RFS, repeal and reform: the print-friendly version

July 24, 2013 |

Capitol“You don’t have enough for repeal. You do have enough for some reforms. ” says key GOP lawmaker; 20-billion-plus requirement, with built-in flexibility proposed, as RFS opponents, supporters tangle on the Hill.

Can the RFS survive?

The Digest’s condensed guide helps you wade through the voices, the issues, and the outcomes.

Background:

Yesterday in DC, the House Energy & Commerce committee convened a major hearing on the US Renewable Fuel Standard — primarily on the short-term impacts of the ethanol blend wall and the impact on RIN prices.

The testimony included a number of far-ranging which included appearances by the American Petroleum Institute, American Fuel & Petrochemical Manufacturers, Renewable Fuels Association, Advanced Biofuels Association, Union of Concerned Scientists Clean Vehicles Program, Growth Energy, The Alliance of Automobile Manufacturers, Briggs & Stratton Corporation, AAA, Society of Independent Gasoline Marketers of America and National Association of Convenience Stores, National Biodiesel Board, National Corn Growers Association, National Chicken Council, National Council of Chain Restaurants, Environmental Working Group, and Professor Chris Hurt from Purdue’s Department of Agricultural Economics.

Our summary is published below — plus, condensed remarks from the key players and charts to illustrate the issues.

Links to full testimony here.

The Face-Off on the Hill

By Isabel Lane
Digest assistant editor

In Washington, five veteran Renewable Fuels Standard warriors faced off yesterday in front of the House Committee on Energy & Commerce in a hearing on stakeholder opinions of the RFS. The hot-button issue was the “blend wall”: the gap between the number of RFS-mandated ethanol gallons and the number of gallons demanded for E10 blends in the United States.

RFS-hearing-4shot

Testifying yesterday in Washington, DC on the US Renewable Fuel Standard (clockwise from top left: Charles Drevna, AFPM; Bon Dinneen, Renewable Fuels Association; Mike McAdams, Advanced Biofuels Association; Jeremy Martin, Union of Concerned Scientists

Speakers on the first panel included:

Jack Gerard, President & CEO of the American Petroleum Institute (API)
Charles Drevna, President of American Fuel and Petrochemical Manufacturers (AFPM)
Bob Dinneen, President & CEO of the Renewable Fuels Association (RFA)
Michael McAdams, President of the Advanced Biofuels Association (ABFA)
Dr. Jeremy Martin, Senior Scientist in the Clean Vehicles program at the Union of Concerned Scientists (UCS)

Because demand for gasoline has declined since the RFS was expanded in 2007, Jack Gerard opened the hearing by warning that exceeding the blend wall stands to slash U.S. GDP by $770 billion. Bob Dinneen and Michael McAdams both fired back that the mismatch equates to only 500 million gallons in 2013: 3.3% of the entire US renewable fuels industry, and less than 0.2% of the U.S. fuel market.

“Calling for the full repeal of the RFS over a short-term issue impacting less than 1% of all the fuels we use doesn’t make a lot of sense as a public policy issue,” explained McAdams. Indeed, Dinneen argued, in 2013, the blend wall is so small that the gap can be closed with existing E15 and E85 stations.

Unfortunately, Charles Drevna contended, consumers do not accept E15 and E85 blends.

Additionally, argued the petroleum interests, the blend wall has driven up the price of RINs, as oil companies are anticipating scarcity of the credits as we approach the blend wall. Drevna noted that RIN market prices have skyrocketed to $1.48 from $0.06.

“RINs are free,” hammered home Bob Dinneen. He went on to say that producers have chosen not to make ethanol, and have entered this market voluntarily. “The bottom line is that you produce a gallon of ethanol, and you get a RIN. It doesn’t cost anything.”

So, if the blend wall exists, does the RFS face repeal?

Representative Bill Cassidy (R-LA), joined a number of his Republican colleagues by acknowledging that full repeal will not happen in this Congress: “I’m a vote counter. I don’t think that there are frankly votes to repeal it. There’s just not.”

If repeal were to happen, though, Rep. Joe Barton (R-TX) asked the panel what would happen to the ethanol industry. The advanced pool would take the hardest hit, agreed the panel, acknowledging that innovation would essentially cease. Bob Dinneen argued that while gasoline companies like using ethanol for the octane value, the market would still gradually shift away from using all types of ethanol.

