On December 1, 2022, the Environmental Protection Agency (EPA) released its proposed Renewable Volume Obligations (RVOs) targets for 2023, 2024, and 2025. The announcement was highly unusual on more than one level. First, the EPA set targets for three years instead of the usual yearly target. Secondly, and most importantly, the EPA abandoned its previous methodology of basing the targets on the expected level of actual biofuels production and arbitrarily reduced the targets based on the premise of a shortage of biomass-based diesel feedstocks. As a result, these new targets are likely to bring dramatic changes to the biodiesel and renewable diesel markets. These new EPA targets represent the most significant event in the biofuels industry in the last ten years.
A Look Back at 2022 RVOs
The Renewable Fuel Standard (RFS), which originated in 2005, is a federal program requiring transportation fuel sold within the U.S. to contain a minimum volume of renewable fuel. The annual volume requirements through 2022 were established in the Energy Independence and Security Act of 2007 (EISA). Annually, the EPA is required to make updates to the renewable fuel volume requirements based on fuel availability. In June 2022, the EPA finalized the 2022 total renewable volume requirement at 20.88 billion gallons equivalent ethanol gallons based on petroleum demand of 175.34 billion gallons. These renewable volume obligations are then converted into percentage standards. U.S. petroleum refiners and importers of gasoline / diesel fuel must satisfy compliance requirements based on these standards rather than a total volume of renewable fuel. Below are the percentage standards for 2022 which were finalized.
|Table 1: EPA Final RFS Percentage Standards for 2022|
|Cellulosic Biofuel (D3)||0.35|
|Biomass-Based Diesel (D4)||2.33|
|Advanced Biofuel (D5)||3.16|
|Renewable Fuel (D6)||11.73|
The total renewable fuel volume required for the year is calculated off the actual gasoline and diesel supplied by the obligated parties for the respective year. The U.S. gasoline and diesel demand for 2022 closed strong with a combined average of 12.7 MMBPD, or 174.68 billion gallons in total. However, this was lower than the volume estimated in the final rule for calculating the percentage standards by 660 million gallons. Based on our analysis, the total renewable fuel volume required for 2022 was less than the finalized rule. But renewable fuel production volumes were even lower than originally projected, putting upward pressure on the pricing of the Renewable Identification Number (RIN) used for satisfying compliance.
State of the RIN Bank
Each gallon of biodiesel produced in the U.S. generates 1.5 RINs, while each renewable diesel gallon yields 1.7 RINs. When biodiesel and renewable diesel facilities produce more RINs than is necessary for the industry to meet its RVO requirements, the RINs can be saved and used at a later date. This storage is referred to as the RIN bank. The volume of the RIN bank is generally measured as a percent of the total U.S. renewable obligation. A RIN bank at 10% could satisfy 10% of the total U.S. RVO requirements for that year. TM&C’s RIN Bank volume model predicted the available number of RINs for each of the four categories to hold at low levels with a slight decline, projecting the RIN bank to end around 5 – 7%. When the final renewable fuel production data for 2022 is posted by the EPA, TM&C will confirm its projection and firm up our future outlook on RIN prices.
RVO Impacts on RINs and RD Supply
The EPA only allows an obligated party to meet 20% of its obligation with the use of prior-year RINs. The remaining 80% of its obligation must be met using RINs produced in the current year. In addition, the EPA only permits RINs to be saved for one year after their generation. RINs not used in the year following their generation must be retired with no value to their owner. These conditions mean that should the RIN bank rise to nearly 20%, the value of the RINs would likely plummet based on the expectation that RINs would soon be retired at no value.
Looking Ahead to the 2023 – 2025 RVOs
The EPA’s yearly RVO targets determine the demand for biodiesel and renewable diesel. The projected output of the existing and planned biodiesel and renewable facilities represents the supply of these products. These markets behave like all others, in that when demand exceeds supply, prices (RIN values) rise. When supply exceeds demand, however, prices (RIN values) would be expected to decline. TM&C’s preliminary assessment is that the production level of new renewable diesel projects substantially exceed the EPA’s estimates. The EPA assumption is that a shortage of feedstocks would dramatically lower utilization rates. Our view is that while feedstocks likely will be priced at high levels, there would be no material shortage. Our calculations indicate that actual biodiesel and renewable diesel production could substantially exceed the EPA’s RVO targets which would result in significant changes in the RIN bank and RIN prices in the near term.
TM&C is assessing the implications of the EPA Proposed RFS Percentage Standards for 2023 – 2025 on the RIN Bank, RIN prices and RD supply outlook. Our views will be incorporated in our upcoming renewable fuels outlook publication in March. TM&C is also developing a report addressing these specific market implications. More details on this report will be communicated soon.