D4 RINs collapse in 2023, driving down prices in entire RINs complex

D4 Renewable Identification Numbers have plummeted 44.5% so far in 2023 due to an uptick in renewable diesel production and a decline in the BO-HO, the feedstock soybean oil and blendstock heating oil spread.

D6 corn ethanol and D4 bio-mass based dieselRIN credits have each fallen to their lowest level since early 2022, as both categories of RINs have plummeted nearly 40 cents in September. On Sept. 27, Platts assessed both D6 RINs and D4 RINs at $1.01/RIN.

RFS background

Historically, D4 RINs have traded at a significant premium to D6 RINs due to the fuel nesting scheme set forth in the US Environmental Protection Agency's Renewable Fuel Standard.

According to the RFS, renewable fuels with a higher GHG reduction threshold can be used to meet the standards for a lower GHG reduction threshold. Biomass-based diesel, including both biodiesel and renewable diesel, has a required lifecycle GHG reduction threshold of at least 50%, while corn ethanol has a threshold of at least 20%.

Impact of renewable diesel growth on RIN markets

Developments in the renewable diesel sector, however, have significantly narrowed the gap in price between D4 and D6 RINs.

In 2023, US production capacity of renewable diesel and other biofuels hit 3 billion gallons/year, overtaking US biodiesel production capacity for the first time, according to the Energy Information Administration.

The milestone in renewable diesel production has been critical in the RIN markets because renewable diesel generates 13% more RINs than biodiesel per gallon blended. For every gallon of renewable diesel blended, 1.70 D4 RINs are generated; while for every gallon of biodiesel blended1.50 D4 RINs are generated.

The increase in D4 RINs supply due to the growth of renewable diesel production, paired with the fuel nesting scheme of the RFS, has placed significant downward pressure on the price of D4 RINs and consequentially D6 RINs as well.

BO-HO nearing 2023 lows

Favorable blending economics for biomass-based diesel producers driven by the significant decrease in the BO-HO has compounded to the downward pressure seen on RINs prices in September.

The BO-HO is nearing lows for 2023, settling at 107.86 cents/gal on Sept. 27, down 82.15 cents from the most recent high of 190.01 cents/gal on Aug. 17.

The drop came as the NYMEX ultra-low sulfur diesel futures contract settled at $3.3147/gal Sept. 27, up 7.14% since Aug. 17 and CBOT front-month soybean oil futures settled at 59.61 cents/lb, down 12.03% since Aug. 17.

The BO-HO is used by the biodiesel industry as a barometer to gauge costs and margins for biodiesel production. A lower BO-HO spread will encourage biodiesel producers to maximize biodiesel production, which has recently been caused by a decrease in the feedstock soybean oil price and an increase in the blendstock heating oil price.

As the BO-HO increases, the cost to produce biodiesel rises with an associated fall in overall blending economics with unfavorable margins, which could occur if there is an increase in the feedstock soybean oil price or if there is a decrease in the blendstock heating oil price.

The BO-HO s calculated by multiplying the cost per pound of soybean oil by 7.37, which is the yield for soy methyl ester biodiesel, minus the cost per gallon of heating oil.