If you read my last piece about RFS, then you know the US Environmental Protection Agency (EPA) missed the November deadline for establishing Renewable Fuel Standard (RFS) minimums for 2022 and beyond. While obligated parties — refineries and importers of petroleum fuels — weren’t completely surprised about it, thanks to COVID-19, it leaves the renewable fuel and biofuel industries rudderless for the moment. It may be months before we have concrete direction regarding the volume of renewable fuels needed by our transportation industry. All of this leads to potentially volatile Renewable Identification Number (RIN) prices over the next few months.
In theory, the Biden administration’s focus on clean energy and climate change should drive renewable energy value higher. In reality, cheaper traditional diesel available right now will be in higher demand by the transport industry, meaning RIN prices could drop — for now. And that’s the golden moment many traders look for: low prices on a future commodity.
So what is RIN trading? How does it work? We’ll answer your questions here. If you’re an advanced RINs trader, or if you trade a similar certificate like Renewable Energy Certificates (RECS), then you might find this article rudimentary. Then again, you might find some thoughtful insight into what’s happening in the world of RIN trading right now. Either way, we’re sure you’ll enjoy the read.
RIN Trading 101
Renewable Fuels, What They Are, and Why We Need Them
Per the EPA website, renewable fuels include ethanol made from corn, biodiesel made from soy and canola, cellulosic diesel made from food waste, and a host of other combustible resources.
- These fuels are faster to regenerate than fossil fuels. But like any other energy, they’re costly to produce.
- The primary benefit of renewable fuels is decreased greenhouse gases (GHG).
These are all hot topics for the Biden administration.
Once renewable fuels are produced, they are blended with petroleum-based diesel and sold on the market. But one gallon of fuel looks much like the next. So to track them, we use Renewable Identification Numbers: RINs. Think of them as a birth certificate for renewable fuels.
Terms to Know
RINs are credits used for compliance. They are the currency of the RFS program.
- Renewable fuel producers generate RINs.
- Market participants trade, buy, and sell RINs
- Obligated parties — refineries and fuel importers — obtain and ultimately retire RINs for compliance.
Know that you can trade RINs in two ways, as:
- Assigned RINs — These are directly associated with a batch of fuel. The certificate numbers travel with that batch of fuel from one party to the next. Purchasers obtain both the fuel and RINs together.
- Separated RINs — These were once assigned with a batch of fuel but are no longer assigned to it. Buyers purchase only the RIN, not the actual fuel.
Typical RIN transactions and terms:
- Generate — A fuel is produced and a RIN is generated.
- Buy — A RIN is bought or traded (the RIN can be attached to a batch of fuel or separated).
- Sell — A RIN is sold or traded.
- Retire — A RIN is used to demonstrate compliance or retired for other reasons.
If you choose to dive into this market and trade, you’ll be dealing with separated RINs (unless, of course, you own tankers and storage tanks to house your fuel purchases.) You’ll purchase a certificate that represents renewable fuel that has already been blended with traditional diesel.
How Do Renewable Identification Numbers Become Available?
When Refiner A fulfills its annual requirement but continues to buy and blend renewable fuels, it can sell extra RINs to Refinery B or an importer who has not yet purchased sufficient renewables to meet its RFS requirement. Private investors and other organizations — “non-obligated parties” — can also buy RINs.
Remember, renewable fuels have a shelf-life. Unlike, say, an ounce of gold, a gallon of renewable fuel will not last more than a few years. RINs aren’t appropriate trades for long-term, set-it-and-forget-it investments. You’ll need to be active, and the RINs trading process doesn’t happen on the stock market. The EPA has a system built to record transactions, known as EMTS.
When you buy or sell an RIN, both the buyer and seller must log into the EMTS system and report the certificate number. If all the numbers match, then the EPA will recognize the trade and log it.
Organizations maintain their RIN accounts by D-codes and “vintage” year, the year a certificate was generated. RINs are then retired for compliance by obligated parties based on their Renewable Volume Obligation (RVO). At the time of writing, we’re unsure what RVOs will be in the immediate future, even though the compliance March 31 deadline looms.
