Making The RIN Program Work
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Background and Overview
The United States is one of the world’s largest producers of fuel from
renewable sources. It invests millions of dollars of private and public
funds each year into research and development of alternative fuels. It
has created a system of regulations, incentives, mandates and tariffs to
bolster domestic production and consumption.
Your Partner in RIN Compliance and Marketing.
In 2007, the US legislature passed the Energy Independence and Security
Act (EISA) with the goal of increasing biofuel use in transportation fuel from 9
billion gallons in 2007 to 36 billion gallons in 2022. Subsequently, the USEPA
developed RFS1 and RFS2 (jointly RFS) to implement the goals of EISA
with respect to biofuels. The key elements of the RFS were the creation of a
mandate for biofuel use and the creation and use of Renewable identification
Number (RINs) – numeric code that is generated by the producer or
importer of renewable fuel and assigned to batches of renewable fuel that
are produced, imported or transferred (change of ownership) to others.
The two primary purposes of the RIN are to 1) allow EPA the ability to track
renewable fuel production and all downstream transactions and 2) create an
incentive for increased blending as the RFS is ratcheted up each year.
In March 2010, the USEPA released RFS2, which developed and improved the policies put in place under RFS1. Under RFS,
obligated parties (with a compliance obligation) are petroleum refiners, importers, and fuel reformulators – entities that produce
and offer gasoline and diesel. Every exporter of renewable fuel is also given a unique obligation which equates to 100% of the
equivalent volume being exported. Obligated parties have to prove compliance by blending renewable fuel or by purchasing RINs
in the RIN market. RINs are assigned to renewable fuels and may only be separated and sold once they have been either been
blended with motor vehicle fuel (on or off-road), heating oil, or jet fuel, or purchased by an Obligated Party. Fuel Reformulators
and refined Fuel Importers are only allowed to separate enough RINs to meet their obligation, which is based upon the gallons
imported or the additional gallons of fuel created while reformulating. Biodiesel blended with heavier ends (No.3 and up) must be
retired at this time.
To a great extent, the RIN market is expected to bridge economic gaps between renewable fuels and refined fuels. A gap
which is expected to grow significantly as the loss of federal blender credits for biodiesel and ethanol are realized by those
blending. Indeed we have already seen a strong surge in the value of biodiesel RINs stemming from the original lapse of the
blenders credit (2010). Complicated RIN management rules, illegal RIN generation, and non-compliant RIN separation have
many wondering if the changes made under RFS2 are enough.
Four Fuel Types
Of primary concern, under the Renewable Fuels Standard, are the increasing possibilities of fraudulent RINs created by
improper RIN separation or illegal RIN generation.
Ambiguity, over what constitutes an EPA approved feedstock worthy of RIN generation, was created by indifferences to
the RFS rules. Exasperated by the introduction of foreign feedstocks, production facility tolling agreements, and mis-guided
renewable fuel producers, the RIN market still appears to be in it’s infancy.
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Making the RIN Program Work
2
Figure 1:
2012 RFS Volumetric Mandates
Fuel Type
Actual
Volume
Ethanol
Equivalent Vol.
(RIN Volume)
Cellulosic
biofuel
8.65 mill gal
10.45 mill gal
Biomassbased
diesel
1.0 bill gal
1.5 bill gal
Advanced
biofuel
2.0 bill gal
2.0 bill gal
Renewable
fuel
15.2 bill gal
15.2 bill gal
Figure 2: Fuel Types and D codes
D Code
Fuel Type
Fuel
GHG
Reduction
Req.
D3 RIN
Cellulosic
Biofuels
Cellulosic
ethanol,
cellulosic
naphtha,
etc.
60%
D4 RIN
Biomassbased
Diesel
Biodiesel,
renewable
diesel, etc.
50%
D5 RIN
Advanced
Biofuels
Sugarcane
ethanol,
renewable
heating
oil, biogas,
etc.
50%
D6 RIN
Renewable Fuel
Corn
ethanol,
etc.
20%
D7 RIN
Cellulosic
Diesel
Cellulosic
diesel
60%
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Feedstocks for renewable fuel production are required to be approved
b y EPA along with processes used to create the fuel, effectively creating an
approved pathway that meets the requirements of specific D-codes. Issues
arise when a producer introduces new or foreign feedstocks that have not been
approved by EPA. A general lack of EPA and industry oversight is having
disastrous impacts resulting in violations, fines, and criminal charges against
those involved in the process.
