When governments make fuel choices otherwise rendered by markets, they base decisions on assumptions that cannot be right. One way they move officially preferred but economically inferior energy forms into the market, for example, is by setting quantitative mandates. Because politicians and regulators predict energy markets no better than anyone else, their targets misalign with eventual reality.
Extreme error of prediction, for example, makes elevation of US gasoline prices likely this year as refiners and importers divert product from domestic markets rather than buy credits to meet unachievable requirements for fuel ethanol. As asserted in this space last week, the statutory mistake underlying that problem, the blendwall, is not the only one bedeviling fuel markets (OGJ, Feb. 10, 2014, p. 16).
Technological assumptions
Governments making energy choices also err in assumptions about technology. Confident that they could orchestrate fuel manufacture, US lawmakers in 2007 set targets for ethanol made from plant waste that have proven to be laughably high. And confident that regulation can advance technical development, the Environmental Protection Agency has been consistently reluctant to adapt congressional fantasy fully to physical reality.
The congressional miscalculation is extreme. The Energy Independence and Security Act of 2007 set the statutory target for blending of "cellulosic biofuel," expected mostly to be ethanol, this year at 1.75 billion gal. A tiny fraction of that will be available.
But how much? About a dozen companies hope to produce cellulosic biofuel—someday. The number changes frequently. Plant sponsors go out of business. Production from supposedly commercial-scale facilities that have managed to start has been intermittent and disappointing.
Amid this uncertainty, EPA must set annual requirements for cellulosic biofuel and other renewable fuels and can mandate volumes below statutory targets. The agency has undershot congressional levels but, basing its requirements for cellulosic biofuel on company announcements and its stated desire to nudge technology, has been optimistic—too optimistic. In comments filed jointly last month about EPA's Renewable Fuels Standard proposal for 2014, the American Petroleum Institute and American Fuels & Petrochemical Manufacturers illuminated a persistent gap between EPA's requirements and actual production.
In 2011, when EPA required 6 million gal of cellulosic biofuel, producers generated no Renewable Identification Numbers (RINs), meaning none of the required fuel was produced for sale in the US. In 2012, when EPA required 8 million gal of cellulosic biofuel, production, measured by RINs generated, totaled 21,810 gal. Last year, EPA lowered the mandate to 6 million gal; through November, production totaled 690,539 gal. The statutory targets for cellulosic ethanol in those years: 250 million gal in 2011, 500 million gal in 2011, and 1 billion gal in 2013.
In its administration of hopeless targets, EPA has been too hopeful. This year, the agency lowered requirements for advanced biofuel and total biofuel—welcome nods to reality. For cellulosic biofuel, however, EPA continues to regulate as though plants with sponsors claiming to be ready to start actually will begin and maintain output. The agency raised the requirement for cellulosic ethanol to 17 million gal, deriving this number not only from information supplied by plant operators, as before, but also from Monte Carlo projection.
Two-headed monster
The resort to probability analysis at least acknowledges problems with reliance on promises of plant entrepreneurs, many of which receive federal financial assistance. Coupled with the record, though, new statistical rigor provides little confidence that cellulosic ethanol required to be blended into US fuel will, for the first time, be available this year in sufficient volume. Refiners and importers will have to buy RINs to cover the deficiency.
Governmental fuel choice—less flexible than markets, wrong in its assumptions, and misshapen by politics—has created a two-headed ethanol monster in the US. It has created similar problems with renewable energy in Europe, about which more will appear in this space next week.