Understanding the ag impact of RFS waivers

By Kent Thiesse

The increased granting of small refinery exemptions by the U.S. Environmental Protection Agency has garnered considerable concern by ethanol and biodiesel plants, farm organizations, and political leaders in recent months. 

In the past couple of years, the EPA has granted an unusually high number of SREs, which has impacted demand for renewable fuels and has negatively impacted the profitability of the ethanol and biodiesel industries. The Trump Administration has now proposed some changes to the procedures for the Renewable Fuel Standard that potentially could address some of those issues. Understanding SREs and how they impact the ethanol and renewable fuel industry can be quite complex, however.

The Renewable Fuel Standard was originally established as part of the Energy Policy Act of 2005 in order to guide the development of the biofuels industry. It was greatly expanded two years later, when legislation granted EPA the authority to set the mandated renewable fuel blending requirement each year for the various categories of renewable fuel, based on production capacity and renewable fuel blending needs.

Due to inadequate production capacity, the volume requirements for most categories of biofuels except for biodiesel and conventional, which is primarily corn-based ethanol, have been set below the original volumes established in the 2007 legislation. For 2020, EPA has continued the volume for ethanol at 15 billion gallons, which is the same as in recent years; while proposing slightly above the 2019 volume of 2.1 billion gallons for biodiesel.

The 2007 RFS legislation basically mandated that most U.S. gasoline contain 10 percent ethanol. The statutory volume of 15 billion gallons for corn-based ethanol was based on an anticipated total gasoline usage in the U.S. of approximately 150 billion gallons. 

However, due to more energy efficient vehicles and some economic challenges, total gasoline usage has not reached that level. As a result, the 15 billion gallon per year production level of corn-based ethanol has exceeded the amount needed for the 10 percent ethanol blend, commonly called the blend wall. 

Under RFS requirements, refiners are required to purchase the excess biofuel through a complicated system of renewable identification numbers which EPA has established to track the use and trading of renewable fuel volumes.

An obscure portion of the RFS legislation grants EPA the authority to grant exemptions to small refineries from complying with the required biofuel blending requirements. At first, EPA granted few such exemptions, but the number of SREs has increased recently, which has caused considerable concern. The SREs are intended to be given to smaller refineries to reduce excessive economic hardship caused by renewable fuel blending requirements.  

This increase has had a very negative impact on the profitability for the ethanol and biodiesel industry. The reduction in the amount of renewable fuels has slowed demand for biofuels at a time when production levels were already exceeding domestic needs. In addition, EPA has been slow to adopt enhanced fuel blends such as E-15 gasoline or expanded grades of biodiesel on a nationwide basis, which would match the trend that has been established in Minnesota. 

Since EPA increased the use of SREs, 19 ethanol plants in the U.S. have either closed or idled production, including the Corn Plus ethanol plant at Winnebago, Minn., with additional plants reducing their production levels. The U.S. biodiesel industry has had nine processing plants close and other plants reduce production levels. 

In addition to having an impact on the profitability of the ethanol and biodiesel plants, the increased use of SRE’s is resulting in reduced farm-level grain prices and is affecting rural economies.  

In early October, EPA announced a plan to maintain the 15 billion gallons of conventional biofuel or corn-based ethanol mandated by RFS requirements. The announcement should help restore some stability in the RFS requirements starting in 2020. However, as October progressed, the details of how the gallons of ethanol and other renewable fuels that are lost to SREs will be compensated for by EPA became less clear. The EPA announcement has been rather short on details for addressing future adjustments for SREs, as well as for addressing the economic challenges facing the renewable fuel industry.  

For additional information email Kent Thiesse, Farm Management Analyst and Senior Vice President, MinnStar Bank, Lake Crystal at kent.thiesse@minnstarbank.com.  
To subscribe to BankWise for weekly Ag Lending News updates email Kristi Ploeger or call 651-789-3997. 

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