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Posted on  

May 27, 2003

New budget includes ethanol credits

By MARTIN DeAGOSTINO

INDIANAPOLIS -- Indiana's new state budget includes $10 million in tax credits that could spur production of ethanol, the corn-derived gasoline additive that makes gasoline burn cleaner while extending fuel supplies.

But analysts inside and outside the ethanol industry say the credits may go unused if companies cannot obtain significant private-sector financing and leap other hurdles that have hindered profitable ethanol production.

"It is not a risk-free investment," said Otto Doering, an agricultural economist at Purdue University. "I think someone who does a really good job of it can probably make a go of it. But there are a number of different things that have to go right."

Indiana's sole ethanol producer, South Bend's New Energy Corp., won't use the tax credits to expand production, according to company President Nathan Kimpel.

The company would have to increase production by at least 40 million gallons per year to apply for the credits, which Kimpel said would cost about as much as building a new facility.

"We are concentrating on maximizing the potential that this plant has, through projects that increase our efficiency, as opposed to going out and making dramatic new investments in this facility," Kimpel said.

New Energy produces about 95 million gallons of ethanol yearly.

Because the company is not planning to expand, Kimpel has not closely analyzed the tax credit program, which offers a one-time benefit capped at $5 million per producer. But he said its value to potential producers would depend on highly variable market conditions.

"It all depends on what the market is at any point in time," he said.

Broad market indicators are favorable now, as corn prices are relatively low, gasoline prices are relatively high and demand is expected to jump as California, New York and other states enter the ethanol market.

Those states need to replace a gasoline additive called MTBE, which works like ethanol to produce cleaner burning gasoline but is a toxic water pollutant.

Pending energy bills in Congress also call for substantially greater use of renewable fuel sources, from about 2.5 billion gallons per year to 5 billion gallons annually within 10 years.

Those combined factors are driving Iroquois Bio-Energy Co., an Indiana startup firm that is trying to raise the money to build a 40-million-gallon ethanol plant in Rensselaer, Ind.

Michael Aylesworth, the company president and a retired Porter County grain farmer, said Iroquois had sold about $2.2 million in shares through mid-May, with a goal of selling $20 million to $25 million by Sept. 30. If successful, the firm would then seek about $36 million in construction loans to build the plant.

Indiana's new ethanol tax credit could heighten investor interest, even though it was proposed and passed into law after the firm issued its investment prospectus in February.

"It does help from the investor side," Aylesworth said, "because it gives you some assurance you're going to make a return on your investment."

The Indiana Department of Commerce agrees, even though the state's lead economic development agency has not pushed for tax credits or other state ethanol incentives since New Energy was built almost 20 years ago.

"If it works, and if the investments come, surely the legislators will come back, revisit the statute and increase the $10 million limit," said Richard Rowley, the department's general counsel.

New plants not a sure thing

Neither the construction nor profitability of proposed new plants is assured, however.

Ethanol production is expensive, investment capital is limited and market development is complicated by the need to sell a high-volume byproduct as animal feed. "You really can't make a go of it in current markets unless you can market that protein that's left over when you make the ethanol," Doering said.

Although new technologies being developed at Purdue and elsewhere promise to reduce that volume and even allow ethanol production from corn stalks and stems, thus maximizing efficiency, they remain in the developmental stage.

"They've got to work on a commercial scale first," Doering said.

That difficulty has not deterred new entrants to the market.

According to the Renewable Fuels Association, an industry trade group, three new plants have launched production this year alone and four others have begun construction.

Total industry capacity stands at 2.85 billion gallons, according to the trade group's Web site, and production this year is expected to reach 2.6 billion gallons.

Indiana's tax credit is aimed at a bigger piece of that pie, especially if demand surges based on federal energy and clean-air policies. State benefits would include increased employment, additional local property taxes, expanded corn markets and, according to Purdue researcher Michael Ladisch, an entry point for a future high-tech economy based on advanced chemical manufacturing.

"The (tax) credit itself will not set up the industry, but it will have a tremendous catalytic effect," Ladisch said.

The state Commerce Department already fields calls every month from potential producers, according to its former energy policy director, and more are expected as word spreads about the credits.

It is not clear, however, if Indiana's incentive is sufficient in an industry that already relies heavily on federal tax credits worth about $600 million per year.

Nor is it clear if new Indiana plants will help satisfy demand, or contribute to excess capacity as plants across the nation come online ahead of demand.

"There is over 5 billion gallons of ethanol production capacity either operating, being constructed or on the drawing board," Kimpel said.

Indiana operators need to make sure they are not the last plant built, according to Doering, lest they wind up chasing markets that are already filled.

But Doering said Indiana's new credits satisfy two criteria that he thinks are the basis of sound public policy.

The credits apply to production after the fact, instead of upfront support for construction or operations, and they are not so large as to draw operations that could not survive without them.

"Everyone thinks this is a clear money-making machine," he said. "It's not a money-making machine unless you're a good manager and run a very tight business."

 

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