1. No category

What is driving Renewable
Identification Number (RIN) prices?
Insights from a Medium-run RIN
Pricing Model
Rob Johansson, Office of the Chief Economist
Lihong McPhail, Economic Research Service
April 11, 2013
(The views expressed herein are those of the authors and not necessarily those of USDA. Model results are for
illustrative use and are preliminary. Please contact the authors for questions or clarifications.)
Conventional ethanol RIN prices have risen sharply in 2013
Dollars per RIN
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Jan 2012
Mar
May
Jul
Sep
Nov
Source: Oil Price Information Service.
Note: 2012 vintage prices shown for 2012; 2013 vintage prices for 2013.
Jan 2013
Mar
http://www.eia.gov/biofuels/worksho
p/presentations/2013/pdf/presentatio
n-01-032013.pdf
2010/1
2011/12
88.2
81.4
91.9
84
Yield per Harvested Acre
152.8
147.2
Beginning Stocks
Production
Imports
Supply, Total
Feed and Residual
Food, Seed & Industrial 2/
Ethanol & by-products 3/
Domestic, Total
Exports
Use, Total
Ending Stocks
CCC Inventory
Free Stocks
Outstanding Loans
Avg. Farm Price ($/bu) 4/
1708
12447
28
14182
4795
6426
5019
11221
1834
13055
1128
0
1128
48
5.18
1128
12360
29
13516
4545
6439
5011
10985
1543
12527
989
0
989
41
6.22
CORN
Area Planted
Area Harvested
2012/13 Proj.
Mar
Million Acres
97.2
87.4
Bushels
123.4
Million Bushels
989
10780
125
11894
4550
5887
4500
10437
825
11262
632
0
632
50
6.75 - 7.45
http://www.usda.gov/oce/commodity/wasde/
2012/13
Apr
97.2
87.4
123.4
989
10780
125
11894
4400
5937
4550
10337
800
11137
757
0
757
50
6.65 - 7.15
Outline
•
•
•
•
•
•
•
•
What are RINs?
RFS and RIN Background
What are Key Factors Driving RIN Prices?
RIN Prices Reflect Changing Ethanol Demand and
Supply
RFS Waiver Options
RIN Pricing Model
Outlook for RIN prices for next three years
Impact of Possible Waiver
What are RINs?
• A RIN is a 38-character numeric code corresponding to a volume of
renewable fuel produced in or imported to the United States.
Renewable Identification Number Code
KYYYYCCCCFFFFFBBBBBRRDSSSSSSSSEEEEEEEE
K
YYYY
CCCC
FFFFF
BBBBB
RR
D
SSSSSSSS
EEEEEEEE
RIN assignment code (1=assigned, 2 = separated)
Year batch is produced/imported
Company registration ID
Facility registration ID
Producer assigned batch number
Equivalence Value for the renewable fuel
Renewable type code
RIN block starting number
RIN block ending number
Source: EPA (2007) Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program; Final Rule (May
1) available online at http://www.epa.gov/otaq/renewablefuels/rfs-finalrule.pdf.
RINs are used to track biofuel use
Blender and refiner can be
separate entities, or single
entity
Ethanol
Producer
Gasoline
Blendstock
Ethanol
(w/RIN)
Blender
Refiner
RIN
RIN
E10 and E85
Retailer
Source: Yacobucci (2012) “Analysis of Renewable Identification Numbers (RINs) in the Renewable
Fuel Standard (RFS),” Congressional Research Service Report No. R42824 (November).
EPA
8
EPA Moderated Transaction System (EMTS)
Ethanol
Producer
Generate
RINs
Blender
Refiner
Retirement
Separate
RINs
EMTS
Note: data by fuel type and year are available online at
http://www.epa.gov/otaq/fuels/rfsdata/index.htm
Secondary
Market
Renewable Fuel Standard (RFS)
Billion gallons
40
Biomass-based diesel (Biodiesel)
35
Other advanced biofuels
30
Cellulosic biofuels
25
20
Implicit non-advanced biofuels,
maximum
15
10
5
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: U.S. Environmental Protection Agency, Energy Independence and Security Act of 2007 (EISA). Note that biodiesel
quantities reflect the amount specified in EISA for years after 2012 that “shall not be less than the applicable volume for
calendar year 2012.”
