By Elizabeth Hilbourn and John Auers
Just when the Renewable Fuel Standard (RFS) program seemed to be getting on track, another monkey wrench has been thrown in. 2012 was the last year RFS was on track before the last compliance year of 2016. On track refers to the EPA setting the target in rulemaking by November 31 of the previous year and obligated parties retiring RINs in compliance at the end of the year. Even 2012 was not totally on track; the cellulosic biofuel standards were set and subsequently removed. Retirement of the 2013 through 2015 obligations was not until 2016. Retirement of the 2016 obligation was on schedule and due April 1, 2017; however, now due to a recent development, the 2016 obligation has to revisited.
On July 28, 2017, the U.S. Court of Appeals for the District of Columbia (the Court) decided that the EPA erred in its interpretation of its authority to waive biofuel requirements that reduced the 2014-2016 obligation below what Congress intended under the RFS. The basis for this decision was the interpretation of “inadequate domestic supply” waiver provision. The rule is remanded back to the EPA and all eyes are on what will happen with RIN prices. Since the Court decision, RIN prices have not noticeably changed. D6 RIN prices have increased a few cents; however, they had been rising at relatively the same rate before the decision.
“Inadequate Domestic Supply”
The Court believes that the EPA should only consider supply-side factors affecting the volume of renewable fuel that is available to refiners, blenders, and importers to meet the statutory volume requirements. The Court expressed their belief that the EPA is not allowed to consider the volume of renewable fuel that is available to the ultimate consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers. The Court agreed with the plaintiff, Americans for Clean Energy, that the term “inadequate domestic supply” refers to the supply of renewable fuel available to refiners, blenders, and importers to meet the statutory volume requirements. Apparently, the version of the Energy Policy Act passed by the House would have allowed EPA to reduce the statutory volume requirements “based on a determination by the Administrator that there is an inadequate domestic supply or distribution capacity to meet the requirements” which was dropped in the version of the bill passed by the Senate. The Court exhaustively demonstrates that supply side factors should invoke the “inadequate domestic supply”; however, they do not exhaustively define what supply side means.
Statutory Renewable Fuel Requirements
Statutory renewable fuel requirements are shown in Table 1. The statutory requirements of 2012 through 2018 increased from 15.2 to 26.0 billion gallons per year. Table 2 shows the final renewable fuel requirements. 2013 was the last year where the statutory requirements were met. The 2018 final obligation of 19.24 billion gallons is substantially less than the statutory requirement. Table 3 shows the difference between the statutory and final renewable fuel requirements in billion gallons, thousand barrels per day and percentage difference. Each year after 2013, as the statutory requirement increased and the blend wall was reached, the difference increased. In 2018, the statutory requirement will be 35% greater or 441 MBPD. The obligation is increasing each year with 2022, the final year in the regulation, with an obligation of 36.0 billion gallons or 2,348 MBPD.
U.S. Renewable Fuel Plant Utilization
Figure 2 shows U.S. biodiesel and ethanol utilization. Biodiesel utilization has increased since 2010. Ethanol utilization has been pretty constant at 100% the last several years. Between 2011 and 2014 ethanol capacity was somewhat constant as plants both went out of service and came into service. From 2014 on, there was a consistent growth in capacity. 2012 and 2013 were the years where large amounts of Brazilian sugarcane ethanol were imported, and the net ethanol exports almost went to zero.
Figure 3 shows U.S. ethanol plant production which is comprised of both consumption and net exports. The last four years have seen a steady increase in ethanol exports, since the blend wall was reached.
Figure 1 depicts the last several years of RIN prices. In 2013, the prices of RINs surged as the blend wall was reached and the 2014 obligation had not been set. In 2013, the price of the ethanol RIN approached that of the biodiesel RIN and the price held until the last half of 2015. In all of 2016, the ethanol RIN approached that of the biodiesel RIN. The gap between the ethanol and biodiesel RIN, which widened at the start of 2017, has been narrowing and is now approximately twenty cents.
