How Does The Renewable Fuel Standard Work?

As alternative fuels incrementally gain market share year-over-year, the regulations that facilitate their adoption attract more and more attention. While the communication of the benefits of many alternative fuels is rooted in the desire for smaller carbon footprints and cleaner emissions, many players are slow to adopt the new technology because of high entry costs. Though it is clear that in the long-term shippers and carriers will need to transition to cleaner-burning fuels as sustainability has blossomed into a strategic cornerstone of corporate strategies.  However, the actual prevalence of alternative energies is relatively small.

To combat slow adoption in the marketplace, federal blending laws encourage the use of alternative fuels in small amounts in the existing fuel mix. One of the most influential of these regulations in the United States is the Renewable Fuel Standard (RFS).

How Does the Renewable Fuel Standard Work?

Put into practice in 2005 and later expanded into 2022, the program requires minimum volume requirements of renewable fuels such as ethanol, biodiesel, and renewable diesel. This minimum can be met by either selling traditional fuels blended with the appropriate amount of alternative fuel, or by selling sufficient amounts of “pure” renewable fuels alongside conventional fuels.

Separate targets are set for the blending of renewables into the nation’s transportation fuel supply for both diesel and gasoline. Refiners and importers of fuel are given an annual renewable volume obligation (RVO) that is based on a portion of their overall production and imports. RVOs create natural demand in the marketplace for renewable fuels.

The most familiar example of RVOs in practice is traditional gasoline that contains 10 percent ethanol, commonly known as E10. This is one of the most widely used means of accomplishing blending requirements. 

Renewable Identification Numbers

Along with the RVOs, parties that produce renewable fuels can generate renewable identification number (RIN) credits for each gallon of fuel made. A RIN is a 38-character number assigned to each physical gallon of renewable fuel produced or imported.  

These RINs are used by refiners and importers to verify their compliance. Producers can meet their renewable volume obligations by either selling the required amount of renewables or by purchasing RINs from another party that sold a surplus of renewables.  Each RIN is categorized into one of four categories and is assigned a D-Code.

RNG fuel (D3 RINs) provides one of the greatest opportunities to remove greenhouse gas emissions from the fuel supply. The fact that D3 RINs are also being traded at a much higher value than other RINs gives RNG an even greater opportunity for adoption and market share.

RFS IS INCREASING MARKET SHARE For Renewables

The overarching purpose of the federal renewable fuels program is to expand the U.S. renewables sector, to cut greenhouse gas emissions, and to reduce the country’s reliance on oil imports. By simply blending fuel types in small amounts, renewables can permeate the already existing market share, infrastructure, and adoption of traditional fuel types, making it a low-cost means of introducing alternatives.

Each year the government raises the minimum volume of renewable fuels to required to promote the growth of the program. This process was originally designed to foster an organic adoption of new technology, rather than mandating an expensive energy overhaul in one fell swoop.

As is evident in the pie charts above, renewable fuels have continued to make up a larger portion of the overall commercial fuel portfolio since 2009.  Biodiesel, renewable diesel and renewable natural gas (RNG) have all made significant penetration in recent years—in total increasing from 1 percent to 7 percent market share in the transportation fuel landscape, in part due to the RFS.

The political landscape led to some uncertainty in the future of the RFS program, and therefore stagnated some renewable penetration until early 2020. A U.S. Federal court ruled in favor of the RFS and rejected three Environmental Protection Agency (EPA) ethanol exemptions granted to small refiners.  As you can see in the chart, RINs credit prices rebounded significantly over its gradual downfall. Furthermore, credit prices did not just surge for D6 – representing ethanol – but also all credit prices showed upward movement, as it was a win for all renewable energies.  

Understanding the purpose behind renewable fuel legislation, how it interacts with the market in practice, and the long-term effect it will have on individual parties is crucial to making viable plans to navigate these changes. The RFS program affects all fuel consumers but has heightened effects on shippers who consume large volumes of transportation fuel.