Possible RFS cut raises fears

Nov 8, 2013

—RFS reduction would hit rural America, biofuels industry, officials say

Hundreds of farmers in Iowa, Kansas and other states already have signed feedstock supply contracts to provide biomass to nextgeneration biofuels production companies in recent years as the cellulosic ethanol industry draws near to launching commercial production.

However, the U.S. Environmental Protection Agency may reduce the Renewable Fuel Standard’s (RFS´s) mandated volumes for corn-based ethanol and advanced biofuels in 2014. If that happens, representatives from two of those biofuels companies told reporters Wednesday, their companies would reconsider the future of multimillion-dollar investments expected to create a new agriculture market for corn stover, wheat straw and other crops.

EPA announced plans to release the 2014 volumes in November, possibly within days.

A draft copy of the RFS was leaked to the press last month. It suggested that EPA would cut the overall RFS mandate by about 16 percent, from about 18.15 billion gallons in 2014 to 15.21 billion gallons. That would include a cut in the advanced biofuels mandate.

The oil industry would see a windfall. An RFS cut would lead to lower purchases of ethanol, and it would discourage investment in fueling infrastructure. Based on projected gasoline demand for 2014, the oil industry would see a $9 billion to $14 billion benefit from a cut to the RFS, said Geoff Cooper, vice president of research and analysis for the Renewable Fuels Association (RFA).

“This would send a signal to the oil industry that we don’t need to invest in infrastructure,” he said. “When you peel back the onion, it would be a huge step back for corn ethanol.”

A cut in the RFS also could hurt a growing agriculture market for biomass. DuPont’s Nevada, IA, plant under construction, for example, requires some 200,000 acres to harvest every year, or about 350,000 tons of stover. Abengoa Bioenergy’s cellulosic ethanol plant under construction in Hugoton, KS, also will create a market for 350,000 tons of corn stover, switch grass or wheat straw.

Christopher Standlee, executive vice president for Abengoa Bioenergy, said reducing the RFS as suggested in the leaked document would put a “chill” on future investment in advanced biofuels.

“EPA would be reducing the RFS below what was actually consumed in 2013,” he said. “We believe this would kill advanced biofuels.”

Stocks hurt

News of the leaked EPA document caused publicly traded advanced biofuels companies to take a hit in stock values, Standlee said, and some companies, including Abengoa, have started to look to other countries when it comes to future investments.

Though he would not name names, Standlee said he has talked to other similar companies that are considering their options if the RFS is scaled back.

“We’re looking very heavily at Brazil,” he said.

Jan Koninckx, global business director for biorefineries for DuPont, said the draft leak was “very surprising and truly disappointing.”

“The RFS is key in making this possible,” Koninckx said.

“If it is a reversal, it is something that would rob the country of a great opportunity. We’re not going to change our strategy on one EPA decision. This may take the U.S. out of a leadership role in biofuels.

“What we don’t want and don’t need is an in creased regulatory risk. If the leaked volumes are correct, we don’t see a consistency,” Koninckx said

Blend wall concerns

An RFA analysis said cutting the RFS would hurt the rural economy. Refiner and blender ethanol purchases would decline, equaling between $2.1 billion to $3.6 billion in lost revenue to ethanol and the rural economy.

“The impact on the agricultural community would be severe,” Cooper said. “You could see a 20 percent to 25 percent reduction in corn prices over the long term. For farmers in the midst of harvesting what is expected to be a record crop, this is not the time to take the stimulus away. I can tell you that the corn sector is very concerned about the value of the corn crop and commodities over time.”

A proposed cut would be made based on concerns that the blend wall— where total ethanol production exceeds the available market—does not leave room for increased ethanol use by blenders in 2014. In addition, EPA has suggested an RFS cut based on concerns that dispensing infrastructure isn’t adequate.

Cooper said EPA cannot consider infrastructure concerns when considering RFS volumes. Instead, EPA can make changes to the RFS based on domestic supply concerns.

“I will tell you that inadequate domestic supply is not a problem for us,” he said, primarily based on falling corn prices and production capacity.

U.S. producers have the physical capacity to produce 15 billion gallons next year, Cooper said, more than the statutory number of 14.4 billion gallons for 2014.

He said an RFA analysis shows that cutting the RFS would be a “huge victory” for the oil industry and a “devastating loss for consumers.” — Todd Neeley, DTN