The Battle for the RFS

Cellulosic biofuels, the blendwall, E15 and future fuel economy standards become weapons in the grudge match between Big Oil and ethanol
By Kris Bevill | June 12, 2012

What would life be like for the biofuels industry without the renewable fuel standard (RFS)? Would there be a domestic market for even a small portion of the billions of gallons of ethanol produced each year in the U.S., or would producers be forced to export all of their product? Or worse, would they have to shutter plants for good? Would consumer gas prices skyrocket? Would refiners openly celebrate the revival of petroleum’s unchallenged grip on the U.S. transportation fuels market, or would they struggle to meet domestic demand and turn back to foreign supplies for help?

The RFS was created in 2005 to establish regulations ensuring that transportation fuel sold in the U.S. would contain a certain amount of renewable fuels. Congress modified that policy in 2007 to increase the minimum volume of renewable fuels to be blended into the supply and to set new categories, and related volume requirements, of renewable fuel sources. The basic goals of the policy are to reduce greenhouse gas (GHG) emissions, reduce the demand for imported petroleum, and expand the domestic renewable fuels sector. By most accounts, the RFS has already overwhelmingly succeeded in these goals and will continue to do so as biofuels volume mandates continue to increase through 2022. But petroleum groups, disgruntled with the notion of having to share an already shrinking gasoline market with biofuels producers, are ramping up their efforts to do away with the RFS, filing a lawsuit against the U.S. EPA to challenge its RFS mandates for cellulosic biofuels volumes and threatening consumer price hikes as the consequence of implied forced noncompliance as biofuels volume requirements grow in coming years. “The RFS is a critical issue for our industry and is growing in importance as we get closer to the blendwall,” says Bob Greco, downstream and industry operations director for the American Petroleum Institute. “We’re starting to find that it’s becoming increasingly unworkable and unrealistic in its current form.”

Cellulosic Biofuels
Regarding the “unrealistic” aspect of the RFS, API has zeroed in on the cellulosic biofuels portion of the mandate. EPA was given the authority to waive or reduce portions of the RFS if the predetermined annual volume is deemed unachievable, and it has done precisely that for the first few years of the cellulosic biofuels category’s existence. This greatly reduced the amount of cellulosic biofuels obligated parties are required to blend, or purchase replacement credits for, in the event that actual gallons are not available. In 2012, for example, the mandated volume for cellulosic biofuels set by the Energy Independence and Security Act of 2007 would have been 250 million gallons, but the EPA reduced that number to just 8.65 million gallons to reflect much lower anticipated actual volume from qualifying biofuels producers. Still, API says that number is too high. It believes the agency is exercising improper use of its authority by setting an unattainable level that will ultimately require refiners to pay for cellulosic credits when no actual fuel is available. “Since we have zero gallons of those cellulosic biofuels commercially available, we don’t understand how the EPA could actually raise the 2012 mandate to a higher level when we have yet to see any fuel,” Greco says. “It becomes a fairness and equity issue and whether EPA is arbitrarily setting a standard without any basis in reality.”

Refiners would prefer that cellulosic volume requirements be based on several months of proven production. They have proposed this alternative repeatedly, but the EPA has said it believes it necessary to be optimistic when setting standards for cellulosic biofuels in order to encourage investment in the new industry. Supporters of cellulosic biofuels expansion have pointed out that the fees paid by refiners to purchase cellulosic credits has been minimal compared to the profits generated by those companies each year, but Greco says fines aren’t the issue. “The issue at hand is whether EPA is fully utilizing its existing authority to adjust the biofuel mandate to what it should be: recognizing available production,” he says. “Right now, it seems to be based on press releases and promises.”

The lawsuit filed by API to challenge EPA’s regulatory authority over RFS volumes was still in the very early stages in mid-May and no briefing schedule had been set, but the court did agree to allow six biofuel industry groups to intervene on behalf of the EPA and defend its implementation of RFS requirements. Bob Dinneen, president and CEO of the Renewable Fuels Association, says the EPA has demonstrated the flexibility of the RFS in reducing cellulosic biofuels mandates and he believes cellulosic biofuels producers will soon be able to meet production goals. “We’re all disappointed that cellulosic hasn’t come on as rapidly as anybody anticipated, but no one anticipated the economic collapse in 2008 either, and it is that situation and the devastating impact that it had on the financial sector that made it so difficult to secure funding for new projects like cellulosic ethanol,” he says. “That’s beginning to turn around.”

