Nightmare Scenario: renewable fuels’ defenders pull out the stops to persuade EPA to continue the war on imported oil

“It’s the industry’s worst nightmare,” says Advanced Biofuels Association president Mike McAdams.

“Dozen and dozens of companies will face bankruptcy,” says Viesel CEO Stu Lamb.

On the chopping block? Non-food, drop-in, affordable, available, sustainable advanced biofuels in the US.

Today, the EPA has scheduled a day of testimony on its proposed 2014 Renewable Fuel volume targets — and a proposed 40 percent slash in the advanced biofuels category to 2.2 billion (ethanol equivalent) gallons, from the original Congress-set target of 3.75 billion gallons.

Yep, those affordable, available, non-food, and usually drop-in fuels that evenryone has been hoping for, and which have arrived these past few years in large volumes.

Roughly 120 individuals are expected today to have 4 minutes each for testimony.

As a result, pro- and anti-RFS forces have arranged a barrage of conference calls this week in advance of their appearances on Capitol Hill.

And there’s just a huge amount of irony that this morning, in Washington, a deep fog has settled over the capital.

The industry message?

Mike McAdams, Advanced Biofuels Association

“The EPA is considering a range of 2 to 2.5 billion gallons. They are recommending 2.2 billion, which is a 40% cut from the RFS2 statute and a 20% cut from the 2013 requirement,

“This is a woefully inadequate target and would represent devastating blow to advanced biofuels producers. It’s the industry’s worst nightmare. The Agency will have pulled the rug from underneath from the advanced biofuels sector and destroyed a sector, that spent $14B in the US on the development of the advanced biofuels.

“It’s a voluminous proposal and we are still studying it. But there are 3 quick points to make.

1. “EPA’s proposed reductions fall disproportionately on advanced biofuels. It’s a 40 percent cut on advanced, yet the proposal is for only a 10 percent cut in conventional fuels. We are scratching our heads at this unfair and counterproductive cut.

2. “The Monte Carlo model will always roll snake-eyes. The model looks backwards at historical data rather than forward at growing capacity. The method will ensure, in a growing market, a continuous oversupply compared to the EPA forecast. This will crater the value of the RIN. RIN prices are instrumental in financing. You cannot support the industry by looking in the rear view mirror.

3. “EPA should set standards based on all available fuels. This proposal leaves low hanging fruit on the tree. Even with low-ball method that EPA uses forecasts 3.2 billion advanced biofuels RINs can be produced.”

“This Administration has spent over $500 million to help build the advanced biofuels. This proposal is a significant departure from previous years and from congressional intent.

Wayne Simmons, CEO, Sundrop Fuels

“We have nearly 50 companies financing new plants in the Advanced Biofuels Association. This is a capital intensive industry and lenders are risk-adverse. Congress created RFS to create economic incentive for equity and reduce risk for debt. The primary vehicle is the RIN, attached to each gallon. The value of the RIN is set by the market based on supply and demand. When EPA sets the demand or the RVO lower than supply, the RIN value collapses.

“By removing the RIN value you remove the incentive for bankers to lend. Congress established increasing values in order to incentivize capital to come in. When the EPA can come in and set demand lower than supply, this stable is this economic incentive going to be over time?”

Leticia Philipps, UNICA (Brazilian Sugarcane Industry Association)

“It came as an extraordinary shock and is deeply concerning that EPA has proposed to drastically reduce the volumes of advanced fuels for the 2014 RFS.

“EPA’s proposal pulls the rug from under the advanced biofuels industry, not just Brazilian sugarcane producers. EPA is proposing to cut advanced biofuel volumes next year by more than 40 percent compared to the requirements written into the RFS statute.

“Ironically, EPA is proposing a less than 10 percent reduction to volume requirements for conventional biofuels, which include a number of grandfather facilities that may well not meet the minimum requirement of 20 percent reduction.”

Governor Terry Branstad of Iowa

“The 1990 Clean Air Act required oil companies to oxygenate their fuel to reduce emissions. The oil companies said “no, no” to ethanol, and were able to convince those on the West Coast and East Coast to use MTBE. Only it led to poisoning of the groundwater in the East and West, and was eventually banned.

“And here come the oil companies again. They were wrong when they promised MTBE could do the job, wrong when they said ethanol couldn’t fit the bill, and wrong again now. They just don;t want something they can’t control, can’t make a profit on. And it will be devastating to a robust economic recovery in the strongest region of the US. I urge the president and Administrator McCarthy to continue robust support of renewable fuels.

