RIN Wrangling - 1

OMAHA (DTN) -- Lack of a commercial-scale cellulosic ethanol industry has led to a Renewable Fuel Standard conundrum: Where do companies complying with the law find gallons or the renewable identification numbers, or RIN?

The U.S. Environmental Protection Agency issued waivers for cellulosic ethanol in the past decade because the industry has been slow to develop. Refiners and importers of gasoline and diesel have faced significant costs. Cellulosic credits are valued four times higher than corn-based ethanol credits.

"An industry organization leader who's now retired said a few years ago that it was easier to find a pink unicorn than the cellulosic fuel still required to be blended, even if at a lower volume," said DTN Energy Editor Brian Milne.

The 38-digit RIN attached to a gallon of biofuel is important to both energy and agricultural markets.

Gasoline refiners and importers must comply with the RFS by buying and submitting credits to the EPA, or face potentially heavy fines.

Several issues with credits threaten to derail the RFS. The credit is at the heart of RFS mandates and the demand the law creates for corn and soybeans.

Refiners and importers must secure enough credits by either blending fuel or buying credits. EPA created credits trading to offer flexibility to meet the RFS. EPA then expanded the required blending volume for biomass-based diesel fuel in response to scarcity of cellulosic ethanol credits.

Refiners and importers have raised concerns about spiking RIN prices, especially for biodiesel. Biodiesel credits, D4s, are valued at a premium to renewable D6 credits that are satisfied primarily by corn-based ethanol. Anticipation of higher gasoline prices has been a focus of complaints.

The credits market has come into question as rising RIN prices led to calls for investigations into market manipulation and increased transparency about credit buyers and sellers.

Even with plenty of ethanol in the market, Milne said, obligated parties that do not actively blend will be required to buy the credits.

The E10 blend wall limits how much ethanol will be blended into gasoline (10%). As a result, Milne said, the blend wall limits credits from transferring ownership. The blend wall is when total ethanol production exceeds the available E10 market.

"Plus, an obligated party can bank up to 20% of their obligation each year bringing demand forward, and as the RFS increases, there's concern the number of available RINs will not keep pace and prices will spike," Milne said.

D6 credits are the baseline, Milne said, with a D4 credit equal to 1.5 of D6 RINs. This means D4 credits should always be priced at a premium. Some refiners and importers have reported large profits from trading the credits. Others required to comply with the RFS have reported big losses from spiking RIN prices. This year, the Renewable Fuels Association asked the Commodity Futures Trading Commission, or CFTC, to investigate possible credit price manipulation.

The successes and failures of the RIN market will be on center stage in debates about the RFS.

RIN TRADING

A RIN is the currency of the RFS program.

Ethanol, biodiesel and other renewable fuel producers generate credits for every gallon of biofuel produced. If a biodiesel company produces 20 million gallons, each of those gallons has a credit assigned.

Market participants trade the credits. Obligated parties obtain and retire the numbers.

Credits can be traded in two forms, according to EPA. Assigned RIN are directly associated with a batch of fuel and travel from party to party. When credits are purchased, buyers obtain both credits and the fuel. A separated RIN is when a buyer purchases only the credit.

RIN market participants include both domestic and foreign companies, according to EPA. A company may fit into one or more categories that can change from year to year, based on refiners' and importers' trading or business activities.

The EPA maintains a credit database for all transactions; parties enter trade agreements outside of the system, keep records about buying and selling the credits, go through a quality assurance check, and then credits are transferred between accounts.

There are regulations about how and when the RIN are retired to meet compliance and about when they expire.

For more information on the RIN system, see http://bit.ly/….

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Editor's Note:

In the second story we'll examine how higher RIN prices affect gasoline and diesel refiners and importers.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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