Podcast - Renewable Fuel Standard Outlook

Andy Kriha: Hello and welcome. This is the first episode in our brand new series about all things energy, climate, environment and natural resources. My name is Andy Kriha, I am an associate here at Holland & Knight. I'm joined by Susan Lafferty, a partner here at Holland & Knight, and we are going to be talking to you today about the federal Renewable Fuel Standard and what is ahead for this program. A lot has been happening in the last year or so. Last June, we received a final rule, known as the set rule, which represented the largest changes to the Renewable Fuel Standard in many, many years. And that became effective in September of last year. So what we're talking about today is what has happened since then, where are we at and what does this program look like in the year ahead. So major topics that we will be covering today: the biogas regulatory reform rule — implementation of that particular rule is ongoing — cellulosic waiver petitions — we had an organization petition the EPA recently to exercise its cellulosic waiver authority to reduce obligations under the program for D3 RINs, and that was denied — and then, you know, what's next? There's a another rule that it's going to have to come out, at some point in the relatively near future, to set obligations for some future years, as well as the possibility of seeing what we call eRINs, or the incorporation of electric vehicles into this program. We'll also just mentioned briefly here, that small refinery exemptions are something that are undergoing litigation. That is another huge topic that is big enough that we're going to cover it in its own episode here in the near future. So without further ado, Susan, I want to turn this over to you to get us going with biogas regulatory reform, or BRR, as EPA has been calling it.

Susan Lafferty: Thanks, Andy. Appreciate it. Yes, EPA is, is calling this instead of B-R-R, it's calling it BRR. I might refer to it as BRR, because while I am chilly on this spring day, it feels easier just to go by the acronyms. On biogas regulatory reform, as Andy said, that was part of the set rule that was finalized last spring, and what it does is updates pretty much all parts of biogas to RNG and then ultimately used as CNG or LNG and transportation fuel. All of those regulatory provisions are now overhauled and actually in its own provision in the regulatory book. The major dates that we're looking at are, first, July 1. This is when any project that is not already up and running, but is about to come online, can either register prior to July 1 and be under the current rules that are before the BRR implementation, or be registered after July 1 and be under the new rules. So Andy and I are aware of a number of projects that are trying hard to get registered before July 1 so that they're not sort of caught in between some no man's land, if you will, that is likely mostly going to be June, where, where they, EPA is not processing new registrations. The next big date under BRR is October 1. And that's where any existing project that's already registered with EPA needs to submit an updated registration to show that it is ready for the new rule, for the BRR. And then that is the, the third and and last date that we are waiting for, which is January 1, 2025. That is the date by which all grandfathered projects and going forward, every single new project, must comply with the BRR rules. So right now, if you are one of those projects that is on the verge of being ready to go, of course, the exact dates can, can move for projects just for a variety of operational reasons. You know, EPA has not definitively said by what date do you have to submit your registration before July 1 in order to get approval before July 1 and have the current rules apply to your project through December 31 of this year. Most people are going for the first half of May. Trying to treat, you know, around sometime between May 1, May 15, as the likely cutoff date by which EPA will probably not have the bandwidth to process your registration. So, after that, if you are not processed by July 1, you will be, EPA will continue to look at registrations and your project would just be approved under the new rules. So that, of course, begs the question of what is the difference? What are the major differences between the new rules and the old rules? The big, new difference is roles that EPA has created for various players in the biogas chain. The first is for a biogas producer to register, and that is a new requirement. The RNG producer also has to register. They are going to also be the RIN generator. And then EPA's created a category called a RIN separator. And this in the old rules was a flexible, was typically done by the RIN generator, but in the new rules that is a defined party. The new rules also do not allow pre-EPA registration storage of RNG, and that is a major change for new registrations that typically have done a couple months' at least worth of storage while they wait for QAP status to be granted. They may also be waiting for LCFS CI scores to get to the CI level that they're hoping for. There is also, as I alluded to, a new RIN generation protocol process. EPA in a recent webinar just announced that they are going to have the biogas producer generate a token in EMTS, that is EPA's electronic, electronic platform, for, for registering and generating RINs, transferring RINs. So this token will be generated in EMTS, and then the biogas producer will transfer that token along with the biogas to the RNG producer. The RNG producer then makes RNG, and upon retiring the token it can generate a RIN, which will be an assigned RIN or K-1 RIN. And then in turn, that RNG producer will transfer that RIN and the RNG to, to its offtaker. The RIN is traveling with the physical fuel, although, of course, once you inject the RNG into a commercial pipeline system, the exact molecules are not, you know, are fungible. But ultimately that RIN is supposed to end up in the hands of a party that is a RIN separator. And Andy, I will let you go further into who a RIN separator is allowed to be.

