Is the Goal to End Ethanol’s RFS?

Source: By Mike McGinnis, • Posted: Monday, March 5, 2018

DES MOINES, Iowa — Why is ethanol such a hot topic at the highest level?

And why does it merit not one but two special meetings with the president of the United States, in one week, at the White House?

“Ethanol and the Renewable Fuels Standard (RFS) is like mom, apple pie, and baseball in the heart of the Corn Belt,” Scott Irwin, University of Illinois agricultural economist, told Successful Farming Thursday.

Irwin adds, “And it (ethanol) is an important element of our national policy with respect to agriculture. All the politics make a lot more sense when you view it that way.”

High talks about the inner workings of the renewable fuels industry are attracting widespread attention because ethanol is an agricultural policy, not energy policy, Irwin says.

“It’s the farm bill in a different form,” Irwin says.

Brendan Williams, PBF Energy vice president of government relations, says that while ethanol has always been a high-profile issue in the Beltway, this year’s attention is centered around President Trump’s efforts in trying to satisfy two different constituencies.

“In the election, President Trump won Iowa and Pennsylvania. So, he’s trying to help farmers. Plus, the risk to manufacturing jobs has heightened the profile of this issue,” Williams says.

This week’s meetings at the nation’s capital involved farm-state lawmakers, senators from oil-rich states, and stakeholders on both sides of the Big Corn vs. Big Oil issue.

Williams says that PBF Energy, present at this week’s White House meeting, is pleased that President Trump expressed interest in finding a solution for everybody.

“We’re optimistic that he (President Trump) can use his negotiating skills to find a win-win for those involved in refining and the ethanol industries,” Williams says.

The White House discussions centered around the issue of independent merchant refiners that have been arguing for some time that they have had to absorb large expenses for purchasing the credits, called RINs, to demonstrate obligation with the RFS.

A Renewable Identification Number (or RIN) is a serial number assigned to a batch of biofuel for the purpose of tracking its production, use, and trading as required by the EPA’s RFS.

For perspective, the annual RIN market equates to a $17 billion market.

Williams says that PBF Energy, a merchant refiner, spent $300 million in RINs last year, equaling 66% of its capitol budget.

Valero Energy, the third-largest ethanol producer in the U.S., spent $1 billion in RINs in 2017.

Earlier this year, 27 small refineries filed for economic hardship waivers against the RFS, due to high RINs costs.

“That is the most waivers the EPA has ever received,” Williams says.

Senator Ted Cruz (R-TX), requested and received a meeting with President Trump to lobby for adjustments or changes to the RFS and RIN credits.

However, Senator Charles Grassley (R-IA) bluntly told Senator Cruz and President Trump that the oil interest’s proposals were not acceptable.

Points of Contention

At the base of the debate between the two industries are four points of contention:

  • The application of various waiver authorities.
  • Expansion of small refinery exemptions.
  • A 10¢-per-gallon cap on RIN prices, pushed by Senator Cruz.
  • The granting of a Reid vapor pressure (RVP) waiver for E15 gasoline blends. (This would allow higher blends of gasoline to be sold year-round. The volatility of gasoline reaches higher levels during the summer driving season, so it isn’t sold during these months.)

Grand Bargain

Irwin, in a weekly article Tuesday, spelled out that a number of proposals have surfaced in recent months to address these concerns, but the one that floats to the top is a so called “grand bargain” that involves the Big Oil folks agreeing to an E15 RVP waiver if the Big Corn folks would allow for a 10¢-per-gallon cap on RINs prices.

“Our analysis indicates that removing the impediment of the current Reid vapor pressure (RVP), a common measure of gasoline volatility, waiver would give a boost to E15 use but the gains in ethanol use would likely be small in the short run. Longer run gains are uncertain and would depend on addressing several other factors that contribute to holding back the growth in usage of higher ethanol blends,” Irwin wrote.

Irwin added, “By comparison, a 10¢ RINs cap would have large impacts on biofuels production and use in the U.S. In particular, the impact of such a low RINs price cap on biodiesel would be catastrophic.”

Because the biodiesel tax credit is not in place, the total biodiesel requirement for the RFS could drop from an expected 3 billion gallons in 2018 to 0 gallons, Irwin says.

“The expected impact of the (RIN) price cap on ethanol is not nearly as severe. E10 use would not be affected, but the cap would remove all incentives for blending higher ethanol blends,” Irwin stated in his weekly letter.

No Deal

So far, even after two top-level meetings at the White House, no deal has been agreed upon between the two groups.

The president has been clear in his support for farmers and energy workers. Thursday’s meeting is a part of the ongoing effort to best understand the many differing views on this issue, and the president looks forward to continuing this discussion.

Congress Approval

Irwin tweeted Friday that “In all of the buzz about a RINs price cap this week, an important point has been missed. Our legal analysis is that a RINs price cap cannot be done administratively by the EPA. It will require modification of the RFS statute by Congress.”

Biodiesel Plays Big Role

Biodiesel plays a pivotal role in setting the overall level of RIN prices. Refiners have the option of using biodiesel, a cheaper biofuel product, to meet their mandate.

