The SuperRIN and renewable fuels distribution
With record discounts to gasoline, will E85 sales boom now?
Or, are there pesky barriers to E85 embedded in the RFS that only a SuperRIN can solve, in order to create more expand rural jobs, decarbonize fuels and increase energy security?
These should be boom times for E85 ethanol blends.
Prices have never been better, compared to gasoline. So says the Iowa Renewable Fuels Association, which tracks wholesale E85 and gasoline prices.
According to IRFA, on Monday, June 16, the average price of regular 87-octane gasoline without ethanol was $3.18 per gallon at the Des Moines Terminal, according to OPIS. Meanwhile, Absolute Energy, an ethanol plant in St. Ansgar, Iowa, was selling E85 for $1.79 per gallon.
The differential — a whopping 44 percent. Now, E85 has roughly 27% lower fuel economy than gasoline owing to the lower energy-density of ethanol. So, you have to buy $2.43 of E85 to get the same mileage as a gallon of gasoline.
But that’s still a whopper. 75 cents.
“E85 is currently being sold in wholesale markets across Iowa at more than a $1.00 per gallon discount to regular gasoline, and that’s serious savings for Iowa families,” stated IRFA Executive Director Monte Shaw. “With the Summer driving season in full swing and uncertainty in the Middle East keeping oil prices elevated, using ethanol is not only helping to support the state’s economy and energy security, it’s also providing Iowa families with a much needed price break at the pump.”
Why is E85 so affordable – 3 factors at work.
Low input prices. Wholesale ethanol is available at low prices this year because of strong corn production — a big crop last year, and a big one expected this year too. And natural gas prices remain quite low — a key factor in operational costs.
New revenue streams. Many producers have installed corn oil extraction technology, and created a small but welcome new revenue stream.
Good RIN prices. RINs — the renewable energy credits used for the Renewable Fuel Standard, have been on the rise. That means that any EPA-registered location can sell a RIN for every gallon of ethanol it blends into gasoline, and pass the resulting revenue on to the consumer in the form of lower prices.
When RIN prices rise, there’s more incentive to blend more gallons, and claim more credits. The ethanol industry gains, not by pocketing the RIN credits, but by selling more gallons into the market by getting more drivers to switch to E85.
The Theoretical: Should E85 be this cheap everywhere in the US?
There are some local factors that affect E85 pricing, but not many – generally, they relate back to transportation and access to markets. The same kind of factors that make natural gas and crude oil cheaper in the US than in Europe or Asia.
Accordingly, a 29% discount in Iowa may be at the high end of expectations, but E85 should be selling everywhere at a steep discount to gasoline, given that ethanol and gasoline are commodities sold in a national market.
Reality: is E85 this cheap everywhere in the US?
In a word, no. In fact, its not even that cheap elsewhere in Iowa. Wholesale E85 prices range from $1.79 via Absolute Energy to $2.48 (for an E70 blend) from HollyFrontier.
Why the huge differential? Well, fuels don’t talk, and blenders sometimes don’t talk much either, but it appears that some parties are simply pocketing the RIN, instead of passing the savings along to the consumer to incentivize higher sales of E85, and higher adoption of renewable fuels.
We’ve made up a quick-glance chart to illustrate — since even in Iowa there are a confusing number of E85 blends (legally, anything between E70 and E85 can be marketed as “E85”).
As you can see, the discount to the value of the underlying fuels can range between $0.42 cents to -$0.12 — 54 cents, presumably in differing views on how much of RIN value is passed along to consumers.
The massive differential in E85 prices is replicated all over the country, according to Chris Hessler and AJW, which issued a comprehensive report on E85 pricing this spring, “E85: A Tale of Two Markets” Hessler’s team, found that “E85 is more attractively priced and more often available at independent fuel retail outlets than at major oil company branded stations.”
In their report, AJW found that: “Since RIN prices began to rise in 2013, the nationwide average discount for E85 (vs. E10) at independent stations has been 14% or greater for all but one month. During the same period, the nationwide average discount for E85 at major-branded stations reached 14% only once.”
A copy of the AJW report is here — it is a startling read.
Let’s go look at some of the underlying causes — and see if there are remedies?
How RINs work, or don’t
The mechanics of RINs can create momentary price differences in the market.
Consider four cases.
