North American environmental commodities exchange platform Nodal Exchange had traded 2.5 million renewable cellulosic biofuel credits Dec. 15-Jan. 5, signaling a surge of interest in renewable fuel futures heading into 2022 after a year of dormancy, representatives with exchange partner IncubEx said Jan. 6.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
Nodal Exchange began offering physically delivered Renewable Identification Number futures in November 2020, where it exchanged futures contracts for cellulosic biofuels, categorized as D3; biomass-based diesel fuels, or D4; advanced biofuels, or D5; and renewable fuels like corn ethanol, or D6.
But while the number of trades recorded over the exchange had been relatively strong in 2021 for the latter categories – thanks in part to the Environmental Protection Agency's higher annual requirements for those fuel types – Nodal Exchange did not record a single D3 RINs futures trade until Dec. 15, 2021, when it saw 100 contracts exchanged, representing 1 million RINs, according to exchange data shared with S&P Global Platts.
That trend continued in January, when 50 D3 RINs futures contracts were exchanged on Jan. 4 and 100 were exchanged on Jan. 5 – representing 1.5 million RINs, the data showed.
"Up until this year, RIN futures haven't really gotten any traction," said Kees Woodward, senior vice president at IncubEx, which launched RINs trading on Nodal Exchange. "It does seem like they're getting traction now."
RINs were first traded as credits under the Renewable Fuel Standard Program, which was passed by Congress under the Energy Policy Act of 2005. The program annually requires a certain volume of fossil fuel to be replaced by volumes of renewable fuel.
In December, the EPA proposed setting biofuel volumes under the RFS for 2022 at 770 million gallons of cellulosic biofuel, or D3; 2.78 billion gallons of biomass-based diesel, or D4; 5.77 billion gallons of advanced biofuel, or D5; and 20.77 billion gallons of all renewable fuels combined.
Cellulosic biofuels have long been the biofuel category with the lowest minimum requirement set by the EPA. And exchanges of D3 RINs mostly occur over-the-courter in bilateral trade – a format that Woodward said is far riskier than trading futures over an exchange.
Trades in over-the-counter markets have much fewer safeguards than those occurring in futures exchanges. Trading RINs bilaterally carries the possibility of one party defaulting on a deal, creating an element of risk.
This risk factor was most recently illustrated last year when Sundive Commodity Group failed to deliver 106 million RINs to Valero. In December, Valero filed suit against Sundive, alleging this forced it to spend $10 million more in the RINs market to meet its RFS obligations.
Events like this cause severe disruptions to RINs trading by constraining liquidity and halting deal-making, Woodward said.
"I've been calling the RINs market the wild west for the last 10 years, and it really still is the wild west," he said. "You can look back throughout RIN history and there's been some pretty interesting default issues."
RINs trading risks are significantly reduced when traded over an exchange rather than over-the-counter, he said. Trading over an exchange is regulated by the Commodity Futures Trading Commission, while futures clearing merchant organizations monitor margins and ensure traders are in good standing to make payment or RINs deliveries.
Moving more of these trades to exchanges is one of IncubEx's goals, the company said.
"That's why we're excited about an uptick in these contracts trading on the [Nodal] exchange," said spokesperson Jim Kharouf. "I think the message is starting to resonate with some, and people are getting more and more interested.
"We'd love to see more people come on board to the futures market," Kharouf said. "It's a cleaner, more efficient, more transparent way to trade the commodity."