EPA’s biofuel plan frustrates US refiners, farmers

By David Shepardson and Chris Prentice

WASHINGTON/NEW YORK, May 19 (Reuters) -- US regulators on Wednesday proposed a modest increase in the amount of corn-based ethanol and biofuels that fuel producers must mix into diesel and gasoline in 2017, disappointing two major industries: Big Corn and Big Oil.

Unveiling the latest stage in its controversial biofuels program, the Environmental Protection Agency called for 18.8 billion gal to be blended into the nation's fuel supply in 2017, up 4% from the 18.11 billion gal set for this year.

That includes 14.8 billion for conventional biofuels, mainly ethanol, up from 14.5 billion for this year, the EPA said.

As expected, the new total for the Renewable Fuel Standard (RFS) is well below the 24 billion gal outlined in a 2007 law aimed at cutting US oil imports and boosting renewable fuel use.

Still the volumes represent "ambitious, but achievable" growth for the renewable fuels industry, the EPA reiterated.

Last year, the regulator said those Congressional targets were not realistic, acknowledging infrastructure constraints known as the "blend wall," the 10% saturation point for ethanol blended in gasoline.

The new targets would push biofuels use well through that level toward 10.4% of total US fuel demand. This could boost the program's cost to oil refiners like Valero Energy and Tesoro.

In response, prices jumped for biofuels credits companies use to prove they have met the requirements. The higher the targets, the higher the cost of compliance.

Low fuel prices have boosted demand by American motorists for diesel and gasoline, making it easier to reach the congressional targets.

Shares in ethanol producer Green Plains rallied on news, then pared gains after Federal Reserve minutes raised expectations for a US interest rate hike in June.

Big Oil and Big Corn both criticized the EPA announcement, from opposing sides of the issue.

The increase did not go far enough for the farm lobby and biofuels companies like Poet LLC, which have spent millions to produce advanced biofuels.

While going in the right direction, "they once again fail to acknowledge the existing capabilities of the biofuels industry and fuel retailers in meeting the (RFS) goals," said POET's chief executive Jeff Broin in a statement.

Oil industry advocates, who have criticized previous targets as unrealistic, renewed calls for an overhaul of the program.

"EPA's proposal makes abundantly clear that the only solution is for Congress to repeal or significantly reform the RFS," said the American Petroleum Institute's downstream group director Frank Macchiarola.

The official numbers confirmed earlier reports by Reuters. The numbers will be finalized by Nov. 30 after a period of public comment.

After years of delays, EPA unveiled the numbers weeks before many in the industry expected and more than six months before the official deadline to finalize the plan.

"EPA has found its groove," said Michael McAdams, President of the Advanced Biofuels Association.

Still, the continuing lobbying battle between oil and farm interests should keep the RFS mired in controversy.

In November 2015, the agency unveiled a retroactive target for 2014 and the first for 2015 and 2016, triggering lawsuits from both Big Corn and Big Oil.

"EPA has ensured that the debate will continue to look backwards at the fruitless fight between corn and oil," said Harvard University professor and former Obama Administration advisor James Stock.