Definition of Supply
The Court has exhaustively determined that demand-side factors should not factor into “inadequate domestic supply”; however, they have not exhaustively determined what “inadequate domestic supply” means. The Court agreed with Americans for Clean Energy that the term “inadequate domestic supply” refers to the supply of renewable fuel available to refiners, blenders, and importers to meet the statutory volume requirements. With enough incentive, conceivably the supply of renewable fuel to the U.S. could be what is produced in the world. Figure 4 shows the world production levels of ethanol and biodiesel which totaled 2,660 MBPD in 2016. In general, the country that produces the renewable fuel is the country that consumes it. It is estimated that in 2016, only 6% of worldwide renewable fuel production was traded. The U.S. currently has an imbalance in both ethanol and biodiesel in that it exports ethanol and imports biodiesel. Assume it is realistic to draw on this quantity of world renewable fuel production. The amount of shortfall in 2018 is a staggering 441 MBPD, more than what the whole European Union produces of both biodiesel and ethanol. If the “inadequate domestic supply” is drawn somewhere in between what is produced domestically and what is imported, where will this line be drawn? Also, the obligation is increasing each year with a 2022 obligation of 36.0 billion gallons or 2,348 MBPD, the level of which is essentially the current total world biofuel production.
What is next?
The July 28, 2017, the Court rule remands the rule to EPA for further consideration of the total renewable requirements for 2016. The Court determined that there are no issues on EPA’s determination of the 2014 and 2015 obligations, however, ruled in favor of Americans For Clean Energy that the EPA did not properly interpret “inadequate domestic supply” for the total renewable requirements for 2016. It is a little odd that the Court determined that setting the 2014 and 2015 obligation in ex post facto as the amount that had been produced since it would minimize the hardship caused to obligated parties; however, for 2016, the Court is saying that supply side factors had not been considered and there is no consideration for hardship to obligated parties. The EPA could possibly do one of the following actions:
- Appeal to a higher court such as the Supreme Court;
- Change the renewable fuel regulations through Congress;
- Set a higher renewable fuel obligation for 2016, perhaps increasing the obligation by the amount of net ethanol that was exported in 2016. This would amount to 66 MBPD or 1.0 billion gallons and could potentially change the 2016 obligation from 18.11 to 19.11 billion gallons. These 1.0 billion gallons could be made up with the 1.6 billion gallons of RIN carryover from 2016 to 2017. The July 11 Turning Point, “Roadhouse Blues” graphed prior year RIN carryover; or
- Appeal with the second circumstance of the “general waiver provision.” The “general waiver provision” allows EPA to reduce the statutory volume requirements in two circumstances. The “inadequate domestic supply” was argued extensively and was the basis for the July 28 Court ruling. The other circumstance, if EPA determines that “implementation of the requirement would severely harm the economy or environment of a State, a region, or the United States” could be petitioned back through the Court. Obviously, if the supply of renewable fuel was much larger than what the demand side could take, there would not be enough D6 RINs available since ethanol producers would continue to export their product, since it could not be blended into transportation fuel. The price of D6 RINs would quickly spike. At the August 1 public hearing for the 2018 renewable fuel standards, Scott Segal, a top lobbyist for Valero, the largest independent refiner in the world, presented the problems with the program, which he said can pose a threat to the economy if not dealt with.
The Court only addressed what was petitioned which was the promulgated Final Rule setting several renewable fuel requirements for the years 2014 through 2016. The mandates for 2017 and 2018 were not addressed. Will the “inadequate domestic supply” argument eventually apply to the renewable fuel part of those mandates also? Currently, there is no indication of this. The comments on the 2018 renewable fuel standard will be accepted until August 31, 2017. By statute, EPA is required to promulgate the percentage standards for a given year no later than November 30 of the preceding calendar year, so the final 2018 standard should be set in the next few months.
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (scheduled to be released later this week) and our various other studies. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting either one of us by visiting our website at turnermason.com or calling Shanda Thomas at 214-754-0898.