Renewing or Refining the RFS

The first Renewable Fuel Standard, or RFS1, was passed into law as part of the Energy Policy Act of 2005 and expanded into RFS2 with the passage of the Energy Independence and Security Act of 2007. As chief counsel at the Senate Committee on Environment and Public Works from 2003 to 2009, Andrew R. Wheeler played a role in drafting some of the language that would come to form the RFS rules and requirements. Today, some of these rules and requirements remain focal points in ongoing debates within and between segments of the energy and agriculture industries.

Since RFS1 and RFS2 became law, the ethanol and biodiesel production segments have experienced tremendous growth. Accordingly, markets have developed for ethanol-blended TOP TIER® gasoline and for biodiesel-blended heating oil, known as Bioheat® fuel. Wheeler has also seen his standing in Washington rise. A coal lobbyist from 2009 to 2017, he was nominated Deputy Administrator of the EPA by President Trump in October 2017, confirmed in April 2018, and following the resignation of Scott Pruitt, named Acting Administrator in early July.

Less than one month later, on August 1, Wheeler appeared before the Senate Committee on Environment and Public Works, the same committee for which he had previously served as chief counsel and prior to that, as staff director. Wheeler’s first congressional testimony since becoming head of the EPA touched on a number of hot-button issues, including the RFS and controversial small refinery “hardship” exemptions that have been granted with much greater frequency under the Trump administration.

The EPA has issued 48 “hardship” waivers to petroleum refineries over the past two years, excusing them from contributing to the Renewable Volume Obligations (RVOs) established annually under the terms of the RFS. Industry experts place the total amount of biofuel lost as a result of these exemptions anywhere between 1.5- and 2.25-billion gallons. The RFS allows for waivers to be issued to small refiners in the event that biofuel blending creates for them an economic hardship; however, EPA appears to have loosened its definitions of “small” and “hardship” in recent years, raising the ire of some ethanol and biodiesel producers.

Asked by Senator Mike Rounds (R-SD) to provide insight and clarity on the logic underlying the hotly contested small-refiner waivers, Wheeler conceded, “As one of the former congressional staffers who helped write that section of the law, I wish we had spent a little more time on some of the details of it now that I’m helping to implement it.”
Past issues of Oil & Energy have summarized some of the larger impacts of RFS changes and small-refinery waivers (see “The RFS in Perspective,” Volume 19/Issue 8, September 2017, and “Year-Round E15 and Small Refinery Waivers,” Volume 20/Issue 6, July 2018). Here, we will provide an overview of the current RFS debate, based on recent public comments, statements and testimony provided by association leaders representing the industries most affected.

Biodiesel

On June 26, the EPA released its proposed RVOs for 2019 and 2020, which, if approved, would increase advanced biofuel gallons from 4.29 billion gallons in 2018 to 4.88 billion in 2019. Biomass-based diesel gallons would also increase, from 2.1 billion gallons in 2019 to 2.43 billion in 2020.

Following the announcement, the National Biodiesel Board (NBB) issued a statement embracing the increases but warning about the “negative impact” of small-refinery waivers.

“We welcome the Administration’s proposal to grow the biodiesel volumes, following two flatlined years. This is a positive signal for our industry and we’re pleased the EPA has acknowledged our ability to produce higher volumes. We’ve consistently demonstrated that we can do much more,” said Kurt Kovarik, vice president of federal affairs at NBB. “The fact remains, though, instability in the RFS program caused by the EPA has done significant damage that can only be rectified for biodiesel through consistent and predictable growth in volumes.”

In its statement, NBB went on to claim that the EPA’s small-refinery waivers have “effectively reduced current obligations for biodiesel by 100 million gallons in 2016 and 275 million gallons in 2017.”

On July 30, NBB went one step further, filing an opening brief in a lawsuit against the EPA. The brief states: “EPA unlawfully has failed to account for all small-refinery exemptions it awards, violating its duty to promulgate percentage standards that ‘ensure’ all aggregate volumes are met. Unaccounted for small-refinery exemptions reduce aggregate volumes, and EPA’s approach creates a new, de facto waiver authority contrary to Congress’s design. Despite knowing those consequences, EPA declines to adjust percentage standards to account for that shortfall, either before it is likely to happen or after it actually does.”

The EPA has since countered that small-refinery waivers do not figure into RVO proposals. Acting Administrator Wheeler, in his August 1 testimony, said that the agency would soon create a public “dashboard” to provide greater transparency on EPA’s waiver-granting process.

NBB submitted its final public comments on the proposed RFS standards in late August. In a letter accompanying the comments, Kovarik wrote: “The biomass-based diesel industry has proven year after year that it can deliver increasing volumes. We appreciate the agency’s recognition of that fact and welcome the signal of growth in the proposed rule. NBB asks that you fully support the industry’s growth by setting the biomass-based diesel volume for 2020 at 2.8 billion gallons and increasing the 2019 advanced biofuel volume to allow growth.”
Using feedstock data from the USDA World Agricultural Supply, LMC International, and the National Renderers Association, NBB attempted to demonstrate that further biomass-based diesel volume growth is achievable.

