Changes to US biofuel credit system to spark another ethanol, oil clash

HOUSTON (ICIS)–The proposal by the US EPA to change the structure of the biofuel credit system under the Renewable Fuel Standard (RFS), will set up another clash between longstanding foes in the oil and ethanol industry.

The US EPA has proposed several changes to the nation’s fuel compliance instrument system aimed at improving transparency. The credits, known as renewable identification numbers (RINs), are generated by ethanol producers and assigned serial numbers for each batch of produced ethanol.

Under the RFS, oil refiners and gasoline distributors are required to blend increasing volumes of biofuels like ethanol into the fuels they sell, or purchase those credits.

Proposed reforms to RIN markets include:

– Prohibiting certain parties from being able to purchase separated RINs;

– Requiring public disclosure when RIN holdings exceed specified thresholds;

– Limiting the length of time a non-obligated party can hold RINs; and

– Increasing the compliance frequency of the programme from once annually to quarterly.

Market observers note the RIN reform proposal, as well as allowing higher blends of biofuels in the fuel supply, sets up yet another clash of ethanol and refiners. The EPA’s leaning appears to favour ethanol, according to analyst Phil Flynn, adding that the US/China trade tariff dispute was especially rough on the American farmer.

“[US President Donald] Trump has been walking a fine line, and obviously farmers are not happy with the trade war [so] it seems to me that by giving farmers a boost it could be some payback,” Flynn said.

The change proposals are being met with reservations by a wide range of parties.

The American Petroleum Institute (API) said the RIN proposal could increase costs for fuel producers and lead to higher prices for consumers.

“[The changes] move the goal posts for US energy companies that have already made capital investments and business decisions based on the current RFS program,” the API said in a statement.

The Renewable Fuels Association (RFA) urged the EPA to separate RINs reform from the ruling on allowing a 15% blend of ethanol, known as E15, year-round.

Growth Energy lauded the E15 expansion, but cautioned against creating market uncertainty.

“We are still reviewing details of the proposal, and we look forward to working with the EPA to ensure that any changes – particularly in the RIN market – do not upend the marketplace,” Growth Energy CEO Emily Skor said.

While the EPA’s proposals are aimed at improving transparency, market participants said limiting speculation has the potential to set up a disaster.

“Tell me one market in the world that went better when you restrict speculating,” said a Houston-based biofuels broker.

Flynn concurred with the sentiment that removing or limiting speculation reduces market liquidity by reducing buyers and sellers.

“If speculator is squeezed out it could set up [extreme] volatility,” Flynn said.

Focus article by Steven McGinn