TURN Expert Predictions on All Key Topics for 2018
Diversiﬁcation Drives RIN Quality Assurance Measures Page 26
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JANUARY 2018 VOLUME 24
A Leap into the New Year By Lisa Gibson Delivering 'Big League' By Emily Skor
Experts in policy, technology, exports, production and finance share their 2018 forecasts By Lisa Gibson
How to Get EUâ€™s Biofuels Policy Moving Again By Emmanuel Desplechin
QAP program could function as diversification tool By Susanne Retka Schill
Summary of Accomplishments By Brian Jennings
26 RISK MANAGEMENT
People, Processes and Playing the Market
Protect margins with personnel, technology and hedging By Lisa Gibson
ON THE COVER PHOTO: ISTOCK
6 | Ethanol Producer Magazine | JANUARY 2018
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8 | Ethanol Producer Magazine | JANUARY 2018
A Leap into the New Year Heading into 2018, we have new Renewable Fuel Standard volume requirements, hopes for new technologies that will increase efficiency or diversify coproducts, and predictions for commodity prices that help form strategies for margin protection. It’s likely how we started 2017, too, and 2016.
Managing Editor firstname.lastname@example.org
Maybe 2015. While each year’s overall outlook consists of largely similar categories, the details and scenarios under each evolve. For this month’s Outlook feature, Ethanol Producer Magazine broke down the industry into five categories—exports, technology, policy, production and finance—and asked an expert in each a few pertinent questions about their predictions for the new year, and comparisons to the last. Respondents talked about the RFS, of course, but also Reid vapor pressure, tariffs in Brazil and China, federal and state funding, innovations, relationships between producers and retailers, and much more. Many battles from 2017 and earlier years will continue to be fought this year. We are ready. Find out what each of the five categories will bring for 2018, starting on page 20. And as those margins widen and innovative technologies bring new revenue opportunities, the industry diversifies. In the feature beginning on page 26, experts discuss how diversification could lead to more participation in voluntary quality assurance programs. EPA has one in place to ensure validity of renewable identification numbers (RINs), but because of the large size, single feedstock, and automation of the corn ethanol industry, RIN validation has not been an issue. As ethanol plants add feedstock, products and technologies, however, increased complexity could drive the need for more quality assurance programs. Look at it as a diversification tool, not a requirement, one source says. Finally, the feature that caps this issue is about financial risk management. We delve into three main techniques: technology, commodities hedging and personnel/insurance. Because I’m not a finance whiz, I learned quite a bit while researching and writing this feature, particularly about hedging and market projections. One source says only about half of all operating ethanol companies use commodities hedging as a risk-management tool, despite the fact that it can bring significant rewards. Technologies that diversify into new products can bring more revenue when ethanol prices slump, while investing in proper personnel and insurance upfront can alleviate risks in compliance violation fines or insurance and other payouts that result from employee injuries. All three bring their own unique margin-padding benefits. “People, Processes and Playing the Market” starts on page 30. I learn a great deal about the ethanol industry with each issue of the magazine I help produce, this being only my fifth as managing editor. It’s complex and broad, but I’m working on becoming an expert. As I leap into this new year with a few editions under my belt, I look forward to more interviews, events and meetings with the industry sources who have shared their knowledge with me. This January issue is yet another success we’re proud to present, and a great product to kick off the new year. I hope you find it informative for your operations in 2018 and beyond.
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Delivering ‘Big League’ By Emily Skor
In the spirit of setting a New Year’s resolution, at Growth Energy we’re reflecting on the previous year’s experiences to guide us as we begin anew, and considering our key achievements and missed opportunities to build the right kind of muscle memory to drive future success heading into 2018. The new administration came into power with a mantra of delivering “Big League,” and I will borrow that mantra to say that delivering “Big League” is exactly what the biofuels industry did this year. We went toeto-toe against the most coordinated and well-funded attack on biofuels since the signing of the RFS2, and we came out on top. The RFS faced existential threats from petitions, proposals and concepts that were levied both formally and informally. By coordinating with a broad spectrum of biofuels stakeholders, supporters and champions on Capitol Hill, we overcame those threats through sound strategy, swift action, disciplined engagement and a laser focus on landing punches when and where they mattered. We led the charge to secure a landmark victory against efforts to upend the RFS by shifting the point of obligation. When the EPA issued its Notice of Data Availability that looked to ultimately lower blending targets for biofuels, we immediately rallied our Congressional champions to ensure that efforts to roll back the RFS would not be implemented. And we once again rose to the occasion when rumors began to swirl that the EPA was discussing attaching renewable identification numbers (RINs) to exported gallons of American ethanol. Though we still need higher blending targets on the cellulosic front, we successfully leveraged our unified voice to impact the new administration and saw 2018 renewable volume obligations (RVOs) for conventional ethanol set at 15 billion gallons. These are fundamental victories that the industry can be proud of. While we haven’t yet achieved Reid vapor pressure (RVP) parity for E15 and higher blends, we made dramatic headway by broadening our base of supporters and positioning retailers as the new face of the RVP fight. This novel approach opened fresh avenues of collaboration with parties who were previously uncooperative or obstructive
10 | Ethanol Producer Magazine | JANUARY 2018
toward ethanol. We now have the momentum, and we have an EPA administrator who has pledged in writing to give RVP due consideration. Our efforts with retailers to expand market access and consumer demand for higher blends was equally important to the policy fight. Through our work with Prime the Pump, we doubled the number of gas stations selling E15, which can now be found at nearly 1,200 stations across 29 states. Selecting E15, E30 or E85 is a behavior change, and driving consumer demand is critical to delivering more sales of higher blends. We’re collaborating with retailers to identify the most important and persuasive E15 attributes to consumers so we can optimize the branding and marketing of the fuel, combining consumer research with in-market testing and experience. With battles won and progress made, there are many positives to take from 2017, but of course we cannot be complacent. While we won several rounds, our success will only embolden our opponents further. We must continue to work every day to educate the administration on the importance of global trade and our need for U.S. government intervention to both open new markets and help eliminate recently erected trade barriers. We must also work toward strong 2019 RVOs that keep moving America forward. And Growth Energy has already begun working on our strategy around the RFS reset provision that looms on the horizon. We’ll continue to lead on E15 development, exploring every opportunity to secure an RVP waiver and bring more retailers into the E15 fold, while also engaging consumers on the benefits of higher biofuel blends. We will validate engine performance through our NASCAR, Richard Childress Racing, American Ethanol Performance Team, and engine performance education initiatives. And we will continue our pan-industry collaboration to move the auto industry toward an E30 certification fuel. 2017 was a busy, exciting, and challenging year. 2018 surely will provide much more of the same, as well as new hurdles to clear. It is our great privilege at Growth Energy to meet those opportunities and challenges head-on for our members. I very much look forward to what we can accomplish together in this new year. Author: Emily Skor CEO, Growth Energy 202.545.4000 email@example.com
