Oregon’s Controversial Clean Fuels Program Revs its Engine

July 27th, 2017 |  Mentions

Originally Posted July 26th by Portland Business Journal

Brandon West turned a valve, sending a stream of brown, murky fluid from a several-thousand-gallon receiving tank into a half-gallon jar on a sunny summer day in Salem.

“This is what we start with, UCO,” the SeQuential shift supervisor said.

That’s used cooking oil; this year, more than 8 million gallons of the unappetizing stuff will be trucked into SeQuential’s plant, from the likes of Burgerville and Kettle Brand and thousands of other fryers of food, in a collection network that stretches from Washington — Safeco Field is a contributor — down to the Bay Area. A remarkably high percentage of the UCO will become biodiesel, a fuel with less than one-fifth the greenhouse-gas emissions of standard diesel.

“We have a conversion efficiency of something like 96 percent,” said Ian Hill, who co-founded SeQuential in 2004. “When we started off, we were in the high 80s. What doesn’t become biodiesel is byproducts. There’s virtually no waste. This team at the plant, they’re at the leading edge of what can be done turning low-value waste-stream feedstock materials into biodiesel.”

As SeQuential sees it, this is what Oregon’s Clean Fuels Program — probably known by most Oregonians as a perennial political football — is all about.

The program aims to reduce greenhouse gas emissions in the transportation sector, setting standards for gasoline and diesel that fuel providers can meet by blending cleaner fuels into their products, or by buying credits from the producers of clean fuels, like SeQuential, who earn credits by coming in under the standard.

The state is targeting fuels because the transportation sector accounts for more than a third of Oregon’s greenhouse-gas emissions, which are running well above targets set by the Legislature. A study commissioned by the Department of Environmental Quality estimated that by 2025 Clean Fuels could trim fuel emissions by up to 5.5 percent.

SeQuential has embraced Clean Fuels as a spur to innovation and efficiency. Hill credits it with adding 150 workers to the company’s 250-employee Oregon workforce, and has looked forward to the day when the program is an accepted feature of Oregon’s economy.

That day might finally be here.

Late last month, with a transportation bill hanging in the balance, Gov. Kate Brown’s office guided a Clean Fuels compromise that was elusive in 2015. Opponents got “cost-containment” provisions they wanted and called it a victory. Advocates said the changes were mostly in line with what was likely through an ongoing rulemaking process, and called it a victory.

That doesn’t mean that the program’s critics have embraced it. Gasoline and diesel providers and their big customers have fought Clean Fuels implementation practically since the Legislature set the program in motion in 2009, eager to see it perish by lawsuit, initiative, expiration or repeal. And the Western States Petroleum Association, which sued the Department of Environmental Quality over the Clean Fuels rules in 2015, still sees it as unfair to its members, flawed and doomed to fail.

But its backers and beneficiaries, like SeQuential, believe the time has come for the program to move forward — encouraging electric vehicles plugged into an increasingly green grid, production of renewable natural gas and, of course, that biodiesel made from UCO — unfettered by the uncertainties that have kept some participants at bay.

How it works

Nearly all the biofuel that SeQuential manufactures is blended into standard diesel, sometimes at a 5 percent level, the minimum required in Oregon, and frequently at 20 percent, known as B20. A small portion of the company’s fuel reaches end users at its two retails stores in Eugene, but most goes through resellers, either fuel distributors or other retailers such as Shell and Astro. SeQuential biodisel is available now at nearly 90 locations.

End users can be diesel car drivers, many of whom, Hill said, might not even know they’re buying an especially clean fuel, but more typically they’re commercial freight truckers. Some fleet operators, like food distributor Organically Grown Company, buy SeQuential biodiesel directly from a distributor and pump it at their own hub.

Those millions of gallons of biodiesel heading into the market each year help the Clean Fuels Program’s regulated parties stay in compliance, while also generating value for Sequential — and it’s all based on a concept called carbon intensity.

Carbon intensity — “CI” as regulators and program participants know it — is a measurement of the lifecycle greenhouse-gas emissions for a given amount of energy produced. It’s not just about what comes out of a vehicle’s tailpipe; CI also takes into account emissions that are generated in the production, transportation and storage of a fuel.

Using the 2015 carbon intensity of typical gasoline and diesel as a base, the program reduces the carbon intensity target for fuel providers annually, first with small reductions, giving providers time to adjust and build up credits, then accelerating toward a 2025 end point, when the target will be 10 percent lower than in 2015.

