Despite Possible RVP Waiver, E15 Blending Econs. Hurt by Lower RINs Prices

Source: By Jordan Godwin, OPIS • Posted: Thursday, April 26, 2018

The ethanol industry’s long-sought goal of obtaining a Reid Vapor Pressure (RVP) waiver for E15 that would allow the higher ethanol blend to be sold year- round in the U.S. received a key boost earlier this month when the president appeared to endorse it, but some in the industry are worried that even with a waiver, depressed Renewable Identification Number (RIN) credit prices may make it difficult for the fuel to win strong consumer acceptance.

In April 12 remarks to farm state governors and lawmakers, President Donald Trump said the administration is working on the issue. “People have been talking about this for years. And we think we are going to do something — I will say, this is no guarantee, but we’re going to raise it up to 15%, which makes a lot of people happy. We are going to go to 12 months [for E15 sales], which makes a lot of farmers very happy, because we go from eight months, it’s a big difference.”

U.S. Environmental Protection Agency Administrator Scott Pruitt in a meeting with agricultural reporters on Tuesday reiterated that his agency is “actively reviewing” the possibility of an RVP waiver and said the uncertainty over whether EPA can proceed administratively or must seek congressional approval for the waiver has delayed a decision.

Without the RVP waiver, E15 sales are barred in a number of parts of the U.S. from June 1 through Sept. 15, the heart of the high-demand summer driving season. The ethanol industry has viewed year-round E15 sales as critical to expanding their share of the transportation fuels market.

But even with the odds increasing that the EPA may grant the fuel an RVP waiver, industry sources say that RIN prices, which have fallen almost 48% since Jan. 1, may be too low to provide the E15 with a significant enough discount to E10 to incentivize a sharp growth in infrastructure investment and consumer adoption.

Renewable Fuels Association (RFA) Executive Vice President Geoff Cooper said RINs prices are “an absolutely critical piece of the puzzle for retail pricing of E15,” adding that with ethanol-related D6 RINs prices around 30-35cts/RIN — OPIS assessed them at 37cts/RIN on Tuesday — the incremental RIN value for E15 over E10 is no more than 1.5cts/gal.

That incremental RIN value is down from about 4.5cts/gal from less than six months ago when RINs prices were around 90cts in November. Cooper said that when D6 RINs were trading in the 90ct range, some retailers were able to discount E15 by as much as 10-12cts below E10 blends at the pump, a price difference that he said “definitely gets the attention of drivers. We have seen very strong consumer response to discounts in that range.”

But with RIN prices in the 30ct range, it will be a greater challenge to convince consumers to try E15.

RINs prices have tumbled in recent months amid uncertainty surrounding possible Renewable Fuel Standard (RFS) reform coming out of Washington. Prices plunged further earlier this month after EPA confirmed it has granted 25 small-refiner economic hardship exemptions from their 2017 Renewable Volume Obligation (RVO), a move that many ethanol proponents have labeled “demand destruction.” The agency in 2016 granted RVO exemptions to 14 small refiners.

“That single-handedly wiped out hundreds of millions of gallons of ethanol demand,” one ethanol trader source said. “That was a humongous blow to ethanol demand. I can’t see RINs prices making a full recovery from that.”

Cooper, however, said that while RIN prices have taken a hit, ethanol still enjoys a wide discount to gasoline prices and that makes the blending economics a lot more ethanol-friendly than they were for much of 2014 to 2016.

For the first quarter of 2018, front-month ethanol futures on the Chicago Board of Trade (CBOT) settled at an average of $1.424/gal, 43.9cts/gal below the average $1.863/gal settlement of front-month RBOB gasoline futures over the same period.

By comparison, that discount stood at just 33.1cts/gal in the fourth quarter of 2017, which was up substantially from Q1 2017, when the average discount was at 6.2cts/gal. Further, ethanol futures actually held a 21.5cts/gal premium over RBOB gasoline futures in Q1 2016.

“Fortunately, the ethanol-RBOB rack spread remains around 50cts/gal and continues to provide some incentive for increased blending, but the RIN isn’t providing nearly as much extra juice as it did just six months ago,” Cooper said. “Ever since RIN prices crashed, we have seen weekly average ethanol blend rates drop below year-ago levels, providing evidence that low RIN prices are already blunting the signal to expand ethanol blending.”

Ron Lamberty, senior vice president with the American Coalition for Ethanol (ACE), said that although RIN values are an important component of the blending economics of selling E15, they aren’t the only part. Lamberty said that as long as ethanol prices maintain a discount to gasoline prices, retailers will likely be able to offer E15 at a discount, but the degree of that discount depends heavily on the price of the RIN.

“Whether it’s 6cts or 4.5cts or 2cts cheaper than E10, E15 costs less and it has a higher octane unleaded fuel,” Lamberty said. “Retailers who offer it say the volume is better than premium and a lot better than midgrade.”

He added that 70% of U.S. drivers make their gasoline purchase decisions based on price. While there are few reliable sources of data on nationwide E15 consumption — and the EPA didn’t even venture to make an estimated guess in its 2018 RFS final rule — there is a consensus that infrastructure investment has grown substantially over the past three years.

In Minnesota, the Department of Commerce provides monthly data on E15 sales. In 2017, E15 sales in the state totaled 19.05 million gal, nearly four times the 5.68 million gal of E15 sold in 2016 and surpassing E85 sales (14.82 million gal) for the first time, the state said. In Iowa, the number of stations offering E15 jumped to 158 by early March, up from less than 100 stations at the same point last year, according to the Iowa Renewable Fuels Association (IRFA).

Even if the White House should decide it has the authority to provide E15 with an RVP waiver it’s unlikely that would be the final word. John Eichberger, executive director at the Fuels Institute, said that as soon as EPA approved year-round sales of the fuel, lawyers for the retail and refining interests would line up to file lawsuits. In the end, it could very well be the judicial branch — rather than the executive or legislative — that ultimately decides the RVP waiver’s fate, he said.

But if it were to go through, Eichberger said that RIN prices aside, he believes E15 would see rapid growth, pushing the number of stations offering it from around 1,200 to over 12,000 within five years.

“If they were able to sell it year-round, they’d be much more inclined to move toward E15,” Eichberger said. “The blending economics of ethanol can really help retailers get a competitive edge.”

For that growth to continue, a year-round RVP waiver that could come as early as next summer would certainly help, but without robust RINs prices, the blending economics could be difficult.

“Regardless of RIN values, E15 will be a good buy for both blenders and consumers because adding more low-cost ethanol will reduce the retail price, and the extra point of octane will be attractive to some drivers,” Cooper said.

“However, it is undeniable that the RIN value is a key catalyst for E15 expansion, and a low RIN price means E15 growth will occur more slowly than if the RFS were being enforced as intended (and small refiners weren’t being bailed out from their obligations).”