For this reason, biodiesel can be used by refiners in three different ways to make up their obligations in the RFS, Irwin, the RIN expert says.

First, biodiesel can fill the biodiesel mandate bucket.

“Biodiesel turns out to be the cheapest way to fill the second bucket, the amount of the advanced mandate above the biodiesel mandates,” Irwin explains. “That’s called the undifferentiated mandate. So biodiesel can fill that bucket.”

And the third bucket is really the key. And that third bucket is the “conventional ethanol gap.”

“That’s the gap between the E10 blend wall and the mandate. So for example, the statutory ethanol mandate is 15.0 billion gallons and the E10 blend wall is 14.0 billion gallons, you have a 1.0-billion-gallon conventional ethanol gap that has to be filled by something because 15.0 billion gallons is the mandate.”

The way the RFS is constructed, biodiesel is the cheapest and preferred alternative to fill that conventional ethanol gap.

“And that’s the critical point, because if biodiesel is marginally filling that conventional ethanol gap, then ethanol RINs have to trade at the price of a biodiesel RIN. And that’s the central part of this story. And that’s what’s happened. That’s why the ethanol RINs are so expensive that the independent refiners are screaming about. So that’s the centrality of the role of biodiesel and the RFS,” the RIN expert says.

Why Not Remove Biodiesel From RFS?

While it seems as though biodiesel is a cog in the wheel of the ethanol debate, Irwin says removing biofuel from the RFS would make things worse.

“If you’re going to keep the mandate at 15.0 billion gallons, the market for the last five years has said that biodiesel is the cheapest way to fill that conventional ethanol gap. If you take away the biodiesel alternative, the gap will have to be filled with E15 and E85, an even more expensive way for refiners to fill that gap,” Irwin says.

Win-Win Solution

If the current trend of increased consumer use of gasoline continues, the problem for the refining industry (high RIN prices) in the U.S. could go away, rendering the White House talks on RINs a moot point.

“So, we have high RIN prices, which are by this conventional ethanol gap getting filled by biodiesel, which has expensive RINs. But with expanding E10 use, what we’re seeing is the size of that conventional ethanol gap steadily shrinking to where it now is projected for 2018/19 to be down to a few hundred million gallons,” Irwin says. “So why not focus on what we need to do to push the usage of these higher ethanol blends, just that last little measure and completely close the conventional ethanol gap. Make it go down to zero.”

And when that happens, the price of ethanol and biodiesel RINs will be delinked, he says.

“Biodiesel RINs prices will probably stay close to where they are and ethanol RINs will shrink back, naturally, to a few cents. And at that point, with pretty modest changes in investment, both sides get what they say they want,” Irwin says.

The refining industry would get a dramatic reduction in the expenses, and the ag and biofuel side would get incremental expansion of ethanol and corn usage.

Bob Dineen, Renewable Fuels Association president agrees with Irwin’s study of RINs.

“The quickest way to lower RIN prices is to establish RVP parity for E15. That is the only win-win solution that upholds the spirit and intent of the RFS and at the same time takes pressure off of RIN prices. We hope the administration closely examines this new analysis as it hosts ongoing discussions on this issue,” Dineen says.

“So, to me, that’s a real win-win solution that everybody should be able to get behind. But that depends crucially on the refining industry negotiating in good faith. Is their real objective to lower the cost of these RINs? That’s what they say. Or is their objective to eliminate the RFS?” Irwin asks.

The analysis shows that their (refiners’) objective is to drive down RIN prices, Irwin says.

“But their behavior in the political process tells me that at least it’s possible that that’s not their real objective,” Irwin says.

Williams says the real rub for the merchant refiners is in the structure of the RIN credit system. He says that the current structure of the RIN system advantages integrated oil companies at the expense of their smaller, merchant refining competitors

“The regulatory changes to the RIN system we are seeking are not meant to end the RFS.  It is the law of the land and the Administration has to implement it.  The concern is leveling the playing field among refiners as it is being implemented,” Williams says.

Also, integrated oil companies are getting out of the refining business, but staying in the large marketing operations that control the blending and distribution to consumers, Williams says.

“Since they blend and market more than they refine, but the obligation is based on refining capacity, they get more RINs than they need.  They use these as a subsidy against merchants (who do not control blending or market access of finished, blended fuel) when selling bulk petroleum fuel and then merchants have to turn around and buy RINs from integrated oil company competitors at great expense,” Williams.

When asked about Irwin’s ‘grand bargain’ idea for both industries to agree on, Williams agrees only that an RVP waver for E15 and E85 would be only a short-term gain for ethanol, not long-term.

“Because of how long it will take to build the infrastructure for distributing the higher blends, as far as adding pumps and stations, it would be years before the RIN prices would be lowered,” Williams says.

“And a lot of refiners don’t have years to wait,” Williams says.

Growth Energy CEO Emily Skor, in a statement this week, said that the arguments that the oil industry are presenting have been heard before.

“Refinery owners are circulating the same old wish list, but their proposals to undermine our agricultural economy will never fly under a president who is truly committed to policies that protect America’s hardworking farmers,” Skor stated.


Jessie Scott contributed this article