Unlike the federal government, several states have altered their biom­ass incentives to enhance the positive impact on rural communities. The Minnesota experience, often called the Minnesota Model, is instructive.

In the early 1980s, Minnesota’s state ethanol incentive mirrored that of the federal incentive—a partial exemption from the gasoline tax. That incentive succeeded in making the price of ethanol competitive with other gasoline additives. The demand for ethanol-blended gasoline soared. But the demand was met entirely by ethanol imported into the state from out — of-state, large manufacturing facilities owned by one multinational cor­poration. Minnesota farmers and Minnesota’s farming communities did not benefit from the expanded consumption of ethanol inside the state.

To remedy this problem, in the mid-1980s, Minnesota converted its state ethanol incentive from a consumer-oriented excise tax exemption to a producer-oriented direct payment. Instead of reducing state gasoline taxes by a couple of pennies for a 10% ethanol blend, the state paid 20^/gal for ethanol produced within the state. To encourage the construction of many plants in different parts of the state, the incentive, which ran for 10 yr, applied only to the first 15 million gal produced.

Some argued that by encouraging many small biorefineries, the gov­ernment was encouraging higher-cost and more inefficient biorefineries because of the engineering economies of scale involved. Indeed, an internal study by the Institute for Local Self-Reliance concluded that a 150 million gal/yr ethanol facility had unit costs about 15-20^/gal less than those of a 15 gal/yr facility.

Thus, the 20^ incentive made up for the difference between small and large biorefineries. The result was that rather than one or two 100 million gal/yr plants, by 2002 Minnesota was home to 15 ethanol plants, the aver­age capacity of which was 15 million gal/yr. The scale of the plants also encouraged farmer ownership. In 2002, 12 of the 15 plants were owned by more than 9000 grain farmers. These plants provided almost 10% of the transportation fuel sold in the state.

The proliferation of small plants led to an unanticipated technological dynamic. Because of the large number of plants built, several engineering firms competed with each other to design and build the least expensive and most efficient facility. Yields of ethanol in dry mills quickly rose from 2.5 to >2.8 gal/bushel. The large number of plants, coupled with equal num­bers of plants being built in surrounding states, accelerated the engineering and operational learning curves. The result was to rapidly reduce the cost of ethanol produced from small dry mills.

A 1998 study by the USDA, a follow-up to a 1987 ethanol plant survey, examined the comparative economics of small — and medium-sized dry mills and large wet mills. In 1987, small — and mid-sized dry mills had cash oper­ating costs of 50^/gal. Large wet mills had a cash operating cost of 47^/gal. By 1998, dry mills had dropped their operating costs to 41.7tf, whereas wet mills had dropped theirs only marginally, from 47.2 to 46 c The 1998 report concluded, "Wet mill variable costs appear to have remained very stable at about 46 cents per gallon. Improved energy cost management was offset by several factors, including waste management and overhead… In contrast, dry mills have experienced a l5-percent reduction in operating costs, due to the effects of reduced energy, labor and maintenance expenditures and possibly economy of scale" (3).