Skyrocketing RIN prices signal ethanol blend wall imminent

Source: Gary Gentile, • Posted: Wednesday, March 6, 2013

Washington (Platts)–5Mar2013/511 pm EST/2211 GMT

Prices of renewable fuel credits, needed by refiners to comply with the nation’s Renewable Fuel Standard, have skyrocketed over the past few months, an indication to some that the dreaded “blend wall” is close.

The price for the traded Renewable Identification Numbers (RINs) for corn-based ethanol have jumped from a trading range of about 2-3 cents/RIN to as much as 79 cents/RIN.

Trading for 2013 ethanol RINs Tuesday started the day at 75 cents/RIN and got as high as 79 cents/RIN before dropping back down to 75 cents/RIN by assessment time. Platts assessed RINS Tuesday at 75 cents/RIN

Since first being assessed by Platts on January 2, ethanol RINs have risen 68 cents to Tuesday’s level of 75 cents/RIN, more than ten times the initial assessment.

Ethanol sources said the sharp increase in ethanol RIN prices to start 2013 were the result of a perceived lack of RINs because of the impending “blend wall.”

“I think the real issue is that you have obligated parties looking forward to 2014, where even with a carryover, it is unlikely that there will be enough D6 RINs available to meet the anticipated 14.4 billion gallon requirement at an E10 blend ratio,” said David Dunn, CFA, an analyst at Florida-based brokerage Progressive Fuels Limited.

“D6” is the label for the corn-based ethanol category that the EPA assigns. Other RINs are issued for biodiesel, cellulosic ethanol and other advanced biofuels.

“The industry is clearly at the blend wall,” Stephen Brown, vice president of government affairs for refiner Tesoro said. “Everyone I’m talking to is hitting the blend wall this year — some sooner than others — but we’re all hitting it this year.”

When the volumetric blending levels were set for the RFS in 2007, lawmakers, as well as industry representatives, didn’t expect the level of ethanol produced to exceed 10% of the national gasoline supply until much later this decade. But steadily declining gasoline demand coupled with increased fuel efficiency mean that benchmark, called the “blend wall,” will hit this year and, for some refiners, may have already been reached.

“The RIN price is a really good proxy” for the onset of the blend wall, Bob Greco, downstream director for the American Petroleum Institute said last week. “Suddenly this is a very real issue.”

The Environmental Protection Agency issues RINs to track renewable fuel usage throughout the supply chain. Refiners, importers and blenders — called “obligated parties” — use them to show the EPA that they have fulfilled their mandated government use of renewable fuels. If the obligated party has not used enough physical product it can buy RINs to satisfy the quota.

Currently, most non-flex-fuel vehicles are allowed to run E10, or a 10% ethanol-gasoline mix. Newer model year vehicles, those made after 2001, are also approved by the EPA to run E15.

But so far, only a handful of retail stations carry E15 — gasoline blended with 15% ethanol. Liability issues related to misfueling, the cost of outfitting a retail station to carry the fuel, and concerns raised by some auto manufacturers who won’t honor warranties if E15 is used, have dampened the market for the fuel.

Flex-fuel vehicles can use a mixture of 85% ethanol. But there is little consumer demand for that option.

The “blend wall” is a description of a time when the maximum amount of the US gasoline pool has been blended with 10% ethanol. Refiners will then be under pressure to run higher ethanol blends, trade RINs or get Congress to alter the Renewable Fuel Standard.

That’s exactly what the API, and the American Fuel & Petrochemical Manufacturers want Congress to do. Both groups have made repeal of the RFS, which was instituted in 2007, a top legislative priority this year.

“We see politicians standing in front of service stations every time there is an increase in the price of gasoline, clamoring for an investigation,” AFPM President Charles Drevna said. “They need to look at this [the blend wall issue and spiking RINs prices] and ask, ‘Did we make a mistake in 2007?'”

If RIN prices move too high, refiners will be left with three options that won’t be “popular,” said Jason Bordoff, Professor of Professional Practice in International and Public Affairs Director, Center on Global Energy Policy, at Columbia University, at the IHS CERAWeek conference. The options include passing the cost of RINs to consumers through higher retail prices, exporting products, or lowering refinery utilization rates.

“With RIN prices this high, this is the sign we have been saying for a while would be indicative of companies showing they have real trouble trying to get past the blend wall,” Patrick Kelly, senior policy adviser at the API said. “It’s all the more reason why we’re going to be stepping up our efforts to repeal it.”