Heard dire comments like “POET expects to stop all future U.S. cellulosic investments if EPA’s proposed base renewable fuel requirements are not strengthened.”
Want to understand the substantive concerns on the Renewable Fuel Standard, but lack the time to read the thousands of pages of commentary? Here’s our Digested version of the key comments.
In late May, the EPA weighed in with its RFS volumetric proposals for 2014 through 2016, and industry has responded with more than 200,000 comments which the EPA will wade through before finalizing rulemaking by November 30th.
Erick Lutt, Director of Industrial and Environmental Policy at the Biotechnology Industry Organization, said: “Today, Americans are sending a strong signal to the EPA that its proposal to lower RVOs under the RFS is unacceptable. The EPA’s misfires and delays have pulled the rug out from the American investors and innovators who have brought the next generation of biofuels online in the U.S.”
Brent Erickson, Executive Vice President of BIO’s Industrial & Environmental Section, writes in the comments:
“The RFS has been a critical piece of our nation’s energy and climate policy. It has driven the investment of billions of dollars in the development and commercial deployment of ultra-low-carbon biofuels. It has spurred innovation beyond biofuels to the development of greener technologies and manufacturing processes while curbing our dependence on foreign oil. These developments were intended by Congress when Congress created the RFS program.
Here’s a summary of key voices in the debate.
Mike McAdams, president, Advanced Biofuels Association
The past efforts at setting RVOs have seen lawsuits filed for missing the November 30th deadline and then lawsuits at the end of the process, forcing EPA to vacate or significantly reduce the cellulosic RVO in particular in
both 2012 and 2013. As a result, this is a process that requires reform in order to restore certainty to the market, entice investors, and bring confidence to the RFS2 program at large.
As we have discussed in the past, we continue to believe that setting the yearly RVOs based on actual renewable fuel production is the best option moving forward. We strongly support your proposed RVOs for 2014 and 2015 as they either directly utilize the actual EMTS volumes or reflect the projected volumes for 2015. Since the final RVOs for 2015 will be published no later than November 30, 2015, EPA should be able to even more accurately predict the total cellulosic and advanced biofuels production volumes for 2015. This approach provides certainty of where the RVOs are coming from and all the stakeholders impacted by the program can follow the actual production numbers throughout the year in the EMTS.
We are completely supportive, as we suggested in our comments last year, with the move away from utilizing a Monte Carlo model as a means of setting future RVO obligations. In addition, we are strongly supportive of the manner that EPA has addressed the advanced and cellulosic pools separate and apart from the blend wall issues associated with the total renewable pool.
Nevertheless, our members continue to have concerns over a myriad of issues remaining unresolved in the regulatory framework for the RFS2 program. Particularly problematic is the intermediate feedstock/co-location issue and the continual delay in approval of pathways for new technologies and feedstocks. Many of these have become significant barriers to entry for individual companies or entire sectors of the advanced and cellulosic sectors.
Alternative Process for Setting the RVOs:
ABFA urges the EPA to utilize the process it used in the setting of 2014 RVOs under the Proposed Rule. There is no arguing that the 2014 RVOs are accurate because EPA used the actual volumes of renewable fuel used as shown in the EMTS system. We would urge the Agency to move the deadline of setting the annual RVOs to March 1st of each calendar year after actual use of renewable fuels is publicly known (e.g., the RVO for 2017 would be published on
March 1, 2018). This will allow for the actual number of produced gallons minus those gallons exported and those otherwise retired RINs to be fully accounted for in the process of setting the RVOs for each of the obligation categories. As has been demonstrated by the current Proposed Rule, most stakeholder groups have no quarrel with the proposed 2014 RVOs because they are the actual numbers produced.
This process might actually encourage more predictable renewable fuel and RIN purchasing by obligated parties as they will calculating their RVOs monthly and not be waiting for “the announcement.” It would also stabilize RIN price fluctuations, which have seen the most volatility caused by regulatory risk.
Biomass-Based Diesel Pool:
One of the true success stories of the RFS2 is found in the biomass-based diesel pool. Renewable diesel and biodiesel as well as renewable heating oil and jet fuel have made significant contributions to the overall program and have delivered the bulk of the advanced biofuel category gallons to date. EISA set the biomass-based diesel RVO at a minimum of 1 billion gallons and the current administration adjusted that volume to 1.28 billion gallons in 2012 to reflect the increasing production of the category. ABFA supports the 1.68 billion gallon volume, which is proposed for 2014, as it reflects the actual net gallons posted in EMTS for that year.
When one considers that the existing annual diesel fuel demand in the U.S. is approximately 50 billion gallons, the contribution in 2014 of 1.63 billion gallons in the D-4 pool is well below any blend wall issues impacting the blenders of biomass-based diesel fuels. It is well below 5% of the total pool, yet creates well over 2.5 billion RINs usable towards meeting the targets in the Advanced Pool. In 2013, the year ended with 3.23 billion RINs generated to be backed against the 2.75 billion RIN target and the overall renewable fuel RIN requirements. Exceeding the RVO requirements in 2013 and 2014 certainly supports the rise in the biomass-based diesel RVO called for between 2014 and 2017.
