices reported by EIA. The biodiesel blend prices were arrived at by taking the appropriate weighted average of B100 and spot diesel prices (e.g. 2 percent of B100 and 98 percent of spot diesel for a B2 blend) plus combined Iowa and Federal diesel excise taxes, a 3.6 cent per gallon transportation fee to move diesel 16 March 6, 2008

17 from the Gulf to the upper mid-west via pipeline, and a blender margin that averages 24 cents per gallon. The retail price was arrived at by subtracting the three cent per gallon tax credit for each blend level. New legislation is being proposed that would change the tax credit to adjust for blend level, maintaining the $1.50 B100 relationship. If enacted, the tax credit for B2 would remain at three cents per gallon, but it would rise to 7.5 cents for B5, 15 cents for B10, and 30 cents for B20. Changing the credit to adjust for blend levels would provide significant financial incentive for retailers to sell, and consumers to use higher blend levels of biodiesel. Table 8 uses the same methodology to calculate the retail price of different blend levels under the proposed tax credits. Table 8 Estimated Retail Price of Biodiesel Blends Under the Proposed Iowa Biodiesel Tax Credit (Cents per gallon) Spot Retail Spot Retail Retail Retail Retail Biodiesel Difference No. 2 Diesel No. 2 Diesel B100 B2 B5 B10 B20 B2 B5 B10 B20 Gulf Iowa Iowa Iowa Iowa Iowa Iowa Iowa Iowa Iowa Iowa Tax Credit Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Average Source: EIA; OPIS; National Weekly Ag Energy Round-up. USDA Livestock & Grain Market News When the proposed blend-adjusted tax credit is included instead, the price of B2 is unaffected, but B5, B10, and B20 all become price competitive. In fact, all four blend levels would have been priced less expensive than regular diesel nine of the past 11 months. Adjusting the tax credit for blend levels would 17 March 6, 2008

18 reverse the current price difference between higher blend levels of biodiesel and conventional diesel, and under most conditions, make all biodiesel blends more cost effective than diesel. The largest change and greatest incentive would be associated with B20. Currently, B20 carries a 22 cent premium compared to regular diesel. Under the new tax credit system, B20 would be the least expensive of all the biodiesel blends, and would also be cheaper than diesel under most conditions. The proposed blend-adjusted tax credit legislation would provide financial incentive for Iowans to consume more biodiesel, and at higher blend levels. Improving the relative price of higher biodiesel blends relative to conventional diesel will facilitate the expansion of biodiesel market share necessary to achieve the 247 million gallon biodiesel use target discussed in Table 2. The Iowa biodiesel industry may not need additional new capacity to supply a 247 million gallon market. However, a three fold increase in biodiesel production will result in a proportionate increase in economic activity and benefit to Iowa. That is, a 247 million gallon biodiesel industry would add more than $1.2 billion to Iowa GDP; generate nearly $32 million in additional household income; and $4.3 million in tax revenue. Impact of Expanding the Iowa Biodiesel Infrastructure Cost-Share Grants Inadequate infrastructure is frequently cited as a major impediment to increasing biodiesel use. According to the Iowa Renewable Fuel Association there were 180 stations offering biodiesel blends in Iowa in 2007 and one blending terminal (Magellan s Mason City terminal). As shown in Table 9, we estimate that Iowa will need 420 new biodiesel pumps and tanks to provide consumers with 247 million gallons of biodiesel by A recent study by the Congressional Research Service estimated that the cost to install one retail biodiesel pump and tank is $100,000 to $200, Using the mid-point of the CRS estimate, the cost to the Iowa biodiesel distribution industry for this new infrastructure is $63 million. 3 CRS Report for Congress: Ethanol and Biofuels: Agriculture, Infrastructure, and Market Constraints Related to Expanded Production. March 16, March 6, 2008

