By Peter Weisberg, The Climate Trust
Biogas projects got a big boost from an EPA ruling this month which qualified their fuel as cellulosic under the Renewable Fuel Standard. What does that mean for the value biogas-to-transportation-fuel projects can expect from selling credits under the standard? Understanding that requires digging into some of the details of the evolving policy.
The Renewable Fuel Standard requires growing quantities of renewable transportation fuel be used in the United States. To meet this requirement, refiners and importers of traditional fuels must retire credits called Renewable Identification Numbers or RINs. Yet not all RINs are treated equally. Instead, regulated entities must acquire a specified percentage of their RINs from tiers of alternative fuels with significant greenhouse gas reductions. In 2013, approximately 17% of RINs had to come from “Advanced Biofuel” (which must reduce greenhouse gases by 50% compared to traditional fuels). A much smaller percentage (only 0.0005% in 2013) of RINs must come from “Cellulosic” fuels—which must be derived from cellulose, hemicelluloses or lignin and have a greenhouse gas reduction of at least 60%. These different tiers of RINs trade at different prices.
Prior to July 2014, biogas projects qualified as Advanced Biofuel. On July 2nd, EPA finalized a new rule that qualifies most biogas projects as Cellulosic. So what does this mean for a project’s revenues? While significant quantities of Advanced Biofuel RINs have been trading for years, Cellulosic RIN prices are not reported because so few credits are generated and sold. However, EPA has required more Cellulosic RINs to be purchased than are currently generated. The EPA therefore issues a “Cellulosic Waiver Credit” which parties can retire along with an Advanced Biofuel RIN to meet their Cellulosic requirements. The price of this waiver is set at $3, minus the wholesale price of gasoline—in 2013, this was $0.42 per credit. The current best guess for the price of a Cellulosic RIN is therefore based on regulated entities next best option for meeting their cellulosic standard: purchasing an Advanced Biofuel RIN (currently selling for $0.53/RIN) and a Cellulosic Waiver Credit (at $0.42/credit) for a combined price of $0.95/RIN. Qualifying biogas as cellulosic therefore increases the RIN value projects can expect by almost 80%.
But what will future prices for Cellulosic RINs look like? There is no doubt that cellulosic fuels will play an increasingly important role in the Renewable Fuel Standard. In the original fuel volume requirements under the Renewable Fuel Standard, cellulosic fuels were set to grow from 6% of the renewable fuel supply in 2013 to 44% in 2022. Yet EPA can, and to date has, adjusted these targets every year. If EPA sets future targets above actual production, Cellulosic RINs could trade at a significant premium over Advanced Biofuel RINs. If the cellulosic targets are below production, however, Cellulosic RINs are likely to be trade at the same price as Advanced Biofuel RINs.
For now, EPA’s ruling has almost doubled the value of RINs for biogas projects. How much value it will add over the long-term depends upon the policy choices and the cellulosic projections made by the EPA. However, there is no doubt that these new rules from EPA clarify that biogas-to-transportation-fuel projects will play a large role in meeting EPA’s ambitious environmental goals over the long term. How it plays out should be fun to watch!