ABFA alone represents over 1.5 billion gallons of overseas production that would like to call America home to a portion of their fuels. These dropin fuels essentially have no blend wall as they meet the existing ASTM D-975 specs in neat form and are able to utilize the existing U.S. pipeline, rail, and trucking infrastructure systems.
EPA’s Barriers to Entry: Co-Location/Intermediate Feedstocks
The proposed rule acknowledges in several sections that some of the fuels that are scheduled to come online are yet to be approved for a pathway.
At this time, however, cellulosic RINs would not be able to be generated for any fuel produced using Sweetwater Energy’s cellulosic sugars since the existing RFS registration regulations were not designed to allow the subdivision of processes between multiple facilities. Until this is resolved, fuel production processes of this type will not be able to generate RINS.
We take issue with this description and application of the rules in this manner. This issue, referred to as the “intermediate feedstock issue,” is casting a large cloud over a number of innovative technologies and limiting the ability of many in the industry to bring production to the market as originally contemplated both by Congress and EPA in its initial RFS rulemaking.
Under the existing regulation, pyrolytic heating oil is produced in one facility and shipped to another facility, where it is combusted in a boiler to produce space heat. It does not generate a RIN when produced, stored, or transported. It only produces a RIN when the consumer provides an affidavit that the product has been used or is to be used for heating interior spaces of homes or buildings to control ambient climate for human comfort and for no other purpose. This affidavit process currently in place for heating oil applications eliminates the potential for fraud or RIN double-dipping and a similar mechanism could be adopted to alleviate concern in co-processing applications.
EPA’s rule requests comments on algae grown from non-photosynthetic pathways. ABFA was encouraged to see the approval of a new photosynthetic pathway but is concerned that the narrow application of definitions is limiting other viable technologies from garnering their own pathways. The Union of Concerned Scientists has written a very well-reasoned document which we encourage you to consider. It is not in the spirit or letter of the RFS2 authors to deny one single cell organism because it’s not an algae and then grant another which is. We accept the premise that EPA must make the distinctions among organisms for the purpose of calculating the GHG reductions, however only accepting one type of bacteria and not another is too narrow of an application of the program and will thwart significant opportunities to bring renewable fuels to the market in the very near future.
Definitional Application and Compliance:
On several occasions, we have had existing members go out of business before they could receive their pathway approval, and most recently the ability to obtain a simple Part 80 facility registration has become a much longer and time consuming process. These represent major challenges for those companies seeking to raise capital to build their first plants. Definitions are being so parsed and tortured in some cases it is almost impossible to bring new feedstocks under the program. The definition of “waste oil” needs to be clearly defined in a manner that will allow some of the cheaper feedstocks to be utilized by the new industry. Particularly at a time when crude prices have been hovering around $50.00 a barrel, this industry needs thoughtful flexibility in order to be able to manufacture competitively priced fuels for the market.
In a similar regard, we were extremely disappointed that the proposal to grant isobutanol a one pound waiver when commingled, which was originally included in the Pathways 2 Rule, was then removed from the final rule and is still pending consideration. Blending E10 and gasoline blended with isobutanol does not cause the Reid Vapor Pressure of the resulting gasoline blend to increase, meaning that such comingling has no negative impact on VOC emissions and thus no negative environmental impact. Broadening market access for advanced biofuels such as isobutanol will have important environmental benefits. By definition, a fuel with lower RVP is less volatile. The use of lower RVP fuel blends containing isobutanol will therefore result in lower evaporative emissions at all stages of fuel use, from service station tank loading and vehicle refueling to vehicle in-use evaporative emissions.
Application of the cellulosic waiver credit:
We still have a situation in the market in which the obligated parties overwhelmingly seek to purchase a waiver credit rather than the cellulosic fuel produced with a RIN attached, or just the cellulosic RIN itself (as in the case of biogas to CNG/LNG). The ability of the obligated parties not to have an explicit requirement to buy those gallons produced in the cellulosic pool or their associated RINs is a major handicap for those seeking to sell and capture value of their cellulosic fuels.
Comments on the Advanced Biofuels Pools
ABFA is extremely supportive of the targets that you have proposed for the Advanced pool. These targets are far more reflective of the historic performance to date of the number of RINs generated in this pool. They also recognize the growth that has already occurred in the cellulosic pool in 2014 and 2015 to date as well expected gains from four additional plants that are already in the commissioning stage or soon to be commissioned.
