Renewable fuels proposal: "Complete capitulation to big oil"

Jim Lane

Obama, in trouble on healthcare, sounds the retreat on renewable fuels; industry groups aghast as EPA targets next-generation, non-food biofuels for biggest cuts; slashes corn ethanol also. Major push-back expected following “complete capitulation to Big Oil”. What are the political, economic drivers? What’s the impact, and how will industry respond?

In Washington, the EPA released its 2014 proposed standards and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original Energy Independence & Security Act.

The announced proposed volumes met with united outcry from biofuels trade associations, and sniping criticism over the continued existence of the Renewable Fuel Standard from food and oil industry groups. Oil refiners were remarkably silent on a day which handed them a significant regulatory victory.

As analysts began to pore over the detail, the EPA’s proposal won support from Jason Bordoff, former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council — and senior Piper Jaffray equities analyst Mike Ritzenthaler wrote that producers would find work-arounds or alternative markets to maintain revenues and cash-flow.

In today’s Digest, we have a complete wrap-up of reaction, plus as look at the proposed rule, the EPA’s rationale, the advanced biofuels vs corn ethanol dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed

The proposed rule

The proposed volumes are (in billons of US gallons):

	Proposed	Statutory volume for 2014
Cellulosic	0.017	1.750
Biomass-based diesel	1.280	1.000
Advanced biofuel	2.200	3.750
Renewable Fuel	15.210	18.150

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol

13.010

14.400

Overall, the reductions from statutory volumes are:

Advanced biofuels vs statute: -41.33%
Corn ethanol vs statute: -9.7%

Comparing the advanced portion to the overall proposed rule

Gallons of advanced biofuels above the biodiesel mandate: 280 million gallons (ethanol equivalent)
Translated into gallons of renewable diesel: 164 million gallons
Current US renewable diesel capacity at Diamond Green Diesel and Dynamic Fuels: 210 million gallons.

The EPA’s rationale

EPA writes: “The proposal seeks to put the RFS program on a steady path forward – ensuring the continued growth of renewable fuels while recognizing the practical limits on ethanol blending, called the ethanol blend wall.”

The blend wall refers to the difficulty in incorporating increasing amounts of ethanol into the transportation fuel supply at volumes exceeding those achieved by the sale of nearly all gasoline as E10 (gasoline containing 10 percent ethanol by volume).

How does the proposed rule compare to the previously leaked EPA document that contained three options ?

	Statutory	Option 1	Option 2	Option 3	Proposed
Cellulosic	0.023	0.017	0.023	0.023	0.017
Biomass-based diesel	1	1.28	1.28	1.28	1.28
Advanced biofuel	3.75	2.84	2.02	2.21	2.2
Renewable Fuel	18.15	15.21	15.21	15.21	15.21
Corn ethanol	14.4	12.36	13.18	12.99	13.01

Bottom line: it’s virtually the Option 3 as previously leaked, except for a reduction in the cellulosic volumes towards the bottom end of the expected 13-36 million gallons production range, and a cosmetic adjustment to bring corn ethanol above the 13 billion gallons range with an adjustment of 10 million gallons.

Beyond the blendwall, the hidden issues

EPA writes: “Although the production of renewable fuels has been increasing, overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in 2007.”

In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.

On a more speculative basis, we see here an Obama Administration very much on the defensive over its legislative program. In deep trouble on Obamacare, the White House appears to have opted to capitulate on energy policy, so as to preserve political capital.

Options in the courts: Suing to enforce the 2014 statutory numbers

It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. It will be interesting to see if the RFA sues to maintain the corn ethanol mandate and potentially leaves advanced biofuels facing an even stronger set of cuts in order to make room for more corn ethanol.

By their statutory authority on cellulosic fuels (not in any way subject to a challenge on their powers under RFS2, but could have been open to challenge based on the gallonage), they could have waived down the celuloisic portion to 17 million gallons based on available fuel, and waived the rest of the standard accordingly down.

The advanced biofuels pool would have been reduced to 2.013 billion gallons, and corn ethanol would have stood at something like 14.387 billion gallons. The agency too steps to decrease the corn ethanol pool — and to increase the advanced biofuels pool slightly.

Why not balance less corn ethanol with more advanced biofuels?

