New Mexico Clean Fuel Standard – Take Two!

April 14, 2023

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(Stillwater Associates) ... New Mexico, New York, and Illinois have introduced LCFS-style bills in the 2023 legislative session, and Minnesota is expected to follow suit.

In this memo, Stillwater examines the potential impacts of implementing an LCFS-style program in New Mexico on the cost of fuels to consumers. We begin by highlighting the differences between New Mexico’s Senate Bill 11 (referred to as the Clean Fuel Standard or CFS) as introduced in the state senate during the first session of 2021 and House Bill 426 (HB 426) which was introduced into the New Mexico House of Representatives on February 14, 2023. Finally, we discuss the potential impacts on the cost of fuel to consumers in New Mexico.

The New Mexico CFS has yet to be passed into law. For purposes of this report, it is assumed that the CFS as outlined in HB 426 is enacted by the New Mexico Legislature in its 2023 session, endorsed by the Governor, and enabling regulations are promulgated in a timely manner to allow program commencement on January 1, 2025. The program outlined by HB 426 largely mimics the California LCFS and the Oregon CFP with key differences being a different choice of baseline year and a different carbon intensity (CI) reduction schedule, both consistent with a later starting date than the California and Oregon programs. A significant difference between the current HB 426 and 2021’s SB11 is HB 426’s elimination of the SB 11 provision which allowed for credit generation from a list of industries outside of the transportation sector. This greatly simplifies the program and removes a key difference from similar programs in other states.

The cost to New Mexico consumers to achieve the 20% CI reduction by 2030 and the 30% CI reduction by 2040 as proposed in HB 426 will depend on key factors including the technical calculation methodologies adopted by the Department of Environment (DoE); the rate at which the NM vehicle fleet turns over to alternative technologies such as EVs, FCVs, and NGVs; and the number and size of additional states which may adopt similar programs in this timeframe. Read on to learn about Stillwater’s estimates of these costs, assuming adoption of a program similar to California’s and Oregon’s.

Overview of the 2021 proposed legislation

New Mexico has yet to pass legislation to establish an LCFS program. Stillwater Associates previously reviewed Senate Bill 11 (SB 11) as introduced to the state senate during the first session of 2021. SB 11 referred to this program as the Clean Fuel Standard (CFS).

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Overview of the 2023 proposed legislation

House Bill 426 (HB 426) was introduced into the 2023 session of the New Mexico legislature by Representative Kristina Ortez, Senator Mimi Stewart, and Representative Christine Chandler on February 14, 2023. As of this writing, it has been referred to the House Energy, Environment and Natural Resources Committee and the House Government, Elections, and Indian Affairs Committee.

Key provisions include:

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Key Differences Between the Two Proposals

There are a number of important differences between the two proposals. These changes appear to be reflective of some of the key concerns raised in opposition to the CFS in the last two legislative sessions.

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Impacts of a New Mexico LCFS – Availability and cost of transport fuel to consumers

The cost to New Mexico consumers to achieve the 20% CI reduction by 2030 as proposed in HB 426 will depend on key factors including:

The technical calculation methodologies adopted by the DoE; this report assumes that the methodologies will be substantially similar to those in place for the California LCFS.
The rate at which the NM vehicle fleet turns over to alternative technologies such as EVs, FCVs, and NGVs. This may be influenced by mandates and incentives other than the CFS. The addition of a requirement for investor-owned utilities to invest CFS credit revenues in transportation electrification may accelerate the transition to EVs over the long term; short-term impacts are expected to be more sensitive to implementation of federal EV incentives.
The number and size of additional states which may adopt similar programs in this timeframe. Further growth in the number of LCFS states will drive competition for potentially limited low-CI fuels.

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There are also factors which may serve to reduce the potential compliance costs of the proposed NM program relative to what has been observed in CA:

NM has already approved the use of E15 (California has not). While current market share of E15 is very small, potential relaxation of EPA requirements for E15 have lowered the cost for retailers to expand availability and implementation of the proposed CFP would create a strong incentive for increasing market share. The use of E15 in place of E10 reduces the number of deficits generated while increasing credit generation, thus lowering compliance costs.
As shown in Figure, NM has a much higher share of diesel fuel in its transportation fuel mix than does CA. Experience in CA has demonstrated that large shares of BD and RD can be readily incorporated in diesel fuel with minimal investment in terminalling and logistics infrastructure. Substantial investments in RD production capacity are already being made, including at the HF Sinclair Artesia refinery.[2] The primary limitation to this potential compliance option is a potential scarcity of suitable, low-carbon feedstocks to enable continued growth in BD and RD production.

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Footnotes

[1] In 3Q2023, RNG in California generated 1.21 million credits, electricity 1.67 million credits, and hydrogen 0.02 million credits for a total of 2.89 million credits out of total credit generation of 6.94 million.

[2] The HF Sinclair Artesia RD facility is capable of producing 125 million gallons per year (3 million barrels per year) of RD, about 18.6% of NM’s 2018 diesel demand. Usage of all of the Artesia RD (30 CI) in New Mexico would drop the overall carbon intensity of the fuel pool in New Mexico by over 5%.