RIN Volatility Due to Regulatory Uncertainty

March 9, 2018

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UPDATED MARCH 12, 2018: Within hours of the publication of this article, the Trump Administration announced that it was indefinitely cancelling the RIN policy meeting between corn and oil states scheduled for March 12th. Although no reason was given for aborting what was to be the 3rd meeting between biofuel and oil interests in as many weeks, sources on both sides of the debate offered their own explanations for the move. Some claimed that the Trump administration elected to place a hold on the negotiations until such time as the U.S. Environmental Protection Agency and the U.S. Department of Agriculture could complete a joint study of the impact of RIN prices on refiners and the consequences of a possible RIN price cap on the biofuel industry. Others believe that the White House retreated in the face of severe criticism over the limited invite list to the meeting. Whatever the cause, the meeting has not been rescheduled, and the ongoing uncertainty of the fate of the RFS will continue to have a deleterious impact on RIN prices.

Original article below.

For the last several months there has been downward pressure on the prices of RIN credits. RINs (Renewable Identification Numbers) are what U.S. suppliers of transportation fuel must buy if they do not blend renewable fuels in to products they sell at their pumps. Renewable fuel producers generate RINs based on the amount of compliant renewable fuel they make available to the market. The decrease in value is of tremendous concern to the providers of alternative fuels, particularly renewable gases, as RINs can be a significant, if not the single largest, source of their revenue.

In a period of relatively low oil and gas prices, the revenue made from the creation and sale of RINs enabled alternative fuel producers, particularly those that produce renewable natural gas (RNG), to match or beat low fossil fuel prices. RINs also provide developers of RNG, such as dairies and food processors, the much-needed stream of capital necessary to justify investment in the physical plant needed to generate, clean up and inject RNG in to the nation’s natural gas infrastructure.

RINs Explained

A RIN embodies the renewable characteristics of a fuel, as defined in the Renewable Fuel Standard (RFS) program. The RFS was authorized in 2005 with the passage of the Energy Policy Act and expanded under the Energy Independence and Security Act of 2007.

In a period of relatively low oil and gas prices, the revenue made from the creation and sale of RINs enabled alternative fuel producers to match or beat low fossil fuel prices.

The RFS was created as a hedge against the U.S.’ dependence on foreign sources of petroleum by increasing the proportion of motor vehicle fuel coming from locally-grown renewable sources, such as corn-based ethanol or soy bean-based diesel. The RFS established a requirement for all transportation fuel producers to replace a proportion of their non-renewable fossil-derived hydrocarbons (gasoline and diesel) with bio-based renewable fuels.

Each year the U.S. Environmental Protection Agency develops a Renewable Volume Obligation (RVO), which specifies the total volume of renewable fuels that must be integrated in to the market. The RVO is then apportioned to all fuel suppliers according to their market share. Fuel suppliers then must purchase the renewable fuels and blend them in to their products, or they must buy renewable fuel credits, in the form of RINs, to meet their RVO.

The RFS created four categories of renewable fuel. These include:

  • Biomass-based diesel
  • Cellulosic biofuel
  • Advanced biofuel
  • Conventional renewable fuel

Each of these categories of renewable fuel are given a “D-Code,” which identifies the renewable fuel type. Conventional biofuel is by far the largest of the categories and is designated by the D Code of 6. Biomass based diesel fuels are either D Code 4 or, if the diesel is derived from cellulosic feedstock, D-Code 7.

Non-conventional renewable fuels , such as methane produced from the anaerobic digestion of organic matter, the conversion of cellulosic plant matter to biofuels, and other renewable fuel production technologies the U.S. seeks to encourage, are given the D-Codes of 3 (cellulosic fuels) and 5 (advanced biofuels). These unconventional RINs also are assigned RVOs, but they are much smaller than the requirements for ethanol (D Code 6).

In today’s market, D-Code 3 and 5 RINs are more valuable than D-code 6 RINs, and are key to making RNG financially viable in an age of very cheap fossil gas. RIN sales are also essential to the effort to reduce short lived climate pollutants, such as fugitive methane. The renewable methane that is produced from rotting garbage in landfills, wastewater, and the manure produced by animal husbandry are all classified D-code 3 which, as of this writing, is five times more valuable than D-code 6 RINs. These organic methane sources also dwarf the methane that comes from oil and gas production in a state like California.

The Price Drop of RINs

The importance of RINs and RIN policy to the financial success of renewable fuels cannot be understated. That is why the recent downturn in prices is concerning, and why it is important to understand the reasons this price drop is taking place, primarily RIN policy.

