Memo						       		

To:	 EPA-HQ-OAR-2005-0161

From:	OnLocation, Inc.

Date:	January 12, 2010

Re:	RFS2 Modeling Analysis Documentation

___________________________________________________________

At the request of EPA, OnLocation has prepared an analysis of the impact
of the renewable fuel standard (RFS2) requirements using a version of
the Energy Information Administration’s National Energy Modeling
System (NEMS) called EPA-NEMS.  Two main scenarios were constructed in
order to examine the overall impact of renewable fuel requirements,
imports of petroleum for energy security analysis, and the monetary
benefits associated with reduced petroleum imports under the RFS2 rule. 
These scenarios included:

A Reference Case with renewable fuel volumes similar to the AEO2007
Reference Case

A Control Case with the EISA renewable fuel volume requirements

The construction of these cases will be discussed in detail below, but
first an overall introduction to EPA-NEMS is provided as background.

EPA-NEMS Introduction

EPA-NEMS is an integrated energy modeling system that simulates the
behavior of energy markets and their interactions within the U.S.
economy by explicitly representing the economic decision-making involved
in the production, conversion, and consumption of energy products.
EPA-NEMS is designed as a modular system.  Four end-use demand modules
represent fuel consumption in the residential, commercial,
transportation, and industrial sectors, subject to delivered fuel
prices, macroeconomic influences, and technology characteristics.  The
primary fuel supply and conversion modules compute the levels of
domestic production, imports, transportation costs, and fuel prices that
are needed to meet domestic and export demands for energy, taking into
account resource base characteristics, industry infrastructure and
technology, and world market conditions.  The modules interact to solve
for the economic supply and demand balance for each fuel. Because of the
modular design, each sector can be represented with the methodology and
the level of detail that is appropriate for that sector.

The production of biofuels is represented in the petroleum market module
(PMM), while demands for biofuel and competing petroleum products are
projected by the transportation model.  The PMM or refinery model
includes several types of biofuel production including corn ethanol,
cellulosic ethanol, virgin and non-virgin biodiesel, and
biomass-to-liquids (using a biomass gasification process).  Each of
these is represented by capital investment costs, operating costs,
energy requirements, and by-product credits. Ethanol can be used in
blending with motor gasoline or as E85.  The model structure allows for
minimum requirements to be set for biodiesel, cellulosic biofuels,
advanced biofuels and total biofuels similar to the tiers set by EISA.  

EPA Reference Case

The first step was the creation of an EPA Reference case to represent
conditions before the passage of the EISA biofuels requirements. EPA had
started their analysis using the biofuels projections from the Annual
Energy Outlook 2007 (AEO2007), so we needed to modify the more current
AEO2009-ARRA version of the NEMS model to replicate the AEO2007 biofuels
levels.  This required a few modifications, as described below, in
addition to removing the EISA renewable fuel standard (RFS) from the
AEO2009-ARRA case. 

The AEO2009-ARRA allows greater blending of ethanol (up to 10% in most
regions and gasoline types) than did the AEO2007, so the maximum
blending share was reduced for the EPA Reference case.  At the same
time, the AEO2009-ARRA includes the EISA CAFE standards which reduce the
growth in demand for motor fuels and hence the potential for blended
ethanol in the long term.  To match the AEO2007 blending, the blending
share is assumed to increase over time.  The ethanol import tariff is
assumed to remain in place as it was in the AEO2007, unlike in the
AEO2009-ARRA where it is assumed to expire.  The sales of flex-fuel
vehicles in the EPA-NEMS Transportation Market Model are adjusted
downward to reduce the total E85 demand and hence the total ethanol
demand.  The price of imported biodiesel is raised and certain biodiesel
feedstocks are restricted in order to better match total biodiesel
consumption and composition.  In addition, the ethanol import curves
from Brazil are adjusted so that the ethanol import projections match
and cellulosic imports from Brazil are eliminated.  Exports of ethanol
are eliminated because that option was not included in the AEO2007. 
Similarly, biomass-to-liquids (BTL) gasification and “green diesel”
technologies were eliminated since these did not exist in the AEO2007. 
The resulting EPA Reference Case matched the AEO2007 biofuels fairly
well, especially in the EISA target year 2022. 

