Fixing Rufus: Congress, 2013 and the Renewable Fuel Standard

September 4, 2013 |

Brown_-_Hip_to_Snip_Large_largeWill Congress “mess with the RFS”?

As choruses of opponents and supporters clash, the Digest looks at how the RFS might be amended, or what 2013-14 might look like if it is “business as usual”

Well, the fall US legislative season is upon us. The question is — from virtually all corners — will the US Congress proceed with an energy bill, perhaps jam it into a debt ceiling package and open up and tinker with the Renewable Fuel Standard for the first time since 2005.

Or, will there be too many distractions of the Syria-type, or other legislative priorities given that 2014 is an election year and the spring and fall sessions are unlikely to be a time of major legislative action.

At this stage — an oddsmaker would likely tilt slightly in favor of “opening up the RFS”, but only slightly— but never mind. In the Digest, today and tomorrow we’ll look at some eventualities in both cases.

Based on our industry sources, here’s an outline for a “change the RFS” outcome – what that might look like.

We see four key elements — ethanol, drop-ins, biodiesel and the RIN system for smoothing out the cost and difficulties for compliance.

Element #1. Ethanol.

In a “change the RFS” scenario, we see ethanol capped at 10 percent of the market or right around that figure.

We seethe strong possibility of a cellulosic preference — possibly in the form of a numeric based not only on energy value, but emissions. For example, a cellulosic gallon that has 60 percent or higher GHG reductions — well, that could count for 1.3 standard corn ethanol gallons. An advanced biofuel gallon (50% or higher greenhouse gas emissions) could count for something like 1.2 standard ethanol gallons.

We also might see a re-calculation of the gasoline baseline emission. Right now, it’s based on 2005. and there’s an awful lot of GHG-heavy fuels or the tar sand type used in the US market — could see all that rebalanced, and we might see advanced and cellulosic biofuels showing even higher greenhouse gas emission reductions compared to conventional fuel.

We see E85 as a market extender, outside the RFS 10 percent ethanol cap. If marketers want to get higher gallonage adopted, they will have the flex-fuel market available to the,. Up to 3 billion gallons — according to a recent CARD study. It is tempting to see E85 as “within the cap” to encourage blenders to make those blends available and get behind them from a marleting point of view. But we’re not sure that anyone on Capitol Hill, given E85’s history, is going to create a higher ethanol mandate — in the context of revising RFS2 — on the basis of E85.

Should Congress be convinced that E15 and E85 offer legitimate opportunities to meet the RFS and bypass the blend-wall — that is likely to be a reason, right there, to keep the RFS in place and not open it up.

We see the oil industry continuing to ignore E15 (by and large), content that Congress will heed the voices of auto makers, boat makers, small equipment makers and so on who have given warning about what they perceive to be the dangers of E15 blends.

Element #2. Biodiesel.

Biodiesel is popular these days. We may see, in fact, a tightening up and clarifying or longer-term biodiesel mandates — giving guidance on numbers for several years out. That’s a maybe; the current system hasn’t caused the biodiesel industry to keel over, and Congress may well leave well enough alone. But if they are tempted to install a more specific mandate, look for a cap around 3 billion gallons or less, through 2018 – possibly moving towards 5 billion in the out years towards 2022, though no one has made a convincing argument that the feedstock will be affordable and available in those quantities…yet.

Element #3. Drop-in fuels.

Always popular – so long as they are not made from palm or corn. Drop-ins are liked by many members of the coalition opposing RFS, and ardently desired by many environmentalists looking for something between Big Corn and Big Oil.

Concerns about capacity and affordable feedstock will bedevil efforts to install specific mandates — Congress has heard enough jaw-jaw about the RFS2 cellulosic biofuel targets to be leery of mandates for relatively new feedstocks and technologies.

Nevertheless, expect some love in a revised RFS for advanced, drop-in biofuels. Probably something like the biodiesel mandate – each year the EPA will set one based on its estimates of capacity and production. Gallons produced will have a physical market.

We see a RIN waiver available from the EPA at around $1 per gallon.

Element #4. RINs and waivers.

We see the existing RIN system kept largely in place, with two exceptions. We see the possibility that the EPA will establish a corn ethanol waiver RIN — one that can be simply bought from the EPA, should the obligated party not wish (or be unable to blend) additional ethanol. Something like $0.50 per gallon might be the number — though we have not heard a consensus on price from our sources — enough to encourage an alternative market while avoiding some of the effects of skyrocketing RIN prices.

We also see the possibility of a SuperRIN. That is, a cellulosic or advanced RIN that can be presented in lieu of a corn ethanol RIN. So that blenders could use extra biodiesel blending, for example, to satisfy RFS requirements that traditionally had been filled only by corn ethanol.

Putting it all together

RFS3 might look something like this:

  • Corn ethanol at something like 12 billion gallons into the E10 market.
  • Premium for high-GHG reduction fuels.
  • Drop ins and biodiesel mandated, annually, as capacity expands.
  • Waivers available for all classes of fuel. More expensive for advanced.

In tomorrow’s Digest, we look at 2013-14 should RFS2 not be tampered with. Interesting economics for ethanol producers, for sure. Stay tuned.

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