August 19, 2020
What do car wrecks, hangnails, and Small Refinery Exemptions (SRE) have in common? Nobody likes them. Well, ok, if you’re a participant in the Renewable Fuel Standard (RFS) and not a small refinery, you might not like SREs very much. But why, though? If you’re new to the RFS and you don’t have a good grasp of the industry, you might find all the hulabaloo a bit much. There is a lot that could be said about SREs, but for the moment, let’s discuss what they are first.
There are two pieces to SRE’s. For the first piece, to even be able to apply for the exemption, you have to be a small refinery. A small refinery is defined by the regulations as: “a refinery for which the average aggregate daily crude oil throughput (as determined by dividing the aggregate throughput for the calendar year by the number of days in the calendar year) does not exceed 75,000 barrels.” That’s kind of a mouthful, right? Once you break it down, it’s actually pretty simple. The term throughput means the amount of crude oil that is refined into a consumable product such as gasoline, diesel, or jet fuel. Essentially, if you break down the definition, to be considered “small,” a refinery cannot produce (refine) more than 75,000 barrels worth of gasoline, diesel, or jet fuel for any given year. Makes it a lot easier to understand when you break it down, huh?
Now, the second piece is the exemption portion . As the name might imply, the exemption is an exception to the requirement of Obligated Parties (OPs) to have to fulfil their Renewable Volume Obligations (RVOs) by retiring RINs. If you don’t understand what any of that means, read Easy Peezy Lemon Squeezy: The Regulatory Purpose of the RVOs, written by yours truly. While that is absolutely a shameless plug for you to read my articles, it is also a good way for you to understand the exemption portion this equation. If you don’t understand that portion, the rest of this article might be a little abstract.
To fully understand what an SRE is, you need to understand a bit of regulatory history. It’s not as boring as it sounds, I promise. When the first version of the RFS was put into practice (RFS1), small refiners were exempt from the regulatory requirements of the RFS. As long as you were a small refinery in the calendar year 2004, the small refinery could apply for an exemption from the requirements from the time of application (which had to be submitted by August 31, 2007) until December 31, 2010. In addition to the initial exemption, the small refinery could petition the EPA Administrator for an extension of that exemption for an additional 2 years. To qualify for the extension, the small refinery had to prove that compliance with the requirements of the RFS would result in an “disproportional economic hardship.” I get it, you want to know what that means, but that’s a longer discussion than you might be prepared for, so for the moment, lets get back to history.
When RFS2 began, many small refiners were still struggling from the RVO requirements of the RFS. To ensure that they would be able to maintain their RVOs in the future, RFS 2 reiterated SREs. Essentially, the regulations gave SREs a bit of a remix by changing the dates, but that’s about all that changed. Any small refinery that had applied for an SRE had to prove that they were a small refinery for the calendar year 2006, instead of 2004. Again, the small refinery could apply for an extension of the exemption for an additional 2 years as long as it could show a “disproportionate economic hardship.” The EPA Administrator, whether the petition was for an original exemption under RFS 1 or RFS 2 could take no longer than 90 days to issue a decision on the petition. If the EPA Administrator granted the petition, the small refiner was granted an exemption to the RVO requirement and would not have to fulfill their obligation. If the Administrator denied the petition, the small refiner was on the hook for their compliance obligation.
All good things have to come to an end. For small refiners, that ending was on December 31, 2012. By that date, all original exemptions and initial extensions would have run. However, the small refiner could still get around the RVOs. Beginning in 2013, small refiners had to petition for an extension of the exemption every year. Keep in mind, this means the small refiner had to have been granted an exemption in the first place. Following the December 31, 2012 deadline, if the small refiner had let an extension from previous compliance years lapse or had never applied for an SRE in the first place, the small refiner could not petition for an extension for an SRE. This changed the landscape a bit on SREs for small refiners. Since RVOs are determined on an annual basis, the small refiner had to know much more quickly than in previous years whether or not they could meet their RVOs. The current SRE is more of an extension of the original exemption under RFS 1. Admittedly, this is more a question of schematics, but the application can be important in the current discussion surrounding SREs in the renewable fuel industry. I’ll write more on that at another time. I know, I know, the suspense is killing you!
So, to recap, the SRE is an exemption to the RVO requirements of the RFS. To be eligible for an SRE, the refiner had to be considered a small refiner and had to petition for an exemption by the appropriate compliance deadline. Exactly! See? That wasn’t so bad!