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EPA’s Final RVO for Conventional Renewable Fuel Simply Has to be 15 Billion Gallons—Here’s Why…

November 3, 2016

           

In late May, EPA proposed Renewable Fuel Standard (RFS) blending requirements for 2017, including an obligation of 14.8 billion gallons (bg) for conventional renewable fuels like corn ethanol.  EPA’s proposed renewable volume obligation (RVO) is below the statutory 15-bg level established by Congress in 2007, and the Agency suggested the reduction was necessary because the marketplace lacked the capacity to consume the volume prescribed by law. In testimony and detailed comments to the Agency, RFA and other biofuel advocates pointed out that EPA does not in fact have the authority to waive statutory RFS volumes on the basis of renewable fuel distribution or consumption capacity. On this point, the law is crystal clear: if the supply of renewable fuel is adequate to meet the statutorily required volumes, then obligated parties are obligated to facilitate consumption of the fuel. But even if EPA could base its RVOs on distribution and consumption capacity, recent dynamics in the marketplace dictate that the final RVO for 2017 should be set at the statutory level of 15 bg. In other words, even if we assume EPA’s consumption-oriented methodology for determining RVOs is legally acceptable, the Agency really has no choice but to raise the final RVO for 2017. Here’s why… In the May proposal, EPA assumed the U.S. market would consume 14.2 bg of conventional ethanol in 2017. That estimate was premised on the 2017 gasoline consumption projection contained in EIA’s April Short-term Energy Outlook, which was 142.26 bg. EPA also assumed the U.S. market would consume 400 million gallons of conventional (non-advanced) biodiesel and renewable diesel. Because biodiesel and renewable diesel contain more energy per gallon than ethanol, one gallon of these fuels counts as more than one gallon toward meeting the RFS required volumes (e.g., one physical gallon of biodiesel counts as 1.5 gallons toward compliance, and one physical gallon of renewable diesel counts as either 1.6 or 1.7 gallons). In the proposal, EPA assumed these 400 million physical gallons would count as 600 million compliance gallons, for an average “equivalency value” of 1.5 compliance gallons per physical gallon. So, that’s how EPA arrived at 14.8 bg as the proposed RVO for conventional renewable fuel (14.2 bg of conventional ethanol + 0.6 bg of conventional biodiesel and renewable diesel). But things have changed since EPA published the proposal in May. EIA’s October Short-term Energy Outlook now projects 2017 gasoline consumption of 143.95 bg, a 1.69 bg increase over the April estimate. If we conservatively assume 98% of this additional gasoline consumption is E10 (and 2% is E0), then an extra 166 mg of ethanol will be blended over and above the volume assumed by the EPA proposal. In other words, the latest EIA projections—which EPA is required to use—effectively force EPA to raise its assumption of 2017 conventional ethanol consumption to at least 14.37 bg. The other development to highlight is that consumption of conventional renewable diesel is outpacing consumption of biodiesel by a factor of nearly 2-to-1. This was the case in both 2014 and 2015 as well. This matters because, as explained above, renewable diesel has a higher compliance gallon “equivalency value” than biodiesel. Thus, it is not accurate to simply assume each physical gallon of biodiesel and renewable diesel will contribute just 1.5 gallons toward compliance, as EPA did in the proposal. In reality, the weighted average “equivalency factor” for conventional biodiesel and renewable diesel in both 2014 and 2015 was 1.65 compliance gallons per physical gallon and it has been 1.63 so far this year. Therefore, the 400 mg of conventional biodiesel and renewable diesel EPA expects will be consumed in 2017 will actually count as approximately 660 mg toward compliance. And there you have it. When you add 14.37 bg of conventional ethanol consumption to 660 mg of conventional biodiesel and renewable diesel consumption you get 15.03 bg—just above the statutory requirement. Of course, we think EPA continues to underestimate the amount of ethanol that can and will be consumed as E15 and flex fuels like E85. We believe actual conventional ethanol consumption in 2017 will be considerably higher than the 14.37 bg derived by following EPA’s methodology. Still, even if we agreed with EPA’s conservative estimates on 2017 ethanol consumption in E15 and E85, the increase in E10 consumption and proper crediting of the contribution of conventional biodiesel and renewable diesel clearly justifies a final RVO at the statutory level of 15 billion gallons.