Transition Period

The federal renewable fuels standard calls for 500 million gallons of biomass-based diesel to be used in 2009. Many questions remain as to how this will play out.
By Ron Kotrba | November 13, 2008
2009 will be interesting with respect to implementation of the new renewable fuels standard, which many refer to as RFS2. New terms such as "advanced biofuel" and "biomass-based diesel" were never part of the 2005 RFS and just this year emerged as part of the new national energy-policy vernacular. Biomass-based diesel is a specified title under "advanced biofuel." In 2009, RFS2 mandates that 11.1 billion gallons of renewable fuels must be blended into energy supplies; 10.5 billion of which is corn-based ethanol, and the other 600 million gallons must be "advanced biofuel," 500 million gallons of which is to be biomass-based diesel. By 2012, 1 billion gallons of biomass-based diesel is required under the mandate.

Since the signing of the Energy Independence & Security Act of 2007-the Energy Bill that RFS2 was part of-speculation has run rampant as to how events will play out. There are a lot of unknowns left, especially since U.S. EPA delayed provisional rulemaking on implementation of RFS2 until January.

Clayton McMartin, president of Clean Fuels Clearinghouse, says the attempt to identify exactly how RFS2 will be implemented prior to its rule is like trying to nail Jell-O to the wall.

Clean Fuels Clearinghouse operates the only renewable fuels registry in the nation, called RINSTAR. RIN stands for renewable identification number, each of which is a long series of numbers used to help the government keep track of what renewable fuel is going where and which companies receive credits. McMartin says there's not a lot of biodiesel activity now in the renewable fuels registry, but numbers 20 through 22 inside the long number can differentiate biodiesel from other types of renewable fuels.

"There are a lot of questions still," McMartin says. "The big question is what's to be done in this interim period, meaning 2009? I don't think anyone expects the final ruling to go into effect until 2010." McMartin calls this interim period RFS1.5. "2008 itself is kind of a hybrid," he says. "The standard for 2008 was established by RFS2 even though we have no proposed rulemaking yet."

According to Paul Machiele, director of EPA's Fuel Programs Center, the biomass-based diesel carve out in the RFS includes biodiesel, biomass-to-liquid diesel and renewable diesel-provided the fats or oils aren't co-processed with petroleum diesel. Clearly for 2009, the only commercially available biomass-based diesel available in significant quantities is biodiesel.

Nathaniel Doyno, executive director of Steel City Biofuels, tells Biodiesel Magazine, "I think we'll see that we can get to 500 million gallons real quick if we don't export it, but that's going to require a shift in currency value. What's fueling the high volume of exports right now is the weak dollar, strong European incentives and a lot of U.S. loopholes regarding the federal blender's credit."

The European Commission is currently investigating whether sanctions should be placed on U.S.-originated B99 in order to level the playing field for European biodiesel producers, who claim the importation of cheap U.S. biodiesel into their markets has adversely affected the European biodiesel industry (see "Biodiesel Trade Wars" in Biodiesel Magazine's
October 2008 issue). A provisional ruling is expected by March, with a final ruling no more than four months after that. Most people watching this unfold expect that it's only a matter of time before a tariff will be placed on U.S. biodiesel entering Europe.

The Waiver Process"The big picture though is that the state of the federal RFS is in transition," Doyno says. "Across the biofuels industries there's a realization that the sustainability bug, the local economic development issues and air quality issues are all reformulating. And I'm proud of the federal government's denial of Texas' petition for waiver, but there are some legitimate problems with the standard. Via policy we're building an industry-it's a delicate act. We need to balance the need to grow without killing the industry in the process. But I challenge you to find someone in the industry who is completely confident in their understanding of this issue of the RFS2-no one really knows."

In addition to the emergence of new terms and volumes in RFS2, compared with the RFS1, perhaps one of the biggest changes in the policy concerns the waiver process. "For RFS1, only states could petition for a waiver," McMartin says. "But in RFS2, anybody affected by the program can petition for a waiver. That's a huge difference. We're going to see lots of waiver requests, lots of petitions. And unfortunately what this does is insert some uncertainty-which makes for good news but whenever you're trying to operate a plant on a day-to-day basis, it's tough." He hopes the EPA's proposed rulemaking establishes more rigorous criteria as to what constitutes a valid waiver. "That's what we should really hope to see," he tells Biodiesel Magazine.

