Ethanol Rins Market Explodes

Lack of transparency makes market analysis difficult.
By Susanne Retka Schill | April 16, 2013

The sleepy world of ethanol renewable identification numbers (RINs) was turned on its head this spring. Prices that had been 2 or 3 cents per RIN rocketed to more than $1 for a few days in March before it slowly settled into the 60-to-70-cent range as the month progressed. Between Jan. 2 and March 22, the average daily price for D6 RINs was 37 cents, according to Informa Economics Inc.

Ethanol opponents ran with the story of high RIN prices to create yet another argument in a campaign to kill the renewable fuels standard (RFS). The ethanol industry rallied to defend the RFS and the RINs compliance system. As the discussion picks up steam, Ethanol Producer Magazine is stepping back to take a look at how RINs work and examine some of the many questions raised in the controversy over the dramatic price increase.

RINs Primer
The system is built upon U.S. EPA regulations to administer the RFS. There are four main players who all register with the EPA: the ethanol producer, the blender, the broker and the obligated party. Speculators may also register to trade in RINs. The EPA provides an online reporting program––the Moderated Transaction System (EMTS)––that generates and tracks RINs as the transactions occur. But beyond the EMTS, a system has evolved in the five years since the Energy Independence and Security Act was passed in 2007 and EPA published its rules in 2010.  

The ethanol producer's role in RIN generation is basic: produce the physical gallons and fill in the required information to generate the RINs in the automated EMTS system. That information becomes part of the shipping documentation as the product moves into the marketplace. In practice, many ethanol producers don’t actually handle RINs at all, but hand off the task to their ethanol marketers and the independent firms providing RINs tracking services. 

RINs follow the physical gallons through the distribution system until the ethanol is blended into gasoline, at which  point the RINs are separated and used by the blender, if it is an obligated party, to meet its renewable volume obligation (RVO). If that blender has excess RINs, they can be banked and, up to 20 percent carried into the next year. Or, excess RINs can be sold. Blenders are not necessarily obligated parties, however, and many separate RINs and offer to sell them privately or in one of the trading platforms offered by brokerage firms.  

Obligated parties in this system are domestic refiners, importers and downstream parties who make finished gasoline or blendstocks. Still proposed as of late March, the EPA’s 2013 RVO for D6 RINs for conventional renewable fuels was 9.63 percent of the gasoline handled by obligated parties. Corn ethanol makes up the vast majority of this classification. Other fuels can generate D6 RINs, but are generally used to meet the mandates for renewable diesel or advanced biofuels. 

Obligated parties that need to demonstrate compliance with their RVO can buy and blend physical gallons of ethanol or buy separated RINs. The RINs market is unregulated and private, although all parties involved in buying and transferring RINs are registered with the EPA. A number of brokers provide trading services and their associated market-analysis services report bids and offers on a daily basis.  

Underlying the basic description, though, is a trading system lacking the transparency and rules that are in place for other commodities. In corn trading, for example, the Chicago Board of Trade handles the corn futures trading that is the benchmark for cash bids posted by thousands of corn buyers on boards and websites on a daily basis. There are CBOT limits to daily price moves and the volume traded each day is reported as are the ongoing and closing prices. Commercial traders using the market for hedging and speculators providing needed liquidity all have rules to follow. A large number of analysts follow trends in the volumes of data that is publicly available and the active participation, or lack of, from commercial and noncommercial traders is the fodder of daily market reports. The RINs market has mimiced that structure, but without many of the rules and little transparency. That will soon change, however, as the CME Group announced in early April that it will offer three RINs contracts on the NYMEX starting in late May.

Market Dynamics
Blue Ocean Brokerage LLC is one of many offering RINs trading services, built upon its platform of physical ethanol and swaps trading services. “What’s been created is a marketplace, a fragmented market,” says David Steiner, senior broker and analyst. “Our role is price discovery.” When asked how many brokers operate in the space, he explains it is hard to tell. “There are a decent amount of brokers out there, but the ones doing a fair amount of business are just a handful, but it is hard to gauge.” In addition, information on the number of obligated parties is available through the EMTS, but is difficult to sort out.  

On the market analysis side, Brian Milne is editor and manager of a team of specialists producing oil market news and analysis for Schneider Electric, owner of the DTN line of services. “It’s not like trades on an exchange where you can look at the end of the day and see the volume,” he says. “We do know there is volume. We see a million RINs on offer. Whether that’s being bought, we can’t tell.” An expected shortage of RINs is driving the market, he explains. “We understand that a lot of obligated parties have already carried over 20 percent of their RINs from last year to help meet this year’s obligations, but the renewable fuels obligation goes up again next year,” Milne says. “And we’re not expecting to see a ramp up in gasoline demand. The concern is not only about meeting this year’s obligation, but 2014.”  

