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Proposed Biofuel Mandates for 2012 and the Blend Wall

AgMRC Renewable Energy & Climate Change Newsletter
July 2011

 

Dr. Robert Wisner
Biofuels Economist
rwwisner@iastate.edu
 

 

The Environmental Protection Agency (EPA) is the government agency assigned to implement the biofuels blending mandates specified by the 2007 Energy Independence and Security Act (EISA).   Each year, EPA is required to submit to the public its proposed quantities of ethanol, biodiesel, and advanced biofuels to be blended with gasoline or diesel fuel for the coming year.  For cellulosic ethanol, the EPA has to estimate potential production for the coming year and adjust downward the volume specified by statutes if insufficient volume is likely to be produced. 

On June 22, 2011, the EPA released proposed mandated volumes and rules for these fuels for 2012. (1) At the same time, it released a proposed 2013 volume for biodiesel.  EPA has released these proposals to the public for reactions from interested parties.  Written comments can be sent to EPA through August 11, 2011. In addition, the agency announced a public meeting was to be held July 12 in Washington, D.C. for discussion of its proposed cellulosic, biodiesel, and advanced biofuels mandates. (2) The proposed blending levels are important to a wide range of stake-holders.  A partial list includes the following:

  • Oil refiners & blenders
  • Gasoline & diesel fuel wholesalers & retailers
  • Ethanol plant owners & personnel
  • Biodiesel plant owners & personnel
  • Grain & oilseed farmers who produce the feedstocks
  • Livestock farmers who have a competing market for the feedstocks
  • Grain elevators & transporters
  • Suppliers of crop inputs
  • Bio-fuel transporters
  • Automobile manufacturers
  • Off-road fuel users
  • State governments whose economies & tax collections are affected
  • Motorists
  • Truckers

EPA’s biofuels mandates for 2012 may have more significance than usual as stakeholders look ahead to the next year.   Reasons for that include:

  1. Relatively low old-crop reserve stocks of major feedstocks, although not quite as low as anticipated a short time ago,
  2. Very late plantings of this year’s major feedstock crops, corn and soybeans,
  3. The industry’s close proximity to the “blend wall” (point at which the U.S. average ethanol blend is E-10 and the ethanol market becomes saturated), and
  4. Opposition to aggressive marketing of E-15 from several sources.   

E-10 is a 10% ethanol, 90% gasoline blend that until a few months ago has been the maximum allowable for non-flex-fuel vehicles. EPA late last year approved E-15 blends for such vehicles produced from 2001 onward, but manufacturers have not approved them in their warranties and many retailers have been reluctant to install E-15 facilities. Thus, E-15 so far offers little or no relief from the blend wall.

Review of Biofuel Mandates from the EISA (3)

Energy legislation passed in December of 2007 established several specific goals to direct the nation toward a rapid increase in use of renewable fuels for automotive transportation.  The initial thrust was to be from corn-starch ethanol, further encouraging a sharp expansion in an industry that was already growing rapidly.  Technology for fermentation of starch that has been available for centuries, rising corn yields per acre and surplus corn supplies that kept prices low and led to high government farm income support costs were important considerations behind the decision to develop the mandates.  Other factors behind the legislation included political instability in major petroleum exporting countries and high costs of crude oil U.S. imports.  

The second stage in expansion of renewable fuels was designated to be biodiesel, made from soybean oil, other vegetable oils, animal fats, recycled cooking oils and other similar feedstocks.  Production of biodiesel, with these mandates and other incentives, has increased significantly since 2007.  

The third phase in the government-mandated move toward more extensive use of biofuels is ethanol from cellulosic feedstocks.  The EISA envisioned this phase to occur earlier and increase more rapidly than has occurred so far.   Commercial cellulosic ethanol production has not yet emerged in the U.S., although a few firms anticipate that they will bring commercial-scale cellulosic ethanol production on line within the next two years.  

