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EPA expected to bow to Congress regarding any corn ethanol mandate changes for 2014
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Charges and counter-chargers are escalating in the ethanol policy arena among industry groups, refiner and renewable fuel firms, and lawmakers on both sides of the impending ethanol blend which some say is driving up RIN prices for refiners and forcing some production facilities to close.
At issue: The petroleum industry wants to repeal the renewable fuel standard (RFS), saying the prospect of hitting the ethanol blend wall in 2013 has already caused steep increases in renewable fuel credit prices, with refiners predicting major economic harm in the coming years. The blend wall is the point at which the amount of ethanol that must be blended into the gasoline supply to meet the country's renewable fuel mandate exceeds 10 percent, the maximum that can be safely used by all vehicles and small engines. The Energy Information Administration (EIA) projects that the US will consume 133.37 billion gallons of gasoline in 2013, but the EPA's proposed renewable fuel standard (RFS) would require 13.8 billion gallons of ethanol, 10.4 percent of the fuel supply, and 16 billion gallons less than forecast in 2008. The mandate jumps to 14.4 billion gallons of ethanol for 2014. At the time the Energy Act of 2007 was passed, forecasts by the Energy Information Administration for gasoline consumption implied almost 150 billion gallons of blended gasoline by 2014.
The blend wall (Source: Congressional Research Service/CRS). More than half of all US gasoline contains some ethanol (mostly blended at the 10 percent level or lower). A key benefit of gasoline-ethanol blends up to 10% ethanol is that they are compatible with existing vehicles and infrastructure (fuel tanks, retail pumps, etc.). All automakers that produce cars and light trucks for the Us market warranty their vehicles to run on gasoline with up to 10 percent ethanol (E10). As a result, this 10 percent blend has represented an upper bound (sometimes referred to as the "blend wall") to the amount of ethanol that can be introduced into the gasoline pool. If most or all gasoline in the country contained 10 percent ethanol, this would allow only for roughly 13 billion gallons, far less than the RFS mandates for 2013 onward.
For ethanol consumption to exceed the so-called "blend wall" and meet the RFS mandates, increased consumption at higher blending ratios is needed. For example, raising the blending limit from 10% to a higher ratio such as 15% or 20% would immediately expand the "blend wall" to somewhere in the range of 20 billion to 27 billion gallons. The U.S. ethanol industry is a strong proponent of raising the blending ratio. In response to industry concerns regarding the impending blend wall, the EPA, after substantial vehicle testing, issued a partial waiver for gasoline that contains up to a 15% ethanol blend (E15) for use in model year 2001 or newer light-duty motor vehicles (i.e., passenger cars, light-duty trucks, and sport utility vehicles), but announced that no waiver would be granted for E15 use in model year 2000 and older light-duty motor vehicles, as well as in any motorcycles, heavy duty vehicles, or non-road engines. According to the Renewable Fuel Association (RFA), the approval of E15 use in model year 2001 and newer passenger vehicles covered 62 percent of passenger vehicles on US roads at the end of 2010.
In addition to the EPA waiver decision, fuel producers needed to register the new fuel blends and submit health effects testing to EPA. Further, numerous other changes have to occur before large numbers of gasoline stations will begin selling E15, including many approvals by states and potentially significant infrastructure changes (pumps, storage tanks, etc.). As a result, the vehicle limitation to newer models, coupled with infrastructure issues, are likely to limit rapid expansion of blending rates. Moreover, a group of engine and equipment manufacturers challenged the partial waiver in court, arguing that EPA failed to estimate the likelihood of misfueling (using E15 in equipment denied a waiver), and the economic and environmental consequences of that misfueling.
In response to these concerns, EPA requires E15 suppliers to submit to the agency misfueling mitigation plans (MMP). Concerns over a preliminary MMP that required a four gallon minimum purchase from some pumps supplying both E15 and E10 led to a new MMP that EPA approved in February 2013 that eliminates the four-gallon requirement as long as a fuel station has at least one dedicated E10 (or lower) pump to fuel older passenger cars and light trucks as well as non-road vehicles/engines.
The blend wall problem is made more acute by substantial revisions in EIA’s projections of US transportation fuel consumption rates since the RFS was first passed into law in 2007. At that time, EIA estimated that US transportation consumers were using about 145 billion gallons of gasoline (including ethanol) per year, but that consumption would grow strongly to 176 billion gallons of gasoline by 2022 — as a result, RFS mandated biofuels would represent about 19 percent of annual gasoline consumption. By 2013, EIA had substantially lowered its fuel consumption outlook — partly due to sustained high petroleum prices, the prolonged effects of the 2008 financial crises on consumer incomes, and significantly higher fuel economy standards on new vehicles. Instead of growth, EIA projects gasoline consumption to fall to about 120 billion gallons by 2022, thus causing the RFS mandate’s share of the gasoline transportation fuel market to grow to nearly 20percent of annual consumption (in gasoline-equivalent gallons).
