A version of this Spotlight from S&P Global Platts Analytics was first published November 10.
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Current-year D6 RIN prices have more than quadrupled in 2020, starting at 15.25 cents on Jan. 3 and climbing to an annual high 70 cents on Nov. 9. There was only one abnormally large spike along the way, a one-day gain of 11 cents on Feb. 26 after Reuters reported the Trump administration would reduce the number of hardship exemptions given to small refineries (SREs).
In an ordinary year, the largest swing in RIN values usually occurs when the US Environmental Protection Agency (EPA) proposes new renewable fuel mandates for the following year or finalizes mandates following a public comment period, neither of which has happened in 2020. D6 RIN prices rallied following Election Day (Nov. 3) on the belief that a Biden administration would result in stronger enforcement of biofuel mandates.
Prior to Nov. 3, this year's escalation in RIN prices was mostly a story of supply and demand. SREs exempt small refiners from blending requirements under the Renewable Fuel Standard (RFS). For the 2016 to 2018 compliance years, the Trump EPA granted 85 SREs, exempting over 4.0 billion RINs from compliance. Following a federal appellate court decision on Jan. 24, fewer refineries will receive exemptions, meaning that more companies will need to acquire RINs to meet their RFS obligations.
Under the court ruling, which requires a refiner to receive a continuous string of exemptions to remain eligible for waivers, SREs may be limited to seven per year, which was the number of exemptions granted for 2015. The EPA may also seek to reverse previously-granted exemptions that are non-compliant with the court decision. The case is now before the US Supreme Court, though S&P Global Platts Analytics believes that the appellate decision will be left intact.
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Though the SRE lawsuit hasn't finished playing out in the judicial system, the writing has been on the wall for refiners all year. At least two dozen refineries will likely be losing their exemptions, converting them from sellers on the RINs market to buyers. This has put upside pressure on RIN prices as more companies need RINs for compliance at a time when D6 RIN generation has sunk 14.6% year on year due to the large reduction in domestic ethanol output. At the same time, discretional ethanol blending has been uneconomical with ethanol priced significantly higher than petroleum-based blending components.
Refiners also have their eyes on 2021 as.2020 RINs can be used for either 2020 or 2021 compliance. With US ethanol production currently around 15% less than capacity, there are legitimate concerns about whether there will be enough domestic supply if the 2021 mandates are not lowered from 2020. The unrestricted portion of the RFS mandate (total renewable fuels mandate minus the advanced biofuels mandate) has been 15 billion gallons every year since 2017. The biofuels industry will pressure the new administration not to lower this threshold. The 2021 mandate for biomass-based diesel has already been set at 2.43 billion gallons, unchanged from this year.
2021 is shaping out to be the first year since 2015 that we will enter a new year without mandates being set beforehand. This brings uncertainty to the refining industry and to RIN prices. D6 RIN prices have subsided a bit after reaching the annual high, closing at 62.25 cents on Nov. 16. S&P Global Analytics believes that the above litigation is already priced into current values, but the bullishness over President-elect Biden will continue.