2018 National Ethanol Conference February 12-14, 2018 JW Marriott San Antonio San Antonio, Texas The National Ethanol Conference is the most widely attended executive level conference for the ethanol industry. Since 1996, the RFA’s NEC has been recognized as the preeminent conference for delivering accurate, timely information on marketing, legislative and regulatory issues facing the ethanol industry. In 2017, 1,000 industry leaders and professionals attended the NEC, representing 38 states, the District of Columbia and more than 14 countries. Networking and business development have been the leading factors promoting attendance since the NEC’s inception. 202-315-2466 www.nationalethanolconference.com
2018 International Fuel Ethanol Workshop & Expo June 11-13, 2018 CenturyLink Center Omaha Omaha, Nebraska
2018 Advanced Biofuels Conference June 11-13, 2018 CenturyLink Center Omaha Omaha, Nebraska
From its inception, the mission of this event has remained constant: The FEW delivers timely presentations with a strong focus on commercialscale ethanol production—from quality control and yield maximization to regulatory compliance and fiscal management. The FEW is the ethanol industry’s premier forum for unveiling new technologies and research findings. The program covers cellulosic ethanol while remaining committed to optimizing existing grain ethanol operations. 866-746-8385 www.fuelethanolworkshop.com
Colocated with the International Fuel Ethanol Workshop, the Advanced Biofuels Conference is tailored for industry professionals engaged in producing, developing and deploying advanced biofuels, including cellulosic ethanol, biobased platform chemicals, polymers and other renewable molecules that have the potential to meet or exceed the performance of petroleum-derived products. 866-746-8385 www.advancedbiofuelsconference.com
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How to Get EU’s Biofuels Policy Moving Again By Emmanuel Desplechin
After a year of debate focusing on what the European Union’s renewable energy policy should look like post-2020, Europe now must decide among several different visions—especially when it comes to biofuels. As we begin 2018, the only thing that is clear to everyone
is that more needs to be done now to decarbonize EU transport and move Europe’s energy reality closer to its ambitious rhetoric. While top officials such as European Commission Vice President Maroš Šefčovič keep up the cheerleading in speeches and press releases, their proposals would actually make a bad situation worse. The latest State of the Energy Union report from the Commission offered a vivid example of how the EU is working against its own goals when it comes to renewables policy. The report shows there has not been sufficient progress toward the 10 percent target for renewables by 2020, and warns that greenhouse gas emissions in transport continue to rise. But instead of pushing for smarter use of existing technology such as crop-based biofuels to help reverse the EU’s poor showing in transport decarbonization, the Commission wants to phase them out and pursue the myth of tomorrow’s zero-emission vehicles. And by proposing a low-emissions fuel blending obligation of just 6.8 percent by 2030, starting from 1.5 percent in 2021, it would leave an unacceptably large percentage of the transport energy mix taken up by fossil fuels. The same counterproductive forces are at work in the European Parliament, where a series of committee votes has sent mixed messages about where the assembly will stake out its position on the biofuels question. The environment committee, which is in charge of the biofuels section of the Renewable Energy Directive, has pushed for a total phase-out of crop-based biofuels by 2030—an even more draconian vision than what the Commission wants. The transport committee, where some members tried to find a compromise way forward, ended up rejecting its own opinion on the legislation.
12 | Ethanol Producer Magazine | JANUARY 2018
The most recent opinion, from the industry and energy committee, went in yet another direction. It would raise the overall EU ambition for renewables in the energy mix to 35 percent, and set a target of 12 percent renewables in transport. While at first glance that seems like a positive step, the proposal also would exclude crop-based biofuels such as renewable EU ethanol from a new, higher blending obligation on fuel suppliers set at 10 percent. So it would still slow down progress toward decarbonization—again, leaving the door open for fossil fuels. This round-and-round positioning on biofuels even has environmental lobby groups confused about the best way forward. A group of them cosigned a letter in November urging members of the European Parliament (MEPs) to reject a renewables target for transport. It is not too late for MEPs to find common ground, but the clock is ticking. The full European Parliament will decide its position on RED II on Jan. 15. Ideally, it will move closer to what EU Member States are asking for in their draft position: build on the success of the existing framework; leave in place the 7 percent cap on crop-based biofuels; and promote advanced biofuels and renewable electricity in addition to, not at the expense of, existing solutions. That vote will be the start of negotiations between the Parliament, the Commission and the Council—a process that could take six months. If the EU wants to be the world leader on promoting renewables, it will need to do more than simply handwringing or calling for “further improvements” in transport energy or relying on uncertain scenarios about growth in electric vehicles. The EU cannot allow another year to go by with an increase of greenhouse gas emissions from transport. It needs to use the tools it has today—including sustainable crop-based biofuels—as it lays the groundwork for more advanced technologies. Author: Emmanuel Desplechin Secretary General ePURE, the European Renewable Ethanol Association firstname.lastname@example.org
Summary of Accomplishments By Brian Jennings
Our sights at the American Coalition for Ethanol are set on growing demand in 2018 and beyond. As we ring in the New Year, here is a summary of our
