Kent Thiesse mug

Kent Thiesse

The granting of “small refinery exemptions” (SRE’s) by the U.S. Environmental Protection Agency (EPA) has garnered considerable attention by ethanol and biodiesel plants, farm organizations, and political leaders in recent months. In the past couple of years, the EPA has granted an unusually high number of SRE’s, which has impacted demand for renewable fuels and has negatively impacted the profitability of the ethanol and biodiesel industries. The Trump Administration has now proposed some changes to the procedures for the Renewable Fuel Standard that potentially could address some of the issues related to the granting of the SRE’s. Understanding the SRE’s and how they impact the ethanol and renewable fuel industry can be quite complex.

The Renewable Fuel Standard (RFS) was originally established as part of the “Energy Policy Act of 2005” in order to guide the development of the biofuels industry. The RFS was greatly expanded under the “Energy Independence and Security Act of 2007.” As it was originally designed, this legislation was supposed to continue to increase in volume from 2008 to 2022, eventually reaching a total 36 billion gallons of renewable fuel. The volume of corn-based ethanol was supposed to increase to 15 billion gallons by 2015, and then be held steady, which it has. Most of the increases beyond 2015 were slated to occur from development of the production of advanced biofuels, primarily from cellulosic ethanol. The production of most advanced biofuels, other than soybean-based biodiesel, have lagged far behind the expectations that were established in 2007.

The 2007 legislation granted EPA the authority to set the mandated renewable fuel blending requirement each year for the various categories of renewable fuel, based on production capacity and renewable fuel blending needs. Due to inadequate production capacity, the volume requirements for most categories of biofuels except for biodiesel and “conventional”, which is primarily corn-based ethanol, have been set below the original volumes that were established in the 2007 legislation. For 2020, EPA has continued the volume for ethanol at 15 billion gallons, which is the same as in recent years; while proposing slightly above the 2019 volume of 2.1 billion gallons for biodiesel.

The 2007 RFS legislation basically mandated that most U.S. gasoline contain 10 percent ethanol. The statutory volume of 15 billion gallons for corn-based ethanol was based on an anticipated total gasoline usage in the U.S. of approximately 150 billion gallons. However, due to more energy efficient vehicles and some challenges in the U.S. economy at various times since 2007, the total gasoline usage has not reached that level. As a result, the 15 billion gallon per year production level of corn-based ethanol has exceeded the amount needed for the 10 percent ethanol blend, which is commonly called the “blend wall”. Under RFS requirements, refiners are required to purchase the excess biofuel through a complicated system of “renewable identification numbers” (RIN’s), which EPA has established to track the use and trading of renewable fuel volumes.

A seemingly obscure portion of the RFS legislation grants EPA the authority to grant exemptions to small refineries from complying with the required biofuel blending requirements. The so-called “small refinery exemptions” (SRE’s) were used very sparingly in the early years of the 2007 legislation; however, EPA has chosen the grant rather large numbers of SRE’s in recent years, which has caused considerable concern. The SRE’s are intended to be given to smaller refineries to reduce excessive economic hardship that is caused by the renewable fuel blending requirements.

During the most recent round of announced SRE’s in August of 2019, EPA granted 31 SRE’s, waiving the requirements for ethanol and biodiesel under the RFS for the 2018 year. Since the 2016, the EPA has granted 85 SRE’s, representing 38.3 billion gallons of gasoline and diesel fuel consumed in the U.S. during that time period. Prior to 2016, very few SRE’s were granted by EPA, and less than 10 SRE requests have been denied by EPA since 2016. The 2018 SRE exemption amounts to 1.43 billion gallons of renewable fuel no longer being required under the RFS law, which followed 1.8 billion gallons being removed by the SRE’s in 2017. Since 2016, over 4 billion gallons have been removed from the RFA requirements.

The more frequent granting of SRE’s by EPA in recent years has had a very negative impact on the profitability for the ethanol and biodiesel industry. The reduction in the amount renewable fuels to comply with RFS requirements has slowed demand for biofuels at a time when production levels were already exceeding domestic needs. In addition, EPA has been slow to adopt enhanced fuel blends such as E-15 gasoline or expanded grades of biodiesel on a nationwide basis, which would match the trend that has been established in Minnesota.

Since EPA increased the use of SRE’s, 19 ethanol plants in the U.S. have either closed or idled production, including the Corn Plus ethanol plant at Winnebago, MN, with additional plants reducing their production levels. It is estimated that the 2.5 billion gallon per year biodiesel industry in the U.S. has lost nearly 10 percent of the total demand due to the SRE’s granted by EPA in the past three years. The U.S. biodiesel industry has had nine processing plants close and other plants reduce production levels. In addition to having an impact on the profitability of the ethanol and biodiesel plants, the increased use of SRE’s is resulting in reduced farm-level grain prices and is affecting rural economies.

In early October of this year, EPA announced a plan to maintain the mandated 15 billion gallons of conventional biofuel or corn-based ethanol that is mandated by the RFS requirements. Starting in 2020, any gallons of required renewable ethanol that are lost due to the granting of SRE’s are scheduled to be compensated for by EPA through the RIN system. There were also provisions included to enhance the use of E-15 and reforms to the RIN system. However, there was not specific mention of addressing the gallons of biodiesel that have been lost by the SRE’s, or any provisions to address the 4.1 billion gallons of renewable biofuel that was lost to SRE’s from 2016-2018.

The announcement by EPA helps should help restore some stability in the RFS requirements starting in 2020. However, as the month of October progressed, the details of how the gallons of ethanol and other renewable fuels that are lost to SRE’s will be compensated for by EPA became less clear. The EPA announcement has been rather short on details for addressing future adjustments for SRE’s, as well as for addressing the economic challenges facing the renewable fuel industry.

For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at (507) 381-7960 or kent.thiesse@minnstarbank.com, or visit www.minnstarbank.com.

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