Aviation biofuel's newly minted ability to generate tradable US renewables credits, known as RINs, may be key to the industry's economics, according to market watchers.
"The availability of RINs is a critical bridge to commercial viability," Nancy Young, vice president of environmental affairs for US airline trade group Airlines for America, said in a recent interview.
"It means there is an economic value assigned to the renewable content in jet fuel that can help the producer of that fuel get closer to the price of traditional jet fuel," Young said.
Biofuels have yet to take flight in the aviation industry, as airlines and biorefiners have still to develop the economies of scale and technological prowess to make drop-in fuels cost-competitive with conventional jet fuel.
But the US Environmental Protection Agency's recent declaration that aviation biofuel -- biojet, in industry parlance -- is eligible to generate Renewable Identification Numbers has both industries hopeful that production will soon be able to ramp up.
EPA, in a final rule published Sunday, determined that biojet qualifies under the Renewable Fuel Standard to generate RINs that can be traded on the open market, though jet fuel itself is exempt from RINs obligations. Depending on how it's made and how much of a reduction in greenhouse-gas emissions it provides, biojet can be eligible for either D4 biodiesel, D5 advanced biofuel or D7 cellulosic diesel RINs.
VOLUMES LOW, BUT COULD GROW
Airlines globally use more than 70 billion gallons/year of jet fuel, but biojet made up just a few hundred million gallons last year, mostly for pilot projects to test its viability.
Airlines and the US military have expressed great interest in biojet as a means of lowering greenhouse-gas emissions, as well as reducing their exposure to price volatility in petroleum markets. US airlines spent about $50 billion on jet fuel in 2012, and spot prices have increased 260% since 2000, Young said.
But with supplies of biojet still extremely limited, most industry goals are still modest. Airplane manufacturer Boeing, for instance, wants biojet to account for 1% of the industry's 600 million gallons/year of jet fuel consumption by 2015.
The aviation industry, biofuels producers and the federal government have been investing in research to bring down the cost of making biojet, as well as financing more refineries.
Brooke Coleman, executive director of the Advanced Ethanol Council, said RINs are key to that.
"What the RIN value does is it creates an incentive to buy and trade this fuel," he said. "The whole reason we need the RFS is because we can show up with a cheaper better fuel, but it doesn't necessarily get it into the marketplace because it's so vertically integrated. RINs make sure the renewable fuel is used in an economically efficient way."
RINS PRICES IMPACT MARKET
But one wrinkle in the RFS that could affect the availability of biojet is the skyrocketing cost of biodiesel RINs.
RINs are a type of credit that can be used to meet the RFS for fuel sold in the US. Refiners and other obligated parties can meet the targets by blending renewables like biodiesel and ethanol with fuel like diesel and gasoline, buying RINs, exporting products or altering their production of fuel that is not subject to the US mandates, such as jet fuel
Increased demand for RINs this year has pushed those prices higher. For instance, biodiesel RINs for 2013 are valued at more than 90 cents/RIN, up from 45 cents/RIN at the start of the year.
Many refiners have switched to conventional jet fuel output instead of diesel to avoid the RINs obligation requirements. Valero, for example, on April 30, said it had increased its jet yield to curb its exposure to spot market trading of RINs.
The increased production of conventional jet fuel could lower prices and keep biojet economically uncompetitive.
But Coleman said EPA could help incentivize biojet by adjusting its RFS volume targets in the advanced fuel category. The agency, which is still in the process of finalizing its 2013 blending mandates, has the authority to adjust how much of each advanced fuel must be blended, depending on the availability of those fuels, Coleman said.
Primarily, cellulosic ethanol has yet to achieve widespread commercial scale, and if EPA continues to waive the bulk of the cellulosic ethanol mandate while still keeping the overall advanced biofuels mandate high, biojet could benefit, he said.
"We're pretty confident that aviation [biofuels] is going to be a strong part of the mix," he said. "EPA has tremendous amount of flexibility to move things around in the advanced category basket. EPA is plugged into the market on these things."
Young added that airlines are also trying to do their part to prop up the biojet industry by signing pre-purchase agreements and long-term offtake contracts with refiners.
But one problem for airlines and the biofuels industry is the patchwork of government incentives that create regulatory uncertainty. For example, the $1/gal tax credit for blending biodiesel was set to expire at the end of 2011, but then was extended for a year in January following last-ditch negotiations in Congress.
Biojet advocates say they will continue to press their case to Congress that the industry is worth supporting with longer-term incentives.
"This year-to-year fits and starts tax policy in the energy space is counterproductive on so many levels," Coleman said. "It doesn't help innovators and drives off investment."
