Governors' Biofuels Coalition

In previous posts [1, 2], I have discussed different aspects of the evolving biofuels Renewable Fuel Standard (RFS) in the U.S. In particular, In the August post, I characterized what the 2014 RFS numbers might look like if EPA followed through with their stated intention in the 2013 Final RFS ruling [3]. On November 15, 2013, EPA issued a proposal for the 2014 RFS levels [4]. In that proposal, EPA went even further than I had suspected and proposed reducing the total RFS volume from 18.15 to 15.21 billion gallons. In the proposal, EPA reconfirmed its commitment to biofuels and the role they can play in reducing greenhouse gas (GHG) emissions and oil imports. EPA also indicated it was balancing that commitment with the realities of lack of progress in cellulosic biofuels and the blend wall. In addition, for the first time EPA provided not only proposed point values but also a range of possible values and requested comments on the proposal.

Table 1 provides the actual legislated RFS levels for 2014, the levels in the EPA November 15 proposal, the numbers I used in my previous posting, and a new set of possible values I am suggesting based on changes that have occurred since August 2013. The way the RFS works, the value in Table 1 for corn ethanol is the difference between the total RFS and advanced biofuel. There is no RFS for corn ethanol; it’s just that this difference represents the amount that can be filled by corn ethanol. Thus, for example, with the numbers from the legislation [5] for 2014, overall is 18.15, advanced is 3.75, so corn ethanol is 14.40. The row I have named other advanced is the advanced (3.75) minus biodiesel multiplied by 1.5 to get ethanol equivalent (1.5) and minus cellulosic (1.75), which equals 0.50 in the original RFS. The other advanced category can be met with cellulosic, biodiesel, or other biofuels classified as advanced such as sugarcane ethanol from Brazil and other countries. The same calculations apply for the other columns.

EPA proposes reducing the total RFS by 2.94 billion gallons (BG); I proposed in August a reduction of 2.3 BG; and now that is reduced to 1.75 BG – the level of the cellulosic RFS. EPA proposed reducing the advanced category by 1.55 BG: previously I proposed 1.70 BG, and now the value is 1.25 BG. Therefore, EPA proposes reducing the corn ethanol level by 1.39 BG; my previous reduction was 0.60 BG, and now it is 0.50 BG.

Table 1. Alternatives for the 2014 RFS (billion gallons)

Now let me explain the differences. The two big drivers of the reduction are the lack of technical progress and investment in cellulosic biofuels and the blend wall. Despite the grand hopes in 2007 when the RFS passed Congress, and despite the investments in research and development that have occurred, there is little production of cellulosic biofuels today. Thus essentially all the cellulosic category must be waived because the product simply does not exist. In fact, the EPA approach has been to estimate how much production is likely to exist in the following year and to set the cellulosic RFS at that level. Build it, and they will come! The EPA estimate for cellulosic availability for 2014 is 17 million gallons with a range of 8-30 million gallons.

The other issue is the blend wall. At present, the U.S. consumes about 133 BG per year of gasoline type fuel, down from 141 BG in 2007, the year the RFS legislation was passed. The reduction has occurred because of the recession and because of the increasing fuel economy of the automobile fleet. With annual consumption of 133 BG, the maximum ethanol that can be blended at 10% is 13.3 BG. EPA apparently believes that the realistic maximum is less than that, since they set the proposed level at 13 BG. They apparently did not include any E15 or E85 in their calculation. E85 can only be used in flex fuel vehicles, of which there are about 12 million on the road today. There is also limited fuel dispensing infrastructure for E85 and E15.

So what is behind the differences in both my suggested values and the EPA proposal? The biggest difference in my original post and EPA is in the level of the corn ethanol mandate. EPA put the level significantly below the blend wall and made no account of possible growth of E85. I think it is a mistake to put the RFS that low. When Congress passes a mandate, they expect it to pull the mandated product into the market. Otherwise, they would not pass a mandate. It is important to have the corn ethanol mandate high enough to provide an incentive for companies to blend and sell more E85. With the price difference between gasoline and ethanol (today 80 cents/gallon) and the price of RINs, there is an incentive to blend and sell more E85. Setting the RFS at 13 BG would destroy that incentive. It would not pull any additional ethanol into the market. Also, we have a production capacity of corn ethanol of around 14.7 BG, so there is no capacity issue. Of course the “pull” cannot be so strong that it is totally unrealistic. That is why I am suggesting something a bit less than the original RFS. This level should expand use of ethanol somewhat without increasing corn prices significantly. So what if enough E85 was not sold? In the near term, it is not a problem. There are carry forward RINs from previous years that can be used in 2014 and 2015.

What has happened since August to cause me to somewhat modify my proposed numbers? First, the gap between wholesale gasoline and ethanol has widened significantly. The price of E85 has started to fall. It is important to maintain an incentive to pull more ethanol into E85 blends. Second, biodiesel production in 2013 is likely to exceed 1.6 BG, so it is not clear we need to maintain the 2014 biodiesel target at 1.28 BG, so I increased it to 1.5 BG in these numbers. Finally, the basic change since the RFS was passed is that we have not achieved the cellulosic biofuels production desired. Thus, it makes sense to reduce the RFS by no more than the level of the cellulosic category – 1.75 BG in 2014.

My current proposal is for a 2014 RFS total of 16.4 BG with 13.9 BG of that allowed to be corn ethanol. I think something in that area does a better job of fulfilling the original intent of Congress in the RFS, but adjusted for current market and technology realities. While any numbers at this point involve a good bit of judgment, and there is no magic to any particular set of values, I do think the current proposal reflects a good balance between the original intent of the legislation and current conditions.

References:

1. Tyner, W.E. The Biofuels Renewable Fuel Standard – EPA to the Rescue. August 12, 2013; Available from: http://www.pennenergy.com/index/blogs/energy-and-environmental-economics/2013/08/the_biofuels_renewab.html.

2. Tyner, W.E. The Ethanol Blend Wall and the Renewable Fuel Standard. June 13, 2013; Available from: http://www.pennenergy.com/index/blogs/energy-and-environmental-economics/2013/06/the_ethanol_blendwa.html.

3. Environmental Protection Agency, EPA Finalizes 2013 Renewable Fuel Standards. August 6, 2013: Washington, D.C.

4. Environmental Protection Agency. EPA Proposes 2014 Renewable Fuel Standards. November 15, 2013; Available from: http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/81c99e6d27c730c485257c24005eecb0!opendocument.

5. U.S. Congress, Energy Independence and Security Act of 2007, in H.R. 6, 110 Congress, 1st session. 2007.

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