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Is Now the Time to Rethink the Renewable Fuel Standard?

Is Now the Time to Rethink the Renewable Fuel Standard?

New challenges to the Renewable Fuel Standards (RFS2) were the norm throughout the first quarter of 2013. Two months after a federal appeals court struck down the Environmental Protection Agency’s 2012 cellulosic biofuel standard, the agency has filed a motion stating its intent to reconsider its 2011 standards as well. The agency initially denied a petition, filed in early 2012 by the American Petroleum Institute, the American Fuel and Petrochemical Manufacturers and the Western States Petroleum Association, to reconsider the 2011 standards. No cellulosic biofuels were commercially available in 2011 or 2012.

In its petition, the EPA noted it used the same methodology to set the 2011 standards as it did those that were struck down for 2012: “When EPA established the 2011 cellulosic biofuel standard that is at issue in this case, EPA used basically the same method for projecting cellulosic biofuel production as EPA used when it established the 2012 standard. Under these circumstances, voluntary remand is particularly appropriate as it is unlikely that upon reevaluation EPA would simply re-affirm the 2011 cellulosic biofuel standard without further analysis or explanation.” The federal appeals court previously ruled the EPA does not have the authority to set standards at levels designed to incent growth within the cellulosic biofuel industry.

Since no federal mandates to dictate biofuels consumption exist, the EPA bases its targets on biofuels supply. The Renewable Fuel Standard established under the Energy Independence and Security Act of 2007 (EISA) required the EPA to base its calculations upon estimates provided by the Energy Information Administration. The EIA anticipates more than five million gallons of cellulosic biofuel could become available this year, which is well below both the one billion gallon target set forth by the EISA and the 14 million gallon standard given by the EPA. Bloomberg New Energy Finance projects 22 million gallons of cellulosic biofuels will become available in 2013.

Year

EPA Cellulosic Biofuels Targets

Commercial Production

2011

6.6 million gallons

0 gallons

2012

8.65 million gallons

0 gallons

2013

14 million gallons

 

According to the EIA: “Although cellulosic biofuels volumes are expected to grow significantly relative to current levels, they will likely remain well below the targets envisioned in the Energy Independence and Security Act of 2007,” the agency said. “That law set a target level of 500 million gallons of cellulosic biofuels for 2012 and 1 billion gallons for 2013, growing to 16 billion gallons by 2022.”

The EIA map below shows the cellulosic biofuel projects scheduled to be operational by 2015. It is difficult to see how these facilities will produce 16 billion gallons of cellulosic ethanol in just over two years’ time. For updates on the KiOR and ZeaChem projects, see the most recent Bioenergy Project News blog article.

EIA: Cellulosic biofuel projects to begin production by 2015

Legislation Proposed to Address Old Targets, New Issues

Just as the EIA, the EPA and other analysts can’t seem to agree on the amount of cellulosic biofuel that will be produced this year, Congress can’t seem to decide whether to support or undermine the RFS. The House Energy and Commerce Committee has opted to revisit the RFS through a series of five white papers aimed to consider the standards in light of past experience and the present and future energy pictures. The first paper, released March 20, anticipates the challenges that will arise when the supply of ethanol is more than required to meet blending mandates. Legislators and ethanol industry advocates appear at odds over how to handle this so called fuel wall. The latter are pushing for the EPA to increase the blending requirements from 10 percent (E10) to 15 percent ethanol (E15). Release dates for the four remaining white papers are not yet available.

Congress, on the other hand, is considering two pieces of legislation, H.R. 875 and S. 344, that respectively aim to delay or ban the sale of E15. House bill 875 seeks to stop the sale of E15 for a minimum of 18 months in order to allow time to research its potential to damage the engines of older cars (those manufactured prior to 2001) and small equipment (lawnmowers, motorcycles, etc.). Senate bill 344 would prevent the sale of E15 altogether. Fueling this controversy, so to speak, are concerns that gas stations not equipped to store this fuel blend and anticipated consumer misfueling would lead to widespread engine damage.

The House bill presents a more reasonable solution to address concerns associated with the use of E15. Research into the effects the fuel has on equipment, and perhaps the impact its introduction would have on retailers and consumers, is simply more logical than an outright ban as a first step. The bills have been referred to the House Subcommittee on the Environment and the Senate Committee on Environment and Public Works, respectively.

 A co-sponsor of H.R. 875, US Representative Jim Sensenbrenner (R-WI), has also introduced H.R. 796 aimed to cap cellulosic biofuels at the greater of five percent of the total volume of commercially available supply for the most recent calendar year or one million gallons. Sensenbrenner suggests the legislation will limit the EPA’s ability to fine petroleum refiners for failure to use fuel that is unavailable, subsequently passing those fines along to consumers in the form of higher prices at the pump.  Similarly, H.R. 550 seeks to require EPA standards for cellulosic biofuels equal the estimated annual volumes of production realized the prior year.

The decision of the federal appeals court to vacate the 2012 standards appear to set the precedent that the oil industry will not be held accountable for a failure to blend biofuels when none are available, thus rendering at least a portion of Sensenbrenner’s argument moot. The establishment of a reliable framework to set reasonable and accurate standards is needed, however, and tangible production in a prior year would seem a valid measure.

Nevertheless, using only realized production or capping future standards based on that amount ignores other variables. Consider, for instance, if such a cap were applied for corn ethanol. Drought conditions experienced throughout most of the nation last summer, subsequently resulting in a reduced corn crop, would have led to an unreasonably low standard for this year. Both House bills have been referred to the Subcommittee on Energy and Power.

Cellulosic Ethanol Nearing Cost Competitiveness

Although the RFS is likely to remain in jeopardy, the industry itself is making progress on cost competitiveness. Those in the cellulosic ethanol industry anticipate their product will rival the cost of corn ethanol within the next three years. According to information gathered by Bloomberg New Energy Finance, cellulosic ethanol costs 94 cents per liter (0.26 gallon) to produce while corn ethanol costs just 67 cents per liter. Despite this difference, the cost of enzymes used in the production of cellulosic ethanol fell 72 percent from 2008 to 2012. While capital expenditures and securing financing remain significant challenges, technological advances that continue to lower operating costs at cellulosic biofuel plants point to price parity by 2016.

What will the rest of 2013 hold? While petroleum refiners are certainly correct in their position that it is unfair to receive fines for their failure to use products that do not exist, it seems unlikely they would continue to blend biofuels if the requirements were lifted altogether. Despite varied disagreements, analysts agree cellulosic biofuels – like those made from wood biomass – will play a critical role in the ability to meet the RFS2 goal that refiners will blend 36 billion gallons of biofuels into the nation’s gasoline supply by 2022. Though targets today remain a far cry from those projected back in 2007, there is no arguing the RFS2 has played a vital role in establishing the cellulosic biofuels industry that appears poised to take off.