With Members of Congress back in their districts for the remainder of the year, it is clear that the biodiesel tax credit will not be extended before Jan. 1. Although on prior occasions after it has lapsed it has been extended retroactively the following year, it is not certain that this will occur next year. Given that many Â鶹ɫ²¥ members have historically utilized the biodiesel tax credit to integrate the product into their diesel supply and offer competitive fuel prices, Â鶹ɫ²¥ offers a few points to keep in mind as you plan for 2017.
1) The biodiesel tax credit is not the only federal incentive for biodiesel blending — The Renewable Fuel Standard (RFS) requires fuel refiners and importers to demonstrate that alternative fuels — including biodiesel — are introduced into the fuel supply. Fuel marketers that blend biodiesel into their fuel supply may obtain “RINs” (Renewable Identification Numbers), which are effectively credits that they can sell in an open market to refiners and importers, who in turn use these credits to demonstrate compliance with the RFS. As with any commodity, these RINs can take on a value of their own, generally reflecting the economics of blending biodiesel with diesel fuel. The money that marketers generate from these sales can enable them to pass savings on to their customers in the form of lower prices at the pump, yet realize greater margins on account of the RIN sales.
Thus, even without the $1.00/gallon biodiesel blender tax credit, there may still be a strong incentive for marketers to blend biodiesel — doing so will enable marketers to acquire and sell RINs. At the present time, the RIN market is extremely volatile. This is largely due to the uncertainty surrounding the Trump Administration’s support for the RFS. Nonetheless, EPA has finalized 2017 and 2018 volume mandates for renewable fuel, and the final volume requirements are robust. This makes it likely that there will be strong demand for biodiesel RINs at some point in 2017, and the value of those RINs will accordingly increase. In the absence of a blenders credit, many observers believe that this will eventually impose upward pressure on the price of biodiesel RINs, since the RINs will need “fill the gap” to encourage blending at sufficient levels to meet EPA’s renewable volume requirements.
So even without a biodiesel tax credit, there may be a strong incentive to continue blending biodiesel in 2017. Click here to learn more about the “economics of RINs.”
2) Given the uncertainty surrounding the tax credit, short-term purchasing agreements may be advisable — It is possible that Congress will move to retroactively extend the biodiesel tax credit next year, but it is also possible that it will not. Consequently, the RIN market is expected to be rather volatile until there is more certainty surrounding the tax credit’s future. Given the uncertainty and expected volatility, Â鶹ɫ²¥ members may be well advised to hold off on longer-term purchasing contracts that lock them into certain economics and pricing structures. Often times long-term contracts will be in your biodiesel supplier’s interest more than it is in your own.
More specifically, as noted above, in the absence of a tax credit RIN prices may eventually push higher to encourage blending at sufficient levels to meet EPA’s renewable volume requirements. This has not occurred yet, however. This underscores the preference for shorter-term supply agreements during the first half of the year in order for Â鶹ɫ²¥ members to maximize flexibility and position themselves to be nimble enough to confront volatile, uncertain markets.
3) Demand either RIN credits or the value of such credits in your purchasing agreement — Without the blender tax credit, the RIN is the only federal incentive for marketers to blend biodiesel into their diesel supply. Marketers can take different approaches to realizing this RIN value:
Some marketers purchase biodiesel without entering the “RIN game.” In other words, they structure their deals to allow their supplier to retain the RINs. This may be advisable for smaller entities who do not have the manpower or expertise to actively trade RINs. In these instances, it is critical that marketers bake the RIN value into their purchasing price, i.e., pay less for biodiesel than they otherwise would, to reflect the value that the supplier realizes by retaining RINs that they can turn around and sell in the open market.
Other marketers do enter the “RIN game.” In these instances, they may pay somewhat more for biodiesel (to reflect the RIN value that the buyer retains) but (ideally) make that money back by selling the RINs to third parties.
Whatever approach you take, it is imperative to demand either the RIN credits as part of your supply contracts, or if you do not get such credits, ensure that the credits’ value is baked into the price you pay.
4) What if the blender credit is extended? A word on “B99” and 50-50 split clauses — Given that this is not the market’s “first rodeo” with respect to a lapsed biodiesel tax credit and the possibility of retroactive extension, biodiesel producers and fuel marketers have developed standard responses to position themselves effectively for both a scenario where the credit is ultimately extended, and a scenario where it is not. Here are a couple of things to know as you proceed down this path:
First, the tax credit is only available for neat biodiesel that is blended with diesel. If your supplier has already “splashed” diesel into the biodiesel to create “B99” (99 percent biodiesel, 1 percent diesel), your supplier will receive all of the benefits of the tax credit should it be extended. Marketers are advised to either (a) insist in purchasing “B100”, which will enable the marker to blend and realize the tax credit if it is extended, or (b) if only B99 is available, ensure that the supply agreement bakes in the potential windfall that the suppler will realize if the credit is retroactively extended. Even if there is no tax credit in place, B99 should cost less money than B100 because the supplier is lined up to receive all of the credit in the event it is extended. Make sure you are positioned to realize some of that gain too.
Second, supply agreements for “neat” biodiesel (B100) will likely contain a “split clause,” generally 50-50, which stipulates that if the tax credit is retroactively extended, the seller gets 50% of the tax credit, and the buyer gets 50% of the tax credit.
However, it is important to keep in mind that the $1/gallon biodiesel tax credit is tax exempt, i.e., the blender of record’s income status is not affected by receiving the tax credit. But income that a contracting party realizes as the result of a “split clause” if the party is not the blender-of-record is taxable.
For this reason, it is important to stipulate in your purchasing agreements that either you will be the blender of record (i.e., purchase B100 as opposed to B99) OR, if the supplier is only offering B99, recognize and incorporate into the contract that a 50-50 split is a facade: If the tax credit is retroactively extended, the supplier’s 50 cents/gallon is tax exempt, and your 50 cents/gallon is taxable income. Accordingly, it may be more equitable for purchasers of B99 to realize a greater percentage than 50% of any retractive tax credit to reflect their increased tax liability relative to the supplier.
Â鶹ɫ²¥ members are encouraged to contact Â鶹ɫ²¥ regulatory counsel David Fialkov with any questions on these issues (dfialkov@natso.com).
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