RIN Compliance and Challenges RFS2 Presentation at 2013 CRFA - PowerPoint PPT Presentation

RIN Compliance and Challenges RFS2 Presentation at 2013 CRFA Conference Sandra Dunphy Director, Energy Compliance Services Weaver and Tidwell, L.L.P. December 3, 2013

About Weaver • Ranked the largest independent accounting firm in the southwest U.S. by Accounting Today magazine • Nationally ranked as a top 50 firm – No. 42 by Austin Dallas Accounting Today No. 39 by INSIDE Public Accounting • More than 60 years of experience Fort Worth Houston • 500 employees, including 64 partners • Largest provider of EPA, CARB and Environment Canada fuel compliance services Midland/Odessa San Antonio • International reach through Baker Tilly International membership and for RFS work, with Control Union Certifications Stamford, CT 2

Today’s Topics • RFS Basics • How RINs work • 2014 RVO Proposal • The Blend Wall • The rationale behind the methodology • How EPA’s actions will affect the biofuels industry • What’s next? 3

In the beginning…. • The Clean Air Act Amendments (1990) and Energy Policy Act (2005) required EPA to implement regulations implementing a renewable fuels standard program • First program was called “RFS1” ‐ effective date Sept. 1, 2007 – Renewable Fuels goals: • 9 Billion gallons by 2008; 22 billion gallons by 2022 – RINs were born and they were intended to be: • The “currency of compliance” • Generated by producers of renewable fuels • Gasoline producers & importers were “obligated” to own RINs – RINs were 38 digit numbers and prone to transfer errors 4

Energy Independence and Security Act of 2007 But not before long, on Dec 19, 2007 Congress passed The Energy Independence and Security Act of 2007 (“EISA”) STATED GOALS: Reduce dependence on foreign oil; reduce GHG emissions; increase US employment in green sector HOW? • Increase volume of renewable fuels required to be blended into gasoline, diesel, heating oil and jet fuel to 36 Billion gallons by 2022 and • Moving the focus of renewable fuels from traditional sources to “advanced” and “cellulosic” biomass feedstocks ……..and EPA was to create regulations to implement EISA within 12 months of this date …………………… 5

To put EISA into motion ~ • February 3, 2010: EPA signs final rule to implement EISA => RFS 2 – Effective July 1, 2010 (except for RVO calcs) – Feedstock focus switched to “renewable biomass” – Implemented biodiesel, cellulosic and advanced biofuels – Retained RIN system for compliance and trading program • RINs are still the “currency” of compliance and trading – Established new EPA software program for RIN transactions – Included diesel fuel volumes in addition to gasoline for obligation calculations Wow, that seems easy enough…. 6

RFS2 Renewable Fuel Volumes GHG Reduction 40 Advanced Biofuel: Unspecified Advanced Biofuel: Biomass-Based Diesel 35 Advanced Biofuel: Cellulosic Biofuel E ‐ 30 50% Conventional Biofuel (corn ethanol) 30 Billion Gallons E ‐ 15 25 60% E ‐ 10 20 15 10 ETHANOL CAPPED AT 20% 15 BG/YR 5 0 Year 7

RFS2 Nested RVO Concept – using Cellulosic RINs (Circle size not Total Renewable (RF) D3, D4, D5, D6, D7 Total Advanced Biofuels (AB) D3, D4, D5, D7 Cellulosic (CB) Biomass-Based Diesel (BBD) D7 D4 Cellulosic Biofuel Waiver Credit* : (CWC) * EPA Cellulosic Waiver Credits cannot be applied to AB or RF RVOs * EPA Cellulosic Waiver Credits cannot be applied to AB or RF RVOs 8

Almost all gasoline has 10% ethanol 9

What happens when… RVO percentages are set by EPA each year by Nov 30 (in theory) RVO % = EISA/EPA annual volume for a given RIN category Gasoline + Diesel projected to be used in coming year Numerator ↑ Denominator ↓ 40 180 Advanced Biofuel: Unspecified Advanced Biofuel: Biomass-Based Diesel RED=2007 forecast 35 Advanced Biofuel: Cellulosic Biofuel Billion Gallons DASHED= 2012 forecast 170 Corn Ethanol BLACK= 2013 forecast Gasoline Demand (Billions of Gallons per year) 30 160 ‐ 28% in 2022 25 150 AEO 07 20 ‐ 12% in 2013 AEO 2012 140 AEO 2013 15 10 130 5 120 Source: EIA/AEO Table 11 ‐ Editions 0 2007, 2012 & 2013. 110 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Year 10 10

