Renewable Identification Numbers, sulphur credit pricing and economics

Renewable Identification Numbers (RINs) are credits used to certify compliance with the Renewable Fuel Standard (RFS) which requires certain minimum volumes of renewable fuels to be blended into fuels sold in the United States.

George Hoekstra
Hoekstra Trading

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Article Summary

Sulphur credits are used to certify compliance with the Tier 3 gasoline sulphur standard which requires a maximum 10 ppm sulphur in gasoline sold in the United States. RINs and sulphur credits are traded at prices determined by market participants. The price of the credits reflects the economic forces affecting that market.

In 2013, the D6 RIN price skyrocketed sixty-fold in a matter of weeks, triggering a crisis that rocked the US refining industry and is still affecting the industry today. This article focuses on the events that led to that RIN price explosion, describes the economic factors behind it, and draws a parallel to the similar situation refiners face today with gasoline sulphur credits.

RIN credit basics
D6 is a code that refers to a category of renewable fuels called “conventional” biofuel which is made by blending corn-based ethanol into gasoline. Several other categories exist for different biofuels and production pathways.

In domestic manufacture, a D6 RIN is earned at the point of blending along the D6 pathway (see below).

D6 RINs are acquired and retired by “obligated parties” to comply with the RFS’s minimum blending mandates. By rule, refiners who produce petroleum gasoline are obligated parties.

By the nature of their business, and by RFS rules, biofuel blenders earn and tend to be long RINs, while refiners take on RIN liabilities and tend to be short RINs.

The RINs market
A secondary market exists in which RINs are traded among market participants. This market enables refiners to purchase RINs from blenders and retire them to meet their RFS obligations.

D6 RIN prices were mostly calm for their first 3½ years of trading history. Then, in February 2013, they hit the boiling point and shot up sixty-fold (not sixty percent!) in 2 months (see above).

The D6 RIN boil over
This boil over occurred because ethanol use, which had been increasing steadily through 2010, 2011, and 2012, reached the 10% maximum that is allowed to be blended into “E10” regular gasoline.

Before hitting the 10% limit, the D6 ethanol production path had been running on auto-pilot for years -- feeding corn, making ethanol, blending it with petroleum gasoline and selling it in E10 gasoline. The ethanol was also serving as a cheap octane booster. It was a profitable operation. The amount of ethanol in gasoline was increasing every year, and farmers, refiners, and blenders were content. 

But the RFS mandates for future years demanded ever-increasing biofuels volumes. By 2013, the use of ethanol in E10 had grown to its maximum 13 billion gallons per year (this maximum is known as the blend wall), and the biofuels mandates effectively dictated a minimum 13.8 billion gallons per year. We had a 13.0 maximum and a 13.8 minimum. Something would have to change.

Possible solutions
One way to get to 13.8 was to increase production of E85 gasoline which is a conventional D6 biofuel blended with a higher ethanol percentage. Ethanol in E85 is not limited by the blend wall. Blending more of it would generate more D6 RINs, expanding conventional biofuels production and solving the blend wall problem. But this was not a feasible solution because of inadequate E85 infrastructure and end-user demand.

Another solution was to lobby, and/or sue to get the 13.8 billion D6 mandate reduced. That solution was pursued vigorously but failed.

A third solution takes advantage of RFS rules about a different category of biofuels called advanced biofuels. By rule, if advanced biofuels are produced in quantities that exceed the advanced biofuels mandate, then those extra advanced gallons also count toward meeting the D6 mandate.

The biodiesel solution
Looking one level deeper into RFS rules, advanced biofuels has its own sub-categories, one of which is biomass based diesel, which is coded D4 and generates D4 RINs. Biomass based diesel was also a well-developed business in 2012. Lots of surplus capacity was available to increase biodiesel production along the D4 pathway and blend those gallons into diesel fuel to generate extra D4 RINs. Then, by rule, those extra D4 RINs would fill the 0.8 billion gallon gap.

There was no D4 blend wall, and no problem with infrastructure or market acceptance of extra biodiesel volume. Furthermore, by rule, one gallon of biodiesel produces the equivalent of 1.5 D6 RINs, amplifying its effect in filling the gap.

In 2012, it was clear that, without a regulatory/legal solution, this would happen -- extra biodiesel, beyond the mandated volume, would be produced to fill the ethanol blend wall gap, and the resulting D4 RINs would substitute for D6s.  And that is what happened. The price of biodiesel was bid up to generate extra biodiesel supply, and the price of D6 RINs was bid up to reflect the blender’s higher cost for biodiesel versus ethanol.

Biodiesel economics
Biodiesel is made from soybeans using a different, more costly process than making ethanol from corn (see above). This solution to the blend wall problem meant the pathway governing generation of D6 RINs would now shift to the D4 biodiesel pathway, and the D6 economics would shift to D4 economics. This would cause a big increase in the price of D6 RINs.

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