As alternative fuels incrementally gain market share year-over-year, the regulations that facilitate their adoption attract more and more attention. While 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 many countries have announced their commitment to diverging from traditional diesel engines, the actual prevalence of alternative energies is relatively small.
To combat slow adoption in the marketplace, federal blending laws encourage the use of alternative energy 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), put into practice in 2005 and later expanded in 2007. The program essentially requires that a minimum amount of renewable fuels such as ethanol, biodiesel, and renewable diesel be blended into the traditional fuel supply, either by selling blended fuels, or by selling sufficient amounts of “pure” renewable fuels alongside conventional fuels.
In practice, the RFS sets separate targets for blending 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 are the reason that – most familiarly – traditional gasoline contains 10 percent ethanol—or E10—and is one of the most widely used means of accomplishing blending requirements. RVOs create natural demand in the marketplace for renewable fuels.
Renewable Identification Numbers
Along with the RVOs, parties that produce renewable fuels 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 required renewables or purchase RINs from another party sold more than they were required to. Each RIN is categorized into one of four categories and is assigned a D-Code.
- Advanced Biofuel or D5 RINs consist of renewable biomass except ethanol
- Biomass-based Diesel or D4 RINs are made up of biodiesel and renewable diesel
- Cellulosic Biofuel or D3 and D7 RINs are renewable fuel produced by cellulose, hemicellulose or lignin, typically known as renewable natural gas (RNG)
- Renewable fuel or D6 RINs is mainly focused on ethanol
RNG fuel (D3 RINs) provides one of the 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.
Increasing Market Share
The overarching purpose of the Federal Renewable Fuel Standard program was to expand the US renewables sector, to cut greenhouse gas emissions, and to reduce the country’s reliance on imported oil. 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 minimum blending requirements to promote growth of the program and to incrementally introduce ever more renewable fuel volume. 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 2010. Renewable Diesel (RD) and Renewable Natural Gas (RNG) have both made significant penetration in recent years—in total gaining 5 percent market share in the transportation fuel landscape, in part due to the RFS.
The political landscape in 2017 led to some uncertainty in the future of the RFS program, and therefore stagnated some renewable penetration (though full renewables data is still being collected). Policy was passed that intended to increase domestically produced fuel sources and decrease dependence on carbon intensive foreign oils. This move strengthened the foothold of traditional diesel and gasoline in the domestic transportation industry, jeopardizing both the effectiveness of RFS and the incentive to invest in alternative fuel technology.
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 Renewable Fuel Standard program affects all fuel consumers, but has heightened effects on shippers who consume large volumes of transportation fuel.