Andy Kriha: Thanks, Susan. So, a RIN separator under the new rules can be any one of three parties. And that is the party that withdraws physical biogas from the pipeline. It can be the party that compresses CNG, or LNG, and it can be the party that dispenses that CNG or LNG as fuel. This is, you know, a little bit of a departure from what we previously saw. Obviously, before any party in the supply chain could, could take on the RIN generator and separator responsibility, we often saw that ended up being a marketer, a gas marketer who sat in the middle. Unless that gas marketer still owns the fuel at the time it's withdrawn from the pipeline, they're no longer going to be able to be the RIN separator. Doesn't mean they can't be the marketer of the RINs, it just means that the RINs will have to be transferred to that RIN separator party, transferred back to the marketer after separation, then to be marketed to the public at large. To the extent that the RIN separator is not the fuel dispenser, they are going, the RIN separator is going to need to be able to demonstrate a contractual pathway from the point at which the RIN was separated to ultimate dispensing as vehicle fuel, that is the only spot remaining in the regulations where a contractual pathway would still need to be required. And it is important to note here, third parties can act as an agent to perform any of the tasks of the RIN separator to, you know, perform these tasks and the EMTS prepare records, etc. But it's really only one of those three parties that can, you know, be on the hook for the action, for violations and, and have the actions done in their name. But outside of that, contractual pathways are no longer needed for the rest of the process. Everything is going to be tracked in the EMTS. But, for commercial purposes, for purposes of, you know, negotiating your contracts between the various parties in the supply chain, those are largely going to look the same. Agreements are going to follow, you know, pretty much the same pathway they've always followed. You just don't need to turn those agreements in the EPA as evidence of dispensing as vehicle fuel anymore. One last note here before I move on. There was a lot of confusion earlier on about RINs being considered to be assigned RINs. In the liquid fuel space an assigned RIN must travel with a volume of liquid fuel until the point of separation, that is, you know, how these regulations read is that an assigned RIN would need to remain with some physical fuel all the way until the point of separation. EPA has come out and clarified that's not the intent. It does not intend to eliminate book and claim accounting, which is how RNG has typically been accounted for in these processes. Each transfer of title of a RIN must be accompanied by a transfer of title of physical gas, but it is still perfectly acceptable for a marketer to take RINs and physical gas at, at one end and then pair that RIN with physical gas to the other end and sell it with a different volume of physical gas, you know, somewhere else on the pipeline system. So with that, I think we are ready to move on to the cellulosic waiver petition. So, AFPM, the trade organization for the American Fuel and Petrochemical Manufacturers, petitioned the EPA, asking it to use its cellulosic waiver authority. So what that means is EPA has authority in two different provisions of the RFS, which we'll mention in a second here to, you know, essentially reduce required volumes of cellulosic biofuels, when actual production is not going to, to be able to meet the previously set obligation, you know, ultimately causing parties to commit violations that are no fault of their own because there simply aren't enough RINs available to meet all of the obligations. So the petition was originally written under a section of the Clean Air Act, Section 211(7)(d), which addresses projected shortfalls in volume, as I just mentioned, where production comes up short of, of what the obligation is. EPA came out and said, you know, we can't grant a petition, we can't even consider a petition. On that basis, EPA has interpreted that provision to be one that EPA has to exercise on its own, and not one that third parties can petition EPA to consider. However, EPA did not just deny the petition outright on that basis. They said we will consider this petition to instead have been submitted under a different section of the Clean Air Act, Section 211(7)(a), which does authorized third party petitions but has a higher standard to meet. Under, under that provision, the petitioning party must show severe economic harm and inadequate domestic supply. So EPA went on to acknowledge that there is a possibility of a production shortfall this year, but nonetheless said it's not going to rise to this higher standard of severe economic harm and inadequate domestic supply because even if there is a shortfall, it's highly unlikely to exceed obligated parties' ability to use carry over RINs. So that's the, the RIN bank, the RINs that are still available from the prior year, and/or to use their carryover or to carry over their obligation into the following year, when perhaps there, there will be more RINs available. So EPA said there was, you know, a similar minor shortfall in 2017. There was no market disruption then. There's no reason to believe there's going to be market disruption now. So there's, you know, not enough evidence here to support this finding of severe economic harm. Nonetheless, there is likely to be the shortfall. The data has now all been submitted for the last compliance year. Not out and available yet as of the time this is recorded. We're recording a little bit before this is actually going to be released. But, Susan, what, you know, what what could come next from this?

