The system devised to force compliance with the US Renewable Fuel Standard appears to be backfiring, forcing refiners to spend more on buying increasingly expensive credits than actually blending renewables into the nation’s transportation fuel.
While renewable fuel advocates see RINs as a tracking tool needed to ensure RFS compliance by refiners and blenders, it does not provide the financial stability fledgling renewable fuel producers need.
“I think when you have RFS, you have to make sure people are complying,” said Wayne Lee, CEO of Lee Enterprises, the world’s largest biofuel consultant in an recent interview with Platts. “But I would certainly be open to a way other than RINs.”
RINs, or Renewable Identification Numbers, are credits generated when biofuels like ethanol and biodiesel are blended with gasoline and diesel, as mandated by the RFS.
Currently, if refiners or other “obligated parties” can’t meet their EPA-mandated RFS blending requirement, they have to buy RINs—a situation that has has contributed to the creation of a speculative trading market.
After a contentious beginning, refiners appear to have made peace with the fact that renewables are here to stay. But they say RINs are not increasing volumes of renewables in transportation fuels.
“We believe renewables have a place in the market now and a part in the future. We have to do something to transition over to more renewables,” Jack Lipinski, CEO of CVR Energy recently told Platts.
“This way is insanity,” he added, calling RINs expense an “egregious tax” which had become CVR’s single largest operating outlay—more than either labor, maintenance, or energy.
Refiners rail against ‘Rinsanity’
Today’s RFS requires more biofuels in fuels like gasoline than consumers want to buy. This forces refiners to ante up and buy RINs to meet the higher volume and percentage requirements mandated by law.
CVR Energy operates two medium-sized niche refineries in the agriculturally driven Group 3 market of the Midwest.
CVR Refining has spent nearly $500 million on RINs since 2013, and estimates 2016 RINs exposure between $200 million and $235 million. Last year, the company paid $123.9 million for RINs on revenues of $938.3 million, according to financial filings with the Securities and Exchange Commission.
Consumer preference forces refiners to buy RINs, Lipinski said, because the majority of US drivers won’t buy gasoline with more than 10% ethanol.
And this year, the EPA set 10.10% as the percent of renewable fuel in gasoline, breaching the 10% level acceptable based on regulatory and car performance levels.
In volume terms, the EPA mandates that 18.11 billion gallons of renewables be added to the transportation fuel pool this year. This rises to 18.80 billion gallons next year, breaching the blendwall and sending refiners out to buy RINs.
As a result, the RINs price is rising. Last year, ethanol RINs averaged 55.2 cents/RIN according to Platts assessment data. So far this year, the average price is 78.2 cents/RIN.
Compliance cost rises as margins fall
Refining margins are falling. The Midwest cracking margin for WTI has averaged $5.01/b so far this year, Platts margin data shows, compared with the $13.57/b for the same time period last year. Platts margin data is formulated by Turner, Mason and Company using Platts prices.
Higher-than-forecast gasoline consumption and speculative trade increased demand for RINs, leaving the market structurally short, Lipinski said.
“RINs should cost 25 cents. And 2 and half cents per gallon of that will show up in the rack price of gasoline,” he said. “Seventy-five cents/RIN is inflation and speculation cost,” he added.
Refiners have filed suit claiming the RFS favors some refiners over others, and they look to move the point of obligation to the blender in order to level the playing field.
Moving the point of obligation to the blender, refiners say, encourages more actual blending of renewables into the transportation pool, supporting higher prices for renewable fuels like ethanol.
Stable funding for biofuel ventures are also necessary to add to the amount of renewables into the transportation fuel.
The federal biodiesel tax credit allows blenders to claim a credit of $1/gal. Since 2009 the tax credit has expired four times, and then reissued retroactively.
“The tax credit is put in for one year at a time, making it very difficult to plan. Last time it was a two-year extension for the first time. It’s a break-even existence,” Lee said.