Podcast: Discussing the Federal Renewable Fuel Standard with Andy Kriha and Susan Lafferty

Susan Lafferty: Welcome to the first of our 2023 podcast on all things related to carbon reduction efforts by lawmakers, regulators and by energy companies. My name is Susan Lafferty. I'm a partner at Holland & Knight, and I'm joined by Andy Kriha, an associate here at Holland & Knight. Today we are talking about a landmark proposed rule at EPA on the Renewable Fuel Standard Program, or RFS, that will impact the direction of transportation fuels for years and, in fact, decades to come. By way of background, the Renewable Fuel Standard, or RFS, was passed into law in 2005 and 2007 energy bills. The program requires a certain amount of renewable fuel to be used in the transportation fuel pool each year. Generally, the producer of renewable fuel generates a credit that's called a RIN, and refiners, importers and blenders of gasoline and diesel are the obligated parties who must acquire and retire the RINs on an annual basis. The rule that we're talking about today is the "set rule." It's called that because the statutory volumes that are mandated each year have actually ceased to be set forth in the statute itself. Instead, authority now transfers to EPA to set the volumes going forward each compliance year by looking at six statutory criteria that were set forth. The proposed rule was released on December 30 and will cover volume requirements for 2023, 2024 and 2025. This is to give the program some stability and to give investors confidence in the direction of the program by covering more than just one year at a time. EPA has also decided to include additional amendments to the RFS, the most significant of which is to establish rules for electricity RIN generation, which we will dive into deeper shortly. It's also adding changes to requirements for the CNG/LNG pathways and a few other changes that we'll touch on. We are in the rulemaking now, as we have noted, and written comments are due February 10. By the consent decree, these 2023 RVOs must be finalized no later than June 14, 2023. There is a lot of buzz around the entire rule, which is why we're doing this podcast, and in particular, the renewable electricity RIN or e-RIN proposals. So, it's important to note that the consent decree I referenced only requires the volumes for 2023 to be finalized by June. So, it remains possible that if other parts of the proposal meet with a lot of resistance or political blowback, an EPA determines that it needs to revamp parts of the proposal that non-volume issues like e-RINs may not be finalized until sometime later than June. This is a TBA, but because of the very long wait to get to this point, that is a proposal for e-RINs that will allow EPA to approve registrations and for RINs to start being generated. Many feel that getting a program in place that is not perfect is better than waiting longer. I'm going to now turn it over to you, Andy, to talk a little bit about the RVO proposal itself.

