Renewable Fuel Standard: Can EPA Regulate America Beyond the ‘Blend Wall’?

(Before It's News)

American Fuel and Petrochemical Manufacturers (AFPM) has released four fact sheets on EPA’s proposed Renewable Fuel Standards (RFS) for 2014, 2015, and 2016, and the biomass-based diesel standard for 2017:

• Renewable Fuel Standard: Summary of 2014-2016 Proposed Rule 
• Fact Sheet: Renewable Fuel Standard Blend Wall
• Fact Sheet: EPA Renewable Volume Obligations (2014-2016)
• Fact Sheet: EPA’s Renewable Fuel Standard “Reset” Authority

Today’s post discusses two key points developed in the Fact Sheets:

• The Blend Wall — the practical limit on how much biofuel can actually be sold in a given year — is EPA’s chief reason for exercising its authority to adjust the statutory RFS blending targets for 2014-2016. However, EPA plans to breach the blend wall in 2016.
• In conceptualizing how the blend wall may be breached, EPA drastically overestimates how much biofuel can be sold as E85 (motor fuel blended with up to 85% ethanol).

First, some quick background on the RFS and EPA’s proposal.

Background

The RFS program, created by the 2005 Energy Policy Act and then expanded and extended by the 2007 Energy Independence and Security Act (EISA), requires refiners, blenders, and fuel importers to increase the overall quantity of biofuel sold in the nation’s motor fuel supply from 4 billion gallons in 2006 to 36 billion in 2022. EISA also establishes sub-targets for conventional, advanced, biomass-based diesel, and cellulosic biofuels. The sub-targets are “nested” such that advanced biofuels can substitute for conventional but not vice versa, and cellulosic can substitute for other advanced biofuels (except for at least 1 billion gallons of biomass-based diesel) but not vice versa.

Here are the nested targets as set forth in EISA for 2014-2016:

EISA authorizes EPA to adjust the targets if “there is an inadequate supply,” defined broadly by the agency to include infrastructure and market constraints limiting supply to “the ultimate consumers.” On May 29, EPA proposed RFS blending targets for 2014-2016 and a biomass-based diesel (BBD) standard for 2017. The overall RFS targets for 2014-2016 are lower than the EISA targets, as are the sub-targets for conventional, advanced, and cellulosic biofuels, whereas the proposed BBD targets exceed EISA requirements.

EPA adjusted the targets based on three main issues:

1. Cellulosic biofuel production remains much lower than forecast.
2. BBD can be produced profitably in quantities exceeding the maximum amount required by EISA (1 billion gallons).
3. The statutory targets exceed the Blend Wall — how much biofuel can actually be sold in the U.S. motor fuel market given smaller-than-forecast demand for gasoline and practical constraints on how much biofuel can be blended into each gallon of motor fuel sold.

I now turn to AFPM’s analysis of the blend wall and EPA’s efforts to breach it.

Blend Wall

AFPM defines the blend wall as the point at which the EISA-mandated volume of renewables “exceeds the volume that can be practically blended into gasoline and diesel fuel.” It further explains that the primary factor determining the blend wall is the 10% cap on ethanol in gasoline (E10):

Nearly 95 percent of vehicles on the road today, as well as lawn equipment, motorcycles, boats, and other small engines are not designed or warranted to use fuel that exceeds E10. In fact, it is illegal to use a fuel that exceeds E10 in small engines and in vehicles built before model year 2001. In addition, the overwhelming majority of refueling and distribution infrastructure is not compatible with blends exceeding 10 percent.

A related constraint arises from the fact that the RFS is a volumetric mandate, “meaning the statutory requirements are the same regardless of how much fuel the U.S. uses.” Consequently, fuel economy regulations — also expanded and extended by EISA — reduce the “pool” of gasoline into which ethanol can be blended. In 2007, when EISA was enacted, the Energy Information Administration (EIA) forecast that gasoline demand in 2022 would rise to 172 billion gallons. In EIA’s latest forecast, gasoline demand in 2022 is only 127 billion gallons – 27% lower than the agency’s original estimate.

In 2015 and 2016, U.S. gasoline demand is estimated to be 138 billion gallons. At a 10% blending limit, approximately 13.8 billion gallons could be sold. Under EISA, the implied target for conventional biofuel (ethanol made from corn starch) is 15 billion gallons each year. “As a result,” observes AFPM, “EPA proposed reducing the 2014, 2015, and 2016 mandates from their statutory levels, but nevertheless proposes to exceed the blend wall in 2016.”

Specifically, EPA’s adjusted targets for 2016 require the sale of 840 million gallons of biofuel beyond the E10 blend wall. EPA estimates that E85 could supply up to 600 million of those gallons. AFPM regards EPA’s assessment as unrealistic because:

• Only 6% of cars on the road and 2% of gas stations are capable of handling E85.
• Upgrading a retail station to be E85 compatible could cost as much as $200,000 per facility — a prohibitive expense for many small business owners. Under the RFS, refiners are “obligated parties” but gas station operators are not. 95% of gas stations are independently owned and operated, with more than half unbranded or unaffiliated with any refiner. Consequently, refiners have little to no control over investment decisions at individual stations.
• Most critically, the energy content of E85 is about 25%-30% lower than gasoline. As a result, the mileage-adjusted price of E85 is historically higher than gasoline. At current gasoline and ethanol prices, a typical motorist would spend an extra $850-$1,350 annually to operate a flexible-fuel vehicle on E85 rather than regular gasoline, according to FuelEconomy.Gov.

EPA authorized the sale of E15 (motor fuel blended with 15% ethanol) in October 2010. If E15 were now the standard blend, refiners could sell 50% more ethanol than a 10% cap on ethanol allows, and the blend wall would not be reached for another couple of years. But E15 has fuel compatibility problems similar to those of E85. According to AFPM:

• E15 is only offered at 100 stations (out of more than 150,000 nationwide) and demand will not grow significantly through 2016.
• E15 is incompatible with existing pumps and storage tanks at most retail stations, and the necessary equipment upgrades are expensive for marketers and independent retailers.
• E15 is not suitable for use in the large majority of vehicles in the current U.S. fleet, and using it may void warranties for vehicles not designed specifically for use of higher ethanol blends.

Here’s the bottom line:

For 2016, there is [in EPA's proposal] an implied 14.0 billion gallon conventional biofuel (corn ethanol) mandate. 14 billion gallons divided by 137.6 billion gallons of motor gasoline consumption yields and average ethanol content of 10.18 percent. After adding in the advanced and cellulosic ethanol, the implied ethanol content for 2016 could reach as high as 10.5 percent. Therefore, the 2016 proposed volumes exceed the E10 blend wall.

Why is breaching the blend wall a problem? Refiners are obligated to blend biofuel only into gasoline and diesel sold in the U.S. domestic market. Refiners lose money when they buy and blend biofuel that cannot be sold domestically. So if RFS targets exceed the blend wall, refiners will act to reduce their blending obligations by either decreasing production or exporting.

Consequently, annual increases in RFS volumes beyond the blend wall can “lead to a reduction in supply of gasoline and diesel fuel in the U.S. market.” That in turn can inflate motor fuel prices — in some scenarios dramatically, imposing significant costs on trucking, commerce, and the economy as a whole.

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