The U.S. Environmental Protection Agency (EPA) recently released the proposed Renewable Fuels Standards (RFS) for the 2013 calendar year. Not surprisingly, the blending targets for all four biofuel categories recognized by the EPA (cellulosic biofuel, biomass-based diesel, advanced biofuel, renewable fuel) have increased. However, the new targets for cellulosic biofuel (client registration required) especially have been a major source of controversy.
The EPA issued a $6.8 million penalty on blenders for failing to meet the 6.6 million gallon cellulosic biofuel mandate for the year 2011. This fine was met with considerable resistance by the oil and gas trade group, American Petroleum Institute (API), because the EIA estimated that there were no known commercial production of cellulosics in 2011, making it impossible for refiners to meet those requirements. The 2012 blending mandate for cellulosics was 8.65 million gallons, a number refiners didn’t meet given that the EPA estimated that the total cellulosic biofuel production in 2012 was just 21,000 gallons. In response to the lack of supply, the U.S. Court of Appeals ruled that the EPA cannot fine refiners for not meeting the blending mandates with biofuels that don’t physically exist.
Many cellulosic producers blame the unreliability of RFS mandates for its slow growth. However, in order to ultimately compete in the fuels market, cellulosic producers need to prove that its fuel can compete on a cost basis to first generation ethanol as well as fossil fuels. The U.S. government has already created a $30 billion market for biofuels through its blending mandates, an enormous opportunity that cellulosic producers have yet to penetrate thus far, because capital and operating costs are too high.
After the ruling, it is not surprising that API was unhappy with the subsequent proposed cellulosic biofuel blending mandate of 14 million gallons for 2013. Cellulosic biofuel production is beginning to ramp up, and if producers such as Kior and Abengoa progress on schedule, blenders should have the ability to meet the RFS. However, delays are expected, and it is likely that the supply will again not meet the regulated demand (client registration required). Cellulosic biofuels producers are on the clock for the next two years, and the outcome of these first production facilities will set the tone for possibly more permanent cellulosic blending regulations in the future.