Beautifying Renewable Fuel Markets with Creative Hedges

June 14, 2013 |

The SuperRIN

But sooner or later, why not create a SuperRIN?

Power purchase agreement are so common, they are advertised on the internet.

Power purchase agreement are so common, they are advertised on the internet.

What exactly is a SuperRIN? It is a renewable fuel credit that can be purchased at a discount to current market prices, can be used to satisfy any renewable fuel obligation, never expires, and can be issued by an advanced biofuels project that has completed a demonstration of its technology but is raising capital for its first commercial plant.

There’s nothing new in the idea of pre-selling future production. One of the standard requirements for project finance for example, in the power business, is that the project has pre-sold at least several years of its proposed output to a credit-worthy buyer. These are called Power Purchase Agreements, or PPAs, have been completely standard in the energy business for many years, and can last for up to 20 years.

In renewable fuels and chemicals it is also completely common, though not universal, to land off-take contracts for all or a substantial portion of proposed capacity expansions well in advance of starting construction. Gevo and Amyris have had these in place, to name examples. Myriant has been able to secure them.

So, if product offtake can be sold years before the product is available — or even before the plant is constructed — why can’t renewable fuel producers sell their RINs on a similar basis?

SuperRINs in everyday practice

To use an example, ethanol RINs have been selling as high as $1.00 per gallon this year. Were new RINs from advanced biofuels producers to come on to the market, prices would inevitably decline — but even if RIN prices dropped to $0.50 per gallon, and advanced biofuels producers earned $0.30 per gallon for their future RINs, a 20-year RIN agreement could raise up to $6 per gallon of capacity for a plant, in the form of non-dilutive capital. In many cases, this would provide all the capital, or very nearly all, required to build the plant.

One of the keys to such an initiative would be to make it possible for obligated parties to use SuperRINs to satisfy their current renewable fuel obligations, and thereby avoid issues associated with what is called the ethanol blend wall in the US. (The blend wall? This refers to the limits on ethanol blending imposed by the 10 percent blending limit for cars built before 2001, the lack of availability of E15, and high prices and a small addressable market for E85.)

Safeguards for obligated parties and covenants for renewable fuel producers would be in order to ensure that project capacity, in fact, comes online and is dedicated to producing fuels to match the RINs that were issued. Further, the economics of how this would impact current RIN prices has to be considered (it wasn’t too long ago that ethanol RINs cost less than a nickel — hardly creating a viable capital-raising impetus for advanced fuels).

But the principle remains — if you allow producers to sell the credits for tomorrow’s production today, and create a mechanism where the buyers could use those credits to solve pricing and deployment problems in their renewable fuel obligations — good things could happen for the future of advanced biofuels.

In today’s Digest, we look at 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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