Educational Series: Who Would Want to Own a RIN?

RFS Educational Series Briefing No. 7: Who Would Want to Own a RIN?

Written by Clayton McMartin for Televent DTN

As we answer the question “Who would want to own a RIN?” it is important to recognize that there are two types of RINs. There is the assigned RIN, having a K code of 1 and being associated with renewable fuel, and there is the separated RIN having a K code of 2 and serving as a paper environmental credit. This important distinction was covered in Briefing No. 6 of this series.

In the case of an assigned RIN any party downstream of the producer would have a financial interest in owning the RIN, as it places more value upon the renewable fuel product which it is associated with. As the marketplace matures, more sophisticated operators are now starting to recognize this distinction and pricing their physical product accordingly. In many instances, petroleum marketers now recognize the RIN as a key economic consideration in their blending economics.

However, even after more than two years of RIN market activity, there remain several companies in the supply chain who have yet to participate in the RIN program. Some operators are avoiding participation due to the hassle and complexity of the rules and others due to the expense associated with compliance programs. Speaking generally, only those companies who would be the smallest of distributors, of say 10,000 gallons of renewable fuel product or less per month, could justify non-participation based on financial returns. This group would represent a very small percentage of the total supply.

In the case of separated RINs, or the ultimate renewable fuel credit, the most obvious parties who have incentive to own these assets would be domestic refiners or importers of gasoline into the United States. These obligated parties are mandated under the regulation to accumulate, either through production or acquisition, their pro rata share of RINs based on the current year’s fuel standard. In the end, only an obligated party would be able to realize the intended value of a RIN. In fact, many refer to the RIN as the “Currency of Compliance” for the renewable fuel standard.

With its free market framework, speculators have also shown an interest in participating in the credit banking and trading market formed through the RFS program. Traders are now actively involved in the RIN market, having interest in acquiring RINs for the purpose of hedging a market position or for speculative financial gain. Price swings in the RIN market have been extreme over the past two years, with 300 percent plus price moves in some cases. This is a dynamic that points to the fact that there remains a need for additional liquidity and overall market efficiency, results that will only come with more understanding and time.

Finally, one last party that may also have an interest in acquiring RINs would be an individual or corporation who wishes to use RINs as a vehicle to demonstrate support for biofuel production and/or environmental stewardship. In this scenario the RIN purchaser would retire the RIN upon receipt, taking the RIN out of the market and effectively promoting additional renewable fuel production in order to fill the void that would be created by such action. This activity recognizes that the only way to generate a RIN is by also producing another gallon of biofuel product. Only in isolated cases is the market seeing such activity at this time.

Click here to download a PDF of Educational Series Briefing No 7: Who Would Want to Own a RIN?

Past briefings are available by clicking here.

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Educational Series: How Do RINs Become Separated From Fuel?

RFS Educational Series Briefing No. 6: How Do RINs Become Separated From Fuel?

Written by Clayton McMartin for Televent DTN

When renewable fuel is produced a RIN is assigned to each gallon. According to the regulations, these assigned RINs can only be transferred along with renewable fuel. The RINs cannot move independent of renewable fuel until such time that the associated fuel is blended into finished petroleum products or purchased by an obligated party, such as a refiner. An assigned RIN can be identified by the first number in the RIN which will be the numeral 1. An example of an assigned RIN is:

12009480270076000011020003994400048031 (K code = 1)

In principal, as the renewable fuel is placed into the retail market, along with petroleum products, the RIN then becomes separated from the fuel. In practice the rules read that obligated parties, such as refiners and importers of gasoline, and those who blend renewable fuel with finished gasoline, such as splash blenders and oxygenate blenders, are required to separate the RIN from the fuel. A separated RIN is easily identified by the first numeral being a 2. An example of a separated RIN is:

22008480270076000011020003994400048031 (K code =2)

At this point in the RIN’s life it becomes a renewable fuel credit, no longer associated with the physical product. In essence the RIN is now a paper credit that can be traded between and among parties that are registered with EPA to participate in the RFS program. A separated RIN trades from one party to the next and independent of renewable fuel.

Ultimately the separated RIN will be used by an obligated party such as a refiner or importer of gasoline(1) into the United States. These obligated parties demonstrate compliance through the submission of RINs to EPA at the end of each compliance year to meet their obligation under the renewable fuel standard – a subject we will take up in our next briefing.

(1)Future View: The advanced standard, RFS2, has been expanded to encompass both gasoline and diesel fuels, refined or imported. The effect of this legislative change will be the inclusion of several more parties who today are not obligated under RFS1.

Click here to download a PDF of Educational Series Briefing No 6: How Do RINS Become Separated From Fuel?

Past briefings are available by clicking here.

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Educational Series: How are RINs Tracked?

RFS Educational Series Briefing No. 5: How Are RINs Tracked?

Written by Clayton McMartin for Televent DTN

The RFS regulations require that accurate records pertaining to RIN activity be maintained and summary reports be submitted to EPA each quarter (1). In principle this is a simple concept; in practice it is much more complex.