The fear — rightly or wrongly — is that the advanced pool will be drowned in low-cost, imported ethanol that qualifies for the advanced biofuels pool — and exacerbates the blendwall issue that it sees in the marketplace. So, they have increased the advanced pool, but kept it quite close to the biobased diesel rule.

At the end of the day, there’s not much production out there, outside of the biomass-based diesel capacity (representing renewable diesel and biodiesel) and the cellulosic fuels capacity. At scale, there are some providers such as Aemetis that can produce qualifying advanced ethanol at scale using the milo-biogas pathway, and there’s sugarcane ethanol.

The major producers, potentially, in the non-cellulosic, non-diesel market are the biobutanol producers, and there are not indications of major capacity expansions here in 2014.

Why is industry freaking out?

RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.

Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.

So, it’s a distribution war. Conventional fuels are protecting their production by protecting their distribution. Renewable fuels haven’t built any, hardly, to speak of. Congress gave every indication that they would force conventional fuels, via mandate, to find distribution solutions are face exploding RIN costs — as certain RINs became attractive to predatory trading — and perhaps even self-serving trading.

When RIN costs exploded, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.

Industry reaction

Economic Analysis

Mike Ritzenthaler & Michael Cox, senior energy analysts, Piper Jaffray

“The EPA released the highly anticipated proposal for the 2014 RFS mandates this afternoon that was largely in line with the leaked proposal in early October. For 2014, the EPA proposes a 1.28 bil gal biodiesel mandate, which is flat to the 2013 renewable volume obligation (RVO), intends to manage the corn ethanol mandate to the blendwall, proposing a ~13 billion gallon RVO, and proposed a 17 million gal cellulosic mandate.

We expect that ethanol RINs will decline to more historical levels in the single-digit cent range, while the 1.28 bil gal biodiesel mandate will hold a floor for biodiesel RINs in order to subsidize the marginal independent soybean oil producer. Although we expect an initial negative reaction by investors for the entire space, we believe our estimates for REGI and GPRE are intact despite the lower potential mandates and that GEVO and KIOR are less impacted than first generation biofuels.

Do not expect large impact to first generation producers or grain market. We do not believe a flat biodiesel mandate or lower ethanol RINs will negatively impact REGI since the biodiesel RIN will adjust in order for the marginal independent soybean oil producer to breakeven. Out of the 1.28 bil gal, we expect more than 200 mil gal will be made up by independent soybean oil refiners and so REGI’s low cost position allows them to continue operating at normal capacity.

Additionally, we believe fluctuations in RINs prices will largely be offset by adjustments in feedstock costs, as we have discussed in previous research. Current favorable fundamentals in ethanol, where forward curves suggest a strong discount between ethanol and gasoline through 2014, will support higher discretionary blending and strong ethanol margins despite the lower mandate.

For the grain markets, we expect that the lower corn ethanol mandate will initially weigh on corn prices to reflect less corn consumption (the difference between the proposed 13 bil gal and 10% of the expected gasoline consumption according to the EIA represents approximately 115 mil bu of corn), but lower grain prices will likely drive higher production for the export market, ultimately resulting in comparable levels of ethanol production and corn consumption.

As it pertains to Gevo and KiOR, the impact is less dramatic than for the first generation producers. For Gevo, we have long viewed fuels as secondary to specialty chemicals in terms of relative importance. Fuels can provide market/volume stability as capacity ramps and quality improves – but the more attractive margin pools clearly fall within chemicals and butene derivatives, both of which have no RIN sensitivity. As a result, we do not see lower RIN prices as a material negative for Gevo from that perspective.

Since KiOR blendstock does not face blendwall complications (generally KiOR’s fuels support the EPA’s policy objectives), we view the 8-30 million gallon range (17 million gallons proposed) for cellulosic fuels as more than adequate to support KiOR’s objectives for 2014.

We do not see any material effect on either AMRS or SZYM stock, since those companies are focused on specialty ingredients, the production assets are located in Brazil, and the proposed mandates are not favorable to advanced fuel imports from Brazil.

Policy analysis

Jason Bordoff, Director of Columbia University’s Center on Global Energy Policy and former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council.