accomplishments and progress on priority issues. More than 1,000 stations in nearly 30 states are offering E15 to their customers. The momentum is real, but we need many more stations to convert in 2018. ACE’s Flex Fuel Forward campaign continues to feature retailers who have “been there, done that” in our paid and earned media, highlighting retailers who are making money selling higher blends to their customers, which, in turn, helps convince other station owners to offer E15. Learn more at www.flexfuelforward.com. The biggest barrier to nationwide adoption of E15 is the outdated Reid vapor pressure limitation. RVP relief continues to be our top nearterm priority. We made progress in 2017, but our Senate champions encountered roadblocks in the Environment and Public Works Committee. In 2018, we will push for enactment of legislation and continue to engage EPA. The fact that Administrator Pruitt is analyzing legal options to address RVP should not be overlooked because, in the past, EPA has simply told us “No.” We are diligently engaged with EPA and Congress to clear this regulatory hurdle. While we tackle RVP here at home, high-octane ethanol is in high demand around the world. We anticipate setting a new record of 1.3 billion gallons of ethanol exports in 2017 and demand should remain strong in the future. Canada, Brazil, India, Southeast Asia and Mexico will be leading customers, and game-changing opportunities could unfold with Japan and China in 2018 and beyond. The Renewable Fuel Standard is no stranger to controversy, and 2017 had plenty of battles. Our biggest win was the U.S. Court of Appeals striking down EPA’s use of the general waiver authority to reduce RFS volumes based on the so-called blend wall. In handing down its ruling, the Court ordered EPA to restore a 500 million-gallon shortfall to the 2016 renewable volume obligation. We also prevailed in convincing EPA to reject petitions from merchant refiners to move the RFS point of obligation downstream. For 2018, the good news is
14 | Ethanol Producer Magazine | JANUARY 2018
that the statutory 15 billion-gallon volume for conventional biofuel will be maintained and that EPA is modestly increasing advanced and total renewable fuel blending obligations. This should help signal to retailers that it continues to make sense to offer E15 and flex fuels to their customers. We are disappointed the cellulosic level for 2018 is less than EPA required in 2017. We firmly believe the capacity is there to justify increasing the cellulosic target. If we are to strengthen rural America, it is essential to expand the use of ethanol. ACE believes the best way to grow demand well into the future is to harness the low-carbon, high-octane value of ethanol. That’s why we were very encouraged that for the first time ever, EPA requested information in 2017 on the role high-octane fuel could play in helping achieve vehicle emission and fuel economy standards. Automakers may need to optimize on high-octane fuels to comply with these standards and research indicates the lowest-cost, lowest-carbon, most efficient way to do that is with blends in the neighborhood of 25 to 30 percent ethanol. As EPA determines the trajectory of vehicle emission standards in 2018, we will remain active in communicating the benefits of high-octane fuel in future engines. In 2018, ACE will also press forward with a constructive discussion about increasing demand for ethanol and improving the sustainability of agriculture production in a manner that maximizes greenhouse gas reductions. We are launching an effort to build consensus around the science related to corn ethanol’s role in reducing carbon emissions. From our perspective, there has been significant and meaningful work done in the past few years to more properly account for the low-carbon benefits of corn ethanol, and now is the time to forge scientific and political consensus on this issue. Finally, all of these priority issues will be addressed during ACE’s 10th anniversary Washington, D.C., fly-in. Please mark your calendars for March 21 and 22, and plan to join us in this all-important election year. Author: Brian Jennings Executive Vice President American Coalition for Ethanol 605.334.3381 email@example.com
People, Partnerships & Projects
CVEC named Ag Innovator of 2017 The Agricultural Utilization Research Institute named Chippewa Valley Ethanol Co. in Benson, Minnesota, its 2017 Ag Innovator of the Year. Each year, the AURI board of directors bestows the Ag Innovator of the Year Award, the organization’s highest honor, on a client company or entrepreneur it feels has made a substantial impact in the areas of product innovation, uniqueness and commercialization potential. This year’s award is the culmination of 20 years of cooperative work between AURI and CVEC. “There were a number of contenders for this year’s award, but the board of directors felt CVEC’s many accomplishments and innovations in the ethanol industry best fit the criteria,” said Shannon Schlecht, AURI executive director. “CVEC contributes to Minnesota’s economy by purchasing more than 18 million bushels of corn from local farmers and has a capacity to produce tens of millions of gallons of ethanol annually, and is notable in its constant exploration of innovative changes to its products and processes to add value for its members.”
16 | Ethanol Producer Magazine | JANUARY 2018
CVEC began 20 years ago as the Chippewa Valley Agrafuels Cooperative, a group of more than 650 shareholders that included producers, elevators and local investors. In 1995, CVAC became the general partner of an ethanol partnership, The Chippewa Valley Ethanol Co., and by early 1996 was in full operation at its own facility. Among its accomplishments, CVEC was the first direct-blend E85 facility in the state. Today, CVEC produces 50 MMgy and has grown to 975 cooperative owners, the majority living within a 50-mile radius of the plant. CVEC is recognized at both the federal and state levels for efficient production and leadership in shaping ethanol policy. The company has ownership interest in four other ethanol companies and is a founding owner of the Renewable Products Marketing Group.
Tierney joins USGC Tim Tierney has joined the U.S. Grains Council as director of strategic marketing/ ethanol, North Asia. Based in Singapore, this new position will seek to capitalize on longstanding relationships and emerging Tierney opportunities for biofuels in North Asia. Tierney’s position reflects efforts to build and align global resources for USGC’s work to capture near-term demand for U.S. feed grain sales and build long-term demand for ethanol among global customers. “Over the past year, the Council’s leadership has heard loud and clear that what our members want is new demand, and they are willing to invest in it by allowing us to hire high-quality people around the world,” said Tom Sleight, USGC president and CEO. “Particularly as we have pivoted to promoting ethanol exports globally, we have focused on ensuring we have the right people in our overseas offices to do this work well and quickly.” Tierney came to the organization from Syngenta and DuPont, where he worked on products developed for the ethanol industry. Earlier in his career, he worked for USGC for more than 10 years as director in Japan, director of international operations based in Washington, and as a trade servicer.
Bredenkamp will serve as Renewable Fuels Nebraska executive Renewable Fuels Nebraska has selected Troy Bredenkamp to be the organization’s next executive director. “We are excited to have Troy and his extensive association experiences leading our organization into the future,” said Ted Bredenkamp Free, general manager of Bridgeport Ethanol and president of Renewable Fuels Nebraska. “We face a lot of challenges and opportunities in Nebraska’s ethanol industry. Troy possesses the background, the expertise and the vision to help our members navigate those challenges while helping to propel our organization and industry forward.” Bredenkamp was most recently the general manager of the Nebraska Rural Electric Association, and before that served as CEO of the Colorado Farm Bureau, director of congressional relations with American Farm Bureau Federation in Washington, D.C., and vice president of technical services with Nebraska Cattlemen. “As the second-largest ethanol producing state in the U.S., this is a tremendous opportunity to serve as RFN’s next executive director, getting in on the ground floor and helping build an organization worthy of the significant economic role that the ethanol industry plays here in Nebraska,” Bredenkamp said. “Agriculture and rural prosperity have always been passions of mine, and RFN represents ethanol—one of the greatest value-added agricultural products and one with substantial economic significance to this state. I am excited to get started representing this vital industry.”
