Industry’s Withering Critique of EPA’s Renewable Fuel Standard Proposals for 2014, 2015, 2016: The Digested Version

July 31, 2015

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by Jim Lane (Biofuels Digest) Heard dire comments like “POET expects to stop all future U.S. cellulosic investments if EPA’s proposed base renewable fuel requirements are not strengthened.” Want to understand the substantive concerns on the Renewable Fuel Standard, but lack the time to read the thousands of pages of commentary? Here’s our Digested version of the key comments.

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Mike McAdams, president, Advanced Biofuels Association

... As we have discussed in the past, we continue to believe that setting the yearly RVOs based on actual renewable fuel production is the best option moving forward. We strongly support your proposed RVOs for 2014 and 2015 as they either directly utilize the actual EMTS volumes or reflect the projected volumes for 2015. Since the final RVOs for 2015 will be published no later than November 30, 2015, EPA should be able to even more accurately predict the total cellulosic and advanced biofuels production volumes for 2015. This approach provides certainty of where the RVOs are coming from and all the stakeholders impacted by the program can follow the actual production numbers throughout the year in the EMTS.

We are completely supportive, as we suggested in our comments last year, with the move away from utilizing a Monte Carlo model as a means of setting future RVO obligations. In addition, we are strongly supportive of the manner that EPA has addressed the advanced and cellulosic pools separate and apart from the blend wall issues associated with the total renewable pool.

Nevertheless, our members continue to have concerns over a myriad of issues remaining unresolved in the regulatory framework for the RFS2 program. Particularly problematic is the intermediate feedstock/co-location issue and the continual delay in approval of pathways for new technologies and feedstocks. Many of these have become significant barriers to entry for individual companies or entire sectors of the advanced and cellulosic sectors.

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On several occasions, we have had existing members go out of business before they could receive their pathway approval, and most recently the ability to obtain a simple Part 80 facility registration has become a much longer and time consuming process. These represent major challenges for those companies seeking to raise capital to build their first plants. Definitions are being so parsed and tortured in some cases it is almost impossible to bring new feedstocks under the program. The definition of “waste oil” needs to be clearly defined in a manner that will allow some of the cheaper feedstocks to be utilized by the new industry. Particularly at a time when crude prices have been hovering around $50.00 a barrel, this industry needs thoughtful flexibility in order to be able to manufacture competitively priced fuels for the market.

In a similar regard, we were extremely disappointed that the proposal to grant isobutanol a one pound waiver when commingled, which was originally included in the Pathways 2 Rule, was then removed from the final rule and is still pending consideration. Blending E10 and gasoline blended with isobutanol does not cause the Reid Vapor Pressure of the resulting gasoline blend to increase, meaning that such comingling has no negative impact on VOC emissions and thus no negative environmental impact. Broadening market access for advanced biofuels such as isobutanol will have important environmental benefits. By definition, a fuel with lower RVP is less volatile. The use of lower RVP fuel blends containing isobutanol will therefore result in lower evaporative emissions at all stages of fuel use, from service station tank loading and vehicle refueling to vehicle in-use evaporative emissions.

Application of the cellulosic waiver credit:

We still have a situation in the market in which the obligated parties overwhelmingly seek to purchase a waiver credit rather than the cellulosic fuel produced with a RIN attached, or just the cellulosic RIN itself (as in the case of biogas to CNG/LNG). The ability of the obligated parties not to have an explicit requirement to buy those gallons produced in the cellulosic pool or their associated RINs is a major handicap for those seeking to sell and capture value of their cellulosic fuels.

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Statutory Reset Post-2016

Uncertainty in the targets for cellulosic biofuels after 2022 will have an adverse impact on the ability of project sponsors to raise funding. The upcoming reset of the RFS mandates provides an opportunity to increase certainty to 2022 and beyond. Upon waiving any particular RFS mandate category by 50 percent in any single year or 20 percent in any two consecutive years, EPA is required to conduct a rulemaking to adjust the overall schedule of the RFS mandates through 2022. EPA tripped the 50% trigger for the cellulosic category in 2010. Now, if EPA finalizes the volumes as proposed, the 20% trigger will be tripped for both the advanced and general renewable fuel categories.

This opens the door to reset all of the mandated volumes. EPA should move forward with this rulemaking expeditiously to provide certainty for investors in cellulosic biofuels by setting the cellulosic volumes through 2022 and beyond at realistically achievable levels. At the same time, EPA should adjust the advanced and general renewable categories in such a way that the greenhouse gas emission benefits of the program are maximized while at the same time ensuring that the overall mandates are consistent with the capabilities of infrastructure and vehicles.

