1. 10/14/2010 1 National Petroleum Council Future Transportation Fuels Study BIOFUELS Base Case Commentary Guidelines and Template

2. 10/14/2010 Purpose of the Templates The following Guidelines and Template are a result of a request from several subgroups for more guidance and structure regarding base case commentary for the NPC Future Transportation Fuels Study –These templates will be used for the November 10 & 11 Supply & Infrastructure report-outs on the Base Case –The templates will be the basis for the narrative assessment of the Base Case in the study report These guidelines are a supplement to pages 10 and 11 of the “EIA AEO 2010 Reference Case Transportation Sector Overview” that was issued by the Supply & Infrastructure Task Group The “In Bounds for Comments on the Base Case” (p.11) section has been further grouped into the following categories : 1.Supply and Infrastructure 2.Technology 3.Demand 4.GHG 5.Legislation 6.Other materially significant areas not addressed. Upon completion, this document should be a top line overview, about 7-10 PowerPoint slides. 2

3. 10/14/2010 Future Transportation Fuels Study – Instructions Instructions: 1.Assess the Base Case (EIA AEO 2010 Reference Case + 2050 Extrapolation + 2005 GHG baseline) A.Consider the assumptions, data and conclusions for each category B.Subgroups should use the data supplied in the Base Case, even if assumptions are not clear 2.Explain the subgroup’s view as compared to the base case 3.Provide references and sources for the subgroup’s view relative to the base case 4.Subgroups should comment on all six categories listed in the template 5.Summarize the subgroup’s top findings upon completing the exercise 3

4. 10/14/2010 4 Supply & Infrastructure Subgroup’s comments (example items for the Supply & Infrastructure category: Supply Chains, Infrastructure availability and development, Refining and manufacturing capacity and production costs, Supply and feedstock availability, volumes, and timing, Opportunities for fuel switching or substitution, State and regional observations, Impact on Food of replacing corn) The relatively rapid growth in adoption of biofuels in the EIA-EO 2010 outlook requires a significant amount of infrastructure to be developed. The assumptions require that 300 million tons of biomass be available by 2020 and that over 500 million tons of biomass be available by 2035. The volume of biomass handled with be something on the order of 3X the current biomass handled in the existing corn infrastructure (liquid biofuels only). This assumes that train, truck, barge, etc and storage must be available to meet the additional transportation demands for this raw material. The outlook also assumes that plants can be build at essentially peak rate (based on current corn based ethanol) and sustained at that level over a number of years. The cost of biomass delivered must allow for competitive economics as the growth of advanced biofuels occurs, even in competitive environments for raw materials.

5. 10/14/2010 5 Supply & Infrastructure

6. 10/14/2010 6 Technology Subgroup’s comments (example items for the Technology category: Technology pathways and timing, Vehicle technology availability, Timelines. Use Category Approach; Deconstruct): In the year 2020, the EIA Annual Energy Outlook predicts that approximately 1.5 billion gallons of cellulosic ethanol will be produced in the US. This prediction implies that the production of cellulosic ethanol is economically viable in 2020, at least relative to other cellulosic biofuels that meet the GHG reduction criteria in the RFS. This raises an important question -- what assumptions must be made (in other words, what assumptions did EIA likely make) regarding the production cost of cellulosic ethanol such that it would be competitive with gasoline in 2020? The EIA reference case predicts that the wholesale cost of gasoline in 2020 will be $2.79/gallon (in 2008 $) (range is $1.56-$4.56 for the low and high oil price cases), for which a break-even (on a Btu basis) wholesale cost of ethanol is $1.86/gallon. The most recent citable work on the cost of production of cellulosic ethanol via the biochemical route is the article in the Journal FUEL that documents the results of the ConocoPhillips/Iowa State/ADM/NREL collaboration on comparative technoeconomic analysis for biochemical, gasification, and pyrolysis pathways. The calculated n th plant baseline cost for the biochemical route was $5.00/GGE in 2007 $, which corresponds to $3.47/gallon of ethanol in 2008 $.

