EPA can make RFS workable

EPA can make RFS workable

How EPA sets 2014 renewable fuel standards could prevent legislative fix to mandate.

THE renewable fuel standard (RFS) has always had its controversy, but 2014 brings the first time when, if left unchanged, the market will experience significant difficulties in reaching the mandated levels.

The Environmental Protection Agency has the authority to reduce next year's requirements in preliminary rule-making expected before the end of the year and, if done appropriately, can help the RFS be workable moving forward.

The oil industry and other lobby groups, including animal agriculture, have argued that the RFS should be scrapped, while the pro-biofuel lobby has argued that the RFS is working and can be made to function as it was intended.

On Aug. 6, EPA issued its final ruling for 2013 and indicated that, for 2014 and perhaps beyond, EPA intends to accept the reality that it will be difficult to meet the RFS levels, which increase each year through 2022.

Darrel Good, University of Illinois agricultural economist, said he expects EPA to release its preliminary rule on RFS levels yet this fall. Although stakeholders will have the opportunity to comment on the levels, in the past, EPA has not deviated much from its initial numbers.

Congress will be watching EPA closely in how it handles the 2014 levels. Rep. John Shimkus (R., Ill.), who represents both ethanol producers and oil refiners, has said his discussions on finding an RFS fix may be moot if EPA takes the appropriate steps in establishing 2014 levels.

Wally Tyner, agricultural economics professor at Purdue University, said EPA has shown willingness to reconsider the blend mandates because it was unrealistic to believe that the industry could meet them as EPA had enforced them in the past.

"I think they saw that a train wreck was coming, and they did the right thing," he said.

Good believes EPA will write down the cellulosic requirement, as it has done in the past, but instead of doing a straight one-to-one switch-out as in the past, he also expects an overall reduction in the mandate. Another option is to freeze the mandate at 2013 levels, but that is unlikely, he added.

The implied mandate for renewable biofuels (the total mandate minus the mandate for advanced biofuels) will increase from 13.8 billion gal. in 2013 to 14.4 billion gal. in 2014 and to 15 billion gal. in 2015 and beyond.

Consumption of gasoline nationwide has declined — from 141 billion gal. in 2007, when the RFS mandates were last updated, to a rate of 133 billion now. This sets up a "blend wall" of 13.3 billion gal. if E10, a 10% ethanol fuel blend, is used.

Tyner explained that with the ethanol blend wall, biodiesel renewable identification numbers (RINs) are needed to meet the shortfall in ethanol, so it became pretty clear that moving forward, the RFS would not be workable.

Tyner calculated in a recent report he wrote regarding the RFS that 15.85 billion gal. of biofuels can be produced in 2014 if EPA reduces its volume targets for corn-based ethanol to better align with the blend wall and by lowering its requirements for the production of cellulosic biofuels from such sources as corn stover, straw and miscanthus grass to what the EPA might deem to be available (Table).

In 2013, EPA established the cellulosic mandate at 6 million gal., compared to the RFS of 1 billion gal. While the cellulosic mandate has been reduced, the mandates for total advanced and total biofuels have not been reduced, even though EPA has the authority to do so.

However, in reducing the cellulosic mandate, the agency has maintained the overall mandate at its original level, Tyner noted.

"What this means is that the shortfall in cellulosic biofuels must be made up from other advance biofuels such as sugarcane ethanol or biodiesel," he wrote.

Tyner said the "devil is in the details" on how EPA takes a situation that looks unworkable now to one that can be quite manageable.

"EPA has taken a pre-emptive strike to make the RFS continue to work in promoting renewable fuels without imposing undue costs on producers or consumers," he said.

 

RFS levels assuming EPA reduces the overall mandate (billion gal.)

 

2014

2015

2016

RFS total

18.15

20.50

22.25

Corn total

14.40

15.00

15.00

Blend wall

13.30

13.30

13.30

Revised conventional

13.80

14.00

14.20

Cellulosic mandate

1.75

3.00

4.25

Actual cellulose

0.05

0.08

0.10

Revised overall total

15.85

16.58

17.30

RIN carry-forward balance

1.70

1.57

1.24

RIN carry-forward used

0.13

0.33

0.55

Sugarcane

0.25

0.40

0.60

Corn ethanol production (gal.)

13.55

13.60

13.60

Biodiesel RINs

1.92

2.25

2.55

Biodiesel production (gal.)

1.28

1.50

1.70

Advanced RFS

3.75

5.50

7.25

Revised advanced

2.05

2.58

3.10

Advanced supplied

2.17

2.65

3.15

Total RINs

15.85

16.58

17.30

Source: PennEnergy.

 

Biodiesel levels

Assumed biodiesel production is much higher than current production, which is about 1.3 billion gal. Biodiesel has 1.5 times the energy content of ethanol, so each gallon gets 1.5 RINs.

Whereas ethanol remains competitive without the RFS, biodiesel use becomes solely dependent on the RFS, which Tyner called the "enforcer" of biodiesel use, unlike market conditions and oxygen requirements, which are a bigger driver in ethanol use.

Economics for the biodiesel industry are not very good, Good noted. Even with the $1/gal. tax credit on biodiesel production, there still is not much money to be made selling biodiesel.

Good explained that the biodiesel industry will ramp up production capacity to meet whatever level EPA sets as that target, possibly as high as 2 billion gal.

Tyner added that if the $1/gal. tax credit goes away at the end of the year, as it is written, it will just make the cost of compliance go up. Without the tax credit, the cost of a biodiesel RIN would go from the 80 cents it is today to $1.80, he said.

 

RIN market impacts

THE renewable fuel standard (RFS) is administered through renewable identification numbers (RINs), which all obligated parties are required to submit to the Environmental Protection Agency at the end of each year.

All biofuels produced domestically or imported come with a RIN. Obligated parties accumulate RINs as they blend during the year and turn in their requirement at the end of the year.

RINs are tradable, so if a company has too few or too many RINs, it can go to the market and buy or sell RINs. In addition, RINs can be carried forward from one year to the next if there are excess RINs.

Wally Tyner, Purdue agricultural economics professor, explained that for corn-based ethanol, the RIN price prior to 2013 was generally less than 5 cents/gal.

"This low price indicated that the RFS really was not binding. However, in the first quarter of 2013, corn ethanol RINs shot up to over $1/gal., signaling that the RFS, together with the blend wall, are now binding," he said.

However, the wide swing in prices is causing skepticism from some, who say markets were inflated by oil users to reinforce the need for changes to the RFS.

Last week, Senate Agriculture Committee chair Debbie Stabenow (D., Mich.) called on the Commodity Futures Trading Commission (CFTC) to review recent allegations about possible manipulation of the markets for RINs.

"I would like the CFTC to help determine whether factors other than supply and demand have been causing extraordinary volatility in the price of RINs and to what extent fraud and manipulation have been affecting the price of RINs," Stabenow wrote to CFTC chairman Gary Gensler in a Sept. 24 letter. "I am concerned that a lack of transparency in these markets has made them more susceptible to manipulation. If this is the case, it is a problem that must be identified and fixed."

Volume:85 Issue:40

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