The RFS Reset: What Is it? Will it Be Triggered

Source: By Rachel Gantz, OPIS • Posted: Thursday, October 22, 2015

In the past few months, there has been increased talk of the “Renewable Fuel Standard (RFS2) reset.” As its name implies, the reset would be a wholesale revision of annual blending mandates in the RFS — another layer of uncertainty for obligated parties and biofuels producers alike.

Below is a primer on the reset, when it could be triggered and what its impact could be on the overall program.

What is the RFS reset?

EPA is required every year to issue annual Renewable Volume Obligation (RVO) targets as part of the RFS. If the agency issues a waiver (under its general waiver authority) for any of the RVO targets by a) at least 20% for two consecutive years or b) at least 50% for a single year, then EPA is required to promulgate a rule within one year after issuing the waiver to essentially reset the overall RVO schedule, through 2022.

The reset would not be triggered if EPA only used its cellulosic waiver authority, which allows the agency to reduce the cellulosic biofuel RVO when the projected volume amount for a given year is less than what is identified in the statute.

When will the RFS reset be triggered?

The statute allows the RFS reset to be made as early as 2016.

Could the reset occur for the 2016 RFS RVO targets?

According to Tim Cheung, vice president and research analyst at ClearView Energy Partners, “EPA’s 2014-2016 RFS proposal would trigger the reset provisions if finalized at the proposed levels for the advanced biofuel and total renewable fuel targets [for example, for 2015, advanced biofuel’s RVO is proposed at 2.9 billion gal, versus 5.5 billion gal in the statutory requirement, while the total renewable fuel proposed target is 16.30 billion gal, versus 20.5 billion gal in the statutory requirement]. We think EPA is likely to increase requirements relative to the proposal, enough to avoid the reset for the total renewable target. We do not think EPA is likely to avoid the reset trigger levels for the advanced biofuel target,” he said.

“From an administrative practicality standpoint, however, it might make more sense to consider a comprehensive reset rather than take a piecemeal approach,”
Cheung added.

Michael McAdams, president of the Advanced Biofuels Association, doesn’t expect a reset in the near future. “With a lack of resources, and the complicated requirements which EPA would have to engage, I don’t believe we will realistically see any reset before 2019,” he said. “As it stands today, the advanced and cellulosic pools are already under a reset relative to EPA’s proposed numbers. The only sector which has not faced a reset is corn ethanol, unless the current rule continues to leave the mandate for corn ethanol below the 15 billion in the statute.”

Meanwhile, as one ethanol source explained to OPIS, “[t]he reset button has already been hit for cellulosic ethanol. It could be hit for the advanced bucket. But there is already broad discretion for the EPA to change these numbers each year anyway. I suppose you could argue that a new schedule in these categories provides more certainty, but I don’t think so. I think the EPA would still mess with them each year,” the source said.

However, given the “higher EIA gasoline demand projections, there is simply no legitimate way for the trigger to be pulled on corn ethanol,” the ethanol source continued. “But it’s the EPA, so who knows. If so, that would really be frustrating and inject needless uncertainty. But what path would the EPA take?
Just push back the 15 billion gal number by one or two years? Or permanently set it at what the oil guys want (below the so-called E10 blend wall)?”

Meantime, according to a June 2015 American Fuel & Petrochemical Manufacturers
(AFPM) fact sheet on the RFS reset, “[t]here is no agency guidance or existing precedent as to how EPA is to implement the reset. To the extent the D.C.
Circuit finds the statutory language to be unambiguous, EPA must implement it as written. To the extent the court deems the statutory provision to be ambiguous, it will defer to EPA’s interpretation of how to implement the reset authority, as long as that interpretation is reasonable.”

“Assuming that EPA finalizes the proposed 2014-2016 rule without change, the cellulosic, advanced and total volumetric requirements would likely have to be reset in 2017,” the AFPM fact sheet continued. “After reset, EPA must continue to issue annual RFS implementation rules to promulgate RVOs and may continue to exercise its waiver authorities, as appropriate,” it noted.

“Once the RFS waiver(s) trigger the reset authority, EPA must issue a reset rule within one year that modifies the applicable statutory volumes based upon the following six factors: (1) environmental impact; (2) energy security; (3) annual production rate of renewable fuels; (4) impact on infrastructure, including the sufficiency of infrastructure to deliver and use renewable fuel; (5) cost to consumers; and (6) other factors such as job creation, price and supply of agricultural commodities, rural development and food prices. EPA must apply these factors in coordination with the Secretaries of Energy and Agriculture,”
the AFPM fact sheet added.

A handful of groups cited the potential RFS reset in their RFS proposal comments submitted to EPA this past summer. According to Shell’s comments, for example, “EPA tripped the 50% trigger for the cellulosic category in 2010. Now, if EPA finalizes the volumes as proposed, the 20% trigger will be tripped for both the advanced and general renewable categories. This opens the pathway to reset all of the mandate volumes. EPA should move forward with this rulemaking expeditiously to provide certainty for investors in cellulosic biofuels by setting the cellulosic volumes through 2022 and beyond at realistically achievable levels, while adjusting the advanced and general renewable categories in such a way that the greenhouse gas emission benefits of the program are maximized, while at the same time ensuring that the overall mandates are consistent with the capabilities of infrastructure and vehicles. We look forward to working with the agency on the reset rulemaking,” Shell noted.

The potential RFS reset was also discussed at a June 18 hearing by the Senate Homeland Security and Governmental Affairs Subcommittee on Regulatory Affairs and Federal Management. Janet McCabe, acting assistant administrator for EPA’s Office of Air and Radiation, was questioned by Subcommittee Chairman James Lankford (R-Okla.) about when the reset could begin.

“On cellulosic ethanol, I would assume there’s no chance we’re going to hit the target for 2017 [of 5.5 billlion gal], so that will require a reset,” Lankford said.

McCabe agreed with Lankford that cellulosic biofuel’s 2017 RVO would need to be reduced. “Depending on how these [currently proposed for 2014-2016] volumes turn out, we may hit the reset volumes for others … as well,” she said. “We think it makes sense to focus on the reset for all the volumes at one time,” she added.

When pressed for further details, McCabe said it’s likely the RFS reset process would take longer than the one year required to compile annual RVO volumes.
“This is not firmly decided, but it’ll likely be two processes. Each would have a comment opportunity and multiple opportunities for stakeholder input,” she said.

“Our highest priority right now is to make sure the 2014-2016 volumes are out,”
McCabe continued. “That doesn’t mean we don’t have staff already thinking about the reset. … I don’t have a schedule for you on that reset rulemaking, but I can assure you the minute the … [current proposal] is done, we will be turning our full attention to 2017,” she added.