Industry faces bleak 2014 with expired tax credit, low RFS target

Source: Amanda Peterka, E&E reporter • Posted: Monday, January 6, 2014

Even as they close out the year with record production levels, biodiesel makers are facing an uncertain year at best in 2014.

Producers will begin the year without their tax credit, a $1-a-gallon production incentive that has spurred the expansion of facilities and new participants entering the market. The measure is set to expire along with a raft of other renewable energy incentives Dec. 31.

They are also facing the prospect of U.S. EPA retreating from aggressive production goals for the industry for the first time since the nation had a biofuels mandate put into place.

It’s a double whammy that could spell big trouble for the still-fledgling industry, biodiesel makers are warning.

“Either one of these setbacks is bad enough, but taken together, we’re looking at significant contraction in this industry in which plants will close and thousands of people could lose their jobs,” said Anne Steckel, vice president of federal affairs at the National Biodiesel Board.

This year, the industry is on track to produce 1.7 billion gallons of biodiesel, a renewable fuel made from soybean oil, animal fats and used cooking grease that is blended into petroleum-based diesel. Although it’s still only a fraction of the 60-billion-gallon diesel market, the production will be a record and is well above last year’s total of 1.1 billion gallons.

According to the National Biodiesel Board, the industry currently supports 62,000 jobs and provides nearly $16.8 billion to the country in economic activity. The nation’s largest biodiesel company, Renewable Energy Group Inc., closed out the year by last week announcing the acquisition of Syntroleum Corp., a company that has developed a key process to convert synthesis gas into liquid fuel.

The industry in 2013 has been helped along by the tax incentive, which was extended at the beginning of the year in the “fiscal cliff” package after being expired all of last year.

But the industry has also walked a fine line this year between ramping up production and expanding too much too quickly, given the uncertainty over the tax credit in the past (Greenwire, July 8). Congress has allowed the 8-year-old credit to expire — and then has retroactively reinstated it — twice in the past five years, and biodiesel makers have long known they cannot take it for granted that the credit will be in place the following year.

The industry has experienced large fluctuations in biodiesel production over the last several years because of the credit’s expiration in 2010 and 2012. In general, biodiesel production has rapidly increased if producers expect the credit to expire at the end of the year and then drastically dropped as the credit goes away.

For example, production reached nearly 110 million gallons in December 2011 and then slid to 71.4 million gallons in January 2012. Yearly production last year remained about level with that of 2011.

“The uncertainty this creates is a major reason why we are still so dependent on petroleum,” the National Biodiesel Board wrote to congressional tax leaders last week. “It is incredibly disruptive, not just to biodiesel plants across the country but also to our bipartisan goals of creating jobs in domestic energy industries and boosting our energy security by diversifying our fuel supplies.”

But in the past, even in years without the credit, the industry has been able to rely on the built-in market growth provided by the renewable fuel standard.

By law, EPA must set a standard for biodiesel production each year. After 2013, the target must be set at 1 billion gallons or higher, according to the 2007 Energy Independence and Security Act.

Until now, EPA has used its authority each year to set goals for the industry that call for at least moderate growth. In 2011, the agency required that refiners blend 800 million gallons of biodiesel into diesel. In 2012, the agency increased the standard for the industry to 1.28 billion gallons, above the 1 billion threshold.

For 2014 and 2015, the agency has proposed to leave the target level at 1.28 billion gallons rather than increase it. EPA has also proposed next year to roll back its targets for conventional ethanol and overall advanced biofuels for the first time in the renewable fuel standard’s six-year life.

At a hearing of the Senate Environment and Public Works Committee earlier this month, EPA Director of Transportation and Air Quality Christopher Grundler said that the agency was not compelled by law to increase the biodiesel standard each year and that it viewed the target as more of a floor than a ceiling.

But the biodiesel industry says the decision is a step backward for advanced biofuels and one that represents a 25 percent cut to this year’s projected biodiesel production. Without the stimulus provided by a strong RFS target and the tax credit, some producers will likely limit expansion plans and others will close. Investors will likely hold on to their money.

“We need a cool, even hand from Congress and the EPA if we are going to see this industry succeed,” Zack Hamm, president of North Carolina-based Triangle Biofuels, said in a recent statement. “Customers, vendors, investors, and financiers all want consistency and predictable growth.”

The report earlier this year by the National Biodiesel Board found that about 7,500 jobs could be at risk in the industry if production next year falls to the floor of 1.28 billion gallons.

“Biodiesel producers are developing new technologies, feedstocks and economies of scale every year to better compete with fossil fuels,” the board wrote to Senate Finance and House Ways and Means committee leaders last week. “But biodiesel remains a young and maturing industry, with a continued need for federal support.”

Not all are predicting gloom and doom for biodiesel producers next year.

The oil industry said it supported EPA on the biodiesel target, noting that the biodiesel industry has well surpassed its target in past years and that it will likely do the same in 2014.

“They’ve got greater production capacity than what EPA is mandating,” Bob Greco, the American Petroleum Institute’s director of downstream activities, said recently. “That would suggest that investors and the industry feel they can produce enough fuels to be viable.”