As title to product and the associated RINs are transferred from one party to the next the supplier (transferor) is required to generate and deliver documentation to their customer (transferee). As the transferee then sells to their customer, and so on down the line, the same type of documentation is required each time title is transferred. Now that each of these events has been documented, each party is required to keep the records in an organized manner and report to EPA every quarter on their activity. These standardized reports are due two months after the quarter closes (1). EPA staff members can then process the data to track the movement of renewable fuel through the supply chain and determine if all parties are in compliance.

EPA utilizes a post-audit approach to the program, where they gather data pertaining to literally millions of transactions and then process, looking for discrepancies and inconsistencies among the data. The shortcoming of this approach is the fact that possible violations are revealed months after they have occurred, making for considerable challenges in the area of enforcement and overall exposure.

An alternative approach is for companies to voluntarily participate on the renewable fuel registry where they take a proactive approach to RIN tracking and validation. By utilizing a third party verifier, companies are able to manage massive amounts of data on one standardized computing system (2). Through a centralized registry, companies are also able to conduct a more through job of due diligence and minimize ownership issues before they occur. The RIN program is “Buyer Beware” and any liability resulting from title defects fall to the current owner.

(1)Future View: As discussed in Briefing #2, the reporting frequency will increase under RFS2, first to monthly then to within three days of the transaction.

(2)Future View: EPA has proposed a centralized and closed system for clearing RIN transactions known as the EPA Moderated Transaction System (EMTS). EPA has stated that they hope to bring increased confidence to the marketplace with EMTS – schedule to go into effect in 2011. More details will be provided about EMTS in future briefings.

Click here to download a PDF of Educational Series Briefing No 5: How are RINs Tracked?

Past briefings are available by clicking here.

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Editorial: EPA Appears Caught in a Catch 22

Two key timing issues have essentially paralyzed the Environmental Protection Agency at this point regarding the Renewable Fuels Standard. The first is the pending issuance of the much awaited final rules for RFS2 and the second is the Nov. 30th deadline for the 2010 mandates. It appears that EPA cannot issue one without the other.

Why is this? Because it is essentially a “Catch 22” leaving EPA in the unenviable position of establishing a mandate with what some will challenge they have no authority to do.

In fact, during the comment period for RFS2 notice of proposed rulemaking, the American Petroleum Institute in comments from Al Manato delivered to the docket on Sept. 25 made the following comments on this subject:

a. EPA cannot enforce EISA RFS volume mandates without final regulation.

“It is API’s position that EPA cannot lawfully establish renewable fuel standards (either general or fuel-type specific) based on the volumes set forth in the Energy Independence and Security Act of 2007 (EISA) without completing the rulemaking specified in the final sentence of CAA 211(o)(2)(A)(i). In addition, EPA cannot lawfully extend the RFS program to fuels other than gasoline. API is concerned that the Agency has imposed the EISA-mandated total renewable volume in 2009. EPA should not attempt to enforce a 17 percent greater mandate in 2010 until the RFS2 rulemaking is finalized. The rules that were finalized according to the Administrative Procedures Act procedures which implemented the Energy Policy Act of 2005 (EPACT05) require no more than 6.8 billion gallons of renewables in 2010.”

Nov. 30th came and went without EPA issuing the much awaited 2010 mandates for renewable fuels. The 2005 Energy Policy Act requires EPA to work with the Department of Energy and establish the coming year’s renewable fuel standard, which then allows obligated parties to establish their volumetric targets for the coming year. According to statutes, this report is due no later than Nov. 30th of the year prior to the compliance year in which the mandates are being established.

Of course, the mandates also serve as a floor to renewable fuel demand and allow producers, distributors, marketers, blenders, and importers to establish their strategic plans for the coming year. Even in the best of cases, there is little time to make final operational and commercial modifications. And now with less than a month remaining in 2009, companies are left wondering what the final targets will be.

Obviously, not everyone sees this important issue the same way. However, the bottom line is the fact that this constant uncertainty combined with delays will take its further toll on all who operate in the renewable fuels business arena.

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Educational Series: How Are RINs Used?

RFS Educational Series Briefing No. 4: How Are RINs Used?

Written by Clayton McMartin for Televent DTN

In previous briefings we covered the fact that RINs are utilized to track renewable fuel through the supply chain, but ultimately RINs are used to demonstrate compliance. Companies identified by EPA as “obligated parties” must meet the mandated standards in order to remain compliant with the federal law.

The typical obligated party is a company that refines crude oil and produces finished gasoline. By far the biggest portion of obligated parties are refiners, such as ExxonMobil, ConocoPhillips, Valero, BP, Shell, and Chevron. Other companies that fall under the RFS obligated party classification would be importers of gasoline into the U.S. as well as companies that buy petroleum intermediate components and blend at facilities like fuel terminals to produce finished gasoline.

Under the regulations, each of these obligated parties is then bound by the law to use their pro-rata share of renewable fuel. Recalling that the RFS is really a percentage established each year (see Briefing #1 What is the Renewable Fuel Standard?), the company multiplies their on-road gasoline production (1) times the RFS to determine their obligation. This is called their RVO or renewable volume obligation.

