Biofuel Industry Responds to Suggestion that EPA Will Lower Ethanol Mandate

The Environmental Protection Agency (EPA) is recommending a reduction in the minimum amount of biofuel that must be blended into transportation fuel, according to an EPA document leaked last month.

A revised Renewable Fuel Standard (RFS) mandate would reduce the level of corn ethanol from 14.4 billion gallons a year to an amount between 12.36 billion and 13.18 billion gallons, the document states. The total renewable volume obligations (RVO) for biofuel would drop to 15.21 billion gallons, a reduction of nearly 3 billion gallons.

The agency’s apparent call for reducing the RVO seems to be a response to Big Oil’s argument that the U.S. fuel chain cannot absorb more ethanol.

Having been forced to cede 10 percent of their gasoline revenues to biofuel suppliers, oil companies are not only doing all they can to keep that number from going up as scheduled over the next eight years, but they are actually trying to roll the number back.

Oil companies base their argument on blend wall, which essentially points to a supposition that retailers won’t be able to sell more than the 10 percent of ethanol that is currently blended into gasoline. They claim that some older model (pre-2001) car engines might reject higher levels of ethanol. Those car owners will avoid the product.

Retooling service stations to sell more E85 (85 percent ethanol) and to transition from the current 10 percent E10 blend to a 15 percent blend is expected to cost the oil industry as much as $300 million.

If approved, the approximately 6-percent reduction suggested by the EPA would be the first setback for the U.S. biofuels program and a major windfall for the oil industry.

EPA officials claim that the leaked document is only a draft. Nonetheless, it instigated an angry response from biofuel supporters.

Geoff Cooper, vice president for research at the Renewable Fuels Association questions whether the EPA has the authority to issue a waiver. He claimed in a news conference last week that the terms of the RFS only allow for a waiver in the event of a supply shortage which, with a near-record corn crop expected this year, is highly unlikely.

The current outlook shows physical capacity of 15 billion gallons, well above the current mandated level.  If anything is going to be inadequate, it’s more likely to be demand, given the combined impact of the recession and the fact that cars are getting more efficient, Cooper said.

Depending on which of the leaked scenarios were to play out, the oil industry’s benefit from these cuts would be anywhere from $9.19 billion to $15.24 billion, he said.

By avoiding wholesale purchases of ethanol to blend with their gasoline they would save $2.1 billion to $3.6 billion, Cooper said. They would then turn around and sell that much additional gasoline bringing in another $2.3 billion to $4.0 billion, assuming gas prices stay the same, he said. But gas prices are not likely to stay the same. Increased demand for gasoline will likely lead to an increase of five to nine cents per gallon. The American consumer would be looking at spending an additional $6.8 to $11.3 billion on gasoline next year, he said.

There is more at stake than what oil companies might gain or lose. The farmers and small business owners who had been assured there would be a biofuels demand for their crops face a potentially catastrophic situation in which corn prices collapse as the market shifts back to gasoline.

During the news conference, Chris Standlee, executive vice president of Abengoa Bioenergy, and Jan Koninckx, global business director for biorefineries for DuPont, both expressed concerns about the future of advanced biofuels.

“It is our belief that if the leaked draft of the RVO is actually published and finalized… it would dramatically impact both conventional biofuels and advanced biofuels,” Standlee said.

“For the first time in the history of the RFS, which was, of course, originally designed to help break the monopolistic hold that the petroleum companies have on the domestic transportation fuel market…EPA will be reducing the requirement for renewable fuels, not only below both statutory requirements and available supply levels, but also well below the levels actually consumed in 2013,” he said. “And we believe that this will effectively kill any future investment in advanced biofuels.”

Makers of cellulosic biofuels  have attracted investors, developed workable technologies, and addressed supply chain issues. For the EPA to take a step backwards now would send a very confusing and discouraging signal to the industry just as it’s ready to take off, they say.

Standlee added the EPA’s policy reversal would send a chill through the investment community. The likely result is that “companies who make those fuels, are already thinking about moving their investments overseas to a more receptive market, costing the U.S. significant potential jobs and future investment,” he said.

Abengoa has more than $1 billion in renewable fuel production on three continents. It is constructing a 25-billion-gallon cellulosic ethanol plant in Kansas — an effort the company had planned to duplicate in other locations. “Publication of this leaked draft would force us to reexamine that investment plan, and consider other countries that are more friendly to this type of investment,” Standlee said.

Should the EPA decide against the RVO reduction, there is evidence that the oil industry will take its case to court, as it has done, unsuccessfully, in challenging the E15 rollout.

DuPont is confident that “this advanced cellulosic technology will be a very good technology and a very commercially viable technology, Koninckx said. “But the RFS is key in making this possible because this large fuel market which is so critical to the world, and to this country, is controlled by the incumbent oil industry. This technology needs a route to market… This tactic of the oil companies to create doubt around this may slow us down or it may take the leadership in this development away form the U.S. But eventually this technology will be commercialized.”

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