National Association of State Energy Officials 2005 Summer Fuels Outlook ConferenceThe National Press ClubWashington, DCApril 7, 2005Douglas A. DuranteExecutive DirectorClean Fuels Development Coalitionwww.cleanfuelsdc.org

Clean Fuels Development Coalition Constituency

AutomobileManufacturers

AlternativeFuel Providers

Clean Fuel Technology Developers

Federal and StateGovernments, Public andPrivate Organizations thatSupport Their Advancement

and the . . .

U.S. Ethanol Industry -- EvolutionU.S. ethanol industry nearly legislated out of business as recently as 1997 by elimination of tax exemption.

Today, ethanol industry is in the midst of an unprecedented expansion.

Billions of dollars in capital investment.

Hundreds of thousands of jobs.

Unrivaled political support.

Can contribute to energy, agriculture, environment, and economic development.

How did this happen?

Ethanol Identified with a Range of Public Policy Initiatives Over 25 yearsENERGYEnergy Security Act of 1978Alternative Motor Fuels Act of 1988Energy Policy Act of 1992Energy Policy Act of 2004/2005

ENVIRONMENTClean Air Act of 1990

AGRICULTUREFarm Bill of 2002Ag Appropriations Commodity Assistance Bills

TRANSPORTATIONHighway Bill of 1978

TAXES AND ECONOMIC DEVELOPMENTEnergy Tax Act of 1980Corporate Tax/Jobs Bill of 2004

Ethanol production estimates based on year-to-date production from U.S. EIA.2005-2006 capacity estimates courtesy American Coalition for Ethanol.

Chart1

0.04

0.06

0.15

0.21

0.35

0.38

0.41

0.6

0.7

0.82

0.82

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

2.9

3.2

3.6

3.9

Billions of Gallons

U.S. Fuel Ethanol Production 1979-2006

Sheet1

'790.04

'800.06

'810.15

'820.21

'830.35

'840.38

'850.41

'860.6

'870.7

'880.82

'890.82

'900.83

'910.85

'920.93

'931.1

'941.19

'951.35

'961.03

'971.3

'981.42

'991.52

'001.62

011.77

022.7

032.9

043.2

05/E3.6

06/E3.9

Sheet1

Billions of Gallons

U.S. Fuel Ethanol Production 1979-2006

Sheet2

Sheet2

0.04

0.06

0.15

0.21

0.35

0.38

0.41

0.6

0.7

0.82

0.82

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

2.9

3.2

3.6

3.9

Billions of Gallons

U.S. Fuel Ethanol Production 1979-2006

U.S. Ethanol PlantsCurrent and projected ethanol production in U.S.82 operating facilities 3.45 BGPY/2004600+ MGPY expansion/under construction, possibly 4+ BGPY/2006Source: Clean Fuels Development Coalition/American Coalition for Ethanol

Ethanol Share of the Pie is Growing

Chart2

4

135

Billions of Gallons per Year

Sheet1

Billion of Gallons per Year

Ethanol4

Gasoline135

Sheet1

0

0

Billions of Gallons per Year

Ethanol Share of the Pie is Growing

Factors Driving Ethanol DevelopmentContinued Need for Clean Fuels:

Federal RFG even without an oxygen requirement.

Carbon monoxide (CO) programs-Both federal and state requirements

CO2/Greenhouse gases-E-10, E-85 particularly effective

Factors (Continued)Economic Considerations:

Extension of the tax exemption through 2010 USDA grants, incentives, loan guaranteesState incentivesIndustry efficiencies = greater yieldLow cost of money = high ROI

Rural America Taking Charge!Plants Going up in Record Time with Larger Capacities and Investor/Owner FinancingSource: Clean Fuels Development Coalition

Chart6

17

18

30

14

Billion of gallons

Plant Capacity

Chart3

17

18

26

14

Billion of gallons

Plant Capacity

Number of Plants

Sheet3 (2)

Sheet3 (2)

17

18

26

14

Billion of gallons

Plant Capacity

Number of Plants

Sheet3

Sheet3

17

18

30

14

Billion of gallons

Plant Capacity

Sheet1

MonthsPercent

Jan20

Feb40

Mar70Up 10 10M17

Apr7010-20M18

May7020-50 M30

Jun6050M+14

Jul58

Aug62

Sep70

Oct75

Nov0

Dec20

Jan20

Mar40

Apr80

May

More Growth Likely Through a Renewable Fuels StandardWould eliminate oxygen in federal RFG, helping to get more MTBE out of the system.

Would establish an annual requirement for refiners to have a modest percentage of their fuels renewably derived.

Establishes a flexible credits and trading program to meet the requirement.

Incentivizes biomass ethanol by giving it greater value in the trading program.

Incentivizes biodiesel, treating it equal to ethanol.

Newest version of this legislation (S.650) would create demand for 700 million gallons per year for the next 7 years!

Lessons Learned From 20+ Years of IncentivesTax Incentives lifeblood of industry-Successful in making ethanol competitive-Critical element of project financing

BUT.

Economics alone insufficient market driver -- ethanol price swings too volatile

Most effective incentives tied to market assurance

Most aggressive growth spurt for ethanol came from CAA as industry doubled in 1990s --10% annual growth -- doubled again in 4 yearsMost recent explosion in development due to assumption of either RFS or capture of MTBE market. Renewal of tax exemption never had the impact of a market driver like this.

Chart4

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

3.2

3.4

Gallons

Year

Billions of Gallons

1990-2003 (2)

1990-2003 (2)

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

3

3.4

Most recent explosion in development due to assumption of either RFS or capture of MTBE market. Renewal of tax exemption never had the impact of a market driver like this.

