Hart Energy report suggests blend wall could drive up RIN prices

By Kris Bevill | December 21, 2011

The anticipated saturation of the U.S. ethanol market could have interesting implications for the future renewable identification numbers (RINs) market, according to a report recently released by Hart Energy. The report, which offers advice on renewable fuel standard (RFS) compliance strategies based on several market scenarios, suggests that a hard E10 blend wall could ultimately drive up the price for D6 RINs in the next few years as obligated parties rush their quotas for corn ethanol early rather than pay higher prices for more expensive D4 or D5 advanced biofuels RINs.

Most of the RIN types are categorized to represent the use of certain fuels—cellulosic biofuels are represented as D3 RINs, biomass-based diesel as D4 RINs, advanced biofuels as D5 and cellulosic diesel as D7. D6 RINs, however, represent a more general “other” renewable fuel category. Until now, corn ethanol has filled the vast majority of that category because it has been the most economical, readily available fuel and could easily be blended into the nation’s gasoline supply.  However, the RFS as originally written calls for an increase in use of conventional biofuels from 12.6 billion gallons this year to 13.2 billion gallons in 2012. Gasoline consumption, on the other hand, is expected to remain flat. Considering the slower than expected introduction of E15 into the market, analysts at Hart Energy believe that soon there might not be sufficient available blending of E10 in the marketplace to generate enough D6 RINs, so parties might have to resort to using more expensive fuels and RINs to fill their quotas.

“Without E15 use, refiners will try to blend as much ethanol as possible, but they will eventually have to use more biodiesel or other more expensive fuels to meet the RIN requirements,” Paul Niznik, biofuels manager at Hart Energy, said. “Market speculation will drive up the price of D6 RINs because obligated parties would rather pay a little more for D6 RINs than a lot more for the other RIN types.” Niznik said D6 RINs are currently selling for less than a penny so obligated parties are likely to also be stockpiling RINs now in order to hedge against higher prices next year. However, parties are only allowed to roll over a limited percentage of the current year’s RINs.

The report also suggests that demand for Brazilian sugarcane ethanol, and the RINs associated with it, will be reduced as a consequence of the U.S. blend wall. Sugarcane ethanol qualifies as an advanced biofuel, which is categorized as a D5 RIN. Those RINs have been priced much higher than D6 RINs in recent history, but refiners have been willing to pay a premium for sugarcane ethanol in order to meet their advanced biofuel RFS requirements and fill domestic demand for ethanol at the same time. However, in a scenario where the ethanol market is saturated, refiners will be more likely to meet their advanced biofuel requirements with biodiesel rather than sugarcane ethanol, Niznik said. “Sugarcane ethanol is still ethanol, so obligated parties seeking to meet their total requirements would rather use cheaper corn ethanol,” he said.

For U.S. corn ethanol producers, higher RIN prices may have some benefits in the form of higher prices for their product. The downside, however, is that higher RIN prices would also indicate a saturated market. Fortunately, Niznik said Hart Energy expects export markets to remain strong in 2012.

One interesting caveat to the company’s RIN report is a scenario in which higher D6 RIN prices actually spur an increased use of E85. “RINs could rise sufficiently to offset the ethanol price discounts needed to drive E85 sales,” Niznik said. “Biodiesel markets have seen high RIN prices work in the same way.”

Niznik said the report was prepared to offer scenarios and possible RIN market strategies for the coming year and offers applicable advice for blenders, traders and producers. A portion of the report has been made available at no cost through the company’s website.