“The EPA’s announcement today that it is lowering the volume of ethanol that the fuel industry must blend into the U.S. gasoline supply marks a notable shift in the Administration’s biofuel policy. This is the right move as it acknowledges a drastic change in the U.S. energy outlook since the renewable fuels mandate was put in place.

“The proposal would lower the ethanol mandate to around 10 percent of the fuel supply, which is in line with a policy judgment that the costs of building out a fuel infrastructure capable of handling more than 10 percent ethanol are not worth the benefits if the ethanol in question will largely come from corn, or be imported from Brazil, as most advanced biofuel mandated by the RFS has been in recent years.

“The proposed rule included an aggressive target for cellulosic ethanol, reflecting a judgment that if there is a breakthrough there, it would be a game changer for ethanol both economically and environmentally that could justify expanding our ethanol fueling infrastructure. Moreover, if the EPA hadn’t acted to ease the mandate, it is possible that Congress would have gotten rid of the mandate altogether, which would have eliminated the possibility that such a breakthrough might actually happen one day.”

Biofuels Trade Associations

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section

“The proposed rule released today turns the logic of the RFS on its head and could significantly chill investments in advanced biofuels projects. We will focus over the immediate comment period on convincing the administration to right the course on this policy.

“The cost of complying with the RFS rose for some parties this year because they dug their heels in against allowing renewable fuels into the market. Other participants in the program have pursued a balanced strategy toward compliance. Attempting to lower the cost of compliance for those who made bad business decisions simply guts the program and renders it ineffective. If the rule is not modified, it is certain to reverse the advanced biofuel industry’s progress. We cannot strangle the advanced biofuels baby in the cradle.”

Mike McAdams, President, Advanced Biofuels Association

“If EPA sticks with 2.2 billion gallons in the final rule, the agency will pull the rug out from underneath the growing advanced biofuels industry. ABFA conservatively estimates that our industry will generate at least 3.5 billion RINs in 2013 that qualify as advanced biofuels, exceeding this year’s target of 2.75 billion advanced RINs by at least 750 million gallons. To continue to support new advanced biofuel production, EPA should set the 2014 advanced biofuel target at 3.75 billion gallons as contemplated by statute. This target can be met and exceeded by current production plus carry-over RINs.

“Now more than ever, all our options remain open – including in the courts and on Capitol Hill – as we pursue that goal.”

Mary Rosenthal, Executive Director of the Algae Biomass Organization

“The way to move the country forward is not to roll back requirements and goals for renewable fuels. There’s no doubt that America’s biofuels industry has been moving the country forward – creating jobs in rural communities, providing choice at the pump and reducing our dangerous dependence on imported oil. The EPA’s decision to require fewer gallons of renewable fuels than last year is a clear step back and sends a chilling signal to investors who are looking to finance the future of the American biofuel industry, putting our economic and environmental security at risk.”

Bob Dinneen, CEO, Renewable Fuels Association

“The Environmental Protection Agency (EPA) today released the proposed 2014 Renewable Fuel Standard (RFS) volumetric requirements. For 2014, EPA is proposing to lower the conventional renewable fuel requirement from the statutory level of 14.4 billion gallons (BG) to 13 billion gallons, and slash the total RFS volumetric requirement from 18.15 BG to 15.21 BG. However, the EPA does not have the statutory authority to lower the total requirement by more than the total reduction in advanced and cellulosic. In addition, the so-called “blend wall” does not qualify under the law as grounds for a “general waiver” of the RFS volumes. The specific conditions needed to effectuate a “general waiver”—severe economic harm or inadequate domestic supply of renewable fuel—are not present.

“By re-writing the statute and re-defining the conditions upon which a waiver from the RFS can be granted, EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies. That would be the death of innovation and evolution in our motor fuel markets, thus increasing consumer costs at the pump and the environmental cost of energy production. This proposal cannot stand.

Brooke Coleman, Executive Director, Advanced Ethanol Council

“While only a proposed rule at this point, this is the first time that the Obama Administration has shown any sign of wavering when it comes to implementing the RFS. EPA is in the right ballpark for cellulosic biofuels, and we are confident that the final number will be the right one for the industry in 2014. But bigger picture issues must be resolved in the final rule because advanced biofuel investors also pay attention to the big picture.”

