Federal Policy for Reducing Uncertainty for Advanced Biofuels Producers

September 6, 2011 |

by Brent Erickson, Executive VP, BIO

As any number of economic analysts have noted, continued policy uncertainty is holding businesses back from the hiring and investment needed to get the economy moving again. The advanced biofuel industry has been trying to deploy pioneering technology in the midst of the recent economic downturn.

Additional uncertainty over the political future of the Renewable Fuel Standard would predictably undermine companies trying to commercialize advanced biofuels.

The biofuels industry has always recognized the enormous challenge in raising capital to build new biorefineries and a value chain for feedstocks and new fuels. A 2009 study by Sandia National Laboratories estimated the need for $250 billion in capital expenditures to create 60 billion gallons of biofuel capacity.

Companies already have made significant investments to commercialize advanced biofuel technology and there have been several recent federal grants and loan guarantees awarded to producers. Unfortunately, this progress may be threatened by some groups calling for radical modifications or even an end to the RFS.

When Congress established the cellulosic biofuel portion of the Renewable Fuel Standard, it recognized that it was trying to hurry the commercialization of a new technology. It also realized that cellulosic biofuel production would begin with small volumes in geographically distinct locations – meaning that blenders and refiners would not have an equal chance to purchase and sell them.

The Energy Independence and Security Act of 2007 directed the EPA to annually evaluate the industry’s capacity and intentions to produce cellulosic biofuels, adjust the standard accordingly and provide blenders and refiners a low-cost alternative way to comply with the law.

The Cellulosic Waiver Credit is not well understood, even though this mechanism is set through a transparent calculation each November, well ahead of the compliance year. The Cellulosic Waiver Credit is set at the difference between $3.00 and the average wholesale gas price for the preceding year, with a minimum of $0.25. As the price of oil climbs toward $100 per barrel, the price of the credit moves in the direction of that minimum price.

The credit provides an option that protects obligated parties from paying too high a price for cellulosic biofuels or RINs. It forces cellulosic biofuels to be cost competitive around $3.00 per gallon. Under the rules established by EPA, obligated parties can forego selling a cellulosic biofuel gallon and instead sell an advanced biofuel gallons and purchase the credit.

So, cellulosic biofuel must offer a better price than the lowest cost advanced biofuel plus the waiver credit cost. Because the credit price is set ahead of the compliance year, everyone can calculate the costs and plan ahead for compliance with the RFS. The EPA’s administration of the RFS rules has been consistent, predictable and transparent, giving assurance to advanced biofuel producers, obligated parties and potential investors.

The RFS is a critically important tool for ensuring that fuel markets will be open to new advanced technology as it becomes commercially available and cost competitive. Any drastic legislative changes to the RFS, followed by additional years of new rulemaking, can only create fresh uncertainty for advanced biofuel producers and their investors, which will serve to hinder a new clean tech industry that is just getting its sea legs.

Refiners, farmers and environmental groups should be promoting additional ways to accelerate the production of advanced biofuels during this time of economic and international instability, instead of seeking to undermine the current RFS.

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