“This proposal will cause the price of corn to drop below the cost of production, and there’s just no reason to flinch under pressure from Big Oil.”

Matt Erickson, economist, American Farm Bureau Federation

“The agricultural economy since 2007 has seen tremendous growth with exports up 57%, total livestock up, crop production up. It’s a yield story. This year, farmers will produce 14 billion bushels, up 30% from last year’s drought, with yields expected to be 160.4 bushels per acre. This amount of planting and harvesting is nothing new. In 1933, farmers planted 109.8 million acres of corn, but realized 22.8 bushels per acre.

“With this proposal, domestic corn demand would drop by 500 million bushels. Last year with the worst drought since the 1930s we saw $8 corn, but now with 14 billion bushels, corn prices are at $4.32, and the cost of production ranges from $3.95 – $4.15 per bushel barring unexpected events like drought or flood. Now, that’s a USDA average and costs will vary farm to farm, but a 25 cent reduction could result in prices falling below the cost of production.

“At the same time, despite the fact that crude oil imports have dropped from 60% to 40% since 2007, there is a long way to go, and the US economy is still affected by swings in oil prices, prices set by world markets. Every time the cost of energy rose to over 4 percent of GDP, we have fallen into recession. We saw this in 1973-74, in 1979-80 and with the 34% run-up in crude oil prices in 2007-08. Here in this sector we have an opportunity to move away from an economy reliant on crude oil prices.”

Looking at the US market and renewable ethanol

There is no shortage of renewable fuel production capacity — and no shortage of distribution capacity in the form of E10 and E85 outlets — to meet the original Congressional target for 2014.

What is lacking is a willingness to market E85 at reasonable prices.

Today, there’s a 40% spread between wholesale ethanol and wholesale gasoline prices. Yet, at the pump, consumers are being offered an average savings of only 20% on E85 vs gasoline, making E85 an unattractive “deal” in economic returns because of ethanol’s lower energy density. The fuel is being unfairly marked up to create the impression of a “blend wall”.

Case in point: E85prices.com reports an average price for E85 of $2.68, yet the price of wholesale E85 is as low as $1.69 from The Andersons in Iowa. That’s a 59% mark up.  The corresponding mark-up on wholesale gasoline is just 67 cents, or 25%.

Where markups have been fair, E85 sales are soaring. In fact, the Iowa Renewable Fuels Association reports that Q3 sales of E85 in Iowa have doubled from Q1 totals.

“During the third quarter, Iowa motorists using E85 routinely saved $1.00 per gallon compared to regular gasoline.” stated IRFA Executive Director Monte Shaw. “But when the EPA announced their proposal to gut the 2014 RFS numbers, they gutted the incentive for retailers to promote low-cost E85.  We saw the E85 price savings pull back, and it won’t be surprising if fourth quarter E85 sales taper off as well.”

If the EPA holds firm on the target, the additional ethanol fuel can find a market via E85 distribution — via 2,300 outlets and 15 million flex-fuel cars . If the EPA wavers, the obligated parties will have learned a successful strategy designed to circumvent Congressional intent.

Congress was fully informed on the blend wall issue when RFS2 was established, and the expectation was that higher blends would find a market, and that rising RIN values would be “the stick” that would ensure that it was economically the right choice to distribute E85 at fair prices.

(Note: we used NYMEX and CBOT wholesale prices (Feb 2014 contracts); the retail gasoline prices from EIA (latest available), and E85 prices from E85prices.com).

Looking at the US market and biomass-based diesel

There is no shortage of biomass-based production capacity — no blend wall in sight, and no shortage of distribution capacity.

In fact, the US biodiesel industry alone is on track to produce 1.7 billion gallons in 2013, as well.

What is lacking is a recognition that consumers are motivated to cover the cost of renewable fuels, should it result in a premium at the pump.

Consumers tell the Digest – in a survey conducted this week — that they are willing to pay 3 cents per gallon more for B2 biodiesel blends, compared to fossil diesel. That’s more than the incremental cost of the fuel.

Thereby, replacing the lubricity that was lost when the US moved to ultra low-sulphur diesel. Providing cleaner air for kids in school buses. Reducing particulate emissions and CO2 emissions. Creating domestic energy jobs, keeping dollars for investment at home instead of exporting abroad, and increasing US energy security by reducing dependence on foreign oil.

Motivated customers know that these benefits comes with costs, but they are willing to pay for the benefits of renewable fuels.