The financial burden for obligated parties to comply with the US' ethanol blending mandate in 2018 could be eased by higher gasoline consumption reducing the per gallon costs of biofuels.

The US Energy Information Administration, in its July Short-Term Energy Outlook, Tuesday raised its forecast for average gasoline consumption in 2018 to 9.38 million b/d, up from the 9.34 million b/d forecast in April, which the Environmental Protection Agency used to build the 2018 renewable volume obligations.

The EPA earlier this month proposed the 2018 renewable blending volume at 19.24 billion gallons, of which 15 billion gallons would be conventional ethanol.

"Presuming that the EPA does not change the volumetric mandates, if the gasoline forecast is higher than it was in the April STEO, the percentage standards will go down," said Corey Lavinsky, director of the biofuels group at PIRA Energy Group, a unit of S&P Global Platts.

"However, I wouldn't say that the RVOs would be "easier to hit" because obligated parties will need a similar volume of ethanol to meet their RVOs," he added. "It will just be a smaller percentage of a higher gasoline number."

That smaller percentage could reduce the cost to obligated parties to comply with the blending mandates because compliance with renewable blending mandates is based on percentages of transportation fuels.

So in 2018, the proposal may be 15 billion gallons of ethanol but for compliance the mandate is 8.28% of transportation fuel. Since ethanol is not blended with diesel it is helpful to remove diesel from the equation, leading to ethanol accounting for 11.66% of gasoline in 2018.

The EPA assumed gasoline consumption without renewables in 2018 would be 128.66 billion gallons, based on the April STEO. The finalized 2018 RVOs, however, will be based on later data from the EIA, no later than October 31.

If the gasoline demand forecast continues climbing then 15 billion gallons of ethanol becomes a smaller percentage of the final projection for gasoline.

And the outright volume of ethanol is unlikely to change in the final 2018 volume obligations, which should be finalized by the end of November. When Congress created the Renewable Fuel Standard it set volume targets, or statutory levels, for each category of biofuel. Ethanol's statutory target is 15 billion gallons, so it is not likely to climb above that level.

COST OF COMPLIANCE

For obligated parties, a lower percentage requirement reduces the per gallon cost of complying with the blending mandate. S&P Global Platts publishes a daily assessment of that per gallon cost, which was 9.2755 cents/gal Friday based on the proposed 2018 renewable blending percentages and 2018 RINs assessments.

But if the percentage is lowered, then the per gallon cost of compliance would fall.

The situation this year differs from the past. In the past, the outright volumes may have changed significantly between the proposal and the finalized blending mandates but the percentages stayed largely unchanged.

This year the EPA has outright volumes that need to remain unchanged so the percentage mandate is what could change depending on demand.

"The cellulosic, biodiesel and ethanol outright volumes have to stay flat," said one market source. "So the only number you can fiddle with is advanced biofuels."

The biodiesel outright volume for 2018 was set in 2016 and can't be changed. And cellulosic biofuels have been plagued by high production costs, limiting the supply for compliance.

But even if gasoline consumption forecasts climb in the coming months, the only forecast that matters to building the finalized 2018 blending mandates is what the EIA provides in the fall.

When that number is set it will determine what the mandates are for 2018.

And if that forecast is higher, as forecasts have trended in the past month, the percentages used for compliance could fall.

"It's great to look at this now but it's meaningless until we see the RVO," the source said. Until the finalized mandates are released, market participants will trade renewable identification numbers and plan compliance based on the forecast.

--Josh Pedrick, joshua.pedrick@spglobal.com
--Edited by Richard Rubin, richard.rubin@spglobal.com

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