Statutory Reset Post-2016
Uncertainty in the targets for cellulosic biofuels after 2022 will have an adverse impact on the ability of project sponsors to raise funding. The upcoming reset of the RFS mandates provides an opportunity to increase certainty to 2022 and beyond. Upon waiving any particular RFS mandate category by 50 percent in any single year or 20 percent in any two consecutive years, EPA is required to conduct a rulemaking to adjust the overall schedule of the RFS mandates through 2022. EPA tripped the 50% trigger for the cellulosic category in 2010. Now, if EPA finalizes the volumes as proposed, the 20% trigger will be tripped for both the advanced and general renewable fuel categories.
This opens the door to reset all of the mandated volumes. EPA should move forward with this rulemaking expeditiously to provide certainty for investors in cellulosic biofuels by setting the cellulosic volumes through 2022 and beyond at realistically achievable levels. At the same time, EPA should adjust the advanced and general renewable categories in such a way that the greenhouse gas emission benefits of the program are maximized while at the same time ensuring that the overall mandates are consistent with the capabilities of infrastructure and vehicles.
ABFA’s comments in full are here.
Advanced Biofuels Business Council
A regulation is only as effective as its waiver provisions – because these provisions establish under what conditions obligated parties can escape their obligations under the law. If waivers are too lenient – or worse, are based on market dynamics that obligated parties control – then the regulation will not drive investment because the risk of stranded investment will be too high. Motor fuel markets are particularly vulnerable to policy-driven investment risk because energy markets are not free markets and therefore rely on policy to drive innovation and change.
We are deeply concerned that the 2015 proposal will undercut investment in advanced, low carbon biofuels by virtue of EPA’s treatment of waivers in primarily two areas: (1) its proposed interpretation of its “general waiver authority” to reduce the total renewable fuel volumes via “distribution waivers;” and, (2) the methodologies used to administer the D3 cellulosic biofuel pool with specific regard to both how it sets the annual volumes and the issuance of cellulosic waiver credits (CWC).
EPA continues to overstate the arrival of the so-called “blend wall” as a hand-forcing market reality that requires a changed approach.
EPA continues to overstate the magnitude of the challenge when it comes to enforcing the statutory requirements of RFS2. EPA’s approach to administering the RFS – through 2013 – focused on maintaining the statutory renewable fuel blending requirements for both the advanced biofuel and total renewable fuel pools based on the available supply of these conventional and advanced renewable fuels and the available supply of carryover RINs. For 2013, the statute required 2.75 billion gallons of advanced biofuel and 16.55 billion gallons of total renewable fuel. The renewable fuel industry produced sufficient volumes of renewable fuel (including carryover RINs, which are fuel as well) to meet the standard.
This approach set up a market dynamic in which, for the first time, the regulation was beginning to change the marketplace at a fundamental level. As discussed in other parts of this document, Protec Fuels, a company that sells and installs blender pumps and E85 dispensers, was closing a deal to install or retrofit pumps at approximately 450 stations nationwide. This deal alone would have increased the number of stations offering E85 nationwide by nearly 14%. In response to the November 2013 EPA proposal, which was the first to propose the fundamental changes maintained in the 2015 proposal, Steve Walk, Protec’s vice president, said, “[i]t was just starting to get to the point where oil companies were saying, ‘Fine, we’ll start putting in alternative fuels.’ Now, those conversations have gone by the wayside.”
The figure below shows steeply increasing E85 sales in Minnesota during the spring, summer and fall of 2013 when RIN prices started to show value and E85 started to be priced below E10. Iowa saw a doubling of E85 sales from in the 3rd quarter of 2013 as compared to the first quarter of 2013.6
During roughly the same period, detailed analysis started coming out about the compliance costs of enforcing the statute. For example, a January 2014 paper on the subject, entitled “Feasibility and Cost of Increasing US Ethanol Consumption Beyond E10,” concluded that EPA could set the 2014 total renewable fuel target at 14.4 billion gallons and meet that standard with: 13 billion gallons of ethanol in E10, 800 million gallons of ethanol in E85, and the use of 600 million banked RINs without any additional E85 stations being built.
EPA continues to overcomplicate the path to getting the RFS back on track; there are feasible solutions that would preserve the integrity of the program.
In essence, EPA is proposing to change its approach in two key areas: (1) the agency is proposing to reinterpret the word “supply” in the waiver provision “inadequate domestic supply” to mean supply-to-consumer, which is a reversal of EPA’s prior interpretation of the word “supply” to mean supply of renewable fuel to obligated party; and, (2) the agency is proposing to not count “carryover RINs” toward compliance when it comes to maintaining the statute.
The current E10 ethanol volume is 13.9 billion gallons, based on July 2015 EIA gasoline consumption data. According to EPA, there are currently approximately 1.8 billion available carryover RINs.13 Because retiring a RIN from carryover RIN stocks does not require additional ethanol blending (or investment to do so), EPA could enforce the 15 bg/2015 statute via E10 (already achieved) and the use of 1.1 of 1.8 billion RINs (i.e. while maintaining ~700 million RINs as a “program buffer”).