A fourth category in the EISA is labeled Advanced Biofuels. Fuels in this category have two main requirements:

  1. They must be from a non-corn-starch feedstock, and
  2. They must reduce greenhouse gas (GHG) emissions by at least 50% from the EPA baseline.(4)

The baseline for GHG emissions is gasoline. A number of possible fuels could potentially qualify as Advanced Biofuels. So far, biodiesel and imported sugar-based ethanol are the only commercially available biofuels that meet the advanced biofuels requirements. In the years ahead, it is anticipated that cellulosic ethanol will also be an advanced biofuel. Other possibilities could be algae-based biodiesel and other biofuels from algae.   Several firms are working to develop biofuels from this source.

Starch Ethanol

The EISA mandates for corn-starch ethanol are shown in Figure 1. (5) These mandates are for calendar years, beginning with 2007 and extending through 2022. The first-year mandate was 9 million gallons in 2007, with the required blending level increasing every year until 2015. At that point, the mandate stabilizes at 15 billion gallons per year.

These mandates are for the quantity of ethanol to be blended with U.S. gasoline. They are not mandated levels of production. Thus, part of the ethanol blended can and has at times come from imported ethanol.  However, in recent months, the U.S. has been a net exporter of ethanol, so nearly all of the recent U.S. ethanol supply has come from domestic production. Factors contributing to the U.S. net ethanol exporter position included:

  1. A tight world sugar supply and high sugar prices that restrained ethanol production in Brazil,
  2. Strong Brazilian domestic ethanol demand, and
  3. A $0.54 per gallon U.S. tax on imported ethanol – except for a limited quantity that could come from Caribbean Initiative countries. 

Brazil in the past has been the main source of U.S. ethanol imports.  Future imports will depend in part on U.S. ethanol import tax policies. Changes in these policies are being considered at this writing.

The mandates should be viewed as a floor, not a ceiling on the amount of ethanol used in the U.S.

The mandates are the minimum quantities required to be blended with gasoline, not the maximum.  Thus, they should be viewed as a floor, not a ceiling on the amount of ethanol used in the U.S.  The U.S. ethanol industry has had no difficulty in meeting these mandates.  In the last two years, domestic ethanol production has exceeded the mandated levels.  In the current corn & ethanol marketing year (September 2010 - August 2011), domestic production may exceed the mandates by as much as 12% to 15%.   As a result, EPA is not proposing changes in the corn-starch ethanol mandate for 2012.

Biodiesel

The mandated levels of biodiesel blending with petroleum-based diesel fuel are shown in Figure 2. The mandated biodiesel blending, specified by EISA, was to begin in 2009 at 0.5 billion gallons.  However, implementation of the mandate was delayed a year and was added to the 2010 mandate.  For calendar year 2011, EISA specified that 0.8 billion gallons of biodiesel were to be blended with biodiesel.  EISA increases its 2012 mandate to 1.0 billion gallons, where it will remain through 2022. The increase from 2011 to 2012, if all of the feedstock were to be soybean oil, would be equivalent to the oil from approximately 130 million bushels of soybeans or the production from about 3million acres. However, actual feedstocks will include a number of other vegetable oils, including corn oil from some ethanol plants, as well as animal fats and recycled cooking oils. About half of the feedstocks used for biodiesel currently are from soybean oil.



As with corn-starch ethanol, the U.S. biodiesel industry has more than enough production capacity to meet the 2012 mandated blending level, as well as the 2013 mandate. Whether it will produce above those levels depends more heavily on government biofuels tax policies than is the case for corn-starch ethanol.  Wholesale ethanol prices at this writing are moderately below those of wholesale gasoline, thus creating an incentive for ethanol blending above the mandated level.  However, biodiesel without the tax credits has a strong tendency to be more expensive than petroleum-based biodiesel.

For 2012, EPA proposes to set the biodiesel volume at 1.0 billion gallons, the same as called for by the EISA. The agency also is required to set its 2013 biodiesel volume 14 months before the beginning of the year.  It proposes a 1.28 billion gallon volume for 2013.  That would be 280 million gallons above the EISA biodiesel mandate.  

