By: Elizabeth Hilbourn and John Auers
On the day before Thanksgiving, the U.S. Environmental Protection Agency (EPA) issued its finalized 2017 Renewable Volume Obligations (RVOs) at levels higher than the previously proposed targets, but lower than the statutory requirements in the Renewable Fuel Standard (RFS). Total renewable fuel volumes grow by 1.2 billion gallons from 2016 to 2017, a 6% increase. Initial reactions showed applause from renewable fuel proponents, and RIN prices moderately increased with ethanol and biodiesel RINs going to 97 and 115 cents per gallon, respectively. Prior year RIN prices have held with current year RINs, but perhaps that will change when the 2017-year RIN is generated in just over a month’s time. In today’s blog, we will dig a bit deeper into the new numbers and the implications for the different players in the industry.
The table below compares total RINs generated with the renewable fuel standard. This is not a RIN inventory balance since up to 20% of current year RINs can be carried over. RIN retirements (other than fulfilling an obligation), along with renewable fuel exports and RIN expirations also affect end-of-year RIN balances; however, this shows that RIN generations have grown over the years, along with the renewable fuel standards.
Two of the great unknowns in the renewable fuel program are (1) how many RINs (renewable identification numbers) can be generated (or used) and (2) from what pathways? Briefly, the overwhelmingly dominant sources of RIN generations are ethanol and biodiesel; however, when you look behind the curtain and see the great OZ, there are some pretty interesting observations in the recent developments in RIN pathways and other RFS considerations.
RIN generation for the past four years and projections for 2016 are shown below.
The number of RINs projected to be generated in 2016 is about 23% more than what was generated in 2012. The total amount of petroleum gasoline and diesel, projected to be supplied to the transportation pool, has only increased by about 10%. On the surface, it looks like cellulosic has finally begun to make a dent; biomass-based diesel is doubling and the renewable fuel (ethanol) has finally broken through the blend wall. Those “obvious” conclusions are not necessarily true, and the real story is quite a bit more complex.
The sources for RINs in 2012, and the sources for projected RINs in 2016 are broken out in the tables below.
Essentially, no cellulosic RINs were generated in 2012. Over 97% of the cellulosic RINs in 2016 came from the biological activity in landfills. Cellulosic renewable fuel production continues to be on the far horizon.
The EPA, in part of their 131-page support for their 2017 RFS, relies on the growth of biodiesel. They showed it increasing by 209 million gallons per year and projected a similar increase for 2016 and 2017. The growth is not a yearly growth, but rather a step change from 2012 to 2013 when the Argentina biodiesel was rerouted from Europe to the U.S. and the European anti-dumping policies went into effect.
RINs from renewable diesel have more than quadrupled, and RINs from biodiesel increased almost 80%. Renewable diesel, which has no performance limitations, appears to be a fuel of the future. The robust growth in biodiesel shows that it has not yet run into any significant performance limitations, and there will be room for more growth in the future.
The precipitous drop in D5 ethanol is because imports of ethanol from sugarcane feedstock have decreased significantly, partly due to the robust growth in biomass-based diesel which is nested in the renewable biofuel.
Renewable fuel is the largest RIN category. Ethanol from corn is the primary source of all renewable fuels (cellulosic biofuel, bio-mass based diesel, renewable biofuel and renewable fuel) and is over 97% of the D6 renewable fuel category. However in 2016, biodiesel and renewable diesel have contributed slightly less than 3% of the renewable fuel. This is primarily because certain pathways for these renewable fuels have not yet been approved and until approved they are allowed to produce D6 RINs if the plants are grandfathered.
The Ethanol Blend Wall
The largest impediment to more widespread renewable fuel use is the gasoline blend wall. Ethanol use in gasoline is generally limited to 10 volume percent of the gasoline pool. Much has been written about these limitations, so we won’t address them in this article; however, it is interesting to add up all the ethanol used in the transportation pool and compare 2012 with 2016. The table below shows that comparison.
The percentage of ethanol in the gasoline pool has stayed remarkably constant over the past five years. The general conclusion is that the blend wall is still a limitation and demand for E15 and E85 has not grown significantly.
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of fuel refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (the next version of which will be released in early 2017) and our various other studies. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. Please contact us for our views on the latest developments and their potential impacts, or if we can assist in any way or answer any questions.