“Most importantly, once EPA has set the annual volumes, it must ensure they are met,” Kovarik wrote. “The volumes EPA ultimately finalizes will be meaningless if the agency continues to retroactively reduce them through small refinery exemptions. The certainty that biodiesel producers need includes an assurance from EPA that the volumes it establishes will be met.”

 

Big Oil

The American Petroleum Institute (API) has essentially the exact-opposite stance of the biodiesel industry. The organization supports small-refinery waivers and generally opposes the RFS on the grounds that it “picks winners and losers in the energy market” and threatens to breach the biofuel “blend wall,” that is, the threshold at which the percentage of renewables in the fuel stream becomes untenable for existing storage and infrastructure and would therefore necessitate a massive economic investment. API’s comments on the June RVO proposal are in keeping with that stance.

“EPA made the right call in not reallocating the waived small refiner exemption volumes, however the agency’s latest proposal for 2019 is yet another example – in fact it’s an annual example of a broken government program that needs a comprehensive legislative solution that includes the sunset of the program,” said API Downstream Group Director Frank Macchiarola.

“The RFS is a backward-looking policy that doesn’t reflect today’s energy market realities of strong domestic energy production. Furthermore, by increasing biomass-diesel and the overall biofuels volumes the government is putting its thumb on the scale, picking winners and losers. The biggest losers from this biomass-diesel proposal could be consumers as once again this proposal threatens to breach the blend-wall. The American consumer is demanding real legislative reform of the program and this annual process only strengthens the case for such reform.”

It is worth noting that API has used the same “blend wall” argument with regards to ethanol and gasoline blending, even though that wall was breached in 2016 when nationwide, U.S. gasoline contained an average of 10.02% ethanol. “Serious vehicle and retail infrastructure compatibility issues continue to exist with gasoline containing more than 10 percent ethanol,” said Patrick Kelly, Senior Fuels Policy Advisor for API. “Three out of four cars on the road were not designed for higher ethanol blends like E15, and history demonstrates that motorists have largely rejected E85.”

 

Motor Fuel

Some gasoline retailers share API’s concerns regarding storage of E10 and the influx of E15. Readers will recall that E15 is not currently available during the summer months, though President Trump has indicated that his administration is “close” to allowing for year-round sales.

Meanwhile, the June RFS proposal keeps the conventional biofuel (corn ethanol) RVO at the 15-billion-gallon statutory maximum.

The Petroleum Marketers Association of America (PMAA) writes: “PMAA continues to be concerned that small business petroleum marketers will be placed in a precarious situation if E15 starts to take hold, because of the potential economic impacts of adding E15 including the costs associated with existing UST system incompatibility…
“For petroleum marketers, the corn ethanol mandate continues to put marketers in a precarious situation given UST system incompatibility with E10-plus blends with regard to the seals, glues, gaskets and other components that would force them to break concrete to sell higher ethanol blends.”

In its public comments on the RFS proposal, PMAA requested that the EPA lower the corn-based ethanol mandate such that it equals approximately 9.7% of projected gasoline demand. This, PMAA argued, would help address the blend wall issue, stabilize the market and level the playing field for smaller motor-fuel retailers.

“PMAA also supports the proposed biomass-based diesel blending mandates for 2020 and the use of the EPA’s cellulosic waiver authority to reduce the cellulosic, advanced biodiesel, and total renewable fuel obligated blending volumes for 2019,” the comments concluded.

While PMAA has repeatedly expressed its concern about increased ethanol blending, the organization has a somewhat different stance with regards to biodiesel. Speaking at the National Biodiesel Conference & Expo in January 2018, PMAA President Rob Underwood said, “With biodiesel, there’s still room for growth.”

Underwood expressed confidence that the diesel fuel infrastructure can sustain biodiesel blends up to B20. “Most underground storage tanks are good until you get above B20 and E10,” he said. “We’ll sell anything if we can do it safely. If the quality is there and it’s competitively priced, we’ll sell biodiesel all day long.”

 

Heating Oil

On heating oil-biodiesel blending, Underwood added: “The Northeastern states have lowered sulfur content in heating oil now down to 15ppm and coupled with a biodiesel component up to a B5 blend, we are cleaner than natural gas. It gives these small-business jobbers a fighting chance to compete with the major natural gas companies, and so, from the biodiesel angle with heating oil, we see that as a future fuel, and that is what the Renewable Fuel Standard has helped push for our industry.”

The New England Fuel Institute (NEFI) does not have an official position on the RFS or ethanol blending. However, NEFI has acknowledged that the RFS, along with the Biodiesel Tax Credit (BTC), “helps increase demand for biodiesel-blended heating oil by reducing consumer prices.”

In a letter sent to Congress in March in support of an extension of the BTC, NEFI President & CEO Sean Cota wrote, “Given the competitive nature of the home heating market, RFS credits and the BTC are passed-on through the distribution chain from producer to importer/supplier, retailer and, ultimately, the consumer.”

NEFI has also written that “increases in domestic biodiesel production, which the RFS mandates, help to make our region and the country more environmentally and economically secure.”

Reporting on EPA Acting Administrator Andrew Wheeler’s recent appearance before the Senate, NEFI Vice President & Director of Government Affairs Jim Collura wrote, “NEFI has been in close communication with the biodiesel industry on the EPA’s management of the RFS and is examining the impact proposed changes could have on biodiesel blending in the heating oil market.”

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