Representative John Shimkus (R-IL) asked each of the panelists whether they were willing to come to the table and negotiate a compromise between full repeal and no action. “You don’t have enough for repeal. You do have enough for some reforms. So we had better get in the room and get it done.” Going down the table, he asked each of the panelists: “Can I get you all to commit to at least exploring something that is in-between?”

Jack Gerard: “We will work with you always…but the RFS is fundamentally broken”
Bob Dinneen: “The concerns can be addressed administratively, but I would like to work with you to make that happen.”
Charles Drevna: “Absolutely, if we agree what the facts are.”
Michael McAdams: “We would welcome the opportunity to work with you.”

 

The Great Compromise

So, if and when these parties get together to work out the kinks, what can we expect?

It’s no secret that API and AFPM won’t support anything less than full repeal of the RFS. But, that could work to their disadvantage if Congress is hungry for compromise.

Looking forward, Congress will be quick to latch onto any legislative plan that prevents the blend wall from escalating. The RFS was designed to give the EPA broad control over the mandate levels, and Bob Dinneen continued to emphasize that many problems could be solved within this framework.

Unfortunately, as Rep. Bill Cassidy (R-LA) put it: “Our side doesn’t trust EPA.”

In order to get House Republicans onboard, the biofuel industry may need to make some legislative concessions that would fundamentally alter the number of gallons required by the RFS. Rep. Jerry McNerney, (D-CA) suggested reducing then overall 36-billion gallon requirement to a 20-billion-plus requirement, with built-in flexibility to raise that number if supply exceeds expectation.

Particularly in the cellulosic pool, Congress is eager to reduce the number of mandated gallons to a level that is achievable by 2022. While Dr. Jeremy Martin asserted that “based on our analysis, the 16-billion gallon target for cellulosic biofuels in the RFS is definitely achievable,” other members of the panel were less enthusiastic, saying that that number might not be realistic until closer to 2030.

Additionally, several representatives including Rep. Steve Scalise (R-LA) called for more transparency in the RIN market. There is currently no transparency in the trading process, and the market has attracted non-oil-producing entities to hold RINs as an investment while they accrue value.

In the meantime, Michael McAdams was the only panelist to offer the Committee a direct action to relieve pressure on the cellulosic requirements:

“The Committee should, in a bipartisan way, send a letter to the EPA and call on them to immediately release the 2013 RVO. I think you’ll be surprised and you’ll see a decrease in the cellulosic number from the preproposed rule. And, you should ask [the EPA] whether they can do the 2014 and 2015 framework by November 31st.”

While cellulosic requirements through 2012 were unattainably high (deemed “phantom fuel”), the court decision handed down in favor of API and AFPM essentially prohibited the EPA from “thumbing down on the scale,” or raising the requirements artificially to stimulate production. McAdams predicted that the 2013 RVOs would be reflective of this change, and would be within reach of current producers.

One way or another, we can expect to see the Committee moving on the RFS soon as they conclude their extended inquiry on the policy. For several months, they have been soliciting stakeholder commentary on issues with the RFS through a series of white papers. In June, they hosted a hearing on the RFS from a governmental agency perspective. Yesterday’s hearing will conclude today with a panel on the agricultural interests involved.

With the Farm Bill also heading to Conference Committee, the next few months in Washington will be decisive for the future of the biofuels industry.

 

The Blend Wall Issue

Joseph H. Petrowski, CEO, The Cumberland Gulf Group – On behalf of the Society of Independent Gasoline Marketers of America and the National Association of Convenience Stores.

Since the enactment of the Energy Independence and Security Act (“EISA”) of 2007, we have heard much about the impending arrival of the so-called “blend wall” – the point at which the market cannot absorb any additional renewable fuels. Most of the fuel sold in the United States today is blended with 10% ethanol. If 10% ethanol were blended into every gallon of gasoline sold in the United States today, there would be an insufficient volume of renewable fuels to satisfy the RFS mandates.

blend-wall

In this regard, we have already hit the blend wall, but because obligated parties are permitted to “carry-over” RINs from the previous year, we have not seen the economic fallout the blend wall will eventually cause. RINs can only be carried over for one year, however, so as the volume obligations continue to rise, eventually there will be insufficient RINs to enable obligated parties to satisfy the RFS’s mandates.