“What we’re seeing is the oil industry taking one last run at trying to convince administrators of the RFS to relieve the legal obligation on them to blend more biofuel based on clever arguments meant to disguise the fact that oil companies just don’t want to blend more biofuel. The RFS is designed to bust the oil monopoly. It’s not going to be easy.”

“We hope that the Obama Administration will realize that reasonably higher RIN prices are a good thing instead of a bad thing. Higher RIN prices are a sign that the oil companies are predictably refusing to blend actual liquid gallons of fuel to comply with the RFS. But higher RIN prices are encouraging those unwilling to obstruct on RFS compliance to actually blend more renewable fuels. Investors are starting to see the RIN program drive more demand for renewable fuels with consumer savings at the pump. Now is not the time to depressurize the program.”

Tom Buis CEO of Growth Energy

“Clearly we are disappointed in the initial proposal that was released today. This proposed rule goes directly against the best interests of our nation and American consumers. We are only five years into a 15 year policy that is working and has saved Americans billions of dollars at the pump. Now is not the time to turn back on the progress we have made and ask Americans to pad big oil’s already record profits. In its current form, this rule would freeze innovation or investment in next generation biofuels; reduce production of conventional biofuels; harm our environment and jeopardize savings to consumers. For over 40 years our nation has been held captive by our addiction to foreign oil, the proposed rule if finalized in its current form is a victory for OPEC and Big Oil and a loss for America.”

Leticia Phillips, the Brazilian Sugarcane Industry Association North American Representative

Slashing the 2014 target for advanced biofuels would be a huge step backwards from the Obama administration’s goal of decreasing greenhouse gases and improving energy security. Advanced biofuels, including Brazilian sugarcane ethanol, reduce carbon dioxide emissions by at least 50 percent compared to gasoline, and EPA has traditionally promoted these clean renewable fuels. That is why we are surprised and disappointed that EPA’s proposal minimizes the 650-800 million gallons of sugarcane ethanol Brazil is poised to supply to the United States in 2014.

Brian Jennings, Executive Vice President for the American Coalition for Ethanol

“There is nothing positive that can be said about EPA’s proposal to unnecessarily restrict sales of ethanol-blended fuel in 2014. This proposed rule will increase pump prices, drain billions of dollars from consumer pocketbooks, and transfer billions more to oil company profit statements. EPA’s proposal fundamentally betrays this Administration’s commitment to clean renewable fuels and caves to Big Oil demands to put a ceiling on ethanol use. Using the E10 “blend wall” as an excuse to reduce ethanol use rewards oil companies for doing nothing to comply with the RFS or inevitability of higher ethanol blends, and sets a dangerous precedent by taking the teeth out of the most consequential policy Congress has ever enacted to reduce greenhouse gas emissions of transportation fuel.”

Anne Steckel, NBB’s vice president of federal affairs, National Biodiesel Board

“The growth in domestic biodiesel production dovetails exactly with President Obama’s statement in July of this year that ‘biofuels are already reducing our dependence on oil, cutting pollution and creating jobs around the country. This is why EPA’s action today is so surprising and disappointing. This proposal, if it becomes final, would create a shrinking market, eliminate thousands of jobs and likely cause biodiesel plants to close across the country. It also sends a terrible signal to investors and entrepreneurs that jeopardizes the future development of biodiesel and other Advanced Biofuels in the United States.”

Monte Shaw, Iowa Renewable Fuels Association Executive Director

“Today’s RFS announcement represents the biggest policy reversal of the entire Obama Administration. The EPA proposal turns the RFS on its head, runs counter to the law and is a complete capitulation to Big Oil. The Obama Administration needs to conduct a thorough soul-searching and decide whether they are serious about cleaner fuels, consumer choice, and cutting petroleum dependence, or whether they truly want to adopt the Big Oil status quo. There is still time to restore Congressional intent and common sense before the rule is finalized.”

“It’s not just the absurdity of lowering the 2014 numbers below the 2013 level, with the new waiver framework, in essence, the Administration would be ceding power to the petroleum industry to dictate the level of each year’s RVO based on the amount of infrastructure the petroleum industry was willing to install. That is the exact opposite of how the RFS was intended to work. The RFS is supposed to be a tool for market access, not market restriction.”