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As we head into 2018, U.S. ethanol producers have plenty to think about and likely have predictions for how the year will play out. This month, Ethanol Producer Magazine rounded up a few experts to discuss five main industry topics: exports, policy, technology, production and finance. They look ahead, compare 2018 with 2017 and provide a roadmap for the new year. Hereâ€™s what they have to say. By Lisa Gibson
20 | Ethanol Producer Magazine | JANUARY 2018
Thomas Sleight President and CEO U.S. Grains Council
Q. What are the most promising export markets for ethanol producers in 2018, and how do they differ from 2017’s top prospects? A. Our ethanol export market development program is truly global, with the chief difference between 2017 and 2018 being the broadening scope of activities across more markets as we build partnerships with countries developing their own ethanol policies. That said, we have a priority list that currently includes markets with major potential and, sometimes, major challenges: Brazil, Canada, China, India, Japan and Mexico. The commonality among these players is shifting policies with regard to biofuel mandates and a need for information and policy development related to the role trade plays in meeting those mandates in tandem with local production. Q. Why do these markets hold promise and what is being done to develop them? A. Our partner markets are generally countries looking to enhance their use of biofuels to meet policy goals that include greenhouse gas emissions reductions to achieve Paris Agreement commitments (Canada, Brazil and Japan) or countries with large and growing populations and serious air quality issues also seeking to boost rural economic benefits (Mexico, China and India). Like with our corn and DDGS market development work, each country has its own plan of action, including a mix of technical assistance, bringing trade teams to the U.S. for tours of our own industry’s set-up, and working directly with policy makers, industry, local media and others. While ethanol market development is more policy focused than grains market development, the same principles apply.
Q. The ethanol industry saw changes to some major markets (China and Brazil) in 2017 because of new tariffs. Is there any talk of similar moves in other major export destinations for this year? A. The policy landscape for ethanol exports is dynamic in ways that both enhance and hinder our efforts to build demand globally. China and Brazil both presented unexpected challenges to existing markets. We are actively and creatively working on both of these issues with our industry partners, our own government and with those in these countries who recognize the important role imports have in meeting national mandates. We know from experience that this work requires extreme diligence in following potential policy-based threats as part of larger strategies customized for the needs and conditions of each individual potential export partner. At the same time, we are expanding our activities into new markets to head off changes in policy that restrict market access. Q. Are there any expected changes to transportation infrastructure that could impact, positively or negatively, export markets or access to them? A. Increasing ethanol exports from the U.S. will require strong infrastructure in both our own supply chain and at destination locations. We know from promoting grains for more than 60 years that well-functioning infrastructure—fast, reliable, maintains quality of the product—is critical to meeting our customers’ expectations and keeping them buying from us. The U.S. industry sees exports as the future growth opportunity and is making investments accordingly. We also work with our domestic partners to ensure the ethanol industry’s needs make it into the federal prioritization process. Like building demand, improving infrastructure requires intensive planning and long-term engagement.
JANUARY 2018 | Ethanol Producer Magazine | 21
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President, CEO Renewable Fuels Association Q. What would you consider the biggest federal policy wins of 2017, and why? What do they mean going into 2018? A. Without a doubt, the biggest policy wins included EPA finalizing the 2018 Renewable Fuel Standard renewable volume obligations on time and maintaining the statutory 15 billion-gallon requirement for conventional renewable fuels like corn ethanol. Maintaining the 15 billion-gallon conventional biofuel requirement will accelerate investments in the infrastructure necessary to distribute mid-level ethanol blends like E15 and E30, and flex fuels like E85. For 2018, that means EPA continues to help promote and support the domestic biofuels industry. Q. What were the largest federal policy challenges or disappointments of 2017, and why? What can be done to mitigate their negative effects? A. Among the continued disappointments is that consumers are still being denied year-round access to E15. Due to an outdated EPA regulation, retail gas stations are essentially prohibited from selling E15 in more than two-thirds of the nation’s gasoline market during the summer ozonecontrol season, from June 1 to Sept. 15. EPA’s nonsensical and disparate Reid vapor pressure regulation of allowing E10, but not E15, during the summer months offers no consumer or environmental benefit whatsoever. Whether through legislative or administrative action, securing equal RVP treatment for all ethanol blends remains our top priority.
Q. EPA Administrator Scott Pruitt says he has directed the EPA to explore whether it has the legal authority to issue a nationwide Reid vapor pressure waiver for E15. Do you think this signals meaningful progress toward a waiver in 2018? Why or why not? A. Yes. Again, EPA has the authority to extend RVP parity with E15. We want to make sure all consumers have access to E15, whether it’s February, July or December. Nearly 90 percent of new 2018 model year vehicles are explicitly approved by the manufacturer to use E15 and likewise, more than 90 percent of the vehicles on the road were built in 2001 or later, meaning they are legally approved by EPA to use E15. We want to ensure year-round consumer access to E15. Q. What other far-reaching changes could be implemented in 2018? A. Another high-priority issue for RFA in 2018 is to ensure there is free trade of ethanol around the world, ending nonsensical tariff and nontariff barriers to trade, such as those imposed by China and Brazil, and continuing to grow the production and use of conventional and cellulosic biofuels. Ethanol provides tremendous economic, environmental and energy-security benefits and we want consumers around the globe to have access to the lowest-cost, cleanest and highest-octane fuel. Additionally, we will continue to push for higher-level ethanol blends as auto manufacturers move toward higher-octane fuels. A high-octane, lowcarbon ethanol blend in optimized engines would be the lowest-cost means of achieving compliance with fuel economy and greenhouse gas standards in the future. Q. What are RFA’s biggest federal policy goals for 2018? A. Maintaining a strong RFS, ensuring year-round access to E15, growth of highoctane, mid-level ethanol blends to meet future fuel economy and greenhouse gas standards, and growing production and use of conventional and cellulosic biofuels.
