Run, Rufus, run: Congress, 2013 and the Renewable Fuel Standard

Will Congress “mess with the RFS”?

As choruses of opponents and supporters clash, today the Digest looks at how 2013-14 might look like if Congress declines to bring forward an energy bill, and it is “business as usual”

Oh, see. Oh, see Rufus. Funny, funny Rufus. Run, Rufus, run!

The fall US legislative season is upon us, and there is every indication that the opponents of the US Renewable Fuel Standard will renew their attacks on the RFS — with a primary goal of bringing an RFS reform bill to the floor of the House of Representatives, possibly attached as an amendment to a debt ceiling bill that would be separately agreed with the White House and Senate.

In yesterday’s Digest, we looked at possible scenarios, should Congress decide to “mess with the RFS”. Today, we look at 2013-14, should Congress elect not to act — but leave the EPA and the markets to govern implementation of the existing law.

2014 Mandate

The EPA will ultimately determine the annual mandate, but Congress scheduled 14.4 billion gallons of ethanol for 2014, and you can expect a mandate around 1.5 billion gallons of biomass-based diesel — plus some comparatively limited amount of cellulosic biofuels, not likely to climb above 250 million gallons.

Capacity

The US. has 24 ethanol plants currently idled. Given that it will take, roughly, 40 plants adding new production to meet the increased demand in the 2014 RFS — look for producers to add capacity. Also, look for idled ethanol plants to acquire, ahem, a certain popularity among obligated parties.

For example, Flint Hills is acquiring capacity. This week, FHR announced that it has finalized the acquisition of an Arthur, Iowa ethanol plant from Platinum Ethanol. FHR’s portfolio now includes five ethanol plants with a combined capacity of 550 million gallons, a biodiesel plant in Texas, and investments in biofuels technology and feedstock development.  The Arthur facility opened in 2008 and has an annual capacity of 110 million gallons of ethanol.  It also produces 300,000 pounds of distillers’ grains and approximately 23 million pounds of non-food grade corn oil each year. The plant employs about 50 people.

Waivers

The Energy Security & Independence Act authorizes the EPA Administrator by his own motion, one or more States, or a refiner/blender to petition for a waiver of the renewable fuels mandate. States and parties subject to RFS requirements may also petition the Administrator to consider waiving the RFS, in whole or in part, based on these criteria. EPA is empowered by the statute to waive any part of the RFS if the
Administrator determines the program is causing “severe harm” to the economy or environment, or if there is “inadequate domestic supply.”

Accordingly, expect a broad waiver effort from a combination of obligated parties and possibly some states where they are concentrated. The rationale for the waiver will not be related to the supply of ethanol — but rather the problem of blending 14.4 billion gallons into something like a 120 billion gallon domestic gasoline market.

If E85 or E15 were widely available, it’s a no-brainer. But with ethanol blending primarily occurring via E10 ethanol blends, you have the problem of 12 percent in mandates vs 10 percent in available market.

Deficit Carry Forward Provision

This from the EISA Act, via RFA: “If an obligated party is unable to blend the necessary quantity of renewable fuel to comply with its annual requirement, and is also unable to obtain sufficient RINs from other parties to cover the obligation, it may carry a RIN deficit into the following compliance year. There is no limitation on the size of the deficit that may be carried forward; the only requirement is that both the deficit from the previous year and the obligation for the current year be fully reconciled.”

RINs

Obligated parties have the option to buy corn ethanol (D6) RINs in the RIN market — and submit those in lieu of buying and blending “wet gallons”.

Which would be great, except that virtually all available RINs for this year will have been used for 2013 obligations, and 2012 RINs will expire (to the extent there are any left). One of the reasons that D6 RIN prices have soared north of $1.00 per gallon.

E15 anti-trust action

All of the above — well, that’s one reason that some sharp eyes will be on the Department of Justice, which has been referred examples of alleged anti-trust activity — in the example of Norco 66, for one — where there were allegations that petroleum marketers used illegal pressures to prevent the distribution of E15 ethanol blends.

DOJ has given no public indication that it is pursuing such an action — nor if, in its view, there is any merit to such a case. But, given that violating anti-trust laws involve criminal investigation and prosecution — and can result in jail time for offending individuals — well, you can imagine how an investigation into E15 anti-competitive activity might influence outcomes.