Figure 3. Most aggressive growth spurt for ethanol came from CAA as industry doubled in 1990s --10% annual growth

Gallons

Year

Billions of Gallons

Chart2

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

3

Gallons

Year

Billions of Gallons

Chart1

0.04

0.06

0.15

0.21

0.35

0.38

0.41

0.6

0.7

0.82

0.82

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

1.98

(E) = 2002 ethanol production estimated based on year-to-date production from U.S. EIA

Billions of Gallons

Sheet1 (2)

Sheet1 (2)

0.04

0.06

0.15

0.21

0.35

0.38

0.41

0.6

0.7

0.82

0.82

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

1.98

(E) = 2002 ethanol production estimated based on year-to-date production from U.S. EIA

Billions of Gallons

Sheet1

'790.04

'800.06

'810.15

'820.21

'830.35

'840.38

'850.41

'860.6

'870.7

'880.82

'890.82

'900.83

'910.85

'920.93

'931.1

'941.19

'951.35

'961.03

'971.3

'981.42

'991.52

'001.62

011.77

022.7

033.2

043.4

Sheet1

0.04

0.06

0.15

0.21

0.35

0.38

0.41

0.6

0.7

0.82

0.82

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

1.98

(E) = 2002 ethanol production estimated based on year-to-date production from U.S. EIA

Billions of Gallons

Sheet2

Sheet2

0.04

0.06

0.15

0.21

0.35

0.38

0.41

0.6

0.7

0.82

0.82

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

3.2

3.4

(E) Ethanol production estimated based on year-to-date production from U.S. EIA

Billions of Gallons

1990-2003

Most aggressive growth spurt for ethanol came from CAA as industry doubled in 19902 -- 10% annual growth -- doubled again in 4 years

1990-2003

0.83

0.85

0.93

1.1

1.19

1.35

1.03

1.3

1.42

1.52

1.62

1.77

2.7

3.2

3.4

Gallons

Year

Billions of Gallons

Ethanol Demand from Renewable Fuels Standard in S.650Source: Clean Fuels Development Coalition

Chart2

4

4.7

5.4

6.1

6.8

7.4

8

Ethanol Demand

Year

Billions of Gallons/Year

EthanolDemand

EthanolDemand

4

4.7

5.4

6.1

6.8

7.4

8

Ethanol Demand

Year

Billions of Gallons/Year

Sheet2

YearEthanol Demand

20064

20074.7

20085.4

20096.1

20106.8

20117.4

20128.0

Source: Clean Fuels Development Coalition

Political Support for Renewable Fuel StandardEthanol producersCorn growers/agriculture2/3 U.S. GovernorsAir quality officialsWater quality officialsMajority of U.S. SenateBush Administration (Clinton as well)Highway interests/road buildersAmerican Petroleum InstituteState petroleum councils

Range in Ethanol Demand From Renewable Fuel Standard LegislationSource: Clean Fuels Development Coalition

Chart1

3.43.94

3.54.24.7

3.94.45.4

4.34.66.1

4.74.86.8

4.957.4

55.28

Under old RFS, production exceeds demand

Old RFS(HR.4)

New RFS (S.650) corrects demand/supply imbalance

Projected Demand Under Old RFS

Current/Projected Ethanol Production Under Old RFS

Projected Demand Under New RFS

Billions of Gallons

Sheet2 (2)

Sheet2 (2)

3.22.9

3.23.2

3.63.2

3.93.4

4.23.5

4.43.9

4.64.3

4.84.7

54.9

5.25

Current/Projected Ethanol Production

Projected Demand with Renewable Fuel Standard

Billions of Gallons

Ethanol Demand From Renewable Fuel Standard Versus Current/Projected Production

Sheet2

Sheet2

3.43.94

3.54.24.7

3.94.45.4

4.34.66.1

4.74.86.8

4.957.4

55.28

Under old RFS, production exceeds demand

Old RFS(HR.4)

New RFS (S.650) corrects demand/supply imbalance

Projected Demand Under Old RFS

Current/Projected Ethanol Production Under Old RFS

Projected Demand Under New RFS

Billions of Gallons

Sheet1

Current/Projected Reformulated Gasoline DemandProjected Reformulated Gasoline Demand with Opt-OutsProjected Demand Under Old RFSCurrent/Projected Ethanol Production Under Old RFSProjected Demand Under New RFS

20032.551.962.93.2

20042.551.963.23.2

20052.551.963.23.6

20062.602.003.43.94

20072.652.043.54.24.7

20082.702.083.94.45.4

20092.762.124.34.66.1

20102.812.164.74.86.8

20112.872.214.957.4

20122.922.2555.28

Current/Projected Reformulated Gasoline DemandProjected Reformulated Gasoline Demand with Opt-OutsProjected Demand with Renewable Fuel StandardCurrent/Projected Ethanol Production

20032.551.963.0638

20042.551.963.6508

20052.551.963.153.6508

20062.602.003.153.6508

20072.652.043.23.6508

20082.702.083.53.6508

20092.762.123.93.6508

20102.812.164.33.6508

20112.872.214.73.6508

20122.922.2553.6508

Legislative OutlookEnergy remains a top priority for the 109th Congress.

Ethanol continues to be an area of consensus.

Renewable fuels standard likely to be included.

Biomass energy for power, fuels, and products must be part of the mix.

Thank you! For more information log on to

www.cleanfuelsdc.org www.ethanolacrossamerica.net