This scenario is certainly over-simplified, but it is important to emphasize that: (1) this methodology is the very methodology used by EPA in 2013; (2) this methodology has already been upheld in court; (3) using RIN carryover to demonstrate compliance does not require investment in infrastructure; (4) there remains substantial carryover RIN stock for those concerned about RIN prices,
The motor fuel market problem the RFS is designed to address
Global oil markets are collusively price-controlled by OPEC at the global level, and are extremely consolidated and vertically integrated domestically. The absence of free market forces in the liquid fuel marketplace are a problem for the advanced biofuels industry (and other innovators) because a noncompetitive marketplace does not properly facilitate and reward innovation. Non-competitive and nonprice driven markets are almost impossible to predict with regard to future demand opportunity, because the market does not behave based on free market fundamentals and the creation of a better product does not necessarily translate into market demand.
The RFS is an aggressive but flexible program that requires obligated parties to blend increasing volumes of various types of renewable fuel over time. It is necessary to, in essence, do what a free market would do on its own: promote and reward innovation.
How EPA’s proposed new interpretation and application of its waiver authority undercuts the commercial deployment of advanced biofuels
The introduction of “distribution waivers” – applied by redefining the word “supply” in the waiver provision “inadequate domestic supply” to mean supply-to-consumer (instead of supply-to-obligated party) – is a “deal killer” for advanced biofuels for a number of reasons:
1. The oil industry controls the distribution of motor fuel to the consumer. Off-take agreements are the linchpin to project finance in the advanced biofuels industry. If EPA provides an incentive for the oil industry to avoid them, they will be avoided and advanced biofuel projects will not get built in this country.
2. The practical effect of EPA’s decision to allow for “distribution waivers” would be to embed the so-called “blend wall” (which would be more accurately described as a “blend step”) and convert the RFS from an additive standard to a cannibalistic one. On its face, the RFS sets forth a marketplace in which cellulosic biofuel grows on top of a growing (then fixed) corn ethanol marketplace. The proposed rule reverses course, and has the cellulosic ethanol industry competing with corn ethanol in a constrained (i.e. capped) ethanol marketplace. This fundamental shift in policy violates Congressional intent in any number of ways. First, and as discussed, it pits different sectors in the renewable fuels industry against each other. Second, it protects the oil industry’s control of 90 percent of the gasoline marketplace in direct conflict with the goals of EISA to reduce petroleum dependence. Third, it puts the cellulosic ethanol industry in the very difficult position of having to compete with a fully mature corn ethanol industry in a constrained, over supplied marketplace that will dilute the market price of first generation ethanol to well below its market value. In essence, the cellulosic ethanol industry will have to produce ethanol at well below market value to compete, which will stall investment in rather than facilitate the commercialization of cellulosic ethanol.
Almost all of the first movers in cellulosic ethanol – Quad County, Abengoa, POET-DSM to name a few – are also first generation ethanol producers (often at the same site). EPA is literally asking these companies to cannibalize their revenue stream with their innovation model. Innovators in cellulosic ethanol cannot and will not do that, any more than second generation solar or wind companies would destroy their first generation revenue streams to make better solar panels and wind turbines.
How EPA’s use of “distribution waivers” violates CAA section 211(o)(7)(A)
When Congress means “capacity to supply” as opposed to just “supply,” it will say so. If Congress had intended EPA to have the discretion to waive the total renewable fuel requirement based on market circumstances other than the supply of qualified renewable fuel, it would have provided the same broader authority in CAA section 211(o)(7)(A) as it did in CAA sections 211(o)(7)(E) and 211(o)(2)(B)(ii). The U.S. Supreme Court has confirmed the presumption that “where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentional and purposely in the disparate inclusion or exclusion.” Sebelius v. Cloer, 133 S. Ct. 1886, 1894 (2013).
Third, and very related, EPA acknowledges in the proposed rule that Congress had before it language that would have provided EPA with the authority to waive the RFS in situations where there was “inadequate domestic supply or distribution capacity to meet the requirement.” The final House version of the RFS included the “distribution capacity” language while the Senate version did not. As such, the conference committee tasked with reconciling the two pieces of legislation had to address this incongruence to forge a final bill. As such, a basic understanding of the legislative process makes clear that Congress made an affirmative decision not to include this phrase in the final provision governing RFS waivers. In other words, Congress decided not to include “distribution,” “capacity” or any combination thereof in the statute governing the RFS – even though these terms were included in prior drafts of the legislation and are used commonly throughout other parts of the CAA. We strongly disagree with EPA that the affirmative decision by Congress to leave out the very language that the agency wants to read into the statute is “uninformative with regard to Congressional intent on the issue.”
