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Tracking and Trading the Renewable Identification Number
Part Two
by Clayton McMartin

As the Renewable Fuels Standard (RFS) is implemented, the renewable identification number – or RIN – has become an important component in today’s ethanol business. The first of this two-part series, seen in the August issue of Ethanol Today, discussed how RINs are assigned and tracked. This article will look into how RINs are managed, what companies are doing to ensure proper accounting controls, who holds the value for the RINs, and how they are traded.

A RIN is a 38-digit serial number, which presents a number of management and administrative challenges. Initially, many companies have taken the approach of managing RINs as part of the invoicing process. In concept this is as simple as denoting the proper RIN number on the invoice and passing it along to the customer. But problems can arise when there are mistakes, as there inevitably will be, and conventional accounting methods don’t lend themselves well to handling serial numbers.


RINs require different accounting methods

To illustrate why RIN accounting is so much different than conventional financial accounting, consider the following example. Acme Ethanol sells its product to World Wide Marketing Inc. During the transaction an error was made, and World Wide Marketing received in product more than they should have. To correct this error using conventional accounting methods, World Wide Marketing would simply send back to Acme, perhaps through a credit invoice or credit memo, placing each party back in accounting balance.

However, dealing with RINs is different than dealing with dollars, because RINs are actually serial numbers. In this scenario, World Wide Marketing should send back the specific RIN numbers that they received in error. This would be analogous to digging through the cash drawer and finding the exact 11 one-dollar bills affected in the transaction, each having a specific serial number.

Issues like this one have become more prevalent in today’s ethanol business, prompting the U.S. Environmental Protection Agency to issue a guidance document, “Improper and Illegal RIN Trading Practices,” which can be found online at http://www.epa.gov/otaq/renewablefuels/impropertrading.htm.

All companies handling RINs should become familiar with this document and its impact on their business operations.


National RIN registry provides advantages

Companies are now learning that it’s best to separate financial accounting systems and RFS compliance systems, and a growing number is participating in the nation’s voluntary renewable fuels registry. The advantages of a central registry include consistent procedures, internal controls, and the ability to validate RINs against the largest possible universe.

Last month’s article illustrated the mechanics of an ethanol producer selling a truckload of ethanol to a marketer, and the marketer selling a portion of the fuel to a splash blender. The paperwork required for this simple scenario can be extensive. However, in those cases when each party participates in the renewable fuels registry, the documentation and recordkeeping is instantaneous with the transfer of physical product. Since everyone’s data is on the same central database, there is no need to even type in the 38-digit RIN.


Using RINs to meet obligations

Turning attention now to the end-use of a RIN, why is this paperwork exercise necessary? The answer is found in what EPA calls an “obligated party.” Typically the obligated parties are the petroleum companies, but more specifically an obligated party is any company that introduces finished gasoline into the retail marketplace. This would include petroleum refiners and those who import gasoline into the United States.

The obligated party establishes its “Renewable Volume Obligation” by taking the RFS percentage (7.76% in 2008) and multiplying that number times the total volume of gasoline produced or imported. The obligated party then submits its pro-rata share of gallon-RINs to EPA in order to demonstrate compliance with its portion of the RFS.

The RIN, in essence, is now a credit used as a method to keep score. If an obligated party blends more renewable fuel than its share, it generates excess RINs. These excess RINs can then be traded or sold to another company that finds it more economical to purchase RINs instead of blending ethanol or biodiesel. Banking and trading of RINs as renewable fuel credits forms the basis for an open RIN market.


Transformation of a RIN

A very important component of the RFS program is the fact that the RIN only becomes a tradable credit as it reaches the end of the supply chain, as it transforms from what is known as an “Assigned RIN into a “Separated” RIN. To illustrate this factor, look back to the beginning with the ethanol producer.

As the producer generates the RIN number associated with a batch of fuel, it signifies that the RIN is assigned by placing the number 1 at the beginning of the RIN. This is known as the K code and would make the RIN number look something like this:

12008650270076000011020000000100020000 (K Code=1)

By having a K code equal to 1, this RIN cannot travel independent of renewable fuel. In other words, the RIN in this form must accompany renewable fuel as it is passed from one party to the next. This is true until the RIN has moved down the supply chain to the point just before the renewable fuel enters the retail marketplace. For the most part, this point in the supply chain is with the refiner or what is known in the ethanol industry as the splash blender.

Once the RIN has migrated to the end of the supply chain, it is then “separated” from the fuel, making it a paper credit which can now be traded independent of the fuel. In part 1 of this article, the example showed the splash blender receiving the following RIN:
12008650270076000011020000000100000792

Through the operation of blending, he would then separate the RIN as follows:

22008650270076000011020000000100000792 (K Code=2)

Any person registered for the RFS program can now trade this RIN now that it is in the form of a renewable fuel credit, having a K Code of 2. The RIN would obviously have value to an obligated party, but there are a number of other dynamics which have the potential to eventually drive the RIN market.


Valuing RINs in the marketplace

Ultimately, the RIN must end up in the hands of the petroleum refiner or gasoline importer to be used for compliance purposes. However, trading of RINs is not limited to just oil companies or renewable fuel suppliers. In fact, any company can trade RINs, provided that it is registered with EPA to participate in the program. With the program now just in its infancy, RIN trading is still being conducted at the most basic level – between renewable fuel suppliers and oil companies. As the market matures, expect to see more players enter the field.

One of the market drivers that seems to still be unnoticed by most in the industry is the use of RINs by ethanol producers to hedge their position in the marketplace. Keep in mind that it is the RIN that is used to demonstrate compliance with EPA and not the actual renewable fuel. By purchasing RINs back at prices below incremental margin, the ethanol producers would be in the position to either sell the separated RIN or produce more RINs by producing more ethanol product.

In reality the RFS and the RIN program is in its infancy. Most companies are still working on systems to handle paperwork and secretly hoping it will all go away. The fact remains, however, that the RIN is the heart of the Renewable Fuels Standard and it will not be going away any time soon – in fact, quite to the contrary, especially as we look to the future and see the RFS2 modifications coming with the Energy Independence and Security Act of 2007.

Ethanol producers have a new player in the game with the advent of RINs and the RFS. Maximized profits will come to those who understand the rules of the game and all the other players on the field.



For more information

McMartin has agreed to enroll Ethanol Today subscribers in the company’s free RFS Educational Briefing Series. Learn more or sign up at  www.RINregister.com/EthanolToday.



About the Author

Clayton McMartin is the President of the Clean Fuels Clearinghouse and founder of the RINSTAR Renewable Fuel Registry, the nation’s only registrar for renewable fuels and RINs. In the one month since Part 1 of this series, the registry has processed over 657 million Gallon-RIN transactions, bring the total to over 3.2 billion Gallon-RINs since September 1 of last year. The registry interacts with over 450 companies throughout the supply chain each day.
 

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The American Coalition for Ethanol publishes Ethanol Today magazine each month to cover the biofuels industryís hot topics, including cellulosic ethanol, E85, corn ethanol, food versus fuel, ethanolís carbon footprint, E10, E15, and mid-range ethanol blends.
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