RIN sales are essential to the effort to reduce short lived climate pollutants, such as fugitive methane.

What prompted this latest round of calls for RFS reform were two events, both concerning RIN policy. The first was the hold that Senator Ted Cruz (R-TX) placed on the confirmation of Bill Northey, the Iowa Agriculture Secretary, to a senior position in the U.S. Department of Agriculture. The second was the bankruptcy filing, on January 21, 2018, of the largest refinery in Pennsylvania, Philadelphia Energy Solutions (PES).

When the story emerged about why PES failed, its owners claimed that it was the rising cost of RINs that led to the company’s insolvency. The failure of one of the largest refineries on the east coast led Senator Pat Toomey (R-PA) to join with long-time RFS critic Senator Cruz to petition President Donald Trump to intervene and order a major overhaul of the RFS program.

Cruz and Toomey claim that the RFS is broken and that it isn’t meeting its goal of protecting American energy consumers. The Senator from Texas told an audience at the now-bankrupt Philadelphia refinery that, had he become president, he would have ended the RFS.

Toomey and Cruz are now calling on the U.S. EPA to establish a $0.10 per D-code 6 RIN price cap. This, they claim, would protect merchant refiners, such as Philadelphia Energy Solutions, from the impacts of RIN price escalation, which they said led to PES’ insolvency and which threatens the financial health of merchant refiners and small fuel retailers throughout the country.  It is worthwhile noting that, at the time Senator Cruz visited PES, D-Code 6 RINs were selling for $0.70.  They closed today at $0.44 per RIN.

The “solution” presented by Cruz and Toomey was met with a solid wall of opposition from farming interests, biofuels producers and elected officials from agricultural states, such as Senators Chuck Grassley and Joni Ernst, both Republicans from Iowa. They rejected the call for a price cap and asserted that mismanagement was the primary reason PES was in financial trouble. Grassley, Ernst and other renewable fuels proponents offered a different solution for the cost of RINs – eliminate the seasonal restriction on the use of ethanol (because it is more volatile than gasoline, ethanol was prohibited in many parts of the country during the summer months). This, they asserted, would relieve pressure on prices as the so-called “blend wall” would be eliminated, creating access to a whole new supply of RINs.

The Ongoing RIN Policy Debate

In the meantime, the Trump Administration has been inconsistent regarding the future of the RFS and RIN policy. Although the President and his Secretary of Agriculture, Sonny Perdue, have vocalized support for the RFS, EPA Administrator Scott Pruitt has expressed reservations about the effectiveness and utility of the program.

A proposed reform package was developed and presented to President Trump by Pruitt and Perdue, which included a RIN price cap, a year-round waiver, and the ability to generate credits from exported ethanol. The administration is believed to have presented these ideas in two White House meetings in late February that were attended by the senators mentioned above as well as various interests on both sides of the debate. By all accounts, no agreement was reached.

Meanwhile, the market’s reaction to the increasingly contentious debate between oil and agricultural interests, as well as inconsistency regarding the real position of the Trump Administration, was predictable – RIN prices weakened. Faced with the uncertainly over the future of the RFS, and with the possibility that RIN prices would be capped at a small fraction of their market value, RIN values plummeted to their lowest levels in a year.

Unless the market’s anxiety over the future of the RFS is resolved soon, we are likely to continue to see RIN prices undermined.

By last week, credits for ethanol-based fuels (D-code 6 RINs), which were selling for over a dollar in mid-2017, fell to less than half that value. This downward trend in the ethanol-linked RINs influences the price of the more valuable D-Code 3 and D-Code 5 RINs, which have also fallen from their summer highs. D-Code 3 RINs, those of most interest to developers of wastewater, landfill and dairy RNG projects, have dropped 17% from $3/RIN as recently as late October to an average of about $2.50 today.

More RIN Policy Debates on the Horizon

As of this writing, the White House is still trying to broker a deal between corn and oil states. The third meeting covering RIN policy is scheduled to happen on Monday, March 12th, to be presided over by Vice President Mike Pence.

Sources indicate that the central demand of refining interests, that a cap be placed on RIN prices, has been repeatedly rejected by the biofuels industry and their allies in Congress. Thus, a resolution to the ambiguity that has roiled the markets over the last couple of months continues to be elusive. Unless the market’s anxiety over the future of the RFS is resolved soon, we are likely to continue to see RIN prices undermined.

In the absence of an agreement, however, it seems clear that oil industry supporters have achieved, at least temporarily,  their objectives of reducing RIN costs to refiners by stoking fear and unease about the future of the RFS.