Authors: John Auers and Elizabeth Hilbourn
As in the 1994 song, “When the Wheels Don’t Move” written by Jay Farrar, “Going green a casino catch phrase, Ethanol’s made of smoke and mirrors,” increasing volumes of ethanol need to fit in a system which is not yet ready. A July 2015 study conducted by NERA economic consulting for the American Petroleum Institute concluded the statutory biofuel mandates in the Renewable Fuel Standard are infeasible to achieve in 2015 and beyond and may harm U.S. consumers. In 2012, NERA issued its first study of RFS2 and found that if the renewable volume obligation remained at the levels called for in the Energy Independence and Security Act (EISA) of 2007 that RFS2 would likely become infeasible in three to four years (2015 or 2016). It feels a bit like déjà vu. The question remains; how did we get to this point, and “who’ll explain it all” if (or when) the wheels stop going round?
In their latest report, NERA compared EPA’s RFS proposal to renewable energy consumption volumes in EIA’s latest energy outlook (see Table 1). Assumptions were made in order to directly compare the EIA numbers to the EPA numbers. For example, the cellulosic EIA number is based on cellulosic ethanol consumption; however, to-date only 2% of cellulosic Renewable Identification Numbers (RINs) have been generated from cellulosic ethanol, with the remaining 98% being landfill biogas used in transportation fuel. The bottom line is pretty clear. The EIA does not expect any significant growth in renewable fuels in the short term; however, the EPA does. It is a bit ironic that the EPA looks to EIA’s forecast of next year’s gasoline and diesel to set final RFS numbers; however, they do not come full circle by matching renewable fuel volume estimates to mandates.
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When the Wheels Don’t Move
Besides looking at future EIA and EPA renewable fuel balances, one can take a close look at the last few years of history (see Table 2). Starting with the RINs generated, we subtract the RINs retired other than for annual compliance (i.e., invalid RINS, spills, used in an application that is not transportation fuel, heating oil, or jet fuel, etc.). Also, EIA lists the volume of ethanol and biodiesel exported each year. Subtracting RINs for those exports, the net RINs can be compared to the Renewable Fuel Standard. Of course, this calculation assumes that renewable fuel exported and reported to EIA match that which is reported to the EPA. The EPA is now able to keep closer tabs on renewable fuel exports since effective September 17, 2014; the regulation was changed to require a 30-day window for RIN retirement on renewable fuel exports. Prior to September 17, 2014, RINs were not required to be retired for renewable fuel exports until two months after the end of the year, which followed the same compliance timeframe as obligated parties.
Table 2 shows that each year the net RINs generated and available for retirement is less than the renewable fuel standard. Of course, one cannot obtain actual year-to-year balances since 2010 is not shown and there are some inherent estimates; however, the table is meant to show rough balances. A difficulty in looking at year-to-year balances is that 20% of prior year RINs can be carried into subsequent years for compliance. 2012 was the last year which RINs were required to be retired and compliance reports submitted for obligated parties (by February 28, 2013). Table 2 shows that there were some significant gaps in 2012 and 2013 and Table 1 shows that there will be another significant gap in 2017. Since 2013 compliance has not yet occurred, 2013 RINs (and 2012 RINs if there any left) can still be traded. Will 2013 come close to the musical chairs game where the music is stopped and we see who is left without a RIN? The market is implying this as 2013 RINs are often reported at selling at a premium to 2014 and 2015 RINs.
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“Bigger chariots didn’t save Rome”
Compliance for 2013, 2014 and 2015 is not until 2016 (January 31, June 1, and December 1 respectively). It will be interesting to see how volatile the RIN market will be in 2016 when three years of compliance (2013-2015) are retired with four possible years of RIN data (2012-2015). Only 2013 renewable fuel volumes have been finalized, while 2014 and 2015 are preliminary. EPA intends to take final action on the proposal by November 30, 2015, which they hope will return the Agency to the program’s statutory timeline for issuing RFS annual rules.
The public hearing held on June 25, 2015 over the renewable fuel proposals was well attended. More than 280 people showed up to testify. Forty-three panels were formed with politicians, companies, organizations and individual citizens; however, the EPA has not indicated any decision based on the hearing.
“Easy money didn’t stay at home “
The renewable fuel standard has struggled since its inception. RFS1 was from 2007 through the first half of 2010 at which time RFS2 began. A key difference between RFS1 and RFS2 was that RFS1 only had one renewable fuel standard versus the four different types that exist today. RFS1 faced problems with managing the RINs, which were paper-generated by the producer using a 38-digit number.
Fraudulent biodiesel producers began to be caught, but not until almost three years into RFS2, and on RFS1 RINs. There were some variations, but for the most part the “producers” were generating RINs without ever having producing biodiesel. In fact, suspicion arose with the first fraudulent producer, not because of RINs or biodiesel, but because of the number of fancy cars he was parking in his neighborhood. So far, there are seven notices of violation (NOV) against biodiesel producers. The problem with the notices is that they are issued several years after the RINs were generated. The latest was New Energy Fuels Inc. who was issued a NOV in mid-2015 over 2010 RINs. On February 22, 2013, Rodney R. Hailey, the owner of Clean Green Fuels, LLC and the first fraudulent producer caught, was sentenced to more than 12 years in prison for selling about $9 million in fraudulent Renewable Fuels Credits.
“They said the iron horse would always roam”
EPA’s solution for the fraudulent activity was a RIN Quality Assurance Program (QAP). The RIN QAP program started retroactively on January 1, 2013 with A/B RINs, though the proposed regulation was not issued until mid-2013. On July 18, 2014, the EPA published in the regulations its 2013 & 2014 interim period QAP program (A&B-RINs) and its final QAP program (Q-RINs). Beginning January 1, 2015, after the interim period was over, the program consisted of a single QAP option, with its associated verified RINs referred to as Q-RINs. There currently are five registered auditors and numerous registered pathways. The voluntary quality assurance program’s purpose is to verify the validity of RINs under the RFS program. In May 2015, the EPA issued a comment request for a RFS2 Voluntary RIN Quality Assurance Plan. The Plan would be a continuation of the current QAP with an information collection request (ICR) submitted by regulated parties and producers involved in the QAP program.
Conclusion
The future of RINs and of the Renewable Fuel Standard program appears set to come to a head in 2016. As the 2013, 2014 and 2015 compliance years come due throughout the year, we will watch closely at how RIN markets react, as parties are required to finally balance the books and retire the RINs once and for all. What the EPA rules for 2015 requirements (tentatively) at the end of November will have yet another impact on the RIN market and total balance. Moving through 2016 and beyond, will there be enough RINs available to satisfy the required demand, or will there be more capitulation and delays as future decisions on the program are dragged out? Finally, what other surprises may lay in wait?
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