EPA Finalizes RFS Obligations

EPA Finalizes RFS Obligations

By Ed Burke, Dennis K. Burke Inc.

In late November, EPA released its final Renewable Volume Obligation (RVO) numbers for 2014, 2015 and 2016 under the Renewable Fuel Standard (RFS), increasing some of the renewable fuels volumes proposed back in May 2015.

The agency said it formulated this policy based on more than 670,000 comments from the public, while using the most recent and most accurate data available. Not surprisingly, the agency is still at odds with its stakeholders.

While the final RVOs are higher than those initially proposed by the agency back in May, EPA had to use its waiver authority to reduce the RVOs below their statutory levels set by Congress. For 2016, EPA will reduce the statutory 22.25 billion gallons of renewable fuel required in the RFS, to 18.11 billion gallons for blending into the fuel supply.

Both the oil and the biofuels industry were upset with the agency’s delayed rulemaking, which had prompted a lawsuit from the oil industry. EPA settled the suit, promising to finalize the overdue volumes by November 30.

Blend Wall Concerns

On the oil industry side, there were issues besides EPA releasing their proposal late, including the reality that Americans weren’t using as much gasoline as the RFS projected back in 2007; the fact that cellulosic biofuels volume requirements were much higher than what the industry actually produced; and the RFS volumes breaching the E10 blend wall.

Ag farmers and the biofuels industry argued that EPA must follow the mandate, and restore the volumes set by Congress. Meanwhile, livestock farmers and food producers point to the RFS driving up food prices, and would like to see the RFS abolished altogether.

So, is the RFS back on track? Well, EPA is finalizing 2014 and 2015 standards at levels that reflect the actual amount of domestic biofuel used in those years. The standards are set for 2016 (and 2017 for biodiesel) that represent attainable growth, based on current levels. So they are back on their statutory schedule for setting volume requirements.

Since the new volume requirements are built around growth of current fuel demand, the decrease in fuel demand over the past years is finally recognized.

EPA said that its final RFS numbers demonstrate its commitment to advanced biofuels. The agency also noted that advanced biofuels made from cellulosic feedstocks such as grasses and corn stover have not developed as fast as Congress had anticipated, and based its 2016 volume requirements on current production available. The final 2016 standard for cellulosic biofuel (the fuel with the lowest carbon emissions) is nearly seven times more than the market produced in 2014.

With regards to breaching the blend wall, the issue gets kicked down the road a bit, but it still remains a huge problem. The RVOs call for 14.5 billion gallons of non-advanced biofuels (ethanol) to be blended into the fuel supply in 2016.

EPA acknowledges that there are constraints to higher levels of ethanol in gasoline – from warnings that blending at levels higher than 10 percent could result in significant damage to a vehicle’s engine and fuel system, to concerns related to retail infrastructure compatibility.

Oil producers are also concerned as to whether compliance flexibilities under the rule (carrying over RINs) and potential growth in the biodiesel market will enable the market to avoid the E10 blend wall.

Janet McCabe, acting assistant administrator of the EPA’s Office of Air and Radiation said that, “Over time, there will be more and more choice in renewable fuels available to consumers, and that means there will be more available than what people refer to as the blend wall.” But she also added that if more cars run on higher blend fuels like E15 or E85, and if more gasoline stations supply these fuels, that problem could be addressed.

Boost for RIN Demand

With our low domestic oil prices, RINs and the biodiesel tax credit really play a crucial role for marketers. Then there’s the added debate as to whether the credit should go to the blender or the producer. Fuel dealers have been embracing biodiesel and particularly, Bioheat® Fuel, which at a 12 percent blend, coupled with ultra-low sulfur heating oil is cleaner than natural gas. EPA requires 1.9 billion gallons of biodiesel for 2016 and 2 billion gallons for 2017.

Almost immediately after EPA’s announcement, the RIN markets responded in a big way with biodiesel D4 RIN prices increasing by as much as 30 percent, while conventional ethanol D6 RINs surged upward by 90 percent for 2016. This could mean that the market probably wasn’t expecting EPA to stay close to the proposed RVOs and had not priced in the required demand.

EPA’s Janet McCabe says that on renewable fuels, EPA is turning matters around. “We think that we’re doing just what Congress intended that we do, which is push ambitious but reasonable and achievable growth in 2016,” she said.

The goal of the RFS is to ensure increasing amounts of biofuels blended into transportation fuels, culminating in 36 billion gallons of renewable fuels by the year 2022. That’s roughly double the amount mandated for 2016.

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