New Fuel Regulations Threaten Fuel Fungibility and Price Discovery

New renewable-fuel regulations and an all-or-nothing push for E15 sales could threaten fuel fungibility, increase costs, and upend the world's most mature refined-product markets.

• The EPA’s proposed ‘Set Rule’ entered a one-month public comment period on January 10, with nearly every stakeholder opposed to the introduction of the electric RIN (eRIN) except for the sole beneficiary—automakers.

• The Inflation Reduction Act’s (IRA) introduction of the 45Z Clean Fuels Production Credit (CFPC) linking fuel to carbon intensity threatens fuel fungibility, which is set to obfuscate price discovery.

• Seven Midwest states are pushing to remove the 1.0 Reid Vapor Pressure (RVP) waiver for E10 sales to promote year-round sales of E15. The move is a last-ditch gamble to bring only incremental volumes of ethanol into the marketplace, yet would severely disrupt the operations of refiners, pipelines, and storage facilities, in turn raising fuel costs and leaving the region prone to more frequent and longer-lasting gasoline supply shocks.

The ‘Set Rule’ enters contentious comment period

On Tuesday, January 10, the EPA’s ‘Set Rule’ entered a one-month public comment period with a wide array of stakeholders, lobbyists, and environmental groups posturing to layout positions and form alliances while highlighting the good, the bad, and the ugly contained within the proposal. The ‘Set Rule’ introduced in December lays out the proposed mandated volumes of renewable fuel consumption for 2023-2025 while also, for the first time carving out an electric RIN (eRIN) available to original equipment manufacturers (OEMs).

While most of the lines drawn in the sand were predictable—ethanol producers were happy, advanced fuel producers unhappy—the implementation of the eRIN proved the most contentious. At the center of the issue is who earns the credit. By allowing only auto manufacturers to earn the eRIN, the EPA is choosing to promote one technology. That contravenes the main statute of the Renewable Fuel Standard (RFS), which is to boost renewable fuel use, allowing the market to determine the technologies needed.

Refiners and biofuel producers took issue with the EPA promoting already heavily subsidized auto manufactures, while effectively taxing the refining industry. EV proponents believe the eRIN should be given to or shared with charging stations to promote the growth of infrastructure. Lastly, most industries doubt the EPA can usher in such a radically complex program in such a short time span. The clear consensus forming in the early days of the comment period is that the eRIN should be removed from the ‘Set Rule’ and dealt with separately.

The IRA’s new credit poses a material threat to fuel fungibility and price discovery

The Clean Fuel Production Credit (CFPC), or 45Z, creates a federal carbon credit scheme to work in concert with the RFS—the RINs program—which delineates a fuels’ credit generation by greenhouse gas emissions (GHGs).

Set to take effect in 2025, the new credit poses hazards to fungibility and pricing as each biofuel will have a unique carbon intensity (CI). The CI score will, in turn, determine the CFPC price and add or subtract value to the fuel’s price. Ethanol will no longer simply be ethanol; it will be a variety of CI scored batches trading simultaneously.

This issue is not without precedent. The implementation of California’s Low Carbon Fuels Standard (LCFS) stratified the ethanol marketplace with 79.9 CI, sub-70 CI, and other precise scores trading side-by-side. This forced LCFS market participants to make rough CI estimates on the fly based on complex calculations and prevailing LCFS credit prices. In the process, a lot of players gave away CI value just to remain fungible.

Scaling this process up nationwide to work in concert with a patchwork of federal and state programs and the nebulous law for stacking credits under the IRA takes a mature market and seeds it with complexity, breaking down fungibility and pricing clarity.

Midwest all-or-nothing E15 push would prove chaotic for regional gasoline markets

Seven Midwest states are pushing to revoke a 1.0 RVP waiver for E10—10% ethanol 90% gasoline—in exchange for promoting the year-round sale of E15. E10 requires a 1.0 RVP waiver as the fuels’ high RVP causes ethanol to evaporate during warmer months.

The move is a huge gamble and would drastically threaten the participating state’s gasoline supply. By discouraging guaranteed E10 sales in exchange for the hope of increasing E15 sales, the states will require refiners to completely reconfigure gasoline production, transport, and storage, increasing gasoline prices in the hopes of incremental blending, as reported by Bloomberg. The move would also prolong gasoline shortages as Gulf coast refiners would have to produce more costly, lower RVP gasoline to send to the impacted states.

E15 consumption remains constrained by a lack of consumer education, poor marketing, lower energy density of ethanol, a lack of blending infrastructure, and liability concerns for engine damage.

Fortunately, the EPA has some leeway to delay implementation for at least a year, possibly longer, and impacted refiners in the Midwest would, at this point, already have to be reconfigured to consistently make lower RVP gasoline to allow for E15 sales.

The US renewable energy sector will undergo the greatest transformation in history as the 'Set Rule' and IRA take effect. Due to the nature of renewable fuels, they are bound to have a knock-on effect in conventional fuels markets for gasoline and diesel. These are some of the most pressing issues facing stakeholders and the possible threats to US fuels supply.

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