CoBank report considers implications of 2014 RFS proposal

By Erin Voegele | December 20, 2013

CoBank, a national cooperative bank serving rural American industries, has published a report predicting that the U.S. EPA’s proposed 2014 renewable fuel standard (RFS) volume requirements will have little impact on U.S. ethanol production and use in the short term. The proposal, however, is expected to result in elevated uncertainty about the future size of the ethanol market and the long-term outlook for the industry.

The report, titled, “Ethanol’s New Path Forward,” predicts that ethanol will continue to be blended at a 10 percent level through 2014, regardless of changes to the RFS. However, CoBank notes that the EPA’s action sends a signal to fuel retailers that investments in higher ethanol blend infrastructure are not necessary. “Additionally, by proposing to align 2014 blending requirements with the blend wall, the EPA has established a precedent whereby  the mandate will be open for revision each year going  forward, based on market conditions. This increases uncertainty about the future of the RFS and the size of  the ethanol market over the long term,” said the authors in the report.

CoBank’s report also addresses challenges associated with increasing ethanol consumption through the use of E85 and E15, noting most station owners have indicated they would not consider installing E15 pumps and storage tanks until warrantee issues are resolved. However, the report indicates that as the number of pre-2001 vehicles on the road declines, E15 could displace E10 as the standard fuel in the U.S., assuming vehicle manufacture warranty issues will be resolved.

Regarding E85, the report notes that although E85 offers great potential for raising the blend wall, efforts to expand the use of E85 have encountered challenges. Some of the challenges highlighted in the report include issues related to pricing, fuel availability, and availability of flex-fuel vehicles. Moving forward, the report notes that increasing E85 sales may be further challenged by changes to the Corporate Average Fuel Economy credits for flex-fuel vehicles. Starting in 2016, flex-fuel CAFE credits are scheduled to be changed out through 2019, when they are eliminated. CoBank said the change could cause flex-fuel vehicle sales to drop drastically.

The report concludes by noting the ethanol industry successfully demonstrated in 2013 that it can operate profitably at less-than-optimal utilization rates. “Most estimates indicate that the ethanol industry operated in 2013 at roughly 85-90 percent of capacity. Incidentally, this is the same rate of utilization under which the U.S. oil refining industry has operated for the past several years,” said CoBank in the report. In addition, the report predicts that mergers and acquisition activity in the ethanol industry may increase over the next one or two years, as well-positioned producers look for opportunities to improve their economics of scale and marginal producers explore options to merge.