The Fuse

Ethanol and the RFS: Some Successes, Many Failures

by Matt Piotrowski | October 27, 2015

The RFS’ main purpose was to reduce U.S. dependence on oil by mandating production of renewable fuel, and in that regard, it has been successful, but only marginally.

The Renewable Fuel Standard (RFS) is just slightly more than 10 years old and it remains as controversial today as when it was passed into law. Its main purpose was to reduce U.S. dependence on oil by mandating production of renewable fuel, and in that regard, it has been successful, but only marginally. Given the expectations that ethanol would one day be a significant rival to oil in the transportation sector, it has been a huge disappointment, making the RFS seem like a disaster and calling into question the longer-term potential for biofuels.

The RFS, which mandates the production and consumption of renewables for transportation, set an original target of 36 billion gallons by 2022 but will not come anywhere near that level. Originated in the Energy Policy Act of 2005 and extended in legislation in 2007, the RFS was put in place during a period when the common perceptions were that peak oil was imminent and U.S. oil demand would continue its upward trajectory indefinitely. But the U.S. shale boom has turned the outlook for oil production upside down, and U.S. demand for gasoline, in which ethanol is blended, fell steadily for years and has not yet returned to previous peak levels. After growing rapidly from 2005-2010, ethanol output in the U.S. has mostly flat-lined, inching up only slightly, as it has been undermined by gasoline demand performing below original expectations. Ethanol is required to be mixed in with 10 percent of the nation’s gasoline supply, but with the market up against this 10 percent “blend wall,” or the maximum percentage of ethanol that can be blended with gasoline, the ethanol industry will have to rely on most of its growth in the coming years to be in exports.

Current corn-based ethanol has helped reduce dependency on oil and has been a contributing factor in lessening the U.S.’ crude imports, but it hasn’t been a game-changer as originally envisaged. In fact, if the potential of shale oil and gas had been understood in the mid-2000s, it’s unlikely the government would have gone forward with the RFS, or at least it would not have done so such an aggressive manner.

Current market conditions okay for ethanol, but just okay

Despite the unfulfilled promises of ethanol, the industry has had a relatively decent year.

Despite the unfulfilled promises of ethanol, the industry has had a relatively decent year, with production hitting an all-time high, demand rising on an annual basis, and exports ticking upward. Corn prices have retreated, too, giving producers stronger margins. For July, U.S. ethanol demand averaged .991 mbd, a .39 mbd jump versus the same time last year, making up just slightly more than 10 percent of gasoline demand.

The volumes sent outside U.S. borders are not extremely high, but any outlet for producers is welcomed given that domestic demand is capped. Ironically, Brazil, a major ethanol producer and consumer, has been a steady customer this year, with the U.S. sending as much as .02 mbd there, as its own sugar-based output has been hurt amid a weakening economy and mill shutdowns. With other parts of the world having also mandated biofuels targets, U.S. producers will try to tap markets in Europe, Asia, Latin America, and Canada as much as possible.

Where the RFS goes from here

Despite ongoing oil industry lobbying efforts, the policy is unlikely to be repealed, but the targets should continue to be revised downward.

The future of the RFS is in doubt. Despite ongoing oil industry lobbying efforts, the policy is unlikely to be repealed, but the targets should continue to be revised downward. The Environmental Protection Agency (EPA) puts the proposed blending target at 16.3 billion gallons for 2015, down from 16.5 billion in 2013, and well off the original target of 20.5 billion gallons for this year. The Energy Information Administration’s (EIA) outlook in 2007 expected gasoline demand to rise by 1.2 percent per year through 2030. If that forecast had come to fruition, demand would now be averaging 10.1 mbd, up 1 mbd from today’s levels, and in turn boosting the need for more ethanol.

Despite the constraints, the renewable industry is arguing for higher blending levels, but the lack of enthusiasm for E85 vehicles—automobiles that run on 85 percent ethanol—and worries about liability from ethanol ruining motors of older vehicles have made a significant increase in targets a non-starter.

rfs

“The original RFS targets were too high. Now they correspond to the reality of the market,” Brian Milne of Schneider Electric told The Fuse.

The biggest failure of the RFS is clearly the mandated volumes for cellulosic ethanol. Most ethanol consumed today comes from either corn or sugar, making it extremely controversial, given that food is being used for fuel purposes. Using cellulosic ethanol, which was also mandated in the RFS, would steer clear of the food-versus-fuel issue since it is produced from the wood, grass or straw. “We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips and stalks or switch grass,” President George W. Bush said in his 2006 State of the Union address. “Our goal is to make this new kind of ethanol practical and competitive within six years.”

This effort has been an abject failure. Cellulosic is not produced in bulk, it is not economical to produce on a large-scale, and there is not enough demand for it.

The ethanol mandates provide an example of government intervention for the right reasons—to improve energy security and fight oil’s stranglehold of the transportation sector—but doing so in wrong and misguided ways.

The original targets for cellulosic ethanol look laughable today. The RFS mandate, when finalized by the EPA in 2010, called for 3 billion gallons of cellulosic ethanol by 2015 and 16 billion by 2022. The most recent proposal for cellulosic for 2015 is 106 million gallons (see table below), or .006 percent of the initial goal. In 2012 and 2013, the proposed volumes were 500 million and 1 billion, respectively, but actual production was insignificant (also see below).

cellulosic

Commercial-scale cellulosic plants have begun to open, however. For instance, a joint venture POET-DSM Advanced Biofuels opened a cellulosic ethanol plant in Emmetsburg, Iowa, last year, while DuPont is developing a $225 million cellulosic ethanol plant in the same state. Even with these developments, cellulosic will never reach the potential envisioned in the 2007 mandate and will presumably never rival oil’s hold over the transportation sector.

The ethanol mandates, for both cellulosic and corn-based, provide an example of government intervention for the right reasons—to improve energy security and fight oil’s stranglehold of the transportation sector—but doing so in wrong and misguided ways.

When ethanol mattered

In 2011, ethanol output in the U.S. averaged roughly .908 mbd, making a dent in gasoline demand and in turn reducing the need for oil imports. Ethanol’s displacement of oil was significant that year because of the turbulence in the global oil market with Libya’s 1.6 mbd of supply going offline and the U.S. shale boom having not yet fully taken off. The increase in ethanol use helped temper the oil price’s rise that year, Schneider Electric’s Milne said, although other factors were just as important, such as the release of stockpiles from strategic reserves and higher Saudi production. But since then, the increases in ethanol output and its place in the fuel mix have lessened in importance. The industry has a tough road ahead.