FocusUS ethanol producers sell E85 to retailers to pass along RIN values

07 June 2013 22:55  [Source: ICIS news]

HOUSTON (ICIS)--Some US ethanol producers are trying to pass on the value of Renewable Identification Numbers (RINs) to consumers by selling E85, or a fuel blend containing 85% ethanol and 15% gasoline, directly to retailers.

“E85 is being sold at attractive prices across the state, but in areas where ethanol producers are selling E85 directly to the retailer, consumers are seeing even greater discounts,” said Lucy Norton, managing director at the Iowa Renewable Fuels Association (IRFA).

A RIN is a credit that demonstrates compliance with the Renewable Fuel Standard (RFS), a federal volume mandate established to boost the production of renewable resources. RINs can be traded or sold on the open market, and prices are determined by typical market factors.

According to the US Energy Information Administration (EIA), a higher ethanol RIN price should lower the market price of E85 gasoline compared with E10 gasoline, or the fuel blend used by modern automobiles and light-duty vehicles, thereby stimulating E85 sales.

“If the [ethanol-blended fuel] is not being sold directly from the producer, it goes to a terminal or tank farm and is put into storage until the jobber or retailer goes there to purchase the product,” Norton said.

“Pulling it from the facilities would include a fee – a handling fee, typically,” she said. Selling it directly "eliminates the middleman, giving jobbers and retailers a price advantage.

"The intention is that the retailer will continue to pass along some of that savings to their customers.”

Minnesota producer Chippewa Valley Ethanol Co (CVEC) said it has been selling directly to retailers over 10 years ago when E85 became a product in the state.

“Back in the day, there was no ability for the retailer to pick up at a terminal,” said Mike Jerke, general manager at CVEC. “We took on the position to facilitate that and have had a really good relationship with a number of retailers.”

He added: “In that same time frame, we’ve seen the ethanol industry grow extremely as well, and a few of [ethanol producers] – not all of them – have taken up selling directly to retailers.”

Absolute Energy, which has a 115m gal/year ethanol plant on the border of Minnesota and Iowa, began offering E85 directly to retailers about three months ago.

“It’s been a huge difference for retailers who aren’t a part of the marketing and don’t really want to be,” said Rick Schwark, CEO at Absolute Energy.

“This gives them an opportunity to get the product directly, and it’s made a big difference in their sales – a 250-300% increase on E85 and E30,” Schwark said. “They’re making a good margin off of fuel, and it’s driving business to their storefronts.”

Last month, Siouxland Energy followed suit at its 60m gal/year ethanol plant in northwest Iowa.

“I think ethanol plants are growing tired of watching a middleman pocket the RIN value to the detriment of consumers,” said Tom Miller, commodity manager at Siouxland Energy.

“Our plant wants consumers to understand the real value of home-grown ethanol, so we’ve cut out the middleman, and we’re selling E85 directly to retailers at a much greater discount,” Miller added.

This could be beneficial to the Minnesota-Iowa areas, which have a high concentration of flex-fuel vehicles, said Paul Winters, a spokesman at the Biotechnology Industry Organization (BIO).

“It also recently had a pretty severe gas price spike, due to refinery outages in the Chicagoland area,” Winters said. “These were planned refinery outages for maintenance and the switchover to summer blends, but they occurred at the same time, causing a supply shortage. This made E85 an attractively priced option during ht recent [Memorial Day] holiday weekend.”

While ethanol producers may not directly benefit from this trend, they are hoping it will pay off in the end.

“Our profit margin is exactly the same,” Schwark said. “We’re not making any more money by doing this. There is a lot of expense in permitting to get our business into doing this.”

He added: “But we needed to do this so the consumer has the opportunity to see the discounts on E85. It will change the face of how people view E85.”

Although some believe it is too early to say that selling ethanol-blended fuel directly to retailer is becoming an industry trend, Schwark said he does expect the practice to grow.

“I think as more and more make it available and as the consumers become more aware of the huge differentials, it will put pricing pressures on others to follow suit,” he said.

According to the EIA, the market price of ethanol RINs increased dramatically during the first quarter – from $0.05/gal at the start of the year to as high as $1.05/gal on 11 March.

In its May report on the short-term energy outlook, the federal agency said the market price of ethanol RINs has averaged about $0.70/gal during April. Its June report will be released on Tuesday.

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By: Tracy Dang
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