A growing group of US biodiesel producers proposes RFS policy fix to save their investments

Ron Lutovsky, chief operating officer and chief financial officer with Iowa Renewable Energy, a leading company in development of the small advanced biofuel refinery initiative (Photo: Iowa Biodiesel Board)

More than a dozen U.S. biodiesel producers are petitioning EPA to not only dramatically increase volumes of advanced biofuels and biomass-based diesel under the federal Renewable Fuel Standard, but also to provide an administrative correction to what they see as a policy distortion that favors large-scale, centralized renewable diesel over small-scale, decentralized biodiesel.

The argument made by these producers is that the rapidly growing renewable diesel industry, which petroleum companies are largely behind through conversion of their outdated or underperforming assets, is not materially adding appreciable volumes of low-carbon biofuel to the market but instead is cannibalizing existing low-carbon biodiesel volumes, thereby jeopardizing billions of dollars of private and government investment in these small, independent, and often rural facilities.

“One hundred-plus decentralized, small refiners of advanced biofuels are rapidly being lost along with the billions of dollars of public and private investment it took to build them,” writes the group of biodiesel producers in a document it recently submitted to EPA as part of the public-comment period for the latest proposed RFS rule. “The decline of biodiesel volumes over the last five years is a trend that is rapidly accelerating.”

To this point, Scott Irwin, an agricultural economist at the University of Illinois, published an analysis Feb. 16 of biodiesel profitability in 2021. In his report, which is based on several modeling assumptions to represent an “average” 30-million-gallon-per-year (mgy) biodiesel plant, Irwin shows that because of surging soybean oil prices that have outpaced biodiesel fuel prices, the average 30 mgy biodiesel plant profits were minus 61 cents per gallon last year. As Irwin points out, “All signs point to a policy-driven boom in renewable diesel production as the underlying culprit behind the surging soybean oil prices, and hence, the losses for biodiesel producers.”

According to the biodiesel producers’ account, as detailed in comments submitted to EPA, this trend of biodiesel volumes being replaced by renewable diesel—a “higher-cost, nonoxygenated product that generally reduces less carbon and other pollutants compared to biodiesel,” which, according to them, “results in less carbon reduced at a higher cost”—is not occurring “because of free market, pro-competitive, pro-consumer forces,” they write. “The displacement is happening because of an unintended way that federal and state government incentives transact, and which parties can capture them. It is a policy problem that is creating market distortions and requires a policy solution.”

The policy solution these producers propose is a two-fold fix. The first proposal is an expected one, as it is what biofuels advocates have been unified in pushing for since the inception of RFS—increasing volume requirements under the program. “EPA should dramatically increase the [renewable volume obligations (RVOs)] for biomass-based diesel so that new renewable diesel and sustainable aviation fuel production can be additive, and not just replace one low-carbon fuel with another,” they write. “This is absolutely necessary to make gains in carbon reduction, otherwise we will be going in the wrong direction from a carbon standpoint. Biodiesel stands ready to do more right now. And carbon reduced today has a massive carbon net present value benefit over carbon that is reduced five or 10 years from now.”

The second proposal is much more progressive and likely much more contentious. “EPA should create a small refinery program for advanced biofuel refiners similar to the small refinery safety net program in place for petroleum refiners under RFS,” the biodiesel producers suggest. “The program would apply to advanced biofuel refiners who produce less than 100 mgy while meeting the highest category emission reductions under RFS.”

How this would be done, according to the group, is by making a subcategory within the biomass-based diesel (D4) category (D4a). “These volumes, starting with 2 billion gallons, would only be able to be filled by producers who have been designated as small producers of advanced biofuel,” they write.

The biodiesel producers behind the policy proposal include companies that own multiple plants, such as Hero BX, as well as small, local manufacturers like Cape Cod Biofuels. Others include Iowa Renewable Energy, Western Dubuque Biodiesel, Owensboro Grain, W2 Fuels, Incobrasa Industries, New Leaf Biofuel, Rio Valley Biofuels, Ever Cat Fuels, Imperial Western Products, Pacific Biodiesel, Community Fuels, Bioenergy Development Group, RBF, and Scott Petroleum. In addition, the Kentucky Soybean Association, Baker Commodities—a rendering company and owner of New Leaf Biofuel—Venture Commodities and SmartTank are also undersigned parties to the comments, either before submission or after. As of Feb. 21, the total number of signatories was 20. Those involved anticipate more companies joining.

“The California Low Carbon Fuel Standard, and how it interacts with the RFS, has disrupted the entire nation’s biomass-based diesel market,” Chris Peterson, president of Hero BX, told Biobased Diesel Daily. “The LCFS has caused renewable diesel volumes to grow in California. But LCFS gallons are a part of the RFS, and the RVOs have become both a ceiling and floor—a zero-sum game. A new gallon of renewable diesel in California means one less gallon of biodiesel used elsewhere in the country. As renewable diesel has been growing rapidly in California, total biomass-based diesel volumes nationally have stayed flat. You’ve not reduced any additional carbon, you’ve just made carbon reduction more expensive. It’s like trying to get addition by subtraction. Our proposal would achieve addition by addition, allowing new renewable diesel gallons to actually grow the program and reduce additional carbon.”

According to Irwin’s analysis of biodiesel profitability last year, the representative 30 mgy biodiesel refinery lost more than $18 million in 2021. “This loss wipes out 40 percent of all profits earned over 2007-’20,” Irwin writes. “It is clear that the recent level of losses is unsustainable. In fact, it is not clear why biodiesel production held up as well as it has during 2021. One possibility is that biodiesel producers had a source of revenue we did not account for in the analysis, such as COVID relief funds. The other possibility is that the industry grimly hung on through 2021 in the face of the onslaught from renewable diesel production and it is only a matter of time before more biodiesel plants are forced to shut down.”

The group of biodiesel producers goes a step further. “Biodiesel companies are being subsumed by large petroleum refineries who are making a higher cost, higher carbon product,” state the comments submitted to EPA. “According to the [U.S. Energy Information Administration], this trend is accelerating at an alarming rate … If EPA does not act to grow the overall biomass-based diesel volumes and to provide a safety net for small producers of advanced biofuels, similar to the safety net program they have provided for small petroleum refiners and similar to the policy measures proposed [here], most of the small advanced biofuel refiners in the program will perish.”

John Heisdorffer, who is on the board of the 30 mgy Iowa Renewable Energy biodiesel plant in southeast Iowa, said he and his board have been tracking these “concerning policy distortions and market trends” for years. The company has been a leader in developing the small advanced biofuel refinery initiative.

“Two years ago, we tried to start a conversation about how to best address this policy glitch in a policy context,” Heisdorffer told Biobased Diesel Daily. “At that time, we were told by some of our colleagues we were just being alarmists. It turns out we were not alarmist enough, as the University of Illinois analysis makes disturbingly clear. Our prediction is no longer a prediction—it’s here.”

Heisdorffer added that carbon policy is—or should be—about reducing the most carbon at the least cost to society. “When it comes to heavy-duty liquid fuels, biodiesel reduces the most carbon at the least cost, and has many other societal and performance benefits,” he said.

In its submitted comments, the producer-led group concludes that “such a small advanced biofuel refinery program would result in more carbon reduced at a lower social cost, enhanced social justice, and other performance, health, safety, economic, energy and environmental benefits. It would strengthen the goals of the RFS at no cost to taxpayers and at a cost savings to consumers.”

Biobased Diesel Daily reached out to Clean Fuels Alliance America, formerly the National Biodiesel Board, for comment on the producer-led proposal and still awaited response at the time of publication.

Click here to access the group’s comments as submitted to EPA.