One of the main changes in RFS2 was the creation of four renewable fuel
categories based on the amount of Green House Gases (GHGs) displaced by
the renewable fuel relative to the fossil fuel it is replacing. At the bottom of
the hierarchy is “Renewable Fuel,” mostly comprised of ethanol from corn,
which is assumed to replace 20% GHGs relative to gasoline. Next in line is the
“Advanced Biofuel” category, which is expected to replace 50% GHGs relative
to the fossil fuel replaced. Members of this group include sugarcane ethanol,
biodiesel, renewable diesel, renewable heating oil, biogas, etc. Finally, there
are two categories for cellulosic fuels- one for cellulosic ethanol and the other
for cellulosic diesel, which must meet a 60% GHG reduction relative to fossil
fuels replaced. Each of these groups has annual volume mandates established
under RFS2 and obligated parties are expected to comply in all four fuel types
assuming they are active in both gasoline and diesel markets.
Corn ethanol is the biggest and most mature group within biofuels- with
2011 production set to exceed the minimum 12.6 billion gallons volumetric
mandate for 2011. Under the requirements of the RFS program, the corn ethanol
volumetric mandate for 2012 is 13.2 billion gallons. Based on gasoline energy
demand projections by the EIA, a total of about 14.3 billion gallons of ethanol
could be consumed in 2012 if all gasoline contained 10% ethanol – leaving a
small positive gap between the mandate and the blend wall in 2012 which could
be filled with ethanol from other sources. Corn ethanol’s volumetric mandate
reaches a ceiling of 15 billion gallons in 2015.
Despite corn’s current commercial and political heft, it is facing some
headwinds as the VEETC (Volumetric Ethanol Excise Tax Credit) and the tariff on
imported ethanol both expired on December 31, 2011. The 15 billion gallons per
year volumetric mandate for corn ethanol in RFS2 ensures that corn ethanol will
continue as a steady fixture in the biofuel mix. However, its expansion potential is
limited unless it can elevate itself into the “Advanced Biofuel” category of RFS2.
Biodiesel is the only “Advanced Biofuel” available in current U.S. markets
in significant volumes. (Per EMTS records at the end of 3Q 2011, non-ester
renewable diesel and heating oil added up to approximately 47 million gallons
compared to 686 million gallons of biodiesel. And advanced ethanol was at
90 million gallons compared to 10 billion gallons of regular corn ethanol.)
According to the EPA and National Biodiesel Board records, the aggregate
production capacity of biodiesel plants in the U.S. is estimated at 2.4 billion
gallons per year across 148 facilities. Biodiesel currently has its own mandate
carved out within RFS2 and is expected to have one at least for the next 2 years.
Making the RIN Program Work
Figure 3:
Biodiesel Feedstock Availability
Vegetable oils
seed oils approved for biodiesel production
(GHG reduction has been modeled) Soy,
Canola, non-food grade corn oil, etc.
Meets all renewable
biomass requirements
(foreign vs. domestic)
Biodiesel
use D4
RIN
Figure 4: 2011 Advanced Biofuel
Production / Import (million gallons)
150
125
3
The main sources of feedstock for domestically produced biodiesel are
soy oil, canola oil, waste oils, rendered fats, and corn oil extracted during
production of fuel ethanol. While the total volume of animal fats is unlikely
to grow significantly over time, more vegetable oils are being modeled and
approved by the EPA, and the available pool of feedstock is expected to grow.
This is critical to the availability of biodiesel in the long run.
The biodiesel market is significantly smaller than ethanol from corn starch,
but, nevertheless, commercially viable and currently booming as a result of the
mandates and credits available to the industry. However, the future of the excise
tax credit is uncertain under current political climate. The last time the tax
credit expired, the industry ground to a halt. This time around two things are
different: one, a clear mandate is in place for 1 billion gallons in 2012; and two,
biodiesel RIN values are expected to fill in the gap left by the tax credit.
The remaining renewable fuel products, at various stages of
commercialization, include advanced ethanol, renewable diesel, renewable
heating oil, cellulosic biofuels, renewable electricity, biogas, etc. This catchall bucket is where the EPA has placed its trust in order to meet the nation’s
36 billion biofuel mandate in 2022. This bucket comprises 58% or 21 billion
gallons of the total 36 billion gallon volumetric mandate for 2022. The only
product in this group available on a large commercial scale with sophisticated
distribution systems is sugar ethanol of foreign origin, but questions remain as
to whether there are sufficient volumes available after meeting local demand in
countries of production. With the current premium attached to the Advanced
Biofuel RIN, and uncertainty over the future of the import tariff on imported
ethanol, economics may favor imported ethanol, provided other variables
such as corn prices remain constant. Some models predict a two-way trade
of corn ethanol exported to Brazil and Brazilian ethanol exported to the US
simultaneously to meet the regulatory requirements.
