Clean Fuels Clearinghouse

Transition Period

By: Ron Kotrba
From the November 2008 Ethanol-Producer Magazine

The federal renewable fuels standard calls for 500 million gallons of biomass-based diesel to be used in 2009. Many questions remain as to how this will play out.

2009 will be interesting with respect to implementation of the new renewable fuels standard, which many refer to as RFS2. New terms such as “advanced biofuel” and “biomass-based diesel” were never part of the 2005 RFS and just this year emerged as part of the new national energy-policy vernacular. Biomass-based diesel is a specified title under “advanced biofuel.” In 2009, RFS2 mandates that 11.1 billion gallons of renewable fuels must be blended into energy supplies; 10.5 billion of which is corn-based ethanol, and the other 600 million gallons must be “advanced biofuel,” 500 million gallons of which is to be biomass-based diesel. By 2012, 1 billion gallons of biomass-based diesel is required under the mandate. 



Since the signing of the Energy Independence & Security Act of 2007—the Energy Bill that RFS2 was part of—speculation has run rampant as to how events will play out. There are a lot of unknowns left, especially since U.S. EPA delayed provisional rulemaking on implementation of RFS2 until January. 



Clayton McMartin, president of Clean Fuels Clearinghouse, says the attempt to identify exactly how RFS2 will be implemented prior to its rule is like trying to nail Jell-O to the wall. 



Clean Fuels Clearinghouse operates the only renewable fuels registry in the nation, called RINSTAR. RIN stands for renewable identification number, each of which is a long series of numbers used to help the government keep track of what renewable fuel is going where and which companies receive credits. McMartin says there’s not a lot of biodiesel activity now in the renewable fuels registry, but numbers 20 through 22 inside the long number can differentiate biodiesel from other types of renewable fuels.

“There are a lot of questions still,” McMartin says. “The big question is what’s to be done in this interim period, meaning 2009? I don’t think anyone expects the final ruling to go into effect until 2010.” McMartin calls this interim period RFS1.5. “2008 itself is kind of a hybrid,” he says. “The standard for 2008 was established by RFS2 even though we have no proposed rulemaking yet.” 



According to Paul Machiele, director of EPA’s Fuel Programs Center, the biomass-based diesel carve out in the RFS includes biodiesel, biomass-to-liquid diesel and renewable diesel—provided the fats or oils aren’t co-processed with petroleum diesel. Clearly for 2009, the only commercially available biomass-based diesel available in significant quantities is biodiesel. 


Nathaniel Doyno, executive director of Steel City Biofuels, tells Biodiesel Magazine, “I think we’ll see that we can get to 500 million gallons real quick if we don’t export it, but that’s going to require a shift in currency value. What’s fueling the high volume of exports right now is the weak dollar, strong European incentives and a lot of U.S. loopholes regarding the federal blender’s credit.” 



The European Commission is currently investigating whether sanctions should be placed on U.S.-originated B99 in order to level the playing field for European biodiesel producers, who claim the importation of cheap U.S. biodiesel into their markets has adversely affected the European biodiesel industry (see “Biodiesel Trade Wars” in Biodiesel Magazine’s 
October 2008 issue). A provisional ruling is expected by March, with a final ruling no more than four months after that. Most people watching this unfold expect that it’s only a matter of time before a tariff will be placed on U.S. biodiesel entering Europe. 



The Waiver Process“The big picture though is that the state of the federal RFS is in transition,” Doyno says. “Across the biofuels industries there’s a realization that the sustainability bug, the local economic development issues and air quality issues are all reformulating. And I’m proud of the federal government’s denial of Texas’ petition for waiver, but there are some legitimate problems with the standard. Via policy we’re building an industry—it’s a delicate act. We need to balance the need to grow without killing the industry in the process. But I challenge you to find someone in the industry who is completely confident in their understanding of this issue of the RFS2—no one really knows.” 



In addition to the emergence of new terms and volumes in RFS2, compared with the RFS1, perhaps one of the biggest changes in the policy concerns the waiver process. “For RFS1, only states could petition for a waiver,” McMartin says. “But in RFS2, anybody affected by the program can petition for a waiver. That’s a huge difference. We’re going to see lots of waiver requests, lots of petitions. And unfortunately what this does is insert some uncertainty—which makes for good news but whenever you’re trying to operate a plant on a day-to-day basis, it’s tough.” He hopes the EPA’s proposed rulemaking establishes more rigorous criteria as to what constitutes a valid waiver. “That’s what we should really hope to see,” he tells Biodiesel Magazine.

