What will cause separation of the D4, D5, and D6 RIN prices? Part 3 – D6 RIN pricing framework
In the U.S. biofuels market, it has become normal for the prices of three Renewable Identification Number (RIN) credits to be the same. They are the D4 (biomass-based diesel), D5 (advanced biofuel) and D6 (conventional renewable biofuel) RINs. This equality is caused by special circumstances that have applied at times. The current question is what will cause the next separation among these three RIN prices?
See other blogs in this series: What will cause separation of the D4, D5, and D6 RIN prices?
- Part 1 – Studying Boundaries with ATTRACTOR
- Part 2 – The Big Bang and the Meiselman model
- Part 3 – D6 RIN Pricing Framework
- Part 4 – The Next Big Move
- Part 5 – The ATTRACTOR RIN System Roadmap
The ethanol supply curve on Figure 1 shows a relationship between the quantity of ethanol supplied to the market and the price of ethanol.
Supply curves are upward sloping to the right because, in competitive markets, the next increment of supply comes at a higher cost than the previous gallons. For example, low-cost ethanol plants can make money selling ethanol at a low price, whereas a high-cost plant will not run unless the ethanol price is higher.
This is one of many supply curves used in the ATTRACTOR model for calculating theoretical RIN prices.
Blend wall boundary
Historically, the maximum amount of ethanol in U.S. gasoline has been 10%. This boundary, commonly called the blend wall, is represented in Figure 2 as a vertical line at an ethanol quantity equal to 10% of the 140 billion gallons per year total US gasoline consumption, or 14 billion gallons/year of ethanol.
Renewable-advanced mandate boundary
Figure 3 shows another boundary at 15 billion gallons per year. It represents the biofuel supply quantity above which corn ethanol is no longer eligible to satisfy biofuel production obligations.
Below 15 billion gallons, any RFS biofuel qualifies to earn those RINs. Above 15 billion gallons, only advanced biofuels qualify.
Bio based diesel supply
Bio based diesel (BBD) is an advanced biofuel. Its supply curve is upward sloping at a much higher price (over $3 per gallon), and with a flatter slope than ethanol. A segment of the BBD supply curve is shown in Figure 4 with a segment labeled “advanced gap”:
The segments shown as one discontinuous solid curve form a quantitative theoretical framework for understanding the movements of D6 RIN prices.
The solid curve resembles, but is not itself, the pattern of D6 RIN price movement that was seen in the market when the blend wall was actually hit in 2013 (see Part 2 of this series for a chart showing the theoretical calculation of that D6 RIN price pattern). The resemblance is evidence the market price follows the theory. To calculate the theoretical RIN price requires also factoring in other supply and demand curves, RFS specifications, and other boundaries that can influence the D6 RIN price.
In ATTRACTOR, this diagram is extended to show the complete framework of the RFS price control system that determines theoretical RIN prices for all the RINs.
Understanding D6 RIN pricing
Figure 4 provides a foundational picture needed to understand, anticipate and forecast future D6 RIN price movements.
Figure 4 provides a foundational picture needed to understand, anticipate and forecast future D6 RIN price movements.
Over time, the operating point moves around the picture. Both supply curves (and the associated supply, demand, and boundary curves with which they interact) move over time with changes in, for example, the supply and price of corn and bio based diesel feedstocks and the operating costs of ethanol and biobased diesel suppliers. The boundaries, which represent constraints on those supply and price movements, change with technological and regulatory changes.
In ATTRACTOR, all these curves are quantitatively specified and the effects of the changes are reliably quantified, something not possible with any RIN price analysis method that does not recognize this fundamental framework.
Too complex?
Some say this fundamental picture is too complex to be understandable. I strongly disagree. In fact, I know it is readily understood by almost anyone who wants to understand it, especially if they ever took a course in, or are willing to learn about Economics 101.
Some say this fundamental picture is too complex to be understandable. I strongly disagree.
Figure 4 also provides the conceptual picture needed to study, quantify and understand answers to more complex questions like:
- what is the cost of the Renewable Fuel Standard?
- who bears that cost?
- what would be the impact of recently proposed changes in RFS specifications?
- what will cause separation of the D4, D5, and D6 RINs?
This is done by applying well-known Economics 101 concepts about how taxes, subsidies and competition are represented on pictures like Figure 4.
Recommendation
If RIN prices are important to you or your business, why would you choose to continue without this roadmap to help you navigate the RIN landscape? Get Hoekstra Research Report 10 and the ATTRACTOR spreadsheet
Get the Attractor spreadsheet, it is included with Hoekstra Research Report 10 and is available to anyone at negligible cost.