Figure   SEQ Figure \* ARABIC  1 

EPA Control Case

The goal of this case was a full implementation of the EISA biofuels
requirements within the EPA-NEMS model.  EISA requires 36 billion
gallons of biofuels by 2022, with 21 billion gallons from advanced
biofuels, of which 16 must be from cellulosic and 1 billion gallons from
biodiesel. 

EIA’s AEO2009-ARRA assumes that cellulosic ethanol and
biomass-to-liquids (BTL) gasification technologies are not sufficiently
mature to provide the required ramp-up in the cellulosic fuels, and
therefore a waiver is issued which reduces the cellulosic and total
biofuels requirements. For the EPA-NEMS reference case, we modified
several assumptions regarding ethanol and BTL production so that the
EISA volumes could be met in the projection.  The ramp up of cellulosic
ethanol and BTL production was allowed to be faster in the EPA Control
Case than in the AEO2009-ARRA.  In addition, the following changes were
made in our attempt to match the EPA Control Case biofuel levels:

Advanced ethanol was eliminated as an option.

Cellulosic ethanol imports from Brazil and Canada were eliminated.

Palm oil imports for biodiesel production were eliminated.

The BTL RFS credit multiplier was increased from 1.5x to 1.7x.

The ethanol import tariff and subsidies were maintained throughout the
planning years.

Corn ethanol production was limited to 15 billion gallons per year.

The resulting biofuel production volumes are given in the following
table and the RFS credits for the various biofuels are shown in the
graph below.

 	Reference Case	Control Case

 

 

 	2012	2017	2022	2012	2017	2022

 	 

 	 

 

Biofuels (Billion Gallons/Year)	 

 	 

 

  Corn Ethanol	10.6	12.1	12.7	14.5	15.0	15.0

  Cellulosic Ethanol	0.1	0.2	0.2	0.1	0.6	5.3

  Imported Ethanol	0.1	0.4	0.5	0.0	2.7	2.6

  Biodiesel	0.3	0.4	0.4	1.0	2.0	2.0

  BTL	0.0	0.0	0.0	0.1	1.6	6.9

Total Biofuels	11.1	13.1	13.8	15.7	21.9	31.8



Figure   SEQ Figure \* ARABIC  2 

Impact of the RFS2 Rule on U.S. Fuel Import Expenditures

The EISA biofuel requirements had the effect of reducing the imports of
crude oil as well as refined petroleum products by approximately 0.9
million barrels per day in oil equivalent terms in 2022 as can be seen
in   REF _Ref250709653 \h  \* MERGEFORMAT  Figure 3 . 

Figure   SEQ Figure \* ARABIC  3 

Expenditures on net petroleum imports were reduced by $41.5 billion
(2007$) between the EPA Reference and Control cases in 2022.  Similarly,
expenditures on net liquid fuel imports including imported ethanol were
reduced by $37.2 billion (2007$) between the EPA Reference and Control
cases in 2022.  As can be seen in   REF _Ref250717085 \h  \* MERGEFORMAT
 Figure 4 , the increased use of renewable fuels in 2022 as required by
EISA serves to reduce the volume of petroleum imports to the U.S. by 9.5
percent as well as the net expenditures on those imports by 9.1 percent.

Figure   SEQ Figure \* ARABIC  4 

 This version is called EPA-NEMS to make it clear that EPA, rather than
EIA, conducted this analysis and that the modifications and data changes
in the model are the responsibility of EPA and OnLocation, Inc.

 Source:  U.S. Department of Energy, Energy Information Administration,
“An Updated Annual Energy Outlook 2009 Reference Case Reflecting
Provisions of the American Recovery and Reinvestment Act and Recent
Changes in the Economic Outlook”, Report No. SR/OIAF/2009-03, April
2009.

 We note here that the RFS credit volumes are larger than the actual
production volumes because the various advanced biofuels are scored
relative to corn ethanol and have credit multipliers that are greater
than one.

 The conversion factor 5.8 mmbtu/bbl was used to convert the BTUs of the
various liquid fuels into barrels of oil equivalent. 

Memo to EPA re: EISA Modeling Analysis

OnLocation, Inc. / Energy Systems Consulting

Page   PAGE  6  of   NUMPAGES  6 

 

 OnLocation, Inc.

Energy Systems Consulting