Noted producers, suppliers and policymakers

US Agriculture Secretary Tom Vilsack

“The Obama Administration remains committed to the production of clean, renewable energy from homegrown sources, and to the businesses that are hard at work to create the next generation of biofuels.

“It’s important to take a long-term approach to the RFS. Clearly, as Governor of Iowa and as U.S. Secretary of Agriculture, my support for the RFS has been steady and strong. But I also believe that improved distribution and increased consumer use of renewable fuels are critical to the future of this industry.

“I am pleased that EPA is requesting comments on how we can help the biofuels industry expand the availability of high-ethanol blends, and I hope the industry uses the comment period to provide constructive suggestions. Together, we will be able to chart a path forward that maintains President Obama’s strong commitment to an “All of the Above” energy strategy for our nation.”

REG CEO Daniel J. Oh

“We are disappointed by the proposed numbers that are not consistent with the goals of the EPA, the White House, nor Congress when it created RFS2. Nevertheless, REG’s lower cost multi-feedstock business model, network of biorefineries and terminals, and strong position within the industry should allow us to continue to succeed as the markets inevitably adjust to reach a new equilibrium. The proposed numbers do not reflect the positive results the biodiesel industry has provided in terms of record production levels of advanced biofuels, job creation, rural economic development, energy and food security, and environmental benefits. We will continue to advocate with our industry partners for logical increases in the biomass-based diesel and overall advanced biofuel RVOs through the public comment period.. Without such increases in the RVO our Nation will be deprived of present and obvious benefits.”

POET CEO Jeff Lautt

“The EPA’s proposed renewable fuel volumes are well below what the ethanol industry is capable of supplying for American drivers in 2014, and POET plans to address the issue in detailed comments to the agency. America is looking at a possible record corn crop, and the opportunity to offer more affordable fuel options to consumers has never been better. At the same time, cellulosic ethanol capacity is coming online in a large part thanks to significant investment from grain ethanol producers such as POET. The proposed reduction from EPA is troubling, as it not only cuts grain ethanol use below the levels set by Congress, it cuts them to a level below the 13.8 billion that was met in 2013. The Renewable Fuel Standard was created to provide a choice to consumers outside of oil-based fuel.”

Adam Monroe, Novozymes President Americas

“The Renewable Fuel Standard was signed into law to break OPEC’s effects on the nation: high oil and gasoline prices, American dollars going offshore and environmental consequences. The only way to break foreign control on oil prices and the nation is to introduce a competitive alternative. The RFS was designed as a two-part strategy: Companies like ours would bring breakthrough renewable fuel technology to market, which we’ve done. Oil companies were then required to blend it into the nation’s fuel mix – which they’ve naturally fought at every turn.”

James Moe, Chairman of the Board, POET-DSM Advanced Biofuels

“Next year, for the first time in history, the U.S. will produce meaningful volumes of cellulosic ethanol. With a number of new plants coming online including POET-DSM’s Project LIBERTY, we can finally say that commercial cellulosic ethanol production has arrived. Unfortunately, the latest Renewable Volume Obligations from the EPA underestimate the volume of cellulosic ethanol that will be produced next year. We understand the intention to not overestimate capacity, but the proposed numbers released today hurt efforts to expand this cutting-edge technology and deny Americans new alternatives to fossil fuels. We ask the EPA to continue to engage closely with the cellulosic biofuels industry during the comment period so that we can demonstrate our confidence in our ability to scale up these processes so that the Final Rule uses the best information possible to support the growth of this new and important industry.”

Industry opponents

Robb MacKie, President & CEO, American Bakers Association

“The baking industry recognizes EPA’s proposal lowering the corn-based ethanol mandate. However, this does not go far enough. Corn-based ethanol is a factor that has led to decreased wheat acreage in the US over the past 30 years and tighter food supplies around the world.”

Mark Dopp, SVP of Regulatory Affairs and General Counsel, American Meat Institute

“The EPA decision to reduce the corn ethanol mandate is long overdue. While this is a positive step, the fact remains the RFS is a flawed policy that requires Congressional action. Even with a record corn crop expected this year, the damaging ripple effect of this defective policy has been moving through the meat and poultry complex for the past several years. The time for Congressional action is now.”

