Assessing the future of US EPA's biodiesel RIN credit regulation
Susan Olson, an executive with energy information provider Genscape who leads the company’s RIN Integrity Network, reported on Genscape’s analysis of what changes it expects to see in how the U.S. EPA regulates the renewable fuel standard (RFS2) specific to RIN validation and consequences for the purchase of bad RIN credits.
A few rogue companies made millions in the past few years selling fake biodiesel RINs, credits used by oil companies to satisfy renewable volume obligations under RFS2, and companies that bought these fraudulent credits were penalized by EPA under its "buyer beware" position, which requires the credits to be replaced and payment of fines. As a result, the biodiesel industry as a whole, particularly the small producer, has been hurt by the scandal because producers now find it hard to move their RINs.
“We are 99.9 percent sure there will be a new rule by 2013,” Olson said at the Collective Biofuels Conference in Temecula, Calif., Aug. 18.
Exactly what the new rule will look like, particularly in its final form after comment and review, is less certain, although Olson said Genscape’s assessment is that EPA will approve and regulate RIN verification service providers. “There is a question whether to regulate the transaction trail,” she said. “There is no resolution to what happens [with respect to regulation] after generation.” It is also unclear whether obligated parties will be granted an affirmative defense to the purchase of bad RINs or if they will remain liable for replacing bad RINs and be subject to penalties.
Obligated parties under RFS2 (oil refiners and importers) just want a system that they can write a contract around, Olson said—and to never receive a notice of violation (NOV) again for buying bad RINs in good faith.
“The biggest black eye for refiners is that they even got an NOV,” Olson said. “It affects their shareholders, their future business.” The financial loss of replacing invalid RINs at much higher prices is secondary to the losses caused by receiving an NOV, she added.
Until EPA determines its regulatory path, Olson said some obligated parties are using BQ-9000 as a base, only buying RINs from producers accredited in the biodiesel quality control program. And some are using a “one-to-many” service to streamline costs. She added that oil company RIN purchasers fear that if they buy another bad RIN, “they will be canned.”
“Obligated parties want to buy from small producers,” she said. “Small producers bring about innovation.”
While many small biodiesel producers are suffering, and the mid-market value proposition is at risk, Olson said the most important thing is that obligated parties accept a solution in order to thaw the biodiesel RIN market.
Solutions to the problem of biodiesel RIN fraud and its effects of freezing the market for some and slowing it for others are not just about validating RINs, Olson said, but they are about rebuilding the community that consists of all streams—biodiesel producers, mid-market players and obligated parties.
For biodiesel producers of all sizes, integrity and transparency lead to liquidity, and with liquidity comes faster cash flows. Todd Hill, founder and head of Promethean Biofuels, a small-scale biodiesel producer based in Temecula, Calif., and this year’s host for the Collective Biofuels Conference, said Promethean has been fortunate compared to others because it has not had a problem moving its RINs. Hill attributed that fortune to the transparency his company provides. “Being open insulated us,” he said during an industrial scale-up course Promethean conducted at the event.
“It’s never been about the money,” Hill said, “but to survive, I have to think about money all the time now.” Hill said when he founded the company in 2007 he thought he would need five to eight people to run the plant. “Now I need eight people just to keep the data straight.”
Promethean, registered under RFS2 since July 2011 as a 2.1 MMgy producer, is currently signing up for Genscape’s RIN Integrity Network, one of the smallest producers to do so.
Olson said while the big biodiesel plants are selling their RINs at or above market price right now (obligated parties are using those big companies balance sheets as a shield), smaller facilities are forced to take a per-RIN discount of 12 to 17 cents (25 cents a gallon). Others, of course, are unable to sell their RINs altogether. Some producers are also paying a quarter of a penny to five cents per RIN for aggregator services.
Finally, while much of the RIN validation discussion has been focused on biodiesel, Olson said what is needed is a solution that is applicable to all biofuels.