Now that we’re a week removed from the US Environmental Protection Agency’s announcement regarding Renewable Fuel Standard targets for 2017, let’s take a closer look at the implications. If you haven’t already read the 84-page, 40,000-word RFS proposal, I highly recommend it. Assuming you’re not interested in wading through the proposal in its entirety, let me highlight seven things to know about what it means.
1. Inexplicable buying frenzy
For starters, on the morning of May 18, when I heard that the EPA would be releasing the numbers that afternoon, I was excited for the program because the agency has clearly put a new priority on hitting its deadlines. The next shocker was the fact that, for some bizarre reason, RINs prices shot up nearly 15% as rumors spread. I’m assuming it was nothing more than paranoid buying since most RINs traded up 7-9 cents and have since given back most of that as the excitement dies down. But still, the price jump was very strange and I’ll tell you why.
2. But wait — there’s more!
Maybe RINs prices came back down to earth because people realized there are hundreds of millions of extras. In its proposal, the EPA estimates there are about 1.72 billion carryover RINs available, nearly 10% of the 2017 proposed mandate. That’d be like an NBA team starting out a game with a 12-0 lead at tipoff — makes things a lot easier for Team Obligated Party. Turns out, the EPA is very sympathetic to the carryover RINs bank and believes providing flexibility is important for the success of the program. The last thing they want is a messy situation where the targets are unreachable and a waiver situation (or worse, an all-out repeal) becomes necessary. The EPA believes it is “highly unlikely” that the bank of carryover RINs will be larger after 2016 compliance demonstrations are made, but if it happens, they made it clear that they might have to take it “into consideration in setting future standards.”
3. Really — there’s more…
Based on the EPA’s EMTS data provided on RIN generation through the first four months of 2016, we’re on a really strong pace. Taking into account the last five years of RIN generation and what months provided the strongest cut of the total (i.e., 7.58% in February and 8.8% in December for D6 compliance on the five-year averages), we’re currently on pace to exceed the mandate by 965 million RINs. The numbers suggest corn-based ethanol (D6) RINs will overshoot its portion by 452 million RINs and biomass-based diesel (D4) RINs will go 1.405 billion RINs over its mandate, thanks in large part to the $1/gal blenders tax credit. When you take away the projected advanced biofuel (D5) deficit of 830 million and the cellulosic biofuel (D3) shortfall of 62 million RINs, you’re left with nearly a billion more carryover RINs heading into 2017.
4. Filling the gap
Reading the proposal, I was surprised how much the EPA still takes into account the statutory levels envisioned by Congress way back in 2007. As faulty, lofty and unrealistic as those numbers were, the EPA still considers them. I found it extremely interesting that the statutory total of 24.0 billion gallons in the original RFS targets included 5.5 billion gallons of cellulosic biofuel. The inability of the second-generation biofuel commercial production to come online at the originally expected pace has been one of the biggest thorns in the side of the RFS program. Instead of 5.5 billion, the EPA set its revised cellulosic target at 312 million gallons, down 5.2 billion gallons. The proposed total mandate for 2017? That’s 18.8 billion gallons, precisely 5.2 billion gallons less than the statutory level from a decade ago. It can’t be that simple, but it’s a pretty funny coincidence, regardless.
5. Higher blends
While the seemingly easily reachable proposed targets were lower than the ethanol industry had in mind, it appears that the EPA is finally taking into account that higher blends of biofuels can be the answer to working around the so-called “blend wall” that caps biofuels blends at 10%. For E85, the EPA said 2014 volumes were at 150 million gallons and only moved up to 166 million gallons in 2015, barely more than 1% of the market. The EPA expects that number to jump to 200 million gallons this year but added that 400 million gallons is, “possible under highly favorable though unlikely conditions.” As for E15, the growth is real. They’re projecting 320 million gallons in 2016, with that number possibly doubling in 2017. Additionally, after the USDA’s Biofuels Infrastructure Partnership (BIP) program is fully phased in, we could go as high as 800 million gallons. For biodiesel, the efforts have been far less than in ethanol, but EPA did note that a nationwide blend of 5% for biomass-based diesel (including the surging renewable diesel market) could boost volumes near 3 billion gallons in 2017, should it come to fruition.
The last thing the RFS wants to be is an instrument for pushing imports of foreign fuels into the US transportation pool. After all, the program was originally set up with a heavy focus on curbing American dependence on foreign fossil fuels. But the EPA did outline a few scenarios where imports might be necessary to help obligated parties satisfy their mandates. The EPA projected just 200 million gallons of imported sugarcane ethanol from Brazil in 2016 and said they expect the same for 2017. In our latest Fuel Ethanol Supply & Demand updates, we’re forecasting 900 million liters (roughly 240 million gallons) of ethanol to be exported from Brazil into the US this year, but more than half of that is expected to be used for ETBE production, which doesn’t generate RINs. As for biomass-based diesel, EPA said imports peaked at 470 million gallons in 2015, and we’re expecting about 377 million gallons of biodiesel to be imported into the US in 2016, not including additional potential from renewable diesel. Through the first four months of 2016, 94.65% of RINs were generated domestically, so it’s unlikely that foreign product will have a huge impact on the final mandate, but that doesn’t mean imports should be overlooked.
6. Trying to be fair
In my personal opinion, one of my biggest takeaways from reading the EPA’s proposal is that they genuinely want to get this number right. Unlike recent years, they’ve done a tremendous amount of homework and research into the markets, they have a much better feel for where we’re headed, and they seem to be more competent in trying to find an appropriate compromise between the Big Corn lobby, the Big Oil lobby and the problematic statutory levels set forth way too long ago. I honestly think they’re trying their best to get the RFS back to being a fully functioning, well-run program with good intentions across the board.
7. Speak now or…
If you don’t see it how I see it and you still disagree with the EPA’s proposed RFS targets, let ‘em know. The EPA invites public comments, suggestions and data that must be received on or before July 11. They’re aiming to have the finalized targets out by the end of the year, which would be a positive step in the right direction after previous years of messy procrastination and litigation.