In a development that will increase liquidity and transparency in the RIN market, two major providers are making RIN future contracts available to be traded. Both CME Group and the IntercontinentalExchange (ICE) will have RIN products available to be traded by mid May. CME Group and ICE will enable over the counter trading (OTC) of D4 RINs, D5 RINs, and D6 RINs. D6 RINs are the most common RINs, typically fulfilled by corn ethanol production. D5 RINs are the most flexible premium RINs, representing advanced biofuel that may consist of biogas, advanced drop in fuels, or other fuel types that meet the 50% GHG reduction standard. D4 RINs are biomass-based diesel RINs, fulfilled primarily by biodiesel and renewable diesel fuels. The development of a futures market could provide a substantial boost to the development of advanced biofuel facilities by enabling their financing. Many financial market participants have in the past regarded RIN revenue as too speculative to include in a plant's pro forma but are likely to be reassured by the presence of RINs in the OTC market. We speculated in our recent white paper that the EPA's rulemaking on Quality Assurance Programs (QAPs) could facilitate the establishment of a RIN futures market. See http://www.stoel.com/showarticle.aspx?Show=10180
The U.S Environmental Protection Agency (EPA) today announced it has denied requests from the Governors of Arkansas and North Carolina to waive Renewable Fuel Standard (RFS) volume requirements, based on the effects of the drought on feedstocks used to produce renewable fuel in 2012-2013. The petitions, filed in August, triggered a review process to determine if the implementation of the RFS requirements would severely harm the economy of those states.
After considering the nearly 30,000 comments received during the public comment period and empirical evidence, such as the prices of RINs and market commodities, the agency’s economic analyses did not produce sufficient evidence of severe economic harm that would warrant the granting of the waiver request. The EPA analyzed 500 scenarios and found no impact from the RFS program on corn, food or fuel prices in 89% of those scenarios. In the 11% of scenarios where RFS impacts were shown, the impact was less than a 1% change in corn prices. EPA acknowledged that “this year’s drought has created significant hardships in many sectors of the economy, particularly for livestock producers. However, the agency’s extensive analysis makes clear that Congressional requirements for a waiver have not been met and that waiving the RFS would have little, if any, impact on ethanol demand or energy prices over the time period analyzed.”
In its 83-page Notice of Decision (PDF file), EPA interpreted the waiver provision in a manner consistent with its prior response to the first RFS waiver request from Texas in 2008, which was also denied. In both cases, Section 211(o)(7)(A) of the Clean Air Act was interpreted as providing narrow authority. In order to grant a waiver, EPA would have had to determine with a high degree of confidence that implementation of the mandate would not only contribute to economic harm, but would itself severely harm the economy of the State or region requesting the waiver.
While the issue is politically charged, EPA’s decision making process in waiver requests focuses on the legal standard established by the Clean Air Act. The waiver is essentially a pressure relief valve for the program but is only available when the very high standard of severe harm is met. EPA utilized an updated version of an Iowa State University model to analyze 500 scenarios. In 89% of the scenarios, the model indicated that the implementation of the RFS program would have no impact on ethanol production and corn prices. This is consistent with the market reality that ethanol blending is driven primarily by factors other than the RFS, in particular blending economics and the value of ethanol as an oxygenate. A significant additional factor considered in the EPA analysis is the availability of rollover RINs from prior years that can be utilized by obligated parties. To the extent that rollover RINs are used this year, this factor would change significantly should similar drought conditions return next year.
While this waiver request has now been resolved, interested parties continue to follow EPA rulemaking activities relating to the RFS closely. It is anticipated that the agency will address the issue of RIN fraud in a pending rulemaking. Thanks to my colleague Sara Bergan for her assistance in reporting the EPA's RFS waiver decision today.
EPA Docket ID: EPA-HQ-OAR-2012-0632
Stoel Rives has long been a trusted advisor to the biofuels industry. Since the industry’s inception, we have assisted biofuel companies in launching ventures, obtaining financing, ensuring regulatory compliance, licensing technology, negotiating agreements, and leveraging incentives and government programs. As the industry has evolved and expanded, our practice has remained on the cutting edge while maintaining focus on the needs of our clients.
