US refiners are working to get their heads around exactly how the long-awaited Renewable Fuel Standard volume obligations set by the Environmental Protection Agency will impact them, while the program's credits -- known as Renewable Identification Numbers -- rose on uncertainty over the status of the Small Refinery Exemption, a key part of the program.
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Prices of D6 2021 ethanol RINs were assessed 11.75 cents/RIN higher at $1.03/RIN while D4 2021 biomass diesel RINs rose 4 cents/RIN to $1.425/RIN on Dec. 8, S&P Global Platts data shows, as market sources said that small refiners – fearful of what will happen with the SRE – were buying RINs as the administration of the program remained in limbo.
"We think they got 2020 by opening this [obligation] to address the COVID-induced demand destruction and the way things got out of whack with that," said Derrick Morgan, senior vice president for federal and regulatory affairs for the trade group American Fuel and Petroleum Manufacturers, about the EPA's Dec. 7 release of Renewable Volume Obligations for 2020, 2021 and 2022.
The EPA's downward revision of the 2020 total volume obligation to 17.13 billion gallons from the 20.09 billion gallons set prior to the coronavirus pandemic was seen as a positive by the AFPM.
For 2021, the preliminary total RVO was revised down to 18.52 billion gallons and Morgan said it made "common sense" that 2021 volumes will be finalized once the year is over because it will be based on actual demand.
"So two cheers for those," he said. "But 2022 is unfortunately back to the policy that got us in trouble in the first place."
The EPA's RFS mandates volumes of renewable fuel which obligated parties like refiners need to blend into their transportation fuels on a yearly basis. If refiners are unable to meet their obligations by blending, they need to buy credits called RINs to meet their goal.
However, the decimation by the coronavirus on transportation fuel demand played a factor in the delay of the EPA's first volume mandate under the Biden Administration, originally due in November, prior to the agency's recent proposal to extend compliance deadlines. Thus, in an unusual move, the agency released the final volumes for 2020 and the preliminary volumes for 2021 and 2022 simultaneously.
SREs and RINs bank depletion
RINs are created when renewables are blended with hydrocarbon-based fuels, and unused RINs accrue in a bank – which is the number of RINs available to be used for compliance.
And carryover RINs for 2020 were pegged by the EPA at 1.85 billion, about half of the 3.85 billion RINs originally envisaged by the agency, due in part to lower RIN generation from weaker demand for transportation fuels as well increased buying by obligated parties as prices rose steadily through 2021 on lack of an RFS mandate for 2021.
This depletion of the RIN bank was part of the concern which created a volatile market and drove prices to record high levels in 2021. Platts assessments showed in Q2 2021 the average price of an ethanol D6 RINs was $1.61/RIN and a biodiesel D4 RINs was $1.70/RIN, compared with the 16 cents/RIN and 38 cents/RIN in Q2 2019. So far in Q4 2021, D6 RINs are averaging $1.16/RIN and D4 RINS are averaging $1.47/RIN.
"By lowering 2020 and 2021 RVO, EPA has avoided the situation where RIN bank would be completely depleted in 2021, causing liquidity issues and RIN price spikes," said Manav Gupta, a Credit-Suisse analyst.
"In the detailed 159 page document, EPA is hinting that it's lowering RVO enough to a point where they don't see the need to issue small refinery exemptions...Some refiners might feel disappointed that 2022 RVO was revised higher (22.8 billion gallons) vs. the original mandate (22.5 billion gallons) and D6 obligation is back at 15 billion gallons in 2022," Gupta said.
About 60 refineries have petitions in for SREs, which under the RFS is available for refineries of 75,000 b/d or less. However, the EPA noted in its Dec. 7 analysis that all obligated parties recover their costs through the market price when they sell their products and "thus do not bear a hardship created by compliance with the RFS program."
Platts Analytics lead biofuel analyst Corey Lavinsky said the EPA is following the narrow holding of the Supreme Court, which ruled in April that there is no need for continuous exemption to be eligible for an SRE "but is still clinging on requiring a small refinery to have received the original exemption 10-plus years ago in order to be eligible."
"If the EPA eliminates the ability for small refiners to get hardship exemptions, then more obligated parties will be required to acquire RINs to show compliance, which will drive up prices," Lavinsky said.
Because the EPA has yet to decide if it will grant SREs for 2020, 2021, or 2022, in the mean time, it issued a range of percentage variables rather than one constant variable to be used to calculate the total RVO, which Platts calculates as the aggregate costs of RINs over all transportation fuel.
According to Platts calculations, under the EPA's Dec. 7 mandates, the 2021 RVO percentage of ethanol drops to 7.76%, down from the 7.87% in 2020. Biodiesel falls to 2.19% in 2021 compared with the 2.37% in 2020. However, in 2022 ethanol rises to 8.49% and biodiesel rises to 2.42% of the RVO.