EPA sets final 2013 US renewable fuel mandate

Industry Analysis

Piper Jaffray analyst Mike Ritzenthaler wrote:

“More interesting than largely keeping 2013 RVOs at proposed levels – only lowering cellulosic biofuel requirements – the EPA mentioned the possibility of reducing 2014 RVO levels for other biofuel categories, including corn-based ethanol, in order to address the highly controversial blendwall issues.

“We believe that the EPA calling out the option to adjust the total renewable fuel mandate opens the door for skepticism surrounding the volume mandate and the sustainability of RINs. Additionally, a lower 2014 ethanol mandate will likely result in continued pressure on corn prices due to perceived lower corn demand – although we would expect improved producer margins to correct the demand destruction as ethanol can be exported, circumventing the blendwall issues.

“Ethanol RINs values have increased significantly since the beginning of the year – up from 7 cents at the start of the year to approximately 90 cents today – and have shown significant volatility throughout, reaching over $1.40 in mid-July.

“We believe the fear of lower ethanol demand for corn will weigh on the Ag sector as a whole, while uncertainty around 2014 RVOs will weigh on stocks in the biofuel space, but as indicated by the EPA, a proposed rule making for the 2014 RVOs is expected in September.”

The Digest’s Take

Items off the table. The EPA’s move may well de-fang voices that point to Congress as the only body that can address blendwall issues — and it may well take RFS repeal (if not reform) completely off the Congressional agenda.

Should blend wall and RINsanity issues be addressed in this rule, it may well take reform off the agenda too — if the EPA has sufficiently demonstrated the flexibility of RFS2 and wisdom in EPA’s stewardship. As ABFA president Mike McAdams notes, it also takes “phantom cellulosic fuels” out of the firing line.

Items on the table. 2014 looms as a big year — essentially not a year about capacity building and production (except perhaps for drop-in biofuels): it will be a year about building market access. The EPA has put the blendwall on the table — and apparently is not convinced that E15 ethanol blending is a total solution and not convinced that drop-in fuels or biobutanol will be available in large quantities in 2014.

Market access? For US ethanol producers, continuing to build export markets and E85 outlets. For drop-in biofuels producers, building capacity. For automakers, making more flex-fuel cars and particularly in clusters.

E85 and higher ethanol blends. With a big harvest expected and corn ethanol volumes flat, low corn prices my open up enough of a spread between ethanol and petroleum to make E85 an attractive alternative.

Biodiesel. If the feedstock is affordable — and rising soy meal demand from China may well power the kind of increased acreage that drops soybean oil prices — it could well be a big, big year for biodiesel. The size of the advanced biofuels mandate will likely rest on EPA’s estimates of biodiesel expansion.

Long-term. We continue to see the possibilities of 18 billion gallons of biobutanol, 5 billion gallons of biodiesel, 1 billion gallons of renewable diesel and 2 billion gallons of drop-in fuels of other types (including algae biofuels and aviation fuels) by 2022. That’s based on current technology, now in operation (e.g. Gevo, numerous biodiesel producers, Diamond Green Diesel, Neste, Dynamic Fuels, and the likes of KiOR, Solazyme, and Sapphire Energy.) Those kinds of volumes would give the US 36 billion gallons of ethanol-equivalent fuels and fit within existing blend levels. otal price tag, somewhere in the $20 billion range (on top of existing industry investment)