Obligated parties demonstrate to EPA that they have met or exceeded their RVO by the submission of RINs each year. These RINs can be acquired through the process of purchasing and blending renewable fuel into their own pool of petroleum products or by acquiring RINs from another party that has blended renewable fuel in excess of their RVO and is willing to sell their RINs to the obligated party. As you can see, central to the RFS program are provisions for credit banking and trading, with the RIN serving as the paper credit for this purpose.

(1) FUTURE VIEW: Under the RFS2 the program basis is extended from only on-road gasoline to now include non-road, locomotive, and marine fuels. Additionally, the RVO will be broadened to encompass four separate standards. With RFS2 come four categories of mandated fuels, resulting in four different standards each year. More details about these four different standards and how the program will work will be provided in future RFS Educational Briefings.

Click here to download a PDF of Educational Series Briefing No 4: How Are RINs Used?

Past briefings are available by clicking here.

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Educational Series: Where Do RINs Come From?

RFS Educational Series Briefing No. 3: Where Do RINs Come From?

Written by Clayton McMartin for Televent DTN

RINs are generated as a result of the production or importation of renewable fuel into the United States. The RINs serve as identification numbers for each gallon of renewable fuel placed into commerce, allowing EPA to monitor the movement and use of renewable fuel in the marketplace.

The assignment of RINs, contrary to what some believe, is not conducted by EPA (1). Instead RINs are assigned by the producer or importer in accordance with the rules found in the Renewable Fuel Standard program. Section 80.1126 provides all of the details necessary for a producer or importer to assign RINs to their product.

With the exception of producers who produce less than 10,000 gallons per year, and importers who import less than 10,000 gallons per year of renewable fuel, it is mandatory that RINs be generated as the renewable fuel is placed into commerce.

The process of generating the RIN is really one of the easiest steps in the program. A producer simply needs to gather the required data pertaining to their entity, facility, and product type. Then as fuel is produced or imported a unique batch number for the applicable year and the total volume of RINs are added to the 38-digit series resulting in what EPA defines as the parent batch RIN. Producers can generate RINs on the renewable fuel registry by providing only two pieces of data, the volume of fuel and denaturant content in the case of ethanol.

(1) FUTURE VIEW: The impending implementation of the RFS2 program will bring fundamental changes to the way RINs are assigned to produced and imported product. EPA has proposed modifications to the rule due to numerous errors that have occurred through the present RIN generation approach. EPA will eventually issue RIN numbers as producers and importers submit operational data directly to EPA in a more real-time manner.

More details about RFS2 and the resulting changes will be covered in future briefings.

Click here to download a PDF of Educational Series Briefing No 3: Where Do RINS Come From?

Past briefings are available by clicking here.

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Educational Series: What is a RIN?

RFS Educational Series Briefing No. 2: What is a RIN?

Written by Clayton McMartin for Televent DTN

The three-letter RIN is an abbreviation for Renewable Identification Number. Under the Federal government’s Renewable Fuel Standard (RFS) a RIN is assigned to every gallon of biofuel produced or imported into the United States. Comprised of 38 digits, the RIN serves effectively as a serial number which is tracked throughout its life in the renewable fuel supply chain, from the point of production to the point at which the fuel is placed into the retail market.

Valuable information about the fuel and its producer is embedded within the 38-digit code that makes up the RIN. Here is a sample of what you can readily determine from the RIN number:

– Status of the RIN as far as being tradable as a separated credit (more on this later)
– The year the fuel was produced - also referred to as the vintage
– Who produced or imported the renewable fuel
– Where it was produced or imported into the U.S.
– What kind of fuel, ethanol, biodiesel, etc. (more on this later)
– Its equivalence value (more on this later)
– Whether it comes from cellulosic technologies or not
– And the total volume of credits assigned to a batch of renewable fuel

As an example of a RIN consider the following:

12009480270076000011020003994400048031

RINs are useful for tracking renewable fuel at every link of the supply chain. The process starts when renewable fuel is produced or imported and the 38-digit serial number is assigned to the fuel. Tracking and reporting to EPA is then continued as the fuel is transferred from supplier to customer and so on and so on. Once the renewable fuel is placed into the retail market the RIN is separated from the fuel and then serves as a tradable credit. This separated RIN, or credit, can then be traded from one party to another, similar to other environmental credit trading programs.

Ultimately the RIN is used to demonstrate to EPA that a party has met their particular obligation under the RFS. EPA monitors the overall program by having every party in the supply chain report their RIN activity to the agency on a quarterly basis. The advanced fuel standard (RFS2) requires that the frequency of reporting increases first to monthly and then to near real-time, or within three days of transfer.

Future briefings will provide more details about how the RIN number is used, who has value in RINs, and how the changing regulations will impact business throughout the motor fuel sector.

Click here to download a PDF of Educational Series Briefing No 2: What is a RIN?.

Past briefings are available by clicking here.

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