Tapping Renewable-Fuel Mandates’ Brakes

Posted May 3, 2013 at 12:21pm

A House panel’s decision to look back at mandates set in the 2007 renewable-energy law could be a pivotal moment for industries hoping to slow down growth in the ethanol industry.

The Energy and Commerce Committee, which helped write the Renewable Fuel Standard, is taking comments on the effect of mandates for commercial use of conventional ethanol, cellulosic ethanol, advanced biofuels and biodiesel. So far, the panel has issued two white papers on the policy and plans three more in a bipartisan attempt to depict RFS successes and failures. Committee leaders also may use the process to provide guidance to the EPA, which reviews and sets the renewable-fuel mandates.

Congress created federal mandates for commercial use of renewable fuels in a 2005 energy law (PL 109-58) and then raised them in 2007 (PL 110-140). At the time, lawmakers wanted “homegrown” alternatives to foreign oil amid expectations that America’s thirst for gasoline and dependence on imported crude would continue to climb. Now, however, discoveries of oil and gas shale deposits in the United States have boosted oil production in this country, while U.S. gasoline consumption has declined because of the recent economic downturn and a population that is driving less often and doing so more fuel efficiently.

Charles T. Drevna, president of American Fuel and Petrochemical Manufacturers, sees the committee movement as a sign that lawmakers may be ready to end “social engineering” through renewable-fuel mandates, especially for conventional or corn-based ethanol. Production of cellulosic biofuel — fuel derived from sources other than corn starch — is below RFS targets set in the 2007 law. EPA has kept mandates for the overall class of advanced fuels at statutory levels, which includes the targets for biodiesel. The agency has adjusted cellulosic mandates to reflect companies’ difficulties in devising production technology, establishing reliable energy feedstock suppliers and overcoming investors’ reluctance to put money into developing industries.

Under the energy mandates, a total of 36 billion gallons of renewable fuels will be produced and used by 2022. The cap for corn ethanol is set at 15 billion gallons by 2015.

Drevna thinks his association of oil refiners and an alliance of livestock groups, environmental organizations and the food industry are inching closer to their shared goal of repealing the RFS. Still, he cautioned, “The problem is, will Congress look at itself in the mirror and say, we made a mistake?”

Bob Dinneen, president and CEO of the Renewable Fuels Association, says there is nothing wrong with the policy. The mandate for conventional ethanol has created markets for the alternative fuel, he says, and it’s the oil industry’s continued opposition that has created whatever problems exist.

“I don’t expect there to be any change in the Renewable Fuel Standard,” Dinneen said. “The oil industry is trying to flame the fires of discontent.”

Those fires cover a lot of territory. The RFS has become a dividing line between corn growers who have seen crop prices rise with the ethanol market’s expansion. The end of cheap corn left the livestock and poultry industry grumbling over higher animal feed costs. For oil refiners, the RFS is a point of contention because it requires them to meet their obligation by either buying certificates or credits known as renewable identification numbers or buying more ethanol each year to blend with gasoline.

The Future of Ethanol

The clash of regional, financial and philosophical interests has generated frequent and often bitter fights over the future of the mandates, particularly for corn ethanol. Several governors in 2012, prompted by livestock and poultry groups, asked the EPA to reduce the 2012 and 2013 ethanol requirements. The governors said the worst national drought since 1956 had reduced corn supplies and would lead to higher animal feed prices and operating costs for animal businesses in their states. They argued that reducing the mandate would increase the amount of corn available for feed.

The EPA rejected the waiver requests, saying its research showed it was “highly unlikely” that a temporary reduction would greatly affect ethanol production or affect corn, fuel or food prices.

In January, the American Petroleum Institute scored a limited court victory on the RFS. A federal judge ruled the EPA had used an erroneous procedure in setting the 2012 mandate for cellulosic biofuels, which are made from woody plants or waste material. Actual production was far below the mandate that the EPA obligated refiners and importers to meet. The judge did not order broader changes to the RFS.

Though the RFS has survived challenges, federal renewable-fuel policy may be at a turning point. Refiners are under pressure as demand for gasoline declines, cars become more fuel-efficient and drivers hit the road less frequently. Fewer gallons of gasoline refined and less demand for ethanol, although refiners and importers remain obligated to use 13.8 billion gallons of conventional ethanol in gasoline this year. Refiners could increase the volume of ethanol beyond the 10 percent commonly blended in gasoline. The petroleum industry cites costs and concerns that engine warranties for most U.S. vehicles might be voided if drivers use gasoline with higher ethanol levels. Higher ethanol blends also would reduce the oil industry’s market share.

The EPA has approved 15 percent ethanol in gasoline in vehicles built in 2001 and later. A handful of gas stations sell E15. The American Petroleum Institute, manufacturers of gas-powered tools and small engines, livestock groups and environmental organizations continue to challenge the EPA approval.

E85, which can be pumped into “flex-fuel” vehicles, also has limited distribution.

To meet their obligations under the RFS, many refiners bought or traded renewable identification numbers. RIN values for corn ethanol rose sharply in January from 2 cents to 3 cents per RIN to a high of $1.10 in March. They are now trading around 70 cents per RIN. The surge in RIN prices drew the attention of Oregon Democrat Ron Wyden, chairman of the Senate Energy and Natural Resources Committee, who has asked the EPA to explain the volatility.

The EPA raised the “blend wall” issue in its March notice for comment on finalizing fuel mandates for 2013. The agency estimated that refiners and importers could roll over credits good for as many as 2.6 billion gallons of ethanol to comply with the 2013 mandate.

“As the volume requirements of the RFS program increase, it becomes more likely that the volume of ethanol that must be consumed to meet those requirements will exceed the volume that can be consumed as E10,” the EPA notice said.

The number of excess credits also would reduce the actual number of gallons of ethanol that refiners and importers need to comply with 2013 mandates. The agency estimated that credits good for as many as 2.6 billion gallons of ethanol could be rolled over to meet whatever ethanol mandate is set.

University of Illinois economists Scott Irwin and Darrel Good warned in a recent paper that the higher prices for the credits are early signs that it will be costly for refiners and importers to continue to meet the ethanol mandate. Irwin and Good suggest that the EPA freeze the fuel mandates while policymakers decide how to proceed with renewable fuels.

“As it now stands, the mandate is problematic. Part of the role of the RFS is to motivate biofuels technology, production and consumption. If you ratchet down the mandates too much or too fast, then it won’t motivate growth into the future for biofuels,” Good said. “There is a bit of a balancing act there of what is reasonable and achievable.”