Breaking Down the EPA's RVO Proposal

Andy Kriha: Sure. Thanks, Susan. So, the Renewable Volume Obligations are really the meat and potatoes of the Renewable Fuel Standard and the piece of this rule that's ultimately going to impact vast majority of the parties, really all of the parties. And yet, because this is something the EPA has done many times before, kind of the most boring part of the rule, I would say, and the least controversial, certainly. And so, just a quick overview for those who may not be aware, there's four different categories of renewable fuel that each have their own separate obligation. There is what are known as the D3 RINs. These are cellulosic RINs derived from the fibers that make up plant cells. These are things like ethanol derived from corn stover and woodchips as well as biogas, which we're going to see a little bit later in the e-RIN rule, that is really going to shake up the program a little bit this year. The lifecycle emissions, the D3 RIN generating fuels, must be 60 percent below the baseline, which is different than all of the others, which must be 50 percent below baseline GHG emissions, making these some of the most valuable RINs in terms of environmental impact. Then there are D4 RINs, which are biomass-based diesel. These are things like vegetable oils, waste oils and animal fats that are turned into diesel, and then D5 and D6 RINs. D6 RINs are your corn-based ethanols, while D5 are other types of ethanol that are not from corn starch, so sugar-based ethanols and the like. EPA each year, or previously each year, now for multiple years going forward, sets a percentage standard by which obligated parties must meet each of these categories and the fuel that they produce. They set specific standards for three of the categories, D3, D4 and D5 RINs, as well as a total standard, which then we use and apply the standard for D6 that can be met as well as any of the other categories. In this particular rulemaking, the EPA is proposing the annual volume standards for three years: 2023, 2024 and 2025. Because 2023 will be about half over by the time the rule is finalized, don't expect the proposal to exactly match the final rule, as they will take into account actual data from the first half of the year. EPA is also taking comment on whether two years or four years would be appropriate for time periods to project out and set these standards. There's a little bit of a tension here, that a lot of parties don't want EPA setting these standards too often because especially in recent years, EPA has been very delayed when they do this, and so doing longer will create more certainty, especially when we know for sure what the rule is going to be before the compliance year actually starts, which has not been the case for the past several years. On the other hand, there have been a lot of comments already in the rulemaking that four years is too long, the projections won't be accurate. And so, that's why EPA has kind of determined that three is the sweet spot, but they are taking comments. In terms of what the actual proposed volumes look like, we'll publish a chart online with the exact numbers, but there are some trends that we can point out here in the podcast. Those D4 and D5 RINs for advanced biofuel and biomass-based diesel have steadily increasing volume requirements each year. This is pretty typical with what we've seen in the past. The D6 implied volume actually stays steady all the way throughout at 15.25 billion gallons. In the first year for 2023, that's two separate numbers, 15 billion as the projected and 0.25 billion supplemental volume resulting from litigation, and then going forward, just a standard volume of 15.25 billion gallons. The really interesting number here is going to be for the D3 cellulosic RINs, because that, as I mentioned earlier, encompasses bio gas. Biogas is what's going to feed into the e-RINs that we talked about later. And so, with the introduction of e-RINs, they're really stepping up obligations for these D3 cellulosic RINs. It's going to double from 2023 to 2024, 2024 being the year in which e-RINs first come into effect, and then much larger steps after that, although not quite, quite doubling. And there have been a lot of comments so far. I think probably the most comments we've seen in regarding the actual volume requirements have been that the D6 implied mandate should be lowered to something around 13.9 billion gallons because of the ability of the existing supply chain to accommodate ethanol. EPA's response to that has been that this allows for growth in the D4 and D5 RIN spaces, that they expect actual supply of those RINs to exceed the obligated requirements. And so, the implied D6 mandate will just kind of fall on its own as a result of that. There have been several other concerns that have been noted in comments so far that we think are worth noting. First, the concern that the D4 and D5 categories are not high enough to accommodate projected growth in the next few years. Many refineries have already converted to renewable diesel and sustainable aviation fuel, for example, and the administration's recently released transportation roadmap actually wants a lot more of that type of growth. So, this is a little bit interesting, that those numbers are low. And there have been other comments as well. Many arguing again, since we talked about cellulosic D3 RINs having the greatest environmental impact, that number should be higher, especially because EPA may have underestimated the number of e-RINs that can be generated from biogas due to the existing electric vehicle fleet capacity and expected growth in that area. One last thing that I'll note here before we move on to the e-RIN discussion, the volumes proposed by EPA were set based on the assumption that there would be no new small refinery exemptions. Small refineries in the past have been granted exemptions from obligations when they've been able to show an undue burden from meeting the RFS's requirements. EPA has taken the stance that small refineries will always be able to recover the costs of obligations by increasing their prices, and so there will never be an undue burden. And so, these volumes were set under the assumption that all refineries are going to have obligations. Anything to add on that, Susan, or do we want to move on to e-RINs?

So, the Renewable Volume Obligations are really the meat and potatoes of the Renewable Fuel Standard and the piece of this rule that's ultimately going to impact vast majority of the parties, really all of the parties. 