2013 RFS requirement
Total Renewable Fuel
(16.55 Bgal)
Advanced Biofuel (2.75 Bgal)
Biomass-Based Diesel
(1.28 Bgal)
Cellulosic Biofuel
(14 Mgal)
Source: EPA (2013) Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards. Proposed Rule (February 7) available
online at http://www.gpo.gov/fdsys/pkg/FR-2013-02-07/pdf/2013-02794.pdf
Proposed 2013 Percentage Standard
Cellulosic biofuel
0.008%
Biomass-based diesel
1.12%
Advanced biofuel
1.60%
Renewable fuel
9.63%
Source: EPA (2013) Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards. Proposed Rule (February 7) available
online at http://www.gpo.gov/fdsys/pkg/FR-2013-02-07/pdf/2013-02794.pdf
Renewable Volume Obligation (RVO)
RVOi = (RFStdi x GVi) + Di-1
• RVOi is the RVO for an obligated party for calendar year i, in
gallons of renewable fuel.
• RFStdi is the final percentage standard for calendar year i,
determined by EPA.
• GVi is the non-renewable gasoline and diesel volume, which
is produced or imported by the obligated party in calendar
year i, in gallons.
• Di−1 is the renewable fuel deficit carryover from the
previous year in gallons.
Projected Gasoline Consumption
EIA's Annual Energy Outlook
Billion gallons
Billion gallons
150
145
150
AEO 2008
AEO 2011
145
140
140
15.7 bgal
135
135
130
130
125
125
120
120
115
115
AEO 2013
110
110
105
105
100
2000
2005
2010
Source: EIA Annual Energy Outlook (AEO).
2015
2020
2025
2030
2035
100
2040
Different types of RINs
Conventional
ethanol RIN (D6)
• Implicit non-advanced
RFS: corn, wheat,
sorghum
Advanced ethanol
RIN (D5)
• Sugarcane, other
advanced feedstock
Biodiesel RIN (D4)
• Biomass-based diesel
RFS
Cellulosic RIN (D3)
• Cellulosic biofuel RFS
The RFS and RINs
Price
Ethanol
market
RFS2
RFS2
S
Ps
RIN core value
P*
Pd
D
Q*
Quantity
For more details see also McPhail, Westcott, and Lutman (2011) “The Renewable Identification Number System and U.S. Biofuels
Mandates,” USDA Economic Research Service Outlook Report BIO-03 (http://www.ers.usda.gov/media/138383/bio03.pdf).
S
Price
What affects RIN values?
RFS2
S’
Ps
Ps’
Price
RFS2
S
RIN core value’
Pd
Ps
Pd’
Pd
RIN core value
RIN core value’
RIN core value
Price
D
RFS2’ RFS2
S
Quantity
D’
D
Quantity
Ps
Ps’
Key characteristic of these charts:
The RFS is always binding
Pd’
Pd
RIN core value’’
RIN core value
RIN core value’
D
Quantity
RIN Price Reflects Ethanol Demand & Supply
• Ethanol demand
– Incentive to use ethanol
– Blend wall caused by decreasing gasoline
consumption and low E85/E15 use
• Ethanol supply
– Incentive to produce ethanol
– Depends on corn prices, co-products, gas price,
etc.
Incentive to Use Ethanol
Ethanol and RBOB Nearby Futures Prices
$/gal.
3.50
Reformulate Gasoline
Blend Stock (RBOB)
3.30
3.10
$.72
2.90
3/28/13
2.70
2.50
2.30
2.10
Ethanol
1.90
1.70
9/1/10
1/13/11
5/27/11
10/8/11
2/19/12
7/2/12
11/13/12
Note: Ethanol prices based on CBOT nearby futures. RBOB (Reformulated Gasoline Blend Stock) based on NYME nearby futures.
3/27/13
Corn Production and Yield
Bushels per acre
Billion bushels
180
16
160
14
Yield
Actual Y
140
12
Production
120
Actual P
10
100
8
80
6
60
4
40
2
20
0
1840
Source: USDA.
1860
1880
1900
1920
1940
1960
1980
2000
0
2020
Corn Production and Yield
Billion bushels
Billion bushels
16
16
$4.60 / bu
15
Production
Actual P
14
15
14
Linear (Production)
13
13
12
12
- 4 billion
bushels
11
11
$7.40 / bu
10
9
8
1998
Source: USDA.
10
9
2000
2002
2004
2006
2008
2010
2012
8
2014
Incentive to Produce Ethanol
Ethanol Producer Net Returns
Above Variable Costs / Spot prices
$/gal.
1.00
+ 87 cents / gal.
(11/23/11)
0.80
0.60
0.40
0.20
0.00
-0.20
+ 11 cents / gal.
