Energy is Energy: Segregation of Renewable and Fossil Fuels Impedes Energy Security Goals

Abstract

Seven years after the passage of the Energy Independence and Security Act of 2007, the United States is entering the heart of renewable fuels legislation that was implemented as RFS2 by the EPA. The percentage of renewable volume obligations (RVO’s) from advanced and cellulosic biofuels continues to rise. However, cellulosic fuel production capacity continues to lag the legislated volumes and is likely to continue to do so for the foreseeable future. While there are numerous reasons for this phenomena such as perceived policy stability, the focus here is on unnecessary administrative restrictions that are retarding the project development process.

Facility registration requirements are embedded with the requirement that the entire value chain of production from feedstock to finished product be conducted at a single location. 40 CFR § 80.1450 requires a producer to state “each type of renewable fuel or ethanol” that will produced at a registered facility. 40 CFR § 80.1401 defines a facility to include 3 elements: (1) the complete conversion of feedstock to renewable fuel is carried out, (2) it is located on a single parcel of real estate, and (3) it is under common control. This means that if one wishes to produce a RIN, the unit of currency for satisfying a RVO, the operator must operate the entire preapproved pathway on one site with common ownership. Conversely, it means that if a renewable fuels operator desires to produce RINs, it is prohibited from only performing the part of the pathway where it adds the greatest value. A simple example is a company that wishes to convert biomass into biocrude or mixed sugars and then market the intermediate product to companies that refine biocrude or ferment sugar.

The use of intermediates is a viable means to defeat the size limitations of renewable fuels facilities due to feedstock aggregation limitations. The localized processing of biomass into an energy dense liquid form allows for efficient transport over longer distances; not unlike the collection of bituminous tar sands that are locally partially processed into flowable syncrude for export to major refineries. A single large-scale biofuels facility could purchase cellulosic sugars from a number of producers to address economy of scale issues. A similar story exists for biocrude with the added dimension of potential co-processing with fossil fuels.

RFS2 is a market pull subsidy that is intended to expire once the renewable fuels industry attains cost parity with the fossil fuel industry. As soon as this occurs, the inherent value of a RIN will go to a de minimus administrative cost. A market pull subsidy goes awry if it incentivizes a behavior that will not persist post-subsidy. This is precisely the case when a renewable fuels producer attempts to replicate processes in the existing energy supply chain solely for compliance with RFS2. An example is a pyrolysis or algae company that is upgrading biocrude into refined products at <10% of the scale of an average refinery. In addition to the small scale, there exists a lack of institutional knowledge that is gained solely through years of operation. Further, there is an underlying issue of how to gain access to the intellectual property required to practice those processes.

The lowest risk lowest cost means to integrate a new technology into the energy supply chain is to be as least disruptive as possible. “Bolt on” technology approaches are an effective way to legitimately finance and implement steps towards large-scale renewable fuels production.

Therefore, the EPA should consider relaxing the facility registration requirements to be more in tune with the modern integrated energy supply chain. This requires a shift in thinking that encourages the integration of renewable and fossil fuel energy delivery despite increasing the burden of RIN tracking and verification. Biofuels developers will benefit from increased access to finance markets via lower risk smaller capital projects. By running a cash positive business, biofuels developers can fund research and development efforts with sustainable capital rather than limited equity tranches. Environmentally minded groups will benefit from a more rapid adoption less intense greenhouse gas energy. Obligated parties will benefit from the reduced RIN price that accompanies plentiful RIN generation. The military benefits by increasing the quantity of transportation fuels that can be produced within North America. Finally, the Congressional intent of increased energy security and independence are satisfied.

Keywords: RFS2, Renewable Fuels, EPA, Market Pull Subsidy, Biofuels, Ethanol, Advanced Biofuels, Biodiesel, RIN, RIN's, Crude Oil, Syncrude, Biocrude