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A volatile corn this year has turned the focus on ethanol and its credit system called RINs market.
Corn-based ethanol has particularly been volatile this year because of the effects of the polar vortex in North America. With uncertain weather dogging the US, transportation of commodities has suffered.
Ethanol, in particular, has rallied because of rail shortage. Rail operators in the US and Canada are seeking a hefty premium of $3,000 to reserve a car, pushing up prices in the bargain. In the last one month, it has gained 60 per cent. Currently ethanol contracts for delivery in May are ruling at $4.02 a gallon.
The rally has resulted in prices of ethanol credits called Renewable Identification Number or RINs surging to 47 cents from around 32 cents a month ago for the bio-fuel produced this year.
Wild marketThe US ethanol credits rivalled Bitcoin last year as one of the world’s wildest markets. Prices for ethanol credits soared to $1 at the start of 2013 from a few cents.
The rally in the RINs market fizzled mid-way last year after the US said that its environmental protection agency was considering cutting the amount of bio-fuel that has to be mixed in petrol or diesel.
US ethanol credits are given 38-character serial number called Renewable Identification Number. This is assigned to a consignment of bio-fuel in the US to track production, use and trading as mandated by the Environmental Protection Agency. This ensures that the renewable fuel standard is implemented as stipulated by the US Energy Policy Act, 2005.
The RIN number, including the year of production, company name and batch number, is generated at the point of production or import.
Annual targetUnder the Act, the Environmental Protection Agency sets an annual target, based on the fuel consumed in the US by automobiles, for blending of bio-fuels with diesel and petrol.
The target is the total amount of ethanol, biodiesel, and renewable biodiesel that should be used in a year as a percentage of projected gasoline use.
Individual companies use this percentage against their production to work out their mandated bio-fuels volume. By 2022, the US expects 35 billion gallons of ethanol and a billion gallons of biodiesel to be blended with fossil fuels.
Oil marketing companies have mandatorily to meet individual renewable fuel standard norms based on the volume of their sale. This is to ensure that the national target by the agency is achieved. These companies will have to file returns to the agency, giving details of the RINs to make sure that the target is being met.
When production of bio-fuels exceeds target, it leads to creation of excess RINs. These RINs can be set off whenever a firm falls short of meeting its target in the future.
Biofuels change hands before reaching the final use. Therefore, RINs are also transferred. They are transferred to refiners, importers, and blenders, who then blend a portion of their supply with ethanol or biodiesel.
A “product transfer document” is created and given to the new owner when the bio-fuel changes hands.
Exports dataAn interesting aspect of the credit system is that exports do not earn RINs, whereas imports can avail of the facility. Ethanol exports from the US have been rising since the beginning of the year.
Canada buys over 40 per cent of US ethanol exports and Brazil another 22 per cent. Some 22 countries, including India, also buy ethanol from the US.
With the sugarcane crop in Brazil affected by a prolonged dry period, ethanol production in the South American nation is expected to drop one billion litres to 24.5 billion litres. This is seen driving up demand for US ethanol to one billion gallons this year from 621.6 million gallons last year.
The RINs market is likely to continue ruling firm in the days ahead.
India, which is seeing its gasohol programme of mixing ethanol for fossil fuels in fits and starts, can draw a lesson from the US in extending credits. Such a system will help bring in a market for credits that can help the producer, consumer and, more importantly, sugarcane growers.
Backing the gasohol programme with a law can help India cut the foreign exchange it spends on importing fossil fuels.
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