19 Table 9 New Biodiesel Infrastructure and Cost: Required B100 Pumps B100 Tank Net New Infrastructure Use Required Capacity /1 Capacity Cost /2 (Mil gal) (Number) (Mil gal) (Mil gal) (Mil $) $ $ $ $ $ $ $ $ $ $ Assumes each pump is supported by a 3,000 gal tank serviced by truck deliveries 3 time a week and 90% capacity utilization. 2. Cost of one retail pump and tank is $150,000. (CRS, 2007) The issue of blending terminals is more complex. Currently, of the 23 active fuel terminals in Iowa, only one offers blended biodiesel. Magellan Midstream Partners completed the construction of its new biodiesel blending facility at the Mason City terminal in October The terminal now has the capability to dispense biodiesel from an injection system that blends B2, B5, B10, and B20 fuel. B100 is stored at the facility in an 84,000 gallon tank, and is blended into the fuel stream as it is dispensed into the trucks. The Mason City biodiesel system also is equipped with insulation and heating of all affected pipelines, including truck offloading lines and lines supplying the loading rack. 4 Terminal blending is far superior to splash blending, which is the alternative method used to blend biodiesel when blending is not offered at a regional terminal. Splash blending requires distributors to first fill their trucks with the appropriate amount of petrodiesel at the terminal, and then make a second stop at a facility that offers 4 Iowa Soybean Association and Iowa Biodiesel Board (October 9, 2007). Magellan opens new biodiesel blending facility. Press release. 19 March 6, 2008

20 B100. The B100 is usually pumped into the top of the tanker, which allows the heavier biodiesel to mix with the petrodiesel as it settles. By sourcing blended biodiesel at the terminal, distributors gain significant savings in time, mileage, and efficiency. Splash blending at a second site carries real cost in time that is spent to drive to and from the blending site, as well as additional time needed to fill the truck. The additional mileage driven to blend at a second site also incurs extra fuel cost for the distributor and wear on the truck which contributes to maintenance and replacement costs. Extreme winter temperatures can also create challenges for splash blending as care must be taken to ensure that the two fuels mix properly. Terminal blending with heated pipelines eliminates the need to consider the potential impact of extreme temperatures. Accuracy and simplicity are also gained from using terminal blending sites. Using an injection system to mix the fuel provides a more accurate means of producing the right biodiesel blends each time. Bill-of-lading also becomes simpler for distributors when only one fueling source is necessary. All of these considerations equate to real cost savings for fuel distributors. Convenient and cost-efficient access to biodiesel at desired blend levels will cause distributors and retailers to supply more biodiesel to consumers. Given the size of Iowa and the volume of biodiesel projected to be used, statewide terminal blending capacity (ie. biodiesel storage capacity at the terminals) is far less of an issue than is the location of that capacity. The Mason City terminal is situated in Northcentral Iowa which provides readily accessible biodiesel to the northern half of the state. However, Mason City is nearly 300 miles from towns in southwest Iowa, and more than 250 miles from portions of southeastern Iowa. Additional investments in terminal biodiesel blending facilities in other Iowa locations will serve to increase biodiesel consumption throughout the state. Relatively small modifications in storage capacity at any Iowa terminal would be necessary to include biodiesel blending at the rack. The estimated $1 million spent by Magellan at its Mason City terminal, and similar investments made at more than 40 other fuel terminals in the U.S., is evidence that consumer demand and cost-share grants make it possible to change how Americans fuel their vehicles. Iowa s existing Renewable Fuels Infrastructure program provides cost-share grants of up to 50 percent or $30,000 for installing E-85 and Biodiesel retail pumps, and up to 50 percent or $50,000 for biodiesel blending terminals. The proposed legislation would increase the matching grant funds for installing biodiesel fueling infrastructure for year round storage and blending of biodiesel at fuel terminals. For 20 March 6, 2008

21 medium-sized wholesales or petroleum jobbers the matching grant would be raised from $50,000 to $100,000. For pipeline terminal facilities the matching grant would increase to $500,000. Expanding these programs would provide an important incentive for the distribution industry to make the necessary investment in biodiesel infrastructure needed to meet the 247 million gallon target by March 6, 2008