The EPA administrator can also waive RFS2 in whole or in part if, in consultation with the U.S. secretaries of agriculture and energy, a determination is made that either there is an inadequate domestic renewable fuel supply; or implementation of the requirement would severely harm the economy or environment of a state, region or the United States. In a report for Congress titled “Waiver Authority under the Renewable Fuels Standard,” written by Brent Yacobucci, a specialist in energy and environmental policy with Congressional Research Service, he writes, “It is unclear how EPA will interpret these criteria. In its May 1, 2007, final rule for 2007 onward, EPA explicitly stated that it would not establish more specific criteria for the waiver.” Then he includes language from the federal registry addressing this: “While EPA realizes that the criteria provided by the statute are quite general, the rationales of severe environmental or economic harm or inadequate domestic supply are sufficient for a basic framework upon which a petition can be built and evaluated. Each situation in which a waiver may be requested will be unique, and promulgating a list of more specific criteria in the abstract may be counter-productive.” 



If the EPA administrator makes the determination that there are significant market circumstances, including feedstock disruptions, “that would make the price of biomass-based diesel fuel increase significantly,” the administrator may reduce the amount mandated for up to 60 days—but the volume reduction can be no more than 15 percent; then, an extension of the waiver can be issued for no more than an additional 60 days.

“Your biodiesel readers should say, ‘Gee whiz, now I’ve got EPA who’s in control over modifying this demand—this mandate or demand for my product—and what are they going to base that on?’” McMartin says. “Do they have reliable, immediate data to draw conclusions from? No because they don’t have a registry like ours.” He says for EPA to gather all the necessary reports on which to base an evaluation could take from two to five months after the fact. “There’s a quarterly reporting period and each quarter everyone in the program must report,” McMartin says. “But then there’s 60 days to submit, and everyone waits until the end, so the data can be two to five months old, but EPA still has to compile that information and somehow make an assessment. They don’t have the systems in place to do that today, and if I were a biodiesel producer I’d say that gives me reason for concern.”

“This is a difficult chicken and egg situation—you want to incentivize the industry but, at the same time, you don’t want to set goals that can’t be met,” Doyno says. “I think we’re going to see the program restructured actively with the next administration regardless of who wins the election.”

On-Road and Off-Road Markets
Unlike ethanol, very little biodiesel is blended by refiners today. Instead, biodiesel is blended closer to the retail end, either by a petroleum marketer or the biodiesel producers themselves. “Most refiners don’t actually take physical possession of biodiesel,” McMartin says. “So, under RFS2, what they would do is, with the provision of the credit trading and banking program the standard provides, buy paper credit from someone else. Logistically we don’t see a whole lot of biodiesel going into refiners’ product at the refiners’ level. It’s once the product moves through the supply chain and just before retail that you actually see the biodiesel introduced.” 



Another milestone deviation from RFS1 to RFS2 is the inclusion of off-road markets in RFS2. “We’re in great shape because we’re really not part of the standard, so we’re not mandated to use biodiesel, but we can be in the position to generate credits under RFS2, so it’s perfect,” says John Huber, president of the National Oilheat Research Alliance. He thinks quite a bit of biodiesel—and RIN credits—will come to the heating oil market. “There’s going to have to be some sorting out though,” he says. “For the credits to be worthwhile there’s going to have to be an association of paperwork, so it’s unlikely that a dealer at the retail level is actually going to be in the credit market. The buyers and wholesalers are most certainly going to be in that market.” With credit generation, Huber says the main point EPA should consider is making it clear in its rulemaking that credit generation is done upstream. “Because, when you’re talking about 2 percent bio at a retail outlet doing 5 million gallons, and the filling out of all those forms, is it worthwhile for that person to go through all that paperwork, versus someone doing a billion gallons? We need to ensure this is approved and credits are generated and available at the wholesale level.” 



Massachusetts has a 2 percent biodiesel mandate in heating oil, which would equate to about 20 MMgy of B100, all of which could be applied to satisfy the mandate, Huber says.

The 112 confirmed operating biodiesel plants in the United States represent nearly 2 billion gallons of installed capacity. “Versus the mandate, the biodiesel industry is overbuilt today and into the foreseeable future,” McMartin says. “So although it will be a differentiated product—a RIN from biodiesel versus a RIN from ethanol—and it’ll trade at different values, it’s likely to trade at a minimum value. I think we’re going to see consolidation in the biodiesel industry unless there’s an increase in the mandate or feedstock costs come down to where they can compete at incremental volumes above the mandate.”

Ron Kotrba is a Biodiesel Magazine senior writer. Reach him at rkotrba@bbibiofuels.com

EPA Warns Companies to Trade RINs Properly

By: Kris Bevill
From the July 2008 Ethanol-Producer Magazine

Established by the U.S. EPA as a way to track the amount of renewable fuel produced in the United States, renewable identification numbers (RINs) have only been around since September 2007 and regulations for them are often overlooked or disregarded.

