Ethanol and Biomass-Based Diesel RIN Prices Approaching All-Time Highs

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February 24, 2021

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by Sean Hill (U.S. Energy Information Administration) The prices of renewable identification number (RIN) credits—the compliance mechanisms used for the Renewable Fuel Standard (RFS) program administered by the U.S. Environmental Protection Agency (EPA)—have been steadily rising in recent months and are approaching their highest nominal levels in the history of the program.

Renewable fuel producers generate RINs that obligated parties, including refiners and importers of gasoline or diesel, obtain and then ultimately retire for compliance. Market participants can trade RINs, and this trading creates prices that the U.S. Energy Information Administration (EIA) tracks.

The RFS program is a federal program that requires the nation’s transportation fuel supply to include renewable fuels. Each year, the EPA issues RFS rulemakings with volume requirements for certain renewable fuel categories, and it sets those volumes through annual renewable volume obligations (RVO). RVOs are the volumetric biofuel targets for obligated parties such as refiners and importers of petroleum-based gasoline or diesel fuel.

The price of RIN credits reflects compliance and trading activity in the RFS and can be either used for compliance or traded in the secondary market, allowing market participants to capture the value of RIN credits, which can encourage increased biofuel consumption when RIN prices increase. The corn ethanol (D6) RIN price reached more than $1.00 per gallon (gal) in late January and early February 2021, the highest price since 2013, when the D6 RIN price reached an all-time high. Similarly, the biomass-based diesel (D4) RIN price, applied to volumes of both biodiesel and renewable diesel fuels, approached $1.20/gal during the same period.

Although the RFS renewable volume obligations for 2021 have yet to be released, RIN prices have been increasing because of limited fuel production as a result of lower fuel demand related to responses to COVID-19, fewer approved new small refinery exemptions (SRE) since 2018, and uncertainty around future RFS levels.

In the past, RIN credit prices increased, generally, because of two situations: when the cost of a biofuel was higher than the petroleum fuel it was blended into or when RFS targets increased more than market-driven biofuel consumption. In the second situation, the higher-value RINs encourage additional, more costly blending beyond normal market levels.

The recent price increase is likely attributable to the first situation. In spring 2020, as transportation demand was quickly falling, wholesale gasoline prices fell by more than wholesale ethanol prices, causing ethanol D6 RIN prices to increase enough to encourage increased ethanol blending. Similarly, diesel fuel prices fell significantly lower than biomass-based diesel (both biodiesel and renewable diesel), driving biomass-based diesel D4 RIN prices higher to encourage blending costlier biofuels. READ MORE

Rising RVO driven by vast market uncertainty (Argus Media)

BIDEN HITS THE ROAD: (Politico's Morning Energy)

U.S. renewable fuel credits hit multi-year high as oil group urges EPA to act (Reuters)

FEATURE: Record renewable RVO price moves US jet fuel market (S&P Global)

RIN costs offset refined products demand increase for smaller US refiners (S&P Global)

Excerpt from S&P Global: RVO uncertainty sparks RINs buying; Supreme Court to rule on refinery exemptions; New EPA mandates may lower RINs prices

New York — US refinery margins have been rising this year as the lifting of coronavirus restrictions has boosted demand for transportation fuels, although that demand increase has been offset for some smaller refiners by the rising costs of adhering to the Renewable Fuel Standard.

So far in the second quarter, RINs prices have averaged $1.33/RIN and $1.42/RIN for ethanol and biodiesel RINs, respectively, according to S&P Global Platts assessments, compared with the 62 cents/RIN and 88 cent/RIN in the fourth quarter of 2020.

Refining margins have also risen, with US Gulf Coast WTI MEH cracking margins averaging $13.61/b so far in the second quarter of 2021, compared with $10.54/b in the first quarter, according to S&P Global Platts Analytics data.

Uncertainty over how the Environmental Protection Agency under the Biden Administration will handle the RFS mandates have boosted prices for Renewable Identification Numbers, which are renewable fuel credits that refiners and other obligated parties must buy if they cannot meet their annual Renewable Volume Obligations under the RFS by blending enough biofuels into the gasoline, diesel and jet fuel they sell.

And by missing its November deadline to set 2021 mandates, the EPA has created uncertainty about the ability of parties to achieve their volume obligations, sparking a boost in RINs buying, even though it has extended the deadline to comply with the yet to be released mandate to Jan. 31, 2022.

Policy impact
"Policy is such a huge factor that must always be considered when looking at RINs," said Corey Lavinsky, biofuel analyst with S&P Global Platts Analytics. "It's when the perception that mandates will be hard to achieve is when RINs prices escalate."

RINS prices have also risen on higher prices for soybean oil, the primary feedstock for D4 RINs, and corn, the primary feedstock for D6 RINs, and on uncertainty ahead of a Supreme Court ruling on the EPA's handling of small refinery exemptions from the RVO.