EPA acknowledges in the proposed rule that the physical capacity for ethanol use in the marketplace is 26 billion gallons; rather, the issue is willingness among incumbents to deliver the product to the consumers and vehicles capable of using it. And, EIA data shows that 22 states used more than 10 percent ethanol blends in 2013.
B. Market liquidity, transparency and certainty in the context of EPA’s cellulosic biofuel forecasting methodology
While it is clear that EPA trying to be right on its cellulosic biofuel forecasts, the market risks of EPA being wrong are substantial. The eligibility of biogas to receive the D3 RIN – something the ABBC supports – offers case in point. EPA is proposing a cellulosic biofuel standard of 206 million gallons in 2016. However, the Renewable Natural Gas Coalition provided an analysis to EPA in March 2015 production alone will be 295 million gallons in 2016. Even if that projection is slightly off one way or another, investors in D3 eligible fuel are left wondering if the 2016 standard will be too low, what the effect an underestimation could have on D3 RIN prices, and what will happen to excess D3 RINs from year-to-year in a marketplace in which the oil industry has resisted engagement.
EPA should remove “distribution waivers” from the final rule; as they will paralyze investment in advanced biofuels, clearly violate the statute and are unnecessary. As discussed, we believe that EPA’s proposed use of “distribution waivers” pursuant to a reinterpretation of its “general waiver authority” is in clear violation of the statute, as well as the legislative history and intent of the Act. Distribution waivers are also “deal killers” when it comes to financing advanced biofuel and cellulosic ethanol projects because oil companies would have little incentive to sign the long-term offtake agreements that drive project finance. However, and perhaps most importantly from a resolution perspective, the use of distribution waivers is also unnecessary.
1. It appears that EPA made a significant error in the proposed rule that, if corrected, would push the blending targets up toward the statutory requirement
During the June 25th RFS hearing in Kansas City, RFA’s Geoff Cooper pointed out that EPA, in deriving the amount of ethanol actually used in 2014 as the baseline for moving forward with a multiyear rule, incorrectly subtracted the total volume of 2014 exports from gross RIN generation, when in fact RINs were not generated—and thus cannot be retired—for a minimum of 370 million gallons of exported ethanol (and a maximum of 393 million gallons).
It is clear that EPA’s “blend wall” volume estimates are too low. EPA uses EIA’s May 2015 Short-Term Energy Outlook (STEO) to conclude that “maximum ethanol consumption as E10” is 13.78 billion gallons in 2015 and 13.69 billion gallons in 2016. The agency uses these “baseline” estimates to conclude that the proposal “is designed to bust through any blend wall.” However, EIA’s gasoline demand projections for 2015 and 2016 have been revised upward in the July 2015 STEO, which essentially means that the “maximum ethanol consumption as E10” number increases as well. Based on the updated EIA data alone, EPA’s estimate for E10 ethanol use alone should increase by at least 180 million gallons in 2016.
The proposed D6 standard for 2016 is 14 billion gallons. The July STEO shows that the new E10 ethanol blending volume is 13.87 billion gallons. However, there was more than 300 million gallons of non-ethanol D6 renewable fuel used in 2014 to meet the D6 standard. And, in addition, oil companies have the ability to retire a massive stock of carryover RINs and carry deficits into ensuing years. Even ignoring the systemic problem of distribution waivers, the blending targets themselves do not even superficially push past the so-called blend wall based on current and historical data.
4. Requiring the residual D6 statute of 15 billion gallons in the final rule is not even a “hard stop,” for obligated parties; oil companies may carry a RIN deficit for one year at a time, providing additional flexibility in complying with statutory RFS requirements Congress added even more compliance flexibility to the RFS program by including a provision to CAA §211(o)(5) allowing obligated parties to carry forward a renewable fuel deficit for one year.
B. EPA should utilize methodologies to administer D3 compliance that ensure that every gallon of cellulosic biofuel produced (within the economic and supply-related protections
contained in the statute) be required for compliance and that any inaccuracies in forecasting for the purpose of setting targets would be corrected.
From a forecasting perspective, we would encourage EPA to more closely consider methodologies that would relieve the agency of the burden of forecasting the right number at the outset of the year, year-in and year-out. The ABBC, then acting as the Advanced Ethanol Council, submitted a document in early 2014 as part of its public comments on the proposed 2014 RVO that called for “rolling over” excess D3 RINs from year to year to ensure that cellulosic gallons are not stranded in the context of EPA’s forecasts.
More recently, a former advisor to President Obama (James H. Stock) published a paper detailing a proposal to “true up” the D3 pool at the conclusion of each compliance year. The concepts are similar. Both proposals focus on ensuring that any delta between EPA’s forecasted cellulosic biofuel blending requirement and the actual amount of cellulosic biofuel available to obligated parties be accounted for so that obligated parties are not required to use a product that is not available (in the case of EPA overestimation) and cellulosic biofuel producers do not face the risk of stranded D3 gallons (in the case of EPA underestimation). While there are some minor differences in how the proposals are expressed and supported, the Stock proposal offers “true up” in the immediate wake of the compliance year in question while the 2014 (AJW) proposal rolls the excess D3 gallonage into the RVO for the following year. Generally, “true up” makes sense.
