Fuels: Backing Away From the Blend Wall

EPA's proposed biofuel volumes have implications for retailers, future fuels

Samantha Oller, Senior Editor/Fuels, CSP

It is a pragmatic response to the realities of today’s fuel-demand dynamics. Or it is a politically motivated, ham-fisted blunder that will destroy new fuel options. Or it did not go far enough.

When it comes to the Renewable Fuel Standard (RFS), which requires a gradually increasing, minimum volume of renewable fuels blended into the country’s transportation fuels, everyone has an opinion. And now that the Environmental Protection Agency (EPA) is proposing in 2014 to waive renewable volume obligation (RVO) increases for the first time since the RFS was enacted in 2005, proponents and opponents are flooding the agency with arguments for and against, in hopes of affecting the final decision, due this spring.

The central issue facing the EPA: There is simply not enough fuel demand today to absorb the volume of renewable fuels that the RFS originally projected the nation would be consuming by now. Consider that in 2007, the Energy Information Administration (EIA) anticipated gasoline demand in 2014 to hit 153.9 billion gallons. In the wake of the recession blunting the nation’s appetite for fuel, demographic trends eroding the consumer base and the vehicle fleet ramping up in efficiency, the EIA projects gasoline demand of 133.1 billion gallons in 2014—nearly 14% lower than originally projected.

At the same time, the EPA is attempting to hold tighter reins on the value of renewable identification numbers (RINs), which were originally set up to provide greater flexibility to obligated parties under the RFS—refiners and importers—in proving compliance to the RFS volume standards. With blending more actual ethanol becoming difficult, the price of RINs shot up dramatically last summer—the cost of which refiners ultimately could have passed on to consumers.

Something has to give. Just ask Carlton Carroll, a spokesperson for the American Petroleum Institute (API), which has led lobbying against the RFS and in fact believes it should be repealed completely.  “We are still forced to blend higher levels of ethanol into smaller levels of gasoline,” says Carroll. “We’re at the point now where … if EPA hadn’t taken steps to resolve the problem, [refiners] would have been pressured to blend more ethanol than is safe for cars on the road today.”

Ethanol supporters, particularly those with roots in corn, believe the blend wall is a manufactured crisis: If only the fueling infrastructure would widely adopt higher blends of ethanol—in particular, E15— the issue would resolve itself. Instead, they charge, the oil industry has spread misinformation and hoodwinked the government, retailers and consumers about the supposed dangers of higher ethanol blends in cars and the fueling infrastructure.

“Instead of investing in infrastructure, knowing that this day was coming since 2005, [the oil industry] continued to litigate and delay and has done everything in their power to stop [the RFS],” says Michael Frohlich, communications director for Washington, D.C.-based Growth Energy, an advocacy group for ethanol producers and supporters. “This problem could easily be solved by simply complying.”

And proponents of biodiesel and second- generation biofuels believe the EPA’s suggested reductions in RVOs for their products ignore their room for growth and will ultimately scare away investment.

But some would argue the EPA had no choice. John Eichberger, vice president of government relations for NACS, Alexandria, Va., is sensitive to the concerns of biofuel proponents. But he believes the agency recognized market realities and took the right step in proposing lowering RVOs, saying this is a case in which making no change could have brought down the entire RFS.

“If you don’t touch the program, you will have massive widespread noncompliance, which is going to result in increased cost for the consumer, with fines passed through, and supply decisions that take product out of the market and impact consumer prices. Ultimately, you will have a backlash against the RFS, which likely would lead to further reductions or repeal,” says Eichberger. “Without touching it, [the EPA would be] playing a really dangerous game of chicken that they would have lost.”

Physical Limitations

The Energy Independence and Security Act of 2007, which updated the RFS, originally mandated an increase in renewable-fuel volumes to 18.15 billion gallons in 2014. Citing the faulty demand projections and need to avoid the blend wall, the EPA now proposes 15.21 billion gallons.

Unlike the API, NACS does not support repeal of the RFS, citing the enormous investment the fuel industry has already made in implementing the mandate. But Eichberger wonders whether the EPA has gone far enough in its proposed RVO reductions for 2014.

“What the EPA has done is provide a stretch goal for the market, a goal that will require some additional blending beyond 10%, which means they didn’t come completely under the blend wall,” he explains. “But they got a lot closer to it. So it’s feasible we can satisfy it next year without running into significant problems, but it’s still going to take some work.”

From the perspective of the Petroleum Marketers Association of America (PMAA), Arlington, Va., the volume mandates will need to be extended as well.

“We do believe EPA needs to lower the ethanol mandate for 2014 and probably for 2015,” says Dan Gilligan, president of PMAA. “There’s no place for the product to go. E15 is not ready for prime time, and it’s not ready to make a serious impact on the E10 market. … E85 will probably do better as years go forward, but certainly not enough to make up a 1-billion-gallon difference next year.”