D4 biodiesel RIN prices have spiked in automatic reaction to EPA’s November 30 publication of higher-than-expected RVO requirements for 2014 through 2017. Analysis of RIN data points to a more than 150mn shortfall in D4 RIN gallons for next year when current rates of RIN generation are balanced against a greatly expanded D5 category requirement plus separations for exports and other non-compliance. Tightness in Brazilian ethanol and the outcome of the US federal debate over biodiesel tax credits meanwhile could further deepen the 2016 D4/D5 RIN market shortfall.
EPA’s final rule ushered in a much stronger-than-expected biofuels blend mandate for 2014-2016. Cross RIN category targets were almost universally higher than EPA’s May proposal. Dedicated D4 mandates for biomass-based diesel were hiked above EPA’s already biodiesel-friendly May proposal, while larger gains in the final 2016 advanced biofuel rule offer even greater opportunities for biomass-based diesel demand growth.
The RVO for D4 bio-mass based fuels was raised by 30mn gal for this year and 100mn gal for 2016 to 2.89bn gal. 2014 mandates were kept flat with May’s proposed RVO and the 2017 blend was set up another 100mn gal at 2bn gal. Producers will need to stretch the pace of 2015 RIN generation to meet the higher 2016 target. Around 500mn RIN gallons are estimated available to be carried into 2015 from 2014, on top of YtD D4 generation through October which sat at 2.3bn RIN gal. Assuming D4 RIN generation holds around the 230mn RIN gal/month 2015 average pace of generation, a 467mn D4 RIN gal surplus looms given the likely absence of any significant D5 shortfall this year at current rates of D5 generation with another two months of RIN generation still to run this year.
EPA trimmed advanced biofuel requirements for 2014 and 2015 by 10mn gal and 20mn gal respectively despite the hikes in biomass-based diesel requirements. D5 generation requirements under the final rule sit slightly down relative to the May proposal at 111mn gal for 2014 and more sharply down at 127mn gal for 2015 before a surge in mandated demand to 492mn gal for next year. In the first ten months of this year D5 RIN generators created just 103mn RINs, putting them only marginally below the final 2015 target but 325mn RINs short of the 2016 target at the current pace of generation. Assuming the annualized rate of growth in D5 generation stays around 50%, the shortfall in D5 RIN generation hovers around 250mn RIN gal for 2016. Current tightness in the Brazilian ethanol market meanwhile threatens to strangle the D5 creation opportunities for sugarcane ethanol deep into the first half of next year, putting the compliance onus on biodiesel.
The D5 shortfall would consume well over half of the D4 carryover into 2016, with exports at a 2015 annualized rate coupled with non-compliance retirements set to consume another 153mn D4 RINs, effectively wiping out any 2015 carryover. This leaves the 2016 D4 RIN market effectively already short against the hiked final rule requiring 1.9bn gal of biomass-based diesel blending, with US lawmakers’ noises over a switch to a producers’ credit increasing the risk for end-users that the current strong flows of exports are suddenly priced out of the US market.