7. 10/14/2010 7 Technology Subgroup’s comments (example items for the Technology category: Technology pathways and timing, Vehicle technology availability, Timelines. Use Category Approach; Deconstruct): The focus of the ConocoPhillips/Iowa State/ADM/NREL study was on technology that will be commercialized in the 5-8 year timeframe. That forced the collaboration to essentially freeze the rate of technological development circa 2007. Several important technological advances have already been made since 2007. To achieve the cellulosic ethanol levels predicted in the AEO, the EIA must have assumed competitive enzyme prices. In the recent ConocoPhillips/Iowa State/ADM/NREL study, the cost of enzymes was approximately $0.71/gallon of ethanol. For cellulosic ethanol to become economically competitive, enzyme cost would need to come down by a factor of around 2X. In 2008, with the support of the DOE, four enzyme companies undertook ambitious programs to further improve the specific activity of enzyme cocktails for the saccharification of lignocellulose to sugars. The stated goals of these projects would bring enzyme cost down into an economically competitive range.

8. 10/14/2010 8 Technology Subgroup’s comments (example items for the Technology category: Technology pathways and timing, Vehicle technology availability, Timelines. Use Category Approach; Deconstruct): In 2007, xylose yields from pretreatment at pilot scale were approximately 55- 60%. Since that time, NREL has made tremendous strides in achieving pilot scale conversions that are above 80% conversion of xylan to xylose. Most of this improvement has come about through enhanced ability to control residence time and through less severe pretreatment conditions. In addition, the most recent commercial enzyme preparations from Novozymes have been very good at helping to achieve these yields (there is some hemicellulase activity in these preparations). This has been documented in internal NREL/DOE milestone reports. Fermentation is another area where technology development will lead to reductions in ethanol production costs. For example, strains are being developed that can effectively convert arabinose to ethanol, which further improves the overall conversion of biomass to ethanol.

9. 10/14/2010 9 Technology Subgroup’s comments (example items for the Technology category: Technology pathways and timing, Vehicle technology availability, Timelines. Use Category Approach; Deconstruct): The DOE predicts that feedstock costs will come down. For feedstock cost, the ConocoPhillips/Iowa State/ADM/NREL study used $75/dry ton for delivered corn stover. DOE, in its multiyear program plan (MYPP) has documented targets for corn stover that are closer to $51/dry ton (http://www1.eere.energy.gov/biomass/pdfs/mypp.pdf). Feedstock cost reductions of this magnitude will have a major impact on ethanol production cost (~$0.35/gallon).http://www1.eere.energy.gov/biomass/pdfs/mypp.pdf For the financial assumptions, the ConocoPhillips/Iowa State/ADM/NREL study assumed 100% equity financing. With more typical industry financing assumptions (eg significant debt financing in addition to equity financing), ethanol cost could be reduced by another $0.20/gallon.

10. 10/14/2010 10 Technology Subgroup’s comments (example items for the Technology category: Technology pathways and timing, Vehicle technology availability, Timelines. Use Category Approach; Deconstruct): Given the various factors described above, and starting with the predicted cost of $3.47/gallon of ethanol based on the ConocoPhillips/Iowa State/ADM/NREL study, the cost of cellulosic ethanol via the biochemical route in 2020 starts to approach the break-even ethanol cost of $1.68/gallon based on EIA’s predicted reference case wholesale cost of $2.79/gallon of gasoline. EIA predicts that advanced biofuels in general and cellulosic biofuels in particular will not meet the amount mandated in the RFS, but they do not give a rationale as to how they came up with the lower amounts. Was a growth rate comparable to that seen in corn ethanol in 2001-2010 assumed? Did EIA look at when proposed plants that have received DOE biorefinery grants will come on line and then extrapolate based on a set growth rate? In the EIA-AEO, Figure 87 (U.S. production of cellulosic ethanol and other new biofuels, 2015-2035) shows that cellulosic ethanol plateaus in 2022 and does not begin to grow again until approximately 2032, whereas other new biofuels grow uninterrupted after 2022. What was the rationale for the growth plateau?

