The RINferno, as It Burns up America’s Venture into Advanced Biofuels
by Jim Lane (Biofuels Digest) … There’s a separate category of RINs for advanced biofuels. These are fuels that have at least a 50% reduction in fossil fuels compared to 2005 baseline gasoline. Overall, to qualify under the RFS, you need a minimum of a 20% reduction — but in theory, there’s an indirect incentive available to producers to maximize low-carbon advantage.
A few years back, Aemetis announced that it had figured out how to run its corn ethanol plant in Keyes, California using sorghum as a feedstock and renewable biogas for heat and power. By doing so, it could increase the carbon savings to more than 50%. At the time, advanced biofuels RINs were worth almost 50 cents more than corn ethanol (D6) RINs.
So, there was an economic return available for investing in advanced biofuels capacity and driving the reduction of carbon.
Then, corn ethanol RIN prices started to rise in 2013, in what was known as RINsanity at the time.
One, as RIN prices rose, the differential between corn ethanol RINs and advanced biofuels RINs all but disappeared. Killing the incentive to bring 50 percent carbon-reduction fuels into the marketplace.
Two, as EPA sealed off the market for ethanol, cellulosic ethanol had no place to be distributed unless it displaced corn ethanol. So, renewable fuels were pitted against each other, instead of being jointly employed against petroleum-based high-carbon fuels. And, because the cost and risks of cellulosic are much higher in these early days, investor interest in deploying cellulosic fuels in the United States vanished overnight.
Attention in the US shifted to a) natural gas as a fuel feedstock and b) making renewable chemicals from biomass. Companies like Coskata, and Primus Green Energy shifted to natgas, and companies like Genomatica, NatureWorks, Verdezyne, Myriant and BioAmber drove the story of renewable chemicals to new heights.
OPEC joins the party
Then, oil prices crashed.
And, at the same time, a little-discussed feature of the RFS started receiving a new level of attention., The Cellulosic Waiver Credit. It was designed as a counter-cyclical element in the RFS, because back in 2007, lawmakers were balking at approving an expanded RFS out of fear that, as happened in the 1980s and 1990s, OPEC would crash oil prices and strand all the investment in renewables.
The credit is complex — what you need to know is that the value goes up when oil prices go down. And it’s implied 2017 price is around $1.70 per gallon now. Compared to $0.25 when oil prices were high.
Bottom line, no one can quite model why corn ethanol RIN prices are spiking. In the September futures market, ethanol is trading at a $0.02 premium to RBOB gasoline. Which, theoretically means that you could buy a wet gallon for $0.88 per gallon less than you can buy the RIN and a gallon of wholesale RBOB gasoline.
On explanation? There’s a shortage of wet gallons, or a shortage of ways to blend and distribute wet gallons. That would produce a RIN price lift as obligated parties scrambled to find a form of alternative compliance.
Another problem? Biodiesel RIN values are spiking, too. They have risen exactly the same percentage this year as corn ethanol RINs. And there’s no blend wall problem with biodiesel.
But D4 RINs can be used to satisfy obligations under the Renewable Fuel Standard that D6 corn ethanol RINs work for. In other words, you can buy a biomass-based diesel RIN as an alternative compliance mechanism for corn ethanol.
So, that could be the explanation.
But there’s another one. It also could be the case that some obligated parties are buying wet gallons and banking the RINs.
BIO, in running the math recently, found that there are 1.38 billion unused 2013 RINs. Almost 10% of all those generated.
If you have banked RINs and can use them not only for compliance this year, but compliance next year, then you have market power over the ethanol seller. You only need the gallons, if they come in at the right price. Conversely, the ethanol producer has limits on ethanol storage and on the credit they have with suppliers. They need to move ethanol more than you need to accept it. Classic response? Suffering ethanol prices compared to RIN prices.
The biggest problem facing cellulosic fuels today is the problem of distributing the fuels. And we’ve mentioned that to a great extent, so long as there is the perception of a blend wall and EPA aggressively limits ethanol distribution, corn ethanol and cellulosic ethanol are in competition. Not only with each other, but imported sugarcane ethanol from Brazil, which qualifies as an advanced biofuels because it delivered 50% carbon savings compared to 2005 baseline gasoline.
The more that ethanol prices sink or stay depressed, the worse for cellulosic ethanol because there’s a cheap way to get obligated fuels into the marketplace. Why buy a $4 fuel when you can buy one for $2.
So, the cellulosic credits are critical. That means there has to be a strong differential in the RIN price between cellulosic and corn ethanol.
To the extent that the world’s carbon problem cannot be solved without transportation, and cannot be solved in time without internal combustion engines, and cannot be solved in enough volume without cellulosic fuels, a lot is riding on EPA to get this right, and now. READ MORE / MORE and MORE (New York Times)