House subcommittee explores RFS and RIN marketing

The Renewable Fuel Standard program is loaded with enough doubt that it limits the proper functioning of the market for Renewable Identification Numbers, or RINs, market experts told the House Energy and Commerce Subcommittee on the Environment July 25.

The hearing was held in the shadow over the future of the RFS, as backers have leveled complaints to the Environmental Protection Agency about its granting of small-refinery waivers to blending requirements for 2016 and 2017. Renewable fuel producer groups say these waivers have created “demand destruction” for ethanol, something the oil industry disputes.

The hearing was arranged to ask if there is sufficient transparency and oversight in the current RIN marketplace, how does the current RINs system impact various types of stakeholders, what instances of RIN fraud are unreported, how is RFS compliance with RINs different from the Clean Air Act’s acid rain program, and how much are RIN prices effected by the RFS blend wall and the extent to which non-obligated parties are speculating in RIN markets.

“RINs are the main component of the Renewable Fuel Standard’s tradable credit system and serve as its compliance mechanism, subcommittee Chairman John Shimkus, R-IL, said. “The purpose of today’s hearing is very much educational in nature and is intended to promote greater understanding of how RINs fit into the overall Renewable Fuel Standard. In order to chart a legislative path forward, it is critical that the subcommittee first gather the facts and comprehend the various complexities of the RFS program.”

Added Ranking Member Paul Tonko, D-NY, “I believe much of the recent volatility in the RIN market can be attributed to the way the Trump administration has operated the RFS program. Press reports of the on-again, off-again RFS negotiations conducted by the White House over the past year or so, have driven RIN prices up and down depending upon the headline of the day. No new RINs were created or removed from the market in these meetings, and no changes to the program were made. Yet, the price fluctuated enough to create losses or gains for everyone involved in the program over the course of the last year.

“Former EPA Administrator (Scott) Pruitt also nearly doubled the number of small refinery waivers that were granted last year, which lowered the price of RINs. It appears that some of these waivers were granted to refineries not experiencing financial hardship, which is a requirement under the law.

“If that is the case, former Administrator Pruitt intentionally misused this waiver authority to manipulate the RIN market and undermine the RFS. The lack of transparency and accountability in the waiver program raises serious questions about how this program is being managed. Market mechanisms can work well. They can lower compliance costs as long as they are not manipulated, which I fear is happening under this administration.”

In testimony at the hearing, Paul Niznik, a senior consultant at Argus Media, a price-reporting and market assessment service, told the subcommittee that uncertainty around potential changes to the Renewable Fuel Standard, or other policies, disrupts the logic of the market and creates RINs price movements and volatility not normally seen under similar market conditions.

“Likewise, policy clarification and long-term guidance have decreased RINs price volatility and returned the market to ‘logical’ behavior in the past, such as the issuance of guidance by EPA on the intention for annual RFS rulemaking in 2015 after a multi-year lapse,” Niznik said.

Gabriel Lade, Ph.D., assistant professor of economics at Iowa State University’s Center for Agricultural and Rural Development, told the subcommittee prices adjust quickly to changing compliance cost expectations. He added that most RIN price volatility since 2013 can be attributed to ever-changing blending targets and uncertainty regarding future mandate volumes.

“However, publicly available data is insufficient to determine whether the market is fully efficient or free of manipulation. Greater transparency would allow researchers and regulators to study these issues. Further, transparency would make attempts to manipulate the market more difficult and costly,” Lade said.

“The empirical economics literature continues to show that, on average, downstream prices fully reflect upstream RIN costs. This means that so long as refiners offset their RFS compliance obligations as they accrue them, on average, they are fully compensated for their RIN costs through higher wholesale gasoline and diesel prices.

“Recent actions by the Environmental Protection Agency likely undermine RIN markets and may drive away market participants. This would be detrimental to market liquidity and inhibit price discovery. RIN markets are designed to provide a signal about the value of biofuel production and distribution. That signal becomes unreliable when EPA decisions are unpredictable and lack transparency.”

In a letter to the subcommittee, Renewable Fuels Association President Bob Dinneen said that EPA’s recent issuance of approximately 50 small refinery compliance exemptions from 2016 and 2017 RFS requirements has ballooned RIN stocks to nearly 3.1 billion RINs. That is more than double the level of RIN stocks just two years ago. Consequently, RIN prices have plummeted from 95 cents in late November 2017 to just 25 cents today, decreasing the incentive for blenders and refiners to increase volumes of E15 and flex fuels like E85 to push past the so-called E10 ‘blend wall.’

The escalation of RIN stocks and associated collapse of RIN prices has caused demand destruction in the ethanol market. Despite very favorable blending economics (i.e., ethanol is priced 70 cents per gallon below gasoline at the wholesale level), ethanol-blending activity has slowed in 2018. Both the absolute volume of ethanol blended and ethanol’s share of finished gasoline consumption are lower than year-ago levels. The 2018 weekly ethanol blend rate has been below year-ago levels in 21 of 28 weeks so far. Meanwhile absolute blending volumes have lagged year-ago volumes in 18 of 28 weeks, including 16 of the past 20 weeks.

Larry Dreiling can be reached at 785-628-1117 or [email protected].