11. 10/14/2010 11 Technology Subgroup’s comments (example items for the Technology category: Technology pathways and timing, Vehicle technology availability, Timelines. Use Category Approach; Deconstruct): Initial BTL technology appears to be exclusively green diesel; this is the lowest cost technology option in the near term. Expanding green diesel production will have to be with vegetable oils (soy, canola, palm, jatropha?) because of the limited amount of waste oil and grease resources. This will be a higher cost option. In the future, additional, higher cost technologies will have to fill the gap, such as biomass FT and pyrolysis. The only economic incentive given for transitioning to these higher cost technologies is higher oil prices and additional GHG incentives. Will there be enough capital to expand BTL production to meet projections for 2035? What is the split of BTL production between the various technologies being considered? Will a lack of biomass infrastructure to deliver feedstock required to meet the 2035 BTL targets hinder production? All things considered, the high cost BTL projections from the NEMS model may be more practical (see spreadsheet I previously distributed). The assumptions used for the reference case seem a bit too aggressive given the current state of BTL technologies.

12. 10/14/2010 12 Demand Subgroup’s comments (example items for the Demand category: Fleet turnover, demand volumes and timing; Biodiesel, Blend Wall, E85, E15+): Predictions for corn ethanol volume are reasonable, assuming blendwall issues are addressed and appropriate supply/distribution investments are made, and/or E85 use increases, which will also require significant supply/distribution investments. Volumes appear to match RFS-2 requirements (15 B gal), approximately 3 B gal over current corn ethanol use. Cellulosic ethanol predictions are larger than anticipated, unless cost and technology breakthroughs materialize, and significant capital investments are made. Regulations will be needed to force larger scale use (i.e., RFS-2, LCFS). See Technology Discussion for a more in-depth analysis of cost. Net ethanol imports (presumably Brazilian sugarcane) appear large. Imports are anticipated to be at much lower levels, unless needed to meet GHG reduction scenarios, or to meet the RFS-2 “Advanced Biofuel” category (i.e., value for GHG mitigation outweighs the higher price). The sum of corn ethanol, cellulosic ethanol, and ethanol imports is larger than can be accommodated, given the blendwall. Aggressive E85 adoption may be consistent with this, but the needed vehicle and delivery/infrastructure investments are large and hence this does not appear realistic. Need to cross-check with the vehicle team about these assumptions. Continued Light Duty Vehicle efficiency improvements will exacerbate blendwall issues and hence will likely moderate ethanol demand growth (regardless of source). The ‘Biomass to liquids’ volume is unrealistic in 2022, given the large capital investments required for FT. For the 2035 time frame, a sustained high price of crude would be needed before such investments are considered. Pyrolysis oils, which may be in this bucket, are not anticipated to reach significant scale due to many technical and economic issues. The biodiesel (FAME) volume is large, roughly double RFS-2 volume requirements of 1 B gal. Without regulatory requirements, it is unlikely this volume will be met.

13. 10/14/2010 13 GHG Subgroup’s comments (example items for the GHG category: Carbon/GHG, Other tail-pipe criteria pollutants, Carbon Neutral, RFS2 Targets, Land Use, Manufacturing, Drying): No “Indirect Land Use” calculations were used in forming the impact to GHG emissions in the base case (We will need to make an assumption on what the science and models will look like in the future). GHG was over simplified in the base case as it assumes no explicit regulations to limit GHG beyond recent vehicle GHG standards. The NPC will be using the Vision model to look forward. Current rules have a limited number of production and feedstock pathways for creating future fuels. The Biofuels task group is assuming that all products must meet the RFS2 threshold for GHG reduction. 20% for Corn Starch Based Ethanol 50% for Biomass Based Diesel 50% for Advanced Non-Cellulosic 60% for Cellulosic Renewable fuel economics and regulations that conflict with RFS2 could force fuels into the market place that do not meet the GHG thresholds set in RFS2. In the base case it appears that they are counting on CO2 sequestration projects to improve GHG from future coal projects. Sequestration test projects have met resistance from the locals at many of these proposed test sites. What if sequestration is not an option in the future. Without counting the impact of Low Carbon Fuels or the ever changing science around GHG the base case could be selecting winners today that are not in the future.