ABFA’s comments in full are here.

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Advanced Biofuels Business Council

A regulation is only as effective as its waiver provisions – because these provisions establish under what conditions obligated parties can escape their obligations under the law. If waivers are too lenient – or worse, are based on market dynamics that obligated parties control – then the regulation will not drive investment because the risk of stranded investment will be too high. Motor fuel markets are particularly vulnerable to policy-driven investment risk because energy markets are not free markets and therefore rely on policy to drive innovation and change.

We are deeply concerned that the 2015 proposal will undercut investment in advanced, low carbon biofuels by virtue of EPA’s treatment of waivers in primarily two areas: (1) its proposed interpretation of its “general waiver authority” to reduce the total renewable fuel volumes via “distribution waivers;” and, (2) the methodologies used to administer the D3 cellulosic biofuel pool with specific regard to both how it sets the annual volumes and the issuance of cellulosic waiver credits (CWC).

EPA continues to overstate the arrival of the so-called “blend wall” as a hand-forcing market reality that requires a changed approach.

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In essence, EPA is proposing to change its approach in two key areas: (1) the agency is proposing to reinterpret the word “supply” in the waiver provision “inadequate domestic supply” to mean supply-to-consumer, which is a reversal of EPA’s prior interpretation of the word “supply” to mean supply of renewable fuel to obligated party; and, (2) the agency is proposing to not count “carryover RINs” toward compliance when it comes to maintaining the statute.

The current E10 ethanol volume is 13.9 billion gallons, based on July 2015 EIA gasoline consumption data. According to EPA, there are currently approximately 1.8 billion available carryover RINs.13 Because retiring a RIN from carryover RIN stocks does not require additional ethanol blending (or investment to do so), EPA could enforce the 15 bg/2015 statute via E10 (already achieved) and the use of 1.1 of 1.8 billion RINs (i.e. while maintaining ~700 million RINs as a “program buffer”).

This scenario is certainly over-simplified, but it is important to emphasize that: (1) this methodology is the very methodology used by EPA in 2013; (2) this methodology has already been upheld in court; (3) using RIN carryover to demonstrate compliance does not require investment in infrastructure; (4) there remains substantial carryover RIN stock for those concerned about RIN prices,

The motor fuel market problem the RFS is designed to address

Global oil markets are collusively price-controlled by OPEC at the global level, and are extremely consolidated and vertically integrated domestically. The absence of free market forces in the liquid fuel marketplace are a problem for the advanced biofuels industry (and other innovators) because a noncompetitive marketplace does not properly facilitate and reward innovation. Non-competitive and nonprice driven markets are almost impossible to predict with regard to future demand opportunity, because the market does not behave based on free market fundamentals and the creation of a better product does not necessarily translate into market demand.

The RFS is an aggressive but flexible program that requires obligated parties to blend increasing volumes of various types of renewable fuel over time. It is necessary to, in essence, do what a free market would do on its own: promote and reward innovation.

How EPA’s proposed new interpretation and application of its waiver authority undercuts the commercial deployment of advanced biofuels

The introduction of “distribution waivers” – applied by redefining the word “supply” in the waiver provision “inadequate domestic supply” to mean supply-to-consumer (instead of supply-to-obligated party) – is a “deal killer” for advanced biofuels for a number of reasons:

1. The oil industry controls the distribution of motor fuel to the consumer. Off-take agreements are the linchpin to project finance in the advanced biofuels industry. If EPA provides an incentive for the oil industry to avoid them, they will be avoided and advanced biofuel projects will not get built in this country.

2. The practical effect of EPA’s decision to allow for “distribution waivers” would be to embed the so-called “blend wall” (which would be more accurately described as a “blend step”) and convert the RFS from an additive standard to a cannibalistic one. On its face, the RFS sets forth a marketplace in which cellulosic biofuel grows on top of a growing (then fixed) corn ethanol marketplace. The proposed rule reverses course, and has the cellulosic ethanol industry competing with corn ethanol in a constrained (i.e. capped) ethanol marketplace. This fundamental shift in policy violates Congressional intent in any number of ways. First, and as discussed, it pits different sectors in the renewable fuels industry against each other. Second, it protects the oil industry’s control of 90 percent of the gasoline marketplace in direct conflict with the goals of EISA to reduce petroleum dependence. Third, it puts the cellulosic ethanol industry in the very difficult position of having to compete with a fully mature corn ethanol industry in a constrained, over supplied marketplace that will dilute the market price of first generation ethanol to well below its market value. In essence, the cellulosic ethanol industry will have to produce ethanol at well below market value to compete, which will stall investment in rather than facilitate the commercialization of cellulosic ethanol.