The Blend Wall is here 11 11

We are at a crossroad • The Blend Wall has caused EPA to propose revising the RFS standards for 2014 downward for all obligation categories: Standards for 2012 BR¹ 2013 BR¹ 2014 BR¹ 2014 BR¹ (EISA/EPA) (EISA/EPA) (EISA) (Proposed)² 0.00865 1.0/0.006³ 1.75 0.017³ Cellulosic biofuel 1.5 4 1.92 4 1.5+ 4 1.92 Biomass ‐ based diesel 2.0 2.75 3.75 2.20 Advanced biofuel 15.2 16.55 18.15 15.21 Renewable fuel 13.2 13.80 14.40 13.01 Corn Ethanol (de facto) ¹ Billions of RINs ² As included in NPRM published 11/29/13 in Federal Register ³ EPA evaluates cellulosic production capabilities each year and can adjust this volume 4 EISA set BBD at minimum 1.0 BG; EPA can adjust upward if warranted by production/feedstocks 12 12

EPA’s “Flexibility” to adjust CB, BBD RVO’s Under the Clean Air Act and EISA: Cellulosic Biofuels: required volume must be lesser of EISA volume or EPA’s projected volume of production • EPA evaluates each cellulosic biofuels plant to determine ability to generate RINs in coming year Biomass ‐ based Diesel: Required volume for 2012+ must be ≥ 1.0 BG, and must be based on review of implementation of the program and analysis of several factors (incl: production/consumption/infrastructure/climate change/etc.) 13 13

Adjustments to AB, RF Advanced Biofuels and Renewable Fuels: • If CB reduced to EPA projected volume, then EPA may reduce AB and RF by same or lesser volume • EPA may waive any portion of the statutory volume requirements (in whole or in part) upon receipt of a petition from a state, an entity subject to the RFS, or on its own motion, if implementation of those requirements would severely harm the economy or environment of a State, region or the United States , or there is an inadequate domestic supply 14 14

Additional option for 2016 If EPA waives (1) at least 20 percent of any applicable volume requirement for two consecutive years; or (2) at least 50 percent of a volume requirement for a single year • EPA must modify the applicable volumes for all following years, beginning with the 2016 calendar year 15 15

EPA’s 2014 RVO Proposal Proposed Methodology for establishing 2014 RVOs is a combination of EPA’s 2 waiver authorities – CB waiver and general waiver ‐ Evaluate cellulosic biofuel production capabilities and adjust the CB RVO downward to reflect anticipated production volumes ‐ Determine the quantity of ethanol that could reasonably be consumed as E10 and E85, and add to that the volume all non ‐ ethanol RF expected to be available (CB, BBD, AB) and consumed EPA is proposing to use this methodology – a combination of waiver authorities ‐ to establish RVOs in all future years 16 16

Proposal v Historical If EPA reduces the standards as If EPA were to leave the standards under proposed: EISA (only lowering the CB volume) ‐ Ethanol RIN prices may go back to ‐ RIN prices will move upward pennies ‐ Some smaller and merchant ‐ Lower Advanced Biofuel RIN prices refiners would likely close will disproportionately impact ‐ Gasoline/diesel exports would smaller producers continue to increase ‐ Corn, soybean prices will fall ‐ Advanced biofuels will have to fill ‐ Investments in Advanced Biofuel in the blendwall shortfall (at plants will dissipate higher prices than ethanol) ‐ Gasoline pump prices will not be ‐ Foreign RF imports will increase affected by RIN prices ‐ Pump prices may increase ‐ Foreign RF may not come to US ‐ Corn, soybean prices stay strong 17

What else is happening? • In addition to the 2014 RVO proposal… – Hearing on 12/5 to hear testimony of 100+ commenters – Other 2014 RVO waiver petitions – API, AFPM, Individual Refiners – Quality Assurance Plans – 1Q14 – Pathways II amendments – 1Q14 • Biogas, biobutanol, foreign producer restrictions – Pathways III amendments – 2Q14? – Feedstock clarifications – corn oil, waste oils, etc. – Enforcement Actions – Tier 3 gasoline regulations – Tax Credits expiration/renewal(?) 18 18

Q & A Thank you for the opportunity to speak with you today Sandra B. Dunphy Contact Information : Weaver & Tidwell, L.L.P. Phone: 832 ‐ 320 ‐ 3218 Cell: 281 ‐ 610 ‐ 4750 Fax: 713 ‐ 850 ‐ 1673 Email: Sandra.Dunphy@Weaver.com Twitter and Yahoo IM: RINderellatx Website/Free Blog: www.Weaver.com 19