When Will I Be Loved?: Supporters of the US Renewable Fuel Standard begin to rally

Defenders begin a high-stakes, high-cost campaign to rally support for the RFS. Who are the defenders? What are the issues? The odds? The alternatives?

In Washington, a large coalition of advanced and traditional renewable fuel stakeholders — led by most of the major biofuels trade associations and some of the titans of cellulosic ethanol, including DuPont, Novozymes and POET — joined forces to defend America’s Renewable Fuel Standard.

The coalition also launched an online platform at FuelsAmerica.org and a Twitter presence @FuelsAmerica.

The Fuels America campaign will be a national effort, including advertising, beginning in Washington, DC and several states, including Colorado, Ohio, Delaware and Montana. Each state will have its own online platform reachable through FuelsAmerica.org and feature the stories of renewable fuel innovators and communities with a stake in maintaining the RFS.

Why now? 

The launch comes as the U.S. Environmental Protection Agency considers a request to “waive” the RFS, a move that coalition members stressed would have serious consequences for America’s rural communities, renewable technology innovators and energy independence.

Eight state governors – from North Carolina, Texas, Arkansas, Georgia, Maryland, Delaware, New Mexico and Virginia – have petitioned the EPA to waive the RFS, responding to calls in the poultry and livestock industries, faced with high corn prices following a tumultuous season of drought across the US corn belt. The EPA has 90 days to respond – from the date of the first request, which was received in mid-August – timing the response for the Presidential campaign season, or just after the elections.

Of particular surprise — the calls for waivers from the governors of North Carolina and Delaware — given that North Carolina is the North American home to Novozymes and Delaware is well-known as the corporate home of Dupont.

The campaign is aimed at addressing the major issues in the current renewable fuel debate, and clarifying the impacts if the RFS is halted or delayed.

The theme of the campaign

A waiver of the RFS would send intolerable signals about market stability to investors — hurting the development and deployment of non-food, advanced biofuels, and leaving the US with, primarily, exactly the corn ethanol-based biofuels fleet that both RFS supporters and detractors wish to move beyond.

“I think just the fact that people are filing waivers kind of creates turbulence in the system,” BIO executive VP Brent Erickson said during a conference call on the RFS.

A sense of the seriousness of the effort

Consider this: the group hired the seriously-talented, seriously-priced DC communications group Glover Park – the same firm that, if you’ll recall, burned the phrase “Food vs Fuel” into the national consciousness three years ago in a campaign for an anti-RFS coalition including the Grocery Manufacturers Association, which landed the RFS in some amount of its trouble in the first place.

The stakeholders

It’s not quite “everyone’s who’s anyone in biofuels,” but it’s close – and it’s just about everyone of import in cellulosic ethanol, excluding BP.

The stakeholders include:

25×25
Growth Energy
Abengoa Bioenergy
National Association of Wheat Growers
ACORE
National Corn Growers Association
Advanced Ethanol Council
National Farmers Union
American Coalition for Ethanol
National Sorghum Producers
American Security Project
Novozymes
Biotechnology Industry Organization (BIO)
POET
DuPont
Renewable Fuels Association (RFA)

Who’s not in the campaign? Primarily the Advanced Biofuels Association and the Algae Biomass Organization – although price-of-entry is an issue with the ABFA, which has been vocal in articulating a “don’t mess with the RFS” message, but whose members lack the kind of association budgets or balance sheets of RFA, BIO, Novozymes or Dupont.

What the stakeholders say

“Fuels America is built around one core idea: renewable fuel is essential to the U.S. economy, our nation’s energy security, our rural communities and the environment,” said former Congressman Jim Greenwood, President and CEO, Biotechnology Industry Organization (BIO).

“The investor certainty created by the Renewable Fuel Standard is essential to our continued growth, and to the growth of other advanced biofuels and bio-based chemicals companies like ours,” said Jim Imbler, President and CEO of ZeaChem. “

“America’s energy security and national security depend on expanding our renewable fuel sector, said Vice Adm. Dennis McGinn (Ret.), President of the American Council On Renewable Energy. “Protecting America’s Renewable Fuel Standard will protect that progress, improve our country’s energy security and protect our men and women in uniform.”

“The Renewable Fuel Standard has created billions in investment and created hundreds of thousands of careers,” said Adam Monroe, President of Novozymes North America. “If the RFS is altered or undermined, companies like ours will have to make tough choices about where to put our long-term dollars. It’s a market-based signal to innovators and investors – and it works.”

“Renewable fuel is making positive impacts on the U.S. economy, our nation’s energy security, and the environment,” said Jan Koninckx, Global Business Director, DuPont Biofuels. “In Delaware, jobs have been created in industrial bioscience and renewable fuels. These are highly skilled jobs, from technicians to scientists, business development people, and various other professionals working in the industry.”

RFS – will it be altered?

The current campaign is aimed at the waiver period – but in a larger sense, of rallying support for RFS2 during what is expected to be a period where anti-RFS forces seek to open and redefine the standard. those efforts come in the wake of disappointing roll-out timetables for cellulosic biofuels, the failure of E85 to boost the market for ethanol, the fast expansion of natural gas availability and falling prices, and the tough capital markets in the wake of the 2008-10 Great Recession.

The greatest fear?

We don’t see much support, as we gauge it, for completely trashing the RFS. There is more support that we hear for lowering or slowing some of the targets given the slow timelines for cellulosic biofuels. We hear a reasonably widespread amount of support for eliminating the cellulosic biofuels pool, and tossing cellulosic into the general advanced biofuels pool where, for example, drop in gasoline, sugarcane ethanol and non-biomass fuels of the sort produced by Joule Unlimited will compete.