Today, we are pleased to announce the launch of our Advanced Biofuels practice. We have assembled an experienced team of attorneys capable of meeting the diverse needs of the emerging Advanced Biofuels industry. Our attorneys possess a wealth of expertise in the full range of relevant legal areas including intellectual property, regulatory issues, financing, mergers and acquisitions, litigation, real estate, permitting, and contract negotiations. Our advanced biofuel attorneys already represent multiple advanced biofuel companies and have invested time in learning the industry and its unique legal requirements. The backgrounds and experience of the team, along with additional resources and publications can be found on our new Advanced Biofuels practice webpage: www.stoel.com/advancedbiofuels
In conjunction with the launch of our website and the announcement of our Advanced Biofuel team, we are also releasing the Law of Biorefineries and Advanced Biofuels. This publication is the first of its kind, providing the industry with a guide to the legal issues that developers of advanced biofuels projects face. We hope that you find our resources informative, and we look forward to working with you in this dynamic industry. The new guide can be downloaded free of charge at www.stoel.com/lawofseries
Stoel Rives is honored to have been named the top partner in the Professional Counselors and Services category by the readers of Biofuels Digest, the most widely read daily news digest in the biofuels industry. Biofuels Digest Publisher Jim Lane and his team produce a great on-line magazine and some of the best conferences in the industry, and we are proud that the readership values the work of the firm.
Stoel Rives attorneys provide counsel on all aspects of biofuel and biochemical projects and are committed to providing valuable assistance to this exciting and dynamic industry. The firm continues to focus on bioenergy project development including real estate, permitting, financing, commercial agreements, RFS and regulatory work. Firm attorneys have extensive experience with both first and second generation projects and regularly provide useful resources for the sector which are available for download here.
Biofuels Digest’s Hot 40 Partners recognizes the industry’s top forty partners, as voted by the readers of Biofuels Digest and a panel of international selectors. According to Jim Lane, readers voted for companies that add credibility to their efforts, and accelerate their path to commercialization. The Biofuels Digest is an indispensible news source for the biofuels industry, covering producer news, research, policy, conferences, and financial news. The Digest reaches over 28,000 subscribers each weekday, and also publishes in-depth market research and data, including the Quarterly Biofuels Business Outlook, and the Advanced Biofuels Project Database.
Yesterday the EPA released the third major Notice of Violation ("NOV") against a biofuel producer in the past six months under the Renewable Fuel Standard ("RFS"). The NOV states that EPA has determined that Green Diesel, LLC of Houston, Texas, generated 60,034,033 invalid Renewable Identification Numbers (“RINs’) with a current market value of perhaps $85 million. Coming on the heels of 31 settlement agreements relating to the Clean Green Diesel and Absolute Fuels RINs, this NOV is likely to trigger immediate market reaction. The EPA has been enforcing invalid RIN cases first against the RIN generator then subsequently against the obligated party, i.e., the company that uses the RINs for compliance with RFS. Obligated parties under the RFS are petroleum refiners and importers in the U.S. About a month after the Clean Green Fuel filing, the EPA filed NOVs against the obligated parties. It remains to be seen whether EPA will do so again. The agency may instead rely upon its past actions and its recently released Interim Enforcement Response Policy to motivate corrections by obligated parties.
Some market participants have criticized the EPA for their managing of the RFS program and questioned the RFS program itself. In response, the biofuel industry and particularly the National Biodiesel Board have taken significant steps to address the validity issues. While there is significant time delay as many of the alleged activities date back to 2010, it appears that the EPA enforcement activities have motivated substantial due diligence activities that will serve the RFS program participants well in future years. The immediate challenge is in addressing the new Green Diesel NOV and the resulting contractual implications for market participants who transacted in these RINs. The rapid growth in the value of the RIN market has certainly presented substantial challenges. Nonetheless, private market responses to date suggest that the resourceful biofuel and petroleum industries can weather these storms and ultimately make the RFS program more effective toward its goals of reducing U.S. dependence on foreign oil imports and reducing GHG emissions.
On February 2, 2012, the Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV") of the Renewable Fuel Standard ("RFS") to Absolute Fuels, a company located in Lubbock, Texas. The NOV alleges that between August 31, 2010, and October 11, 2011, Absolute Fuels generated over 48 million Renewable Identification Numbers ("RINs") and that all of these RINs were invalid. This EPA action is likely to have a substantial impact on the overall RIN market and could be followed by related NOVs to other market participants.
The Absolute Fuels NOV represents the second major enforcement action by the EPA under the RFS. The first action alleged invalid generation of over 32 million RINs by Clean Green Fuel. The Clean Green Fuel action proceeded with a criminal filing by the U.S. Attorney for the District of Maryland and was followed by the EPA's filing of 24 NOVs against the companies that utilized the Clean Green Fuel RINs for compliance with RFS obligations. EPA did not allege that the obligated parties that received the Clean Green Fuel RINs had any knowledge or reasonable basis to have knowledge regarding the RINs' invalidity. This alert provides an analysis of the regulatory basis for these EPA enforcement actions.
