Genscape could lose its ability to verify Renewable Identification Numbers after verifying "approximately 68 million invalid A-RINs," the US Environmental Protection Agency said in a notice late Wednesday.
The company, a subsidiary of DMG Information, verified "millions of RINs that were fraudulently generated by two companies: Gen-X Energy Group, Inc. (Gen-X), and Southern Resources and Commodities, LLC (SRC)," the EPA said.
Genscape declined to comment Thursday. The EPA took civil action against Gen-X and SRC in December 2015 for producing invalid A-RINs.
In addition to potentially revoking Genscape's verification privileges, the EPA will require the company to retire valid RINs within 60 days to replace the incorrectly verified RINs.
"Genscape is obligated to do this because both Gen-X and SRC failed to replace the invalid RINs," the EPA said in the notice.
Obligated parties who ended up with invalid RINs do not have to replace them if they meet the EPA's affirmative defense requirement, according to the notice.
Genscape has 60 days to send comments to the EPA in response to the notice. Until the EPA takes final action, Genscape can continue to verify RINs as a voluntary quality assurance plan (QAP) provider.
Under the federal Renewable Fuel Standard, obligated parties use RINs to demonstrate compliance with biofuel blending targets.
The original format of the QAPs had two options.
Under Option A, "RINs [are] verified by a third-party auditor, who would be responsible for replacing the RINs in the event that they were invalidly generated," the original ruling said.
The RINs that Genscape verified were A-RINs, meaning they were verified under the first option and leaving Genscape on the hook for covering the invalid RINs.
Sources said that many of the RINs were advanced biofuel RINs, or D5s, with the remainder likely biodiesel RINs, or D4s. The US typically finds itself short on D5 RINs as the US produces little non-biodiesel advanced biofuel.
In 2016, the US is on pace to fall more than 425 million D5 RINs short of the 530 million RIN blending mandate, based on five-year trends and EPA RIN generation data.
That has pushed the value of D5 RINs up to some of their highest values in three years. S&P Global Platts on Thursday assessed D5 RINs for 2017 compliance at 99 cents/RIN.
Based on current RIN prices, Genscape would likely have to spend approximately $70 million to buy the replacement RINs were the final action to match Wednesday's notice.
The EPA set up QAPs at the beginning of 2013 in response to concerns from obligated parties about receiving fraudulent RINs. Using a QAP, a third-party such as Genscape would verify the RINs were generated correctly by a biofuels producer or importer.
There are currently four third-party verifiers: Genscape, EcoEngineers, RINtrust and Weaver.
(This version of the story clarifies A-RINs)
--Josh Pedrick, joshua.pedrick@spglobal.com
--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com