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Decoding EPA's New Proposals on E15 Waiver, RIN Trading

Nilanjan Choudhury
Bear of the Day: Bed Bath & Beyond Inc. (BBBY)

Yesterday, the Andrew Wheeler-led Environmental Protection Agency (EPA) released a draft proposal that included changes to the RIN market and made E15 ethanol available year-round.

RIN Reforms

What Are RINs: It all started in 2005 when the Congress passed the 'Energy Policy Act' to reduce America's dependence on imports, lower greenhouse gas emissions and enhance the country's energy security. The legislation, among other provisions, created a Renewable Fuel Standard (or RFS) requiring the mixing of renewable fuels (like corn ethanol or other biofuels) into gasoline and diesel.

The U.S. EPA calls for a blending target known as the Renewable Volume Obligation (or RVO). For example, in 2010, EPA proposed that 12.9 billion gallons of ethanol and other biofuels be blended into gasoline and diesel. By 2018, the amount had jumped to 19.3 billion gallons and the RVO requirement for 2019 is 19.9 billion gallons.

Apart from its efforts to force the use of ethanol in the domestic gasoline mix – the percentage of which has gone up from around 3% in 2005 to roughly 10% now – Congress instructed the EPA to develop a system of electronically tracking numbers that could allow the agency to check whether the assigned blending requirements were being met by the concerned parties.

These 38-character tracking numbers or tradable certificates (sometimes referred to as ‘credits’) are known as RINs (Renewable Identification Numbers). Each physical gallon of renewable fuel produced/imported is assigned a RIN that follows the fuel’s journey to a blender. Post blending, RINs are separated from the blended gallons of petroleum-based fuels, and they are used as proof by obligated parties that they have complied with the federal program.

Lack of Transparency Leads to Widespread Abuse: Interestingly, the so-called RFS point-of-obligation are not the actual parties engaged in blending gasoline with ethanol or other biofuels, but refineries and gasoline-diesel importers. That means, all oil refiners – big and small – are required to shoulder the burden for mixing ethanol into gasoline, even if they do not possess the blending terminals to do so.

EPA's Suggested Reforms: The agency has come up with several structural changes to increase RIN market transparency and prevent price manipulation. The proposals include preventing certain parties from gaining access to RINs, public declaration for RIN holdings when they reach a threshold, stipulating a holding period for non-obligated parties and increasing the frequency of disclosure requirements from annual to quarterly.

The E15 Rule

The administration announced the removal of the federal restriction on summer sales of E15 ethanol.

The Current Ruling on E15: The vast majority of ethanol consumed in the United States comes in the form of E10, or a 10 vol% blend with gasoline. In 2011, the EPA permitted a partial waiver for blends of up to 15% with gasoline for passenger vehicles manufactured after 2001. While the ruling was bitterly contested by refiners, there was a rider associated with this approval that prohibited the sales of E15 ethanol between Jun 1 and Sep 15 every year. The restriction during the summer driving season was attributed to concerns over the potential for smog formation resulting from the volatile organic compounds in the hotter days.

EPA’s Suggested Reforms: Yesterday, EPA proposed the removal of restrictions on E15 sales and allow year-round blending of the fuel rather than for just eight months of the year.    

Gainers and Losers from the Proposed Rule Changes

The planned RIN credit reform is strongly opposed by large integrated energy conglomerates like ExxonMobil XOM and Chevron CVX. These biggies, with operations equipped to process ethanol, are placed at an advantage to standalone downstream operators. Both ExxonMobil and Chevron currently retain a Zacks Rank #3 (Hold).

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The facilities of independent refiners can process just petroleum products and not ethanol. This means that the refiners have to either buy or build special ethanol blending terminals or purchase RINs to comply with the RFS. For most of the smaller players, investing in a new ethanol blending and distribution infrastructure is not financially viable. So, the only option for them is to buy RIN credits that they require to meet the RFS standard. Most independent refiners have to purchase them from integrated majors and biofuel producers who sell their excess credits.

Meanwhile, ethanol producers like Green Plains GPRE and Pacific Ethanol PEIX – that have been on the receiving end of the trade war and adverse weather – obviously stand to gain from the lifting of the summer ban on E15.

What Lies Ahead

The EPA is currently accepting comments from the stakeholders before holding a public hearing on the proposal on March 29. In particular, the demand for year-round E15 sale has been a longstanding demand of ethanol groups and a pledge of Trump’s presidential campaign. However, it remains to be seen if the new rules come into effect by the summer driving season that starts on June 1.

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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
Pacific Ethanol, Inc. (PEIX) : Free Stock Analysis Report
 
Green Plains, Inc. (GPRE) : Free Stock Analysis Report
 
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