The RVOs set forth in the 2007 law bear absolutely no rational relationship to current market conditions. The market simply cannot absorb the quantity of ethanol required without administrative or statutory changes to existing law.

Consistent with the flexibility that Congress granted the Agency, EPA should use its waiver authority to avoid the economic harm that the blend wall will cause. The economic harm that will result from hitting the blend wall would be severe and directly caused by the RFS. This will have three salutary effects:

First, it will achieve displacement of foreign fuel with domestic fuel without inflicting excessive costs on consumers.

Second, it would relieve the burden of non-compliance from the refining community without making those entities produce less and/or export more fuel, either of which would increase the price at the pump domestically.

Third, it would preserve the benefits of a diverse fuel supply.

As a policy matter, EPA’s waiver authority represents the proper allocation of responsibility, whereby Congress is not charged with designating the appropriate annual volume obligations based on the market. Instead, this task falls to experts at EPA, who are required to consult with their counterparts at the Departments of Agriculture and Energy. In other words, a waiver to avoid the blend wall is how both the RFS, and the government in general, is supposed to work.

 

The RINs situation

Charles Drevna, American Fuel & Petrochemical Manufacturers

As referenced above, gasoline demand is falling in the United States. EIA’s current projection of gasoline demand for 2013 is 132.9 billion gallons, and is expected to fall an additional 200 million gallons to132.7 billion gallons in 2014.

At these levels of demand, the 10 percent (E10) saturation point is approximately 13.2 billion gallons. This year, the RFS requires obligated parties to obtain and submit 13.8 billion conventional biofuel renewable identification numbers (RINs) to demonstrate that the requisite gallons of renewable fuel were blended into the fuel supply. In 2014, as obligated parties run out of banked credits from over- complying in previous years, and as gasoline demand declines further while facing an implicit ethanol mandate of 14.4 billion gallons, the math becomes even more problematic.

drevna-rins-prices

This is most apparent in the RIN market, which reflects the expectation of how much ethanol can be blended into gasoline. Prior to the onset of the blendwall, conventional biofuel RINs (D6 category) typically traded at $0.02-0.04 until late 2012. Since that time, however, D6 RIN prices increased to as much of $1.45 the week of July 15th as the market anticipates a RIN shortage.

E85 will not (and cannot) generate sufficient RINs to alleviate the effects of the blendwall—particularly in the short term. Due to limited infrastructure, the limited number of flex-fuel vehicles (FFVs) in commerce, and lack of interest in the fuel from FFV owners with access to the fuel, E85 will not solve the blendwall problem. In particular, the Department of Energy estimates that approximately 2,347 retail stations (less than 1.5 percent of stations nationwide) carry E85.

There are only approximately 11.5 million FFVs in use today (equal to about 5.1 percent of the overall light duty vehicle fleet).

E85 has not been price competitive with regular gasoline at any point since the inception of the RFS, a major reason for stagnant consumer interest. In fact, E85’s lackluster sales extend to the heart of the corn belt. Sales of E85 in Minnesota, which has the nation’s most developed E85 infrastructure, decreased from a peak of 22 million gallons in 2008 to 15 million in 2012 even as the number of FFVs in the Minnesota marketplace increased. In June, a National Association of Convenience Stores (NACS) survey found that 75 percent of retailers do not believe there is sufficient demand for E85 to justify installing an E85 pump.

 

Is the Blend Wall a RFS-buster?

Bob Dinneen, CEO, Renewable Fuels Association

In creating a market for 36 billion gallons of renewable fuels, Members of Congress most certainly knew in 2007 that such a large volume of fuel could not be absorbed by the gasoline market expected in 2022 without changes to the vehicle fleet and fuel distribution infrastructure.

The RFS was intended to drive innovation in technology by fostering investment in cellulosic ethanol and other advanced biofuels…and innovation in the marketplace, with E85 and other blends providing consumers choice at the pump.