(3/22/13)
-0.40
9/3/10
12/28/10
4/23/11
8/17/11
12/11/11
4/5/12
7/30/12
11/23/12
3/19/13
Note: USDA-WAOB estimates based on USDA-AMS plant reports and DOE-EIA estimates and forecasts for natural gas and electricity prices.
Ethanol Producer Net Returns
Above Variable Costs / Spot prices
$/gal.
Net $/gal.
Corn oil adj. $/gal.
1.00
+ 87 cents / gal.
(11/23/11)
0.80
0.60
+ 19 cents / gal.
(3/22/13)
0.40
0.20
0.00
-0.20
+ 11 cents / gal.
(3/22/13)
-0.40
9/3/10
12/28/10
4/23/11
8/17/11
12/11/11
4/5/12
7/30/12
11/23/12
3/19/13
Note: USDA-WAOB estimates based on USDA-AMS plant reports and DOE-EIA estimates and forecasts for natural gas and electricity prices.
Ethanol Production Consumption & RFS
Billion gallons
16
RFS mandate (06-08); Non-advanced (09-10)
14
Ethanol production
12
Ethanol consumption
10
8
6
4
2
0
2006
2007
Source: U.S. Department of Energy, EIA
2008
2009
2010
2011
2012
Ethanol Blend Wall
E10 blend wall to constrain compliance with
“conventional” Renewable Fuel Standard (RFS)
Billion gallons
16
Implicit “conventional” RFS,
(mostly ethanol derived from corn starch)
10 percent of
motor gasoline plus E85
12
8
4
0
2008
2010
2012
2014
2016
2018
2020
2022
Calendar year
Sources: USDA-ERS calculations derived from U.S. Department of Energy, Energy Information Administration,
Annual Energy Outlook, 2013, and the Energy Independence and Security Act of 2007.
Billion gallons
Billion gallons
Projected E85 Consumption
18
18
16
16
14
14
AEO 2008
12
12
10
10
AEO 2011
8
8
6
6
4
AEO 2013
2
0
2000
Source: EIA.
4
2
2005
2010
2015
2020
2025
2030
2035
0
2040
How do RIN Stocks Affect Prices?
Price
RFS2’
Ethanol
market
RFS2
S
Ps
RIN core value
P*
Pd
D
Q*
Quantity
DOE (2012) http://www.regulations.gov/#!documentDetail;D=EPA-HQ-OAR-2012-0632-2544
Babcock (2012) http://www.card.iastate.edu/publications/synopsis.aspx?id=1179
Domestic Ethanol Production
Billion gallons
17
16
15
14
13
12
11
2009
2011
Source: EIA AEO (2013).
2013
2015
2017
2019
Ratio: ethanol price : gasoline price
Ratio: ethanol price : gasoline price
2.5
2.5
2.0
2.0
1.5
1.5
2013 ethanol demand
1.0
1.0
2014 ethanol demand
0.5
0.5
2015 ethanol demand
0.0
0.0
0
2
4
6
8
10
12
14
Ethanol Supply and Demand (billion gallons)
Model assumption
16
18
20
Ratio: ethanol price : gasoline price
Ratio: ethanol price : gasoline price
2.5
2.5
2.0
2.0
1.5
1.5
2013 ethanol demand
1.0
1.0
2014 ethanol demand
0.5
0.5
2015 ethanol demand
0.0
0.0
0
2
4
6
8
10
12
Restricted Ethanol Supply and Demand (billion gallons)
Model assumption
14
16
RFS2 Waivers
(42 USC § 7545 - Regulation of fuels)
• the Administrator shall reduce the applicable
volume of cellulosic biofuel required under
paragraph (2)(B) to the projected volume
available during that calendar year.
• the Administrator may also reduce the
applicable volume of renewable fuel and
advanced biofuels requirement established
under paragraph (2)(B) by the same or a lesser
volume.
RFS2 Waivers
(42 USC § 7545 - Regulation of fuels)
• The Administrator may waive the
requirements of paragraph (2) by reducing the
national quantity of renewable fuel required
under paragraph (2)
– (i) based on a determination that implementation
of the requirement would severely harm the
economy or environment of a State, a region, or
the United States; or
– (ii) based on a determination by the Administrator,
after public notice and opportunity for comment,
that there is an inadequate domestic supply.
What happens next?
