Gauging 2012 Volumes

Will RINs prove that the RFS needs modifying?
By Kris Bevill | October 18, 2011

It’s an already too-familiar routine to ethanol producers and petroleum refiners. By Nov. 30, the U.S. EPA will issue its renewable fuel standard (RFS) volumes for the upcoming year and, once again, it will dramatically ratchet down the cellulosic biofuels category. At the time this article is being written, one could still speculate on how low the volume could go. Would agency officials settle on the lowest proposed amount—3.45 million gallons, less than 1 percent of the initial 500 million gallons initially set by the RFS? Or would they remain optimistic and finalize a volume on the high end of the proposed range, closer to the 12.9 million gallon mark? It’s difficult to say that 12.9 million gallons is the high side when considering Congress initially believed 500 million gallons could be attainable by now, but that’s the uncomfortable reality of cellulosic ethanol production at the end of 2011.

No matter what end of the proposed volume spectrum the final needle points to, someone will be unhappy. This is due mostly to the renewable identification numbers [RINs] attached to each gallon of fuel produced. In the case of non-existent cellulosic biofuel up to this point, the RIN is replaced by a certificate issued by the EPA in place of actual gallons produced. For refiners who must pay for the cellulosic RIN certificates, this presents a case for them to argue against the RFS. Why should they be required to pay for RINs meant to track their compliance with consumption mandates when there is no existing fuel for them to consume? In July, representatives from the petroleum industry emphasized that point during a public hearing held by the EPA to gain feedback on its proposed 2012 RFS volumes.

“The Clean Air Act directs EPA to project the amount expected to be sold or introduced into commerce based on credible facts, not based on press releases, hopes or wishes,” said Greg Scott, who was serving at that time as executive vice president and general counsel of the National Petrochemical and Refiners Association. “No cellulosic biofuel RINs have been generated for the 11-month period of July 2010-May 2011. This should suggest caution when selecting the regulatory volume for 2012. If the EPA is wrong or if a biodiesel trade group representative or cellulosic ethanol spokesperson is wrong in his or her rosy predictions for production, it is our members that will experience the economic and regulatory pain.” Scott equated the cellulosic biofuel mandate and subsequent waiver credit requirement to a tax on refiners. “RFS obligated parties can buy up to 6 million cellulosic biofuel waiver credits in 2011,” he stated. “This is a $6.78 million tax that NPRA’s members must pay due to EPA’s misguided optimism regarding cellulosic biofuels production this year. Refiners should not have to pay millions of dollars in compliance taxes because of EPA’s gross miscalculation, and EPA must not repeat this miscalculation in 2012.”

At What Cost?

The Energy Independence and Security Act of 2007 provides the EPA with the authority to adjust the RFS each year based on anticipated production levels for the coming 12 months. In the case of a cellulosic biofuel production shortfall, EISA requires the EPA to establish a price for waiver credits, which are then purchased by obligated parties as a substitute for RINs to prove their RFS compliance. The price of each waiver credit is set on an annual basis and is calculated by determining the difference between the average wholesale price of a gallon of gasoline and $3, not to drop below 25 cents per credit. In 2010, the price of cellulosic biofuel waiver credits was $1.56 per gallon. This year, credits were priced at $1.13 per gallon.

Ethanol industry representatives believe optimism is required to entice investors into the space. The Renewable Fuels Association asked the EPA to choose the high side for next year’s cellulosic volume mandate because it would provide a policy signal in support of cellulosic technology. “By setting the standard near the high end of expected industry production, EPA will provide certainty to projects under development and assist the industry in meeting the increased production requirements of the RFS2 over time,” the RFA stated in its comments. “If EPA sets the 2012 standard well below what the industry is likely to produce in 2012, the urgency of project development will dissipate, making each subsequent annual target that much more difficult to achieve.”

But for oil companies, the balance sheet rules. Several petroleum groups presented the EPA with alternatives to the cellulosic waiver credit situation this year, each of which results in refiners being exempt from paying for unproduced gallons of cellulosic biofuels. BP suggested that the EPA could waive any shortfall of production, eliminating the need for obligated parties to purchase waiver credits, but still provide the obligated parties with the option to comply through the purchase of credits or RINs. “This approach would continue to provide cellulosic producers assurance of a market, based upon the project volume to be made available, while eliminating the unjustified cost to obligated parties only after it was clear that the obligation was impossible to achieve,” Robert Leidich, BP regulatory and advisory manager, stated in written comments submitted to the EPA.

