Congressional hearings this week focusing on the EPA Renewable Fuel Standard brought together impassioned speakers representing the U.S. biofuel constituency, traditional fossil fuel interests, major food companies and other stakeholders. With so many business interests involved, there is clearly a lot at stake -- thousands of jobs and billions of dollars, for starters -- but what lies beneath the spin, backroom politics and exaggeration?
The Environmental Protection Agency created the RFS program under the Energy Policy Act (EPAct) of 2005, and established the country’s first renewable fuel volume mandate. A major RFS component -- perhaps the most controversial -- seeks to ensure 10 percent of the U.S. fuel supply consists of ethanol, and there is talk of expanding this to 15 percent.
The Renewable Fuels Association and other groups represent biofuel manufacturers’ interests, while the American Petroleum Institute and American Fuel & Petrochemical Manufacturers are going to bat for the oil companies and refiners. Check out these two videos running in Washington, D.C. this week, as they set the stage, even if they do raise more questions than they answer.
Renewable fuels argument:
Traditional fuels argument:
The U.S. refining industry will tell you the only solution is repealing the RFS.
American Fuel & Petrochemical Manufacturers President Charles T. Drevna has this to say:
The flawed and irrational implementation of the Renewable Fuel Standard (RFS) is the most glaring example of shortsightedness of the [Obama] administration’s energy and climate agenda. As a proselytizer for the biofuel industry, the administration is turning a blind eye on eight years of demonstrated failures in implementing an unworkable RFS. The administration also turns a deaf ear to the growing chorus of warnings from environmentalists, poultry and meat producers, the boating industry, automakers, outdoor power equipment manufacturers, motorcyclists, snowmobilers, fuel manufacturers and others about fuel that is either unsafe in the amounts mandated, nonexistent, or has damaging environmental consequences. It’s been said that there are two ways to be fooled: one is to believe what isn’t true; the other is to refuse to believe what is true. Consumers will be left to pay the price of the administration’s unwillingness to accept the truth through higher fuel and food costs and potential engine damage.
On the other hand, renewable fuel boosters admit the RFS is not perfect, but claim their opponents are just looking to protect their U.S. fuel market monopoly. “You have two strong coalitions going after one another -- Big Food aligned with Big Oil -- and they have always been against this; they want to keep their feedstock prices low,” said Bob Dinneen, President and CEO of the Renewable Fuels Association (RFA) on a recent media call with journalists.
Also representing the biofuels voice on the same briefing call, Adam Monroe, President of Novozymes North America, said, “Brazilians drive cars on 18 percent to 25 percent ethanol made by Ford & GM; why can’t we? We can! We’ve developed the technology and are building the plants, so why are critics attacking us? They are protecting their monopoly. Don’t be distracted by the incumbents’ actions.”
“EPA rulemaking [for RFS] was completed three years ago, so we are in the first three years of a fifteen-year plan -- it needs time to work,” said Monroe. “I’m more a proponent of pursuing the good rather than the perfect. Investors kept on the sidelines [due to regulatory uncertainty] will go home and put their money elsewhere in the world. I need stability, not perfection,” he said.
So what is the current status of the EPA’s RFS? The industry is waiting for EPA to finalize the 2013 Renewable Volume Obligations (RVOs), which set out the total amount of each category of biofuel on a percentage basis that is required to be blended into the U.S. fuel supply. The four biofuel categories are ethanol, biodiesel, advanced biodiesel and cellulosic.
Renewable Identification Numbers (RINS) are 38 digit codes assigned to every gallon of ethanol refined. A RIN is assigned by the EPA as part of administering the RFS. A recent post on farmgateblog.com sums up the current situation:
RINS have a value and they have been worth 1¢ to 4¢ per gallon since the inception of the RFS, since sometimes they are bought and sold by fuel blenders, ethanol refiners, and lately by speculators since they have recently become a traded commodity on the New York Mercantile Exchange (NYMEX). That trading process since May has pushed RIN values to nearly $1.50 per gallon of ethanol.
“2013 RINs are currently trading at $1.37, up a staggering 240 percent from the 1Q average,” investment bank Simmons & Co. wrote in a research note. Refiners claim the situation puts them at a competitive disadvantage because those without RIN stockpiles could be forced to purchase them on the open market -- at comparatively high prices -- or pay RFS non-compliance penalties.
The crux of the problem with RFS, particularly with regard to ethanol, is that the program was originally designed around inaccurate U.S. gasoline consumption forecasts. “By 2015, U.S. gasoline consumption was expected to be 150 billion gallons and 10 percent gets you to 150 million gallons, so no problem. But the baseline was badly off and legislation was not written as a percentage, but a hard number. Without that level of consumption, we are in a bind,” according to Scott Irwin, Professor of Agricultural Economics at the University of Illinois.
“You can’t stuff any more into the domestic fuel supply.” This is known as the ethanol blend wall. “We believe we’ve been at blend wall for at least a year. U.S. ethanol consumption has been flat since 2012,” Irwin said. “The policy bind comes from a set of mandates written in 2006 and 2007 for a world of gasoline usage that didn’t pan out as expected. So what do you do?”
This is what they are fighting about on Capitol Hill today and why the oil industry says the program is broken.
Irwin thinks EPA will stick with the 2013 RVOs as they have been proposed, but the more pressing concern is what to do about 2014? He thinks the regulator will write down the total mandates to represent the industry’s inability to produce cellulosic ethanol in commercial volumes. However, the real question is whether they write down the mandates to be consistent with the current binding E10 ethanol blend wall.
The decision EPA takes on this controversial issue will severely impact the U.S. transportation fuel industry -- for both renewable and petroleum-based fuels -- as well as automakers, agricultural concerns, fuel-intensive industries and, ultimately, U.S. consumers.