Cellulosic ethanol is expected to arrive for the first time in 2012. The EPA
has come out with a modest 8.65 million volumetric mandate for cellulosic
biofuel, which may include a bit of cellulosic diesel in its projection. This is
based on production estimates from actual projects for 2012, thus we may be
witnessing the beginning of the cellulosic era.
100
70
50
25
0
Jan Feb Mar Apr May Jun Jul Aug
biomass based diesel
advanced biofuels
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Renewable Identification Numbers (RINS)
RFS2 rests on two pillars- one is the increasing annual mandates for the
different fuel types; and the other is the implementation of the RIN program.
RINs are numerical code created with every gallon of fuel domestically
produced or imported into the country. RINS play the dual role of 1) a
renewable fuel credit to incentivize renewable fuel production and use and
2) a tracking mechanism to monitor production, movement and blending of
biofuels in the country. For successful implementation, RINs have to function
as compliance currency, which gives them actual market value.
Making the RIN Program Work
4
RINS have the de facto role of bridging a gap in the economics of supply
demand in biofuel production and distribution. For example, if biofuel
production is below the mandated minimum due to high production costs,
obligated parties will bid up the prices in order to hedge their risk of not
meeting their obligation, and RIN values will increase till production restarts. The loss of the federal $1 biodiesel blenders credit and the $0.45 VEETC
(ethanol) blenders credit, on January 1, 2012, will pose new challenges for
production facilities that have come to rely on these credits and for pricing
product at the dispenser. The RIN is intended to maintain economic incentives
for blending but the lag-time in RIN value response may take several months.
Biodiesel RIN values, reflecting an imbalance in supply-demand rose from
$0.50 in late 2010 to $2.00 in early September 2011. In the ethanol industry,
the re-structuring in the industry in 2008-2009 created supply shocks and saw
RIN prices rise when the uncertainty of meeting obligations loomed over the
obligated parties. Current ethanol RIN prices are understandably low due to
sufficient supply, a competitive playing field and relatively stable economics of
production. Any shock that could potentially destabilize the equilibrium – such
as loss of the VEETC – could have an effect on RIN prices.
Figure 5: RIN Prices per gallon of
Biodiesel (May – Sept 2011)
$3.00
$2.82
$2.55
$2.50
$2.03
$2.00
$2.13
$2.00
$1.50
$1.20
$1.20
$1.00
$0.85
$0.90
$0.44
$0.50
$0.44
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
$–
In order to function effectively as a currency, RINs must have the backing of
the government, the trust of industry and stability in value. The EPA has repeatedly
made it clear that the burden of proving RIN validity is on the RIN generator.
Under RFS1 RINs were 38-digit numbers that were kept on spreadsheets. The 38
digits were a numerical code that contained information on the RINs vintage- type
of fuel, year of production, batch and facility numbers, etc. At the end of each year,
a third party review of the numerical code against the plant production records
would ensure compliance. Despite being conceptually sound, the practicalities of
tracking a national credit scheme on excel spreadsheets using 38 digit numbers
were fraught with errors. RFS2 attempts to address that weakness with the new EPA
Moderated Transaction System or EMTS.
The new EPA Moderated Transaction System (EMTS) requires renewable fuel
producers to generate RINs and submit their fuel/RIN transactions in EMTS.
EMTS offers immediate validation on the registered status of producers and
their ability to process specific feedstock and fuels. This eliminates the accidental
creation of an ethanol RIN by a biodiesel producer or vice versa. The facility also
cannot use a feedstock it is not approved to process. Producers’ EMTS accounts
are created from an independent third party engineering report of the production
facility verifying the plant’s ability to produce fuel in compliance with the approved
pathways in 40CFR Part 80.1426 Table 1 and submitted to the EPA as part of the
facility registration. EMTS tracks fuels by D codes and keeps real-time account of
production. All of this results in greater accountability in RIN generation.
RINs are generated when a producer enters relevant data regarding a batch
of fuel into EMTS- the EPA expects producers to generate RINs within five
business days of fuel production. Producers have to enter the type and quantity of
feedstock used for the particular batch for which RINs are generated. They also
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Making the RIN Program Work
5
have to enter an affirmation that the feedstock meets the definition of renewable
biomass and they have to enter information regarding the co-products generated.
All this goes into the RIN’s DNA and is available for future verification.
One practical point of contention related to reporting RIN generation is
that there is not enough time to reconcile transactions in EMTS against posted
transactions in a company’s books. EMTS assumes an error free world in
which all RIN generations are entered into the system within 5 working days.
