RINderella – A Fuel Story
“How do RINs work and who profits?” Those were the questions Sandra Dunphy attempted to answer at the Southern New England Energy Conference, September 25. It’s a tall order for anyone, because the Renewable Identification Number (RIN) market is notoriously murky, and the policy underlying it, the Renewable Fuel Standard (RFS), famously intricate. Nevertheless, if there’s anyone who can make sense of all this, it’s Dunphy, who has spent the last eight years as Director of Energy Compliance Services at the national CPA firm Weaver and whose widely recognized expertise in RIN trading has earned her the nickname “RINderella.”
Here, we will share some key takeaways from the presentation in hopes of providing at least a basic understanding of the RIN market. Please note this article is by no means comprehensive. To learn more, visit epa.gov/renewable-fuel-standard-program and speak with a professional RIN consultant.
Renewable Fuels By D-Code
According to the RFS, a renewable fuel is one that is produced from renewable biomass; used to replace or reduce a quantity of fossil fuel in a transportation fuel, heating oil, or jet fuel; and has lifecycle greenhouse gas (GHG) emissions that are at least 20% less than baseline lifecycle GHG emissions, unless the fuel is exempt from this requirement.
Although there exists a common misconception that oil companies generate RINs, in fact, it’s the renewable producers that generate RINs. RIN generation occurs before blending, at the production stage. RINs are then passed down through the supply chain until they are retired by oil refiners when they use them for compliance. A different quantity of RINs is assigned to the renewable fuel depending on the fuel category and its corresponding “D-Code.” These D-Codes, which carry different values in the market, are as follows:
- D4 = Biomass-based diesel (biodiesel or renewable diesel)
- D3 = Cellulosic biofuel
- D6 = Corn starch ethanol and other “grandfathered” fuels
- D7 = Cellulosic diesel
- D5 = All other advanced biofuels.
Heating oil and diesel sellers should note: almost all biodiesel production generates 1.5 D4 RINs per gallon; renewable diesel, which must be used as a replacement for diesel or heating oil, generates 1.1–1.7 D4 or D5 RINs per gallon; and cellulosic diesel generates 1.0–1.7 D7 RINs per gallon. For reference, corn ethanol provides the basis of comparison as it generates 1.0 D6 RINs per gallon.
When looking at RIN value before a biofuel purchase or sale, it is important not to mistake RIN pricing for the biodiesel tax credit (BTC). Whereas the BTC is allotted on a $1-per-gallon basis, RINs are priced like any commodity and traded on a per-RIN basis, not a per-gallon basis. So, for example, to determine the RIN value of a gallon of B100 biodiesel, one would multiply the current D4 RIN price by 1.5.
That being said, the state of the BTC is a major factor in determining the current D4 RIN price. Due to uncertainty surrounding the future of the BTC, D4 RIN pricing is extremely volatile. The market currently assumes that the BTC will once again be retroactively renewed, which has helped keep RIN prices down throughout 2018.
Should You Blend?
Dunphy points out that biodiesel or renewable diesel can be blended into diesel or ultra-low sulfur diesel (ULSD) at almost any level as long as it’s used as transportation fuel, heating oil or jet fuel. The environmental benefits of blending with a renewable fuel have been explored elsewhere in this and previous issues of Oil & Energy. Thus, here we will focus instead on the potential economic benefits, looking specifically at four different ways a ULSD heating oil seller can participate in the market, followed by a few price-risk considerations to keep in mind.
1) Buy RIN-less biodiesel to blend with heating oil: It is possible for a buyer to negotiate a RIN-less price in order to buy biodiesel at a discounted rate. When this happens, the seller keeps the RIN and can potentially monetize it for its full value. Although the buyer does not get to sell or otherwise cash in on RINs, the buyer still participates in the market by receiving biodiesel at a discounted rate. However, not all sellers have the ability to sell RIN-less biodiesel.
2) Buy neat (B99-B100) biofuels with RINs to blend with heating oil: Should a ULSD heating oil marketer wish to buy and sell RINs, the marketer must be prepared to comply with all Renewable Fuel Standard regulations. Once the purchased biofuel has been blended into ULSD heating oil, the corresponding RINs can be sold into the marketplace. “Be careful, though,” Dunphy cautions. “When choosing a biofuel seller, look for a producer that is in compliance with the BQ-9000® accreditation program and participating in an RFS Quality Assurance Plan, or QAP, verification program. Make sure they are creditworthy, as well.”
3) The “small blender” option: There are about 32 companies in the U.S. registered with the EPA as small blenders. Any company that purchases no more than 250,000 gallons of biofuel per year can register as a small blender for no fee. Because small blenders cannot own RINs, all of the RIN-related responsibilities are delegated to the biofuel supplier. The small blender and the supplier must both maintain quarterly affidavits related to biofuel sales, but the supplier assumes the bulk of the regulatory compliance obligations.
4) Buy a biofuel-heating-oil blend: Of course, many biofuel sellers, particularly in the Northeast, also offer sales of blended products. The buyer typically does not receive RINs with these purchases. However, they also incur little to no administrative burden. They simply buy the blended product, then re-blend and/or resell it as desired. In this sense, the buyer is not participating in the RIN market. However, the buyer can still market the environmental and economic benefits of the blended product and pass its value on to the consumer.
Price-risk considerations: The first risk to consider is the obvious fact that RIN prices change constantly. With this in mind, buyers should also consider how long it would take to acquire enough RINs to viably sell them into the market; the lower RIN prices are, the larger the volume of a transaction will have to be. Finally, buyers should keep in mind that although RINs are tradable during the calendar year in which they are generated, as well as the next calendar year, they lose value if they are not monetized in the first year. This occurs because the refiners that are required to blend biofuels or purchase RINs to comply with the RFS can only satisfy their obligations with up to 20 percent prior-year RINs; the rest must be generated during the current calendar year.
The Bottom Line
“It’s critical for buyers to do their RIN homework,” Dunphy emphasized. “Explore all your options for what to buy and who to buy it from. And remember, too, that in addition to any financial benefit you may reap from trading RINs, blending renewable biofuels into your products is good for achieving sustainability goals, which more and more customers are looking for.”