RIN registry, trades, prices continue to grow

By Ron Kotrba | January 12, 2009
Web exclusive posted Feb. 2, 2009, at 11:35 a.m. CST

Clayton McMartin, president of Clean Fuels Clearinghouse and the RINSTAR renewable fuel registry, was a guest on Bob Taylor's live webcast show Jan. 27. Prior to the interview, more than 200 questions were submitted for McMartin to answer.

A year ago, McMartin said RINSTAR's member companies totaled approximately 25, and since then, the registry has grown to include more than 140 members. In 12 months, RINSTAR has validated more than 500,000 trades, and renewable identification number (RIN) prices have gone from the 2 to 3 cent range to 15 cents on the market. "Most importantly, we've helped companies throughout the industry profit from this emerging market," McMartin said.

Taylor placed the submitted questions in one of four categories: general program, compliance and penalties, the new renewable fuels standard (RFS2) and renewable fuels standard 1.5 (RFS1.5), and the economy and marketplace. Taylor then chose questions to ask McMartin during the one-hour show based on frequency.

"The way the RIN program works is through the mandate, obligated parties, refiners or importers are obligated to use their pro rata share, their mandated volume of renewable fuel," McMartin explained. The fuel is identified at the point of production or import, and then as it's transferred from one party to the next, the regulations require that the fuel be tracked "A party that produced ethanol, biodiesel or imported fuel assigns a 38-digit code to that batch of fuel," he said. Then that RIN would be transferred with the fuel - not necessarily the same fuel - through the supply chain until it got to the end just at the point of consumption, and then that RIN becomes separated or "unassigned," or in other words, a credit. When that happens, the first digit in the 38-digit series changes from a one to a two. As a credit, the obligated party could apply that credit toward their obligation.

If the obligated parties don't blend their share of renewable fuels, they can go to another party that blended more than their fair share and acquire RIN credits. "That's how an obligated party demonstrates compliance," McMartin said.

What are the legal separation events? "In laymen's terms, just at the point before the renewable fuel is introduced to the consumer, and in legalese, that's whenever the obligated party - the refiners or importers -accept the RIN from their supplier," McMartin said. Other legal separation events occur when a company takes finished gasoline and splash-blends it with ethanol. With the proper documentation, a marketer or distributor can separate RINs when a biodiesel producer puts B100 into the marketplace directly for the consumer

"I think I know why you're called the RIN Master," Taylor quipped during the show.

"It's a complex issue that, at this point, there's a lot of incentive for people to learn more about," McMartin responded.

The EPA provided flexibility for commercial considerations. As the renewable fuel is blended, the blender has the ability to separate as many as 2.5 RINs for every gallon of physical product they blend, McMartin said.

How do companies track RINs both before and after they enter the market? McMartin advises managing the RINs as two separate asset classes. "Furthermore, we manage the fuel associated with those RINs as another asset class," McMartin said. "We do not keep in our system a straight ratio of one-to-one or one-and-a-half-to-one, and while that's more convenient from an accounting standpoint, it does limit you considerably in operational flexibility. That's really starting to come to the forefront now that this has moved from really a back-office issue to a commercial consideration."

Companies also need to validate RINs and check them against the regulatory requirements making sure they have 38 digits in them, for example. "Ideally you want to check them against your inventory to make sure you haven't already received it from the same party or another party," McMartin said. Clean Fuels Clearinghouse validates its RINs against the inventory of 140 different companies on its registry. "Take proactive action before you place it on your books as an asset at all," he said. "Manage the RIN as a separate asset class and don't just tack it onto the fuel as a separate rider."

What is the most common mistake made in the RIN program? "Mistakes are all over the map," McMartin said, adding that 27,000 RINs were rejected over the past 15 months. One of the most problematic mistakes is when assigned RINs attempt to come back into the system. If someone in good faith purchases an invalid RIN, what's the penalty? "It's a buyer-beware program, and if it's invalid, it can't be used," he said. The penalty, which is enforceable under the Clean Air Act, is $32,500 per day. "Obligated parties do have latitude though, he added. "They can carry a deficit forward for one year.".

If fuel is exported, any RINs associated with that fuel must be taken off the market. If obligated parties are exporting renewable fuels, they need to acquire RINs to offset their renewable volume obligation to offset their exports.

McMartin said the $64,000 question is, "When will the RFS2 rule come out?" Once it does, then there's a commentary period, followed by the final rule. He said he wouldn't expect a final RFS2 rule before Jan. 1.

With the RIN program being relatively new, McMartin admits there are a "good deal of inefficiencies in the system," which provide for "good opportunity in a capitalistic market." He said RINSTAR will have additional information available soon.

McMartin isn't concerned about the RFS mandate being reduced, which the EPA has the power to do after evaluating the market. "If it were reduced, it would be the final straw for many production facilities," he said. "RIN prices are headed up, and I can predict that idled plants will start back up. The only legal way to generate RINs is to produce fuel."

When RINs were introduced, McMartin said, RIN prices were only one-fourth of 1 cent. Now at more than 15 cents each, there's tremendous profit potential. "If we had a crystal ball then, we'd be doing this interview on a beach somewhere," he joked.

With ethanol and biodiesel plants producing at reduced capacity or not at all, McMartin said renewable fuel inventories are lower, and until the inventory is up, he doesn't expect RIN prices to go down.