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May 29, 2015
On May 29, the EPA released the 2014, 2015 and 2016 fuel volumes under the Renewable Fuel Standard (RFS). Certainly, you may have read the news that calls this a ‘corn ethanol’ victory, but for those who don’t closely follow the renewable fuels industry, what do these numbers mean for the future of the overall biofuels industry going forward? More generally, what, if any, is the point of continuing to invest in and produce renewable fuels in the face of low gasoline prices, increasing engine efficiency, surging domestic production of oil, and a growing electric vehicle market?
Historical Context: The Renewable Fuel Standard
While alcohol-based fuels have been around for over 100 years, serious discussion of their use didn’t pick up until the oil embargo of 1973. Fast forward to the mid-2000s, when President George Bush famously declared, “America has an addiction to oil.” Against this backdrop, the Renewable Fuel Standard (RFS) was established by Congress as a part of the Energy Policy Act of 2005 (EPAct, P.L. 109-58), and further expanded under the Energy Independence and Security Act (EISA) of 2007 (the expanded standard is commonly referred to as RFS2).
What Is the Renewable Fuels Standard, Anyway?
The RFS sets blending requirements of renewable fuels into the transportation fuel supply and, as such, is the primary driver of domestic biofuels production in the United States. There are two major biofuel categories: total renewable fuels (which includes corn-starch ethanol) and advanced biofuels, which include biomass-based biodiesel, cellulosic and agricultural waste-derived biofuels, and other advanced biofuels. Each fuel category has specific volume targets and greenhouse gas (GHG) emission reduction thresholds relative to conventional gasoline. The advanced biofuels category is ‘nested’ in that any fuel that meets a higher GHG reduction threshold may also qualify as an advanced biofuel.
RFS2 increased the mandatory minimum annual volumes of renewable fuels to be used in the national transportation fuel supply through 2022. Corn starch ethanol production is capped at 15 billion gallons, with cellulosic fuels expected to provide 16 of the 36 billion gallons of renewable fuel required by the RFS by 2022 (see Table 2). Under RFS2, the remainder of the 36 billion gallons (approximately 5 billion gallons) would be provided by biomass-based diesel and other advanced biofuels.
The “Perfect Storm” of Events that Led to EPA’s 2013 Proposal to Cut Renewable Fuel Volumes
Several things happened after the passage of the RFS2 that contributed to the ‘perfect storm’ to dramatically change the perception around renewable fuels. They include technological set-backs in creating fuel from cellulose -- the woody part of plants -- as well as falling gas prices, a devastating drought in 2012, the economic collapse, and a well-funded campaign against biofuels from the oil industry. None of these challenges should have distracted from the overall goal of low-cost, cleaner, domestically produced fuels going forward. However, the fear that rising prices for Renewable Identification Numbers (RINs), the tradable mechanism used for RFS compliance, would cause gasoline price spikes and hardship for oil refiners, may have been the straw that broke the camel’s back.
During the summer of 2013, RIN prices surged from 5 cents to over $1, due to refiner stockpiling, and refiners without adequate blending facilities saw compliance costs triple, according to industry disclosures. During this time, White House records show that a dozen representatives from refineries met with top White House economic adviser Gene Sperling, to discuss a 2012 study paid for by the oil industry warning that the U.S. economy would fall into a “death spiral” unless the biofuel mandates were cut. As RIN prices climbed to $1.45, records show that additional meetings were held with the White House. During the summer of 2013, representatives of 17 refineries visited the White House Office of Management and Budget, while only 6 biofuels companies visited.
The biofuels industry only stepped up lobbying efforts as word got out that EPA was planning to cut the ethanol mandate. In 2013, refineries spent more than $81 million on lobbying, approximately three times that of biofuel producers, according to the Center for Responsible Politics. That fall, for the first time since passage of the RFS, the EPA proposed lowering the volumes of all categories of renewable fuels – corn ethanol, biobased diesel, and cellulosic fuel. A final rule was expected by sometime in 2014, but that time never came. Shortly after the 2014 mid-term elections, EPA announced that they would not release the rules for 2104 that year, as promised. Instead, they would release 3-year volumes (2014 – 16), no later than June 1 of 2015.
What Are the 2016 Volumes, Where Does This Put the Industry Going Forward?
The volumes for 2014 and 2015 are essentially a wash, as 2014 is over, and 2015 is half over. These numbers are set at actual production levels. What does matter, in terms of setting policy going forward, is the volume that EPA calls for in 2016. And according to the ethanol industry, the final 2016 volumes themselves aren’t as important as the methodology the EPA used to reach these volumes.
While slightly higher than the volumes they proposed in 2013, the volumes are still much lower than those laid out by Congress – the statutory volumes. In their volume announcement, EPA claims that “the Clean Air Act provides EPA with the authority to reduce the volume requirements from their statutory requirements … EPA has evaluated the availability of qualifying renewable fuels and factors … that constrain the supply of those fuels to vehicles that can consume them.” This is a change in the interpretation of the statute, which seems to give credence to the idea of the E10 (10 percent ethanol 90 percent gasoline) “blend wall.” This is a major hindrance to greater use of renewable fuels, and the EPA sets 2016 volumes for total renewable fuels at 9.63 percent of the total transportation fuel supply.
The EPA has set production volumes for 2016 above current levels, mostly thanks to rising gasoline use expected through 2016. According to the agency the standards are “ambitious but within reach.” However, a target that hovers slightly above production provides no real confidence to investors that the United States is a growth market for renewable fuels. Indeed, when Congress signed the RFS into law, they did so with the intent of attracting significant investment into rural economies. So far, the RFS has done just that. But the chilling effect of delays has already caused the industry to lose $13.7 billion in investments, mostly for advanced biofuels, according to an industry report.
If Ethanol Is Capped at 10 Percent, What Happens?
While no one is happy about today’s announcement, the ultimate losers in all of this will be advanced fuels. Since advanced fuels are still a growth industry, compared to the more mature corn ethanol fuels, they will feel the cuts first and most deeply. Indeed, several analyses have confirmed that if the U.S. fuel supply is capped at 10 percent ethanol, corn ethanol will continue to be the dominant source of ethanol, due to its maturity in the market. If the RFS were completely abolished tomorrow, oil refiners would still continue to use ethanol as a cheap source of octane, and they would use corn ethanol.
Conversely, advanced fuels are at an inflection point. Two commercial scale plants are already open, one is slated to open by the end of 2015. If the EPA does not fix its methodology for 2016 volumes, big ethanol companies won’t build another cellulosic ethanol plant in the United States. Instead, they will look to China, South America, and other regions which have stable biofuels policies.
Taking the long view, there has been incredible progress in the advanced fuels sector in the ten years since the RFS was originally signed into law in 2005. Two commercial scale cellulosic ethanol refineries have opened in the past year (POET DSM Project Liberty in Nevada IA, and Abengoa Bioenergy Biomass Kansas plant in Hugoton KS), and another (DuPont) is expected to be operational by the end of 2015. Industry and proponents point out that the lead up to the commercialization of this technology has been incredibly fast, and short-term delays in commercialization of these technologies should not be reason to pump the brakes on federal support.
If one looks at the long term goals of the RFS, reduced petroleum use, consumer choice, diversified fuels (including biogas and electricity) reduced GHGs, invigorating the rural and farm economy, reduced economic vulnerability to global oil supply disruptions and lower fuel prices, it has been a successful policy driver. Certainly, infrastructure challenges are a bump in the road compared to the overall successes to be had in continuing to seek renewable fuels as well as chemicals and biobased products.
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