Renewable Fuel Standard (RFS)

What if a gallon of milk cost you $29? What if filling your gas tank was over $500? That’s how a 750% price increase would hit your wallet, and it’s exactly the price increase our industry has recently seen in RFS compliance costs.

The RFS program was created in 2005 and expanded in 2007 as part of the Energy Independence and Security Act. The program requires that transportation fuel (gasoline and diesel) contain minimum volumes of renewable fuels, and those volume mandates typically increase every year.

Though the program was designed to spur the use of advanced biofuels, more than any other, it is conventional corn ethanol that gets blended into gasoline that accounts for the lion’s share of RFS biofuels.

If gasoline and diesel consumption in the United States had continued to rise like projections from 2007 suggested, growing RFS mandates would be less of a problem, but that’s not the reality we’re dealing with.Today, American drivers are using about 40 billion gallons less gasoline than Congress believed we would when the RFS passed. And therein lies much of our current problems.

Individual refineries are the “obligated parties” under the RFS. That means each refining facility is required to prove that enough biofuels are being added to gasoline and diesel fuel each year. The way refineries submit their proof to the Environmental Protection Agency (EPA) is by turning in a sufficient slate of renewable identification numbers (RINs).

Where ethanol is concerned, RINs are acquired by whomever blends ethanol into wholesale gasoline. One gallon of ethanol blended = one D6 conventional ethanol RIN. However, blending generally isn’t done at refineries at all. So unless a refinery has an agreement with a blender or is part of an integrated company that also owns blending infrastructure, they typically have to buy RINs second-hand on the open market. Ethanol RIN market prices have broken records this year, and one reason is because they’re in short supply.

This raises a couple key points and connects back to the problem of 2021 fuel consumption being a lot lower than Congress expected:

  • There’s a limit to how much ethanol we can blend. Ethanol is chemically different from gasoline and can’t travel through pipelines along with refinery wholesale gas (the primary reason why ethanol gets added at blending facilities closer to retail rather than refineries). Additionally, most vehicle, power equipment and recreational engines are only able to handle gasoline blends with a maximum of 10% ethanol (often called E10). If gasoline consumption was higher, like Congress thought it would be, this 10% limit would not be an issue. We could easily add enough ethanol to gasoline to satisfy the RFS. However, because we’re using less gasoline overall, the 10% limit has become a sticking point. Fifteen billion gallons of ethanol into a smaller pool of gasoline exceeds what our infrastructure can currently handle.
  • We’re in danger of running out of RINs. Every year biofuel mandates increase in size beyond consumer demand and infrastructure capacity, refineries are conscious that they might have a hard time acquiring the RINs necessary to meet their annual obligation. That raises competition and prices in the RIN market as refineries try to secure what they need to meet the law. The number of second-hand RINs available for purchase is dwindling rapidly, and many believe the RIN bank could completely zero out in the near future.

RFS Costs Are Unsustainable

The costs associated with RFS are unsustainable. While most people have never heard of RINs, their effect is staggering and they make fuel more expensive. In June 2021, OPIS reported that RIN purchasing was adding nearly 23-cents to the wholesale cost of each gallon of gas leaving refineries. These RFS bills add up to billions of dollars per year and cost the United States good-paying jobs and put petroleum refining capacity at risk, which could threaten national energy security.

2021 has seen unprecedented RFS price surges and RIN market volatility:

  • Total compliance costs for 2021 are on a trajectory to reach nearly $30 billion.
  • Ethanol RIN prices exceeded the previous program high set in 2013 nearly 50 times this year, eclipsing by 27% the old all-time record.
  • RFS compliance is frequently the second-largest operating expense for refineries, exceeding payroll and benefits and trailing only the cost of crude oil.
  • Amid these prices, some individual refineries faced quarter one (2021) RFS obligations exceeding their entire annual RFS bills from prior years. One Pennsylvania facility had a 2019 RFS bill of $58 million. In just the first three months of 2021, reports say they amassed a $350 million RFS liability.
  • President Biden, EPA Administrator Michael Regan and Congress need to take a serious look at the current state of the RFS program and take steps to reform it so that compliance costs don’t put refineries out of business or threaten America’s energy security.

    To learn more about the need to fix the RFS program, watch this video.

    Adding these options in case more visuals would be helpful: