Biofuel Sector Touts California LCFS Amid RFS Uncertainty, Oil Price Drop

Source: By Curt Barry, Inside EPA • Posted: Friday, February 6, 2015

SACRAMENTO, CA — As California regulators prepare to re-adopt the state’s low-carbon fuel standard (LCFS), biofuel industry representatives are touting the program, seeing it as a model amid the uncertain fate of the federal renewable fuel standard (RFS) and low oil prices that eliminate some biofuels’ price competitiveness.

Many leading biofuel and alternative fuel industry representatives converged here Feb. 3 for the “Clean, Low-Carbon Fuels Summit,” focusing discussion on the California Air Resources Board’s (CARB) “re-adoption” of the state’s LCFS scheduled for later this month, and the importance of the regulation in continuing investment in alternative fuels.

The conference was hosted by CALSTART, which describes itself as an organization representing more than 140 companies “dedicated to expanding and supporting a clean transportation industry.”

“Now, more than ever, it’s important for states like California to double-down on things like the LCFS and to, frankly, try to teach Washington how to get their ducks in a row — they’ve done a miserable job,” Mike McAdams, president of the Advanced Biofuels Association, said during a pre-conference meeting with reporters.

“I feel like I represent the collateral damage industry, sitting on the advanced cellulosic side of the table. We need all these options” provided by the LCFS, he said. “This is an all-of-the-above energy strategy, and that is what this nation needs to move forward on.”

California’s LCFS currently requires fuel providers to reduce the carbon intensity of gasoline and diesel 10 percent by the end of 2020, compared with a 2010 baseline. Companies can comply by blending cleaner fuels, such as ethanol and biodiesel, into gasoline and diesel and by purchasing credits generated by utilities and other companies that provide natural gas, electricity or hydrogen for transportation purposes.

While the regulations were first issued in 2009, CARB is required to re-adopt the LCFS because of a 2013 state court ruling in POET LLC, et al., v. CARB that found the board failed to comply with the California Environmental Quality Act and administrative procedure rules when it initially adopted the regulation.

As a result of the decision, CARB was forced to freeze its 2013 LCFS requirement — a 1 percent reduction in carbon intensity — through 2015, which clean fuel researchers recently found contributed to a reduction in estimated production capacity for low-carbon advanced biofuels in 2014.

In addition, it is possible that after CARB re-adopts the LCFS later this month, POET attorneys could renew their challenge against the LCFS environmental assessment, according to sources.

State regulators have informally proposed the program be extended to 2030, requiring an additional 10 to 15 percent reduction in carbon intensity.

The board also plans to make a number of significant amendments to the LCFS during its Feb. 19-20 meeting, including changing the carbon intensity scores of a variety of fuels.

CARB Chair Mary Nichols reiterated much of this in an address to the conference, according to her prepared remarks.

While noting the current requirements of the regulation, she added that the 10 percent reduction by 2020 “is not our end goal. There is a range of clean fuels already available today that will enable us to meet this goal and push even further beyond 2020. Fuels like hydrogen, electricity, renewable natural gas and diesel, and clean biofuels are already supplying California’s market in response to the LCFS, and more projects are poised to come on-line in the future.”

RFS Uncertainty

While the re-adoption of the LCFS may eventually provide manufacturers with more certainty, they are still grappling with uncertainty created by delays and policy disputes over the federal RFS, which requires refiners to blend fixed volumes of certain categories of biofuels into the fuel supply.

A key factor was EPA’s proposed 2014 RFS, which suggested significant reductions in blend volumes for several categories of renewable fuels. Many in the oil industry favored such reductions because they feared the biofuel sector may not be able to produce the fuels to scale, leaving them on the hook to purchase compliance credits.

But the biofuel industry strongly resisted the proposal, charging it would undercut production incentives and future demand for the fuel. In the face of the industry dispute, EPA has still not promulgated a final 2014 RFS, though the agency plans to issue final volumes this spring, with 2015 and 2016 requirements slated to be issued later this year.

In addition, congressional opponents are renewing their push to repeal the program — or at least portions of it. For example, a bipartisan group of House lawmakers led by Rep. Bob Goodlatte (R-VA) Feb. 4 re-introduced a bill repealing the corn ethanol provisions of the RFS.

But even in the face of this uncertainty, manufacturers are now producing some low-carbon biofuels, such as cellulosic fuels, at significantly higher volumes than they were previously, a move that will likely ease EPA’s ability to issue new blend volumes for the fuels.

McAdams and others say it is crucial for CARB to re-adopt the LCFS program — and extend it through 2030 as they plan to — to provide longer-term certainty for fuel producers. “In 2022, the [federal RFS] statute is silent on what happens,” said McAdams. “So depending on where the politics go in Washington, D.C., you could have the end of the RFS in 2022.”

Lisa Mortenson, CEO of Community Fuels, a biodiesel producer, said the extension of the LCFS through 2030 is important because it will help longer-term compliance with any new requirements.

Compliance “relies upon early adoption of low-carbon fuels to create excess credits in the early years of the program in order to achieve compliance later, as the curve becomes more aggressive,” she said. “So this re-adoption is critical to force the petroleum industry to take action today, instead of waiting until the last minute to try to comply in 2020.”

Several speakers also noted the need to finalize new rules to give investors sufficient confidence to provide start-up and other capital.

McAdams said, for example, that because EPA has not yet set volumes for 2014-16, “the financial sector has to hold back” on approving loans for projects. “And, ironically, a lot of those investments came from venture capitalists here in California, and [it] means a lot of my members are trying to basically save capital this year because there’s no driver coming out of Washington.”

He explained that many of his organization’s member companies have plans to make major capital investments in clean-fuel projects, of between $250 million and $1 billion apiece. “You tell me a bank that’s willing in 2015 to make a billion-dollar investment when the support program and policy both from the Washington federal level with the RFS and at the state level [is uncertain] — why would they loan the money? That’s what a lot of my members are going through right now.”

And Tim Carmichael, representing the California Natural Gas Vehicle Coalition, cautioned during this week’s pre-conference press meeting that without longer-term regulatory certainty, project developers and their financial backers are unable to estimate future costs and sales. “If you are developing a project — to create and sell an alternative fuel — you can’t do that financially, based on a five-year market horizon, and you can’t factor in credit sales into your financial analysis and viability of the project if you can only show you’ve got a few years left of potential sales,” Carmichael said.

Oil Prices

The plummeting cost of oil and gasoline over the past several months also has the potential to disrupt confidence and investment in low-carbon fuels, because alternatives such as ethanol and renewable diesel are no longer economically competitive or appealing for fuel providers to purchase, the industry representatives said.

“Collectively, we’re trying to break into, or break up the monopoly on transportation fuel globally,” said Carmichael. “When you’re trying to get your foot in the door, or a crack in that armor, you need every competitive advantage you can get. That’s why incentive programs are so important. That’s why, whenever we can show a price advantage in the marketplace, that’s a huge leg up for any of our fuels.”

Despite uncertainties in the market, several recent studies by pro-biofuel groups claim there will be plenty of supply of the alternative fuels in the years to come to meet potential demand both in California and the West Coast, if Oregon and Washington eventually adopt LCFS programs of their own.

For example, a study released Feb. 2 by three environmental groups estimated that California is capable of tripling its use of alternative fuels over the next 10 years and that the oil industry can easily comply with longer-term LCFS requirements. The result, the study says, is that “California can extend the LCFS beyond a 10 [percent] carbon-intensity reduction in 2020 to 15 [percent] in 2025.”