Mark Allen, President, International Foodservice Distributors Association

“Why must restaurant operators and their customers, the American consumer, continue to pay higher food prices due to the corn ethanol mandate in the Renewable Fuel Standard? It is time to end the misguided policy of using corn for fuel.”

Michael J. Brown, President, National Chicken Council

“While we are thankful and support the action EPA is taking today, its timid adjustment reconfirms the program is broken beyond repair. This is a good first step, but ultimately, Congress must act. Congressional action to repeal the RFS remains the most viable pathway to allowing all users of corn to have equal standing in the marketplace.”

Rob Green, Executive Director, National Council of Chain Restaurants

“The Renewable Fuel Standard has wrought havoc on food retailers, restaurants, franchisees and operators, as well as food producers, and suppliers. However, the ultimate losers are consumers. Study after study has shown that the corn ethanol mandate has artificially driven up commodity costs by billions of dollars annually, and with it, consumer prices. Today’s proposal by the EPA reaffirms our steadfast belief that Congress needs to repeal the RFS mandate once and for all.”

American Energy Alliance President Thomas Pyle

“The American Energy Alliance welcomes today’s better-late-than-never announcement that the EPA will scale back the ethanol mandate for next year. With this ruling, even the EPA now recognizes that this program is flawed and fails to take into account existing market realities. Today’s action by the EPA, however, does not take away the need for Congress to act quickly to repeal the law. With this ruling, the “blend wall” may not immediately be hit, but the real problems for consumers have not gone away.

“With this RPS ruling, the EPA is still requiring the production of millions of gallons of phantom cellulosic biofuel, an 800 percent increase from the 2013 levels that were actually produced. Further, the 2.2 billion gallon mandate for “advanced biofuel” is especially absurd considering the practical result is we are merely swapping Brazilian sugarcane ethanol with U.S corn based ethanol in the marketplace.

Alex Rindler, Environmental Working Group Policy Associate, said:

“EPA’s proposal recognizes that the RFS is on a collision course with reality. In order to bring alternative biofuels to the market, Congress must permanently reform the program to eliminate the costly and environmentally destructive corn ethanol mandate. Corn ethanol has clearly failed to produce the benefits it once promised, and has proven to be disastrous for consumers and the environment.”

Comment period

Once the proposal is published in the Federal Register, it will be open to a 60 day public comment period.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher ethanol blends such as E15 or E85. This would contribute to restoring gallons lost in the overall renewable fuels pool — and, essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production capacity, which should be a no-brainer, but also convince EPA that production capacity can and would translate into actual production — especially given that the $1 biodiesel tax credit, which helps drive biodiesel sales — expires at the end of the year.

The new EPA view, summarized

The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution. Rather, the EPA opts for a more passive role of providing a market for those capacities that are, in fact, built – based on incremental, if any, changes in infrastructure.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable fuels to shift strategies more towards driving consumer demand over compliance-driven demand.

This means:

1. Build the E85 market based on price and positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based on corporate demand for B5 blends based on social, and price-hedging opportunities — while limiting the practical impact of any differential in street prices of diesel vs biomass-based diesel by having low-level blends (that is, a $1.00 per gallon cent cost differential translates into a nickel a gallon at B5 blend levels).

3. Building markets in diesel and jet fuel based on overall price parity. That is, building a case that fuel price should include ta) the cost of volatility and risk with fossil commodity fuels; b) the social costs, such as disappointing end-use customers who prefer renewable fuels, and c) differential in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building in cellulosic biofuels with appropriate market mandates.

The bottom line

Clearly the industry is apoplectic over the waive-down and the strategic shift at EPA.

For advanced biofuels, EPA could very well have simply waived down the pool to 2 billion gallons — and industry will have to step gingerly around arguments for higher volumes — presenting virtually iron-clad production forecasts in biomass-based diesel. Clearly, building capacity and advocating “don’t mess with the RFS” has not been persuasive.

For corn ethanol, there is going to be a strong push back based on hopes that persuading EPA to stick with a tough mandated number will prompt the conventional fuels industry to push through wider adoption of E15, which would be good not only for corn ethanol, but ultimately for advanced ethanol fuels when they are available in higher numbers.

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