Refinery renews plea for reform of biofuel standard as credit prices inflict more financial pain
The owner of Delaware City Refinery is trying again to get some relief from renewable fuel credits it is required to purchase, and it’s getting support from Delaware’s Congressional delegation and Gov. John Carney
Contributor Jon Hurdle takes a look at these credits and why they are getting attention now.
Delaware’s Congressional delegation and Gov. John Carney stepped up pressure on the federal government to reform a system of renewable fuel credits that may threaten the survival of Delaware City Refinery.
The governor and federal representatives asked the U.S. Environmental Protection Agency to find ways of easing the financial burden on independent refiners like plant’s owner, PBF Energy, that are required to buy millions of dollars’ worth of credits every year to comply with the federal Renewable Fuel Standard (RFS), which sets rules for the volume of biofuels such as ethanol that must be blended with gasoline and diesel.
PBF has long protested the requirement to buy the credits, known as “RINs” and now says the financial pressure has increased because of a sharp recent rise in the price of the credits, which are traded on the financial markets.
The credits are the second-biggest expense – after the cost of crude oil – faced by PBF, which operates five other U.S. refineries but does not blend renewables into its gasoline, and so must buy RINs instead. The company buys the credits from larger refiners that have the capability to blend renewables into gasoline; PBF argues the purchases are in effect a subsidy to its competitors.
In a letter to the EPA in March, Sens. Tom Carper and Chris Coons plus Gov. Carney and Rep. Lisa Blunt Rochester urged the agency’s new administrator, Michael Regan, to use his authority to calm the volatility in the RINs market. They said the EPA should give refineries more time to comply with the 2020 RFS volume requirements, should quickly issue requirements for 2021 and finalize those for 2022 as soon as possible.
The delegation also urged the EPA to work with the federal Commodity Futures Trading Commission to prevent RIN market manipulation. It accused EPA of failing to collect data on any manipulation, despite a request by the CFTC.
“This price volatility creates great difficulties for independent merchant refineries, like the one located in Delaware City, to plan and comply with the RFS, especially while grappling with the market effects of COVID-19,” it said.
The delegation acknowledged that the RFS has played a “critical part” in boosting the use of biofuels since it began to implement the Energy Independence and Security Act of 2007 but said it has not always been “smooth sailing” for refineries and biofuels producers.
"If you look at small merchant refiners across the country, there's going to be a large swath of refining capacity put at risk if these things go unchecked." - PBF Energy's Brendan Williams.
It accused the Trump administration of worsening the volatility in the RINs market, resulting in the EPA being months late in setting renewable fuel obligation volumes for this year.
The delegation said it strongly supports a national transition to sustainable transportation fuels but while the country remains dependent on petroleum products, argued that they should be made at U.S.-based plants like that in Delaware City. The plant employs about 535 people, and up to 1,000 contractors at certain times of year.
“By taking prompt action now to right the ship of RFS, EPA can help both biofuel producers and domestic refineries weather the economic impacts of COVID-19 while we pursue the administration’s goal of net zero by 2050,” the letter said, referring to a point where the addition of greenhouse gases is no greater than that taken out of the atmosphere.
In 2020, PBF spent about $325 million on buying RINs, about twice the amount in 2019, because of a spike in the price of the credits, which have risen to an average of about $1.90 currently from 10 cents in January 2020, and $1 in January this year, according to Michael Karlovich, a spokesman for the company.
It’s hard to forecast what RINs prices will do this year because of the EPA’s ongoing discussions on RFS reform, and because the market is waiting for a U.S. Supreme Court ruling on whether RFS exemptions for small refiners granted by the Trump administration can be renewed, Karlovich said.
“Nonetheless, we can safely estimate that, at current levels, we will spend significantly more on compliance credits this year than last year,” he said.
The U.S. Energy Information Administration said in February that RINs prices for ethanol and biomass-based diesel were nearing record highs.
