The deadline is fast-approaching for the U.S. government to issue updated targets for the blending of renewable fuels into motor fuel.
The future of the U.S. biofuels policy is at stake, as scrutiny heightens over U.S. government delays to setting of targets and slow development of the advanced fuels industry, which is meant to represent an increasing portion of the total renewable fuel pool.
For the ethanol and oil industries, the proposals represent the culmination of a years-long battle for market share, one that may determine whether the volume of biofuel in the U.S. gasoline pool pushes beyond the 10 percent share it holds now, the so-called "blend wall."
What is Expected By June 1?
The U.S. Environmental Protection Agency (EPA) has promised to unveil its proposal for how much biofuel must be blended into the nation's fuel supply for the years 2015 and 2016, and to revise previously proposed volumes for 2014 by June 1. It hopes to finalize targets for all three years by Nov. 30, the statutory deadline for next year's mandate.
Why Has It Taken So Long?
The Renewable Fuel Standard (RFS), created in 2005 and expanded in 2007, requires that so-called 'obligated parties' - mainly refiners and wholesale fuel merchants - must blend a steadily increasing amount of ethanol, biodiesel and cellulosic fuel with diesel or gasoline each year.
Though the law laid out volumetric standards, the EPA is tasked with specific volumetric biofuel blending goals each year, a process that has become an increasingly fraught battle between deeply entrenched oil and farm interests.
In late 2013, the EPA saw a strong backlash to a proposal to cut volume requirements for the following year, stalling efforts to finalize the rule for 2014 or propose targets for 2015. It pledged in April to end years of uncertainty by June 1.
What's At Stake?
Essentially, it is the future of the RFS, which has come under attack from politicians, industry, and environmentalists as a fundamentally flawed policy that should be revised or repealed.
Oil refiners like Carlyle Group and Delta Air Lines have lobbied against the mandate, arguing that blending more than 10 percent ethanol into fuel streams is impossible without infrastructure changes in automobiles and at the pump.
Much rides on the 2016 targets for renewable fuel, mostly made of ethanol, which were set in 2007 at 15 billion gallons.
If the EPA stands by that level, it would be a major victory for the corn lobby and ethanol producers, like the Fuels America coalition and major producers Poet LLC and Abengoa SA, which have spent millions to produce advanced biofuels.
It would also be a major reversal from a proposal in 2013 to lower targets, citing constraints in both consumption and renewable fuels volumes.
In turn, if the target is cut significantly, it would be good news for oil industry advocates.
What's The Problem?
Following the financial crisis, U.S. use of gasoline abruptly reversed course after decades of gains, entering an unexpected decline that runs counter to the assumptions underpinning the pre-crisis RFS.
U.S. consumption of motor fuel fell to 137 billion gallons last year, down 4 percent from a peak 142 billion gallons in 2007, according to the U.S. government. Although lower pump prices have stoked fuel demand this year, that is not expected to reverse a trend of steadily lower consumption.
That trend-change has made the biofuel targets increasingly difficult to reach without breaching the blend wall, which oil interests say prevents them from injecting petroleum fuel with more than 10 percent ethanol.
Based on last year's estimated 9.8-percent blending rate, domestic ethanol demand would total about 13.6 billion gallons this year. That would be well below the 15 billion gallons originally targeted for 2016 in the law.
What is EPA's Position on a 'Blend Wall'?
In late 2013, the EPA proposed cutting 2014 biofuels targets, acknowledging there are limits to blending more than 10 percent ethanol into fuel streams, and signaling the agency was bowing to arguments from the oil lobby.
Many market participants expect it to stick to that rationale.
Is it All About Numbers?
No. EPA's rationale will be as closely-watched as the volumes themselves. In 2013, the agency argued it had the authority to lower the volume targets set by the policy to address constraints in consumption and supplies. Ethanol advocates say that argument oversteps EPA's regulatory authority.
How Can Companies Meet a Target For Last Year?
If oil refiners and other obligated parties such as Tesoro Corp did not meet their blending requirements for last year, they can buy credits called Renewable Identification Numbers (RINs) instead.
These are generated for each gallon of biofuel producers make and are used by refiners and importers of gasoline to show compliance with EPA ethanol blending quotas.
Last year, the industry blended about 13.5 billion gallons of ethanol into gasoline, more than the EPA target, which created a surplus of credits. It is likely the proposals will spark jockeying in the RINs market, as obligated parties find themselves either long or short the credits.
What Are The Actual Numbers?
Here is how EPA'S proposed targets compared to the original targets set forth by Congress:
Type of Renewable Fuel 2013 Volume Proposal 2007 Volumes Set
Cellulosic biofuel 17 million gallons 1.75 billion gallons
Biomass-based diesel 1.28 billion gallons 1 billion gallons
Advanced biofuel 2.2 billion gallons 3.75 billion gallons
Implied ethanol target 13.01 billion gallons 14.4 billion gallons
Total Renewable fuel 15.21 billion gallons 18.15 billion gallons
Reality Vs. Plans
The EPA has said it would use last year's use levels to finalize the proposal on last year's mandate, which has huge implications on fuel refiners and importers, who are obligated to show compliance with the RFS program.
The final numbers of fuels blended - represented by refining credits - were above the mandates proposed by the EPA in 2013, but lower than the initial numbers targeted by the policy.
Type of Renewable Fuel Net RINs Generated
Cellulosic Biofuel 33,020,888
Biomass-Based Diesel 2,703,471,963
Advanced Biofuel 143,220,826
Renewable Fuel 14,341,265,304
Cellulosic Diesel 54,308
It is broadly expected that the EPA will use a similar methodology to set the 2015 biofuels mandate.