The Renewable Fuel Standards and the new Corporate Averaged Fuel Economy Standards

Two titanic pieces of regulation, the RFS and CAFE standards, may run into each other and begin to create instabilities that will cause difficulties for the RFS, even after the 2012’s season of drought is just a memory.

Under new regulations agreed to by the US auto industry, average fuel economy in the US will reach 54.5 miles per gallon for 2025 model cars – up from 24.5 miles per gallon in 2011 – and 47.5 miles per gallon in 2022, the final year of the current Renewable Fuel Standard.

Let’s look at that in context of the established RFS target of 36 billion gallons of renewable fuel.

Based on the 93% increase in vehicle mileage contemplated by CAFE standards between now and the 2025 model year, there’s every reason to assume that baseline US fuel demand for passenger cars and light duty trucks will drop correspondingly to roughly 80 billion gallons in 2022. To arrive at that figure, we projected that the actual fleet will get around 40 miles per gallon by 2022 – as older cars with lower fuel economy remain on the roads.

Energy independence in light of CAFE standards and domestic biofuels production

Now let’s look at domestic US petroleum production – today, the US meets 45 percent of its needs through domestic production. That’s the equivalent of around 58 billion gallons of domestically-produced gasoline for the light duty-market.

That’s good news for fans of US energy independence. There’s every reason to expect the US to be able to reach full energy independence – in terms of light duty fuel – by adding 22 billion gallons or so (on a gasoline equivalent basis) of renewable fuels into the pool.

RFS targets, and what’s left for domestic petroleum and traditional refiners

But what does that leave for US oil refiners, in terms of producing traditional fossil gasoline for the domestic light duty market? Somewhere in the neighborhood of 45-53 billion gallons, depending on how much diesel is displaced through RFS. That’s a big drop in production: they’ll squawk, and hard, and who would blame them?

Where’s the ethanol – or other biobased fuel – going to go? The RFS targets represent as much as 30-35 percent of the pool – how is that going to be distributed into the pool? CAFE raises questions that undermine the RFS’s own architecture.

Stability and the RFS

The purpose of the RFS was to create stability and investor confidence – born in 2007 and now approaching its fifth birthday – to what extent has it succeeded? It has drawn some mighty brands into advanced biofuels. POET, Abengoa, BP, DSM, Novozymes, and DuPont. Shell, sort of. Valero, less so now than in the past.

To date, only BP and Valero have shown much appetite for investing in advanced biofuels capacity as an owner-operator – and possibly POET-DSM and Abengoa, as we learn more about their long-term plans. DuPont and Novozymes expect to be key industry suppliers, although they are making substantial investments to do so, and DuPont is financing early-stage plants off the balance sheet.

Investors are on the sidelines, but watching carefully. Companies like Chemtex have indicated that they have a substantial book of potential customers for contracts to build cellulosic biofuels, once they have demonstrated that their first commercial plant works at scale.

That’s, for sure, one of the reasons that trade associations are so vitally interested in the stability that the RFS brings – they believe that a new wave of investors will only come in to expand on the work completed to date, if RFS targets are in place.

Alternative “vehicles” for stability

There may be other ways to achieve a stable platform for the financing of advanced biofuels at scale.

Let’s look, for example, at the power market. For years, biofuels producers have struggled to get financing, while watching their brethren in wind and solar have easier access to production tax credits, 20 year power purchase agreements, and premium rates as much as four times the going price of electricity.

As a biofuel CEO once observed, “give me a 20-year contract with annual price escalation, no risk on feedstock cost, and a $15 per gallon price, and I would be in a different world in terms of financing expansion.”

Suggesting that there is more stability for investors in the utility model than in other models that biofuels producers have to contend with.

The problem in the fuel markets is that there is no public or private utility in the center, absorbing commodity price risk coming in from the supply side. In the fuel markets, there are basically unprotected sellers and unprotected buyers meeting together in a commodity market that spikes according to titanic and unpredictable market shocks and forces. In short, crisis in the Middle East – crisis at the pump. Waves of speculation in the fuel markets – crisis at the pump. Disruption of supply due to hurricane or other natural disaster – crisis at the pump.

Here in Digestville, we very much prefer a public utility model for transportation fuels. The public utility provides a levelized price to the consumer – averaging out the price swings in the commodity markets.

In turn, the utility strikes long-term fuel price agreements with a blend of suppliers – based on a pool of attributes. Price attributes, carbon attributes and perhaps even local economic development of national fuel independence attributes.

Like the utility market, one continues to have a free market in supply, and a free market in demand. Just a buffer in the center. Owned by the public and private investors, managed as a private corporation with private sector management, and accountable for P&L. reinvesting a portion of its earnings into the development of long-term fuel alternatives and energy efficiency.

To us, that provides more stability than the RFS model – and is proven to work in the utility markets. At the same time, we have little doubt that the industry will continue to focus on RFS2.

The bottom line

We see the RFS debate ratcheting up several notches in volume this fall. Good to see that those most at risk – the cellulosic biofuels and corn ethanol producers and their suppliers – have banded to make a fight of it. With Glover Park, we have no doubt they will do well and go far on the waiver debate.

For the long-term, we look at CAFE standards and wonder how the RFS is not ultimately going to run into difficulties as its numbers grow and the US fuels pool begins to dramatically fall.