OUTLOOK: TECHNOLOGY economic or financial investment. Diversity of electric supply means beyond the grid— whether from solar, wind, or natural gas-fired CHP. Many plants are now considering microgrids for at least a portion of their electric load in order to avoid a catastrophic loss of production due to a power outage. A microgrid permits the plant to “island” all or a portion of its process loads, to help protect and insulate it from disturbances on the power grid due to weather events, maintenance issues or other external factors.
Vice President of Advisory Services Kinect Energy Group Q. What technologies were ethanol plants most interested in in 2017? A. • Combined-heat-and-power (CHP) technologies. Conventional CHP inquiries increased due to increasing electric costs combined with concerns about electric reliability. Plants also have an interest in reducing emissions and reducing the cost of compliance, and this has driven interest in exploring emerging CHP technologies with the potential for reduced emissions. • Renewable energy projects, including solar and wind. Solar received the most inquiries due to continued price declines improving project economics. Q. What drove those investments, and did they work? A. Boosting plant efficiency is high priority for plants that have been operating for five to 10 years, or more. There are opportunities to replace aging equipment and potentially remove constraints with more efficient technologies, at an acceptable return on investment. Lowering emissions is also a driver, especially for plants that are using the Efficient Producer petition process to increase volumes that can generate renewable identification numbers (RINs). Reducing operating cost is a priority for plants—and, indeed, many of the renewable energy or CHP projects being considered reduce costs. Q. Financial advisers often suggest diversification. What are some of the common ways ethanol plants are doing that through new technologies? A. Onsite power generation can be a diversification play, in addition to being an
Q. What do you expect will be the driving force behind technology investments on the part of ethanol plants in 2018? A. Key technology investment drivers will likely include: • Cost reduction: Plants are paying increased attention to the bottom line as the industry has matured and become more cost competitive. • Resiliency: Facilities are taking steps to be able to stay online even when the grid is down, through some form of onsite power production. • Value maximization: Plants are exploring ways to increase the value of their ethanol product, through improved efficiency and lower carbon intensity (CI). Lower CI lets plants produce RINs for volumes above the grandfathered level. • Increased production: Many plants are seeking capital-efficient ways to produce more ethanol. CHP, in particular, is a potential vehicle. Q. What kinds of new technologies are being developed that you think could be widely used this year? A. Renewable energy technologies are advancing at a phenomenal pace, especially for solar energy systems. Not only are costs dropping rapidly, but panel power density is improving each year, resulting in less acreage and capital needed for the same watt output per square foot. Battery costs are also falling precipitously, providing plants with the option to make greater use of renewable energy generated from solar or wind. Finally, some plants are investigating in emerging CHP technologies to help destroy volatile organic compound emissions much more efficiently than through the classic approach of thermal oxidation.
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OUTLOOK: PRODUCTION on ethanol imports is a great concern and may negatively impact ethanol demand.
Board Member, Dakota Ethanol LLC Chairman of the Board, American Coalition for Ethanol Q. What was the biggest challenge producers faced in 2017, and what do you anticipate could be the biggest challenge of 2018? A. Ethanol producers enjoyed low-cost corn in 2017, but ethanol sales prices were also low. Compared to many preceding years, the volatility of input costs and selling values were very low, resulting in steady but modest net income per month. Looking forward to 2018, corn supplies look to be low priced again and other input costs look to be flat. 2017 is on track to set a new record for ethanol exports, and we are cautiously optimistic that China may provide new ethanol export opportunities in the coming years. However, the Brazilian tariff
Q. What were some of the main strategies producers implemented to increase efficiency or revenues in 2017? Will those strategies change at all in 2018? A. Ethanol companies have always strived to increase efficiency, and 2017 was no different. Several new production technologies that improve efficiency have been developed that reduce energy, enzyme, yeast, and other chemical use at plants, improve yields and result in new coproducts. Corn that grows its own enzymes (Enogen), dry fractionation, cellulosic ethanol from corn kernel fiber (ACE), and energy use efficiency (municipal-solid-waste energy recovery) are examples. These efficiency improvements are incentivized in part by the California LCFS and Federal RFS provisions that reward producers for lowering carbon intensity. I donâ€™t see any of this slowing or changing in 2018. Q. What efforts can be taken by producers and trade organizations to help increase demand for ethanol, further grow domestic markets and encourage higher blends? A. Each trade organization has and will continue to make unique contributions to those efforts. Programs and private businesses that install blender pumps deserve much support. These are critical infrastructure investments that have to be made.
On the political side, work with the EPA on RFS issues are ongoing. We also continue to work with low-carbon fuel market administrators in California and Oregon to ensure that corn ethanol has a fit in their transportation fuel greenhouse gas reduction programs. Q. Is Dakota Ethanol planning any expansions or diversifications? If so, what are those plans? A. At Dakota Ethanol, as is the case in most ethanol plants, debottlenecking, efficiency and new energy-reduction technologies are almost constantly being evaluated and deployed. Several plans are being evaluated currently at Dakota Ethanol, but itâ€™s too soon to say if they will be feasible. Q. What are the main goals ACE will work toward for the ethanol industry in 2018? A. Efforts to educate potential ethanol fuel blenders and retailers are a priority. Ethanol exports have rapidly increased the past few years, so efforts in this area are ramping up. On the regulatory side, we continue to push for Reid vapor pressure relief, and defend the RFS legislation. And because ethanol fuel has unique attributes (low life-cycle GHGs, high octane and oxygen content) that provide transportation sector GHG and toxic emission reductions, we actively support strong federal Corporate Average Fuel Economy standards, low carbon fuel programs, and other transportation fuel emission reduction efforts.
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OUTLOOK: FINANCE Q. In general, was a lot of debt paid off in 2017? Will 2018 allow more debt payment and why/why not? A. About a quarter of plants have held essentially no long-term debt for the past several years. 2017 held to this pattern, with even more plants able to completely pay off debt obligations. On average, long-term liabilities for an average ethanol plant were about 13 cents per production gallon in 2017, a number that has decreased steadily over the past few years. Even plants with substantially higher debt levels were able to pay them down in 2017. If margins hold steady as expected in 2018, debt repayment will likely continue at a similar pace. But some plants are opting to make investments or dividends a priority over further debt reduction.
