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RFS waiver and the future role of biofuels

The U.S. Environmental Protection Agency (EPA) recently announced a proposal to reduce the Renewable Fuels Standard (RFS) for 2014 from the previous requirement of 18.15 billion gallons to a revised level of 15.21 billion gallons. The EPA proposal represents a reduction of approximately 16% from the original RFS fuel volume for 2014, which was originally established by the Energy Independence and Security Act (EISA) of 2007. The overall goal of this legislation was to reduce U.S. dependence on foreign oil to meet our energy needs, and to expand the production of renewable fuels domestically in the U.S.

The EISA of 2007 set a target of 18.15 billion gallons of total renewable energy for 2014, with an estimated 14.4 billion gallons to be derived from corn-based ethanol production. The total RFS set by the EPA for 2013 was 16.55 billion gallons, with an estimated 13.8 billion gallons from corn-based ethanol. EPA is now recommending a total of 2.20 billion gallons in 2014 from advanced biofuels (biomass-based diesel and cellulosic ethanol), as compared to 3.75 billion gallons originally established by EISA in 2007, or 2.75 billion gallons set by EPA in 2013.

The RFS, as it was originally designed in 2007, was supposed to continue to increase in volume from 2008 to 2022, eventually reaching a total 36 billion gallons of renewable fuel. The volume of corn-based ethanol was set to increase to 15 billion gallons by 2015, and then be held steady. Most of the increases beyond 2015 were slated to occur from development of the production of advanced biofuels, primarily from cellulosic ethanol. Thus far, the production of most advanced biofuels, other than soybean-based biodiesel, have lagged far behind the expectations that were established in 2007.

The 2007 EISA legislation granted EPA the authority to waive the renewable fuels requirement for an individual calendar year by “reducing the national quantities of renewable fuels that are required,” based on certain criteria. To reduce the RFS requirement, EPA must determine that implementing the requirements would “severely harm the economy or environment,” or that there is “an inadequate domestic supply” of renewable fuels. EPA is expected to consult with the U.S. Secretaries of Agriculture and Energy before reaching a final decision. Now that EPA has issued revisions in the RFS requirements, there is a 60-day public comment period, which will continue until January 28, 2014.

U.S. production and use of corn-based ethanol, soybean-based biodiesel and other forms of renewable energy should remain solid for the short-term; however, the proposed RFS requirements could restrict future growth of the renewable fuels industry. The corn-based ethanol industry is well established, with many well managed and profitable ethanol plants in operation. According to the Renewable Fuels Association, there are expected to be 210 ethanol production facilities operating in the U.S. in 2014, with a total production capacity exceeding 14.7 billion gallons. As long as ethanol production is profitable, these plants will likely continue to operate at capacity, regardless of the RFS requirements.

According to the latest USDA estimates, U.S. ethanol production is scheduled to utilize approximately 4.9 billion bushels of corn for the 2013-14 fiscal year, which represents about 35 percent of the estimated 2013 total U.S. corn production of 14 billion bushels. If you factor in that nearly one-third of the corn volume used comes back as dried distillers grains (DDG’s) for livestock feed, the actual net percentage of the U.S. corn crop utilized for ethanol production is probably closer to 25 percent of the total. Most analysts expect corn use for ethanol production to remain in the 4.5-5.0 billion bushel range in the next few years.

EPA seems to be using the so-called “blend wall” to justify the proposed revisions in the RFS requirements for 2014. In simplistic terms, the ethanol “blend wall” is the point at which the required volume of ethanol for gasoline blending matches the expected production of ethanol. Back in 2007, when EISA was enacted total gasoline consumption in the U.S. was at about 142 billion gallons per year, and was expected to increase to 150 billion gallons by 2014. Since 2007, estimated annual U.S. gasoline consumption has been declining, and is now estimated to be approximately 132 billion gallons for 2014, which translates to a “blend wall” of 13.2 billion gallons of ethanol at a 10 percent blend. The reduction in total U.S. gasoline consumption has been the result of the struggling U.S. economy, relatively high gasoline prices, and the introduction of more fuel-efficient vehicles.

Assuming that U.S. gasoline consumption levels are going to remain fairly level in the coming years, about the only way to increase the amount of renewable fuel being used is to blend higher amounts beyond “E10” into the gasoline mixtures. Even though EPA has allowed the use of “E15” gasoline blends for automobiles that are 2001 and newer, the adoption of “E15” blends has been very slow, and there has been considerable backlash to adopting “E15” blends by oil companies, auto manufacturers, and others. The number of “flex-fuel” vehicles in the U.S., allowing up to “E85” fuel blends, has increased considerably in recent years; however, the availability of “E85” fuel blends at the retail gasoline pumps is very limited in many areas of the U.S. The other likely occurrence from added U.S. ethanol production, beyond domestic fuel needs, will likely be increased ethanol exports to Canada, South America, and Asia, in the coming years.

The proposed RFS revisions would also heavily impact the U.S. soybean-based biodiesel industry. EPA is proposing a required volume of 1.28 billion gallons of biomass-based diesel fuel, which is primarily soybean-based diesel. According to the National Biodiesel Board, it is estimated that total production of soybean-based biodiesel will be over 1.7 billion gallons in 2014, well-above the proposed EPA requirements. Minnesota has three soybean-based biodiesel plants in operation, producing approximately 60 million gallons per year.

The biggest loser in the scaling back of future RFS requirements may be the development and advancement of renewable fuels from cellulosic sources, biomass, and other new technologies. Many of these “next-generation” forms of renewable energy are still in the research and development stages, and may be years from commercial development. Federal government policy and resources will likely dictate how fast the commercial development of these advanced biofuels occurs. Without some backing by the Federal government to assure a future market-share, it may be very difficult to get the needed investment dollars and technology expertise to make these concepts for “next-generation biofuels become a reality.

TAGS: Energy
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