Renewable Identification Number Compliance Issues Today
The compliance year is coming to an end. Renewable fuel producers and certificate traders are on deadline right now.
- Obligated parties (refineries) usually retire RINs at the end of the compliance year by March 31.
- Exporters must retire exported RINs for compliance within one month of the export date.
RINs not retired for compliance can carry over into the next compliance year ONE TIME. Thanks to that shelf-life issue mentioned earlier, Renewable Identification Numbers are only good for satisfying obligations for the current year or the following year. You can only use 2020 RINs in the 2020 and 2021 compliance years. RINs expire after that and can no longer be used for compliance.
On a side note, one year ago, on March 27, 2020, EPA extended the 2019 RFS compliance date for “small” refineries — those producing less than 75,000 barrels per day — to provide them with additional flexibility. It could happen again and has been proposed.
Can Retailers Game the Renewable Identification Number System?
Well, yes. But that’s how people play the game. We’ve talked about this before. The big dogs make expensive moves to establish and maintain their position. It’s been happening since the dawn of trading and occurs in the renewable fuels market today.
Let’s switch gears for a moment and consider how the fuel market works, from generation to end-user. As Bernard Weinstein, Ph.D. wrote in 2016, to the final customer — whether an individual or a freight company — the retail fuel market consists of three types of companies:
- Convenience stores, the gorillas in the sector that sell something like 80% of all fuel in the US
- High volume “hypermarkets” like Walmart or Costco, responsible for 14% of fuel sales
- Traditional service stations, which account for about 6% of fuel sales
Retailers purchase diesel fuel, containing varying amounts of certified renewable fuel, from wholesalers who blended renewable fuels into the product.
(At branded retail stations — Exxon, Shell, and the like — blend specs are tightly controlled by the brand. Some large retailers do their renewable fuel blending in-house.)
And that’s where market distortions arise. In a standard, non-pandemic year, RVOs apply to refiners and importers. But they don’t apply to other entities that could control diesel blending. “Non-obligated parties” and major retailers can, and do, game the system for huge profits.
How to Play the Game
Imagine a large retailer, like Walmart or Amazon, taking ownership of fuels at the blending point and creating RINs to sell at a profit. They generate additional funds by selling separated RINs to obligated organizations like exporters, refineries, or smaller organizations and use the funds to undercut their competitors’ prices. It’s a double-whammy against smaller organizations or traditional petroleum refineries, who must buy the RINs at a cost and send that money into the pockets of their competitor.
- Of course, only the largest retailers have the resources to participate in RINs trading at that level and manipulate the fuel market. Smaller organizations and private individuals just don’t have that kind of capital on hand.
The process of fuel blending costs millions of dollars. A big player would need the liquidity to purchase bulk quantities of diesel and bulk amounts of renewable fuels like ethanol or other biofuels. The inventory must be moved to the blending location, stored, blended, and stored again.
It would be a big operation involving tanker trucks, CDL drivers, regulated storage facilities, and plenty of payroll and insurance costs. Only large retailers can cover these expenses, but the profits are tremendous.
Marathon Petroleum Plays the Game
Marathon Petroleum executed this strategy in 2014. This company owns Speedway convenience stores, the nation’s largest company-owned and operated convenience store chain.
- In 2014, Marathon reported gains on sales of excess RINs totaled profits to the tune of $74 million.
- Right now, Marathon is in the process of selling Speedway to 7-Eleven.
On February 2, 2021, Marathon’s CEO Mike Hennigan said the company has a commitment to sustainable energy. Marathon will be increasing its exposure to renewable fuel production. We’re (sarcastically) sure that has nothing to do with the value of RINs under the new administration.
Over time, the game is disadvantageous to small retailers and has severe implications for their survival. The current regulatory oversight of RINs trading allows large fuel marketers and large retailers to generate tremendous amounts of money every year. Mega-retailers like Walmart can use the RIN profit stream for all sorts of expansion and continually acquire a larger share of an enormous US fuel market. Smaller organizations cannot compete price-wise. So they have to shut down.
Again, this is how the game is always played across all markets since it all began. But it’s something to consider if your decision to invest in RINs has a foundation in social responsibility beyond environmental issues or climate change.
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