John Christianson Managing Partner Christianson PLLP
Q. Overall, how were margins for ethanol producers in 2017? What are your predictions for 2018? A. Margins in 2017 were comparable to those seen in the two previous years. EBITDA (average earnings before interest, tax, depreciation and amortization) is down about 4 cents per production gallon over 2016, but is virtually identical to the 2015 average. The most profitable 25 percent of plants in our survey reached over 20 cents per gallon, and even the least profitable 25 percent were able to deliver some earnings on average. The marketplace has concerns about overproduction for 2018, creating some downward pressure on prices. We are optimistic that continued interest from the global market, and increased availability of higher-blend products like E15, will help keep margins relatively stable in the year ahead.
Q. What types of projects are ethanol plants investing in (bolt-on coproduct systems, efficiency improvements, emissions control, debottlenecking, etc.)? Why? A. While weâ€™re still seeing projects that focus on production increases and debottlenecking, weâ€™re starting to see increased investment in value-added coproducts to diversify revenue streams. Energy efficiency investments are also on the rise, as plants seek to reduce cost and the carbon impact. And many plants are approaching or beyond the 10-year age mark, so they are starting to look at replacing large capex items. Q. How can smaller plants stay competitive? A. Identifying their more meaningful advantageâ€”low corn prices, superior logistics or quality operations teamsâ€”will help. Openness
to innovation is another way a small plant can stay competitiveâ€”new technology always involves risk, but there is no question that new processes, enzymes or technologies can pay off bigger for early adopters. Some successful smaller plants are also finding that local initiatives such as E30 campaigns, or partnerships with fuel stations to place and brand more E15 pumps, are meeting with success. Q. Do you foresee any changes to financing programs of use to ethanol producers, or any completely new programs in 2018? A. Program funding through the USDA and DOE are always in question during budget cycles. Most of the programs are focused to provide an incentive to improve energy efficiency, plant efficiency, and plant production. Two common federal grant programs include the Value Added Producer Grant and the Rural Energy for America Program, and each state offers unique funding sources, as well. Q. What tips do you have for producers to get through the up and down cycles the ethanol industry faces? A. First, focus on feedstock: good relationships with elevators and farmers are critical. Make sure storage is adequate. Next, hire the best managers and operators you can find, and make sure you keep them. Finally, maintaining excellent communication between the board and investors is critical, during up cycles and down cycles.
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26 | Ethanol Producer Magazine | JANUARY 2018 26 | Ethanol Producer Magazine | JANUARY 2018
Weaver RINtrust Genscape
For some biodiesel, cellulosic and biogas fuel producers, EPA’s quality assurance program is virtually a requirement. Corn ethanol has gotten a pass, but that could change as the industry diversifies. By Susanne Retka Schill
Only a few ethanol producers to date have paid much attention to the U.S. EPA’s quality assurance program for renewable identification numbers (RINs). EPA reports about
12 percent of all RINs are Q-RINs. The bulk of those are for D4 biomassbased diesel RINs, though not all. Biogas producers generating D3 cellulosic RINs and many advanced biofuel producers generating D5 RINs use Quality Assurance Plans (QAP) as well. Under the Renewable Fuel Standard, RINs are used by obligated parties to demonstrate compliance. Every gallon of renewable fuel is assigned a RIN—a long number that includes the fuel type and D-code, whether the RIN is a Q-RIN, and other information. RINs are recorded in EPA’s Moderated Transaction System (EMTS) and tracked until they are separated. Obligated parties use separated RINs to demonstrate compliance, and any surplus or RINs separated by nonobligated parties can be sold. While worth just pennies in the beginning, RIN value has risen to more than $1 at times and, in the case of cellulosic D3 RINs, are expected to be much higher to support cellulosic biofuel development. From the start, the system has been based on a buyer beware approach. Under the regulations, the obligated party is liable if RINs are found to be invalid and must purchase new ones as replacement, plus be at risk for Clean Air Act violations. JANUARY 2018 | Ethanol Producer Magazine | 27 JANUARY 2018 | Ethanol Producer Magazine | 27
Independent Third-Party Verification FEEDSTOCK-RELATED - Planted crops or residue meet Renewable Fuel Standard requirements. - Waste-based feedstocks follow EPA-approved separation plan. - Factors such as moisture are correctly measured and correct formulas used. - Purchase contracts, invoices and bills of lading reviewed. PROCESS-RELATED - Process technology and capacity matches RFS registration, meets requirements. - EPA Moderated Transaction System reporting matches producer records. - Mass and energy balances measured accurately and calculated correctly. RIN GENERATION - RIN calculations verified. - Sales contracts, certificates of analysis, product transfer documents reviewed. SOURCES: U.S. EPA, WEAVER, ECOENGINEERS
RIN Fraud Trouble
For corn ethanol, with its single feedstock, large scale and automation, not to mention a D6 RIN value of just a couple cents in the early years of the program, RIN validation was not an issue. But biodiesel was another story. The EPA created the voluntary QAP program in 2014, following a high-profile RIN fraud case involving a biodiesel producer early in the RFS. The agency laid out a system where third-party auditors would verify RINs following EPA-approved QAPs that are reviewed annually. Four companies have been approved as QAP providers: EcoEngineers, Weaver, RINtrust and Genscape.
28 | Ethanol Producer Magazine | JANUARY 2018
When the quality assurance program was established, the EPA said obligated parties would have an affirmative defense should any Q-RINs be found invalid, and clarified the process for RIN replacement. EPA lists 13 enforcement actions on its website since 2013, all of them for biomass-based diesel. In response to one of those actions, the EPA published a notice of intent a year ago to revoke Genscape’s ability to verify RINs, saying that it had failed to “meet all elements of its approved Quality Assurance Plan, and for verifying millions of RINs that were fraudulently generated by two companies, Gen-X Energy Group Inc. and Southern Resources and Commodities.” Both are biodiesel producers. The invalid
RINs are A-RINs, which were verified under the interim program used until the final rule was published in July of 2014. In the Q&A accompanying the notice on its website, EPA said Genscape could “function normally as a QAP provider unless the EPA issues a final decision to revoke Genscape’s registration.” Genscape had until April 18 to respond to EPA’s notice. No update on the notice was found on the EPA website in early November, and Genscape declined to comment on the pending issue for this article.
