Would You Like Some Fuel with Your Ethanol?

Posted: January 11, 2022

Blended ethanol is something RARE PETRO has covered in the past, but 2022 could be a truly pivotal year for the fuel component. The blending program, known as the Renewable Fuel Standard (RFS), could be subject to major overhaul by the Biden administration. The “R” in RFS comes from the intention to incorporate a minimum number of “renewable fuels” into gasoline (mainly corn ethanol) and started back in 2005 under the Bush administration. Since then, the goal was to increase the amount of blended renewable components into transportation fuels each year through 2022, but a 2016 report from the Government Accountability Office found that the program was more than unlikely to meet targets for reducing greenhouse gas emissions. Many stakeholders have argued for and against the RFS program since then and 2022 is the year to make or break the standard.

How Does the RFS Change the Way Fuel is Refined?

2022’s proposed volume requirement of ethanol at 21 billion gallons. Still, refiners have a choice. They can either:

  • Blend renewable components into fuels in order to receive tradeable credits known as Renewable Identification Numbers (RINs)
  • Refuse to blend renewable components and purchase RINs in order to offset their lack of ethanol blending

The credits exist to incentivize refiners to blend the fuel because it does cost more to add ethanol to mix. It is far cheaper to forgo the inclusion of ethanol without the incorporation of RINs. Some refiners are too small to be able to purchase RINs or their margins are too thin to justify the blending as they will sell finished fuel at a loss. In this case, the government may exempt the on grounds of financial harm with Small Refinery Exemptions. At the end of the day, RINs further complicate the process of refining, mixing, and selling fuel and add further pressure to refiners when oil prices are high and/or gasoline prices are low. There were many points between 2020 and 2021 that refiners were scraping small percentages of profit in sales.

2022 – Maintain or Abandon?

This year concludes the first phase of the RFS spanning from 2005 to 2022. The EPA, Department of Energy, and Department of Agriculture must now decide what the next phase of the program will look like. Proposed plans will be announced by summer and the rest of the year will be used to zero in on the final agreement, and right now, the Biden administration is at a crossroads. Energy commodities are quickly rising to multi-year highs (especially gasoline), and midterm elections are approaching. The democratic party would likely want to drive these prices down to maintain favor among the public. On the other side of the coin, the white house has set aggressive goals for reducing carbon dioxide emissions and fighting climate change. It would be contradictory to loosen the requirements of blended “renewable” components (at least in the eyes of the public). There are even more stakeholders outside of policymakers. Farmers love the fact that the RFS exists and want the EPA to raise the required blending volume. Refiners argue that this creates an artificial demand for corn and would rather reduce the required blending volume in order to let the free market guide commodity prices. Environmentalists side with the farmers and demand that more of the renewable components be blended. Even labor unions are involved as any change in ethanol requirements could remove hundreds of jobs from several sectors. This tug of war doesn’t just involve individual people, but million’s of dollars fly around from lobby groups looking to maintain their best interests.

What Else is on the Docket?

As if things weren’t complicated enough already, there will be new legislation surrounding EV credits. As long as electrical vehicle power generation is sourced from greener forms of energy (such as methane siphoning from landfills or dairy farms), the EPA is considering expanding RINs to encapsulate EVs. Refiners could also gain RINs from making use of advanced biofuels such as renewable diesel made from plant oils or animal fats. Even Small Refinery Exemptions may get a change as the EPA is considering rejecting up to 65% of pending applications.

There is a lot on the table to discuss when considering the next phase of the RFS program, and it could alter the trajectory of biofuels for more than a decade.


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