As one ethanol producer put it in reviewing the evolution of E15, “You just need to build a case against one guy, one head of division looking at 20 years. And trust me, E15 will flood the market as they pull out those 89 octane [mid grade] pumps and put in E15.”

Well, we’ll see. You’d think that, if E15 was as lousy and unsaleable a fuel as some of its opponents claim, there wouldn’t be any need for anti-trust or anti-competitive action to prevent it reaching the market. That remains one of the perplexities of E15.

E85 ethanol blends

It really comes down to addressable markets, pumps and pricing.

Bruce Babcock and Sebastien Pouliot, of Iowa State’s Center for Agricultural and Rural Development, write:

“Our estimates indicate that it is feasible to meet 2014 and 2015 biofuel mandates with expanded E85 consumption given existing numbers of flex vehicles and stations that sell E85. Not surprisingly, the key variable in expanding E85 consumption is to lower its price.”

How might that work? Babcock and Pouliot add:

“Suppose that the ethanol mandate is 14 billion gallons and the incremental value of ethanol as a transportation fuel in an E10 blend wall is zero for any quantity above 13 billion gallons. Thus, the plant price of ethanol will equal the RIN price, which will equal the cost of producing the 14 billionth gallon of ethanol. Obligated parties would be paying ethanol plants their full cost of producing a product for which there is no value. Clearly, this situation creates a strong incentive for obligated parties to create value out of the extra billion gallons of ethanol because even 10 cents per gallon of value decreases their compliance costs by $100 million.

“One billion gallons of ethanol blended in an E85 blend of 75 percent ethanol and 25 percent gasoline creates 1.33 billion gallons of fuel. Suppose that obligated parties believe that this fuel could be sold to owners of flex vehicles but only if was heavily discounted relative to E10, which we assume is priced at $3.60 per gallon. For example, suppose the 1.33 billion gallons of E85 could be sold if its retail price were $2.16 per gallon. At this price, the cost per mile of fuel using E85 is about 20 percent lower than using E10. Subtracting an average wholesale to retail price markup of $0.75 per gallon implies a wholesale price of E85 of $1.41 per gallon. With wholesale gasoline at $2.85 per gallon, this implies that the wholesale value of ethanol as a transportation fuel is $0.93 per gallon…They are $930 million better off with 1.33 billion gallons of E85 than without.

The complete CARD report is here.

Biodiesel

Boy, is home-grown biodiesel going to be popular next year. In addition to qualifying for its own portion of the RFS — as Geoff Cooper points out at the Reneable Fuels Association, “If there is a shortage of grain-based ethanol, imported sugarcane ethanol or biodiesel (both of which are classified as advanced biofuels) can be used to meet conventional renewable fuel requirements.”

Not only can it be used, but a gallon of biodiesel counts for 1.5 gallons towards RFS requirements, because of biodiesel’s higher energy density.

To illustrate with an example

To illustrate, let’s say that there’s a 12 billion gallon “blend wall” for grain ethanol blended as E10, and a 14.4 billion gallon ethanol mandate. To fill the shortfall, sugarcane ethanol doesn’t really help because the issue is about market access, not a shortage of fuel.

There are five options on the table:

1. Blend 2.4 billion additional gallons in the form of E15 ethanol. Which would require roughly 60% of the market to use E10 and 40% to use E15. Lot of pumps.

2. Blend 2.4 billion additional gallons in the form of E85 ethanol (averaging 75% ethanol content). Would require roughly 97% of the market to use E10 and 3% to use E85.

3. Blend 2.4 billion gallons in the form of 1.6 billion gallons of biodiesel. Would require a 2.6 percent additional biodiesel blend, across the diesel market.

4. Blend no additional gallons, carry forward a deficit for one hyear, and kick the 2014 problem into 2015, when there would be hopes that more gallonage via advanced biofuels (e.g. biobutanol, renewable diesel, cellulosic biofuels).

4. Some combination of the above. Say, 1 billion gallons of E85, 600 million gallons of biodiesel and a 500 million gallons RIN deficit, for example. Argentine biodiesel producers having trouble accessing the EU market — not to mention US producers that had idled plants while awaiting higher prices — well, they’d be thrilled.

The Bottom Line

There are so many scenarios for compliance, we’re not convinced that the EPA will be much impressed by powerpoints from the oil industry predicting collapse of the national economy in the case of maintaining RFS, as is, no waivers.

But it all comes down to projected capacity, which everyone needs.