Dinneen-oilfoodprice

As long as the RFS stays in place and is allowed to work as intended, it will create the economic incentive for gasoline marketers to install the infrastructure necessary to blend E85, E15 or other higher blends. Today’s market for Renewable Identification Numbers (RINs) will provide that incentive. In response to higher RIN prices, we have already seen increased E85 use, and renewed interest in E15. That is the genius of the RFS, the credit system not only provides flexibility, but it also provides the incentive to drive innovation in the marketplace.

dinneen-gasolineimports

The market-driving benefit of the RFS credit program was recently affirmed by BP Biofuels CEO Phil New, who stated: “[t]he conventional RIN markets are responding to the blend wall – exactly as could have been anticipated. The RIN markets are now starting to incentivize all members of the value chain to seek ways to resolve the blend wall. What had become a static, entrenched relationship is now starting to look much more fluid, as the incentives provided by the RIN markets provide a real prompt to innovation – not just on the supply side, but for the better demand side players as well.”

Viable options exist for breaking through the E10 “Blend Wall” and meeting RFS requirements with physical ethanol volumes instead of paper RIN credits. E15 and E85 blends are legally approved and offer a workable pathway for meeting increased RFS volumetric requirements. Only slight increases in E15 consumption would be needed in 2013 to satisfy this year’s RFS obligations with physical gallons rather than banked RINs. If E15 accounted for just 1% of total gasoline sales in 2013, the RFS requirement for renewable fuel could be met strictly with physical gallons of ethanol.

dineen-ghgs

The Regulatory Impact Analysis that accompanied the RFS2 final rule includes a detailed assessment of the costs to modernize fuel distribution infrastructure to accommodate higher-level ethanol blends under the RFS. Notably, the analysis is based on input from petroleum terminal operators, the rail industry, the marine transport sector, the trucking industry, retail gas station owners, manufacturers of fuel storage and dispensing equipment, and other industry sources.

The higher-ethanol blend infrastructure necessary to bridge the gap between the infamous E10 “blend wall” (approximately 13.3 billion gallons) and the 2013 RFS requirement of 13.8 billion gallons would cost about $30 million—or $0.00023 per gallon of expected 2013 gasoline sales.

 

Concerns about E15 ethanol

Robert L. Darbelnet, President and CEO, AAA

AAA is not opposed to ethanol and we have not opposed the RFS. We are very concerned with the way that one particular new ethanol blended fuel has been brought to market and is being sold to consumers: E15.
AAA believes that ethanol blended fuels have the potential to provide drivers with a welcome choice at the pump, which supports American jobs, promotes American energy independence and can save Americans money.

In our view, the first step for a new fuel being introduced to market is thorough and thoughtful testing of how it will impact consumers and their vehicles…Next, it is critical to implement consumer education efforts to ensure that the new product is only used as directed….Finally, it is vital for regulators to work closely with industry stakeholders to ensure that manufacturers support federally-approved fuels marketed as safe to consumers….E15 has been introduced into the market without the successful completion of any of these necessary steps.

e15-ethanolSupporters of E15 rightly note that the Department of Energy (DOE) rigorously tested the fuel for exhaust emissions and components…It was however neither the rigor nor the duration of this testing that fell short, it was the scope of impact that these tests were designed to capture. After reviewing this research, along with other studies that have been conducted, AAA’s automotive experts have concerns about reduced engine life and fuel pump failure from E15 use — factors that DOE testing was not structured to measure.
AAA would support E15 gasoline coming to market, but only following complete and conclusive testing demonstrating it was safe for approved vehicles and once necessary consumer awareness and protections were put in place.

AAA found that more than 95% of consumers have not heard of E15. In the best of circumstances, when filling up at a pump that dispenses the fuel, motorists have only a 3 and 5⁄8 inches wide by 3 and 1⁄8 inches high label (attached) to warn that they may be using a new product not designed for use in their vehicle. As AAA noted in our public comments submitted to the EPA in 2011, this label alone is insufficient. It is easily overlooked by motorists among the other stickers and signage on the pump and the final version is a watered-down and less attention-grabbing version of the initial label proposed by the EPA. The risk is only more alarming considering a recent survey referenced by the National Marine Manufacturers Association that found 35 percent of the current registered sellers of E15— six of the then 18 registered program sites — had not even bothered to label the pump at all.

RFS impact on the food sector

Chris Hurt, Professor of Agricultural Economics Purdue University

Several of the drivers of high food commodity prices are expected to moderate in coming months and years. In addition, much of the sector adjustments to higher crop and animal prices has been made. However, biofuels policy could still be an influential factor.