RIN Generation and Biogas: What You Need to Know

Susan Lafferty: You know, the only thing I'll add is, Andy is right. This is sort of the meat and potatoes, and the RVO setting the volumes is certainly what's driving this overall rulemaking that, as you have gathered, is actually about two years late at being proposed. That said, the volumes are very critical to each of the different categories and the stakeholders in them. And one thing that has been noted, perhaps especially in the cellulosic arena where e-RINs are coming on board, but even more generally is what happens if in between the rulemakings, if it's three years, that EPA has clearly, woefully underestimated what RIN generation is going to be in a specific category? How might they address that? Of course, the concern is if you have too much supply of RINs, then the prices crash and investment is not as attractive. If EPA overestimates and they clearly have been too aggressive in setting any of the volumes, waiver authorities still exist in the statute and could be used to actually lower volumes. So, that's something to watch for, I think, in the comments that are going to be submitted to EPA and to see what EPA does, if anything, and a final rule to address this concern. So, the very hot topic of e-RINs is, as we said, getting a lot of the attention and buzz in this proposed rule. EPA has previously talked about renewable electricity from biomass, from cellular, cellulosic fuel being used to generate renewable electricity that then is used in an electric vehicle to be allowed. But, EPA has actually never approved a registration for such RIN generation. So, what it is doing now is addressing its long-standing concerns with regards to how that RIN is generated and that renewable electron is tracked to make sure that there is not any sort of double killing of RINs and that there is some level of accountability in terms of the pathway. So, this new proposal is attempting to address these issues, and one of the ways that EPA is saying that it's going to sort of baby step even more into the program is by hopefully finalizing a rule mid-June, but not having the e-RIN proposal effective until next January 2024. What the proposal would do is set the original equipment manufacturers, OEMs, which are the electric vehicle manufacturers themselves, as the sole entity able to generate an e-RIN. This would be a D3 RIN, but it's nonetheless, would be marked as electric generating RIN, and this would, therefore, satisfy the cellulosic biofuel volume requirements. Biogas producers, RNG producers and electricity generators would also be regulated parties in this e-RIN chain. The way it would work is, EPA expects that you have a biogas producer who either works with the RNG producer or not, the biogas producer, who gathers raw biogas from either a landfill or a digester could give it to a RNG producer who cleans it up before injecting onto a pipeline. Or, the biogas producer could collect the biogas again and sell directly to a renewable electricity producer. The renewable electricity producer then, of course, uses that biogas or RNG to generate renewable electricity. Under EPA's proposal, the renewable electricity itself could still be sold to whomever the generator has agreements with, PPAs. But now the renewable electricity producer would find an OVM to contract with in a document that EPA is calling a RIN Generation Agreement. The RIN Generation Agreement is again, not for the title or use of that renewable electricity, which is important to point out. It's just for the right to generate the e-RIN by the OVM. EPA is therefore giving that right to generate the RIN and then go out and sell it, presumably either to parties that are brokers or to obligated parties who will ultimately need that D3 RIN for their obligations each year. But EPA is assuming, as it says in its proposal, that the OVM is going to share the value of that RIN that it now has and will be selling up and down the chain. EPA is hoping that value goes both to the biogas producer in order to incentivize additional projects on the level of landfills and digesters. They're hoping also that it goes to renewable electricity producers to get them involved and interested in participating in this program. They are also hoping that for the OVMs itself, it drives their interest and ability to get more EVs on the road, maybe in the form of rebates to customers or just overall lower prices. Finally, I'll note that EPA does also reference the charging stations themselves, and again, their hope that there is some value that goes to those chargers as well. But, the important thing to note is none of this is mandated by the rule. Again, these are all will be set up via contracts that EPA does not prescribe in and of themselves, so the value that's going to be attached to each stage of this pathway has yet to be determined. A lot of price discovery will need to happen between now and next January. One thing to note is that each electricity generator under the proposal can only sell to a single OVM. EPA is calling this the Many-to-One Requirement, where renewable electricity generators will contract with just one OVM. This, again, is all trying to deal with EPA's concerns over double counting, and their belief, EPA's belief, that OVMs actually have the best access to data about actual vehicle use. I think the important thing to remember is once again, this is a transportation fuel use programs trying to get renewable fuel into the U.S. transportation vehicle pool. And so, ultimately, they want to have the data that shows that renewable electricity that is being put on the grid is also being used or allocated at least, to the use of electricity by electric vehicles. Again, several different alternative arrangements in terms of who could have generated the RIN itself are discussed by EPA in the proposal. EPA really mostly focuses on the fact that perhaps the biogas producer or the renewable electricity producer also appear to be in a position to generate the e-RIN, but EPA obviously decided to go in its proposed rule in the regulatory language with the OVM. They are taking comment on other views. Also, just to further clarify that biogas is currently the only allowable feedstock under this program for renewable electricity production that then can be used to generate an e-RIN. The Renewable Fuel Standard itself is based on feedstocks that are made from renewable biomass. Therefore, solar, wind, hydro and other sources of renewable electricity cannot participate in this program. I will note that biomass is a cellulosic and has been discussed for potentially the next feedstock that EPA considers and might allow for use for e-RIN generation. So this, as we've noted, is the hot topic of the proposal, and therefore there are lots of questions and frankly, discussions and controversies, about these provisions. So, we're going to give you a quick overview of what they are and what to watch for in the comments. The first, again, is that Many-to-One limitation that I just referenced that is that a renewable electricity producer can only contract with one OVM. EPA says that this is in part done because there are not only so many OVMs on the market, while there are many electricity producers and they think it's unlikely that an electricity producer is going to have enough electricity to go to more than one OVM. Nonetheless, the arguments I have already started hearing are that, that feels like an unnecessary constraint on the marketplace and parties deciding who and how they want to contract with others. So, I think that there will be some fairly strong pushback that this limitation isn't needed and in fact, it could be what the de facto result is. But still, why? Why put it in the rules? The other thing is that currently under the RFS program, RIN generation happens sort of on an ongoing basis in the biogas to RNG, and then CNG/LNG use, it is by practice done monthly, but that's not prescribed by the regulations themselves. It's more a creature of how, how the paperwork best facilitates RIN generation. So, in this proposal, EPA is saying that they are going to mandate that e-RIN generation is quarterly, and this might seem like sort of a minor issue, but in terms of the impact on the market, many do have concerns that this could result in sort of an e-RIN dump at the end of each quarter. That then, again, suppresses prices and impacts that negatively. Also, I think there's some concern that obligated parties are used to going out and buying RINs on a ratable basis as they incur their obligation. And by having e-RINs come onto the market quarterly, there is going to be some disconnect between how obligated parties, again, acquire RINs for their obligation for all the other categories. So, this is something else that we expect to see some pushback on. So now, Andy, you get the juicier topic of the legality of what EPA is trying to do.