As of March 2012, RFA listed only 13 stations in three states offering E15 for retail sale. Thus concerns about a rapid expansion of E15 by its opponents may be overstated, at least as of the first quarter of 2013.
Two additional options to resolving this bottleneck exist but appear to be long-run alternatives. First, increased use of ethanol in flex-fuel vehicles (FFVs) at ethanol-to-gasoline blend ratios as high as 85 percent (referred to as E85) is a possibility. However, increased E85 use involves substantial infrastructure development, particularly in the number of designated storage tanks and E85 retail pumps, as well as a rapid expansion of the FFV fleet to absorb larger volumes of ethanol. Infrastructure expansion will require significant investments, especially at the retail level. Installation of a new E85 pump and underground tank can cost as much as $100,000 to $200,000. However, if existing equipment can be used with little modification, the cost could be less than $10,000.
A second alternative is to expand use of processing technologies at the biofuel plant to produce biofuels in a "drop-in" form (e.g., butanol) that can be used by existing petroleum-based distribution and storage infrastructure and the current fleet of US vehicles. However, more infrastructure-friendly biofuels generally require more processing than ethanol and are therefore more expensive to produce.
Vehicle Infrastructure Issues. If a large portion of any increased RFS is met using ethanol, then the US likely does not have the vehicles to consume the fuel. The 10 percent blend wall on ethanol in gasoline for conventional vehicles still poses a significant barrier to expanding ethanol consumption beyond 14 billion gallons per year. To allow more ethanol use, vehicles will need to be certified and warranted for higher-level ethanol blends, or the number of ethanol FFVs will need to increase. Turnover of the US automobile fleet has slowed during the recession, making it more difficult to integrate FFVs into the fleet.
The Environmental Protection Agency (EPA) must finalize fuel standard blending requirements for 2013, with sources expecting no major changes from its initial announcement relative to corn starch ethanol. However, there is a growing belief that Congress will visit the matter regarding the 2014 ethanol mandate, with hearings expected shortly after lawmakers return from the Easter recess, and with the introduction of several legislative initiatives on the matter fully expected.
Both ethanol producers and petroleum refiners agree EPA should reduce the amount of advanced biofuels that will be required in 2013 because cellulosic ethanol production has not yet reached commercial scale. In previous years, EPA has drastically reduced the requirement for cellulosic ethanol, which is a subset of advanced biofuels, but it has not reduced the total advanced biofuels requirement by a commensurate amount. Instead, the gap has been filled by imported sugar cane ethanol from Brazil. EPA's decision to retain the overall advanced biofuels requirement in its proposed 2013 volume requirements as cellulosic ethanol production lags "hands those volumes over to sugar cane ethanol," the RFA said.
"Energy independence and security means something different now than it did in 2007," said Robert Greco, the American Petroleum Institute's group director of downstream and industry operations. He predicted Congress could begin hearings on the implications of the blend wall as well as other renewable fuel standard issues when it returns from its upcoming recess. "We need Congress to have this debate as soon as possible," Greco said.
Some industry personnel say the impending blend wall has significantly driven up prices for renewable identification numbers (RINs), credits refiners can use to comply with the RFS. New ethanol RINs were recently trading at just over $1 per credit, up from single digits in early 2013.
The blend wall "is going to be a tumble" because its effects will be felt over time rather than all at once, Greco said. "There will not be a date where every company will feel it," he said. "The RIN price is a good proxy for where we think [the blend wall] is heading this year."
The volatile market for ethanol RINS has resulted in lawmaker and industry reaction. Sen. David Vitter (R- La.), the top Republican on the Environment and Public Works Committee, and Sen. Lisa Murkowski (R-Alaska), Ranking Member of the Energy and Natural Resources Committee, asked Gina McCarthy, nominee to lead the Environmental Protection Agency (EPA), to outline "how she will protect American citizens from rising gas prices due to the rising cost of ethanol Renewable Identification Numbers (RINs)."
The Wall Street Journal Online reported that, "Valero Energy Corp. said it will have to spend two or even three times as much as it did last year to comply with the federal ethanol-blending requirement due to the high prices of credits it needs to buy under the law. The company said in a presentation posted on its website Tuesday evening that it will spend $500 million-$750 million buying the credits this year, compared to $250 million in 2012 and $230 million in 2011."
