Alternative Fuels Council Offers Biodiesel Strategy
Jeff Hove, vice president of NATSO’s Alternative Fuels Council, provides perspective on current political, regulatory and market events relating to biodiesel blending, and how a myriad of potential changes will affect downstream operators.
The U.S. EPA’s Renewable Fuel Standard provides incentives for marketers to increase margins and be more competitive. Since its inception, the RFS has generally been a very successful program as blenders across the U.S. improved margins. If current legislative proposals move forward, marketers could witness another 13 years worth of similar incentives.
But renewable identification number (RIN) value volatility—driven by political rumor, speculation and poor departmental management of small refinery exemptions—as well as a continually lapsing IRS blender’s tax credit make for difficult times for downstream blenders. At times, the economic risk appears to be too high, and blending must stop and wait for better days.
The variables that make blending economics questionable at times, however, are the same variables that can give blenders hope that market conditions will get better.
The downstream transportation fuel industry is no stranger to risk, as fuel pricing ebbs and flows daily. Biofuel producers typically don’t understand that blenders and marketers live in a world where they are selling at a loss one day and hoping for gains the next. This willingness to take on risk is what keeps the biodiesel industry moving forward during periods of policy uncertainty.
Today’s blenders must intelligently follow all the market variables and assess the overall costs and benefits of blending on a regular basis. Tracking RIN sales alone is simply not enough as RIN values are built into the price per gallon, and as potential IRS tax credits are “shared.” In an ultracompetitive fuels market, these are the things that keep us awake at night. Additional costs associated with transportation, stoppage fees, and special storage and blending equipment also must be minimized.
The good news is blenders that take a more prescriptive and hands-on approach can still increase margins in excess of 5 cents per gallon.
The final RFS standards for 2019 (and 2020 for biomass-based diesel) give some relief, if not assurance that the current EPA administration is attempting to play by the rulebook. The final rule increased advanced biofuel volumes to 4.92 billion gallons for 2019, up from 4.29 billion gallons in 2018. The final rule also increased the 2020 requirement for biodiesel to 2.43 billion gallons, up 330 million gallons from the 2.1 billion gallons required this year and in 2019 (biodiesel volumes are set a year in advance of the other biofuels). Both of these create opportunities to improve margins by blending more biodiesel.
A number of factors are in play, however, that stand to have profound effects on biodiesel blending. For example, how the administration manages the “reset” and “set” rules—both of which are to occur between now and 2021. Both give EPA the opportunity to consider the impacts of new renewable diesel production currently being planned and hopefully adjust pertinent renewable fuel volume obligations (RVO) upward.
In addition to activities at EPA, Congress also is considering legislation that would enhance renewable fuel blending opportunities. Two legislative bills have been published that will create additional complexities but give the biodiesel model significant support. The first establishes a multiyear phaseout of the IRS blender’s tax credit over a seven-year period. The phaseout would allow for the consistency and transparency needed for industry to invest in biodiesel production and retail markets. The phaseout also allows the RIN credit to adjust accordingly to assure incentives are maintained. The second proposal would require biodiesel, along with advanced and cellulosic fuels, be given definitive goals out to 2032 (ethanol would be removed from the RFS and supported, rather, by new high-octane standards). If passed, this legislation would more than guide EPA during its RFS “set,” which requires the agency to establish RFS goals post-2022.
If legislative measures such as these do not move forward, and if EPA fails to develop a progressive RFS, states could take matters into their own hands and seriously consider low carbon fuel standards. This would be especially likely in states heavily invested in agriculture.
Managing biodiesel blending and marketing requires attention to detail and an understanding of present and future variables. Additional policies, intended to increase the volumes of low carbon fuels, will undoubtedly create additional levels of complexity.
The policy solutions above, while good, won’t make doing business simpler or more streamlined. Just as they give petroleum marketers the incentives necessary to continue blending and investing in alternative fuels, they also will create more variables to track and report—all of which can lead to more tax remittance and refund snares to get caught in, as well as more RIN credit marketing scenarios to manage.
NATSO and its Alternative Fuels Council are working diligently to ensure that fuel marketers have the resources needed to manage these complex requirements and market uncertainties by providing the tools necessary to meet federal and state requirements, and to increase the value of incentives for blenders.