By Reiter Scientific Consulting | Company News | Feb 13 2012
The End of Biodiesel's Innocence
Upon departure from the 2012 National Biodiesel Conference in Orlando, I couldn’t help but be flooded with mixed emotions. For the better part of the last 5 years, our company has specialized in helping small (<5M GPY) biodiesel producers get off the ground by offering technical expertise, engineering guidance, and hands on assistance. While the 2012 NBB Conference did allow us to strengthen our ties to our existing clients and brokerage partners we couldn’t help but feel concern regarding the negative impact that the recently announced RIN fraud could have on many of the companies that we have had the privilege of help get off the ground in the past 5 years.
The Best of Times
Fiscal year 2011 was nothing short of spectacular for most Biodiesel producers. With a $1 per gallon IRS tax credit in place, and D4 RIN values exceeding $2 per gallon for much of the year, it seemed the biodiesel industry (powered by more than $3 per gallon in government incentives) had proven itself as a worthwhile (and relatively low risk) investment. Despite record high feedstock prices (yellow grease reached an all time high of nearly $3.50 in many markets) margins held strong due in part to strong demand (and the rusulting high prices) associated with Biodiesel. Neat Biodiesel (B100) regularly traded upward of $5 per gallon creating strong margins for existing producers and a strong incentive for new producers to enter the market. I’ll be the first to admit, it couldn’t stay this easy (and profitable) forever.
At the same time that biodiesel companies nationwide were posting record profits, a storm of fraud was brewing behind the scenes that is only now being seen on the horizon. In October 2011, the U.S. EPA charged Maryland-based Clean Green Fuels LLC and Texas-based Absolute Fuels LLC with fraudulently creating and selling invalid RINs. Early estimates indicated the monetary value of this fraud to be well into the millions of dollars. Renewable Identification Numbers (RINs) are the EPA conceived method of subsidizing the renewable fuel industry. When a company produces renewable fuel, they in turn producer RINs which via various means must be attained by the Petroleum Companies in order to satisfy their Renewable Fuel Standard (RFS) obligations.
The announcement of the RIN fraud led nearly immediately to catastrophic industry wide fall out. With the validity of RINs now put into question, the Obligated Parties (the petroleum industry) now had a very strong justification for no longer purchasing RINs from small biofuel producers. Their reasoning being that it was just too difficult to verify the integrity of the RINs and thus they were putting themselves at great risk by purchasing these RINs from brokers who aggregate the RINs produced by smaller biofuel producers.
With rumors of RIN fraud percolating through the industry, the immediate reaction was...confusion. On the one hand, the EPA’s stance that the Obligated Parties would need to replace the “falsified RINs” with legitimate RINs led some to believe that there would be a near term increase in RIN values. This “supply/demand” based theory did indeed prove to be correct. What few people suspected, was that only a select few would benefit from this “new normal.”
In short order, a 2-tier RIN system emerged where small producers would be offered only a fraction of the true-value of their RINs while the major producers continued to be able to sell their “trusted” RINs at even higher prices. The bottom line? Due to no fault of their own, small biofuel producers now find themself at a competitive disadvantage to large producers who make the same exact product and (in many cases) at slightly lower cost.
The Worse of Times
A 2-tier RIN market cannot last forever. If “realized” RIN values continue to fall, small producers will be forced to compete against larger producers on an uneven playing field. Sad as this is, this is the BEST CASE NEAR-TERM SCENARIO. Over time, margin improvement for the major producers coupled with margin deterioration for the smaller producers could change the landscape entirely. Already, major fuel marketer and blenders have ceased to purchase fuel entirely from many small producers. To quote an unnamed source at the NBB show, “Half of these guys will go out of business this year. They are walking around, not even realizing how big of a deal this RIN scandal is.”
What can be done? Well, I asked this question directly to the EPA. Unfortunately, their “answer” left me more disheartened than before I asked the question.
Do you have an idea as to how this situation can be resolved? Email it to kristof@reiterscientific. The best submissions will be discussed in further posts.