14. 10/14/2010 14 Legislation Subgroup’s comments (example item for the Legislation category: Existing legislation and regulation, Blend Wall, Adjustments, RFS2, Responsibility on wrong party, CRP ): EISA Structural deficiencies of the RFS2program EIA's analysis assumes that the RFS2 program is implemented as written, with the exception that EIA recognizes that the cellulosic renewable fuels requirements will not be met and will have to be adjusted downward. In fact, by virtue of waiving the cellulosic requirement by more than 50% in 2010, EPA triggered a legal obligation to undertake a rulemaking to reduce the RFS2 requirements. EIA overlooks significant deficiencies in the RFS2 program design that will likely hinder the ability of the country to meet the requirements of all the categories of renewable fuels. EISA and EPA’s RFS2 regulations impose the obligation on refiners and importers, even though refiners and importers are not the parties in the distribution system that are in a position to decide which renewable fuels to blend. It is at the terminal level that decisions whether to blend general renewable fuels, advanced renewable fuels, or cellulosic renewable fuels will, be made. This disconnect between the obligation and the decision making abilitiy is likely to cause difficulty in meeting the cellulosic and advanced renewable fuels requirements, and consequently the overall renewable fuel requirements. The ethanol blend wall is likely to cause additional problems in meeting the RFS2 requirements. Beyond the blendwall, the RFS2 presumes that large volumes of E85 will be used. The difficulty with this is that most retail gasoline stations in the U.S. are not owned by the obligated parties, and it is these non-obligated retailers that will have to take action to expand the use of E85. This will likely cause difficulty in meeting EISA's requirements. EIA makes projections of possible volumes of the various categories of renewable fuels. It is not clear whether EIA has analyzed whether the volumes projected will meet the greenhouse gas reduction thresholds specified in EISA. This confusion is created by statements in the AEO that indicate that carbon emissions from the various biofuels are presumed to be carbon neutral, whereas EISA specifies that renewable fuels must meet emission reduction thresholds in order to qualify in the various renewable fuel categories. This may have resulted in overly optimistic projections.

15. 10/14/2010 15 Legislation Subgroup’s comments (example item for the Legislation category: Existing legislation and regulation, Blend Wall, Adjustments, RFS2, Responsibility on wrong party, CRP ): Conservation reserve program: If use of CRP acreage is assumed to reach the biomass production targets in the base case legislation. Adjustments would need to be made to the program or incentives to leave the program and plant energy crops would need to take place. In anticipation of a profitable lignocellulosic biorefinery business model, amendments were made to the management of CRP land. The Farm Security and Rural Investment Act of 2002 (FSRIA) permitted managed haying, grazing and biomass harvesting of CRP grassland in accordance with a conservation plan (USDA, 2003). To ensure the environmental benefits attributable to grassland birds and other species, the Farm Service Agency (FSA) incorporated recommendations from grassland ecologists into the legislation (Cunningham; USDA, 2003). Acres that are used for grazing, haying or on which biomass has been harvested shall be assessed a 25 percent reduction in annual rental payment. The legislation also limits managed harvest or grazing to a maximum of once every three years. (Biorefinery Feedstock Production on Conservation Reserve Program Land, Lawrence D. Mapemba, Francis M. Epplin, Charles M. Taliaferro, and Raymond L. Huhnke)

16. 10/14/2010 16 Other materially significant areas not addressed Subgroup’s comments (example item for the Other category: Significant gaps (define significance), Other issues of material impact, Other Governments Renewable Fuels Policies, Impact on Food) Ratio corn/cellulosic might be different vs RFS2 Competing demands for biomass might be an issue for RFS2 (eg renewable power, food/feed/fiber vs transportation)

17. 10/14/2010 17 Base Case Assessment Summary of Top Findings Subgroup’s comments: Volume and required infrastructure development seems difficult The assumptions require that 300 million tons of biomass be available by 2020 and that over 500 million tons of biomass be available by 2035 Unclear what the drivers are going to be to get to the volume of potential mandates A multitude of technologies are assumed for alternative biofuels to be competitive (technology, feedstock costs) Multiple technologies that are economically competitive developed on a parallel path Competing demands for biomass will significantly impact cost (renewable power, food/feed/fiber, transportation fuels) Policy will be the biggest factor; Structural deficiencies in EISA RFS2 program that will likely hinder the volume that EIA projects for 2022 and later.