The EPA administrator can also waive RFS2 in whole or in part if, in consultation with the U.S. secretaries of agriculture and energy, a determination is made that either there is an inadequate domestic renewable fuel supply; or implementation of the requirement would severely harm the economy or environment of a state, region or the United States. In a report for Congress titled "Waiver Authority under the Renewable Fuels Standard," written by Brent Yacobucci, a specialist in energy and environmental policy with Congressional Research Service, he writes, "It is unclear how EPA will interpret these criteria. In its May 1, 2007, final rule for 2007 onward, EPA explicitly stated that it would not establish more specific criteria for the waiver." Then he includes language from the federal registry addressing this: "While EPA realizes that the criteria provided by the statute are quite general, the rationales of severe environmental or economic harm or inadequate domestic supply are sufficient for a basic framework upon which a petition can be built and evaluated. Each situation in which a waiver may be requested will be unique, and promulgating a list of more specific criteria in the abstract may be counter-productive."

If the EPA administrator makes the determination that there are significant market circumstances, including feedstock disruptions, "that would make the price of biomass-based diesel fuel increase significantly," the administrator may reduce the amount mandated for up to 60 days-but the volume reduction can be no more than 15 percent; then, an extension of the waiver can be issued for no more than an additional 60 days.

"Your biodiesel readers should say, 'Gee whiz, now I've got EPA who's in control over modifying this demand-this mandate or demand for my product-and what are they going to base that on?'" McMartin says. "Do they have reliable, immediate data to draw conclusions from? No because they don't have a registry like ours." He says for EPA to gather all the necessary reports on which to base an evaluation could take from two to five months after the fact. "There's a quarterly reporting period and each quarter everyone in the program must report," McMartin says. "But then there's 60 days to submit, and everyone waits until the end, so the data can be two to five months old, but EPA still has to compile that information and somehow make an assessment. They don't have the systems in place to do that today, and if I were a biodiesel producer I'd say that gives me reason for concern."

"This is a difficult chicken and egg situation-you want to incentivize the industry but, at the same time, you don't want to set goals that can't be met," Doyno says. "I think we're going to see the program restructured actively with the next administration regardless of who wins the election."

On-Road and Off-Road Markets
Unlike ethanol, very little biodiesel is blended by refiners today. Instead, biodiesel is blended closer to the retail end, either by a petroleum marketer or the biodiesel producers themselves. "Most refiners don't actually take physical possession of biodiesel," McMartin says. "So, under RFS2, what they would do is, with the provision of the credit trading and banking program the standard provides, buy paper credit from someone else. Logistically we don't see a whole lot of biodiesel going into refiners' product at the refiners' level. It's once the product moves through the supply chain and just before retail that you actually see the biodiesel introduced."

Another milestone deviation from RFS1 to RFS2 is the inclusion of off-road markets in RFS2. "We're in great shape because we're really not part of the standard, so we're not mandated to use biodiesel, but we can be in the position to generate credits under RFS2, so it's perfect," says John Huber, president of the National Oilheat Research Alliance. He thinks quite a bit of biodiesel-and RIN credits-will come to the heating oil market. "There's going to have to be some sorting out though," he says. "For the credits to be worthwhile there's going to have to be an association of paperwork, so it's unlikely that a dealer at the retail level is actually going to be in the credit market. The buyers and wholesalers are most certainly going to be in that market." With credit generation, Huber says the main point EPA should consider is making it clear in its rulemaking that credit generation is done upstream. "Because, when you're talking about 2 percent bio at a retail outlet doing 5 million gallons, and the filling out of all those forms, is it worthwhile for that person to go through all that paperwork, versus someone doing a billion gallons? We need to ensure this is approved and credits are generated and available at the wholesale level."

Massachusetts has a 2 percent biodiesel mandate in heating oil, which would equate to about 20 MMgy of B100, all of which could be applied to satisfy the mandate, Huber says.

The 112 confirmed operating biodiesel plants in the United States represent nearly 2 billion gallons of installed capacity. "Versus the mandate, the biodiesel industry is overbuilt today and into the foreseeable future," McMartin says. "So although it will be a differentiated product-a RIN from biodiesel versus a RIN from ethanol-and it'll trade at different values, it's likely to trade at a minimum value. I think we're going to see consolidation in the biodiesel industry unless there's an increase in the mandate or feedstock costs come down to where they can compete at incremental volumes above the mandate."

Ron Kotrba is a Biodiesel Magazine senior writer. Reach him at rkotrba@bbibiofuels.com or (701) 738-4942.

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