Using those credits to comply with the 2013 standard could leave an even larger hole in 2014 when refiners would be required to blend 14.4 billion gallons of ethanol into the gasoline supply, unless EPA were to lower the renewable fuel standard to the blend wall level.
Renewable Identification Numbers (RINs). A RIN is a unique 38-character number that is issued (in accordance with EPA guidelines) by the biofuel producer or importer at the point of biofuel production or the port of importation. Each qualifying gallon of renewable fuel has its own unique RIN.
Any party that owns RINs at any point during the year (including domestic and foreign producers, refiners, exporters, and importers of renewable fuels) must register with the EPA and follow RIN record-keeping and reporting guidelines. RINs can only be generated if it can be established that the feedstock from which the fuel was made meets EISA’s definitions of renewable biomass, including land restrictions. The feedstock affirmation and record-keeping requirements apply to RINs generated by both domestic renewable fuel producers and RIN-generating foreign renewable fuel producers or importers. After a RIN is created by a biofuel producer or importer, it must be reported to the EPA (usually on a quarterly basis). When biofuels change ownership (e.g., are sold by a producer to a blender), the RINs are also transferred. When a renewable fuel is blended for retail sale or at the port of embarkation for export, the RIN is separated from the fuel and maybe used for compliance or trade.
Small Refinery Exemption. A permanent exemption is available to any parties who produce or import less than 10,000 gallons of renewable fuel in a year — they are not required to generate RINs for that volume, and are not required to register with the EPA if they do not take ownership of RINs generated by other parties. Under EISA, this exemption is temporarily extended (for up to three years beginning with the calendar year in which the refinery produces its first gallon of renewable fuel) to renewable fuel producers who produce less than 125,000 gallons per year from new production facilities. This exemption is intended to allow pilot and demonstration plants to focus on developing the technology and obtaining financing during their early stages rather than complying with RFS2 regulations.
Flexibility in Administering the RIN Requirements. RINs generated during the current year may be used to satisfy either the current year’s or the following year’s RVO. A RIN would not be viable for any year’s RVO beyond the immediately successive year; thus giving it essentially up to a two-year lifespan. For any individual company, up to 20% of the current year’s RVO may be met by RINs from the previous calendar year. In addition to compliance demonstration, RINs can be used for credit trading. When a fuel supplier has blended or sold a quantity of biofuel, the RINs are detached from the biofuels. If a supplier has already met its mandated share and has supplied surplus biofuels for a particular biofuel category, it can sell the extra RINs to another supplier (who has failed to meet its mandate for that same biofuel standard) or it can hold onto the RINs for future use (either to satisfy the succeeding year’s requirement or for sale in the succeeding year). Since biofuels supply and demand can vary over time and across regions, a market has developed for RINs. The marketability of RINs allows fuel suppliers who have not bought enough biofuels to fulfill their RFS requirement for each of the four RFS categories by purchasing the biofuels-specific RINs instead. As a result, RINs have value as a replacement for the actual purchase of biofuels. Because four separate biofuel mandates must be met, the RIN value may vary across the individual biofuel categories. Since the RFS biofuels categories are nested, the price of RINs for specific sub-mandates (e.g., cellulosic biofuels or biodiesel) must be equal to or greater than the price of RINs for advanced biofuels which, in turn is equal to or greater than the RIN value for total renewable biofuels. Thus, RIN values may vary across RFS categories as well as geographically with variations in specific biofuels supply and demand conditions.
A RIN also may have speculative value, even when in surplus, if an investor were to anticipate a shortage in the near future (i.e., within the period for which a RIN is valid) and seek to acquire RINs cheaply in advance of the shortage. To date, the overall biofuels mandates have not been binding and until recently general renewable fuel RIN values generally have been small. It is expected that, if the RFS becomes binding, fuel suppliers will pass the added cost of biofuels acquisition (i.e., the RIN value), on to motor fuel consumers in the form of higher fuel prices.
Because RINs have value, they are not immune to fraudulent activity. In late 2011 and early 2012, EPA issued notices of violations (NOVs) to three companies (Clean Green Fuels, LLC, Absolute Fuels, LLC, and Green Diesel, LLC) that the agency alleges fraudulently generated a combined 140 million biodiesel RINs in 2010 and 2011. Subsequently, individuals representing two of these companies have also faced criminal prosecution. Earlier this year, EPA unveiled a Notice of Proposed Rulemaking to set up a voluntary quality assurance program to verify the validity of RINs. "The voluntary quality assurance program is intended to improve RIN market liquidity and efficiency and improve the ability of smaller renewable fuel producers to sell their RINs," according to EPA. Link to proposed rule. Link to EPA fact sheet on RIN Quality Assurance Program.
