March 22

Quick Takeaways:

• Since neither retailers nor fuel blenders are subject to the RFS requirements, refiners will continue to over-comply with the mandates for bio and renewable diesel to meet a significant part of the mandate for ethanol.
• This situation ensures the market shift toward renewable diesel will likely continue, ensuring the RFS will no longer effectively drive investments toward ethanol.
• Policymakers can turn this “lose-lose” situation into a win-win by combining biofuel industry proposals allowing for year-round E15 with legislation offering a fixed-price ethanol RIN, providing growth for ethanol consumption while stabilizing the RIN market and protecting domestic refiners and fuel supplies.

Deep Dive:

Many still view the Renewable Fuel Standard (RFS), the national biofuel mandate, as a boon for small-town corn farmers and ethanol producers. However, a look at how refiners are forced to comply with the RFS proves this is not the case.

Under the RFS, independent refiners must demonstrate compliance with the program, even though they have little to no control over biofuel blending and fuel retail outlets (e.g. gas stations). To comply, independent refiners are forced to purchase compliance credits called Renewable Identification Numbers (RINs), which are generated when biofuel is physically blended with gasoline or diesel fuel.

There are different kinds of RIN codes depending on the type of fuel they represent. For example, ethanol blending into gasoline creates D6 RINs. Blending bio or renewable diesel into the petroleum diesel fuel generates D4 or D5 RINs that are needed to comply with the “advanced biofuel” requirements of the RFS. The mandate is set in a manner where the requirements for different types of biofuels are “nested” within each other. Without getting too much in the weeds, this essentially means that refiners can over-comply with the “advanced biofuel” requirement in the RFS – which mandates lower carbon biofuels like bio and renewable diesel – to meet the ethanol portion of the mandate, if it makes sense to do so.

For several years, EPA has been setting the RFS ethanol requirements at levels that exceed the maximum ethanol concentrations the nation’s engines and infrastructure were built to handle. This has made ethanol RINs scarce and driven their prices up extensively over the last few years.

The ethanol lobby argued high RIN prices would drive more ethanol blending. However, retailers or companies that own wholesale fuel distribution terminals where gasoline is mixed with ethanol for the “last mile” to gas stations don’t have to comply with the RFS requirements. Since these businesses face massive costs to switch their infrastructure to E15 or E85 - $2.03 PER GALLON[1] according to EPA – there is no incentive to offer higher ethanol blends. In fact, doing so erodes profits retailers make from selling RINs.

As a result, rather than push more ethanol into the fuel supply, unachievable RFS ethanol volume requirements are forcing refiners to use renewable diesel above and beyond the “advanced biofuel” requirement in lieu of ethanol to meet a sizeable portion of the RFS’ ethanol mandate. This situation has caused the D6 RIN price to rise and converge with the D4 RIN price, as EIA has noted recently. It has also led to more renewable diesel production coming online to meet the ethanol-specific portion of the mandate.

As S&P further elaborates:

"Historically, D4 RINs have traded at a significant premium to D6 RINs due to the fuel nesting scheme set forth in the US Environmental Protection Agency's Renewable Fuel Standard," the S&P explains. But now, "the increase in D4 RINs supply due to the growth of renewable diesel production, paired with the fuel nesting scheme of the RFS, has placed significant downward pressure on the price of D4 RINs and consequentially D6 RINs as well."

The current structure of the RFS will work to ensure renewable diesel keeps replacing more of the ethanol requirement in the RFS until the existing RIN-based scheme is fixed. Why? As EIA notes, “Biomass-based diesel production generates D4 RINs that satisfy the biomass-based diesel, the advanced biofuel, and the total biofuel obligations.” With blenders and retailers exempt from the RFS mandate and, thus, not incentivized to market higher ethanol-laced fuels, refiners will continue to need  “D4” renewable diesel credits to comply with ethanol requirements that continue to exceed the functional limits of engines and infrastructure, coupled with a RIN system that disincentivizes the businesses that have the power to offer higher ethanol blends into commerce from actually doing so    

It is important to note that while the influx of renewable diesel to meet the ethanol requirement has helped bring RIN prices down significantly, they remain about 5 times higher than 2019 levels and remain a significant cost for independent refiners.

The broken RIN-based credit system ensures the shift toward renewable diesel being used to meet the ethanol portion of the mandate we’re seeing now is inevitable. The RFS is no longer helping expand the national ethanol supply—it isn’t helping ethanol at all.

Additionally, independent refiners have repeatedly pointed out how the unproductive, unpredictable costs of RFS compliance credits could easily put refining capacity once again at risk, particularly if EPA looks to once again raise volume requirements significantly when it establishes the next phase of RFS requirements next year.

The RFS program, originally designed to enhance America’s energy independence, has contributed to several refinery closures and conversions in recent years. It’s clear that the current compliance scheme of the RFS makes it a lose-lose policy for refiners and ethanol producers alike.
 
However, lawmakers have a win-win opportunity to restore the original intent of the RFS and protect America’s fuel supply by making commonsense fixes to the RFS compliance scheme and lowering the costs of RINs. Congress could pair legislation allowing E15 to be sold year-round with HR 4576 and S. 2242, which put a price cap on ethanol RIN prices. This commonsense compromise would lower D6 RIN prices extensively, which would both protect independent refiners and lower gas prices (since it would prevent retailers from selling fuel with the RIN price included to boost their profits) while also allowing for broader free market penetration of ethanol into the market place that would not need to be driven via excessive mandates. Independent refiners are ready to support such a commonsense compromise.

Congress should seek to take such an opportunity to turn the current “lose-lose” into a “win-win” for refining, ethanol and the American consumer.