American Coalition for Ethanol
Collapse in RIN prices after EPA proposal
Several market watchers reported the collapse in D6 RIN prices shortly after EPA’s NPRM was released on May 29, 2015. “Spot D6 RIN prices, as tracked daily by OPIS, fell to 37.75 cents on Friday, June 5, from 73.25 cents on Friday, May 1.” The same OPIS report quoted Tristan R. Brown, assistant professor of Energy Resource Economics at The State University of New York’s College of Environmental Science and Forestry. “There were early signs in the industry that convenience store operators, particularly large chains, were responding to the higher profits they were earning from their ethanol blending operations by increasing their output of E15 and E85. I don’t believe that the blend wall will be overcome in the presence of low D6 RIN prices, since convenience store operators will no longer have a financial incentive to make it available to drivers.”
Impact of RINs on gasoline prices negligible
In previous comments, ACE cited studies by Informa (Analysis of whether higher prices of RFS RINs affected gasoline prices in 2013. Informa Economics. January 2014) and Iowa State University (Impact of increased ethanol mandates on prices at the pump. CARD Policy Brief 14-PB18. January 2014. http://www.card.iastate.edu/publications/synopsis.aspx?id=1218), which concluded RIN prices not only did not increase retail gasoline prices, they led to greater ethanol use due to lower pump prices for flex fuels like E85. That data continues to be relevant to the RVO discussion for 2015 and 2016.
The impact of RINS on E85 prices
RINs, however, are being recognized more frequently by retailers as a potential solution for adding volume and income; income that will help pay for equipment needed for a station that wants to sell flex fuels. While E15 can be added to a station at very little additional cost, E85 can increase equipment prices significantly – nowhere near the hundreds of thousands often quoted by ethanol opponents, but for a station with four dispensers (national average is 4.5 dispensers) E85 can cost $50,000 more than E10 or E25 compatible equipment.
The South Dakota instance
When ACE commented on the now-withdrawn 2014 proposed RVO, we demonstrated how the South Dakota-based Midway Service station used the majority of its RIN profits to lower the prices of ethanol blends, which led to more volume and more RINs. Midway Service’s sales have more than tripled over the past seven years, and his use of RINs is the primary factor Midway Service owner Bruce Vollan credits for the dramatic sales and profit growth of his station.
At EPA’s December 5, 2013 hearing, Bruce Vollan of Midway Service said this of the blend wall: “The best way to get over the blend wall is to try to get over the blend wall.” His station’s sales were about 6 percent above the so-called E10 blend wall from time he equipped the station to sell E15 and flex fuels, and sales have expanded as he gains customers who want to have a choice at the pump. This year, Midway Service’s sales were 45 percent E10, 21 percent E15, 9 percent E30, 2 percent E50, and 23 percent E85. The total renewable portion of his fuel is more than three times the “blend wall” – 30.9 percent ethanol overall.
More from Minnesota
A recent report by the National Association of Convenience Stores’ Fuels Institute -“E85–A Market Performance Analysis and Forecast,” contains a study of Minnesota’s E85 stations that seems to confirm Midway’s strategy. Among other findings, the report showed that discounts greater than 50 cents per gallon generated additional E85 sales. During the period of the study, the only way stations could have offered discounts that high would be if they were either separating and selling RINs themselves, or, buying pre-blended E85 that was discounted to reflect at least some portion of the RIN value. Quoting from the report:
“The profitability of E85 during the summer of 2013 can largely be attributed to the dramatic increase in the value of RINS (renewable identification numbers) that are used to demonstrate compliance with the Renewable Fuel Standard (RFS). (See Figure 26) When the value of RINS increased to a peak of $1.46 on July 18, 2013, the ability of retailers who were selling E85 to offer a more competitive price and increase overall profitability per gallon likewise increased. Once the RINS values retreated in the fall, E85 margins followed suit and then returned as RINS values climbed in early 2014. Since RINS values increased in the spring of 2013, the NACS-CSX data indicates E85 has delivered an average margin of $0.497 compared with $0.144 for regular unleaded.”
Cars warranted for E15 vs diesel or “premium-only” fuel
Auto manufacturers have produced vehicles capable of using up to E85 for almost 20 years, and are going on year four of cars and light trucks that specifically approve E15 as a fuel. All in all, cars and light trucks built and warranted for E15 outnumber “premium only” vehicles about three to one, and exceed diesel cars and light trucks by nearly six to one. Even if EPA doesn’t trust its own numbers, manufacturer-approved “E15 vehicles” are more widely available than all the premium and diesel vehicles on the road.
