Growth in the renewable fuels market today faces two major problems:
- Feedstock supply limitations: The feedstock market is seeing unprecedented demand growth from the expansion of renewable fuel production.
- Legislative uncertainties: Small refinery exemptions and delays on mandate releases have destabilized the markets in the past, and calls for mandate rollbacks pose a risk for the future.
US renewable diesel capacity is forecast to double over the next six months. The growth in capacity will surpass the total supply of fats, waste oils, and greases in the US domestic market. Buyers are going to have to expand their reach, both geographically and in materials used, in order to find feedstocks to fuel the growth in the renewable diesel and sustainable aviation fuel markets.
Small refinery exemptions (SREs) and delays in releasing renewable volumetric obligations (RVOs) created an uncertain trading environment in the past. And now, the threat of high grain and oilseed prices and political pressure related to food insecurity are generating concern over global biofuel mandates.
Assuming that regulation for blending mandates in the US will not undergo major updates, biofuels producers and buyers must move quickly to meet current production and usage expectations.
The planned renewable fuel capacity is set to outpace domestic feedstock supply; where will the additional feedstock come from?
The above chart shows that the forecast for feedstock production keeps growing year on year. Ideally, a best-case scenario for raw material production broadly assumes that feedstock availability is supported by stable, long-term increases in both yield and imports.
However, this does not seem to be the case.
While yield increases will be utilized to boost the supply of feedstocks, the pace of growth in the renewable sector is much faster than the growth in technology needed to increase oil yield, both for oilseeds and in waste-based products. As a result, buyers will look to import more feedstocks, but increasing local demand may limit availability in the near term.
High feed costs, partially due to drought and a myriad of supply chain issues, threaten growth in feedstock supply from the meat-packing sector. Additionally, the higher prices of raw materials, for example soybean oil for cooking oil, may slow the collection of waste-based feedstocks, e.g. used cooking oil.
Keeping up with demand despite potential feedstock supply shortages and calls for policy updates
Despite the challenges that producers face in procuring supply, and the concerns around biofuels mandates, production must keep up with the climate emergency as established in the latest decarbonization targets set out by COP26 as well as the Renewable Fuel Standard (RFS), the Low Carbon Fuel Standard (LCFS), the Renewable Energy Directive (RED) and other governmental programs.
Regulation is still the biggest demand driver
The increase in demand over the last ten years has been consistent. This has hugely been thanks to regulatory support and infrastructure investments incentivizing production and usage. The California LCFS and the federal RFS policy are notable examples, driving decarbonization in the United States.
The current administration has signaled its support of renewable fuel producers and programs. In December 2021, the USDA announced an $800 million budget to support biofuel producers and restore the renewable energy market following the crisis in the supply chain brought by the Covid-19 pandemic in 2020.
The Biden administration recently announced an emergency waiver that will permit year-round sales of E15, a gasoline blend containing 15 percent ethanol. The move comes as fuel costs are soaring in the US as a result of Russia’s invasion of Ukraine.
These moves come despite continued calls from some obligated parties, such as oil producers and small oil refineries, to offer RVO waivers to avoid economic damage. Earlier this month, the EPA denied petitions from 36 producers for SREs, a change from the more than 30 granted during the Trump administration in 2018. However, the Biden administration is offering alternative means for relief to over 30 of the petitioning parties.
Meanwhile, EU regulators are relaxing standards for biofuel blending.
The European Commission said it would support member states that suspend or relax binding biofuels blending mandates and bolster edible crops for food supplies in the wake of price spikes and fears of shortages in key commodities following Russia’s war on Ukraine.
In response, traders of biofuels and compliance bio-ticket markets warned that the prospect of weaker mandates was a potentially bearish factor for prices, which have been subject to increased volatility since Russia’s full invasion of Ukraine on February 24.
Against the backdrop of these uncertainties and challenges, to manage risk and find the best investment opportunities, market players must use reliable insights and forecasts able to factor in and assess temporary and long-term supply and demand trends.
At our last conference in Chicago, industry experts and regulators answered questions such as:
- Which way are the political winds blowing – what are the pressures to roll back biofuels mandates?
- Where will the additional supply come from in the next ten years? Where are the opportunities?
- How do renewable fuels fit into a low-carbon future?
- How can buyers and sellers manage risk without a futures market for some of these feedstocks?
- What changes in Europe may potentially change trade flows in the coming years?
Keep up to date with the industry news, price data, and forecasts by checking our biofuels market page.
