### O n L o c a t i o n , I n c . E n e rgy S y s t e m s C o n s u l t i n g 

# Memo To: EPA- HQ - OAR- 2005 - 0161 From: OnLocation, Inc. Date: January 12 , 20 10 Re: RFS2 Modeling Analysis Documentation



## ___________________________________________________________ At the request of EPA, OnLocation has prepared an analysis of t he 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 . 1 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- NE MS 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 energ y 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 ch aracteristics, 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

1 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 mo del are the responsibility of EPA and OnLocation, Inc.Mem o to EPA re: EISA Modeling Analysis

OnLocation, Inc. / Energy Systems Consulting

Page 2 of 6 with motor gasoline or as E85. The model structure allows for minimum requirements to be set for biodiesel, cellulosic biofuels, advanced biofuels and total b iofuels 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 project ions from the Annual Energy Outlook 2007 (AEO2007), so we needed to modify the more current AEO2009 -ARRA2 version of the NEMS model to replicate the AEO2007 biofuels levels . This required a few modifications, as described below, in addition to removing th e 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 EPANEMS 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 feed stocks 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 fro m Brazil are eliminated. Exports of ethanol are eliminated because that option was not included in the AEO2007. Similarly, biomass - to liquids (BTL) ga sification 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 .

2 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 Re cent Changes in the Economic Outlook”, Report No. SR/OIAF/2009

- 03, April 2009.Mem o to EPA re: EISA Modeling Analysis

OnLocation, Inc. / Energy Systems Consulting

Page 3 of 6 Figure 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 ce llulosic and 1 billion gallons from biodiesel. EIA’s AEO2009 -ARRA assumes that cellulosic ethanol and biomass - to - liquids (BTL) gasification technolog ies 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 ce llulosic 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: 1. Advanced ethanol was eliminated as an option. 2. Cellulosic ethanol imports from Brazil and Canada were eliminated. 3. Palm oil imports for biodiesel production were eliminated. 4. The BTL RFS credit multiplier was increase d from 1.5x to 1.7x. 5. The ethanol import tariff and subsidies were maintained th roughout the planning years. 6. 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. 3

3 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 multiplier s that are greater than one.Mem o to EPA re: EISA Modeling Analysis

OnLocation, Inc. / Energy Systems Consulting

Page 4 of 6 Refe rence 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 2 

### Impact of the RFS2 Rule on U.S. Fuel Import Expenditure s 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 Figure 3 . 4

4 The conversion factor 5.8 mmbtu/bbl was used to convert the BTUs of the various liquid fuels into barrels of oil equivalent.Mem o to EPA re: EISA Modeling Analysis

OnLocation, Inc. / Energy Systems Consulting

Page 5 of 6 Figure 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 t he EPA Reference and Control cases in 2022. As can be s ee n in 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 .Mem o to EPA re: EISA Modeling Analysis

OnLocation, Inc. / Energy Systems Consulting

Page 6 of 6 Figure 4