The Environmental Protection Agency (EPA) is exercising its authority and enforcing the requirements of the Clean Air Act’s renewable fuel standard (RFS) program. The EPA issued twenty-four notices of violation on November 7, 2011, to petroleum refiners, importers and exporters of renewable fuel.
Following a filing last month of criminal charges of wire fraud, money laundering, and violations of the Clean Air Act (CAA) against an individual, Rodney R. Hailey, the EPA issued civil notices of violations (NOVs) to the entities that relied upon the allegedly invalid Renewable Identification Numbers (RINs) generated by Mr. Hailey. The companies involved are obligated parties under the RFS program and thereby, subject to Renewable Volume Obligations (RVOs) designed to demonstrate compliance with the renewable fuel standards set by Congress -- 36 billion gallons by 2022.
Stoel Rives issued a legal update on these matters, among the first enforcement actions initiated by the EPA under the RFS2 requirements. The entire update can be read here.
The Sustainable Aviation Fuels Northwest (SAFN) is the first stakeholder effort to review the challenges surrounding the production of sustainable aviation fuels and to develop a regional solution.
The initiative was launched in July 2010 by Boeing, Alaska Airlines, the Ports of Portland, Seattle and Spokane– and Washington State University. Climate Solutions, a Northwest clean-energy nonprofit, managed the stakeholder process that included a wide range of groups across aviation, biofuels production, environmental advocacy, agriculture, forestry, federal and state government agencies, academic research and technical consultancies. Stoel Rives was proud to be a participant in the process and to provide specific input regarding incentives, and the Renewable Fuel Standard.
We hope that you find the report useful and informative, see http://www.safnw.com/ for further information.
The current version of the budget compromise provides relatively good news for projects seeking DOE loan guarantees. During the past several months, renewable energy projects in the DOE’s Loan Guarantee pipeline have been exposed to substantial uncertainty as a result of the budget crisis in DC. The developers of these projects have previously invested substantial resources to apply to the program which would become wasted effort if the program funds evaporate as the projects wait for DOE approval. The Loan Guarantee Program Office led by Jonathan Silver was clearly aware of this issue and prudently allowed all open solicitations to expire in early 2011 without issuing any new ones. The renewable energy project developers’ concern has been that the budget deal would involve a substantial claw back of previously appropriated funds that have not yet been committed to projects.
The battle is not yet resolved but the current compromise is encouraging for these projects. There is a claw back of $18.183 billion in uncommitted funds but these were funds appropriated under provisions that required that the Credit Subsidy Cost to be paid by developers. The Credit Subsidy Cost was the bane of the Loan Guarantee Program as it essentially required the program applicant to cover the present value risk that the project would default on the loan. The Stimulus Bill solved this problem and greatly increased the attractiveness of the Loan Guarantee Program by appropriating funds to cover the Credit Subsidy Cost. Similarly, the current budget compromise appropriates an additional $1.183 billion in funds and allows these funds to be utilized to cover Credit Subsidy Costs. Thus, while the provision claws back funds, these are funds that were not attractive due to program limitations whereas new funds are appropriated to the preferred program. In addition, the proposed legislation imposes an Office of Management and Budget certification of compliance requirement as a control on the program.
The current bill is HR 1473 and is likely to be voted on later this week and thus is still subject to amendments. To obtain the latest details and access to the bill, see the Open Congress site at http://www.opencongress.org/bill/112-h1473/show
There has been a wave of good and bad news this past week regarding the DOE's Loan Guarantee Program. On the positive side, Secretary Chu announced on Friday that the Department would be adding an additional compliance period for the Innovative Solicitation. The current deadline for the Part I application under the program is August 24th. Secretary Chu announced the applications would be accepted until October 5th thus providing six more weeks of time to applicants. Secretary Chu did not extend the Part II deadline and cannot extend the September 30, 2011 start construction deadline as that deadline was established by the Stimulus Bill itself. Still, the extension was generally viewed as a respite and perhaps an indication of a willingness to further extend the program.
On the bad news side, the Senate approved the FMAP state aid bill to avert teacher layoffs and pay for Medicaid which is to be funded in part by taking $1.5 billion in funds that the Stimulus Bill appropriated to the DOE Loan Guarantee program. Clearly driven by Pay-Go requirements, this is a reminder of the $2.0 billion fleecing that the Loan Guarantee Program suffered when Cash for Clunkers program was passed. While it has been promised that the funds will be restored, the fact that the Cash for Clunkers funding has not yet been restored raises concern about whether the restoration will occur.