Beautifying Renewable Fuel Markets with Creative Hedges

June 14, 2013 |

hedges-elephantsObligated parties are having trouble finding low-cost supplies of renewable fuel credits.

Advanced biofuels companies are having trouble finding low-cost supplies of investment capital for their first commercial plants.

Why not put those two problems together into one solution like SuperRINs?

Of all the nightmare scenarios peddled around in the renewable energy business, nothing is even close to the scenario that obligated oil companies under the Renewable Fuel Standard will conclude that it costs less to reduce gasoline production than to buy renewable fuel (or offset credits) required under the Energy Security and Independence Act.

Distribution challenges for today’s renewable fuel capacity

Why? Should gasoline production be reduced below current demand – consumers would see the kind of fast rising gasoline prices that small changes in refiner capacity usually bring (for example, one one the reasons that prices at the pump rise every spring are tight supplies caused by refineries going offline for periods of time to switch over to summer fuel blends).

2010-2013 RIN prices

2010-2013 RIN prices

Why a nightmare? There’s little doubt that obligated fuel blenders would point the finger at biofuels and the RFS2 for bringing on pain at the pump, and any slowdowns in US or global economic activity that would result from high fuel prices.

Many in the renewables community think that this is a low-risk scenario. But, consider that the energy consultants at Argus, in advising obligated parties this past week at the Cowen & Co summit on the Renewable Fuel Standard, said that exporting as many barrels as possible was a go-to, short-term option to reduce exposure to high RIN prices (the renewable fuel credits that are bought and sold in the fuel markets).

Advise from Argus at the recent Renewable Fuels Summit pointed towards obligated parties reducing production to avoid obligations

Advise from Argus at the recent Renewable Fuels Summit pointed towards obligated parties reducing production to avoid obligations

Less production for the US market, goes the theory, equates to lower obligations for blending renewable fuels – and less buying of credits where it was difficult or impossible to use renewable fuels.

Financing challenges for tomorrow’s renewable fuel capacity

At the same time – with our friends in the cellulosic and advanced biofuels communities, we see that affordable capital continues to be very, very tough to find. The instability of the Renewable Fuel Standard, ironically, is doing some of the damage in keeping the cheap money disinterested in backing large-scale, long-term investments in renewable fuel capacity.

Here in Digestville we are temped to see that the solution to both problems lies with the EPA, which was given considerable leeway by Congress to define the rules for Renewable Fuels so as to meet the mandated targets under EISA by 2022.

It seems obvious that it is highly unlikely that any significant long-term action is impossible at EPA until Gina McCarthy is either confirmed as EPA Administrator, or the White House moves on to another candidate.

In today’s Digest, we look at SuperRINs in practice, how power purchase agreements create markets, how frequent flyer mile markets operate as a hedging and capital-raising system, and how other hedges and market catalysts might and should emerge. All via the page links below and our extended coverage today on RINs, RINsanity, and the financing of advanced biofuels.

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