The RIN Generation Agreement is again, not for the title or use of that renewable electricity, which is important to point out. It's just for the right to generate the e-RIN by the OVM. EPA is therefore giving that right to generate the RIN and then go out and sell it, presumably either to parties that are brokers or to obligated parties who will ultimately need that D3 RIN for their obligations each year. 

OVMs and the Clean Air Act

Andy Kriha: Yes, and this has been very hotly debated and I think will continue to be hotly debated until the rule is finalized, and then probably in the courts thereafter. So, first of all, there are serious questions that have been raised as to whether or not the electric vehicle manufacturers, OVMs, are even allowed to be written generators under the terms of the Clean Air Act. I think there are some arguments to be made, certainly in both directions. But what we will say is that EPA really did not devote a lot of space in the rule to defending the legality of this provision. And we think that was a little bit of a mistake. There are two provisions in the Clean Air Act that matter. There's one that defines which parties shall be allowed to generate credits. And then there's a separate provision that defines which parties may be allowed to generate credits, and EPA, in a single sentence buried on page 180 something of the 700-page rule, defended the legality in a world where the May provision doesn't exist and simply said, well, the Shell provision doesn't stop us from doing this, but there are questions that the May provision could potentially restrict who is allowed to generate credits. And so, that is something that we expect there to be comments on, and if EPA does not address those comments in a meaningful way, either in an, in a second proposed rule or in the final rule, that's going to raise a lot of Administrative Procedure Act questions. Even if they do address those and the Administrative Procedure Act is taken off the table, there are still direct issues under the Clean Air Act that we fully expect to go to litigation. Even if you think that areas that e-RINs are generally not precluded, that OVMs are generally not precluded from being the e-RIN generators under the terms of the Clean Air Act, there's still kind of this tension between designating OVMs as the generators, and what everyone has kind of always assumed to be the purpose of the Renewable Fuel Standard, which is to incentivize the production and use of renewable fuel. And a lot of commenters so far have had a hard time squaring the electric vehicle manufacturers as somebody who fits within that chain of production and use of renewable fuel. And so, certainly we would expect somebody to challenge this. So, it's definitely worth watching the comments over the remaining comment period to see what arguments are actually raised so that we can predict what types of arguments are actually going to be raised in litigation and how the location may play out. Ultimately, getting an injunction on this rule would have to satisfy an extremely high bar for injury. It is more likely that this will play out in the courts over quite some time while the rule is allowed to go into effect and then will be remanded for future versions of the rule if courts ultimately decide that it's not allowed. That said, EPA, if it's worried enough based on the arguments made about its legal position, may be inclined to delay finalization of this piece of the rule beyond June. So, certainly from what we've seen so far, quite a bit of uncertainty that was injected into the e-RIN program as a result of the choice of OVMs to be the RIN generator. All right. So, the second hotly, hotly debated topic that is going to take a long time to resolve — and probably a long time after finalization of the rule to resolve — is whether or not e-RINs and RECs can be stacked. So, what we're talking about here is renewable energy credits. These are voluntary credits in many cases, or credits of other programs such as state renewable portfolio standards, and these have been sold by renewable electricity generators for years already. Can e-RINs and RECs be sold that are tied to the same electrons, to the same batch of electricity? EPA stated that as long as you can demonstrate transportation use and there's no express conflict in the rules of the program under which the REC is generated, then these two attributes can in fact be stacked. I think we tend to think this is going to be more of a case-by-case question and that more often than not, they probably are not going to be able to be stacked, although that very much remains to be seen. There's a lot of technical questions. You really have to get down into the weeds to determine in any given circumstance whether or not an e-RIN could be stacked with a REC. Some of these questions that are going to have to be answered are things like, is the e-RIN a properly thought of as an environmental attribute, or is it simply a compliance instrument that doesn't represent the underlying attribute of renewable-ness of the fuel? What claims are made by the parties that retire each of these attributes, since we think ultimately the laws that might determine this are greenwashing laws at both the state and federal levels, and then whether certain things like government compliance filings count as a claim under some of these laws. Ultimately, EPA is probably not going to be the authority that gets to determine if RECs and RINs can be stacked. That's most likely going to be the FTC and relevant state authorities that prosecute greenwashing claims, and then ultimately will be decided in the courts. Like I said at the top, though, generally, I think we take the view that this is a very risky move. If you're stacking, that is very difficult for us to see how, if the renewable-ness attribute, whether or not you consider the e-RIN to be an environmental attribute, in a REC, it certainly is. And so, if you've sold the underlying attribute of renewable-ness along with a REC, how could you then say that the fuel generated, that the e-RIN still holds that same attribute, is still generated from renewable-ness when the renewable-ness has been sold off? So, definitely something to watch, definitely something that's going to require a very deep technical, in the weeds, case-by-case analysis, and it will probably take quite some time to play out well after finalization of the rule.

