Ethanol Producer Says Renewable Fuel Standard Is Broken

Soundings Trade Only
September & October 2013

It's a welcome surprise that the latest attack on the Renewable Fuels Standard (RFS) mandates has been launched by the head of the nation's third largest corn-ethanol producer, Valero Energy Corp. Welcome aboard!

Bill Klesse, CEO of Valero, has called on lawmakers to scrap and rewrite the country's renewable energy policy. Testifying before the Senate Energy and Natural Resources Committee, Klesse said: the RFS is broken. We should repeal it and start over. The situation has completely changed." He couldn't be more right!

Valero operates 15 refineries and ten corn-ethanol plants. Klesse told the senators the 8-year-old RFS law that requires refiners to produce alternative fuels to help reduce the country's dependence on foreign energy is "out of control" and needs to be overhauled to better reflect today's marketplace.

Specifically, when the RFS was passed in 2005 and set the volume of alternative fuels required, refiners were mandated to meet renewable volume obligations (RVOs) through the submission of renewable identification numbers (RINs). The RINS provided a method of tracking the program as well as some flexibility because they could be bought and sold. But, the RINS market has caused significant unintended consequences.

When the RFS was revised in 2007, it greatly increased the RVOs and that set the stage for big trouble. The requirement for much higher RVOs at the same time the nation's demand for gasoline was dropping has resulted in RINS becoming a huge cost being passed on to consumers. For example, the price of corn ethanol RINS was $0.05 in late 2012, now it's as high as $1.16. Notably, at the outset of the RFS, EPA stated in its regulatory preamble that RIN's cost would be "negligible." Talk about being profoundly wrong!

Moreover, given the projected future demand for gasoline, there simply aren't enough gallons of gas in which to put all of the required gallons of ethanol! What's more, even the RINs market itself has been beset by allegations of fraud, raising serious questions about EPA's ability to administer the program.

Now, if you're an ethanol producer and the gallons of gasoline are not increasing while your gallons of ethanol are, what do you do? Well, how about getting the EPA to pander to your interests by allowing an increase in the amount of ethanol in each gallon of gas. Hello E-15, a debacle we in the marine industry are all too familiar with! But Klesse didn't mince words about this, either.

He told the Senate panel: Some have suggested, including the EPA, that the refining sector should move the percentage of ethanol blended from 10 percent to as high as 15 percent, a blend called E-15. While Valero supports ethanol and is a leading producer, experts have repeatedly noted that the E-15 blend is not warranted for use by 95 percent of cars on the road today.

E-15 reduces engine life and prompts fuel pump failures and consumer misfuelings. The American Automobile Association (AAA) even called on EPA 'to suspend the sale of E-15 until motorists are better protected.' There are also issues with boats, lawn mowers, motorcycles, and other small engines. Greater reliance on higher ethanol blends is not the way to go and would likely undermine consumer confidence in alternative fuels. Plus, we must all consider the effect corn ethanol in fuel has had on world food prices," he further emphasized.

Having failed to get the courts to consider that EPA is in violation of the Clean Air Act by allowing E-15 into the marketplace, the marine industry, in concert with others in the power products and petroleum industries, is pursuing the repeal and revision of the RFS. The RFS is clearly out-of-touch with today's realities and we must push Congress to take the right actions.