First, overall crop supplies in the U.S. and world are coming into better balance with heightened demand and this will allow farm commodity prices to moderate…The 2013 U.S. crops are expected to be closer to normal after three short production crops…World production capacity has been increasing as well.

hurt-china-ethanol

Demand growth may slow as well. Chinese demand for soybeans from the U.S. is expected to grow but at a slower rate than in recent years…Corn demand growth for ethanol may be limited due to constraints from the blending wall. [Overall], food inflation could drop back below the core inflation rate as it has already done this year.

How the RFS2 is implemented in 2014 and beyond can have major impacts on the agricultural sector. Agriculture was asked to generate capacity to produce up to 15 billion gallons of conventional ethanol, and to develop that capacity in a short time frame. U.S. Agriculture has largely completed what Congress asked of them with large positive and negative consequences for various sectors. Most of the adjustments have occurred as supply has finally risen to meet the current level of demand and commodity prices are expected to moderate. Crop farmers want to at least maintain current conventional ethanol levels and can, in a few years, increase production to meet the 15 billion gallon mandate if a way can be found around blend wall constraints.

Buis-CPI

Oilseed production can also increase modestly allowing some modest expansion of biodiesel use, again over time. However, this cannot meet multi-billion gallon mandates without major distortions to segments of food markets. The animals sector and food consumers want to avoid political mandates in an RFS that increase demand for crops at a faster rate than U.S. and world supply can reasonably meet.

 

Diversifying the fuel supply

Joe Jobe, CEO, National Biodiesel Board

Many today have focused on concerns about the blendwall and E-15, but I would like to take this opportunity to remind everyone that biodiesel is an Advanced Biofuel under the program that is exceeding volume requirements. Our industry, in fact, has cracked the 1 billion gallon mark for two consecutive years, exceeding the volume requirements under the RFS in 2011 and 2012. And we are on pace to do so again this year.

In exceeding the minimum requirement under the RFS, our industry has produced more than 800 million excess biodiesel gallon RINs. This has given obligated parties a number of options, including the ability to use those excess gallons and RINs to help fill their conventional fuel requirements. In other words, a biodiesel gallon can be used to fill 1.5 ethanol gallons under the RFS.

jobe-excess-RINS

Looking back, in 2004, before the RFS was put in place, our industry produced only 25 million gallons. This year, we are on pace to produce more than 1.5 billion gallons. We have registered capacity at EPA to produce more than 3.0 billion gallons, so our facilities are running at approximately 50 percent capacity.

Opponents of the RFS often try to assert that hydraulic fracturing and horizontal drilling technologies have provided access to domestic shale oil, and that these new domestic sources of oil will make us energy independent. Their argument is that we no longer need the RFS or to develop any alternative sources of transportation fuel because we are increasing domestic petroleum supply which will lead to cheap fuel prices for US consumers. This is a false argument because it assumes that crude oil is priced regionally rather than globally. The US is several years now into one of the largest domestic oil booms in decades, yet US consumer prices for gasoline and diesel fuel have remained high and unstable.

Canada is a net exporter of oil – completely energy independent. Yet Canadian consumers will be paying the same increased cost at the pump generated by [the] latest unrest in Egypt. The Canadian experience provides compelling evidence that as a country, you can be a net exporter of oil, but it will not insulate your citizens from paying whatever price the international market and OPEC decide they will pay.

As stated recently in the Wall Street Journal (July 10, 2013): “The return of geopolitical concerns to oil markets has dimmed hopes that a U.S. shale boom could put a lid on the prices motorists pay at the pump.”

The fact is that we simply cannot manage the global price of oil by increasing our own supply.

The only answer – which the RFS is gradually accomplishing – is to do what the electricity markets have smartly done: diversify our supply of fuels and build capacity. Coal, natural gas, nuclear, hydro, geothermal, wind, solar, and biomass all fuel our power plants, making our electricity prices stable and affordable. Clearly it makes sense to do the same in the transportation fuels market. We must also increase our refining capacity – and the only efficient way to do that in the near to midterm is through the ongoing development of biofuels

The real problems and immediate relief

Michael McAdams, Advanced Biofuels Association

In 1990, this Committee saw in the Clean Air Act an opportunity for biofuels to contribute to meeting national energy and environmental goals by creating a 2% oxygen mandate for gasoline. In 2005 you created the RFS and called for a mandate of 7.5 billion gallons by 2012, and then in 2007 amended it with a focus to develop an innovative advanced and cellulosic industry and called for 36 billion gallons by 2022.