As a result, the EPA recently reissued a document warning companies about improper and illegal RIN trading practices. No changes have been made to the regulations. The document merely serves as a stern reminder from the EPA for companies to comply – or face fines. Violators of RIN regulations can be punished with fines established under the Clean Air Act that can be up to $32,500 per day.

The EPA document covers three commonly occurring RIN transactions that defy regulations. The first is a situation in which an error during the sale was made, either a billing or volume error, and the seller “re-bills” RINs that have already been transferred. For producers, this is illegal because renewable fuel must be transferred with the correct number of RINs attached. Also, the ownership of RINs is transferred along with the fuel, so those RINs automatically become owned by the receiving company and cannot be simply transferred back to the seller.

Clayton McMartin is President of Clean Fuels Clearinghouse which manages the only operating registry of RIN numbers. He likens the reselling of RINs to someone selling a car, handing over the title, and then months later selling the car to a different person and asking the original buyer to just give the car back. McMartin said the equivalency is happening with some frequency in the world of RIN trading.

The second situation addressed by the EPA involves transferring assigned RINs, also known as K1s, without renewable fuel. Assigned RINs cannot be transferred separately from fuel, under any circumstances. Any attempt to do so is a violation of EPA regulations and voids the transfer of those RINs to the potential buyer. McMartin said the illegal transfer of K1s is occurring by both ignorant and fraudulent practices. Some people simply do not yet understand the complexity of RIN regulations and others who do are figuring out ways to defraud the system. According to McMartin, a fraudulent transfer of K1s can be achieved simply by changing the number of the RIN. The only true way for a buyer or seller of RINs to protect against RIN fraud, in McMartin’s opinion, is to use a registry that tracks RIN numbers and prevents owners from actually physically having access to the number, therefore preventing changes to the number.

The final situation addressed by the EPA is the issue of tardy product transfer documents (PTD). Buyers are apparently experiencing situations where the PTD for RINs is being delivered much later than the PTD for fuel. This can be a confusing issue because there are no regulatory requirements for the timeliness of transferring PTDs, rather the EPA leaves it up to companies to follow industry standards. One solution is to include RIN information on the fuel invoice. Another solution is to provide RIN information on a separate document to be transferred to the buyer within 24 hours of the invoice transfer.

McMartin said Clean Fuels Clearinghouse’s RINSTAR registry operates by transferring separate RIN documents. He said that is the most efficient way to handle transfers – preventing RIN documentation from being delayed by shipping and the movement of RINs can continue smoothly through the line of buyers and sellers.

The EPA’s document addressing improper RIN transactions can be viewed in its entirety at http://www.epa.gov/otaq/renewablefuels/impropertrading.htm.

The Hidden Costs of the Renewable Fuels Standard

Author: Clayton McMartin
From the February 2008 Ethanol-Producer Magazine

Millions of dollars in operating capital are being wasted as the ethanol industry struggles to comply with the renewable fuels standard. A survey conducted during an Oct. 30 web conference attended by 234 industry stakeholders indicates that as many as 61 percent of renewable fuel suppliers are out of compliance.

Each of these facts are directly attributable to the requirements set forth in the RFS regulations requiring new documentation for product transfers throughout the renewable fuel supply chain. Many players have attempted to satisfy these requirements by modifying their existing production account systems, resulting in a short-term solution with long-term consequences.

Although the threat of $32,500-per-day fines for Clean Air Act violations is significant, even greater daily costs have come to bear upon the entire industry by those mixing business systems with regulatory compliance systems. Millions of dollars in extra operating capital are required for those who have adopted this ill-advised operating practice, which comes at a time when most in the biofuels business are experiencing painfully low profit margins.

The root of the problem stems from the U.S. EPA requiring the use of a product transfer document to signify transfer of title to both renewable fuel and any associated renewable identification numbers. RINs are the serial numbers assigned to each gallon of fuel under the RFS program and tracked throughout their life in the supply chain. The product transfer document serves to record the transfer of title from one party to the next and must be kept on record for five years. The document is analogous to a warranty deed received when purchasing a house or other piece of real estate.

Regulations Result in More Paperwork
Prior to Sept. 1, 2007—the effective date of the RFS—the industry had no product transfer document. In practice, the closest legal document satisfying this purpose would have been a written contract between buyer and seller stating all terms and conditions, including title transfers. Of course, this type of contract served more as a static document, where numerous individual sales could be executed over weeks, months or even years.

Faced with the impending deadline, two schools of thought formed. One developed new documents called the product transfer document and associated RIN certificate. The other modified existing invoicing systems in an attempt to satisfy the new requirements.

