Biofuel Investors Score a Big Victory in Court
This might not have been front page news, but a recent court case is about to have a big impact on American energy markets – especially when it comes to biofuels.
On Tuesday, the U.S. Court of Appeals for the District of Columbia denied an oil industry challenge to the EPA’s 2013 Renewable Fuel Standard (RFS) requirements.
The case was brought by Monroe Energy LLC, a refinery operator in Trainer, Pa. It’s a legal challenge I’ve been watching for some time.
That’s because the advanced biofuels addressed in the case come largely from biological waste products that have long been touted as a more environmentally-friendly energy source.
But the volume of these fuels mandated by the EPA’s 2013 RFS was called into question when the agency downwardly revised the amount of cellulosic ethanol (largely corn-based) that would be required.
Here’s why this court decision is so important for biofuel investors…
The Court Comes Down Hard
In its ruling, the court rejected Monroe’s arguments that the EPA should have taken into account the costs of credits refiners must buy if they do not reach the required RFS levels.
The law requires that refiners earn Renewable Identification Numbers or RINs by blending renewable fuels into their traditional production. But only the companies that actually do this have the power to generate the credits. Companies like Monroe that have to purchase their RINs are at the mercy of an open and volatile market.
In its suit, Monroe had claimed that a spike in the price of RINs last year could cost the company more than $100 million.
But the court said it found “No ground to conclude the 2013 standards are unlawful simply because RINs are costlier than in prior years.”
Also rejected “as without merit” were Monroe’s arguments that the 2013 standards were invalid because the EPA was late in finalizing the volumes and should have reduced overall advanced biofuel volume requirements when it reduced cellulosic ethanol volumes last year.
In all, the EPA is now projecting the use of about 15.2 billion gallons of renewable fuel in 2014, some 3 billion gallons below the level set in legislation. The EPA had reduced its 2013 cellulosic biofuel requirements because fuel production from agricultural and forest waste has been slow and has not yet reached the legislated volume.
“The RIN program perversely penalizes independent refiners for market conditions that they are powerless to change,” Monroe had maintained.
What the RFS Court Decision Means for Investors
Now, aside from chalking up another court victory for the EPA, what should investors take away from this case?
Well, it doesn’t mean you should try to corner the market in corn stalks or wood chips.
Yes, it is true. We will continue to see rising volumes of biodiesel from such sources, the so-called “advanced biofuels.” Yet, no matter how advanced these fuels may be, they will remain a very small part of the overall energy mix for quite some time.
What it does do, however, is emphasize yet again a matter I have addressed time and time again over the years. The real objective of our as yet non-existent national energy policy is to foster and enhance a genuine energy balance.
That balance requires two things. The first involves the use of several distinct energy sources. The second requires that they be as interchangeable as possible.
Obviously, the rise of biofuels contributes to the first objective, even though it’s just a small part of the overall mix. Remember, as I have said before, looking for a single source to overcome dependence on crude oil is misguided. There is no “silver bullet” approach.
However, the second goal is more vexing. A wide range of distinguishable energy sources means little if we have to continue to rely on one of them as a major component of end usage. I’m referring to what we power our vehicles with in the short to medium term.
So long as we are tied heavily to gasoline, the ultimate aim of the energy balance remains frustrated. And that’s where the contribution of biofuels becomes interesting.
While the market views the move toward liquefied natural gas (LNG) and compressed natural gas (CNG) as the longer-term remedy (a position I essentially agree with), the percentage of the mix provided by biofuels will still increase.
Already, the combination of one fuel (ethanol) with another (biodiesel) is having its effect. More “split fuel tanks” are appearing, especially in municipal service applications. These usually involve a combination of E85 ethanol and B20 biodiesel.
Admittedly, there are limitations in the amount of power they provide and the mixture is not the best solution in all climates and terrains. But this is a movement that promises to continue.
And that means there will undoubtedly be even more biofuel investment opportunities available in the near future.
Government mandates receiving judicial imprimatur have a way of moving the markets.
PS. Just a heads up…I spent most of yesterday traveling back from meetings in Canada on what may be the third oil and gas company in our trend-setting Money Map Projects. You can expect some very exciting new developments on this front coming soon.