Rules were developed before demand collapsed in petroleum markets
By Ed Burke, Dennis K. Burke Inc.
The U.S. Environmental Protection Agency (EPA) has been getting a lot of heat since announcing in November that it was unable to decide the 2014 RFS requirement for biofuels until 2015.
Our energy market has changed considerably since 2007, when the Renewable Fuel Standard (RFS) was in its nascent stage. Has America’s oil boom changed any of the RFS objectives or focus?
EPA’s decision to hold off on issuing a final rule for 2014 volume obligations (biofuels required to be blended with convention fuels under the RFS) prolongs the atmosphere of uncertainty for the biofuels industry and their investors.
Comment and Controversy
Earlier last year, an EPA proposal indicated that the agency was planning to reduce the volume obligations for the first time. Many expected a huge backlash if the 10 percent ethanol blend wall was exceeded. EPA says the proposal “generated significant comment and controversy” over how the biofuel targets should be set and how attainable the renewable fuel volumes actually are. Last year, the biofuels industry was lobbying for an increase over the 2013 mandate of 16.55 billion gallons of biofuels to 18.15 billion gallons.
EPA is expected to take up the RFS early this year, when it seeks to set volume levels for 2014 and 2015. The agency is expected to adjust the 2014 reporting requirements so refiners can comply retroactively.
Surprisingly, even folks in the ethanol industry admit that the proposed rule would have been a train wreck for the industry and would have set the renewable fuels effort back quite a bit. They say “by EPA backing away from the rule and deciding they were not ready to finalize the rule, is a good thing.”
Many environmentalists have backed off from their early enthusiasm for ethanol. More and more studies show that corn ethanol does not provide the environmental benefits or carbon reductions that were projected. “It’s not a good signal that they can’t get this done,” noted one environmental policy analyst who is in favor of biofuels but critical of corn ethanol. “The only real option at this point is for Congress to take up the reins in 2015 and take a serious look at reform.”
The oil industry doesn’t like that EPA was unable to finalize the standard before the year was over, saying that “after all the gasoline was blended, then EPA tells you what you should have complied with for the year.” They also believe this shows how broken the Renewable Fuel Standard is, and the current RFS ought to be scrapped and started over.
Stress on Biodiesel Producers
Policy setbacks were taking a major toll on biodiesel producers. Nearly 80 percent of U.S. biodiesel producers have scaled back production in 2014, and more than half have idled production at a plant altogether. Additionally, two-thirds of producers said they have already reduced or anticipate reducing their workforce as a result of the downturn.
In 2013, the U.S. biodiesel market reached a record of nearly 1.8 billion gallons, with plants in almost every state supporting over 62,000 jobs. However, last year’s proposal would hold the RFS biodiesel volume at 1.28 billion gallons. The continued uncertainty throughout the year without a final rule has left many producers struggling to survive. I make this point because biodiesel has real growth potential. Most truck OEMs have already approved blends up to 20 percent, and the heating oil industry is turning to biofuels “so they’re not left behind as the country makes a long-term transition to a low-carbon and renewable future.”
The $1 dollar biodiesel tax credit is a saving grace for biodiesel producers and blenders. Unable to get the RFS finalized before the end of 2014, the House of Representatives approved an extension of the Biodiesel Blender’s Credit for one year (through the 2014 tax year). As Oil & Energy went to press, the Bill was awaiting action in the Senate.
So, is the EPA really rethinking the RFS? A proposal with lower volumes, combined with the decision to delay the final rule to review comments, would lead you to believe EPA is looking ahead and is willing to work with stakeholders to resolve some of their issues.
Roll Back the Requirements?
To start, refiners have argued that the EPA should lower the standard by about 16 percent because gasoline and diesel consumption has dropped an average of 4.4 percent per year since 2007. Another major contention for refiners is that production of cellulosic ethanol (made from corn husks and other non-food plant materials) has not met what the mandate requires refiners to use. Will the final rule change the requirement for refiners to blend cellulosic ethanol if it’s not available? And the big question, how will EPA deal with the E10 blend wall?
Keep in mind, the biofuels industry and environmentalists are also looking for changes in the RFS that are closer to their agenda. The biofuels camp wants to see increased volumes and get the RFS back on track. Can EPA come up with any changes to corn ethanol production that would regain the support of environmentalists?
Obviously, not everyone will be happy with decisions that the EPA needs to make. We’ll have to wait and see how it all plays out over the next few months.