Demand for QAP
As a result of the issues in biodiesel RINs, smaller independent biodiesel producers are virtually required by buyers to be part of a QAP program, says Pete Moss, president of RINtrust. “The ethanol industry—D6 corn ethanol—has gotten somewhat of a pass. They have been in business for so much longer, are well established and have long-term buyers of their products, so they have not been under the same microscope as you’ve seen in the biodiesel industry.” He adds that not all biodiesel producers use QAP, even some of the largest companies. Jim Ramm, director of engineering at EcoEngineers, estimates around 7 to 8 percent of ethanol plants have participated in QRINs on D6 starch ethanol. “They’ve done it to differentiate themselves and as an additional quality standard,” he says. “Where ethanol producers are diversifying into D3 cellulosic, D4 renewable diesel or D5 advanced, the great
RINS ethanol producers registered 29 U.S. for multiple RINs 22 D5 and D6 (mostly using sorghum) 6 D3 and D6 1 D4, D5, D6 SOURCE: U.S. EPA NOTE: DOES NOT CAPTURE COMPANIES THAT FORMED A SEPARATE ENTITY TO PRODUCE CORN OIL-BASED RENEWABLE DIESEL
majority of those producers do put a Q-RIN on the D3, D4 or D5.” Other cases where buyers may want QAP would be a new plant just starting up, plants producing small quantities or foreign producers, says David Bennett, partner in the energy compliance service group at Weaver. As renewable fuel facilities become more complex, the possibility of issues increases, he says. “In the example of a biodiesel plant, the more types of feedstocks, the higher the potential for error. Are they mixing the feedstock? Are they keeping it separate? Are they following the regulations?” The QAP process is not necessarily designed to detect fraud, he adds, though it should uncover any major issues. “The source of that might be clerical error or it could be an error with equipment in the plant.”
The EPA lays out the basic elements of a QAP. QAP providers must be independent third parties that will review a plant’s systems and records and verify the information being reported to the EPA. That includes one-time verification of such things as compliance with relevant RFS requirements and being properly registered in the EPA Moderated Transaction System. It also requires ongoing verification of production volumes and the RINs being generated and recorded in EMTS. The regulations specify quarterly and annual reporting. While the “what” is set by the EPA, the “how” varies by the QAP provider and facility. The plans are highly customized. “We set up a series of audits and confirmations, mass and energy balances and site visits in order to verify their RINs are valid,” Ramm says. “Measurement and yield varies from facility to facility and pathway to pathway, so it’s a site-specific plan tailored to the fuel type.” Kernel fiber to cellulosic will have additional requirements, he adds. “For every 500,000 D3 gallons produced or at least annually, you’ll need to submit new data supporting the converted fraction.”
Complexity Drives Need
QAP goes beyond accounting to technology, Moss says. “We have to be careful with cellulosic ethanol or biogas, making sure we understand the technical side, so we can properly account for what is happening. It’s not just accounting, it’s a technical function.” As plants move toward the biorefinery model, adding feedstocks and products and more diverse technologies, the increased complexity is likely to drive the need for quality assurance, he says. “The last thing obligated parties want is for later down the road, something to be called into question just because it was different and wasn’t monitored appropriately.” Moss suggests corn ethanol producers should not be concerned that QAP will interfere with operations. “In reality, it might help determine some things that may be slightly out of compliance and help them do a better job of accounting.” Bennett adds that Weaver strives to provide value by maximizing efficiency and ensuring clients’ compliance, maintaining the integrity of the RFS. “Our overall goal is to work
with our clients to justify their investment in the QAP program and help improve profitability.” Ramm suggests ethanol producers look at Q-RINs as a diversification tool, and not a requirement. “Look at it as a way to get involved in additional fuel types, or additional types of blending, marketing and RIN separation.” EcoEngineers is preparing for another level of verification coming down the road, he adds. “The California Low Carbon Fuel Standard will be requiring a verification program in 2019 that we’ll be offering,” he says. “They’re developing their own program for the verification of LCFS credit generation.” If history is any predictor, California’s system is likely to be quite different from the EPA’s. With the size of California’s market, carbon intensity validation is likely to draw a much larger segment of the corn ethanol industry into quality assurance. Author: Susanne Retka Schill Freelance Journalist email@example.com
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JANUARY 2018 | Ethanol Producer Magazine | 29
P EO PLE , PR O C E S S E S AND
PLAYING THE MARKET
Ethanol plants have a few options when it comes to protecting their margins. The main ones fall into three categories: technology, commodities and personnel/insurance. By Lisa Gibson
Charles Wyman, president, of technologies on the cost side, whether it’s adding a little bit of yield or decreasing costs.” CEO and cofounder of Vertimass Technology represents a viable strategy LLC, says his company’s technol- for financial risk management, but so do commodities hedging and personnel/insurance ogy helps manage risk for ethanol strategies. Done right, each achieves margin plants by offering producers more padding in its own way and can set a plant up product options when ethanol for success in the near or long term. prices slump. The system converts etha- The ‘Big Thing’ in nol to hydrocarbons—at a rate of 0.6 gallons per gallon of ethanol—for blending with jet Technology fuel, diesel fuel or gasoline. It also creates the chemicals benzene, toluene and xylene. “Ethanol producers can continue to make ethanol if that is most profitable or swing to these various hydrocarbons if they provide greater margins,” Wyman says. Vertimass’ technology is one of many that producers might explore to manage risk. Plants are trying to lower costs, increase efficiency and produce more ethanol and coproducts. “We do have a wide variety of plants in various stages of due diligence of technologies and the adoption thereof,” says Jamey Cline, business development director with Christianson PLLP. “As with any industry, as we continue to reach maturation, they’re trying to either work on lowering their costs or increasing revenue by diversification on the production side.” In general, plants are more apt to invest in technologies to cut costs than to diversify, he adds. “We’ve definitely seen more adoption
Vertimass is developing its hydrocarbon technology with the help of a $2 million award from the U.S. DOE, Wyman says. The technology was invented by the Oak Ridge National laboratory, and, through a competitive solicitation process, Vertimass was awarded exclusive rights to further develop and scale it up, he says. The company is working on a pilot demonstration system with engineering firm TechnipFMC, already showing improved hydrocarbon yields and advancements in catalyst development. The idea is to license the technology to ethanol producers and provide flexibility in their markets, Wyman says. While the hydrocarbon yield is less than the ethanol quantity used to produce it, Btu value is preserved in the hydrocarbon product, he adds. “What this does is just compact the energy of ethanol into a smaller volume.”
