Office of the Chief Economist Office of Energy Policy and New Uses Biofuel in diesel and heating oil Tony Radich Agricultural Economist [email protected] EIA State Heating Oil and Propane Program Workshop Washington, DC July 13, 2016 Office of the Chief Economist Office of Energy Policy and New Uses Agenda •What is distillate fuel and which biofuels are compatible? •Federal, state, and local policies on biofuels in distillate fuel •Economics of biodiesel production, including the effects of biofuels policies OfficeDistillate of the and Chief heating Economist oil overlap but not perfectlyOffice of Energy Policy and New Uses • Distillate fuel consists of No. 2 diesel fuel and No. 2 heating oil – Kerosene (No. 1 fuel oil) is a separate product in EIA data – Blends easily with No. 2 distillate, often used to improve cold flow • “Heating oil” can also refer to grades heavier than No. 2 – No. 6 heating oil is classified as residual fuel by EIA – No. 4 heating oil is a blend of No. 2 and residual fuel • Two trends in heating oil – Reduction in sulfur levels – Addition of biofuels • Diesel and heating oil can contain biodiesel and renewable diesel – Both produced from vegetable oil or animal fat but different production processes – ASTM standards for diesel fuel and heating oil allow 5% biodiesel in fungible products – Blends of up to 20% biodiesel are supported by many engine and burner manufacturers – Renewable diesel can be used in any proportion in diesel or heating oil • Cellulosic diesel and cellulosic heating oil are under development – Both are produced by pyrolysis of wood fiber; more upgrading of pyrolysis oil is required for diesel use OfficeU.S. policies of the Chief on Economist biofuels are moving away from subsidies…Office of Energy Policy and New Uses • Federal tax incentives for corn ethanol expired at the end of 2011 – Ethanol blending tax credit (45 cents per gallon) – Ethanol import tariff (54 cents per gallon) • Two other Federal incentives are still available – Biodiesel and renewable diesel blending tax credit ($1 per gallon) • Has lapsed several times but then renewed retroactively • In place at the beginning of 2016 and available for the entire year – Cellulosic biofuels tax credit ($1.01 per gallon) through 2016 – In contrast to the Renewable Fuels Standard, there is no greenhouse gas reduction threshold for blending tax credits Office…and of toward the Chief consumption Economist standards that can actOffice like of Energysubsidies Policy and New Uses • Federal Renewable Fuels Standard – Petroleum refiners and importers are obligated in proportion to their total volumes of petroleum-based gasoline and diesel sold into the U.S. market – Compliance is demonstrated by Renewable Identification Numbers (RINs) which can be traded between parties – 4 nested standards (RIN type in order of descending value): • Cellulosic biofuel (D7, D3) • Biomass-based diesel (D7, D4) • Advanced biofuel (D7, D3, D4, D5) • Total renewable fuel (D7, D3, D4, D5, D6) • California Low Carbon Fuel Standard (LCFS) – Each biofuel and associated production process (pathway) receives a carbon score • Yellow grease biodiesel has lower (better) score than soybean biodiesel – LCFS credits can be traded between parties • Commercial data services collect prices of D4, D5, and D6 RINs and LCFS credits State and local standards for biodiesel blendingOffice of the also Chief play Economist a role in diesel and heating oilOffice markets of Energy Policy and New Uses State or locality Laws and regulations relating to biodiesel in distillate fuel Minnesota All diesel fuel must be B10 in summer and B5 in winter; summer requirement for B20 in 2018 Maryland 3 cent-per-gallon tax credit for bioheat blends with at least 5% biodiesel, $500 limit per taxpayer; half of oilheat equipment in state buildings must use bioheat with at least 5% biodiesel New York City 2% biodiesel blend required for No. 2 and 4 fuel oil New York Each percentage point of biodiesel in heating oil up to 20% earns a credit of 1 cent per gallon against the state income tax through December 31, 2016 Rhode Island 4% biodiesel blend required; 5% as of July 1, 2017 Massachusetts 5% biodiesel blend requirement legislated but not implemented Connecticut 10% biodiesel blend if neighboring states establish similar requirements Vermont 7% biodiesel blend if surrounding states establish similar requirements Source: National Oilheat Research Alliance, https://noraweb.org/2015/07/sulfur-and-bioheat-requirements-in-the-northeast-states/ Since May 2013, the New York Mercantile ExchangeOffice of the hasChief based Economist its heating oil contract on Office of Energy Policy and New Uses ultra low sulfur diesel Source: Energy Information Administration Today In Energy, May 10, 2013 http://www.eia.gov/todayinenergy/detail.cfm?id=11211 OfficeSoybean of the oil Chief is generally Economist not cost-competitive with Officecrude of oil Energy or diesel Policy fuel and New Uses Dollars per gallon 5.50 Iowa biodiesel 5.00 Iowa soybean oil (per gallon biodiesel) 4.50 4.00 3.50 3.00 Gulf Coast ultra low sulfur diesel 2.50 2.00 1.50 West Texas Intermediate crude oil; 1.00 Cushing, Oklahoma 0.50 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Sources: United States Department of Agriculture, Agriculture Marketing Service; and Thomson Reuters as republished by the Energy Information Administration The relationship between D6 and D4 RIN prices Officeindicate of the that Chief ethanol Economist blending alone cannot meet Officethe total of Energy renewable Policy andfuel New requirement Uses Dollars per RIN Price ratio 2.20 1.1 Current-year biodiesel (D4) D6/D4 price ratio 2.00 1 1.80 0.9 1.60 0.8 1.40 0.7 1.20 0.6 1.00 0.5 0.80 0.4 0.60 0.3 0.40 0.2 0.20 Biodiesel tax credit 0.1 Current-year ethanol (D6) restored 12/18/15 0.00 0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Note: One RIN represents the energy equivalent of one gallon of ethanol Source: Oil Price Information Service OfficeThe biodiesel of the Chief blending Economist tax credit has more than Officeoffset of biodiesel’s Energy Policy price and New disadvantage Uses relative to petroleum diesel Dollars per gallon 4.00 3.50 Gulf Coast ULSD 3.00 2.50 2.00 Gulf Coast biodiesel less current-year RIN and tax credit 1.50 1.00 0.50 Biodiesel tax credit restored 12/18/15 0.00 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Oil Price Information Service and Thomson Reuters as republished by the Energy Information Administration OfficeBiodiesel of the producer Chief Economist margins have improved in Office2016 of Energy Policy and New Uses Dollars per gallon biodiesel 5.50 5.00 4.50 Biodiesel price 4.00 3.50 3.00 Soybean oil 2.50 2.00 Biodiesel margin, excluding capital expenditures 1.50 1.00 0.50 0.00 -0.50 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Oil Price Information Service and Thomson Reuters as republished by the Energy Information Administration The biofuels share of distillate has grown Officesubstantially of the Chief since Economist the commercialization of Officebiodiesel of Energy in 2001 Policy and New Uses Billion gallons Percent 60 6 50 5 Diesel consumption, including electric power Biodiesel and renewable diesel share of distillate 40 4 30 3 20 2 Heating oil consumption 10 1 0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Energy Information Administration, Short-Term Energy Outlook July 2016 Office of the Chief Economist Office of Energy Policy and New Uses THANK YOU .