RIN-Tin-Tin: Will the RINs mechanism save the day, power biofuels to new heights?

February 8, 2011 |

Well, the annual National Biodiesel Conference is underway and the NBB is touting a plan to spend up to $3 million over the next few years to re-position biodiesel as “America’s advanced biofuel,” but what was really drawing in the crowds, and the questions, and the buzz, was the subject of RINs.

RINs- those pesky Renewable Information Numbers that have so many digits they give 140-character tweets on Twitter a run for their money. The bar code of biofuels – the thing that virtually no one understands, or much cared about.

Until that is, the Federal courts settled a case in December, ruling that the EPA could go ahead with enforcement of the revised Renewable Fuels Standard, or RFS2. Specifically, that meant that refiners and importers were obligated to blend 1.15 billion gallons of biomass-based diesel in 2009 and 2010. Now, Rins are reminding us us Rin Tin Tin, the wonder dog of movie fame who always seem to arrive in the nick of time and save the day.

Now, what is a RIN, exactly?

It’s a number that is associated with every gallon of renewable fuels produced by a qualifying facility. Obligated parties are required to submit a certain volume of RINs each year – either through gallons they buy and blend (“wet gallons”), or from submitting RIN credits.

Why would there be a RIN credit and no fuel. Well, for one, many companies who might use renewable fuels are not obligated parties. For example, mining companies, or renewable power generators – who do not use the fuels for road transportation covered under RFS2. Those parties can buy fuel, blend into their fuel supply, and sell off the RINs on the secondary market.

So, why are RINs so popular, all of a sudden?

Well, in the case of biomass-based diesel, there are only an estimated 725 million gallons in available RINs from production in 2008 and 2009, and another 325 million in production for 2010. That leaves obligated fuel buyers about 100 million gallons short of their 2010 obligation – that is, the year just ended.

At the end of the day, that means buying RINs – or taking a one-year deferral and hoping for excess supply in 2011 (and buying surplus RINs and submitting those in satisfaction of the obligation).

But, with the fuel obligation at 800 million gallons for biomass-based diesel for 2011, no one is quite sure how much production there will be in the US. Why? Because, with the tax credit lag and so many biodiesel plants closed, even with 2 billion gallons in biodiesel capacity registered with the EPA, there’s no guarantee on how much production will come back, and how soon.

So obligated parties may have to buy RINs in the secondary market, and that is driving the RIN price up.

Why is all this important? RIN credits drive biofuel prices below parity threshold

Well, let’s go through some math, courtesy of Renewable Energy Group.

Take today’s diesel price of $2.71, and REG’s $4.61 price for REG 9001-1 biodiesel (B100). Well, the tax credit is worth $1.00, and the RIN is priced at $1.38 today for a gallon of qualifying biomass-based diesel.

So what does that mean? The effective cost to the consumer for biodiesel (for example, a mining company that can sell the RIN to an obligated blender), is just $2.23, once the $2.38 in credits are taken into account.

Bottom line, its effectively $0.48 per gallon cheaper to buy a gallon of biodiesel than a gallon of diesel. And with fuel prices rising and RIN prices rising, that spread could become more intense in the first half of 2011.

What would have happened – with the tax credit but without the RIN? Biodiesel would be still well above the price of diesel.

REG, and others, think they are going to sell a whole lot of biodiesel if the capacity comes back fast enough. REG is talking in terms of 11 billion gallons of biodiesel demand by 2015, on a global basis (nearly half of it in the EU), and the industry is setting goals such as 5 percent replacement of petroleum by 2015 in the US – or three billion gallons.

Will RIN prices stay this high?

Not likely – they were at $0.50 a year ago, and not much over $0.15 a year or two before that. But REG believes the price will increase in the first half, with biodiesel capacity coming back slowly, before beginning to normalize.

The RIN market is already incentivizing supply ensuring that the biodiesel market will come back online quickly, to capture that value. The cost to the diesel customer – about 9 cents per gallon of B5, if the price is passed through to the end user. Either way, the sector is already delivering on an Obama energy pledge – to shift incentives away from fossil fuels and more towards renewable fuels.

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