Ethanol, petroleum industries explain concerns over proposed RFS

By Kris Bevill | August 11, 2011

Members of the ethanol and petroleum industries voiced their concerns over the U.S. EPA’s proposed renewable fuel standard (RFS) volumes for 2012 during a public hearing held July 12 in Washington D.C. The agency issued its proposed 2012 volumes on June 21, suggesting that next year’s cellulosic biofuels volume be reduced from the initial goal of 500 million gallons to as few as 3.55 million ethanol-equivalent gallons. On the high end, the agency proposed no more than 15.7 million ethanol-equivalent gallons (12.9 million actual gallons) of the fuel should be counted on next year. The agency also proposed to maintain next year’s overall volume of 15.2 billion gallons, however, rather than lower it to reflect the reduced cellulosic expectations.

In comments delivered to EPA officials at the hearing, ethanol representatives admitted that the proposed cellulosic production volumes were likely accurate, but stressed the need for continued optimism on the part of the EPA. Meanwhile spokesmen from the petroleum industry said optimistic production goals create financial hardships for their industry. Greg Scott, executive vice president and general counsel for the National Petrochemical & Refiners Association, pointed to this year’s 6 million gallon volume requirement for cellulosic biofuels as proof that optimistic expectations lead to real-world implications for refiners obligated to comply with the mandate. “If the EPA is wrong or if a biodiesel trade group representative or a cellulosic ethanol spokesperson is wrong in his or her rosy predictions for production, it is our members that will experience the economic and regulatory pain,” he stated. No cellulosic biofuel RINs (renewable identification numbers) were generated between July 2010 and May 2011 and the only facility registered to generate cellulosic biofuel RINs—Range Fuels Inc.—is not operating, he said, adding that the EPA should take that into consideration when determining next year’s cellulosic volume. “Obligated parties will be required to buy up to 6 million cellulosic biofuel waiver credits at a $1.13 per gallon RIN in 2011. This is, in essence, a $6.78 million tax that NPRA’s members must pay to EPA due to the agency’s misguided optimism regarding production this year.”

In contrast, Brooke Coleman, executive director of the Advanced Ethanol Council, urged the EPA to continue its aggressive goals regarding cellulosic biofuels, stating that the agency’s mandated volume directly affects the industry’s ability to produce fuel. “There is this funny thing going here where you guys have to go out and measure capacity, but the numbers you come out with and the amount of capacity that you put into the Federal Register will have a giant effect on how much capacity we actually create,” he said.  The EPA’s volume mandates send signals to the investment community, he said, indicating that investors may be unwilling to put up the desperately needed cash to build the first few commercial-scale plants if the EPA does not provide consistent production volume targets. “What is keeping us out of the marketplace and slowing us down is risk,” he said. “As a subset of that, uncertainty exacerbates risk.”

Patrick Kelly, senior policy advisor for API, suggested that the EPA should base the coming year’s cellulosic production volumes on proven production from a three-month period in the current year, rather than the “subjective assumptions” currently used by the agency to determine potential production volumes. Therefore, if no cellulosic biofuel was produced during September, October and November this year, for example, there should be no cellulosic biofuel mandate in 2012. He also expressed concern regarding the overall volume for 2012. “We expect to hit the ethanol blend wall in the near future,” he said. “Our members are very concerned about complying with an unworkable mandate.” To alleviate those concerns, Kelly said the EPA should lower the advanced and total volume categories to reflect the reduced cellulosic total. “Failure to do so will shorten the time frame that we have reached for the blending,” he said. When asked when API believes the blend wall will be reached, Kelly said his group estimates it will happen “within a year or so.”

Corn ethanol producers appear to be mostly concerned with the advanced biofuels category of the RFS. Jim Nussle, president of Growth Energy, asked EPA officials to consider supporting legislative changes to remove the current corn -discrimination clause which prevents any corn-based ethanol from qualifying as an advanced biofuel. “We believe that excluding corn ethanol risks many unintended consequences such as increased costs, reduced supply pressures, and market uncertainty which would harm investment,” he said. Nussle indicated that if the corn-discrimination clause were eliminated future technological breakthroughs could allow some corn ethanol to meet the 50 percent greenhouse gas emission reduction threshold necessary to qualify as advanced biofuel, but was unable to immediately provide further evidence to support that claim.

In written comments submitted to the EPA, Neill McKinstray, vice president and manager of The Andersons Inc. ethanol division, said his company would support a reduction to next year’s advanced biofuels mandate, but urged the agency to allow corn ethanol to be used to make up the difference for the overall volume. According to his comments, the EPA’s proposal to maintain next year’s 2 billion gallon advanced biofuel mandate is based in part on anticipated sugarcane ethanol imports from Brazil. The Andersons does not believe Brazil will have available ethanol to send to the U.S. due to its own increased ethanol demand, volatile sugar markets and lower than average sugarcane production. “It is highly improbable that Brazil can or will export 450-500 million gallons to the U.S., unless they also import similar quantities of conventional ethanol from the U.S.,” McKinstray said in his comments. “The policy could only achieve its target by requiring the burning of marine fuel to transport the exact same commodity in both directions due to market distortions created by RIN values.”

The EPA will review comments received and issue its final 2012 RFS volume rule by Nov. 30.