An Energy Insurance & Security Act: Looking behind “Mend it and End it”.

In today’s Digest, we published an important column by longtime contributor Douglas Faulkner, the former acting Undersecretary of Agriculture and a former Assistant Secretary of Energy, titled “The Renewable Fuel Standard:  Mend It AND End It.”

In his column, Faulkner begins by citing the competing and buffeting political winds around the RFS — from the left, unhappiness with food vs fuel and other perceived environmental and social impacts of the biofuels energy policy. From the right, unhappiness with federal mandates for fuel and with the EPA’s oversight role.

In the center, a coalition trying to hold fast with the RFS as originally designed — but without the political stability that the RFS was supposed to create and the investor confidence that was supposed to galvanize.

He notes that [first generation] “biofuels are coming closer to on-shore wind and solar energy in terms of cost-competitiveness with fossil fuels, later generations of biofuels still need more time to mature.” And rues the fact that advanced biofuels are being deployed in such a politically unstable climate — eroding investor confidence and raising perceptions of risk, that translate into higher required rates of return, that can cripple vital technologies.

He predicts that “ticking debt time-bomb in the federal budget and a counter-reaction to the surge of federal regulations in the Obama Administration will shrink financial and other assistance from Washington, D.C. for the industry – – and, ultimately, appetites for government interventions in the marketplace.” And suggests that, regardless of who controls the Congress after the November 2014 elections — an “unexpected boom of domestic oil and gas production…married to possible shifts in society’s historical driving habits and greater fuel efficiencies of vehicles, have pushed back a decade or two the pressing need for biofuels seen at the time of the RFS”.

As a result, he concludes that “the industry’s basic message has grown less persuasive, as the many justifications used over the years have been muddied or swept away by surging technological, economic and political forces that have undermined earlier arguments for support.”

What is that message? The traditional appeal for biofuels has been on the basis of the Three Es: Energy Security, Emissions reduction and Employment (particularly in high-tech corridors and rural areas).

Where are the breakdowns?

Energy Security. While concern remains high, a rise in domestic oil & gas production has greatly eased fears regarding energy independence. A connection to the crisis of 1941 has not been effectively made by the friends of the industry — an hour when, despite US energy independence, the instability created by Japanese energy dependency and economic expansion resulted in war. The emphasis in the US military and diplomatic debate is “stability throughout the world,” not just stability at home. Yet the energy debate does not embrace the advantages of “sustainable energy for all” — but rather stops at the joys of energy independence. Something that Russia and Saudi Arabia already have — and has that made for a safer world?

Emissions. The left has successfully demonized corn ethanol in terms of limited gains in emissions at a huge cost in food prices and availability, and land-use disruption. The right has successfully demonized climate change action and the EPA — leaving us with mounting evidence of climate shift and no consensus on action. A perceived impact of corn ethanol on food prices is widely assumed,. This, despite rising ethanol demand and falling corn prices, Despite falling corn prices and rising food prices.

Employment. This part of the equation has general remained intact, but increasingly has restricted bipartisan support of biofuels to the rural Midwest.

What are the solutions proposed?

Faulkner proposes a 9-Point Grand Bargain, including:

1. (Possible) Passage of support for the Keystone XL pipeline.
2. (Possible) A lift in the embargo on exporting US petroleum.
3. A specific sunset year for the RFS, which currently goes on forever and in subject to annual EPA volume setting.
4. Revised targets for advanced biofuels, with specific statutory volumes.
5. An end to EPA’s oversight role in volume-setting — instead, using numerical indexing to match biofuels supply with expected overall fuels demand.
6. Approval of pending biofuels fuel pathways that have held up new fuel choices for up to two years.
7. The establishment of specifications and standards regarding feedstocks — rather than a feedstock-by-feedstock approval process. Similar to the ways fuels are approved. Given that every barrel of petroleum contains a slightly different mix of molecules, and no two gallons of gasoline are exactly alike in their chemical composition — fuels are approved in terms of meeting performance specs and environmental standards.
8. (Possible). A faster transition from mandate to market for first-generation ethanol.
9. (Possible). Amendment of fuel efficiency standards to “crack open the door more for intermediate blends of blended biofuels.” We are ourselves in Digestville not quite sure how that might work — except to note that, for example, flex-fuel cars are built in the US driven politically by a favorable trade-off in required corporate averaged fuel economy (CAFE) standards — the more flex-fuel cars that are built, the more easing off on CAFE standards — given that biofuels can reduce emissions faster than increased fuel efficiency.

Faulkner suggests that biofuels must transition to full market exposure within ten years — less if the RFS is scrapped or reformed without industry support and reformed in an injurious way.

Looking at the plan

First of all, it looks like more of a carrot for the right than the left. Keystone, petroleum exports, sunset for the RFS, fast tracking the end of mandate support for first-gen ethanol. That may be realistic given the likely composition of the Congress in 2015-16.

Second, it does provide investor stability for advanced biofuels deployment— if it included a fixed price RIN credit for biofuels — as opposed to the politically unpopular and price-volatile RIN market of today, and if there are hard targets for advanced biofuels and teeth in the mandate.

Third, it does remove the time-consuming and confusing oversight role for EPA, which has led to the 2014 mandate not being expected until October 2014, which contributes heavily to sector instability and investor flight.

Fourth, it does not offer blender’s tax credit stability, which would be highly useful in terms of ensuring the transitional support that is needed to sustain biodiesel growth. Presumably, this is a recognition of the specific difficulties in funding long-term tax credits under PAYGO rules where added cost or a cut in revenues must be offset by revenues or slashed costs elsewhere.

The Bottom Line

We expect that there will be broad support for a plan with many of these elements in the advanced biofuels community — since it offers stability that the next wave of technology needs.

The cellulosic fuels community would want to see the details: what they fear is a ruinous head-to-head competition with first-gen ethanol, where oil refiners have caps on how much ethanol they purchase because of blend wall constraints, and choose first-gen ethanol every time because it is cheaper.

The first-gen community is likely to be very unhappy with this outline, and corn farmers too. Seeing a cap on growth, and the potential of losing market share down the line.

Broader sections of the general community will likely focus more on items like Keystone XL and tune their support accordingly.

What are the alternatives? With the situation today — more uncertainty building up, more investor flight, and cellulosic projects generally deploying outside the US. For advanced fuels – where feedstock is cheap, some expansion on the diesel and jet fuel side, but not much elsewhere.