Valero Energy Corp.’s position in the system as both an ethanol producer and an obligated party as a refiner provides another example of the system’s complexity. In the world of ethanol, Valero’s total ethanol capacity of 1.2 MMgy puts it in third place among U.S. ethanol producers. But Bill Day, executive director of media relations, points out its ethanol production is a fraction of the volume handled in its refineries. The total ethanol capacity matches just one medium-size refinery, and the company has 16 refineries, making it the largest independent refiner. “The ethanol Valero makes in its plants doesn’t necessarily get blended into the gasoline Valero makes at its refineries,” he explains. Like other ethanol producers, the RINs generated in Valero plants accompany the shipments into the market. Valero does little actual blending and thus buys the needed RINs to meets its RVO on refinery production of gasoline.

When asked whether many RINs were trading at these high prices, Day replies, “It’s not a terribly tiny volume of trade, because we buy a lot of RINs.”  While Day declined to comment on the numbers, an investor presentation on Valero’s website shows a throughput capacity of 3 million barrels per day at its 16 refineries. With an RVO of 9.63 percent, that would require several hundred thousand RINs daily.  

It is difficult to analyze the RINs market, Day concurs. “It’s hard to tell because the RINs market is so opaque, there’s no transparency to it. It’s not a regulated market like gasoline or crude oil or other commodities that trade on the New York exchange or CBOT. It’s mostly private transactions.” While it’s difficult to know the volumes of trade, he adds, “It seems obvious that some are banking RINs because of the idea that the country is getting close to or at the blend wall.”  

Ethanol Response
As RINs prices rose rapidly, the American Petroleum Institute, the American Fuel & Petrochemical Manufacturers association and individual oil industry executives warned that gasoline prices would need to rise to cover the increased cost of RINS. Estimates of 10 cents per gallon were reported in the media, indicating some expected the entire cost to be passed through to the consumer. RINs became one more part of their argument to modify or end the RFS.     

The ethanol industry organizations, the Renewable Fuels Association, Growth Energy, the American Coalition for Ethanol and the recently formed coalition, Fuels America, as well as individual producers, kicked into high gear to explain the complex issues and provide documentation to support the ethanol industry’s point of view. In multiple news conferences, statements, blogs and reports, the industry laid out its basic position:

• The oil industry, in dragging its feet on implementing higher blends such as E15 or E85, has brought the blend wall situation on itself. 

• It is entirely possible to blend more ethanol. There is no shortage of ethanol nor of ethanol capacity to produce more ethanol, and thus, more RINs. And, with ethanol trading 50 to 60 cents per gallon less than gasoline, more should be blended to save consumers money.

• There are 2.5 billion unassigned RINs going into 2013, more than enough to cover any deficits for the compliance reports due in February 2014.  

• The oil industry originally helped design and openly supported the open market RINs mechanism for the flexibility that RINs credits would provide in showing compliance. 

• High gasoline prices are being driven by the record profits of the oil companies, with profits of more than $1 per gallon. 

Independent Analyses
In late March, two separate analyses came out that conclude increases in RINs prices are having little impact on gas prices. University of Illinois economists Scott Irwin and Darrel Good conclude the impact on RINs on gasoline prices was but a few cents in the first quarter. “RINs prices started moving higher in January and peaked near 90 cents in early March and then declined modestly,” they write in a FarmDocDaily analysis. “The timing of the increase in CBOB (conventional blendstock for oxygenate blending) gasoline prices predates the increase in RINs prices by several weeks, which casts doubt on RINs prices as a significant driver of gasoline blendstock prices. In addition, CBOB prices were lower in late March than in October, further suggesting that factors other than RINs prices dominated CBOB prices.” 

“It is difficult to make a precise estimate of the impact of high RINs prices on gasoline prices, in large part because of the diversity of obligated parties within the motor fuel supply chain,” they continue. “Some of the obligated parties are fully integrated through the motor fuel supply chain (refining/blending/retailing). At the other extreme, some obligated parties participate only at one end of the supply chain. These would include firms who only import or refine and those who only blend.” 

