Panda Ethanol on Wednesday confirmed it has canceled a 100-million-gallon ethanol plant it had planned to build in Wallace, Neb.
The plant is the second to be canceled in the state so far this month, according to the North Platte Bulletin, which mistakenly called the company Panda Energy, the name of its former parent. RAE also cancelled a plant near Gothenburg, Neb., on Dec. 5, according to the Bulletin.
And those announcements are part of a long line of delays and cancellations as ethanol companies find their margins squeezed between low market prices for the fuel and high prices for the crops used to make it (see Ethanol Margins Suffer, BioFuel Energy Halts Ethanol Plant, Ethanol Stocks Keep Falling and Ethanol's Tough Times Continue).
But when E3 Biofuels filed for bankruptcy earlier this month, it cast some doubt over the potential success of a new type of ethanol plant that uses cow manure for power -- a type of plant that Panda Ethanol also is pursuing.
While E3 said the bankruptcy was related to mechanical issues in the ethanol-making, not in the manure-to-natural-gas part of the plant, some industry insiders wondered whether the economics behind the building of such a plant might have played a role in E3's financial troubles (see E3 Plant Craps Out).
Because manure-powered ethanol plants are rare, companies don't know what to expect, said Rick Kment, a biofuels analyst at research firm DTN.
"With that, you usually see a lot of delays," he said. "E3 never got up to full capacity."
And because such systems cost more up front and hope to make that up with natural-gas savings over a longer period, financing for a new plant might be more difficult, he said. Companies would be expected to begin paying back their loans for a new plant even if there were unexpected delays, and postponing payment ends up costing more in interest.
"Even if you're running [at half capacity], you have to pay the same debt service and depreciation on that infrastructure cost," Kment said. "Therefore, the short-run cost of energy is costing them a lot more than if they'd have just went out and bought the natural gas. … If you're not up to production [by the time you're scheduled to begin payments], it becomes a very large challenge to meet those cash-flow obligations."
But Panda Ethanol said its cancellation is unrelated to those issues. The plant in Nebraska was designed to tap into regular natural gas rather than make it from manure.
In fact, it chose to cancel the Nebraska plant instead of one of its manure-powered ethanol projects because it expects the costs for ethanol from those plants to be lower, said Bill Pentak, director of corporate communications and investor relations at Panda. After corn, energy is the highest cost of making ethanol, making up more than 35 percent, he said.
"There is a greater up-front cost, a capital cost, to build a biomass-powered plant, but the energy savings are substantial," said Pentak, who added the company expects it will pay $2.17 per million BTU of energy compared with $7.19 per million BTU for natural gas. "We believe we're going to be the low-cost producer of ethanol because of the biomass-fueled nature of our facilities."
At the same time, he said, raising money to build such a plant -- or any ethanol plant -- right now would be a bad idea.
"We're focused on getting Hereford online with production and revenue and managing that project," he said. "This is not a good time to go to the capital markets to obtain money for a new ethanol facility. But we think there are a lot of drivers in the marketplace that make the investment thesis for the ethanol industry intact. We're being patient for that turnaround and, at that point, will go out into the markets to raise financing."
In the meantime, Kment said backing out of plants not yet under construction is just a sign of the times.
"Six months ago, we saw people delaying plants; now we're seeing more people pulling plants as they look at the short-term profitability being quite a bit lower," he said. "The financing might not have fallen through, but the terms might not look as good."
"The next thing we have to look for is if projects that are in structural construction are left high and dry," he said. "That will be the next sign of troubles or challenges we might run into over the next few months to weeks."