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Blog

Renewable Fuel Standard Challenges

June 13, 2012
Author: Suz-Anne Kinney

Challenges to the Renewable Fuel Standard (RFS) and biofuels development are all over the news these days. Intended to speed the development of a biofuels industry by encouraging refiners, importers, and blenders to invest in the development of this emerging market, the current RFS was established by the Energy Independence and Security Act, which was signed by President Bush on December 19, 2007.

It should be noted that the development of this new market will benefit working forests. Because traditional markets for timber have been shrinking, new markets are essential for preserving existing forests. When no profitable market for timber products exist, forest land is much more likely to be converted, either for development or for more profitable agricultural purposes.

Whether this new market will flourish, however, is questionable. Three major drivers of success (or lack thereof) in cellulosic biofuels production are biomass availability, technology, and financing.

In order to be eligible for RINs, biofuels created from wood-based feedstocks must fall into one of two categories: either “planted trees and tree residue from actively managed tree plantations on non-federal land cleared” prior to December 19, 2007 or “slash and pre-commercial thinnings that are from nonfederal forestlands.” This strict definition limits the amount of wood-based feedstocks available for biofuels production.

Technological failures—like that of Range Fuels—have led to setbacks. In the timeline of any new technology development, however, failures are to be expected. As has been proven over and over again with emerging technologies, the majority of firms will fail until the one or two pathways to success are established, and then those technologies are widely adopted and a market is established.

Financing these capital intensive projects is also difficult. Acquiring the necessary debt and capital is becoming even more challenging due to the significant regulatory uncertainty that began to mount as multiple bills were introduced into Congress in 2011 to diminish the RFS’ effectiveness. This uncertainty has grown in 2012, as a series of petitions, suits and current Congressional actions are taking aim at the RFS. A summary of these efforts follows:

1)      On January 20, 2012, the American Petroleum Institute (API), the American Fuel and Petrochemical Manufacturers (AFPM, formerly known as the National Petroleum Refiners Association) and the Western States Petroleum Association (WSPA) filed a petition asking the Environmental Protection Agency to retroactively waive the 6.6 million gallon 2011 cellulosic biofuel requirement established under the Renewable Fuels Standard (RFS) “due to an inadequate domestic supply of such fuel.”

AFPM President Charles Drevna elaborated:

“Refiners are being ordered to do the impossible—use large volumes of cellulosic biofuels even though none have been produced. Because they can’t use something that doesn’t exist, refiners are being told to pay $6.8 million to EPA. We don’t even know how the proceeds of this hidden de facto tax will be used. This mandate is excessive and harmful to consumers and will undoubtedly raise energy costs and could have a negative impact on fuel supplies. The time has come for EPA to approach this issue rationally and use good judgment when making a decision.”

On May 22, the EPA denied the petroleum industry’s request for waiver. In its announcement, the agency argued, “Basing projections only on proven production levels would be unlikely to provide the market incentives for this fuel that are needed to meet Congressional goals in establishing cellulosic biofuels as part of the RFS program.”

On June 11, the AFPM and the WSPA filed a suit against the EPA in the US Circuit Court, appealing the EPA’s decision to reject their petition. Drevna again: "The requirement to blend cellulosic biofuels that do not currently exist—and will not be available in the immediate future—in any form that satisfies EPA's phantom fuel requirements, let alone the quantities mandated by the RFS program, is one of many examples of how the RFS is broken. Congress should repeal the RFS and embrace a more realistic approach to biofuels; American consumers deserve better from their government."

2)      After filing the 2011 petition, the API turned its attention to the 2012 standard. On March 22, it filed a petition for review with the US Appeals Court challenging the EPA’s 2012 RFS targets, arguing that the Act requires the EPA to set more realistic annual standards. The API believes, according to Bob Greco, API group director of downstream and industry operations, that the EPA should use at least 2 months of actual cellulosic biofuel production in the current year in order to establish the standard for the following year. Using this methodology, the 2012 standard would be the annualized rate of 1Q2011 cellulosic biofuels production. Since no cellulosic biofuels were produced in 1Q2011, the API is suggesting the cellulosic biofuels requirement for 2012 would be zero.

3)    A recent anti-biofuels amendment to the National Defense Authorization Act for fiscal year 2013 by the Senate Committee on Armed Services included two provisions that would limit use of biofuels by the military; the amendment: 1)  prohibits fiscal year 2013 funding on the production or purchase of an alternative fuel if the cost of doing so is higher than the cost of traditional fossil fuel and 2) prohibits the DOD from entering into a contract to design or construct a biofuels refinery or any other facility or infrastructure used to refine biofuels.

4)    In addition, a new Senate study group called the Biofuels Investment and RFS Market Congressional Study Group will begin holding sessions in June to discuss the RFS and its future. Many believe that the purpose of this group is to begin the repeal of the RFS that the API’s Drevna mentioned above.

With this uncertainty and the resulting difficulty in financing biofuels projects, it may be time not to repeal the RFS, but to re-think it. As Biofuels Digest’s Jim Lane recently wrote in The Coalition of the Unwilling and the Doctrine of Underwhelming Force, “Focusing on the end goal, which is capital formation, is right. Thinking about extending the RFS2 out to 2030 is right, also—after all, debt issuers are likely to want to see 15-year RFS protection for 15-year debt. Thinking in terms of alternative feedstocks, rather than alternative fuels—that’s interesting, isn’t it? Dropping the volumetric requirements for advanced biofuels, and simply giving a RIN for production—that’s highly interesting too.” A new RFS configuration that focuses on capital formation, a broader definition of biomass and regulatory certainty may actually be better at speeding biofuels development and, therefore, benefit America’s working forests more quickly than the current RFS.


Comments

National Low Carbon Fuel Standard | F2M Market Wat

08-17-2012

[...] The law is being challenged in Court and in the court of public opinion because it penalizes producers for failing to use fuels that don’t currently exist (read more). [...]

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