Cellulosic Ethanol

The EISA cellulosic ethanol mandates are shown in Figure 3. These original mandates were scheduled to begin in 2010 with 100 million gallons, then increase to 250 million gallons in 2011, and were scheduled to increase to 500 million gallons in 2012. The original mandates increase sharply in each of the next 10 years after 2012, rising to 16 billion gallons in 2022. That would be a billion gallons larger than the maximum corn-starch ethanol mandates. Annual increases for 2014 to 2022 range from 125 million to 300 million gallons.  



Achieving these mandates was a problem last year and this year because no commercial-scale cellulosic ethanol plants have come on line. A few pilot-size plants are producing cellulosic ethanol, but their volumes are quite small.  As a result, the EPA cellulosic ethanol mandates for 2010 and 2011 were reduced to a very small fraction of the original EISA mandates.  EPA’s cellulosic ethanol mandate for 2010 was reduced to only 6.5 million gallons. (6) For 2011, it was 6,6 million gallons. (7) With a continued lack of commercial-scale cellulosic ethanol plants, EPA is proposing that the 2012 volume be set within the 3.45 to 12.9. million-gallons range in 2012.  

A few firms have developed plans for commercial-scale cellulosic ethanol plants, including at least two in Iowa that will use corn stover as feedstocks.  Stover is the non-grain portion of the corn plant, including stalks, leaves, and cobs. One planned Iowa plant also indicates it may use other cellulosic feedstocks besides corn stover. (8) A few other plants are being planned for other areas of the country. The first commercial cellulosic plants are expected to come on line in 2013 or 2014.  Typical sizes appear to be in the 20 to 30 million gallons per year range.  With an average plant size of 25 million gallons, 40 such plants would be required to meet the EISA 2013 mandate.  By 2015, 120 such plants would be needed.  Thus, it is likely that the cellulosic ethanol mandates will be reduced each year for at least a few more years.

Advanced Biofuels

EISA also established a category of fuels called “advanced biofuels.”  These are fuels, as noted earlier, that are required to reduce GHG emissions by at least 50% from the EPA baseline. Biodiesel qualifies for the designation as an advanced biofuel, as noted earlier, and cellulosic ethanol also is expected to be an advanced biofuel.  Figure 4 shows the EISA mandates for the non-cellulosic advanced biofuels category and puts the various mandates in perspective as components of the total biofuels mandates package.  Combined production of these various biofuels is mandated to reach 36 billion gallons by 2022, with nearly half of that coming from cellulosic ethanol. Non-cellulose advanced biofuels for 2012 at this writing would be largely or entirely accounted for by biodiesel and imported sugar cane ethanol.   In later years, it may include biobutanol, fuels from algae, and other non-ethanol fuels derived from cellulosic feedstocks.  EPA indicates that for 2012, it does not plan to deviate from the EISA mandated volume for advanced biofuels. (9)  That volume is a total of 2.0 billion gallons and probably is expected to be met by biodiesel and sugar cane ethanol plus a small amount of cellulosic ethanol.


 
In relating EPA volumes to the mandates, a corn-starch equivalent conversion factor is used. These factors are as follows: (10)

  • Biodiesel                    1.5
  • Cellulosic ethanol      1.0
  • Cellulosic biodiesel    1.7

In other words, a billion gallons of biodiesel is counted as 1.5 billion gallons of biofuel for regulatory purposes.  One hundred million gallons of cellulosic ethanol would be counted as 100 million gallons.

Corn Requirement of the Ethanol Mandate

For calendar year 2012, the EPA is anticipating that a corn-starch ethanol mandate of 13.8 billion gallons will be in effect.  That is an increase from 12.2 billion gallons in the current year. The increase is equivalent to the ethanol from about 575 million bushels of corn. That looks like a very large increase in potential corn demand, especially in a year when potential production is uncertain because of very late plantings in a number of areas and extensive flooding in parts of the major corn producing region. However, current U.S. ethanol production for the September 2010-August 2011 marketing year appears likely to be about 13.9 billion gallons. That’s based on recent USDA projections that 5 billion bushels of corn will be processed into ethanol and DGS. Thus, the ethanol industry’s production is already slightly above the anticipated 2012 mandate.