The two economists conclude the current controversy reveals a major weakness in the system. “Importantly, the E10 blend wall and current high prices of D6 RINs may be revealing a significant flaw in the way EPA designates obligated parties for RFS2. In 2010, EPA considered, but rejected, the alternative of moving all RVOs downstream of refineries and importers to those who supply finished gasoline at the retail level. This change would have resulted in a more homogeneous group of obligated parties and better aligned an obligated party's RVO with access to RINs. Such a realignment may have precluded some of the current diverse impacts of high RINs prices on obligated parties and minimized the cost of RFS2 compliance.”

Informa Economics was commissioned by the RFA to do a third-party assessment of the impact of RINs prices on gasoline prices, which it concludes was 2 cents at most and more likely a fraction of a cent. Gas prices went up following distinct seasonal patterns, not RINs prices. “The increase in gasoline prices and crack spreads during the first quarter of 2013 has been generally consistent with increases experienced in 2011 and 2012, despite the fact that conventional ethanol RIN prices averaged 3 cents during the first quarter of 2011 and 2 cents during the first quarter of 2012,” the report says. Another factor is that in the first quarter of 2013, ethanol prices averaged 44 cents per gallon below wholesale gasoline, which translated into a net benefit to consumers of 2 to 4 cents, considering both the ethanol price advantage and the direct cost of RINs prices. 

Informa Economics also took a look at factors affecting ethanol prices. As the weekly average price of D6 RINs in late March increased by 76 cents from the first of the year, the Chicago spot price of ethanol increased by a comparatively modest 19 cents per gallon. Corn prices, on the other hand, increased by 30 cents per bushel. Thus, the report says, “11 cents per gallon of the ethanol price move can be ‘explained’ by the increase in production costs.” 

More analyses will no doubt be coming in the weeks and months ahead as the industry works to fully understand the complex RINs trading system and shed light on its opaque workings. More seriously, the RINs controversy is becoming one more test of the nation's commitment to renewable fuels. Ethanol industry veterans have described the current challenges to the RFS as the toughest yet. There is no doubt that the ethanol industry is rising to meet the challenge.  

Quality assurance for RINs

Amidst the controversy over RINs prices, ethanol producers are also contemplating proposed rules from the U.S. EPA to create a voluntary quality assurance program (QAP). Created as a response to RINs fraud in biodiesel, the new system would provide options to reduce the liability for obligated parties who are ultimately held responsible for demonstrating compliance with valid RINs, and replacing any RINs found to be invalid. In the biodiesel case, the U.S. EPA estimated three companies generated over 140 million biomass-based diesel RINs that did not represent qualifying biofuel. 

The ethanol industry could rightly argue that this shouldn’t apply to it since there have been no fraud allegations, says Shashi Menon, managing partner in Iowa-based EcoEngineers, a RINs management service. “Also, ethanol plants are bigger and much more sophisticated.” But the run-up in RINs prices increases the risk for the obligated parties, he adds.  “Maybe there won’t be a demand for QAP for ethanol—unless your buyer tells you that you need it.”

The proposed voluntary QAP system has two tracks. Option A is more stringent, but relieves the obligated buyers of liability to replace invalid RINs. Menon describes the QAP system his company provides to several biodiesel producers and a few ethanol clients. “We take production data each night, in an automatic data dump. We generate the RINs for them—it automatically interacts with the EMTS.” The system includes ongoing monitoring of plant production data to verify the physical gallons produced match the RINs generated. While it may seem like overkill, he admits, the EPA’s proposed rules for QAP would require this sort of ongoing monitoring for Option A. 

Option B is less stringent and requires four site audits, explains Menon. “It requires a professional engineer to sign off on the mass balances for the quarter.” This would be in addition to the annual attestations now required where a certified public accountant audits a plant’s records to confirm product transfer documents and RINs generation are properly done.

Menon often hears from ethanol producers that their RINs are handled by their marketers, but he cautions that it is the producer who is held liable by the EPA. “I’ve talked to many ethanol plants that don’t have a staff person assigned to do any interface with the EPA because their marketer does it all for them.” They are vulnerable, he suggests, because should their marketing arrangements change, they may not have ready access to their RIN accounts and risk falling into noncompliance. “They’re still 100 percent responsible,” he cautions. 

Looking ahead, Menon expects that as corn ethanol producers begin to add cellulosic or advanced biofuel capabilities, RINs verification will become necessary. He also expects that California officials will soon follow EPA in asking for audits for the California low carbon fuel standard. “For those who say, ‘We don’t touch a RIN, we just give it away,’ that may be true for a while for many,” Menon says.  “But if you want to be competitive in the marketplace, you have to understand RINs and you have to be able to take care of them.” 


 Author: Susanne Retka Schill
Senior Editor, BBI International publications