The Advanced Biofuels Association’s RFS Gambit: The Complete Remarks

Advanced Biofuels Association president Michael McAdams in happier days, attending the 2012 RIMPAC Green Strike Group demonstration aboard the USS Nimitz

Here are the complete remarks by Michael McAdams, president of the Advanced Biofuels Association at ABLC 2015, as prepared.

It is always good to be back with you at the ABLC.

I could have never imagined when I first spoke at this conference seven years ago that I would be here today forced to say that 2008 was a better year. Sadly, it’s true.

Today, members of the Advanced Biofuels Association are facing incredible challenges, including diminishing capital markets, an uncertain tax code, and a patch-quilt of state laws and federal regulations. Unfortunately, the Renewable Fuels Standard (RFS) – the very tool that was created to foster our industry – has become one of the greatest obstacles to continued development of the advanced and cellulosic biofuel industry due to inconsistent and poor implementation.

Remember back to 2007 when the RFS amendments were debated and signed into law by an overwhelming bipartisan majority. Some members of Congress wanted to expand energy options to enhance our national security. Others were motivated by the promise of lower carbon fuels, while still other lawmakers were focused on economic opportunity for new jobs in rural America. But, there was near unanimous agreement that the ultimate prize of the RFS was to foster the development of the advanced and cellulosic biofuel manufacturers who would use non-food feedstocks to produce next-generation fuels. In fact, the authors optimistically called for an additional 21 billion gallons by 2022, well beyond 15 billion gallons of corn ethanol.

Eight years after its passage, it is easy to see that the RFS may be working for some, but it is only minimally helpful to advance the promise and potential of next-generation renewable fuels. We need to acknowledge the simple fact: that the RFS is not equally helpful to all sectors of the biofuels industry.

Let’s look at last year’s performance to demonstrate this point, that one size does not fit all. According to the EPA EMTS system, the corn ethanol industry produced 14.3 billion gallons in 2014, while the biomass-based diesel pool – made up primarily of biodiesel – produced around 1.7 billion gallons. Those are billions with a “B” and healthy numbers. What do corn ethanol and biodiesel have in common? They use established technology, process traditional food feedstocks and have already built more production capacity than called for under the statute.

As for the non-biodiesel advanced and cellulosic sectors, last year’s production was under 180 million gallons. That’s better than nothing, but not nearly enough. The current RFS simply doesn’t work as well for companies trying to move cutting-edge technology from a demonstration plant to commercial scale – which necessarily involves raising capital to build new production facilities. It’s not working for three primary reasons.

First is the inverse relationship between policy uncertainty and my members’ ability to raise investment capital. Repeatedly missing deadlines to set annual RFS requirements and reducing those requirements below statutory levels has created significant uncertainty, and that ambiguity causes financing for advanced and cellulosic companies to evaporate.

Second, the calendar is now also working against us. Even if your company has a business plan that works when a barrel of oil costs $50 and at today’s RIN prices, capital markets now question whether the support provided by the RFS will exist after 2022. There’s a reason most of us take out 30-year mortgages, but today’s RFS uncertainty would have lenders requiring advanced and cellulosic companies to look at paying it off in seven years.

Another concern is the lack of a market for companies actually making cellulosic fuel. Let’s say your company somehow manages to overcome the obstacles I’ve highlighted and produces cellulosic biofuel. Perversely, with EPA’s current implementation, it is usually a much better deal for obligated parties to purchase a refundable waiver credit from the EPA than it is to buy your actual gallons with the cellulosic credit. That’s why 33 million gallons of cellulosic biofuel RINs were left sitting on the sidelines in 2014, because it was cheaper for oil companies to buy EPA cellulosic waiver credits.

After working with EPA since 2009 to attempt to get pathways approved, feedstocks approved, annual volume requirements released on time, only to frequently be told from the agency that they do not have sufficient legal authority to get the job done, it has become clear that statutory changes need to be made to the RFS. And that is why the members of ABFA are now calling on Congress to pass legislative fixes that will solve these problems.

• First, we need a minimum RIN value for cellulosic fuels that will provide enough certainty and stability for our members to build facilities and commercialize their innovative products. And because we are competing against fossil fuels produced at cash cost, using already built and fully depreciated facilities, cellulosic RIN values should also be indexed to the price of oil, providing more support when petroleum costs $50 per barrel and less at $100 per barrel.

• Second, Congress should show their support for advanced and cellulosic fuels by making it clear the program extends beyond 2022 to provide sufficient time to develop this industry. Again, we can’t pay off the new plant in seven years.

• And lastly, we need to remove the loop hole that allows the oil industry to opt out from buying a cellulosic gallon with its credit and in lieu buying a waiver credit. The RFS should encourage production of all available advanced and cellulosic biofuels. But just as important, oil companies must be required to purchase what is produced so Americans can benefit from consuming these cleaner fuels.

In order to achieve such changes, the RFS needs to be amended legislatively. So I am announcing today that ABFA, at the instruction of our members, will actively seek to reform the program. We call on Congress, which has studied these issues for two years and held numerous hearings, to step up and pass the fixes I have outlined. We believe that if Congress enacts these changes, then the investment community will have the certainty necessary to finance continued development of the advanced and cellulosic industry.

As for the current mess setting annual volume requirements, we have advocated for over a year now to simply utilize the actual production numbers off the EMTS system. Reset the start times from November 30^th to mid-February when the final numbers are available. Doing so will eliminate the difficulty in setting the RVO numbers each year and turns the function into a simple administrative function rather than a long, drawn-out debate which would require a long rule making process.

Most of you got into this business because we want to leave the world in better shape for the next generation – a mission that is as critical as ever.

By 2050, global population is expected to grow to 9 billion. The demand for liquid transportation fuels will increase because there’s no other good option for powering the airplanes, heavy-duty trucks, diesel equipment and ocean-going vessels that will be necessary to move people and deliver freight. Next-generation biofuels are still a critical part of the solution to finding more sustainable, lower carbon alternatives to provide the energy our world needs. At a minimum, they are a smart insurance policy.

If you are committed to fulfilling this mission, and if you believe like I do that advanced and cellulosic biofuels are still poised to flourish in the right environment, then I ask you to join us and work with the Advanced Biofuels Association to reform and strengthen the RFS so it can deliver the promise of next-generation renewable fuels.

Again, it is a pleasure to be with you today, and I look forward to your questions.