1. Obligated party, who (e.g a “merchant” refiner) does not have fuel blending or ethanol production capacity. They simply sell RBOB gasoline or #2 distillate into the market – someone else makes that into a finished fuel formulation that can be sold at retail (e.g. meets California’s strict reformulation standards, or contains ethanol, or contains an additive like Techron, and so on).
This party simply buys RINs — they have to, to present to the EPA at year-end.
2. Obligated party, who does have fuel blending and/or ethanol production capacity (“fuel marketer”). When they blend ethanol, they generate a RIN — which they will need for their own account. If they generate extra RINs (for example, because they have built excess renewables production capacity), they can sell RINs into the market themselves, and make more money.
Well, they could add E85 distribution capacity — but, why would they? Probably make just as much money selling RINs to merchant refiners and other obligated parties, and avoid the costs and risks of building E85 distribution capacity, which would require them (to sell the fuel) to discount E85 sufficiently to find a market. Meaning, they make less money.
3. Non-obligated party, who has ethanol production capacity but does not blend or distribute fuels (let’s call this a “merchant ethanol refiner”). These companies don’t hugely participate in the RIN market with respect to E85 decision-making. They don’t blend fuels, so they don’t generate RINs – nothing to sell, no value to capture or pass along.
4. Non-obligated party, who has ethanol production capacity and has started to blend or distribute fuels (“fuel marketer”). This is like the Absolute Energy case we mentioned above. They can generate RINs and sell them, and pocket more money. But they can also discount E85 to build a market and still make their original target price per gallon by selling the RIN. In this case, they make money not only by pocketing RINs, but by selling more gallons of ethanol.
But, generally speaking, they are not really going to make more money selling E85 than selling RINs — it should be a wash — so, even this case requires a certain amount of corporate altruism and belief in renewable fuels to push ahead with an E85 program.
The Bottom line here? None of these parties has any absolutely clear financial incentive to work hard to develop an E85 market, unless a gallon of E85 could be manifestly demonstrated to be more valuable than the the underlying ethanol, gasoline, and RIN. We haven’t seen that kind of popularity yet develop.
So, if we want less renewable ethanol in the marketplace — for instance, we like fossil fuels or we have stronger faith in biodiesel or drop-in renewable fuels — there’s really no need to do anything. Except annually persuade the EPA not to mess with any volumetric mandates, except perhaps the ethanol mandates. That task is trickier than it sounds — because, increasingly, ethanol producers are finding ways to qualify for the advanced biofuels pool — the more low-cost ethanol in that pool, the more that EPA will be sensitive to waiving down mandates because of concerns about blendwalls.
If you would like more E85 in the marketplace — and America’s 15 million or so flex-fuel cars could be driving on, say, some 12 billion gallons of E85 fuels today if the distribution and prices were perfected — well, the system is sub-optimal.
The SuperRIN
Here is a change that might help.
The single most important factor is to ensure that RINs drive lower-prices for renewable fuels — and thereby stimulate adoption. That can be, perhaps, simply done by establishing an additional SuperRIN that is generated at retail on selected high-blend fuels.
For example, what if every gallon of ethanol at E30 blends or higher generated a super-RIN. Or a blend of biodiesel at 20 percent or higher. Or a 50% or higher blend of a “drop-in fuel”. Encompassing aviation as well as road transport.
As blend walls approach (as they do), conventional RINs would become more expensive as more obligated parties would find it difficult to distribute, say, E10 ethanol. At some stage, SuperRINs would be more affordable than conventional RINs — and trigger more distribution of renewable fuels.
And, since the RIN is only generated at retail, on sale — the retailer only makes RIN income by moving the fuel. Pressuring them to pass to the consumer as much RIN value needed to incentivize truing and buying.
Thereby incentivizing creativity in marketing — those who find ways to make renewable fuels more “premium-worthy and sexy” through marketing, will need to pass along less of that RIN discount to the customer. Effective marketers will make more money — and effective marketing could spread through the market.
Unlike the conventional RIN structure — there’s no chance that RIN’s can simply be pocketed to generate higher profits and no renewable fuels. They are only generated when fuels move — highly desired fuels that could change the pace of advanced biofuels adoption.
The Bottom Line
Are SuperRINs the answer? Well, perhaps they are an answer — but, at least, let’s advance the dialogue on how to make RIN’s more attractive through rule-making instead of legislation.
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