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

Educational Briefing Series

Article No. 6

How Do RINs Become Separated?

Author: Clayton McMartin

When renewable fuel is produced a RIN is assigned to each gallon.   According to the regulations, these assigned RINs can only be transferred along with renewable fuel.  The RINs can not move independent of renewable fuel until such time that the associated fuel is blended into finished petroleum products or purchased by an obligated party, such as a refiner.  An assigned RIN can be identified by the first number in the RIN which will be the numeral 1.  An example of an assigned RIN is:

12008480270076000011020003994400048031 (K code = 1)

In principal, as the renewable fuel is placed into the retail market along with petroleum products, the RIN is then separated from the fuel.  In practice the rules read that obligated parties, such as refiners and importers of gasoline, and those who blend renewable fuel with finished gasoline, such as splash blenders and oxygenate blenders, are required to separate the RIN from the fuel.  A separated RIN is easily identified by the first numeral being a 2.  An example of a separated RIN is:

22008480270076000011020003994400048031 (K code =2)

At this time in the RIN’s life it becomes a renewable fuel credit, no longer associated with the physical product.  In essence the RIN is now a paper credit that can be traded between and amongst any parties that are registered with EPA to participate in the RFS program.  Ultimately the separated RIN will be used by an obligated party such as a refiner or importer of gasoline in the United States.  These obligated parties demonstrate compliance through the submission of RINs to EPA at the end of each compliance year.

Author: Clayton McMartin

EPA Administrator Stephen Johnson issued a press release today addressing the long awaited decision to Governor Rick Perry’s RFS waiver request filed 88 days ago.  And the answer is, we need more time.

“Additional time is needed to allow staff to adequately respond to the public comments and develop a decision document that explains the technical, economic and legal rationale of our decision,” the EPA said in a news release on Tuesday July 22, 2008.  

According to testimony given by Principal Deputy Assistant Robert Meyers during the July 10, 2008 Senate Environment and Public Works hearing on implementation of the Renewable Fuel Standard, over 15,000 comments had been received by EPA on the waiver request. 

The administrator’s comments would indicate that EPA has yet to make a final decision on the matter, assuring the public through the press release that, “The process remains fair and open, and no agreements have been made with any party in regard to the substance and timing of the decision on the waiver request.”

According to Administrator Johnson, a final decision on the Texas Governor’s petition is expected in August.  No additional details were available.

Whatever the final decision, the impact to the renewable fuel supply chain will be significant.   Texas Governor Rick Perry will open the RINWorld Summit in Dallas Texas on October 16, where industry leaders and government official will convene to discuss and learn more about the cost effective implementation of the RFS.  

Educational Briefing Series

Article No. 4
 

How Are RINs Used?

Author: Clayton McMartin

Ultimately RINs are used to demonstrate compliance by what EPA calls an obligated party. An obligated party is a company that refines crude oil and produces finished gasoline. By far the biggest portion of obligated parties are refiners, such as Exxon-Mobil, Conoco-Phillips, Valero, BP, Shell, and Chevron to mention some of the biggest. Other companies that fall under the RFS obligated party classification would be importers of gasoline into the U.S. as well as companies that buy petroleum intermediates and blend at facilities like terminals.

Each of these obligated parties is then bound by the RFS to use their pro-rata share of renewable fuel. Recalling that the RFS is really a percentage established each year (see What is the RFS?), the company multiplies their on-road gasoline production times the RFS to determine their obligation. This is called their RVO or renewable volume obligation.

Obligated parties demonstrate to EPA that they have met or exceeded their RVO by the submission of RINs each year. These RINs can be acquired through the process of purchasing and blending renewable fuel into their own pool of petroleum products or by acquiring RINs from another party that has blended renewable fuel in excess of their RVO and is willing to sell their RINs to the obligated party. As you can see, central to the RFS program are provisions for credit banking and trading, with the RIN serving as the paper credit for this purpose.

FUTURE VIEW: Under the RFS2 the RVO will be changing to encompass 4 separate standards. Beginning in 2009 the standards will apply to Biomass-Based Diesel, and Cellulosic Biofuel. These two combine with other advanced biofuel types to establish the third Total Advanced Biofuel standard. And finally each of these individual standards then combine with grain derived ethanol to establish the fourth overall Total Renewable Fuel Standard. EPA is working on the proposed rule now – more details to follow.