Gasoline and diesel providers can meet their targets, theoretically at least, through blending in low-emissions fuels to reduce carbon intensity.

If a provider’s fuel doesn’t meet the target, deficits are generated. Meanwhile, fuels that fall below the carbon intensity target generate a credit for every ton of greenhouse-gas emissions saved.

Credits, then, become a way for gasoline and diesel importers to offset deficits they might run. Their accounts need to be in balance by the end of each calendar year, a requirement that will kick in this year, after DEQ delayed enforcement a year to give fuel providers more time to adjust.

“Low-carbon fuel standards are the most effective policy tool out there in terms of sending a market signal to stimulate an increasing supply of lower carbon fuels for transportation,” said Graham Noyes, executive director of the Low Carbon Fuels Coalition. “They don’t require an appropriation and they create market opportunities.”

Clean Fuels critics disagree, particularly when it comes to gasoline. The amount of ethanol that can be blended into gasoline has been stuck at 10 percent, despite efforts to push that level higher. Ethanol made from feedstocks other than the usual suspect, corn, can offer somewhat better carbon intensity benefits. Cellulosic ethanol, made from plant fiber, is viewed as the great low-carbon-intensity hope, but, so far, it hasn’t panned out.

“Gasoline’s the tough one,” Catherine Reheis-Boyd, president of the Western States Petroleum Association, said. “And now it’s going to get tougher with Oregon and California competing for the same lower carbon intensity fuel.”

Plug it in

Clean Fuels proponents insist that better ethanol and higher blends could help gasoline providers meet the falling carbon intensity standard, but increasingly they’re talking about a completely different alternative fuel for cars.

Electricity.

Based on Oregon’s statewide energy mix, electric vehicles have a carbon intensity of 31.85, well below the 98.54 carbon intensity of the typical gasoline sold in Oregon today. For EV drivers served by utilities that rely mostly on hydropower, the carbon intensity can be even lower, into the single digits.

That translates to potentially valuable credit generation through Oregon utilities or third-party administrators who will aggregate the credits earned from home charging.

Electric vehicles have always been part of the Clean Fuels thinking, and Oregon has been among the leaders in EV adoption. Still, rates remain low, barely nudging up to 2 percent of new vehicle sales, leaving many EV boosters and environmentalists to wonder how long it might be before the state’s drivers are really plugged in.

That’s why they pushed hard for an EV incentive program in the transportation bill, and they got it, with rebates of up to $2,500.

Jeff Allen of Forth, the EV advocacy group formerly known as Drive Oregon, called it “the single biggest thing the state could have done to help electric vehicle sales.” And Clean Fuels could soon provide another inducement to go electric.

In California, which implemented a low carbon fuel standard in 2011, Pacific Gas & Electric is giving EV owners a rebate of $500 this year, based on credits earned from home EV charging. Oregon’s Clean Fuels credit prices, around $45 now, aren’t as lucrative as California’s, which have been hovering around $75 to $85. But with lower electricity prices, rebates here could easily cover the electricity cost for 5,000 miles of EV driving, perhaps even as much as 10,000 miles.

ChargePoint, which says it operates the world’s largest charging network, has been in California’s clean fuels program for two years, and is signed up as an Oregon credit generator.

“The benefits that we have accrued (in California) have made us excited for what’s possible in Oregon once it really gets started and we start to see credits sold,” said Anne Smart, ChargePoint’s vice president for public policy. “We think the program is going to generate revenue that will help us do things like reinvest in driver services, put stations in underserved communities and provide educational services.”

RNG spells low carbon

Cleaner options are more robust on the diesel side. The trash collection industry, where natural gas use is growing fast, stands as an example of the possibilities — and it’s not just big players like Waste Management Inc. who are driving the transition.

Heiberg Garbage & Recycling LLC, in Milwaukie, bought its first compressed natural gas vehicle in 2012; now it’s up to 11, nearly a third of the 35-truck fleet it runs regularly. In 2015, the company spent about $500,000 for a fueling station that can fill up 12 trucks at a time.

A 35 percent state tax credit was the biggest factor in making that investment economically viable, but because they own the pumps and CNG has a carbon intensity around 20 percent below standard diesel, Heiberg is a credit generator. Every quarter, the company accumulates another 16 to 18 credits. At today’s credit prices, it’s no windfall, but if credit prices rise as high as Clean Fuels detractors believe they will — to a $200 cap set in the transportation bill compromise — the payoff will increase.

“That’s a benefit that gets passed through to our customers,” co-owner Bruce Heiberg said.