In the last six years, US businesses have spent $14.72 billion dollars in pursuit of the policy goal you collectively laid down for this country. These numbers represent people and jobs all over America: jobs in rural America planting and cultivating the best new energy crops, jobs building and operating biorefineries, technology and engineering jobs, and laboratory jobs researching new feedstocks and enzymes and many more.

FA_SummerGasPoll_National_062513a

To repeal the RFS would pull the rug right out from under them and change the rules in the first half of the game. This confusing policy signal is a benefit to incumbent players in the fuels market and a significant disadvantage to those trying to finance and build new innovative technologies.

A potential short term solution can be found at EPA. When Congress passed the RFS2 in 2007 it provided EPA with significant flexibility and authority to address issues which could arise from hurricanes, droughts, and unforeseen economic factors….between the gallons produced in all categories of the RFS and the extra RINs brought forward from 2012, there are sufficient RINs and gallons to meet the proposed targets of the RFS for 2013.

The challenge is whether that will still be true in 2014 and 2015.

Much of what is difficult about the RFS today is the uncertainty of the annual obligations. ABFA and others have called on EPA to release the Renewable Volume Obligations (RVOs) for 2013 and 2014 as quickly as possible. Providing an additional year of clarity with the 2015 RVOs would help rapidly defuse much of the economic pressure those of us on this side of the table are feeling. This Committee should encourage EPA to explore a combined 2014 and 2015 rule.

A clear signal from EPA, given to stakeholders in advance, with targets for 2014 and 2015, would be a huge step forward in adjusting EPA’s procedures to help all of our markets work more smoothly.

 

A way forward?

Chris Martin, the Union of Concerned Scientists

The RFS is a more flexible policy than many people appreciate, and Congress was smart to give EPA the authority to adapt the second phase of the policy to changing circumstances, and move us forward in a pragmatic way. Now EPA must use that flexibility and provide more clarity on the path ahead. To start with, EPA should acknowledge that 36 billion gallons (BG) is no longer a realistic target for 2022.

Martin-RFS-options

In fact, a careful reading of the RFS reveals that it not really a 36 billion mandate for 2022 at all. It is more accurately described as a mandate for 20 billion gallons, plus whatever level of cellulosic biofuel production is actually achieved, up to a maximum of 16 billion gallons (call it a 20BG+ RFS for short). Of this, 15 billion gallons comes from conventional biofuels like corn ethanol, which is already built out and for the most part locked into fuel markets. There is also a mandate for non-cellulosic advanced biofuels, fuels like biodiesel, sugarcane ethanol, and some newcomers like ethanol from grain sorghum. This mandate grows steadily to 5 billion gallons in 2022, which may sound modest compared to 15 billion gallons of corn ethanol, but is actually a very rapid expansion from where these fuels are now. So that adds up to 20 billion gallons. But the largest part of future mandate growth was supposed to come from cellulosic biofuels.

However, the scale-up of cellulosic biofuels is not happening at the rate anticipated in the original RFS schedule. Even with robust investment and steady growth, cellulosic biofuel production capacity in 2022 will probably be closer to 2 billion gallons than 16 BG. The RFS anticipated this possibility, and requires the EPA to adjust the mandates annually in line with projected capacity, a requirement reaffirmed in the recent court ruling. So in total the real minimum mandate for 2022 is likely to be closer to 22 billion gallons than 36, and it will be 2030 before we are likely to see a full 36 billion gallon mandate reached.

Because the lifecycle analysis process is time consuming and requires extensive input from stakeholders and experts, we suggest EPA conduct a thorough analysis and rulemaking in 2013 and 2014, and use that analysis as the basis for setting concrete criteria that would be used to decide on subsequent annual volume determinations in the 2016 to 2022 timeframe. Proving this type of forward looking guidance tied to measurable market factors (in agriculture, trade, fuel production and infrastructure) would provide all the stakeholders affected by the RFS more visibility to make their own plans.

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