Susan Lafferty: So AFPM of course, could sue in D.C. Circuit. And they very well may go ahead and do so. But given how litigation moves, any decision is likely going to take about a year. At which point, another compliant year will be done. 2024 would, would certainly be done. And, and we might even, frankly, have a new administration. Also by then, perhaps EPA will have, even released, proposed or even finalized, the next set rule. And so in that set rule, they could have adjusted RVOs — we're not expecting retroactively for 2023, but, but they could have, could have tried to deal with the problem there. I mentioned a new administration. Obviously, this is an election year, and it is always a question mark about how a new administration would act, and frankly, for any administration, it takes time to get people in place and to, to get your policy down pat. So it also is a question of how quickly an administration could act. A new administration, if they did want to take some sort of actions with regards to the volumes. Right now though, based on the petition response, it seems very clear that EPA's preference is to wait and see what happens in the market and only adjust volumes and probably most likely future volumes if they can, as necessary, if a material shortfall does unfold. And that would be the preference, I think, rather than waiving current volumes. In fact, we haven't heard about obligated parties who were unable to comply in 2023. As Andy said, the numbers aren't completely out yet, but obligations were due March 31 and there really haven't been any stories in the press of obligated parties saying that they had truly had issues with either complying this year or being able to roll forward their compliance obligation to next year, which is allowed to do at least once at one time. You can't have more than two deficit rollovers in, in, court in following years,  but you can do it for an individual year. So this seems to really support the idea that EPA has a position of wait and see. And frankly, again, in an election year, EPA is highly unlikely to want to take action that it really doesn't have to. Whether it’s increasing volumes or decreasing volumes, it does not want to get the attention of either side of the debate and any of the potential voters out there. So unless the situation becomes pretty dire this summer, this, you know, early fall before November, we think that EPA is likely to be quiet on this issue. Also, from the petition's response, it seems pretty likely, it seems pretty evident that this EPA would rather not issue cellulosic waiver credits, CWCs, and EPA is, of course, only authorized to issue CWCs if it uses its cellulosic waiver authority. As Andy said, EPA in this decision to deny the petition declined to use its cellulosic waiver authority and did not talk about it any further after it said that that authority is not one that you can petition for EPA to act on. EPA just needs to decide on its own that it has been triggered. So that is another question mark as to whether EPA would, in adjusting volumes, use its waiver authority at all for current or for future obligations, and therefore allow for CWCs. Again, looks like this administration would rather not have CWCs, they would prefer for obligated parties to go out and drive demand for the actual RINs themselves, which means for the biofuels and goes to support production. A new administration again, of course, could change that view. So this is one where, just like EPA, I think we wait and watch and see where we are come post-election in November. So the next big thing is, of course, the set rule. The next set rule, set 2.0, as some people are talking about it, the big thing that was dropped out of the first set rule, as we have said, were eRINs, electricity RINs, that would be allowed for for electric vehicles. By statute, the rule covering the 2026 obligation should be out by this November 2024. But EPA, of course, in the past has missed deadlines repeatedly with basically no consequence. And EPA authorities have, frankly, said very publicly that they were not even working on set 2.0 yet and had no expectation that it would be even proposed, much less finalized, before the election. So I think the question will be, is set 2.0 ready to go so that once the election is over, if Biden wins and we'll be entering into a second term, will EPA be ready to issue a proposed rule pretty quickly after November? Alternatively, if Biden does not win and we'll have a new administration, then right now, our expectation is this EPA would not act. It would punt the set 2.0 issue to the new administration. You know, inauguration is, is mid-January of, of, you know, 2025. So that would be expected to, again, just cause more delays in when the set 2.0 would actually be proposed, much less, much less finalized. So we very much could be in a position where we don't have a final 2026 rule before Q4 of 2025. Hopefully, hopefully doesn't go into the the actual compliance year. And, Andy, I'll let you talk about eRINS.

Andy Kriha: Sure. So eRINs, as Susan mentioned, are electricity RINs. This would fold in EVs to the RFS for the first time. A key note, a difference between the federal Renewable Fuel Standard and state low carbon fuel standards in the RFS, all fuels that qualify must be biomass-based fuels. So we're not talking about solar to EV here, we're not talking about wind to EV. We're really almost entirely talking about renewable natural gas that then powers natural gas electric generation facilities. As Susan mentioned as well, this was a major cornerstone of the original set rule, proposed rule that got dropped out before the rule was finalized. There were a lot of comments bringing up its various legal arguments, you know, we're not going to rehash those legal arguments here. We are running out of time, but they've been hashed out in public comments, they've been hashed out in other forums. You know, I think what we need to understand here is there would be procedural hurdles to any sort of a challenge if eRINs were finalized. Because there were past rule makings that went unchallenged, that presents a higher barrier to being able to challenge future rules. If those procedural hurdles were overcome, there are, I would say, strong legal arguments on both sides. It would be a highly contentious legal battle. But no matter what barriers are in the way, if eRINs are finalized, especially if they continue to include original equipment manufacturers as as a RIN generator or in a similar role, there will be a legal challenge no matter what. And I think this administration does not want to see that legal challenge raised prior to the election, so just as with the rest of set 2.0, I think it's fair to say that despite some speculation we've heard about a standalone eRINs rule this year, I don't think we we see that happening. So with that, I'd like to thank you for joining us here in this first episode of our new series and learning a little bit more about what is coming up in the Renewable Fuels Standard and invite you to join us on our next episode, which is still going to be covering the Renewable Fuel Standard, but small refinery exemption litigation, another exciting piece of this puzzle. Thank you.