With those numbers in mind, obligated parties still require branded stations to sell premium gasoline, and diesel fuel is widely available, while oil company supply agreements specifically prevent station owners from offering E15.
Biotechnology Industry Organization
- Establish the cellulosic RVO for 2015 at no less than 157 million gallons and for 2016 at no less than 350 million gallons. Work with foreign producers and expedite approvals of pathway petitions to bring more advanced and cellulosic biofuels into the market.
- No reductions need be made – nor should be made – on the basis of the statute’s general waiver authority.
- Set the 2015 and 2016 advanced and overall RVOs at the full statutory volumes; EPA has not met its burden to prove the need to reduce the volumes. If EPA were able to adequately justify utilizing its cellulosic waiver authority to shrink the market for advanced and overall renewable fuels, then volume obligations should be set at the highest levels achievable through the renewable fuels industry’s growing capacity to produce higher volumes in the future
- In setting the volumes, EPA should take into account the availability of carryover RIN credits as done in prior years.
Most acts of Congress are not sweeping or extraordinary. The RFS is a rare exception to that rule. The RFS has deep economic and political significance because Congress intended for it to dramatically transform the way we produce and use motor fuels in the U.S. We urge EPA to better appreciate the magnitude of your responsibility to implement the RFS in the manner intended by Congress. A bipartisan majority of Republicans and Democrats in Congress believe that left to their own devices, oil companies will not reduce the carbon intensity of motor fuel or make alternatives such as E15 and flex fuels available to consumers.
The National Biodiesel Board
We are writing to urge the Administration to revisit the proposed 2014, 2015, 2016, and 2017 Renewable Fuel Standard (RFS) volumes for Biomass‐Based Diesel and the 2014, 2015 and 2016 RFS volumes for Advanced Biofuel. We are particularly concerned that this proposal re‐ establishes volumes already produced in 2013 and 2014, especially when considering already established monthly run rates of nearly 220 million gallons which converts to annual industry run rates of more than 2.5 billion gallons.
According to the EPA’s own calculations, biodiesel reduces greenhouse gas emissions by 57 percent to 86 percent ‐‐ with today’s feedstock usage ratio we are averaging over 80% greenhouse gas emission reductions when compared to baseline diesel fuel. That is an incredible reduction, particularly when you consider that the transportation sector accounts for more than a quarter of total U.S. greenhouse gas emissions. In fact, strong biodiesel growth under the RFS can make a significant impact in helping us reach the goals that President Obama has outlined in the United Nations Framework Convention on Climate Change. This Administration has committed to reduce greenhouse gas emissions by 26‐28 percent by 2025. As you know, the transportation sector accounts for 28 percent of U.S. greenhouse gas emissions, second only to the electricity sector, which accounts for 32 percent. This rulemaking is a key test of that commitment, and is one of the only opportunities the Administration has to achieve meaningful emissions reductions in the transportation sector for the foreseeable future. In fact – using federal emissions reductions estimates for biodiesel ‐ the Administration can achieve nearly one‐fifth of its 26‐28 percent goal in the transportation sector share solely by increasing Biomass‐based Diesel use through 2025 in line with the volume growth outlined below.
EPA has proposed 1.8 billion gallons and 1.9 billion gallons of Biomass‐based Diesel in 2016 and 2017, respectively. It is in this context that, after careful review of industry capacity, feedstock availability and other factors, the National Biodiesel Board believes our original request for 2.4 billion gallons and 2.7 billion gallons is reasonable and achievable. However, we believe any volume less than 2 billion gallons and annual increases of less than 300 million gallons through 2017 would be unreasonable, particularly when you consider the availability of prior year RINs. This is a modest increase of 300 million gallons from your proposed volume of 1.7 billion gallons in 2015. While the 300 million gallons means a great deal for our energy and environment
Specifically in response to your proposal, we believe you have significantly underestimated the volume of imports that are already making their way into the U.S, and you will substantial information in our comments that will confirm our understanding of the import marketplace. Already, we are seeing an uptick in biodiesel imports from Argentina and we expect that trend to strongly continue.
Additionally, however, the failure to propose stronger biodiesel volume increases that more closely mirror the volume of the Advanced Biofuels category of 3.4 billion gallons has already led to new influxes of sugarcane ethanol entering the U.S. which is beginning to fill the overall Advanced Biofuel bucket. Clearly, the intent of Congress in creating the program – passed under the Energy Independence and Security Act of 2007 – was to generate more domestic production in the bio‐massed based diesel pool rather than creating a situation where US ethanol producers are shipping ethanol overseas and Brazil producers are sending ethanol to the U.S.
The National Biodiesel Board (NBB) recently conducted an analysis of private and public data to identify at least 54 biodiesel plants in 30 states that have either idled production or shut down over the past two years as the EPA failed to implement a functioning RFS for 2014 and beyond. This includes 25 plants that have closed and 29 plants that have idled temporarily. Dozens of other plants have sharply reduced production.
