By Clayton McMartin, RINSTAR – special to Biofuels Digest
Certainly one of the biggest changes to the advanced renewable fuel standard (RFS2) was the dramatic reduction of the mandate for Cellulosic Biofuels in the year 2010. This particular fuel category, which industry now refers to as Type C, entails both ethanol and diesel range products generated through cellulosic technology. EPA, after considerable deliberation, reduced the volumetric target from 100 million gallons this year all the way down to 6.5 million gallons (foot note that this is actually an energy content adjusted level and the actual volume projection by EPA, considering ethanol and diesel range cellulosic biofuels, was 5 million gallons).
EPA’s decision can be attributed to the fact that most cellulosic projects have yet to make their way into the commercial marketplace. On the surface, one could certainly argue the logic in such a decision. The fact is that capital is tight and investors haven’t rushed in like was seen just a few short years ago in the corn ethanol boom.
It would only seem reasonable that the mandate for Type C biofuels would be within the achievable range of industry’s production capacity. Perhaps a mandate that amounted to 10% or even 20% greater gallons than currently demonstrated would be acceptable – or at least tolerable. But not one that would be 2000% more. How could those obligated for such a volume possibly comply? The answer can be found in the thousands of pages that make up the original standard, RFS1, and the new advanced standard, RFS2.
My prediction is this. The Cellulosic Biofuel (Type C) mandate will be exceeded by far more than 2000% in 2010. That’s right, I am saying that there will be over 100 million RIN credits available in 2010. In fact, most of these credits will be generated before RFS2 even goes into effect – July 1, 2010.
The Devil is in the Details
This is one of those classic examples of where regulations do not necessarily represent reality. One of the most challenging aspects of the renewable fuel standard is making the connection between regulatory initiatives and commercial viability. Where conventional wisdom falls short, literal interpretation of the written word carries the day.
The definition of Cellulosic biomass ethanol under the original RFS1 can be found at 40 CFR Part 80 Section 80.1101, and aside from what one would anticipate for ethanol derived from lignocellulosic or hemicellulosic matter it also goes on to read:
“Ethanol made at facilities at which animal wastes or other waste materials are digested or otherwise used onsite to displace 90 percent or more of the fossil fuel that is combusted to produce thermal energy integral to the process of making ethanol, by: (i) The direct combustion of the waste materials or a byproduct resulting from digestion of such waste materials (e.g., methane from animal wastes) to make thermal energy; and/or (ii) The use of waste heat captured from an off-site combustion process as a source of thermal energy.” This means that Cellulosic biomass ethanol generated under RFS1 may have nothing to do with cellulosic technology and everything to do with energy recovery.
So what does this have to do with RFS2? Actually a whole lot since 2010 Type C RINs generated under the RFS1 definition will be directly applicable to the RFS2 Type C mandate. Even Type C RINs generated in 2009 can be applied towards up to 20% of the 2010 Type C mandate, as the rule stands today.
How many Type C RINs will be available to the market? Analyzing 2009 and the first 2 months of 2010 data available through the RINSTAR renewable fuel registry, we would estimate that far more than 100 million gallon-RINs will be available. This then would amount to a surplus. Contrary to a shortage of physical product, the supply of Type C RIN credits will far exceed the 2010 mandate. Based on the market insight gained through the renewable fuel registry, we would conclude that the originally proposed 100 million gallon-RIN mandate would have also been exceeded.
To further support this argument one only needs to look as far as the current price of Type C RINs in the market. It should be noted that the price of Type C RINs are essentially the same as the price for RINs derived from corn ethanol. RFS2 would place corn ethanol in the class of fuels defined as Renewable Fuels, or shortened by industry to Type R. As long as Type C RINs are at or near parity with Type R RINs, the cellulosic sector will lack an important element in driving demand for their product. This then would seem to make it even more difficult to attract the capital necessary to build the capacity to satisfy the mandate.
The cellulosic biofuel sector has certainly met with more than its share of criticism lately. Could this have been what Congress really intended? Is this an issue being considered during the 60 day period for Congressional review? These would seem to be viable questions that perhaps we will hear answers to in the coming weeks.
But one we do know one thing for certain – the biofuel industry is unequivically tied to EPA, now with RFS2, more than ever. What appears to be a decision based on sound logic is actually complicated by a set of regulatory rules that never anticipated a set of factors coming together as they have. A review of legislative history will show that this set of circumstances have roots all the way back to the 2005 energy bill. EPA is doing the best they can within the bounds set by Congress. But as is often the case, not everyone will see things the same way.
This is a classic example of “Unintended Consequences”. The details of these new rules really do matter.
To learn more about how your business will be impacted in the future, download the free White Paper, “America Advances to Performance Base Biofuels – The Advanced Renewable Fuel Standard / RFS2″, available free here.