EPA hears two-sided protest to blending mandate changes

Source: By Dylan Chase, Argus Media • Posted: Wednesday, January 5, 2022

US refiners and biofuel groups today renewed respective arguments against the US government’s handling of renewable fuel blending standards, following a pivotal policy update issued in early December.

The US Environmental Protection Agency (EPA)  held a hearing on its 7 December proposal to update renewable fuel blending mandates for the 2020, 2021 and 2022 compliance years, leading US biofuel interests to signal that the agency could face more litigation over the blending standards. 
The EPA’s early December proposal included a few policy changes favorable to the development of US renewable fuel industries, including a less friendly approach to exemption waivers historically granted to small petroleum refiners looking to avoid compliance with blending standards. But the agency overstepped its “legal authority” by proposing a retroactive cut to 2020 renewable fuel blending percentage standards originally finalized in late 2019 and lower-than-expected standards for 2021, biofuel advocates argued in a virtual hearing.

“[The proposal] sets an extremely troubling precedent of revising finalized volumes for 2020 and back-setting volumes for 2021 rather than driving growth in renewable fuels,” Growth Energy chief executive Emily Skor said. “The proposed retroactive cuts to 2020 exceed EPA’s legal authority, and negatively impact the entire agriculture and fuel supply chains.”

The agency’s 7 December proposal came nearly two years after its last policy update, as the administrations of former president Donald Trump and President Joe Biden took ample time to interpret how the Covid-19 pandemic’s demand depression and high-profile lawsuits would reframe mandates enforced under the Renewable Fuel Standard (RFS).

The EPA’s latest update attempted to strike a balance between the interests of refiners and biofuel producers. Total 2020 renewable fuel blending mandates were retroactively revised down to 17.13bn USG, marking a 14.7pc drop from levels originally set months before the pandemic began to spread in the US. Mandates for 2021 were proposed at volumes of 18.52bn USG, 8pc below the original 2020 mandates.

But a confident outlook for road fuel demand and renewable diesel production growth prompted the agency to target total renewable fuel blending mandates at 20.77bn USG for 2022. In a win for biofuel groups, the EPA also proposed to deny all outstanding Small Refinery Exemption (SREs) waivers pending for the 2016-2020 compliance years, heralding a possible end to waivers that have historically freed certain refiners processing less than 75,000 b/d from compliance.

The EPA’s attempt at a compromise of interests may still spur the kind of legal opposition that has long followed its management of the RFS program. The latest updates fail to enforce the law and create an uncertain investment climate around renewable fuels, Advanced Biofuels Business Council executive director Brooke Coleman said today.

“RFS enforcement history has created an RFS believability problem that percolates and cycles through the whole supply chain,” Coleman said. “Failing to enforce the law, waiving it for dozens of oil refiners, retroactively opening old rules — it’s all retroactive compliance alleviation that undercuts innovation investment.”

SRE sea change

The agency’s proposed denial of 65 pending SRE requests was founded on a new approach to the exemptions, which typically offer small refiners an exemption from blending if companies can demonstrate that compliance will cause “disproportionate economic hardship.” Refiners both large and small can offset higher costs for renewable identification numbers (RINs) — the credits refiners and fuel importers use to show compliance — by simply charging more for products, undercutting arguments about disproportionality or hardship, the EPA said in December.

But the EPA’s position is slanted toward large integrated refiners, because smaller operators without blending operations are unlikely to remain cost competitive at the rack or pump if large rivals can offset thinner retail margins with RIN credit sales, one US refiner argued today.

“EPA’s continuing insistence that all RIN costs are passed through represents the ultimate example of cognitive dissonance in our opinion,” said PBF Energy government relations head Brendan Williams. “While refiners try to pass through costs as much as possible, a review of notes from financial analysts covering the refining sector quickly highlights the widespread recognition that RIN markets disadvantage merchant refiners for the benefit of integrated refiners and marketers.”

RIN markets rallied following the 7 December proposal, with the proposed SRE denials buoying prices for D6 ethanol credits, the main currency of compliance under the program. The Argus-assessed Renewable Volume Obligation (RVO) averaged $12.88/USG from 1-7 December ahead of the EPA’s new proposed standards, before increasing to an average of $13.31/USG from 8-31 December.

Delek, CVR Energy and United Refining are among refiners that sought SRE waivers for individual facilities before the EPA’s blanket denial and will likely face the stiffest effects of a competitive market for RINs this year. While the Argus RVO eased from an average near $20/USG in the second quarter, the fourth quarter average of $14.71/USG was still far above the $8.29/USG average recorded in the same period in 2020 and the $2.77/USG average seen in the fourth quarter of 2019.

The EPA will continue to accept public comments on its proposed 2020, 2021 and 2022 mandates until 4 February, while refiners and importers will have until 7 February to submit comments on proposed SRE rejections.