Greater gains are possible with a greener type of natural gas, renewable natural gas, or RNG. It’s made by upgrading biogas, a byproduct of landfills, waste treatment plants, dairies and other sources of organic matter that’s frequently used onsite for electrical generation. The carbon intensity of RNG varies by source, but can frequently be 85-90 percent below diesel’s. In California, 61 percent of the compressed natural gas used is now renewable.

“That’s largely a result of California’s low carbon fuel standard,” Johannes Escudero, CEO & executive director of the Coalition for Renewable Natural Gas, said.

Renewable gas infrastructure is expensive, Escudero said, requiring a facility for upgrading the biogas, and a connection to the gas grid. Still, the development is happening. From 1982 to 2011, 30 projects were built in the U.S.; in the past six years, 27 more have come online, Escudero said.

Oregon will get its first RNG facility in the next year, at the city of Portland’s Columbia Boulevard Wastewater Treatment Plant in an arrangement with NW Natural, the region’s major natural gas provider. Could more be on the way?

“The clean fuels standards in California and Oregon are creating a lot more interest, spurring people to explore what it would take to interconnect,” said Mary Moerlins, community affairs and environmental affairs program manager at NW Natural.

To try to take advantage of opportunities, lawmakers this session passed Senate Bill 334, which requires the Oregon Department of Energy to establish an inventory of potential renewable natural gas sources in the state and develop recommendations for removing barriers to their development.

A low-carbon program is a prerequisite, in Escudero’s view.

“These are projects that have tremendous environmental and economic benefits,” he said. “But the only way they pencil out is having the addition of an environmental credit.”

Ready to compete

Electric cars, CNG, renewable natural gas — all of these excite SeQuential’s Hill.

“The thing we love about the policy most is that it doesn’t pick winners,” he said. “It’s not mandating any type of fuel use. All it’s saying is that in our total fuel shed, we’re going to reduce the carbon intensity by x number over time. Then it’s a matter of competing, and those of us who believe in the program welcome that.”

For SeQuential, he said, the growth challenge is mostly on the supply side.

“Our concern is not about finding a market for our product,” he said. “It’s really about how do we grow our source of feedstock in a business-conservative and secure way to enable the growth on the demand side.”

In 2016, the company acquired four cooking-oil collection companies in the Bay Area. The Clean Fuels Program was at the heart of that decision.

“That was largely to build up the oil that’s feeding our plant, in anticipation that the market for biodiesel will continue to grow as the program gets shored up and strengthened,” Marketing Manager Rachel Shaver said.

“The program has shifted the way we look at how we grow and how we make business decisions,” Hill added.

The company is contemplating building a second production plant, or expanding in Salem. If it does build, it might do so in California, allowing it to sell biodiesel at a lower carbon intensity, thanks to decreased transportation inputs.

Clean Fuels is a welcome part of the decision-making process.

“That’s the kind of stuff good policy should do,” Hill said. “It raises carbon up as a real decision factor in the business community. Ten years ago, it was not even on the radar. But now, it’s something you talk about in a board meeting.”

Clean Fuels arrives

Oregon’s Clean Fuels Program survived a handful of roadblocks thrown up by powerful detractors. Here’s a timeline of the program’s lifecycle:

June 2009: Gov. Ted Kulongoski signs bill authorizing the Department of Environmental Quality to adopt rules to trim the carbon content of transportation fuels by 10 percent from 2010 levels by 2020. The bill, however, has a sunset date of Dec. 31, 2015.

April 2012: Gov. John Kithaber asks the DEQ to develop rules to implement the program in two phases, noting that the department “has conducted an extensive technical and economic analysis of the policy.”

December 2012: DEQ requires fuel providers to register with the department and report on the volume and carbon intensity of their fuels.

January 2015: DEQ sets a 2015 to 2025 time frame for a 10-year, 10 percent reduction in fuel carbon content.

March 2015: Gov. Kate Brown signs bill extending the low carbon fuel standard.

June 2015: Republicans demand repeal in return for supporting a transportation spending package. Democrats, lobbied hard by environmental groups, refuse. The transportation bill dies.

April 2016: Oregon Fuels Association drops effort to repeal the clean fuels standard by initiative.

July 2017: The Legislature passes a $5.3 billion transportation bill that includes a Clean Fuels Program compromise. The changes cap credit prices at $200, give the Office of Economic Analysis new forecasting responsibility with the possibility of deferring tightening of the fuel standard if shortages are forecast and requires the DEQ to provide monthly and annual information on program costs and greenhouse-gas reductions.