Those exemptions were the lifeline for smaller refiners like CVR Energy with plants under 75,000 b/d, which lacked the ability to create RINs through biofuels blending.

CVR Energy, a small refiner with two plants in the Midwest, said in a recent Securities and Exchange Commission filing that including its open obligation of about 221 million RINs for 2020, 2021 RINs costs will range from $260 million to $280 million, net of the $95 million to $105 million from the company's renewable diesel project due online in mid-2021, which will create RINs.

In 2020, CVR's RINs costs were $190 million, up from $43 million in 2019.

Larger integrated refiners with renewable fuel production capability, blending, and retail outlets have been able to sell excess RINs they generate on the open market, thus benefiting from the higher RINs prices.

Supreme Court ruling
On April 27, 2021, the Supreme Court is set to hear on appeal the Jan. 24, 2020, ruling by the Tenth Circuit Court of Appeals which said the SRE exemption could only be applied to refineries which had received them continuously for each year going to 2011.

A brief filed with the Supreme Court by the Small Refineries Coalition notes that while RFS statute's minimum volume blend targets rise annually, reaching 36 billion gallons in 2022, gasoline consumption is trending lower, particularly last year due to coronavirus lockdowns, creating an untenable situation for their members.

"The RFS renewable fuel targets and therefore small refineries' compliance obligations become more difficult for small refineries to achieve with every passing year," according to brief amicus curiae filed by the coalition in the suit against the Renewable Fuel Association trade group.

A decision is expected by June or July, and if the Supreme Court upholds the ruling, it could be ruinous for about all but about seven of the 109 refineries granted SREs between 2013 and 2018, according to Platts Analytics forecasts.

"If this case is affirmed, this will likely lead to a bunch of refinery closures and bankruptcies," said Lavinsky.

Lavinsky expects the EPA will propose volume mandates for 2021 and 2022 around the time of the Supreme Case decision in July.

"We are forecasting that the actual mandate will be less in 2021 than it was in 2020," he said, a move which would also cause RINs prices to ease. READ MORE

Excerpt from Politico's Morning Energy: BIDEN HITS THE ROAD: President Joe Biden is heading to Delaware County, Pa., today to sell Democrats’ Covid relief package and commemorate the economic toll of the pandemic. But local refiners are using the occasion to make a plea for relief from the Renewable Fuel Standard, which they say has exacerbated the financial woes brought on by the pandemic-induced decline in fuel demand. “Today’s high RINs costs make it even harder for refineries to overcome this challenging environment. Since January 2020, those compliance costs have increased over 600%, creating an untenable financial strain during a time of sustained economic upheaval across the country,” the Fueling American Jobs Coalition wrote Monday to Biden. READ MORE

Excerpt from S&P Global: In 2020, RVO prices averaged 5.87 cents/gal, from 1.76 cents/gal in January to crossing the 10-cent barrier on the final day at 10.13 cents/gal. Jet fuel ranged from a 1.75-cent premium to a 37-cent discount in the pandemic days when few flights happened but trucking demand picked up.

"Diesel values are somewhat steady," the second trader. "On the other side, if don't want jet at all, it can disconnect and go well below." The full-year 2020 correlation was -0.05.

But in the first quarter of 2021, the RVO rose above 10 cents all but three days, reaching a record 17.21 cents on March 15, or $180,600 for a typical 25,000-barrel deal. Jet fuel discounts to ULSD ranged from 8.25 cents Jan. 12 to 18.45 cents on March 15. The Q1 correlation of +0.92 indicates every move in RVO was mirrored by the jet/ULSD spread. The first quarter had a +0.02 correlation in 2019 and a +0.38 in 2020.

Swaps play a part

The trend has occurred at other times of RINs volatility. The resulting RVO in 2017 gyrated from 6 cents between 10 cents in the first eight months before Hurricane Harvey. Fluctuations in the jet/ULSD spread mirrored the performance, with a +0.72 correlation. But the biggest change occurred in 2013, when the RVO started from 0.50 cent/gal -- a relatively high value since the program was created eight years earlier. The RVO rose to 14 cents/gal that July as gasoline consumption could not keep up with federal mandates for renewable fuels that increase every year, forcing producers to buy RINs to offset their obligations. The jet/ULSD correlation to RVO rose to +0.93 for July through August of 2013.

Besides output, refiners can manage costs by hedging. Brokers have said there are RINs swaps, but they're illiquid and expensive. They did not even exist during the first surge, so traders said they tried to hedge by buying ULSD and sell jet fuel swaps, or vice versa.

At the least, a third active jet trader said, companies seem to be hedging jet more. Volumes for CME Gulf Coast jet swap contracts jumped from 13 million in December to 28 million in January.

"It's definitely impacting paper decisions, the RVO is," a third active US jet trader said. "I'm guessing the jet players are long RINs, so as they move they have an offsetting position on jet paper. But cash and fundamentals on the front end will tell the real story." READ MORE