EPA Proposed Fuel Blend Percentages

The EPA has translated its proposed biofuel blending volumes into percentages of national gasoline and diesel fuel consumption.  Its proposed 2012 average percentage blends for the four types of biofuels are shown below.  If the corn-starch ethanol mandate is met, it may produce an average U.S. corn-starch ethanol fuel blend of about 10%, which appears to be at or extremely close to the blend wall.

  • 2012 Cellulosic biofuel 0.002 to 0.010%
  • Biomass-based diesel 0.91%
  • Total advanced biofuel 1.21%
  • Renewable fuel 9.21% (largely corn-starch ethanol)

The Ethanol Blend Wall

The blend wall does not apply to biodiesel since it can be blended at essentially any percentage with biodiesel, with the exception of seasonal limitations in the northern part of the country.  However, the blend wall is a major issue for all forms of ethanol production for 2012 and beyond. Recent U.S. gasoline utilization has been about 138 billion gallons per year. (11) Until very recently, the maximum allowable ethanol blend for non-flex-fuel vehicles, as noted earlier, has been 10%.  Technically, an E-15 blend is now allowed for such vehicles produced since 2001. However, in practice, the E-10 blend is about the practical upper limit at this time with existing retail infrastructure and automobile manufacturer concerns. The other market for ethanol is E-85, which is approved only for the relatively limited flex-fuel fleet.  The E-85 blend results in a sharp reduction in fuel mileage versus E-0, thus requiring a price discount of roughly 25 to 28 percent versus E-0 to make it competitive for consumers. (12) Also, a very limited number of E-85 retail facilities are available, and in many cases this blend has not been priced competitively with gasoline. (13)  

Unless the blend wall is raised or removed, the ethanol fuel market willbe filled by corn-starch ethanol and there will not be room forsignificant quantities of cellulosic ethanol.

As a result, the blend wall for ethanol is approximately 13.8 to 14 billion gallons of ethanol at current gasoline consumption levels.  When compared to the EISA ethanol blending mandates, the blend wall is far below ethanol usage levels envisioned by Congress in 2007 when it passed EISA.  Corn starch ethanol production is very close to this level.  Accordingly, unless the blend wall is raised or removed, the ethanol fuel market will be filled by corn-starch ethanol and there will not be room for significant quantities of cellulosic ethanol.  Since cellulosic feedstocks are very bulky material and are much more difficult to convert to ethanol than corn starch, cellulosic ethanol is expected to be more expensive than corn-starch ethanol and is not expected to be able to displace it in the market place.   Unless something is done to remove or substantially increase the blend wall, this is a very negative signal to investors in cellulosic ethanol facilities.

References

  1. EPA, 2012, Renewable Fuel Standards and 2013 Biomass-Based Diesel Volume for Renewable Fuel Standard program (RFS2): Notice of Proposed Rulemaking, June 22, 2011
  2. EPA, Regulation of Fuels and Fuel Additives: 2012 Renewable Fuel Standards; Public Hearing 
  3. U.S. Congress, Energy Independence and Security Act of 2007, December 2007 and EPA, Renewable Fuel Standard (RFS)  
  4. Bob Larson, Talk titled “USEPA’s Regulatory Action under the Energy Independence and Security Act”, March 2008, Transportation and Climate Division  
  5. Ibid. is source of data for Figure 1.
  6. R. Wisner, “Implications of EPA’s Renewable Fuels Standards II for Ethanol and Biodiesel”, AgMRC Renewable Fuels Newsletter, March 2010
  7. EPA, “EPA Finalizes 2011 Renewable Fuel Standards”, EPA420-F-10-056, November 2010  
  8. Reuters, ”Plant could produce 25 million gallons of ethanol a year”, Washington, D.C., July 7, 2011 and  Rod Swoboda, “Central Iowa Will Get Next Generation Ethanol Plant”, Wallaces Farmer, July 7, 2011.   
  9. EPA, 2012 Renewable Fuel Standards …, Op. Cit.
  10. Ibid.
  11. U.S. Energy Information Agency, Department of Energy, Petroleum Statistics
  12. See EPA fuel economy website  
  13. R. Wisner, Is “E-85 Ethanol Competitive with E-0 Outside the Midwest?,” AgMRC Renewable Fuels Newsletter, September 2010
     
 

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