Patrick Kelly, senior policy advisor for the American Petroleum Institute, expanded that idea further, suggesting the cellulosic biofuels industry produce measurable amounts of fuel before refiners are required to pay for anything. He recommended that mandated volumes for the upcoming year be based on three consecutive months of proven cellulosic biofuels production. If no fuel is produced in that three-month period, then the next year’s mandate should be zero. “This type of certification process would help the agency develop more realistic estimates and thus, achievable standards,” he said.

Of course the ethanol industry rejects this notion and says it flies in the face of what Congress intended when it established the RFS, which was to encourage the expansion of renewable fuels. “Basing annual cellulosic biofuel requirements on past production levels does absolutely nothing to encourage the construction of new cellulosic biofuel and discourages innovation,” the RFA stated.

Advanced at a Premium

Of greater interest to many grain-based ethanol producers is the advanced biofuels portion of the RFS. The EPA proposed to maintain the initial 2 billion gallon requirement for next year’s advanced biofuels category, a significant increase over the 2011 requirement of 1.35 billion gallons. In order to qualify as an advanced biofuel, the fuel must reduce greenhouse gas emissions by at least 50 percent and, to the dismay of corn ethanol producers, cannot be produced from corn. This could create an interesting scenario in 2012, says Clayton McMartin, president of the Clean Fuels Clearinghouse, which owns and operates the Rinstar Renewable Fuels Registry. “There’s going to be more and more demand for advanced biofuels, and sugarcane ethanol is pretty much the only option,” he says. This situation could drive up the prices for advanced biofuels RINs as obligated parties fight to comply with the RFS, he says.

In his remarks at the EPA hearing, Growth Energy President Jim Nussle asked EPA officials to reconsider the corn discrimination clause in the advanced biofuels category. “We believe that excluding corn ethanol risks many unintended consequences, such as increased costs, reduced supply pressures and market uncertainty, which would harm investment,” he said. Other ethanol producers have requested that the EPA reduce the advanced biofuels category but leave the overall 2012 mandate of 15.2 billion gallons untouched so that corn ethanol could be used to make up the difference.

Crystal Ball 

It is risky to attempt to predict the EPA’s actions, but if history tells us anything, one can assume that the agency will land somewhere in the middle of the RFS debate. The petroleum industry has been requesting the elimination of cellulosic biofuels mandates since 2009, and the EPA has yet to agree with it. In issuing its final volume requirements for 2011, the agency noted that it must remain optimistic when establishing cellulosic biofuel mandates because if actual production exceeds the mandate the industry will be at risk for weak product and RIN demand. The agency has also never agreed that corn ethanol should be allowed to make up for shortcomings in other categories. For the past two years, the EPA has settled on a cellulosic biofuels mandate of approximately 6 million gallons, and with little change in the industry it is likely to do the same this year.

Cellulosic producers agree it will be necessary to reduce next year’s mandate. Of the six ethanol producers expected to produce next year, several have a lot of unfinished business to attend to. Fiberight LLC has an existing 5.5 MMgy facility in Blairstown, Iowa, to work with, but it has been fine-tuning its technology and equipment this year and hasn’t yet begun steady commercial production. Earlier this year CEO Craig Stuart-Paul said the delay in market value for cellulosic RINs was a factor in the company’s lack of production. The EPA expects Fiberight to contribute 3 million ethanol-equivalent gallons of cellulosic biofuel next year, but until commissioning is complete at the plant, Stuart-Paul was hesitant to predict whether that would be possible. As of late September, Fulcrum Bioenergy Inc. had not yet begun full construction of its 10 MMgy facility in McCarran, Nev. ZeaChem Inc.’s 250,000 gallon per year demonstration-scale facility in Boardman, Ore., was expected to produce biochemicals by the end of the year, but ethanol production would not be complete until 2012.

In Florida, Ineos New Planet BioEnergy LLC’s 8 MMgy facility was 25 percent complete by mid-September. Dan Cummings, vice president of Ineos Bio, said his company was comfortable with the projected 3 million ethanol-equivalent gallons anticipated from the plant and expected to be able to produce that much in 2012.

No matter what the final volumes are next year, the petroleum industry will likely continue to cry foul. Certain Congressional members have renewed the call to revise the RFS and the ethanol industry is furiously battling those efforts, but 2012 could prove to be a make-or-break year for the cellulosic industry. With so many federal government programs under fire for “wasteful” spending, it is inevitable that the RFS will get lumped into a big picture argument and without a success story to point to it will only get harder to fight the opposition.

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
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