Almost all of the first movers in cellulosic ethanol – Quad County, Abengoa, POET-DSM to name a few – are also first generation ethanol producers (often at the same site). EPA is literally asking these companies to cannibalize their revenue stream with their innovation model. Innovators in cellulosic ethanol cannot and will not do that, any more than second generation solar or wind companies would destroy their first generation revenue streams to make better solar panels and wind turbines.

How EPA’s use of “distribution waivers” violates CAA section 211(o)(7)(A)

When Congress means “capacity to supply” as opposed to just “supply,” it will say so. If Congress had intended EPA to have the discretion to waive the total renewable fuel requirement based on market circumstances other than the supply of qualified renewable fuel, it would have provided the same broader authority in CAA section 211(o)(7)(A) as it did in CAA sections 211(o)(7)(E) and 211(o)(2)(B)(ii). The U.S. Supreme Court has confirmed the presumption that “where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentional and purposely in the disparate inclusion or exclusion.” Sebelius v. Cloer, 133 S. Ct. 1886, 1894 (2013).

Third, and very related, EPA acknowledges in the proposed rule that Congress had before it language that would have provided EPA with the authority to waive the RFS in situations where there was “inadequate domestic supply or distribution capacity to meet the requirement.” The final House version of the RFS included the “distribution capacity” language while the Senate version did not. As such, the conference committee tasked with reconciling the two pieces of legislation had to address this incongruence to forge a final bill. As such, a basic understanding of the legislative process makes clear that Congress made an affirmative decision not to include this phrase in the final provision governing RFS waivers. In other words, Congress decided not to include “distribution,” “capacity” or any combination thereof in the statute governing the RFS – even though these terms were included in prior drafts of the legislation and are used commonly throughout other parts of the CAA. We strongly disagree with EPA that the affirmative decision by Congress to leave out the very language that the agency wants to read into the statute is “uninformative with regard to Congressional intent on the issue.”

EPA acknowledges in the proposed rule that the physical capacity for ethanol use in the marketplace is 26 billion gallons; rather, the issue is willingness among incumbents to deliver the product to the consumers and vehicles capable of using it. And, EIA data shows that 22 states used more than 10 percent ethanol blends in 2013.

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American Coalition for Ethanol

Collapse in RIN prices after EPA proposal

Several market watchers reported the collapse in D6 RIN prices shortly after EPA’s NPRM was released on May 29, 2015. “Spot D6 RIN prices, as tracked daily by OPIS, fell to 37.75 cents on Friday, June 5, from 73.25 cents on Friday, May 1.”[9] The same OPIS report quoted Tristan R. Brown, assistant professor of Energy Resource Economics at The State University of New York’s College of Environmental Science and Forestry. “There were early signs in the industry that convenience store operators, particularly large chains, were responding to the higher profits they were earning from their ethanol blending operations by increasing their output of E15 and E85. I don’t believe that the blend wall will be overcome in the presence of low D6 RIN prices, since convenience store operators will no longer have a financial incentive to make it available to drivers.”

Impact of RINs on gasoline prices negligible

In previous comments, ACE cited studies by Informa (Analysis of whether higher prices of RFS RINs affected gasoline prices in 2013. Informa Economics. January 2014) and Iowa State University (Impact of increased ethanol mandates on prices at the pump. CARD Policy Brief 14-PB18. January 2014. http://www.card.iastate.edu/publications/synopsis.aspx?id=1218), which concluded RIN prices not only did not increase retail gasoline prices, they led to greater ethanol use due to lower pump prices for flex fuels like E85. That data continues to be relevant to the RVO discussion for 2015 and 2016.

The impact of RINS on E85 prices

RINs, however, are being recognized more frequently by retailers as a potential solution for adding volume and income; income that will help pay for equipment needed for a station that wants to sell flex fuels. While E15 can be added to a station at very little additional cost, E85 can increase equipment prices significantly – nowhere near the hundreds of thousands often quoted by ethanol opponents, but for a station with four dispensers (national average is 4.5 dispensers) E85 can cost $50,000 more than E10 or E25 compatible equipment.