There are several ways a transaction may not get entered into EMTS in a timely
manner, such as partial file upload, technical failure, etc. Sometimes, by the
time the error is caught, it is already past the deadline. For some producers,
getting paperwork from third party carriers in a timely manner can be a
problem. The EPA has not yet developed a working solution for error correction
although they offer some tools for error reporting. It is often difficult to get
answers to specific problems from the regulators in a timely manner.
Once the RIN is generated it moves down the supply chain to downstream
parties in EMTS. In order to monetize a RIN, it must be separated from the
wet gallon that generated it- a metaphorical umbilical cord must be cut. At this
point the RIN status changes from “assigned” to “separated” and it can freely
trade in the biofuel derivative markets. RIN separation rules are detailed and
rigorous. There are very narrow sets of circumstances that warrant a separation
and parties that separate are expected to document the event and report it in
EMTS. The most common event that triggers a separation is blending of the
renewable fuel with fossil fuels into a mixture ready for retail use.
For exported gallons of renewable fuel, RINs must be separated and retired
against an obligation equal to 100% of the volume being exported. Unfortunately,
many exporters do not realize their role under the RFS and have failed to register
with EPA. Instead, they are apt to buy RIN-less product for export, not realizing
that they are still required to retire RINs by purchasing and retiring RINs at a
later date. This situation has resulted in skewed available gallon/RINs in the U.S.
Based upon export volumes (EIA), as many as 100,000,000 biodiesel RINs and
1,000,000,000 ethanol RINs have yet to be retired for 2011.
RIN Integrity
RIN integrity falls squarely on the shoulders of industry. EPA’s policy of
“buyer beware” has clearly stated that it is industry’s responsibility to perform
quality control checks.
The eventual integrity of a RIN as a valid compliance tool depends on the
1) whether its generation meets regulatory requirements regarding fuel quality,
feedstock use and the mass balance of its inputs/outputs and 2) whether the
RIN was separated in accordance with the rules.
At the point of generation, RIN validity depends directly on feedstock and
processes used for biofuel production. If the feedstock is crop-based -e.g. corn
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Your Partner in RIN Compliance and Marketing.
Executive Summary:
Since the inception of the Renewable
Fuel Standard (RFS), industry compliance
specialists at RINAlliance have been creating
and adapting tools to best serve renewable fuel
marketers, blenders and RIN owners. Their
full suite of compliance tools have a proven
record of helping industry comply with the RFS
rules while generating revenue that incentivizes
renewable fuel blending.
Developed by staff of the not-for-profit
Petroleum Marketers and Convenience Stores
of Iowa, established 1936, RINAlliance quickly
expanded service beyond Iowa to marketers
and blenders, coast to coast. What began as
a program to help small businesses to continue
blending renewable fuels has rapidly grown
into a dynamic service capable of managing
RINs for the most complex companies. More
importantly, helping blenders find assurances
that their renewable fuels meet EPA qualifiers in
order to avoid invalid RINs.
Since 2007, the RINAlliance group has stayed
focused on delivering accurate quality solutions
to help industry maintain compliance and
maximize profits. RINAlliance’s greatest
assets are the companies in the program. The
cooperative structure of RINAlliance has netted
RIN sales above the group’s expectations. As
RIN values grow to more than $3.00 per gallon
for biodiesel, more and more marketers and
blenders are entering the RIN compliance
and profit game and are relying on the tools
provided by RINAlliance to gain the competitive
edge they need.
6
starch or virgin edible oils – the biofuel producer must ensure that no new land
was brought into cultivation to grow that feedstock- this is especially true of
feedstock grown on non-US agricultural lands.
Global trade in feedstock requires domestic producers to be vigilant and
conduct strict due diligence on the origin of feedstock used for fuel production.
For foreign grown feedstock, there is a list of requirements to be met in order
to generate RINs, including submitting maps of lands where the feedstock was
cultivated. As we continue along the long march towards 36 billion gallons
of biofuels, we will see more and more varieties of feedstock and fuels- ethanol
from cane and beet, biodiesel from palm and so on. All this will require rigorous
documentation of the land of origin of the feedstock and related chain of custody
as it travels downstream to the processing plant. With cross border trade of seed
oil growing each year, the rules create a dis-incentive to use foreign feedstock to
produce biodiesel for sale in the U.S. even if the cost structure is attractive.
Although, the control mechanisms that monitor land use and cultivation
practices for fuel crops are addressed in the Renewable Fuel Standard, feedstock
certification may be a weak link in the RIN quality control mechanisms. The
regulatory guidelines clearly restrict biofuel production to approved domestic
feedstock or very closely tracked foreign feedstock; but there is no mechanism to
actively monitor compliance with these regulations. The main enforcement tool
is the year-end attestation, which may a little too late if the RINS generated in the
early part of the year have already reached the end of their compliance life.
