President Bush signed the Energy policy Act of 2005 Aug. 8 at New Mexico’s Sandia National Laboratories. The $14.5 billion legislation includes tax incentives for things like energy efficient homes and hybrid cars, and also promotes the development of alternative energy sources. Although the bill will not provide immediate relief from today’s staggering oil and gasoline prices, the measure does touch on virtually every aspect of American energy production and consumption. Electrical grids, hybrid cars, traditional oil and gas drilling, and incentives to develop new energy sources are just a few of the points agreed upon. The legislation fundamentally alters U.S. motor fuels policy and makes the first ever federal commitment requiring the use of renewable fuels for transportation.

Samuel Bodman

U.S. Energy Secretary Samuel Bodman commented on the Energy Bill during his recent visit to WVU. NAFTC Photo

The energy bill is the first comprehensive legislation adopted by Congress in over ten years. Attempts to pass energy legislation have failed in recent years. However, spurred on by mounting public concern over escalating petroleum prices, a last minute compromise over legislation dealing with MBTE’s and the support of both the Chair and ranking member of the Senate Energy & Natural Resources Committee, the final House-Senate conference report passed both houses with broad bipartisan support.

The Energy Policy Act of 2005 represents the most extensive energy legislation in decades, and pertains to the industry of Alternative Fuels with the following provisions:

Building Alternative Fuel Infrastructure: While most renewable fuels are blended with petroleum products and sold through normal gasoline stations, there is a growing interest in utilizing renewable fuels to “replace” fossil fuels. To make these fuels more available to the public, the bill allows taxpayers to claim a 30% credit for the cost of installing alternative, clean-fuel pumps up to a maximum of $30,000. Clean fuels must contain at least 85% ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen. Biodiesel blends of 20% or higher also qualify.

Diversification of Renewable Fuels:While ethanol is expected to provide the bulk of renewable fuels under the RFS, the bill promotes other renewable fuels by extending the volumetric excise tax credit for biodiesel, currently scheduled to expire at the end of 2006, through 2008. Further, ethanol from non-grain sources is boosted. Every gallon of cellulosic or waste derived ethanol counts as 2.5 gallons toward RFS requirements. Grants and loan guarantee programs are created for cellulosic production facilities. Finally, the bill authorizes a variety of measures to bolster a “bioeconomy” including research and development, biobased product procurement, and new financial incentives to industry and academia.

Renewable Fuels Standard: Makes the first ever commitment to expanding domestic fuel supplies with renewable fuels like ethanol and biodiesel. The renewable fuels standard (RFS), which sets a national minimum usage requirement, begins at 4 billion gallons in 2006 and increases to 7.5 billion gallons in 2012.

Greater Refinery Flexibility: Provides refiners flexibility by creating RFS credits (for renewable fuel blended above baseline) that have a lifespan of 12 months. This allows refiners to use renewable fuels when and where they are most cost-effective. In addition, the reformulated gasoline (RFG) oxygenate standard is eliminated 270 days after date of enactment (immediately for California) – a provision refiners have sought for six years. Finally, MTBE was not banned nationally and in a critical compromise, supporters of a liability waiver for producers of the controversial additive dropped their insistence that the waiver be included in the bill. Removal of the liability waiver was a key to the bills passage.

Consumer Protections: The clean air gains for the RFG program will be maintained as the remaining RFG air quality performance standards are enhanced to make up for the elimination of the oxygenate standard. Further, RFS waiver options in the event of limited supply or unusually high biofuels prices will protect consumers from any negative gas price implications.

Farmer Provisions: Updates the small ethanol producer definition from 30 to 60 million gallons per year. This change, which allows modern farmer-owned plants access to the existing small ethanol producer tax credit (SEPTC), ensures farmer-owned ethanol plants continue to play a vital role in the growing ethanol industry. Additionally, the bill creates a similar program for small agri-biodiesel producers.

The enhanced role for renewable fuels in U.S. motor fuels supplies is a promise to spark economic development in rural areas nationwide. According to an analysis by John Urbanchuk with LECG, LLC, establishing an RFS similar to the one contained in the final energy bill between 2005 and 2012 would:

  • Spark $6 billion (2005 dollars) of new investment to build 4.3 billion gallons of new ethanol capacity;
  • Add nearly $200 billion (2005 dollars) to Gross Domestic Product;
  • Generate an additional $43 billion (2005 dollars) of household income for all Americans;
  • Create more than 230,000 new jobs in all sectors of the economy;
  • Displace over 2 billion barrels of crude oil;
  • Reduce the outflow of dollars largely to foreign oil producers by $64.1 billion (2005 dollars); and,
  • Lessen America’s dependence on imported oil from an estimated 67.4 percent to 62.3 percent.

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