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Frequent exemptions are negatively impacting the biofuel industry.

Kent Thiesse, Farm management analyst and vice president

November 5, 2019

6 Min Read
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The granting of small refinery exemptions (SREs) by the U.S. Environmental Protection Agency (EPA) has garnered considerable attention by ethanol and biodiesel plants, farm organization, and political leaders in recent months. In the past couple of years, the EPA has granted an unusually high number of SREs, which has impacted demand for renewable fuels and has negatively impacted the profitability of the ethanol and biodiesel industries. The Trump Administration has now proposed some changes to the procedures for the Renewable Fuel Standard that potentially could address some of the issues related to the granting of the SREs. Understanding the SREs and how they impact the ethanol and renewable fuel industry can be quite complex.

History of the RFS

The Renewable Fuel Standard (RFS) was originally established as part of the Energy Policy Act of 2005 in order to guide the development of the biofuels industry. The RFS was greatly expanded under the Energy Independence and Security Act of 2007. As it was originally designed, this legislation 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 supposed to increase to 15 billion gallons by 2015, and then hold steady, which it has. Most of the increases beyond 2015 were slated to occur from development of the production of advanced biofuels, primarily from cellulosic ethanol. The production of most advanced biofuels, other than soybean-based biodiesel, have lagged far behind the expectations that were established in 2007.

The 2007 legislation granted EPA the authority to set the mandated renewable fuel blending requirement each year for the various categories of renewable fuel, based on production capacity and renewable fuel blending needs. Due to inadequate production capacity, the volume requirements for most categories of biofuels except for biodiesel and conventional, which is primarily corn-based ethanol, have been set below the original volumes that were established in the 2007 legislation. For 2020, EPA has continued the volume for ethanol at 15 billion gallons, which is the same as in recent years; while proposing slightly above the 2019 volume of 2.1 billion gallons for biodiesel.

The 2007 RFS legislation basically mandated that most U.S. gasoline contain 10 percent ethanol. The statutory volume of 15 billion gallons for corn-based ethanol was based on an anticipated total gasoline usage in the U.S. of approximately 150 billion gallons. However, due to more energy-efficient vehicles and some challenges in the U.S. economy at various times since 2007, the total gasoline usage has not reached that level. As a result, the 15-billion-gallon-per-year production level of corn-based ethanol has exceeded the amount needed for the 10 percent ethanol blend, which is commonly called the blend wall. Under RFS requirements, refiners are required to purchase the excess biofuel through a complicated system of renewable identification numbers (RINs), which EPA has established to track the use and trading of renewable fuel volumes.

Blending requirement exemptions

A seemingly obscure portion of the RFS legislation grants EPA the authority to grant exemptions to small refineries from complying with the required biofuel blending requirements. The so-called small refinery exemptions (SREs) were used very sparingly in the early years of the 2007 legislation; however, EPA has chosen to grant rather large numbers of SREs in recent years, which has caused considerable concern. The SREs are intended to be given to smaller refineries to reduce excessive economic hardship that is caused by the renewable fuel blending requirements.  

During the most recent round of announced SREs in August 2019, EPA granted 31 SRE’s, waiving the requirements for ethanol and biodiesel under the RFS for the 2018 year. Since the 2016, the EPA has granted 85 SREs, representing 38.3 billion gallons of gasoline and diesel fuel consumed in the U.S. during that time period. Prior to 2016, very few SREs were granted by EPA, and less than 10 SRE requests have been denied by EPA since 2016. The 2018 SRE exemption amounts to 1.43 billion gallons of renewable fuel no longer being required under the RFS law, which followed 1.8 billion gallons being removed by the SREs in 2017. Since 2016, over 4 billion gallons have been removed from the RFA requirements.

The more frequent granting of SREs by EPA in recent years has had a very negative impact on the profitability for the ethanol and biodiesel industry. The reduction in the amount renewable fuels to comply with RFS requirements has slowed demand for biofuels at a time when production levels were already exceeding domestic needs. In addition, EPA has been slow to adopt enhanced fuel blends such as E-15 gasoline or expanded grades of biodiesel on a nationwide basis, which would match the trend that has been established in Minnesota.

Since EPA increased the use of SREs, 19 ethanol plants in the U.S. have either closed or idled production, including the Corn Plus ethanol plant at Winnebago, Minn., with additional plants reducing their production levels. It is estimated that the 2.5-billion-gallon-per-year biodiesel industry in the U.S. has lost nearly 10 percent of the total demand due to the SREs granted by EPA in the past three years. The U.S. biodiesel industry has had nine processing plants close and other plants reduce production levels. In addition to having an impact on the profitability of the ethanol and biodiesel plants, the increased use of SREs is resulting in reduced farm-level grain prices and is affecting rural economies.  

Maintaing the biofuel mandate

In early October of this year, EPA announced a plan to maintain the mandated 15 billion gallons of conventional biofuel or corn-based ethanol that is mandated by the RFS requirements. Starting in 2020, any gallons of required renewable ethanol that are lost due to the granting of SREs are scheduled to be compensated for by EPA through the RIN system. There were also provisions included to enhance the use of E15 and reforms to the RIN system. However, there was not specific mention of addressing the gallons of biodiesel that have been lost by the SREs, or any provisions to address the 4.1 billion gallons of renewable biofuel that was lost to SREs from 2016-2018.

The announcement by EPA should help restore some stability in the RFS requirements starting in 2020. However, as the month of October progressed, the details of how the gallons of ethanol and other renewable fuels that are lost to SREs will be compensated for by EPA became less clear. The EPA announcement has been rather short on details for addressing future adjustments for SREs, as well as for addressing the economic challenges facing the renewable fuel industry.  

About the Author(s)

Kent Thiesse

Farm management analyst and vice president, MinnStar Bank

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