You really have to get down into the weeds to determine in any given circumstance whether or not an e-RIN could be stacked with a REC. Some of these questions that are going to have to be answered are things like, is the e-RIN a properly thought of as an environmental attribute, or is it simply a compliance instrument that doesn't represent the underlying attribute of renewable-ness of the fuel? 

Separated Food Waste Recordkeeping and Final Thoughts

Susan Lafferty: It is very sticky, indeed. So, we'll wrap it up with two final reviews of what EPA is proposing. Already talked a lot about the e-RINs, obviously. Biogas is already being used quite a bit in the cellulosic biofuel category. It is biogas to RNG, which is the cleaned up version of biogas that can be injected into a pipeline that is then being sold to a CNG or LNG dispenser for vehicle fuel use, and to line up the existing rules with e-RIN rules, EPA believes that reforms are needed to the CNG/LNG pathway. The key things here are that the RNG producer now will be the designated D3 RIN generator. You can no longer decide by commercial contract who that will be, it will be the RNG producer. Then the RNG will be sold to a CNG or LNG dispenser, and the RIN will travel with that, with the biogas, with the RNG to the dispensers. Upon dispensing and having evidence of dispensing, then the dispenser can separate that RIN from the underlying commodity and sell it into the market. So, this is going to impact, probably all of, the most existing RNG to CNG/LNG agreements because for one, it is requiring specific RIN generator, ensuring that the RIN travels with the fuel to the dispenser — that's brand new — and then the dispenser gets to separate the RIN, so it will be the dispenser who has this K2 RIN and can sell it into the market. Certainly they could sell it back to the RNG producer, but that may not be necessary. So LEAP agreements, frankly, will also be impacted here as well. Andy, why don't you bring us home on the last issue?

The key things here are that the RNG producer now will be the designated D3 RIN generator. You can no longer decide by commercial contract who that will be, it will be the RNG producer.

Andy Kriha: Absolutely. So, we're going to talk here about separated food waste recordkeeping requirements. This has been another controversial topic over the last nine or 10 months. So, last year, EPA took the position that renewable fuel producers under existing recordkeeping requirements must be able at all times to provide detailed information of the sources of used cooking oil and other separated food wastes that they ultimately use to produce renewable fuel. EPA framed this as a clarification of its existing position. As opposed to a new requirement, industry generally disagreed, as that had not been the practice for several years. Because renewable fuel producers generally don't source from individual restaurants and individual small businesses around the country because that would be relatively inefficient, they generally source from aggregators. These aggregators go around, they're the ones that are actually picking up for restaurants, and they don't have any particular desire to share their supplier lists with the renewable fuel producers that they sell to for competitive reasons. And so, EPA has proposed a rule that would solve this issue and allow the aggregators to register as participants in the Renewable Fuel Standard. They would follow rules that very closely mirror the rules for bio intermediate producers. Participation would be voluntary. Those that participate would not be required to share their supplier lists with renewable fuel producers. Both the aggregator and the renewable fuel producer under this program would be required to utilize the QAP program and use the same verified third party QAP provider, so that EPA is able to track appropriately from source to production. It is important to note that although EPA hasn't taken any action yet in the past year or so since it announced its position, as of right now, EPA does still consider any renewable fuel producers that don't have access to the ultimate supplier lists from their aggregators to be out of compliance. I don't think we expect them to take any action against these producers unless they continue to be out of compliance after the rule is finalized, but definitely, definitely something to keep in mind.

Susan Lafferty: That's exactly right. And I'll wrap it up by noting this is a strict liability program, not just for the separated food waste portion, but for all of it. So, compliance is really critical no matter where you are in the chain. So, on that note, we will wrap up. Please reach out to me or Andy if you have any questions on this topic, either now or in the future. Thanks so much for joining us.