Feature: US RINs complex under pressure while renewable diesel helps RVO mandates

US D4 Renewable Identification Numbers have plummeted 53.4% in 2023 while helping to meet the renewable volume obligation mandates for several renewable fuel categories primarily because of an increase in renewable diesel production and a decline in the BO-HO, the feedstock soybean oil and blendstock heating oil spread.

D4 biomass-based diesel Renewable Identification Number credits hit 79.50 cents/RIN on Nov. 7, its lowest level since Nov. 2, 2020.

2023 RVO progress

In September, the cumulative year-to-date production of biomass-based diesel (D4) surpassed the 2023 RVO mandate of 2.82 billion gallons set by the US Environmental Protection Agency. The early satisfaction of the 2023 D4 RVO can be mainly attributed to growing renewable diesel production and favorable blending economics during most of the second half of 2023.

According to EPA Nov. 16, through the month of October the US is 470 million gallons above the 2023 D4 RVO of 2.82 billion gallons produced, only taking into consideration 2023 domestic production. Despite the early satisfaction of the 2023 D4 RVO, demand for D4 RINs is being helped by mandate shortfalls in other RIN categories, such as in conventional and advanced biofuels.

The data also showed the US was short about 2.80 billion gallons of conventional renewable fuel (D6) production from meeting the 15 billion-gallon RVO for 2023. Due to this shortfall in D6 production, excess D4 RINs are being used to meet compliance for both D6 and D5 RINs, as both categories' 2023 RVO's have yet to be fulfilled -- thus generating demand for D4 RINs and preventing a further collapse in the RINs complex.

Carryover RINs from 2022 will be used to meet the 2023 RVO mandate, but the carryover RIN bank calculations performed by the EPA will not be known until sometime after the Renewable Fuel Standard next compliance date of Dec. 1, when all obligated parties and exporters are required to submit their RIN compliance data for the preceding year to the EPA. Market projections are for a 1.80 billion-1.85 billion carryover RINs from 2022 will be available for the 2023 compliance year.

Small refineries that petition the EPA for an exemption from their RFS obligations will also be a deciding factor for total carryover RINs from 2022 as exempted volumes must be redistributed across all other obligated parties. If a small refinery can demonstrate disproportionate economic hardship due to their following RFS obligations, the EPA may grant an exemption.

Although the Trump administration granted 88 exemptions, the Biden administration has consistently rejected exemption requests, which will mean their having less effect for total carryover RINs from 2022 and 2023 RVO mandate.

RFS background

According to the RFS, renewable fuels with a higher greenhouse gas 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 conventional renewable fuel, or corn ethanol, has a threshold of at least 20%.

Thus, D4 RINs have the versatility to be used to meet RVO mandates for both D4 and D6 categories, which results in a pricing structure that normally values D4 RINs higher than D6 RINs. As a result of the early satisfaction of the 2023 D4 mandate, however, current year D4 and D6 RINs have been valued equally by the market, according to assessments by Platts, part of S&P Global Commodity Insights.

Impact of renewable diesel growth on RIN markets

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 blended 1.50 D4 RINs are generated.

Thus, the growth of the renewable diesel sector has resulted in higher-than-expected volumes of D4 RIN- eligible fuels produced and has consequentially led to the early satisfaction of the 2023 D4 RVO mandate.

BO-HO near 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 through November.

The BO-HO is near the lows for 2023, settling at 106.06 cents/gal on Nov. 17, down from the high of 257.01 cents/gal on July 25.

The drop came as CBOT front-month soybean oil futures settled at 52.01 cents/lb, down 19.45% since July 25 and the December NYMEX ultra-low sulfur diesel futures contract settled at $2.7725/gal on Nov. 17, up 2.2% since July 25

Favorable blending economics for biomass-based diesel producers should continue in the near term helped by a lower BO-HO spread driven by higher ultra low sulfur diesel prices caused by the Israel-Hamas war and related Middle East geopolitical concerns and lower soybean oil prices because of poor export demand coupled with improving weather in South America and an expected large soybean crop.

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 is 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.