Contending with a Changing Downstream Landscape

A finalized Renewable Fuel Standard (RFS) for 2023 through 2025 from the U.S. Environmental Protection Agency (EPA) is expected on June 21, and fuel buyers and sellers should be on their toes, with credible reports indicating a key feature proposed by the EPA in December 2022 will be delayed. Trading for RFS compliance credits called Renewable Identification Numbers (RINs) could erupt depending on how the EPA realigns the volume mandates under their nested categories.

Trading for RFS compliance credits called Renewable Identification Numbers (RINs) could erupt depending on how the EPA realigns the volume mandates under their nested categories.

The federal agency’s proposal included a pathway to generate RINs through renewable electricity consumed by electric vehicles called eRINs. The proposal builds on the RIN-generating pathway for electricity made from biogas established by the EPA in 2014 but delayed because of concerns it could create policy and implementation issues. It is this component of the 2023-2025 RFS proposal that is expected to be delayed.

The Energy Independence and Security Act of 2007 expanded RFS to include volume mandates for cellulosic biofuel, yet actual volumes have consistently failed to meet the statutory mandate, triggering a reset under the RFS that lowered volume requirements. The EPA’s proposal is designed to spur cellulosic biofuel consumption through eRINs, which would fall under the D3 and sometimes D5 RIN coding, depending upon the biogas feedstock. D3 RINs are for cellulosic biofuel, and D5 RINs represent the advanced biofuel nested category.

The EPA’s proposal would begin eRIN generation in 2024 with a volume mandate of 600 million RINs, increasing to 1.2 billion RINs in 2025. If, indeed, the final RFS delays eRIN generation for 2024 or both years, how does the EPA address the lost volume? Considering 2023 marks the first year without statutory volume mandates, the EPA has leeway, potentially erasing the volume. Yet, when establishing the eRIN generation pathway, the agency noted a statutory goal in expanding the consumption of renewables in lieu of petroleum-based fuel for the transportation sector.

The other two nested categories are biomass-based diesel D4 RINs generated through biodiesel and renewable diesel production, and the most common, D6 RINs, which is the baseline RIN, equivalent to one ethanol-equivalent gallon of renewable fuel.

The EPA’s proposal would begin eRIN generation in 2024 with a volume mandate of 600 million RINs, increasing to 1.2 billion RINs in 2025.

The RFS proposal for 2023 mandates volume of renewable fuel of 15 billion RINs, and for a second year running, includes a supplemental standard for 250 million RINs. The supplemental standard addresses a missed volume mandate for 2016, with a federal court remanding the EPA to make up the 500 million RINs. For 2024 and 2025, the volume mandate for D6 RINs is 15.25 billion gallons.

Fuel volatility standards limiting the level of ethanol concentration in conventional gasoline zones to 10% at the wholesale terminal level beginning on May 1, and extending to retail outlets through Sept. 15, have restricted growth in ethanol consumption. Retailers have been reluctant to sell to the public a gasoline formula with a higher concentration of ethanol for only part of the year, especially when considering underground storage tanks and dispensing pumps must be certified for E15.

Through EPA waivers triggered by concerns over fuel shortages caused by Russia’s invasion of Ukraine, E15 was allowed during the summer of 2022, and under the same authority, is again being allowed this summer. Bipartisan legislation proposed in both the U.S. Senate and House of Representatives called the Consumer and Fuel Retailer Choice Act of 2023 would allow for E15 sales year-round.

In determining estimated costs of the RFS, the EPA projected slow growth in ethanol consumption from 2023 through 2025, projecting a year-on-year increase for 2023 at 609 million gallons or 4.35% to 14.59 billion gallons, which trails off to annual growth of 29.4 million gallons or 0.2% in 2025, for consumption of 14.670 billion gallons. The sluggish growth rate reflects the needed investment at retail outlets. A shortfall between actual ethanol consumption and the volume mandate would push D6 RIN prices higher.

RIN volume mandates for biomass-based diesel were proposed at 2.82 billion, 2.89 billion, and 2.95 billion, respectively, for 2023 through 2025, below actual production of more than 3 billion gallons in 2022.

“Considerable investments by biodiesel and renewable diesel producers, oilseed processors, and farmers in our states will be put at risk without a true upward trajectory for the RFS volumes,” the governors of Iowa, Missouri, and Nebraska said in a letter to EPA Administrator Michael Regan on May 25 urging the EPA to increase volume mandates for biomass-based diesel and advanced biofuel for 2023, 2024, and 2025 above the agency’s December proposal.

The Energy Information Administration estimates that domestic renewable diesel production could reach 5.9 billion gallons by 2025.

The letter from the governors came well after the public comment period for the December RFS proposal on February 10 but also follows news reports that the EPA would delay the eRIN proposal out of concern over lawsuits. In doing the math, lifting the volume mandate for biomass-based diesel to compensate for eRINs seems plausible. Moreso, when considering the Energy Information Administration estimates that domestic renewable diesel production could reach 5.9 billion gallons by 2025.

While it’s unclear what the specifics of the finalized RFS for 2023 through 2025 will be, knowing the landscape in a changing downstream sector will allow both fuel buyers and sellers to be in a better and, hopefully, more profitable market position.

The volatility of changing rack rates brought on by RIN legislation and market movement makes it critical to have the most up-to-date rack rate pricing. Visit DTN FastRacks to learn more.

 

About the author

Brian L. Milne

Brian L. Milne is a 28-year veteran of the energy industry, and served in multiple roles at DTN, including editor and analyst. Milne delivered dozens of presentations on a wide range of topics discussing the energy markets and has been quoted widely in the media, including the Wall Street Journal, Barron’s, USA Today, Newsweek, CNN, National Public Radio, and major regional news outlets. He has authored numerous articles for international magazines, exploring market dynamics and providing forward-thinking commentary and analysis. Milne graduated from Monmouth University in New Jersey with a Bachelor of Arts in history and an interdisciplinary in political science (magna cum laude).