The product transfer document and RIN certificate approach, like that used by those on the renewable fuel registry, allows for documents to be generated independent of any corporate financial function. This approach avoids costly delays in payment for product.

On the other hand, the use of invoices almost always results in delays, which can be attributed to the inherent nature of the process itself. Invoices always have some time delay after shipping, and make a company dependent on its supplier to send RINs before they can complete their own invoicing. These delays are further compounded whenever product is traded multiple times before finally reaching its end user.

Inherent Costs of Delayed Paperwork
To illustrate the impact of these delays, consider a railcar of product that is produced at an ethanol manufacturing facility. The title is transferred to a marketing company that sells it to a trader that turns around the same day and trades it to yet another marketer before it is ultimately shipped to a petroleum refiner, which is the end user. This series constitutes four transfers of title to the product and the associated RINs. If each party attempts to handle the product transfer document requirements with its existing invoicing processes, and considering a minimal two-day lag time for each of the invoicing steps, the RINs will lag the product by at least eight days. The example is a real-life case seen every day throughout the industry.

Let’s look at the dollars and cents. Let’s assume the railcar holds 28,500 gallons of ethanol at $2 per gallon, or $57,000 in working capital. Also assume a cost of capital at 10 percent, 250 working days per year and a two-day lag costing each company just over $45. Applying that to everyone in the supply chain in the example means more than $180 was wasted as a result of inefficient compliance management systems.

Conservatively, the time delays resulting from the invoicing methodology results in a cost of $1.50 per 1,000 gallons transferred. This does not count any additional cost for increased personnel or computing systems. With renewable fuel production levels at approximately 7 billion gallons per year, and assuming an average of three title transfers during the life of each gallon, the industry is tying up $31.5 million annually by handling the product transfer documentation through modifications to invoicing systems. Again, this is a conservative estimate, as experience has shown many companies experience as many as four- or five-day delays in their invoicing, as well as the need to increase staff levels.
Many companies simply can not afford to wait for their RINs before invoicing. However, the regulations clearly state that RINs must be transmitted on the same day as the product transfer document—the invoice in this instance. To not abide by this requirement places these companies out of compliance with the RFS and subject to hefty fines. It’s possible that two-thirds of the industry is still out of compliance with the basic product transfer document requirements of the regulation. This is supported by polling conducted during a late October webinar that showed that only 39 percent of participants receive RINs on the same day they receive their invoices.

A New Approach Offers a Better Way
The regulations do not force companies to transmit RIN information on invoices. The regulations only state what information must be transmitted and that it must be done on the same day as title to the product is transferred. Title-to-product transfers occur well before any invoices are prepared. Early on in the program, and at the request of many throughout the industry, EPA loosened up on its interpretation to allow for invoices to serve the product transfer document requirements. However, EPA still maintains that RINs be transmitted no later than the same day as the invoice, so transferring RINs seven to 10 days after the invoice is clearly not permissible.

Another proven approach to handling the product documentation requirements of the rule is to prepare a separate product transfer document and accompanying RIN certificate. This is the approach utilized by participants on the renewable fuel registry. Regulatory compliance documents are generated independent of any corporate invoicing processes. The registry approach to product transfer documents minimizes costly delays in payment for product and saves the industry millions of dollars in working capital.
Counterparties are notified immediately of RIN transfers, allowing members to operate their accounts receivable and compliance programs independently and in parallel. This approach allows for minimal disruption to commercial operations while avoiding regulatory violations. With registry participants now accounting for more than 1 billion gallons per year of biofuel transfers, millions of dollars are being saved across the industry with a simple change in operational procedures.

Dangerous Precedence Forming
Some within the industry are now developing payment policies that require RINs be transmitted on the invoice before payment is made. The regulations do not mention the word “invoice” at all, and certainly do not require that RIN information be transmitted on invoices. However, the law requires that RINs be transferred on the same day title to the product is transferred so it is reasonable for a customer to expect RINs no later than their supplier’s invoice. In the case of the product transfer document/RIN certificate approach, however, RINs can show up well in advance of any invoice. Denying payment in this scenario would have no regulatory support.

Formal recognition of this issue will almost definitely come as a result of attestation engagements as required by the RFS regulation. The first of these independent outside audits are not due until May 2008, with many already qualifying to delay until May 2009. Proactive companies will certainly not want to wait until an outside auditor brings this to EPA’s attention before taking action. Fines for such willful violations are tallied on a daily basis, so the sooner a company acts to correct this issue the better. Companies finding themselves in this situation should seriously consider taking proactive measures by notifying EPA’s Office of Transportation Air Quality Enforcement Division and implementing corrective solutions as soon as possible.