CES Spotlight Blog
Biofuel Renewable Identification Numbers (RINs)
CES is helping many large clients in Northern New England look at alternatives to oil to save money and reduce emissions. For most clients, without a near term prospect for pipeline natural gas, the list of options includes: CNG, LNG, propane, wood chips and wood pellets. A few clients are also considering biofuels or renewable fuel oil. The term biofuel is a very broad catchall for liquid oil substitutes produced from a wide variety of feed stocks. The biofuel industry has suffered as a result of the resurgence of oil and natural gas production in the US. Several large oil majors have significantly curtailed investment in biofuels as they focus on increasing production of conventional oil and gas. A key to keeping the biofuels industry afloat is the value introduced by the sale of Renewable Identification Numbers, or RINs. RINs are similar to Renewable Energy Credits used in the electricity marketplace. RINs are a subsidy that may make biofuels economically viable for selected projects. If you have never heard of a RIN please read on – we promise to do our best to make these 38-character alphanumeric numbers slightly less sleep inducing.
The Renewable Fuel Standard (RFS), administered by the EPA, requires that certain minimum amounts of renewable transportation fuels must be produced or imported into the US each year. Specific quantities of each renewable fuel type (cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel) are allocated to obligated parties using Renewable Volume Obligation (RVO) percentages. RVO percentages are calculated by dividing the mandated quantity of each renewable fuel type by the total estimated supply of nonrenewable gasoline and diesel fuel in each year. The RVOs are applied to each obligated party's actual supply of gasoline and diesel fuel to determine its specific renewable fuel obligation for that year.
Renewable Identification Numbers (RINs) are used to facilitate the RFS program. Each RIN corresponds to a specific gallon of renewable fuel produced in or imported into the U.S. Once a renewable fuel is blended into gasoline / diesel or sold directly to consumers, the RIN becomes, metaphorically speaking, detached from the physical biofuel it represents. The RIN can then be used by the original producer or importer for RFS compliance or traded on the market, where it can eventually be used for compliance by another obligated party. RINs are valid in the year they are generated and in the following year. A maximum of 20% of an obligated party’s mandate may be satisfied with the previous year’s RINs.
If the market’s production of renewable fuels exceeds the RFS mandates, RIN prices should be zero or near zero. But if the market would otherwise produce below RFS-mandated levels, RIN prices must be positive. This is so suppliers have an incentive to produce renewable fuels at quantities where it would otherwise not be profitable. For example, corn ethanol RINs have historically averaged one to five cents per gallon when the biodiesel RFS mandate was easily exceeded.1 But corn ethanol RIN prices jumped to $1.00 per gallon in March 2013 on concerns that a higher 2014 biodiesel mandates and the E10 ethanol “blend wall” will make it difficult for market demand to meet the mandate without exceeding “safe” levels of ethanol in gasoline.1
A noteworthy feature of the RFS is that nonobligated parties, upon registration with the EPA, can produce renewable fuels that generate associated RINs. These renewable fuels can be sold to obligated parties for blending into transportation fuel, or they can be sold to nonobligated parties for other purposes, such as for use in a University Combined Heat & Power (CHP) plant. Because end users do not have to comply with the RFS, the RINs associated with the renewable fuel must be sold on the market. The value of the RIN may be used to lower the effective price of the fuel. Renewable Fuel Oil (RFO) vendors who have submitted proposals to CES clients have indicated that their products are supported by RINs (currently in the $1/gallon range) in the advanced biofuel category. With a value in excess of $7/MMBtu, the RIN goes a long way to helping RFO products compete with #2 and #6 oils.
A positive RIN price acts like a subsidy, shifting the supply curve to the right. This lowers the price suppliers are willing to accept for their unbundled fuel commodity. But the RFS program also increases demand for renewable fuels that are commonly used for blending by obligated parties. These obligated parties must incentivize suppliers by bidding up the price of RINs or by bidding up the price of renewable blending fuels like ethanol. The latter option represents a rightward shift in the demand curve; for any given quantity of renewable fuels the obligated parties are willing to pay more. As the demand curve shifts, the price of the renewable fuel can increase, even though the RIN is acting like a subsidy for suppliers. However, the demand curve will not shift for renewable fuels that aren’t used for blending, such as a cellulosic Renewable Fuel Oil that could be used in a University CHP plant. Thus the price offered to the hypothetical University end user should decrease because of the RIN subsidy.
As the EPA sets higher RFS mandates, expect RIN prices to remain high or possibly increase. In turn, non-blending renewable fuels should become even cheaper for nonobligated parties – supported by high RIN values and low product demand. This may present opportunities for certain CES clients who are looking to convert from oil to an alternative. The best fuel for a given end user is very dependent on specific geographic and usage characteristics, however, for certain end users, it may make sense to consider biofuels along with the more common oil alternatives.
Special thanks to Grant Smith who researched and co-wrote this blog post.
Tags: Renewable Identification Number, RIN, Biofuel, Renewable Fuel Standard, Environmental Protection Agency, Oil Alternatives