RFS Roundup: Deal or No Deal on RFS Reform

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March 1, 2018

The past few weeks have been a flurry of activity regarding the Renewable Fuel Standard (RFS) with now-bankrupt Philadelphia Energy Solutions (PES), the East Coast's largest refiner, claiming that compliance costs associated with the RFS are to blame for their financial woes. The President’s campaign trail promises, to both the oil and biofuels industries, have put him in an awkward spot on the RFS since taking office and have led to a number of high-level meetings on the subject.

In short, refiners must either blend biofuels or purchase Renewable Identification Numbers (RINs) a tradable compliance mechanism of the RFS.  As RIN prices have increased, a growing number of smaller refineries, which had not invested in biofuels infrastructure, have been crying poor, despite little evidence that they are harmed by the RFS.

Today, we look at the timeline of activities and meetings at the White House over the past several months, and compare the various reform proposals from both Congress and the White House that are still largely rumors.  While there is no ‘deal’ at this time, action from both the administration and Congress is still in the mix. Whether or not all the talk results in any kind of action remains to be seen.

 

Timeline:

Oct 26: Senator Cruz (R-TX) announced he would put a hold on the confirmation of Bill Northey, the Iowa Secretary of Agriculture, for a position as Undersecretary at the U.S. Department of Agriculture.  Cruz’s actions sets of a series of meetings between lawmakers and the President on the RFS throughout the fall but resulted in no action on either side.

Jan 22: PES, the East Coast’s largest refinery, files for bankruptcy and blames the RFS for its financial woes, despite evidence to the contrary.

Feb 1: During an interview, EPA administrator Pruitt points to PES’s bankruptcy as evidence for a need to reform the RFS, setting off a maelstrom of lobbying from the biofuels and oil industry to Congress and the White House.  Trump vows to meet with both sides of the issue to find a workable solution.

Feb 27: A meeting at the White House between President Trump, Senators Grassley (R-IA), Ernst (R-IA), Cruz (R-TX), and Toomey (R-PA), Secretary of Agriculture Perdue and EPA Administrator Pruitt results in no action, but several proposals are on the table.  According to Reuters, the proposal put forward by the administration included a cap on RIN prices, as well as allowing RINs to be assigned to gallons of exported biofuels. After the meeting, Senator Ernst commented they must weigh the economics of any proposal, “to randomly agree on anything at this point is premature because we don’t know what would be helpful for the industry, what would be harmful to the industry.”  Additionally, the meeting also resulted in Senator Cruz lifting the hold on the Northey nomination, who was promptly confirmed by an overwhelming vote.

Mar 1: The President met with representatives from oil refineries and biofuels interests Thursday. According to Politico, Valero Energy Corp., Delta Air Lines’ Monroe Energy and PBF Energy Inc, as well as a PES Union representative were present. Biofuels companies in attendance were POET (SD), Green Plains Renewable Energy (NE), Renewable Energy Group (IA), The Andersons Inc. (OH), Absolute Energy (IA and MN) and Western Iowa Energy (IA), as well as an Iowa-based filling station chain that sells higher ethanol blends. Senators Grassley, Ernst, Cruz, and Toomey were also in attendance. 

  • At the meeting, biofuels interests continued to push the year-round sale of E15 as a potential solution, which would help reduce RIN prices in the long-term.
  • Oil refiners again raised the question of a RIN price cap, but there is still wariness around the effect of capping RIN prices from the biofuels industry.  No deal was struck, except to provide more data on the issue from both sides.

 

Proposals:

The Cruz Cap: Senator Cruz (R-TX) has long suggested a 10-cent cap on the price of RINs. According to the Senator, a cap would control compliance costs with the biofuels program.  In reviewing the proposed cap, agricultural economist Scott Irwin of the University of Illinois stated that the impact of such a cap would “shut down the entire U.S. biodiesel industry,” as well as putting downward pressure on the blending of ethanol.  The 10-cent cap is largely a non-starter with the biofuels industry and its supporters in Congress.

The Cornyn and Udall bill: Rumors have been swirling for a few weeks that Senators Cornyn (R-TX) and Udall (D-NM) are working on a bipartisan RFS reform bill.  Potential items for inclusion in the bill include:

  • A separate pool of RIN credits for blending over 10 percent ethanol (E10), which Senator Cornyn believes would help lower the cost of RINs, overall.  There is no consensus from the refining sector on this proposal.
  • Lifting the cap on year-round ethanol sales. This would allow for the year-round sale of E15, which for technical reasons, has not been sold in the summertime.  While biofuels interests have sought this change for years, they don’t necessarily want it to be part of a broader deal on the RFS.
  • Sunsetting the RFS post-2022, the date when EPA is set to take control of the program.      

The administrative fix: At Tuesday’s meeting, the administration signaled its interest in allowing EPA to issue RIN waivers to independent refiners, such as PES.  Doing so would allow a not-insignificant portion of refiners to comply with the RFS at a significantly lower cost. Additional rumored proposals include:

  • Allowing exported biofuels gallons to earn RINs. Since RIN prices would fall if more RINs are created, by allowing exported gallons to receive RINs, the RIN market will cool.  Valero Energy had pushed this proposal last fall.  However, it’s not likely that this could be done without Congressional intervention, as it would change the core intent of the RFS to increase the use of domestically produced biofuels.
  • Increase transparency in the RIN marketplace. There has long been speculation that the lack of transparency in the RIN marketplace invites speculators with no business interest in the industry to play. Both sides of the debate are warm to the idea of reforming the way RINs are bought and sold.
  • At Thursday's meeting, the President signaled support for both a price cap on RINs, and year round sales of E15. 

 

Reactions:

All the talk of reform has biofuels interests anxious.  Coming off of accusations of not being a strong enough champion of biofuels, Secretary Perdue commented to corn, soy, wheat and sorghum farmers at the annual Commodity Classic this week, that “I will not, I have not and will not support any policies in this country that diminish the demand, undermine the RFS and are harmful to our agricultural producers. I will not.” 

However, many are worried that he and many in the administration lack a fundamental understanding of how the program works, and the relationship between the RIN market and blending levels.  As one biofuels industry watcher put it – you cannot separate the RIN market and the RFS.

For now, it appears that Senators Grassley and Ernst are steadfast in the support of the RFS "as-is." After Tuesday’s meeting, Ernst commented to reporters, “There is no independent, respected study we have seen that indicates that RINs are the problem for these refineries.”  

Leaders of all the major farm and commodity groups, including Corn, Soybean, Wheat and Sorghum growers, as well as the Farm Bureau and the Farmers Union also wrote to the President this week, asking that he not entertain any proposals that will undercut the RFS, noting its importance to rural economies and farmers. 

It is expected that EPA will also weigh in on the issue relatively soon, but it is unclear what options they have available to them to significantly change the program. Previous EPA-led efforts to significantly change the RFS under the Trump administration have largely been thwarted by the White House after outcries from the biofuels industry. Additionally, any action that may favor one refiner over another would face harsh opposition from the oil industry as a whole.

 

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