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Cars warranted for E15 vs diesel or “premium-only” fuel

Auto manufacturers have produced vehicles capable of using up to E85 for almost 20 years, and are going on year four of cars and light trucks that specifically approve E15 as a fuel. All in all, cars and light trucks built and warranted for E15 outnumber “premium only” vehicles about three to one, and exceed diesel cars and light trucks by nearly six to one. Even if EPA doesn’t trust its own numbers, manufacturer-approved “E15 vehicles” are more widely available than all the premium and diesel vehicles on the road.

With those numbers in mind, obligated parties still require branded stations to sell premium gasoline, and diesel fuel is widely available, while oil company supply agreements specifically prevent station owners from offering E15.

American Coalition for Ethanol’s comments in full are here.

Biotechnology Industry Organization

Establish the cellulosic RVO for 2015 at no less than 157 million gallons and for 2016 at no less than 350 million gallons. Work with foreign producers and expedite approvals of pathway petitions to bring more advanced and cellulosic biofuels into the market.
No reductions need be made – nor should be made – on the basis of the statute’s general waiver authority.
Set the 2015 and 2016 advanced and overall RVOs at the full statutory volumes; EPA has not met its burden to prove the need to reduce the volumes. If EPA were able to adequately justify utilizing its cellulosic waiver authority to shrink the market for advanced and overall renewable fuels, then volume obligations should be set at the highest levels achievable through the renewable fuels industry’s growing capacity to produce higher volumes in the future
In setting the volumes, EPA should take into account the availability of carryover RIN credits as done in prior years.

Most acts of Congress are not sweeping or extraordinary. The RFS is a rare exception to that rule. The RFS has deep economic and political significance because Congress intended for it to dramatically transform the way we produce and use motor fuels in the U.S.

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The National Biodiesel Board

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NBB’s comments in full are here.

The Iowa Renewable Fuels Association

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National Corn Growers Association

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National Corn Growers Association comments in full are here.

POET

POET expects to stop all future U.S. cellulosic investments if EPA’s proposed base renewable fuel requirements are not strengthened. The development of cellulosic and other advanced biofuels is inexorably entwined with continued regulatory predictability based on RFS targets (e.g., the statutory 15 billion gallon base renewable RVO in 2016). EPA lowering the base renewable requirements will effectively undermine the entire RFS program and destroy confidence in its incentive structure for all biofuels.

EPA’s use of the general waiver authority as proposed would be immediately subject to litigation that would throw the Renewable Fuel Standards (RFS) into turmoil, create uncertain national fuel markets, and tarnish the legacy of EPA and this Administration. EPA can set readily‐achievable Renewable Volume Obligations (RVOs) in 2014 through 2016 without resorting to the general waiver authority.

The market has responded to the proposal with crashing D6 RIN prices, undermining the very mechanism necessary to push for higher volumes of biofuels. RIN prices – particularly for D6 RINs that are the largest category of RIN – incentivize the build‐out of biofuels distribution infrastructure and reduce biofuels prices. This is exactly what Congress intended, and exactly what a market‐based regulatory program does—put a price on certain behavior (here, use of petroleum transportation fuel) and incentivize other desired behavior (biofuels use).

EPA has already determined (correctly) that RIN prices don’t increase retail gasoline prices. Incumbent petroleum interests have monopolized the nation’s transportation fuel supply, and lacked a financial incentive to cooperate in diversifying the nation’s transportation fuel because of EPA’s delayed, proposed RVOs and market signals contained therein. Raised RVOs and RIN values are necessary to provide the economic boost to increase biofuels use, as Congress intended, and these values can be raised without harming consumers.

POET’s comments in full are here.

Some pro-biofuels op-eds on the EPA’s work, worth reading

Op-eds from this summer:

Omaha World-Herald: World-Herald editorial: EPA should stand by biofuel

Des Moines Register: Renewable Fuel Standard is good for rural economies

Sioux City Journal: OUR OPINION: Iowa must fight EPA proposal on RFS

Grand Island Independent: EPA wrong to diminish biofuels mandate

The Iowa Republican: Biofuels Under Attack: Same Old Story

Daily Caller: Why Is Obama Allowing Big Oil To Kill Biofuels?

Waterloo Region Record: Ethanol benefits environment, economy

Columbia Daily Tribune: EPA puts oil industry’s agenda ahead of American farmers

Salt Lake Tribune: Op-ed: Biofuels are cleaner energy that should be encouraged