The effects of the blend wall could decrease the gross domestic product by $770 billion in 2015 as refiners exhaust their stores of RINs and gasoline becomes increasingly expensive, the American Petroleum Institute said in a March 20 report. The increased costs to produce gasoline and diesel fuel as a result of increasing RIN prices would cost average households $2,700, the report said. The petroleum refiners said increasing blending demands in the renewable fuel standard could force them to limit production or export more gasoline to avoid exceeding 10 percent ethanol in the fuel supply.
The ethanol industry hopes the approaching blend wall will provide incentives for higher ethanol content in gasoline, including E15 and E85, but the adoption of both fuels has lagged. As previously noted, EPA has approved E15 for model year 2001 and newer passenger vehicles, which account for more than half of the national fleet, but retailers have been slow to embrace the fuel, which has been opposed by petroleum refiners and automobile manufacturers. Industry-funded studies have suggested that E15 could damage vehicles that have been approved to use it by EPA. The ethanol industry accuses petroleum companies of "blocking the delivery of alternative fuels in a desperate attempt to maintain its monopoly."
The Renewable Fuels Association (RFA) contends that refiners could meet the proposed 2013 renewable fuel mandate without resorting to credits if just 1 percent of the nation's gasoline supply was E15. However, the ethanol group admits that fewer than 20 retail stations nationwide have chosen to offer E15 for sale. Another 2,000 nationwide offer E85, according to the American Petroleum Institute.
The ethanol industry has also accused petroleum companies of "blocking the delivery of alternative fuels in a desperate attempt to maintain its monopoly over the fueling of America's cars, trucks, and light-duty vehicles." The RFA asked EPA and the Transportation, Energy, and Agriculture Departments in a March 19 letter to investigate whether oil company practices that block retail station franchisees from selling higher ethanol blends violate the Sherman Act, the Gasohol Competition Act of 1980, and the Petroleum Marketing Practices Act.
The penalty for failing to comply with the renewable fuel standard is $37,500 per day per occurrence.Some petroleum refiners are concerned that EPA could define each gallon refiners may be short of the requirement as an "occurrence."
The American Petroleum Institute said it is speaking with members of Congress about its concerns with the RFS. Legislation is being considered that would block introduction of higher ethanol blends into the marketplace. Rep. James Sensenbrenner (R-Wis.) is circulating a draft bill that would block the introduction of E15 until the fuel can be studied further by the National Academies. Sens. Roger Wicker (R-Miss.) and David Vitter (R-La. ) introduced a bill (S 344) on Feb. 14 to overturn EPA's waivers approving E15 for newer vehicles.
In a potentially important development, this week the House Energy and Commerce Committee released its first in a series of white papers that will examine a number of issues emerging with the current system and solicit input from interested stakeholders. Energy and Commerce Committee Chairman Fred Upton (R-Mich.), Ranking Member Henry Waxman (D-Calif.), and other members of the committee are leading the effort to review the law and its implementation.
"It has been more than five years since the RFS was last revised, and we now have a wealth of actual implementation experience with it," the white paper explains. "In some respects, the RFS has unfolded as expected, but in others it has not. Several implementation challenges have emerged that received little if any consideration prior to passage of the Energy Independence and Security Act of 2007. Furthermore, the overall energy landscape has changed since 2007. It is time to undertake an assessment of the RFS."
The white paper released addresses the blend wall, the point at which adding the required volume of ethanol to gasoline supplies would result in ethanol blends that exceed 10 percent, which is the maximum ethanol content approved for sale for use in all vehicles. As gasoline demand has declined in recent years, and ethanol targets have continued to rise, the blend wall is approaching much faster than anticipated. The required volumes of ethanol as set by the RFS must now be added to a smaller-than-expected pool of gasoline, and many experts predict the 10 percent blend wall may be reached as soon as this year. While blends containing up to 10 percent ethanol (E-10) have long been used, refiners may need to start producing E-15 to stay in compliance.
The approaching blend wall raises several issues for producers, refiners, auto manufacturers, and fuel retailers. The white paper examines these issues and poses a number of questions for discussion. The committee is requesting interested stakeholders to send responses to these questions by April 5, 2013.
To view a copy of the white paper, a list of questions for stakeholder comment, and instructions to respond, click HERE.
Links to background information:
-- CRS report - Renewable Fuel Standard (RFS): Overview and Issues
-- CRS report - Meeting the Renewable Fuel Standard (RFS) Mandate for Cellulosic Biofuels: Questions and Answers
NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.