Energy Finance Report

Biofuel Mandates Escape Current EPA Scrutiny

Posted by Jerry Muys on 6/21/17 2:16 PM

The Renewable Fuel Standard (RFS) is a regulatory program administered by EPA that requires petroleum-based transportation fuel sold in the U.S. to contain a minimum volume of various categories of biofuels. The program’s mandates are subject to a statutory waiver provision that may be exercised by EPA in the event that market conditions present an obstacle to meeting the minimum volumes. With the new administration’s continuing scrutiny of EPA’s numerous regulatory programs, there has been a great deal of uncertainty regarding the likely fate of the RFS Program.

Under the RFS program, biofuel must be blended into transportation fuel in increasing amounts each year, capping out at 36 billion gallons by 2022. Compliance with the blending obligations are imposed on petroleum importers and refiners, known as “obligated parties.” The annual amounts of the various categories of biofuels that must be blended are referred to as Renewable Volume Obligations (RVOs). Obligated parties can comply with the RFS program by either blending the requisite volume of renewable fuel into their transportation fuel or purchasing credits designated as Renewable Identification Numbers (RINs) to meet the RVO.

Although the Clean Air Act sets forth annual volumetric targets for certain biofuels, EPA is required to establish enforceable RVOs through a formal rule-making process. Separate quotas and blending requirements are determined for cellulosic biofuels, biomass-based diesel, advanced biofuels, and total renewable fuels. Refiners and importers must either blend the requisite amount of each of the four categories of biofuels, or acquire the necessary amount of RINs for each of the categories. Parties that purchase or sell RINs are required to enter the transaction information into the EPA Moderated Transaction System.

Initial uncertainty over the fate of the program began in 2015, when EPA exercised its statutory waiver authority for the first time and set an RVO lower than the benchmarks established by Congress. Litigation ensued, and many in the biofuel industry argued that EPA had abused its waiver authority by setting an RVO lower than the statutory minimums. As of the current date, the litigation remains unresolved.

In November of 2016, EPA set an RVO of 19.28 billion gallons of total biofuel for 2017; this was an increase from the 18.11 billion gallon figure adopted for 2016, but still below the statutory standard of 24 billion gallons. However, renewed uncertainty arose in January of 2017, when President Trump ordered a temporary freeze and review of thirty EPA regulations that had been issued between the time of the U.S. election and his inauguration, including the 2017-18 RVOs.  

To the industry’s relief, the regulatory freeze expired without the new administration making changes to the 2017-18 RVOs, and immediately thereafter RIN prices spiked for a period of time. However, overall RIN prices have dropped 19 percent since President Trump’s election, reflecting continued uncertainty about the future of the program.

Though the new administration did not revise the current RVOs, it is entertaining a policy initiative by Carl Icahn (an investor in the petroleum sector who also serves as a special adviser to President Trump) to shift responsibility for meeting RVO requirements away from refiners and importers to blenders and others in the chain of commerce. A ruling by EPA on the Icahn initiative may be several months away. The public comment period on the Icahn-backed measure ended February 22.

Despite uncertainties regarding the future of biofuel mandates in the U.S. and elsewhere, advancements within the industry continue to occur. The liquid biofuels industry now employs more than 1.7 million people globally, and recent technological developments have expanded the range of biofuel applications.

It has been reported that Cool Planet Energy Systems developed a technology that converts farm waste, wood chips, and nut shells into liquid jet fuel. The company has secured investments from three major oil companies, in addition to a $91 million grant from the Department of Agriculture, and is continuing to refine its process with the hopes that it will become a viable supplement or replacement for traditional jet fuel.

The U.S. Navy has also taken an active interest for a number of years in utilizing greater quantities of biofuel in order to reduce its dependency on fossil fuels. During the Obama Administration, the Navy conducted several training exercises in which a large number of the ships and planes participated using a fuel blend that was 10% biofuel. Those efforts appear to be continuing.

More significantly, on June 19, Exxon Mobil Corp. and Synthetic Genomics Inc. announced a possible breakthrough in biofuel technologies. Their scientists reportedly discovered a way to double the fatty lipids in algae, bringing them a step closer to being able to use algae as a biofuel feedstock, a potentially more sustainable alternative to the feedstocks currently utilized.

Jerry Muys is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Biofuels, Renewable Fuel Standard, Cellulosic biofuel, Biomass-based diesel, Renewable Volume Obligation, Advanced biofuel, Renewable Fuel, Renewable Identification Number

Renewable Tax Extenders Package Set To Emerge From Finance Committee

Posted by Merrill Kramer on 7/20/15 8:42 AM

PTC articleRenewable energy is back on the docket for the Senate Finance Committee, and Chairman Orrin Hatch (R-Utah) is likely to release the draft of his bill as early as this week. The Committee is considering a two-year extender for tax incentives for new wind, geothermal, biomass, landfill gas and ocean energy projects during a markup. Also being considered is the extension of second generation biofuel producer tax incentives for production of biodiesel and renewable diesel. The extenders package covers 52 items concerning a wide range of industries in addition to renewable energy, including mortgage lenders, education, and retail and restaurant improvements. The 30% investment tax credit for solar and fuel cell projects is not expected to be on the table. The Solar Energy Industries Association (SEIA) urges the solar community to advocate the investment tax credit, which is set to step-down in 2016 without an extension.

Senator Chuck Grassley (R-Iowa) is lending support to the Production Tax Credit (PTC) extension as its original author in 1992. The modern PTC that expired at the end of 2014 provided a rebate of $0.023/kWh for wind, geothermal, closed-loop biomass projects and $0.011/kWh for other eligible technologies. The PTC generally applies to the first 10 years of a project’s operation. The PTC expired at the end of 2014; however, the Internal Revenue Service provides “safe harbor” to projects that were under construction on the expiration date.

In the past it has proven difficult to finance new projects once the PTC expires. For example, when Congress failed to extend the PTC in 2013, the wind industry experienced a 92% drop in new installations and a $23 billion plummet in private investment according to the American Wind Energy Association. Similar cliffs occurred when the PTC expired in 2000, 2002 and 2004.

One hurdle for the Senate’s tax extenders bill is finding a legislative vehicle to put to vote before the full Congress. Congressman Paul Ryan, Chairman of the House Budget Committee, has suggested combining international tax reforms with a highway trust fund extenders’ bill that has already passed the full chamber. However, members of Chairman Ryan’s party have sought to eliminate the tax credit and have co-sponsored a bill introduced by Rep. Marchant (R) in the House aptly named the “PTC Elimination Act.” Wind energy could prove to be a wedge issue for Republicans since, among the Congressional districts, over 81 percent of all installed wind capacity is in Republican-held districts in the 112th Congress.

Topics: Biofuels, Biomass, Energy Policy, Structured Transactions & Tax, Energy Finance, Distributed Energy, Renewable Energy, Wind

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