RIN Compliance and Challenges RFS2 Presentation at 2013 CRFA - - PowerPoint PPT Presentation

RIN Compliance and Challenges

Sandra Dunphy

Director, Energy Compliance Services

Weaver and Tidwell, L.L.P.

December 3, 2013

RFS2 Presentation at 2013 CRFA Conference

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Stamford, CT

• Ranked the largest independent accounting

firm in the southwest U.S. by Accounting Today magazine

• Nationally ranked as a top 50 firm – No. 42 by

Accounting Today No. 39 by INSIDE Public Accounting

• More than 60 years of experience
• 500 employees, including 64 partners
• Largest provider of EPA, CARB and

Environment Canada fuel compliance services

• International reach through Baker Tilly

International membership and for RFS work, with Control Union Certifications

Austin Dallas Fort Worth Houston Midland/Odessa San Antonio

About Weaver

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• RFS Basics
• How RINs work
• 2014 RVO Proposal
• The Blend Wall
• The rationale behind the methodology
• How EPA’s actions will affect the biofuels industry
• What’s next?

Today’s Topics

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In the beginning….

• The Clean Air Act Amendments (1990) and Energy Policy Act (2005)

required EPA to implement regulations implementing a renewable fuels standard program

• First program was called “RFS1” ‐ effective date Sept. 1, 2007

– Renewable Fuels goals:

• 9 Billion gallons by 2008; 22 billion gallons by 2022

– RINs were born and they were intended to be:

• The “currency of compliance”
• Generated by producers of renewable fuels
• Gasoline producers & importers were “obligated” to own RINs

– RINs were 38 digit numbers and prone to transfer errors

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But not before long, on Dec 19, 2007 Congress passed The Energy Independence and Security Act of 2007 (“EISA”) STATED GOALS: Reduce dependence on foreign oil; reduce GHG emissions; increase US employment in green sector HOW?

• Increase volume of renewable fuels required to be blended into

gasoline, diesel, heating oil and jet fuel to 36 Billion gallons by 2022 and

• Moving the focus of renewable fuels from traditional sources to

“advanced” and “cellulosic” biomass feedstocks ……..and EPA was to create regulations to implement EISA within 12 months of this date ……………………

Energy Independence and Security Act

• f 2007

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• February 3, 2010: EPA signs final rule to implement EISA

=> RFS 2

– Effective July 1, 2010 (except for RVO calcs) – Feedstock focus switched to “renewable biomass” – Implemented biodiesel, cellulosic and advanced biofuels – Retained RIN system for compliance and trading program

• RINs are still the “currency” of compliance and trading

– Established new EPA software program for RIN transactions – Included diesel fuel volumes in addition to gasoline for obligation calculations

Wow, that seems easy enough….

To put EISA into motion ~

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5 10 15 20 25 30 35 40

Year Billion Gallons

Advanced Biofuel: Unspecified Advanced Biofuel: Biomass-Based Diesel Advanced Biofuel: Cellulosic Biofuel Conventional Biofuel (corn ethanol)

ETHANOL CAPPED AT 15 BG/YR

E‐10 E‐15 E‐30

GHG Reduction 50% 60% 20%

RFS2 Renewable Fuel Volumes

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(Circle size not

Total Renewable (RF) D3, D4, D5, D6, D7

Total Advanced Biofuels (AB) D3, D4, D5, D7

Cellulosic Biofuel Waiver Credit*: (CWC) Biomass-Based Diesel (BBD) D4

* EPA Cellulosic Waiver Credits cannot be applied to AB or RF RVOs

D7

Cellulosic (CB)

* EPA Cellulosic Waiver Credits cannot be applied to AB or RF RVOs

RFS2 Nested RVO Concept – using Cellulosic RINs

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Almost all gasoline has 10% ethanol

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What happens when…

RVO percentages are set by EPA each year by Nov 30 (in theory)

RVO % = EISA/EPA annual volume for a given RIN category

Gasoline + Diesel projected to be used in coming year Numerator ↑ Denominator ↓

5 10 15 20 25 30 35 40

Year Billion Gallons

Advanced Biofuel: Unspecified Advanced Biofuel: Biomass-Based Diesel Advanced Biofuel: Cellulosic Biofuel Corn Ethanol

110 120 130 140 150 160 170 180 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Gasoline Demand (Billions of Gallons per year) AEO 07 AEO 2012 AEO 2013

Source: EIA/AEO Table 11 ‐ Editions 2007, 2012 & 2013.

