RFS2 Compliance for Obligated Parties

By Sam Gray | September 20, 2010
Plenty of confusion has surfaced recently regarding the impact of a 2010 advanced biofuel standard for obligated parties. The 2010 advanced biofuel requirement of 0.95 billion gallons would, in theory, be met by the biomass-based diesel standard for 2010 using simple RFS2 math: the equivalence value of biodiesel (1.5), multiplied by the mandated volume of biomass-based diesel for 2010 (0.65 billion gallons) equals 0.975 billion gallons. Since biodiesel is nested within the advanced biofuels standard, and since the above number exceeds 0.95 billion gallons, the advanced biofuel standard would be automatically met. Case closed, right?

Well, that depends on your outlook for biodiesel production for the remainder of 2010, and for this we first look to the Energy Information Administration. EIA biodiesel production figures show an industry that is producing approximately 34 million gallons per month for the first half of 2010. EIA's June Monthly Energy Review shows a net deficit between biodiesel imports and exports of 737,000 barrels, or roughly 31 million gallons, during the first quarter of 2010. When biodiesel is exported, RFS2 statutes demand that exporting parties establish a renewable volume obligation in biomass-based diesel using the physical volume exported, multiplied by its equivalence value. Removing biodiesel gallon renewable identification number (RIN) credits from the domestic pool by exporting biodiesel simply demands more domestically consumed biodiesel to make up the deficit. Without a substantial increase in biodiesel production over the second half of 2010, combined with a large decrease in net exports, it is possible that less than 300 million gallons of domestically consumed biodiesel (and their 450 million associated RINS) will be available to meet the combined 2009-'10 biomass-based diesel standard.

The EPA projects RFS2 regulatory levels of 2010 biodiesel consumption within their revised Q&A document released in July, stating: "Based on our current review of the 2009 RFS compliance report data submitted by obligated parties, we anticipate that this straight reading of the regulations would require obligated parties to obtain 2010 biomass-based diesel RINs representing approximately 345 million gallons (518 million RINs) after accounting for 2008 and 2009 RINs that EPA believes may be properly applied to the combined 2009-'10 biomass-based diesel requirement of 1.15 billion gallons."

And how does this impact the 2010 advanced biofuel standard? EPA explains: "If 345 million gallons of 2010 biodiesel (or the equivalent of 518 million RINs) are used in satisfying the combined 2009-'10 biomass-based diesel standard, these RINs would also be valid for meeting the 2010 advanced biofuel standard of 950 million gallons. However, an additional 432 million advanced biofuel RINs would still be required to meet the 2010 advanced biofuel standard ... Such biofuels could potentially include U.S. biodiesel production in excess of 345 million gallons, cellulosic biofuel RINs with a D code of 1, 3, or 7 in excess of the 6.5 million ethanol-equivalent gallons needed for 2010 compliance, or imported sugarcane ethanol RINs with a D code of 5. In addition, while up to 190 million RINs from 2009 could be used toward meeting the 2010 advanced biofuels requirement consistent with the applicable 20 percent rollover cap, only excess 2009 biodiesel or renewable diesel or cellulosic ethanol RINs (that is, RINs not used for compliance in 2009) could be used for this purpose."

What does this all mean to RFS2 obligated parties? Initially, the 20 percent rollover cap for this year's advanced biofuel standard allows up to 190 million cellulosic or biodiesel RINs from 2009 to be used for compliance with the 2010 advanced biofuel standard. Obligated parties will be well-suited to purchase the cheaper of 2009 cellulosic or biomass-based diesel RINs to satisfy this quantity of RINs. Once this volume has been acquired, the same metric applies to 2010 cellulosic/biomass-based diesel/advanced biofuels RINs: buy the cheapest RIN, or purchase the cheapest biofuel to separate the necessary RINs required to satisfy their remaining 2010 advanced biofuel obligation. With 2009 biodiesel and cellulosic RINs selling for just over one cent, and with comparable 2010 advanced RINs approaching 50 cents, it is easy to see that parties who are well versed in the RFS2 regulations will be able to shave millions off their 2010 compliance costs.

Sam Gray is a fuel trader with Ft. Worth, Texas-based VICNRG LLC. Reach him at (404) 293-5884 or sam.gray@vicfuel.com.
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