RFS RIN Forecast: eRINs Introduce Additional Complexity while D4-D6 Differential to Tighten on Flat Mandates
This is an excerpt from our latest analysis on the RFS program available to our subscribers which includes short-term and long-term RIN price forecasts, supporting factors and different scenarios.
The US EPA has released a proposed RFS rule with renewable volume obligations (RVOs) for 2023, 2024, and 2025, expanding volumes slightly while providing some future outlook for the market. Previous rule releases have been delayed and even had an ex-post-facto revision due to the unprecedented nature of compliance in 2020. With this new rule proposal, the EPA is attempting to signal some certainty in the market for participants by setting RVOs ahead of time.
In our previous analysis, we highlighted to watch for the increase in the D3 mandate in order to accommodate new eRIN fuel pathways. The EPA has now proposed a large increase in the cellulosic biofuel (D3) mandate in 2024 and 2025 to accommodate a growing amount of eRINs pathway approvals and RIN generation in those years. The increase in the D3 mandate represents 87% of the increases in the total renewable fuel mandates in 2024 and 2025 with biomass-based diesel (D4) and advanced biofuel (D5) increasing slightly and a flat implied D6 mandate (renewable fuel mandate minus advanced biofuel mandate). The lack of increases in the D4 mandate volumes has attracted criticism from biomass-based diesel producers as there is a large capacity of renewable diesel projects coming online in the next three years and an expectation of increased D4 RIN generation due to these volumes. The D4 mandate volumes could be altered in later finalized rulings, but the EPA could also want to use these excess D4 RINs to meet the overall renewable fuel mandate since gasoline demand is expected to decline with the ethanol blending market share only expected to increase slightly, effectively reducing D6 RIN generation and making the renewable fuel mandate harder to meet. This use of D4 RINs to meet the overall renewable fuel mandate will likely cause a tightening between D4 and D6 RIN prices.
The major addition in this ruling, is the published text concerning how eRINs will be treated under the RFS. The EPA is proposing that only OEMs of EVs (automakers) receive the eRINs in order to limit the regulatory complexity of dealing with multiple parties. OEMs would be required to register under the RFS this year and submit a multitude of data on EV fleet numbers, charging data and vehicle efficiency in order to assist the EPA in calculating accurate D3 RVOs. The EPA believes that the value of the D3 eRINs will be shared since the OEMs must purchase renewable electricity from qualifying biogas projects in order to receive the eRINs. The ruling also published alternative scenarios for eRIN compliance with biogas and renewable electricity providers receiving value from the eRIN directly and other hybrid models, but Stratas Advisors believes the EPA will stick to their proposed model of granting eRINs directly to OEMs. These proposed cellulosic biofuel (D3) RVOs, and thus advanced biofuel and renewable fuel RVOs, are likely to change as the EPA has calculated estimate numbers of eRIN generation. As OEMs enroll in the program and share quarterly data with the EPA, the calculations will likely change. Another important change in the RFS is the removal of cellulosic waiver credits (CWCs) which when combined with a D5 RIN allowed for obligated parties to meet D3 RIN obligations. These helped provide soft D3 pricing floors and ceilings and flexibility in the compliance with the D3 mandate given the nascent nature of RNG production and difficult economics of cellulosic biofuel production. Now with eRINs, the D3 RVO will be comprised of three separate volumes to be estimated by the EPA in order to calculate the overall D3 RVO while the flexibility to comply with the mandate has been removed by eliminating CWCs...
In the EPA’s previously published rule, the 2021 and 2022 D3 mandates were reduced by 60 million gallons and 140 million gallons respectively, while the 2021 and 2022 D6 mandates were raised by 320 million gallons and 110 million gallons (via a 250 million gallon supplemental standard added to comply with court rulings), respectively. The 2021 and 2022 advanced biofuel (D5) mandates were reduced by 150 million and 140 million gallons, respectively, while the 2020 RVOs were unchanged after their retroactive lowering in December 2021. As expected, the EPA also officially denied 69 small refinery exemptions (SREs) thus restoring some integrity to the mandated volumes after the Trump Administration used the SREs to repeatedly undercut actual compliance with the RFS and reduce RIN prices. The agency also approved fuel pathways for renewable diesel made from canola oil and will now allow bio-intermediaries, such as biocrude or ethanol-to-sustainable aviation fuel (SAF) to generate RINs.
However, the rumors of the restarted climate negotiations from Senator Manchin in late July 2022 boosted RIN prices, which have since subsided since the passing of the Inflation Reduction Act. The bill, totaling $437 billion in spending, is seen as the biggest climate package in US history. President Biden signed the bill into law on 16 August and this legislation contains many pieces of his previously proposed ‘Build Back Better’ legislation, albeit at a smaller scale. In the Inflation Reduction Act, $369 billion is specifically earmarked for “Energy Security and Climate Change” funding, compared to almost one trillion in total spending under the proposed Build Back Better Act and bipartisan deal. The expansion of the 45Q credit value from $50 in 2026 to $85 will improve the economic viability of ethanol CCS projects, which could lead the EPA to reclassify CCS corn ethanol in the future. In addition, the Blender’s Tax Credit (BTC) was extended, supporting biodiesel and renewable diesel producers, and a sustainable aviation fuel (SAF) credit was added which will boost US SAF production and D4 RIN generation if it does not cannibalize RD production. These credits will fuse with the alternative fuel credit after 2025, allowing transport RNG and other alternative fuel pathways with at least a 40% emissions reduction (when compared to petroleum diesel) to generate a $1/gallon (~$8/MMBTU) tax credit. This will also support more RNG project generation and possibly pressure the EPA to increase D3 RVOs in order to accommodate these new volumes.
This is an excerpt from our latest analysis on the RFS program available to our subscribers which includes short-term and long-term RIN price forecasts, supporting factors and different scenarios. Please contact us to learn more about our service offerings and capabilities.
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