Renewable Fuel Standard to be Delayed According to EPA

Testimony from EPA Principal Deputy Assistant Administrator Robert Meyers is the first official indication that the Renewable Fuel Standard will be delayed.This development was revealed during a Senate Committee on Energy and Public Works hearing, held on July 10, 2008.

According to Mr. Meyers, “it would be difficult to meet the statutory deadline by the end of the year”. When pressed for a completion date by Majority Leader Senator Barbara Boxer, Mr. Meyers responded “according to our projections we believe we can go final next year, somewhere in the middle of the year” Presumably, we can expect to see the final rule in the June timeframe of 2009.  Mr. Meyers did indicate that the notice of proposed rule making (NPRM) will be out this fall. 

Delaying the final rule will have an affect on participants throughout the renewable fuel supply chain, especially in the area of advanced biofuels, such as the emerging area of cellulosic fuels, and on obligated parties such as refiners. With new mandates set to come online Jan 1, 2009, EPA will need to provide interim direction on how the RFS is to be administered in this time of transition. Look to the Clean Fuels Clearinghouse as new developments form in this area.

Educational Briefing Series

Article No. 3

Where Do RINs Come From?

Author: Clayton McMartin

RINs are generated as a result of the production or importation of renewable fuel into the United States. The RINs serve as identification numbers for each gallon of renewable fuel placed into commerce, allowing EPA to monitor the movement and use of renewable fuel in the marketplace.

The assignment of RINs, contrary to what some believe, is not conducted by EPA. Instead RINs are assigned by the producer or importer in accordance with the rules found in the renewable fuel standard program. Section 80.1126 provides all of the details necessary for a producer or importer to assign RINs to their product.

With the exception of producers who produce less than 10,000 gallons per year, and importers who import less than 10,000 gallons per year of renewable fuel, it is mandatory that RINs be generated and delivered as the renewable fuel is placed into commerce.

The process of generating the RIN is really one of the easiest steps in the program. A producer simply needs to gather the required data pertaining to their entity, facility, and product type. Then as fuel is produced or imported a unique batch number for the applicable year and the total volume of RINs are added to the 38 digit series resulting in the parent batch RIN. The renewable fuel registry handles this process for its participating producers by requiring only two pieces of data, the volume of fuel and denaturant content in the case of ethanol.

FUTURE VIEW: The impending implementation of the Energy Independence and Security Act of 2007 and the associated RFS2 program will bring fundamental changes to the way producers and importers assign RIN numbers to product. With specific requirements for each product type, it is conceivable that a single facility will produce two or more types of RIN numbers. More details about EISA, RFS2 and how this law and impending regulation will impact commercial operations are available at the RINSTAR Renewable Fuel Registry.

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.

Educational Briefing Series

Article No. 2

What is a RIN?

Author: Clayton McMartin

RIN is the acronym for Renewable Identification Number.  Under the Federal government’s renewable fuel standard (RFS) a RIN is assigned to every gallon of biofuel produced or imported into the United States .  Comprised of 38 digits, the RIN serves effectively as a serial number which is tracked throughout the renewable fuel supply chain, from the point of production to the point at which the fuel is placed into retail.

Imbedded within the 38 digit RIN is the following information:

•        Status of the RIN as far as being tradable as a separated credit (more on this later)
•        The year the fuel was produced, also referred to as the vintage
•        Who produced or imported the renewable fuel
•        Where it was produced or imported into the U.S.
•        What kind of fuel, ethanol, biodiesel, etc.
•        Its equivalence value (more on this later)
•        How it is derived, either from grain or cellulosic technologies
•        And the total number of Gallon-RINs assigned to a batch of renewable fuel

As an example of a RIN consider the following:

12008480270076000011020003994400048031

RINs are used to track renewable fuel at every link of the supply chain.  The process starts when renewable fuel is produced or imported and continues as the fuel is transferred from supplier to customer and so on.  Once the renewable fuel is placed into the retail market the RIN is separated from the fuel and then serves as a credit which can be traded from one party to another, similar to other environmental credit trading programs.  Ultimately the RIN is used to demonstrate to EPA that a party has met their particular obligation under the RFS as the RIN activity is reported by every party in the supply chain on a quarterly and annual basis.

More details about the RIN number can be found in section 80.1125 of the Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program; Final Rule.The regulations are available at EPA’s website at the following URL address: http://www.epa.gov/otaq/renewablefuels/rfs-finalrule.pdf