Advanced Biofuels
API indicated in legal documents that it may also address possible Clean Air Act violations made by the EPA in failing to decrease the 2 billion gallon advanced biofuel volume requirement or the overall 15.2 billion gallon renewable fuel volume for the 2012 RFS. Concerns related to the advanced biofuel mandate were somewhat substantiated by a recent Hart Energy report, which found that a lack of Brazilian sugarcane ethanol supply could make it difficult for obligated parties to meet advanced biofuel requirements as early as this year. Sugarcane ethanol is deemed by the EPA to meet the 50 percent GHG emissions reduction required to qualify as “advanced” and has therefore supplied a significant portion of the advanced biofuels volume until recently. If Brazilian ethanol is not available, obligated parties will need to turn to more expensive advanced biofuels such as biodiesel or renewable diesel, but the availability of those fuels is also limited and Hart Energy analysts predict that there simply will not be enough to satisfy RFS mandates. Some ethanol advocates have suggested that improved production techniques should qualify at least some of the nation’s corn ethanol supply as “advanced,” but Dinneen says the scientific community has yet to reach a consensus on the issue and it would be premature to request that type of policy change at this time. “We are not in favor of changing the RFS right now,” he says. “We think it’s a risky political strategy.” Over time, corn ethanol could meet the 50 percent reduction in carbon, he says, but the chances of convincing Congress to modify the RFS to allow corn ethanol into the advanced biofuels category will be better after more evidence is amassed.

Meanwhile, API is doing what it can to convince legislators to downgrade RFS requirements, or eliminate the policy completely. Greco says he believes pressure is growing in Congress to act in response to the various issues brought up by the petroleum groups, including cellulosic biofuels production, the blendwall and invalid renewable identification numbers in the biodiesel industry. Dinneen expressed confidence that no action will be taken this year. However, it’s up in the air what will happen when a new Congress enters Washington, D.C., next year. “Certainly there will be legislative activity,” he says. “The long arm of Big Oil is going to make sure there is a constant drumbeat of negative attention on the RFS. Our job is to make sure there is a constant response so that members of Congress and the public understand the real benefits of the RFS.”

E15 Implementation
It’s true that demand for gasoline is diminishing as consumers drive more fuel efficient vehicles and travel fewer miles. This shrinking gasoline pool brings the E10 blendwall ever closer and refiners say it will soon be very difficult to comply with total renewable fuel volume requirements because the market is already nearly saturated with E10. This situation makes the introduction and expansion of E15 “critically important” to the continued success of the RFS, according to Dinneen, who says increased market opportunities for various renewable fuels and ethanol blends, including E85, will be needed to meet future RFS mandates. But the petroleum industry would rather not have E15 as an option and is awaiting a decision in a lawsuit it filed against the EPA based on its belief that the EPA’s decision on E15 was premature and could potentially damage millions of consumer vehicles. Besides, Greco says, even if E15 were compatible with all vehicles, 50 percent of the current retail infrastructure cannot be used with E15. API predicts that E15 implementation would at best delay the blendwall by two years. “It doesn’t get to the underlying problem of these large mandated volumes of ethanol that we will be unable to blend into fuels,” he says.

Efficiency Standards
By 2017, the RFS as it currently stands will require 24 billion gallons of renewable fuel to be blended into the nation’s transportation fuel. President Barack Obama’s administration has also proposed continuing to increase fuel economy standards for vehicles that, if approved, will require passenger cars to achieve 40 miles per gallon in 2017. Greco admits the combination “raises challenges” with regard to oversupplies of gasoline and excessive refining capacity in the U.S., but he suggests that the petroleum industry is not trying to push ethanol out of the market. “Ethanol has a number of desirable blending properties, octane being first and foremost,” he says. “Regardless of whether or not there’s a mandate, ethanol has a use and a place in the gasoline pool.” He concedes, however, that the RFS is certainly the driving force behind the volumes of ethanol currently being used.

If the RFS is reducing the market share for refiners, then it’s just more evidence that the policy is working as intended, Dinneen says. “The desperate need to reduce our dependence on foreign oil, to generate domestic renewable energy resources, is as critical today as it was in 2005 when the RFS was passed,” he says. “When the RFS was first enacted we were 60 percent dependent on foreign oil. As a direct consequence of the RFS, we are now only 45 percent dependent. The RFS has been a huge success. Big Oil doesn’t like it. Big deal.”

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 540-6846
kbevill@bbiinternational.com