Is ethanol’s number up?

Source: BY STEVE EVERLY, The Kansas City Star • Posted: Tuesday, September 3, 2013


As bureaucratic terms go, “Renewable Identification Numbers” sound innocent enough. But the numbers, one for each gallon of ethanol, have become a flash point for ethanol and its role in the country’s energy policy.

That’s because the numbers — RINs for short — also act as renewable energy credits for refiners, who have to blend a certain amount of ethanol into their gasoline to meet annual federal quotas.

If they don’t, they face stiff financial penalties. Those can be avoided by buying the credits from others who have more than they need.

The ethanol mandate has risen over time and is set to keep rising, but U.S. fuel consumption hasn’t. So concerns about meeting the steadily increasing mandate have caused the market price for RINs to soar.

In January, RINs could be had for 7 cents each, and even that was up from 4.5 cents last fall. Then they spiked to $1.43 in July before dropping back, and cost 69 cents on Friday — still a nearly10-fold increase this year.

The oil companies, which have never been fond of ethanol, are screaming about the higher cost and say it’s causing gas prices to rise. The American Petroleum Institute, a trade group representing the companies, is calling on Congress to repeal the biofuel mandate.

The biofuels industry is fighting back, saying the fears of higher fuel prices are hyped by the oil companies, who don’t like the competition. There is no need to repeal the mandate, ethanol producers say, and they argue that it has been crucial in reducing the country’s dependence on foreign oil.

“There’s a decent amount of political gamesmanship going on here,” said Geoff Cooper, vice president of research for the Renewable Fuels Association.

But the dispute has raised a serious question: Is the country’s approach to ethanol headed for a change?

The answer appears to be a qualified yes.

A repeal seems unlikely, especially with the Obama administration strongly backing biofuels as part of its energy policy. Ethanol has so far reduced the need for petroleum in gasoline by about 7 percent, which no other alternative fuel has come close to doing.

But a shift is already in the works.

The federal Renewable Fuel Standard, set up in 2007, set specific targets for ethanol made from corn; for cellulosic ethanol, which is made from non-food crops such as switchgrass or from plant waste; and for biodiesel or other advanced biofuels.

The initial annual volume in 2008 was 9 billion gallons, which has grown to 16.55 billion this year. The mandate will continue to grow until it reaches 36 billion gallons by 2022, a goal widely viewed as unrealistic.

The U.S. Environmental Protection Agency, which oversees the biofuels standard, has tinkered with the program this year. It was clear that cellulosic ethanol, made from such feedstock as switchgrass, would be unable to supply its hoped for 1 billion gallons and was slashed to 6 million gallons. But the overall 2013 mandate is still expected to be met with corn ethanol and using more biodiesel and imported Brazilian ethanol made from sugar cane.

More serious changes are expected next year. The federal agency announced in early August that for 2014 it was proposing to use its “flexibilities” to reduce the total gallons of biofuel required for the year.

That triggered mixed reactions. The biofuels industry including the Renewable Fuels Association appears to be supporting the potential adjustment as long as it doesn’t touch the mandate for corn ethanol. The American Petroleum Institute called the adjustments short-term relief and still wants the mandate repealed.

“The (Renewable Fuels Standard) is broken beyond repair,” said Bob Greco, the API’s downstream director, in a statement.

The biofuels industry is undoubtedly facing challenges. The federal mandate was front loaded with a reliance on corn ethanol on the premise that cellulosic and other advanced biofuels would later become available in significant quantities, and that isn’t happening as hoped. Cellulosic ethanol was expected to meet nearly half of the 36 billion gallon mandate by 2022, but the fuel has struggled to reach commercial production.

Meanwhile, corn ethanol is approaching a “blend wall.” The country’s primary use of it is in E-10, a gasoline blend that contains 10 percent ethanol. But as Adam Sieminski, administrator of the federal Energy Information Administration, recently told a U.S. House of Representatives committee, the federal standard’s growing demand for the biofuel “cannot be approached through the current low-percentage blending of ethanol.”

The situation is aggravated by declining gasoline sales since 2007 because of the recession and more fuel-efficient vehicles. Fewer gallons of E-10 mean less need for ethanol.

The ethanol industry has said for some time that a blend wall was coming and has been looking for ways to use more ethanol. Earlier this year, the EPA approved its request for E-15, a blend with 15 percent ethanol. The fuel can be used in cars and light trucks from the 2001 model year and after. But its adoption has been slow, and some states including Missouri don’t allow gasoline to be sold with more than 10 percent ethanol.

Missouri regulators are now considering allowing E-15, but the state’s fuel station operators are opposing the move, saying there are many problems including warranties on fuel dispensing equipment that don’t cover using E-15.

“We have lots of concerns,” said Ronald Leone, executive director of the Missouri Petroleum Marketers & Convenience Store Association.

Another option is using more E-85, a blend that can be used only in “flex fuel” cars and light trucks, which make up about 5 percent of U.S. vehicles.

Ethanol has less energy per gallon than gasoline, and E-85 has struggled to be cheap enough to offset the difference. But many blenders in recent months have slashed the fuel’s price with profits earned from RIN sales making it more competitive. There are reports in Iowa and Minnesota of more interest in E-85 and rising sales, although so far it’s still not a large contributor to the ethanol mandate.

The possibility of hitting the blend wall has brought a rare flash of public attention to RINs, which declined in price after the EPA announced in August it was considering cutting the biofuel mandate. But it’s still not certain what it will decide to do, and the volatility may not be over.

“My hunch is we haven’t seen the end of $1 ethanol RINs,” said Tom Kloza, chief oil analyst at GasBuddy.

Here’s a simplified explanation of how the RINs work.

• The EPA calculates how much ethanol a refinery company needs to sell to meet its share of the mandate.

• A company buys the ethanol, each gallon coming with a 38-digit RIN.

• If the refinery falls short in fulfilling its annual allotment it can avoid financial penalties by using banked RIN credits earned in past years when it sold more ethanol than required.

• If those aren’t available, it can still avoid the penalty by buying RINs on the over-the-counter market, which are being sold by refiners or others who have more of the credits than they need.

In practice it gets more complicated, in part because it depends on who is buying and blending the ethanol. BP does a lot of it and has extra RINs it has been selling. The credits are doing “quite well” financially, according to the company’s recent conference call with analysts. But HollyFrontier, a regional company with five refineries including one in Kansas, blends only half its fuel and relies on other companies to blend the rest. It expects to pay $125 million for RINs this year.

But overall, RINs so far are mainly being gathered by simply buying the ethanol and not buying the credits. Despite warnings that higher prices for ethanol credits are already being passed through to the retail pump, there is little evidence that is happening in any significant way.

“My personal assessment is it’s probably very small,” said Sean Hill, an analyst for the Energy Information Administration.

But the volatility in RIN prices has set into motion a serious review of the Renewable Fuels Standard and the need for adjustments.

“I think they (RIN prices) have sent a signal that the status quo is out,” said Scott Irwin, professor of agricultural marketing at the University of Illinois.

Read more here: