In Washington, the EPA released its 2014 proposed standards and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original Energy Independence & Security Act.
The announced proposed volumes met with united outcry from biofuels trade associations, and sniping criticism over the continued existence of the Renewable Fuel Standard from food and oil industry groups. Oil refiners were remarkably silent on a day which handed them a significant regulatory victory.
As analysts began to pore over the detail, the EPA’s proposal won support from Jason Bordoff, former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council — and senior Piper Jaffray equities analyst Mike Ritzenthaler wrote that producers would find work-arounds or alternative markets to maintain revenues and cash-flow.
In today’s Digest, we have a complete wrap-up of reaction, plus as look at the proposed rule, the EPA’s rationale, the advanced biofuels vs corn ethanol dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.
The Proposed Rule
The proposed volumes are (in billions of U.S. gallons):
* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.
The effective corn-ethanol mandate is (in billions of U.S. gallons):
Overall, the reductions from statutory volumes are:
Comparing Advanced Portion to Overall Rule
The EPA’s Rationale
EPA writes: “The proposal seeks to put the RFS program on a steady path forward – ensuring the continued growth of renewable fuels while recognizing the practical limits on ethanol blending, called the ethanol blend wall.”
The blend wall refers to the difficulty in incorporating increasing amounts of ethanol into the transportation fuel supply at volumes exceeding those achieved by the sale of nearly all gasoline as E10 (gasoline containing 10 percent ethanol by volume).
How does the proposed rule compare to the previously leaked EPA document that contained three options?
Bottom line: it’s virtually the Option 3 as previously leaked, except for a reduction in the cellulosic volumes towards the bottom end of the expected 13-36 million gallons production range, and a cosmetic adjustment to bring corn ethanol above the 13 billion gallons range with an adjustment of 10 million gallons.
The Hidden Issues
EPA writes: “Although the production of renewable fuels has been increasing, overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in 2007.”
In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.
On a more speculative basis, we see here an Obama Administration very much on the defensive over its legislative program. In deep trouble on Obamacare, the White House appears to have opted to capitulate on energy policy, so as to preserve political capital.
Options in the Courts
It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. It will be interesting to see if the RFA sues to maintain the corn ethanol mandate and potentially leaves advanced biofuels facing an even stronger set of cuts in order to make room for more corn ethanol.
By their statutory authority on cellulosic fuels (not in any way subject to a challenge on their powers under RFS2, but could have been open to challenge based on the gallonage), they could have waived down the celuloisic portion to 17 million gallons based on available fuel, and waived the rest of the standard accordingly down.
The advanced biofuels pool would have been reduced to 2.013 billion gallons, and corn ethanol would have stood at something like 14.387 billion gallons. The agency too steps to decrease the corn ethanol pool — and to increase the advanced biofuels pool slightly.
Balance Less Corn Ethanol with More Advanced Biofuels?
The fear — rightly or wrongly — is that the advanced pool will be drowned in low-cost, imported ethanol that qualifies for the advanced biofuels pool — and exacerbates the blendwall issue that it sees in the marketplace. So, they have increased the advanced pool, but kept it quite close to the biobased diesel rule.
At the end of the day, there’s not much production out there, outside of the biomass-based diesel capacity (representing renewable diesel and biodiesel) and the cellulosic fuels capacity. At scale, there are some providers such as Aemetis that can produce qualifying advanced ethanol at scale using the milo-biogas pathway, and there’s sugarcane ethanol.
The major producers, potentially, in the non-cellulosic, non-diesel market are the biobutanol producers, and there are not indications of major capacity expansions here in 2014.
RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.
Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.
So, it’s a distribution war. Conventional fuels are protecting their production by protecting their distribution. Renewable fuels haven’t built any, hardly, to speak of. Congress gave every indication that they would force conventional fuels, via mandate, to find distribution solutions are face exploding RIN costs — as certain RINs became attractive to predatory trading — and perhaps even self-serving trading.
When RIN costs exploded, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.
Turn to the next page for industry reaction and analysis.