Irregularities in RIN separation can also result in uncertainties around
the effectiveness of the program. For example, a perfectly good ethanol RIN
generated by a corn ethanol plant in the Midwest is separated by a party
downstream who sells the product for non-transportation use. The rules prohibit
monetization of RINs from fuel that was used in non-transportation purposes
and these RINs cannot be used as a compliance unit. However, a party that buys
this RIN in the market may not have any knowledge of its reason for separation
or who was responsible for the separation. Although this information may be
available to the EPA in its EMTS databases, it is not accessible to industry to
perform its due diligence. And it is a buyer beware marketplace.
In 2011, the EPA initiated criminal charges against at least two registered
biodiesel producers who were allegedly generating and trading fraudulent
RINs. Subsequently, the EPA issued Notices of Violation (NOVs) to Obligated
Parties who had purchased or traded in the invalid RINs generated at the
suspect facilities and required them to replace invalid ones submitted for
compliance purposes with valid ones.
The EPA fuels program approaches compliance with a combined
Presumptive Liability policy and a “Buyer Beware” marketplace. This is
supposed to motivate industry to adopt the necessary policies and procedures
to ensure compliance with regulations. The “Buyer Beware” policy is one of
the cornerstones of the RFS program. It provides incentive for the regulated
community to comply and it mandates due diligence on the part of all RIN
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7
buyers. It also encourages self-policing on the part of RIN generators, owners
and users in order to keep the program functioning smoothly.
Executive Summary:
EcoEngineers is a privately-held engineering
& software firm that offers a full suite of
compliance services to renewable fuel producers
regulated under the US EPA’s Renewable Fuels
Standards (RFS). Ecoengineers specializes in
managing Renewable Identification Numbers
(RINs), a credit generated by renewable fuel
producers under RFS and a critical component
of the economic viability of renewable fuel
production in the U.S. EcoEngineers has
created customized software solutions for RIN
management that incorporates strict quality
assurance programs and product traceability.
EcoEngineers’ suite of solutions include
customized compliance software, RIN quality
assurance programs, product traceability and
and tracking, biofuel plant engineering reviews
and registration and other customized solutions
to help with management decision making.
Please visit www.EcoEngineers.us for more
details.
A critical defense against the presumptive liability is a strong oversight
program, such as a Quality Assurance Program (QAP) supported and overseen by
a third party. A strong QAP at the fuel production facility provides assurance to all
down-stream parties regarding the integrity of the RINs they are transacting and
thus mitigates the uncertainty and risks of a “Buyer Beware” market.
In the light of recent events, it will become imperative for industry to
implement quality assurance/control programs as RIN markets mature. At
EcoEngineers we offer such a program to producers, and can give obligated parties
the needed assurance. Our program involves rigorous record-keeping and oversight
of production and transfer of fuel and RINs. RIN generators and independent
auditors conduct timely internal inspections of their RIN generation and separation
activities in order to ensure proper RIN generation and the accuracy of RIN
information in EMTS. If you are currently purchasing renewable fuels, it is strongly
suggested that you ask the producer for their quality assurance documentation.
Conclusion
RFS2 provides a clear roadmap for biofuel blending in the US. It has
spurred investment in domestic renewable fuel facilities and given some
confidence and stability to the industry. Global interest in the U.S. biofuels
markets is also growing as a result of RFS2. More and more international
producers are registering with the USEPA, so they can export their fuel as
opportunities arise. In conjunction with mandates and regulations in other
countries, RFS2 creates a framework for global biofuel trade. If 2010 was
a record year for biofuel production, the rest of the decade will only see
increasing biofuel use each successive year.
Common problems in RFS2 implementation are no different than the
implementation of any large and unwieldy government regulation- it hinges on
the interpretation and enforcement of rules by overworked staff and a certain
“settling period” as practical implementation concerns are discovered by
industry in its attempts to comply. This is when the finer points of the rules are
shaped on the anvils of industry experience. The result is a more robust set of
rules that not only capture the intent and spirit of the original legislation but
also is tested for effective implementation.
It is critical to maintain the integrity of your RIN related compliance. Since
RINs have a vital role in the economics of renewable fuel production and use,
it is only through reliance on their credibility that the system can function
smoothly. Compliance failures come with hefty fines of up to $37,500 per day
and/or criminal charges. RIN fraud is a very serious offense.
In the light of recent events, RIN transactions are facing more scrutiny and
industry is rightfully expecting stricter due diligence. This will result in a more robust
RIN market in the longer run by raising quality standards in the supply chain.
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