The Iowa Renewable Fuels Association
According to USDA figures, from 1981 through 2005, the average price a farmer received for a bushel of corn was below the average cost to produce that bushel in 22 of those 25 years. (Attachment B) The result was depressed farm income, high costs borne by taxpayers for Farm Bill programs, and rural economic doldrums.
However, with the implementation of the RFS…from 2006 to 2014, the average price of a bushel of corn was higher than the average cost to produce it. The growing demand for ethanol had provided the sponge necessary to soak up the excess supplies of corn.
The bottom line remains clear: there is no legal, marketplace, or consumer rationale for reducing the conventional biofuels level below the RFS statutory requirements. The EPA must enforce the RFS as Congress wrote the law. Let the RIN marketplace do its job in lowering fuel prices and incenting additional renewable distribution capacity.
The members of IRFA recommend that the EPA discard its convoluted misinterpretation of the “general” waiver authority and maintain the levels for undifferentiated renewable fuel at the levels prescribed by Congress for 2014, 2015, and 2016 (14.4, 15.0, and 15.0 billion gallons respectively). Further, by properly accounting for U.S. biodiesel production and consumption capacities along with the high likelihood for significant biodiesel imports, IRFA urges the Agency to set the biomass-based diesel levels for 2016 and 2017 at no less than 2.0 and 2.3 billion gallons respectively.
IRFA’s comments in full are here.
National Corn Growers Association
“The RFS has spurred growth in agriculture, increased energy diversity and decreased GHG emissions from fossil fuels through the development of renewable energy resources. We urge the Agency to stay the course and support this important piece of transformational energy policy, and we request it reconsider its proposed reduction in the 2014, 2015 and 2016 renewable volume obligations.”
In a letter accompanying NCGA’s comments, NCGA President Chip Bowling writes, “The RFS is doing exactly what it was intended to do. It is successfully driving the adoption of renewable fuel alternatives to petroleum, supporting jobs across the country, and ensuring the United States remains a global leader in developing new renewable energy sources while decreasing GHG emissions here at home. [We are asking the EPA to] provide regulatory certainty to the most successful renewable fuel program in place. The continued stability and health of the rural economy and the nation’s environmental improvements hinge upon your decision.”
POET expects to stop all future U.S. cellulosic investments if EPA’s proposed base renewable fuel requirements are not strengthened. The development of cellulosic and other advanced biofuels is inexorably entwined with continued regulatory predictability based on RFS targets (e.g., the statutory 15 billion gallon base renewable RVO in 2016). EPA lowering the base renewable requirements will effectively undermine the entire RFS program and destroy confidence in its incentive structure for all biofuels.
EPA’s use of the general waiver authority as proposed would be immediately subject to litigation that would throw the Renewable Fuel Standards (RFS) into turmoil, create uncertain national fuel markets, and tarnish the legacy of EPA and this Administration. EPA can set readily‐achievable Renewable Volume Obligations (RVOs) in 2014 through 2016 without resorting to the general waiver authority.
The market has responded to the proposal with crashing D6 RIN prices, undermining the very mechanism necessary to push for higher volumes of biofuels. RIN prices – particularly for D6 RINs that are the largest category of RIN – incentivize the build‐out of biofuels distribution infrastructure and reduce biofuels prices. This is exactly what Congress intended, and exactly what a market‐based regulatory program does—put a price on certain behavior (here, use of petroleum transportation fuel) and incentivize other desired behavior (biofuels use).
EPA has already determined (correctly) that RIN prices don’t increase retail gasoline prices. Incumbent petroleum interests have monopolized the nation’s transportation fuel supply, and lacked a financial incentive to cooperate in diversifying the nation’s transportation fuel because of EPA’s delayed, proposed RVOs and market signals contained therein. Raised RVOs and RIN values are necessary to provide the economic boost to increase biofuels use, as Congress intended, and these values can be raised without harming consumers.
Some pro-biofuels op-eds on the EPA’s work, worth reading
Op-eds from this summer:
Omaha World-Herald: World-Herald editorial: EPA should stand by biofuel
Des Moines Register: Renewable Fuel Standard is good for rural economies
Sioux City Journal: OUR OPINION: Iowa must fight EPA proposal on RFS
Grand Island Independent: EPA wrong to diminish biofuels mandate
The Iowa Republican: Biofuels Under Attack: Same Old Story
Daily Caller: Why Is Obama Allowing Big Oil To Kill Biofuels?
Waterloo Region Record: Ethanol benefits environment, economy
Columbia Daily Tribune: EPA puts oil industry’s agenda ahead of American farmers
Salt Lake Tribune: Op-ed: Biofuels are cleaner energy that should be encouraged
News-Sentinel: Get the facts straight on renewables
Des Moines Register: Renewable Fuel Standard is good for rural economies
Des Moines Register: Ethanol cuts carbon emissions compared with gasoline