China pulls the plug on ambitious fuel ethanol target

China is pushing its environmental agenda, and recent reports suggest that the country’s “war on pollution” is starting to make some headway. Swiss firm IQAir AirVisual reported that Beijing’s concentrations of fine particulate matter (PM2.5) have fallen to their lowest levels since 2008 when record-keeping began. These findings are supported by official data released recently by the Chinese Government that highlights significantly improved air quality in the capital city.

Biofuels are a central part of the Chinese government’s strategy to alleviate its environmental issues, with ethanol seemingly the biofuel of choice. On 13 September 2017, China released an “Implementation Plan Regarding the Expansion of Ethanol Production and Promotion for Transportation Fuel.” The plan, a joint announcement between China’s National Development and Reform Commission (NDRC), the National Energy Administration (NEA), the Ministry of Finance and several other ministries, detailed the mandatory adoption of a 10% ethanol-gasoline blend (E10) by 2020. By 2025, China aims to transition to commercial-scale production of cellulosic ethanol, manufactured by converting vegetation unsuitable for human consumption.

The benefits to China of increasing fuel ethanol uptake are plentiful. China’s gross crude oil imports have doubled since 2009, reaching 68% in 2017. The expanded use of ethanol will help curb China’s crude oil import dependence. China is well versed in the need for energy independence and security. Improving air quality and reducing its reliance on fossil fuel consumption are also key drivers behind China’s fuel ethanol policy as the region continues to shift energy consumption patterns and maintains its commitment to the Paris Accord.

Jeopardizing food security is a major concern regarding biofuel feedstocks. Farming subsidies in China have seen the country accumulate a huge corn inventory in recent years. China’s E10 program offered an opportunity to reduce its corn inventory and stimulate demand for agricultural production. In 2018, an estimated 87% of China’s fuel ethanol production was corn-based, with only 2% derived from cellulosic feedstocks. Given we have just ticked over into the new decade it is worth reviewing how China is tracking towards its ambitious year-end target.

A report released by the USDA Foreign Agriculture Service on 26 July 2019 estimates a 2.5% blend rate in 2019. The Global Agricultural Information Network (GAIN) report emphasizes a recovery to blend rates observed a decade ago rather than a significant step forward. A blend rate of between 3.0-3.5% is expected by 2020, well short of the government’s mandate.

The GAIN report, compiled by Gene Kim and Michael Ward, suggests uptake of E10 varies widely by location, owing to variable enforcement, and is often linked to fuel ethanol production capacity in the region. The provinces of Anhui, Guangxi, Heilongjiang, Henan, Jilin, Liaoning, and Tianjin had implemented mandatory E10 fuel ethanol blending in 2018, with Hebei, Shandong, Jiangsu, Inner Mongolia, and Hubei provinces achieving partial implementation. Shanxi, Zhejiang, and Guangdong launched pilot programs in 2019 in a select number of cities.

However, an article published in the Financial Times on 28 October 2019 suggests many local petrol stations are not yet providing ethanol-blended fuel despite the government mandate. Only 57% of petrol consumption in the central province of Henan was E10 in 2018, despite the province requiring the use of ethanol fuel since 2004.

Nationwide use of E10 brings with it a significant price tag. The Singapore-based Asian Clean Fuels Association (ACFA) has estimated that upgrade costs for refineries and petrol stations could reach USD43 billion. Major infrastructural requirements and production costs that remain high are a substantial barrier to ethanol production. Who will foot the bill to upgrade these facilities?

Previously, China’s central government has offered subsidies for fuel ethanol production, including both inputs and feedstocks. However, production subsidies were eliminated for grain-based ethanol in 2016. Corn processors in North-East China welcomed generous subsidies from 2016 to 2018. Provincial and central authorities have now removed subsidies for ethanol production, leaving producers struggling with rising production costs and many wondering whether the government is truly committed to its mandatory ethanol targets.

The high cost of production and absence of an enforceable national fuel standard threatens to make ethanol a loss making business. Understandably, many oil firms are unwilling to expand investments into ethanol storage, distribution and blending infrastructure. The most prolific investment in fuel ethanol production has occurred in North-East China, home to China’s Corn Belt, and the Songliao Basin, a prominent oil and gas producing region.

The ongoing China and United States trade conflict has not made things any easier. China has imposed multiple tariffs on ethanol imports from the U.S.; effectively closing the door on ethanol imports and, heaping additional pres sure on domestic supply.

China is the world’s fourth-largest fuel ethanol producer and consumer, headed by only the U.S., Brazil and the European Union. And while the capacity of ethanol producers rose by 258 million litres to a total of 5,258 million litres in 2018, the GAIN report highlights a fuel ethanol supply gap below China’s E10 target of more than 14,039 million litres in 2020. Projects with 2,661 million litres per year (2.1 million tons) will boost capacity when they come online, however, total capacity remains well short of the required volumes to achieve China’s bold E10 target. Nonetheless, industry sources suggest many plants are running at low capacity, citing a lack of orders.

Aside from apparent cost and supply concerns, the government’s ethanol strategy has also faced significant opposition from industry groups. Producers of methyl tert-butyl ether (MTBE) are particularly concerned about the impact on their factories. MTBE is primarily used as a blendstock in the gasoline pool and competes directly with ethanol as a gasoline oxygenate for improved engine performance.

The China State Council signalled its intentions for MTBE on 3 July 2018, when it released a three-year “Blue Sky Protection Plan (2018-2020).” The plan imposed new restrictions on the sale of fuel blending components such as MTBE as part of an effort to reduce emissions for sulphur dioxide and nitrogen oxides. These restrictions should boost demand for fuel ethanol as a transport fuel additive.

However, reports emerging from an NRDC meeting in last December indicate China has suspended its nationwide rollout of E10 in January 2020. Media reports have attributed the cessation to concerns around food security, amid a sharp decline in corn stocks and production capacity limitations. The pause of the E10 rollout will come as a major blow to domestic producers, many of whom may have already invested heavily in the construction of new plants.

On 6 January 2020, Chinese green energy company Anhui Guozhen and Chemtex Chemical Engineering announced a joint venture to establish a commercial plant to produce cellulosic ethanol from agricultural residues. The 50,000-ton per annum plant will be constructed at a greenfield site in Fuyang city in Anhui province. Swiss specialty chemical company Clariant has granted a license for its sunliquid® cellulosic ethanol technology.