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November 14, 2019

EPA small refinery exemptions in the Renewable Fuel Standard explained

RFS SRE decisions
Source: U.S. Energy Information Administration, based on U.S. Environmental Protection Agency's EPA Moderated Transaction System
Note: RFS is the Renewable Fuel Standard program.

The Renewable Fuel Standard (RFS) mandates the amount of renewable fuels refineres must blend into the U.S. transportation fuel supply. As part of the RFS program, the U.S. Environmental Protection Agency (EPA) can grant annual waivers to some petroleum refineries, called small refinery exemptions (SREs), which are provided under conditions of economic hardship. Although these SREs lessen the number of tradable compliance credits that refineries can use to comply with the RFS program, actual biofuel consumption is influenced by additional market factors.

The Clean Air Act, as amended by the Energy Policy Act of 2005, exempted small refineries from participating in the RFS program through the 2010 compliance year. The EPA later extended these exemptions for 2011 and 2012. Starting in the 2013 compliance year, small refineries—those rated at less than 75,000 barrels per day (b/d) of crude oil throughput—could petition EPA for an exemption if RFS compliance would cause disproportionate economic hardship for the refinery. SRE waivers exempt petroleum refineries from their renewable volume obligation (RVO), typically for the previous compliance year.

The EPA sets targets for the amount of renewable fuel to be blended into petroleum-based gasoline and diesel annually. On November 30, 2017, EPA issued an overall RFS target of 19.29 billion gallons of renewable fuel for the 2018 compliance year. Renewable identification numbers, or RINs, are the compliance credits used in the RFS program. RINs are generated when renewable fuels are produced domestically or imported. To meet their obligations, refineries may blend renewable fuel or purchase RINs from other parties that have not used (or retired) RINs for compliance, or obtain an SRE from the EPA.

SREs are typically approved retroactively after the previous compliance year has ended. On August 9, 2019, EPA approved 31 SREs, which was equivalent to 1.43 billion RINs, or about 7.4% of the 19.29 billion gallon target of renewable fuel for the 2018 compliance year. Because SRE waiver approval is uncertain and retroactively applied, small refineries may consider other factors when making decisions on blending renewable fuels. Key market factors include the cost of blending renewable fuels relative to the cost of motor gasoline and diesel. In the United States, most motor gasoline contains 10% fuel ethanol, or E10, which is the most cost-effective method to boost the fuel’s octane content to meet fuel specifications.

RFS renewable fuel volume mandate
Source: U.S. Energy Information Administration, based on U.S. Environmental Protection Agency's EPA Moderated Transaction System

Although SRE waivers effectively exempt some of the renewable fuel mandate for a compliance year, the actual amount of available renewable fuel not blended into the U.S. transportation fuel pool as a result of SREs can be difficult to estimate. EPA does not disclose which refineries received exemptions, and the U.S. Energy Information Administration’s (EIA) published refinery data is aggregated at the regional level.

The estimated volume of exempt RINs in a compliance year is based on the number and capacity of refineries receiving exemptions. More waivers do not necessarily mean more exempt volumes: for example, the number of exempt refineries decreased from 2013 to 2015, but the number of estimated exempt RINs increased. As of November 2019, EPA approved 31 SREs for the 2018 compliance year and 2 SRE applications are still pending.

RINs created by biofuel producers and importers are not necessarily paired immediately with an unblended gallon of fuel. Each RIN is valid for more than one compliance year and expires after two years, meaning some RINs can be banked for future compliance or trade. RFS rules allow the use of RINs generated in the previous year (banked RINs) to satisfy up to 20% of the current year’s RVO targets.

Banked RINs provide a buffer between the physical blending of renewable fuels and any shortfalls in annual RVO targets. Currently, the transparency on the amount or details regarding these RINs is limited. In particular, the extent that refineries use banked RINs to meet compliance obligations in each year is unclear.

Although the number of RINs refineries use to comply with the RFS program has generally increased since the 2014 compliance year, EIA expects U.S. biofuels consumption to remain mostly stable in 2019 and 2020, based on its most recent Short-Term Energy Outlook.

Principal contributor: Dennis Mesina