Congressional threats to RFS shaking investors’ confidence — financial adviser

Source: Amanda Peterka, E&E reporter • Posted: Tuesday, February 12, 2013

Congressional bills proposing to pare down the renewable fuel standard are taking their toll in the investment arena, a financial adviser said last week.

Legislation introduced in Congress over the past few years and the recent talk of changing or repealing the standard this year are shaking investors’ confidence, the consultant said. The result is that investors are feeling uneasy about decisions they make and wondering whether the targets set by the RFS are realistic.

“It’s no secret that a contingent of influential industries is determined to substantially alter if not repeal the RFS. And they have their champions in the Congress,” said Mark McMinimy, director of policy research and analysis for agribusiness and biofuels at Guggenheim Securities. “The merry-go-round of attacks keeps the uncertainty alive, and it has a corrosive effect on confidence.”

McMinimy, who spoke at a renewable fuels industry conference last week in Las Vegas, interprets Washington, D.C., policies for institutional investors such as pension funds, mutual funds and hedge funds. Some of his investors own securities in ethanol or biodiesel producers, while others own securities in companies that are indirectly affected by biofuel policies, such as farm equipment manufacturers, seed developers and enzyme manufacturers.

Most recently, House and Senate members introduced legislation that targets the cellulosic biofuel portion of the renewable fuel standard that U.S. EPA sets each year (E&ENews PM, Feb. 7). The numbers mandated by EPA, critics say, are far too high given the lack of commercially available cellulosic fuel, or fuel made from plants such as switch grass and agricultural residues, in the marketplace.

Industry observers expect to see many more bills this year targeting part or all of the standard.

“We think this program doesn’t work. We’ve been trying for seven years to make it work. At this point — time to start over,” Martin Durbin, executive vice president at the oil industry trade group American Petroleum Institute, said at the same conference last week.

While full repeal is unlikely, the legislative threats to the renewable fuel standard come amid a host of other challenges. They include lawsuits against EPA’s decisions related to the RFS and concerns about breaching the “blend wall,” the term commonly used to describe the saturation of 10 percent of the nation’s fuel supply. While EPA has approved a higher level of ethanol in gasoline, 15 percent, gasoline distributors and auto manufacturers have been slow to accept it.

“We know there is an administrative flexibility built into the RFS, and we know that there are work-arounds that can be employed to avoid arriving at an unworkable situation,” McMinimy said. “But investors increasingly want to see a clear pathway through the blend barrier.”

The 18-month timeline that most institutional investors have makes the near-term threats to the RFS and the biofuels industry more acute, McMinimy said. It doesn’t help, he added, that Congress in general is the “poster child for uncertainty.”

“Is it any wonder that anytime one of these RFS bills is introduced, my phone starts ringing?” he said.

McMinimy said that while he is starting to hear some investors say they believe that the corn ethanol industry could make its own way without the renewable fuel standard, most investors would take a “wait-and-see approach” to the industry if they became convinced that the standard were to be rolled back.

Biofuels groups have for several months warned that targeting the renewable fuel standard could have detrimental effects, especially in the advanced arena, where many smaller companies are trying to scale up new technology. Speaking to reporters last week, Agriculture Secretary Tom Vilsack also expressed concern over the effects of anti-RFS legislation, regardless of whether it is actually passed into law.

“I think the larger issue here, the longer-term issue, if you will, is the impact that you have on investments in new innovations that are spawning these new products, these new co-products and byproducts” that are part of the bio-based economy, Vilsack said.