The first 90 days under RFS2 rules

Posted Oct. 20, 2010

On July 1, the new RFS2 rules took effect requiring registration and new trading methods for biodiesel blenders and retailers hoping to capture Renewable Identification Number credits and maintain trading flows. Ninety days later, after a full quarter of operation, Hart Energy hosted a webinar that highlighted the first driving season under the new rule.

Despite the sharp decline in biodiesel production after the expiration of the tax credit, Gary Haer, vice president of sales and marketing for Renewable Energy Group Inc., said there is enough volume to satisfy prescribed RFS2 requirements. He added that 1.8 billion gallons of capacity are currently registered with the U.S. EPA. The current obligation under the new RFS2 rule is 1.15 billion gallons. "There's more than enough capacity already registered with the EPA to address the current and foreseeable future need of biomass-based diesel RINs for the industry," he said.

Coleman Jones, biofuels implementation manager for General Motors of North America, said through July the biodiesel industry produced about 210 million gallons. "At that current rate we would produce another 150 million gallons more, which would push that total to 360 million gallons," he said. "This is significantly short of the 650 million-gallon inferred mandate for 2010; however, there are enough 2008 RIN credits to bridge the difference between the cost of biodiesel and their petroleum competitors."

According to analysis put out by the National Biodiesel Board and EPA, approximately 350 million gallons would have to be produced for the remainder of the year. Haer said that would provide the RINs necessary for carry-forward provisions allowed from 2008-2009 to meet the current obligation.

With the expiration of the federal blender tax credit being a driver of instability within the market, concerns by original engine manufacturers persist as they can drive changes in producer behavior. An increase in RIN prices will likely rise as obligated parties scramble to meet their quotas, according to Jones, adding that it will likely trigger the industry to start-up and work hard to meet the mandated volumes. However, a downside could be that quality of biodiesel may suffer as a result, Jones warned.

Jess Hewitt, chairman of Gulf Hydrocarbon Inc., address some of the bottleneck challenges the industry faces regarding the distribution chain for supplying the market. Hewitt, also a chair on the marketing committee for the NBB, found less than 80 terminals serve up biodiesel blends. "That's not enough to get that much fuel into the market," Hewitt said.

Hewitt focused the utilization of rack blending methods in order to expedite biodiesel flow into the diesel pool for consumption and RIN reporting through the EPA. Depending on what the retailers and their distributors are looking for, rack blending, according to Hewitt, offers a precise blend percentage of biodiesel.

"It also allows for an excellent paperwork trail to show that biodiesel was blended to EPA requirements," he said. "That's very important in our industry because we have to show the actual amount of biodiesel blended into diesel fuel in order to free those RINs. We also have to be able to show that the blending was done on our site and that's very important when we're looking at biodiesel blending."

Hewitt said he expects to sell significant volumes of biodiesel into the heating oil market. BioHeat, which also qualify for RINs under RFS2, represent a potential 200 MMgy biodiesel market. "It's a fairly significant market for us," Hewitt said.

Fred Walas, fuels technology manager for Marathon Oil, said he sees no impact on the physical blending of biodiesel by obligated parties in the first 90 days. His company is using the same blending equipment for RFS2 biofuels as it did for RFS1.

He added that the challenge for obligated parties who have to blend biodiesel is not so much blending the fuel itself as it is more of a recordkeeping challenge. In the RFS2 rule, four types of biofuels are bundled together as opposed to one in RFS1. This can be problematic, he said, for obligated parties to sometimes over-comply in one area to cover the obligation for another, which ultimately can constrain the overall system.

"There's a limited time window to match trades within the EPA's Moderated Transaction System between the buyers and the sellers," Walas said. "That has the potential to cause some issues with the system and it's one of the areas we're working with the EPA as well as the biofuel producers to come up with a better system."