Brendan Williams, PBF’s director of government relations, declined for competitive reasons to say how much the credits are costing Delaware City Refinery specifically but warned that so-called merchant refiners like PBF are at risk because of how the Renewable Fuels Standard works.
“If you look at small merchant refiners across the country, there’s going to be a large swath of refining capacity put at risk if these things go unchecked,” he said in an interview. “Whether refiners are going to be able to emerge from the pandemic or whether a significant proportion of American refining capacity will be at risk could very well be dependent on where the price of these credits will go.”
PBF President Matt Lucey warned in a presentation to investors at the end of April that survival of that section of the refining industry may depend on reform of the RFS.
“Unless the administration and Congress address the program, the unfortunate trends of refinery closures and loss of jobs in the U.S. are likely to accelerate, which will increase U.S. reliance on imported fuels, increase costs to consumers, and further impact our energy independence,” Lucey said.
Still, the company’s net loss narrowed to $22.2 million in the first quarter of 2021 from $1.06 billion a year earlier as demand for refined products rose with the rollout in coronavirus vaccine, PBF said in an earnings statement.
Replying to the Delaware letter, the EPA said in mid-April that it’s working on setting renewable volume requirements for 2021 and 2022, and aims to propose those levels this summer.
The agency said it is aware of concerns that the RIN market is subject to manipulation, has recently set rules that are designed to deter the practice, and is assessing their effectiveness.
But it defended the Renewable Fuels Standard, saying it has played an “important role” in the development of biofuels over the last decade, and pledging that the policy will continue during the Biden administration.
"They may be suffering hardship, I'm not arguing with that, but not because of the RFS. That's why they shouldn't be given a pass." - Jan Koninckx, External Board member at the Univ. of Maryland's Dept of Chemical and Biomolecular Engineering
Defenders of the RFS also include Jan Koninckx, a member of the External Board at the University of Maryland's Department of Chemical and Biomolecular Engineering, and an independent consultant in the renewables industry. He argued that refiners are entitled to relief from the RFS if they can show that they have suffered hardship because of the standard but that doesn’t apply to PBF because it can pass on the cost of buying credits to its customers.
“Over time, there is no link between RINs and refinery margins,” he said. “There is no hardship due to the RFS.” Rather, he said, there are fluctuations due to other factors such as the price of crude oil, market demand and currency risk.
Independent refiners like PBF have had a rough year because of the pandemic, the plunging economy, and the sharp fall in demand for their products but not because of the RFS, Koninckx said.
“They may be suffering hardship, I’m not arguing with that, but not because of the RFS. That’s why they shouldn’t be given a pass,” he said.
Koninckx said he felt compelled to speak out against PBF being given any special treatment because he fears that would undermine a broader push toward low-carbon transportation fuels.
“If we give refiners that don’t blend a break, then really what we do is reward the refiners that have chosen not to comply directly,” he said. “If we do that, we jeopardize any kind of renewable energy legislation or initiative in the future.”
For his part, Sen. Coons said he will work with the Biden administration to curb RIN prices so that they don’t threaten the financial survival of Delaware City Refinery.
“The EPA is looking at a range of options for addressing RIN prices in the near term and making the RIN market more stable and transparent in the long run,” he said in a statement. “I will continue to advocate with senior members of the administration for immediate action to bring prices down to protect the livelihood of our workers at the Delaware City Refinery.”
For PBF, the EPA’s options for reforming the RFS include setting a “reasonable” volume requirement for refiners’ use of biofuels; offering government-issued credits at a fixed price, or requiring refiners with blending capability to take on the obligation of meeting the volume requirements, Williams said.
“We’ve been extremely flexible in seeking any reforms that would ensure a competitive U.S. refining sector,” he said.
But he said there’s been little sign of action from Biden’s EPA on PBF’s requests so far. “It’s a new administration. They are still getting all their folks in place. For the administrator, it’s a new issue for him to deal with, and it’s a complex issue,” he said. “We have no idea when we could expect an annual standard or where they are going right now.”