The system would cost about $15 million in capital investment for a 60 MMgy ethanol plant, but could pay itself off in a couple of years, although there are variables in that timeframe, Wyman says. Its low capital cost relative to technologies that provide risk management by producing cellulosic ethanol makes it attractive, he says. While the cost might be lower for an addon fuel and chemical technology, the cellulosic ethanol processes are further along in development, Cline says. “There is interest in other fuels, as well as value-added chemicals in the industry right now, but those technologies are fairly nascent and there’s a high degree of technology risk at the present time with many of those technologies. We would love to see them continue to develop and continue to move forward.” Those options represent a solution in the longer term, while technologies that produce ethanol from corn fiber, for instance, are viable shorter term, he adds. The “big thing” now is using cellulase or corn fiber for diversification, Cline says. The approval process for them has become slightly easier, but the technologies do still bring government risks, along with their technology risks. A few technologies, including Quad County Corn Processors and Edeniq, have U.S. EPA approval to generate D3 renewable identification numbers (RIN), while several others are close behind, Cline says.
PRODUCT OPTIONS: Vertimass LLC is developing and scaling up a technology to produce hydrocarbons from ethanol, designed to provide flexibility in product offerings when ethanol margins are low. PHOTO: VERTIMASS LLC
30 | Ethanol Producer Magazine | JANUARY 2018
Ethanol Profit Margin Management Process • Model the operation to capture all costs and revenues unique to the plant.
• Project forward margin opportunities using the price discovery mechanism of the futures market as far out as possible. • Rank margin opportunities based on historical percentiles of profitability to help evaluate the relative strength of profit margin projections. • Develop a plan to capture margin opportunities by scaling into protection when projected profitability is favorable from a historical prospective. • Monitor margins to determine potential adjustments where profitability can be improved through active position management. SOURCE: COMMODITY & INGREDIENT HEDGING LLC
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32 | Ethanol Producer Magazine | JANUARY 2018
Beyond cellulosic ethanol, companies have developed processes to increase efficiency on the backend, such as White Fox Technologies’ membrane technology, and others that are working toward higher-protein DDGS for potential export. In addition, Cline says he’s seen increased sophistication in software to help track and manage commodity pricing risk. “There’s definitely proliferation of products out there.”
But even with evolving tracking and managing technology, commodities hedging is done by just more than half of existing ethanol plants as a financial risk management strategy, says Chip Whalen, vice president of education and research for Commodity & Ingredient Hedging LLC. “What we’ve seen, historically, is a lot of plants like to stay on the spot market,” Whalen says. “In other words, they don’t want to commit to managing risk on commodity prices forward in time, and I think there are a lot of reasons for that.” One, he says, is that corn prices are in a carry, meaning they increase over time when projected out. But ethanol is the opposite—its price decreases as projections get further out. “There’s almost been a disincentive for ethanol companies to hedge,” Whalen says. “But over the last few years, they’re more open to doing so because they realize that there is a lot of risk out there. It’s a growing trend. The liquidity of the market is improving as more plants embrace it. I’d venture to guess that more than half of the plants out there are actively looking at this and taking positions.” Ethanol plants have a few choices in commodities hedging. They can lock in an ethanol or corn price with a futures contract, or they can purchase options to protect their margin but allow for price flexibility if the margin improves. The ideal position is to be able to protect the margin against decreases, but allow flexibility to improve over time, at a minimal cost, Whalen says. But realizing that minimal cost after the initial option purchase can take time and requires market changes. That’s why market fluctuation is positive in an option scenario. “We need that volatility in the markets over time to be able to make adjustments to a position, to take advantage of those swings on the market to get to that point,” Whalen says. So, in a hedging strategy, a producer would consult forward margin projections, determine what might be driving those margins, determine whether those margins are worth protecting and then devise a strategy—hedg-
RISK MANAGEMENT ing—to do it. “What we see is plants will set targets or triggers to initiate protection or coverage,” Whalen says. Then, continue to manage and monitor that margin. Each plant will have its own tolerance to risk and biases in the market, he says, so the strategies aren’t standard across the board. “It’s standard in the sense that we can look at strategies in isolation and talk about attributes of the market.” Beyond that, commodities hedging strategies are subjective to each ethanol company.
to that. It’s come a long way over the last 10 years. Safety always was a secondary thought. But nothing beats having boots on the ground and being with the employees all the time.” The extra investment for pay and benefits for that employee outweighs the financial and safety risks that arise when nobody is dedicated specifically to the job, Santo says. “Sometimes it’s hard for a general manager or a CEO to quantify the cost/benefit of ‘How much do we invest in safety for our employees? How much risk do we take?’ There’s always a dollar amount involved.”
But much like managing risk through hedging or investment in new technologies, personnel-related strategies are evolving and improving, too. “Personnel risk management has come a long way in ethanol in the past 10 years, but there’s always room for improvement.” Author: Lisa Gibson Managing Editor, Ethanol Producer Magazine 701.738.4920 email@example.com
While it might be hard to quantify in a spreadsheet, proper personnel, compliance and insurance decisions can make a big difference in the bottom line, too, says Mike Santo, risk management consultant with Parthenon Agency LLC, a risk management service provider in the ag cooperative and ethanol industries. The company helps ethanol plants choose proper insurance coverage, navigate compliance mazes and interpret workers compensation claims. Compliance, in particular, is a major concern for ethanol plants Santo works with, he says. With so many government agencies watching over them, plants can easily trip up. “They all try to stay in compliance, but sometimes the lack of knowledge is a concern. They might not know all of what they have to comply with.” Noncompliance, as most plants are aware, can result in fines and shutdowns. “You’re spending money to get this done, and it’s hard to quantify the bottom line because if you do it right, you don’t have any bottom line costs, but if you do it wrong, you have a bunch of bottom line costs.” Hiring the proper personnel and employing appropriate insurance for plants also helps lessen the risk of liability or other insurance claims, in the event of an accident, for instance. An injury causes lost time, medical expenses, and potentially retraining a new employee, retraining the injured employee for another position within the plant, or even disability payments, Santo says. Therefore, actively practicing proper safety procedures and having a trained and specified safety manager is a must, he adds. Many plants have employees pulling double duty, handling safety responsibilities in addition to their primary jobs. But safety warrants a designated employee who handles it as his or her primary job, providing constant feedback onsite, out on the production floor, Santo says. “Most big plants have caught on JANUARY 2018 | Ethanol Producer Magazine | 33
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