42 USC § 7545 - Regulation of fuels
“For any of the tables in paragraph (2)(B), if the Administrator
waives—
(i) at least 20 percent of the applicable volume requirement set forth
in any such table for 2 consecutive years; or
(ii) at least 50 percent of such volume requirement for a single year,
the Administrator shall promulgate a rule (within 1 year after issuing
such waiver) that modifies the applicable volumes set forth in the
table concerned for all years following the final year to which the
waiver applies, except that no such modification in applicable volumes
shall be made for any year before 2016. In promulgating such a rule,
the Administrator shall comply with the processes, criteria, and
standards set forth in paragraph (2)(B)(ii).”
Model Part I
Minimize RIN purchase costs
• Obligated parties minimize RIN purchase costs for
three different Renewable Volume Obligations
(RVOs) over the regulated period (2013-2015) by
choosing
– Corn ethanol use for each year
– Sugarcane ethanol use for each year
– Biodiesel use for each year
• RIN purchase cost each year = (conventional RIN
price*corn ethanol use+ advanced RIN
price*sugarcane ethanol use+ biodiesel RIN
price*1.5*biodiesel use)
Model Part II
Structural Partial Equilibrium Simulation
• Given biofuel use for each year, estimate RIN
prices by constructing a structural, partial
equilibrium simulation model for related markets:
U.S. corn, corn ethanol, soybean, soybean meal,
soybean oil, biodiesel:
– Reduced-form supply and demand equations of each
market. Markets clear by selecting prices and
quantities.
– Ethanol and biodiesel demand equations explicitly
include the RFS and tax credit policy variables by year
and fuel type.
Ethanol RIN Price Model
Production
Corn
Supply
Beginning
stocks
Imports
Corn Price
Conventional
Ethanol RIN Price
Corn Ethanol
supply Price
Advanced RIN Prices
Ethanol
demand
Price
Food
Corn
Demand
Feed
Ethanol
Supply
Ethanol
Demand
RFS
Storage
Export
Demand of
corn from
ethanol
Sugarcane
Ethanol
Supply
Price
Sugarcane
Ethanol
Imports
Biodiesel RIN Price Model
Soybean
Meal
Supply
Soybean
Meal Price
Soybean
Meal
Demand
Food
Crushing
Soybean
Demand
seed
Soybean oil
Supply
Biodiesel RIN Prices
Storage
Export
Soybean Price
Soybean Oil
Price
Biodiesel
Supply
Price
Biodiesel
Demand
Price
Production
Beginning
stocks
Imports
Soybean
Supply
Soybean oil
demand
Biodiesel
Biodiesel
Supply
Biodiesel
Demand
Tax
Credit
RFS
Arbitrage Conditions
• Biodiesel RINs are at least as valuable as advanced RINs.
• Advanced RINs are at least as valuable as conventional RINs.
• Conventional RINs
• Advanced RINs (Biodiesel RINs &
Cellulosic RINs)
Total RFS
Advanced RFS
• Advanced RINs
• Biodiesel RINs
• Cellulosic RINs
Biomassbased RFS
• Biodiesel RINs
Cellulosic
ethanol RFS
• Cellulosic RINs
• Expected RIN prices increase at the interest rate, assuming
mandates continue bind.
Biodiesel and Advanced RIN Price
Arbitrage Conditions
Cents per RIN
250
200
150 Biodiesel
RIN Prices
≥
Advanced RIN
Prices
≥
Conventional
Ethanol RIN Price
2014 RIN
Prices
≥
2013 RIN
Prices
100
2015 RIN
Prices
≥
50
0
8/28/2009
Source: OPIS.
3/23/2010
10/16/2010
5/11/2011
Biodiesel RIN Price
12/4/2011
Advanced RIN Price
6/28/2012
1/21/2013
Comparison with ISU drought analysis
2012/13 Marketing
Year
Conventional Ethanol
RIN Stock Use (bil.)
Corn Price ($ /bu)
US Corn Ethanol
Production (bil. gal.)
US Ethanol Exports
(bil. gal.)
US Ethanol Imports
(bil. gal.)