‐12% in 2013 ‐28% in 2022

RED=2007 forecast DASHED= 2012 forecast BLACK= 2013 forecast

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The Blend Wall is here

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We are at a crossroad

• The Blend Wall has caused EPA to propose revising the RFS standards

for 2014 downward for all obligation categories:

Standards for 2012 BR¹ 2013 BR¹ 2014 BR¹ 2014 BR¹

(EISA/EPA) (EISA/EPA) (EISA) (Proposed)²

Cellulosic biofuel

0.00865 1.0/0.006³ 1.75 0.017³

Biomass‐based diesel

1.54 1.924 1.5+4 1.92

Advanced biofuel

2.0 2.75 3.75 2.20

Renewable fuel

15.2 16.55 18.15 15.21

Corn Ethanol (de facto)

13.2 13.80 14.40 13.01

¹ Billions of RINs ² As included in NPRM published 11/29/13 in Federal Register ³ EPA evaluates cellulosic production capabilities each year and can adjust this volume

4 EISA set BBD at minimum 1.0 BG; EPA can adjust upward if warranted by production/feedstocks

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EPA’s “Flexibility” to adjust CB, BBD RVO’s

Under the Clean Air Act and EISA: Cellulosic Biofuels: required volume must be lesser of EISA volume or EPA’s projected volume of production

• EPA evaluates each cellulosic biofuels plant to determine

ability to generate RINs in coming year

Biomass‐based Diesel: Required volume for 2012+ must be ≥ 1.0 BG, and must be based on review of implementation of the program and analysis of several factors (incl: production/consumption/infrastructure/climate change/etc.)

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Adjustments to AB, RF

Advanced Biofuels and Renewable Fuels:

• If CB reduced to EPA projected volume, then EPA may

reduce AB and RF by same or lesser volume

• EPA may waive any portion of the statutory volume

requirements (in whole or in part) upon receipt of a petition from a state, an entity subject to the RFS, or

• n its own motion, if implementation of those

requirements would severely harm the economy or environment of a State, region or the United States,

• r there is an inadequate domestic supply

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Additional option for 2016

If EPA waives (1) at least 20 percent of any applicable volume requirement for two consecutive years; or (2) at least 50 percent of a volume requirement for a single year

• EPA must modify the applicable volumes for all

following years, beginning with the 2016 calendar year

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EPA’s 2014 RVO Proposal

Proposed Methodology for establishing 2014 RVOs is a combination of EPA’s 2 waiver authorities – CB waiver and general waiver ‐ Evaluate cellulosic biofuel production capabilities and adjust the CB RVO downward to reflect anticipated production volumes ‐ Determine the quantity of ethanol that could reasonably be consumed as E10 and E85, and add to that the volume all non‐ethanol RF expected to be available (CB, BBD, AB) and consumed EPA is proposing to use this methodology – a combination of waiver authorities ‐ to establish RVOs in all future years

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Proposal v Historical

If EPA reduces the standards as proposed:

‐ Ethanol RIN prices may go back to pennies ‐ Lower Advanced Biofuel RIN prices will disproportionately impact smaller producers ‐ Corn, soybean prices will fall ‐ Investments in Advanced Biofuel plants will dissipate ‐ Gasoline pump prices will not be affected by RIN prices ‐ Foreign RF may not come to US

If EPA were to leave the standards under EISA (only lowering the CB volume)

‐ RIN prices will move upward ‐ Some smaller and merchant refiners would likely close ‐ Gasoline/diesel exports would continue to increase ‐ Advanced biofuels will have to fill in the blendwall shortfall (at higher prices than ethanol) ‐ Foreign RF imports will increase ‐ Pump prices may increase ‐ Corn, soybean prices stay strong

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What else is happening?

• In addition to the 2014 RVO proposal…

– Hearing on 12/5 to hear testimony of 100+ commenters – Other 2014 RVO waiver petitions – API, AFPM, Individual Refiners – Quality Assurance Plans – 1Q14 – Pathways II amendments – 1Q14

• Biogas, biobutanol, foreign producer restrictions

– Pathways III amendments – 2Q14? – Feedstock clarifications – corn oil, waste oils, etc. – Enforcement Actions – Tier 3 gasoline regulations – Tax Credits expiration/renewal(?)

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Thank you for the opportunity to speak with you today

Sandra B. Dunphy Contact Information: Weaver & Tidwell, L.L.P. Phone: 832‐320‐3218 Cell: 281‐610‐4750 Fax: 713‐850‐1673 Email: Sandra.Dunphy@Weaver.com Twitter and Yahoo IM: RINderellatx

Website/Free Blog: www.Weaver.com

Q & A