Ethanol RIN Price
($/gal)
Biodiesel RIN Price
($/ethanol gal)
Advanced RIN Price
($/gal)
Full
Mandate
Full
Mandate
Flexible
Mandate
Flexible
Mandate
No
Mandate
Mandate
(Optimal RIN
Use)
0
0
2.4
2.4
0
0.46
9.73
8.74
7.82
7.8
7.24
8.68
13.3
13.6
12
11.69
11.25
13.83
0
0
0.39
0.49
0.38
0.49
0.71
0.55
0.49
0.55
0
0
1.35
1.29
0.26
0
0
0.62
1.35
1.29
1.33
1.29
0
1.60
1.63
1.29
0.82
0
0
0.67
Note: Calendar
Year
(preliminary model results, not for use or citation)
ISU Model
USDA Model
Source: Babcock (2012)
http://www.card.iastate.edu/publications/synopsis.aspx?id=1169
Baseline Results
Biodiesel credits, Inelastic Demand
Illustrative Results
Three Year
Baseline w/o Three Year w/ Biodiesel Three Year w/ Biodiesel
Biodiesel Credit
Credit
Credit, Inelastic Demand
2012/13 Marketing Year
Corn Price ($/bu.)
8.68
8.66
8.77
Corn use for Ethanol (bil. Bu.)
4.95
4.94
5.01
2013 Calendar Year
US Corn Ethanol Supply (bil. Gal.)
13.83
13.77
14.08
D6 Price ($/gal.)
0.62
0.55
0.91
D4 Price ($/gal.)
1.60
1.29
1.64
D6 RIN use (billion)
0.46
0.52
0.21
RIN purchase cost (billion)
12.36
10.6
16.41
(preliminary model results, not for use or citation)
Hypothetical 2015 Waiver
Known in 2013 or Known in 2014
Illustrative Results
Three Year Baseline w
Biodiesel Credit, No
Waiver
2015 waiver known 2015 waiver known in
in 2013
2014
2013/14 Marketing Year
Corn Price ($/bu.)
4.96
4.93
4.87
Corn Ethanol Use (bil. Bu.)
5.17
5.00
4.99
2014 Calendar Year
US Ethanol Supply (bil. Gal.)
14.46
13.86
13.67
D6 Price ($/gal.)
0.58
0.33
0.19
D4 Price ($/gal.)
1.36
1.11
1.59
D6 RIN use (billion)
0.42
1.01
1.21
RIN purchase cost (billion)
13.13
8.5
8.1
(preliminary model results, not for use or citation)
Note: hypothetical waiver of cellulosic RFS to 10 mgal and additional reduction of the advanced and total RFS
by 3 bgal.
Appendix material
Ratio: ethanol price : gasoline price
Ratio: ethanol price : gasoline price
2.5
2.5
2.0
2.0
1.5
1.5
2013 ethanol demand
1.0
1.0
2014 ethanol demand
0.5
0.5
2015 ethanol demand
0.0
0.0
0
2
4
6
8
10
12
14
Ethanol Supply and Demand (billion gallons)
Model assumption
16
18
20
Billion gallons
10% Blendwall with and without 5% Neat Supply
Billion gallons
14.5
14.5
14.0
14
13.5
13.5
13.0
13
12.5
12.5
12.0
12
11.5
Ethanol
11.5
11.0
10% BW -5
11
10.5
10% BW
10.5
10.0
10
Source: EIA, USDA.
Is the Price Right?
E85, Regular, and E85 energy content
Dollars per gallon
Dollars per gallon
$4.00
$4.00
$3.50
$3.50
$3.00
$3.00
$2.50
$2.50
Regular
$2.00
Source: EIA.
energy
E85
$2.00
Seems to be
moving in the
right direction
http://e85prices.com/
But gasoline spreads are difficult to calculate as there
is a lot going on
$/gallon
US Conventional Regular Retail Gasoline Prices
$/gallon
$5.00
$5.00
2005
2006
2007
2008
2009
$4.50
$4.50
2010
2011
2012
2013
2004
$4.00
$4.00
$3.50
$3.50
$3.00
$3.00
$2.50
$2.50
$2.00
$2.00
$1.50
$1.50
Source: EIA.
$1.00
3-Dec
22-Jan
13-Mar
2-May
21-Jun
10-Aug
29-Sep
18-Nov
7-Jan
$1.00
26-Feb
Available infrastructure?
DOE waiver
analysis 2012
Current Sales
125
Fills E85
12
Fills E10
52
Potential sales with
weekly deliveries = 125 x 4 = 600
million gallons / year
fills per year
fills per year
Alternative
Calculation
E85 Sales
Stations
3,026
Average tank size
10,000
Potential sales
without changing
deliveries
363
Potential sales with
weekly deliveries = 363 x 4 = 1,450
gas stations
gallons
million gallons / year
million gallons / year
million gallons / year
• New shale gas and tight oil may lead to
alternative oxygenate sources that are
cheaper than ethanol.
Source: EIA.