Renewable Transport Fuel Certificates (RTFC) upside less likely in 2023

As energy markets adjust to an era of embargoes and biodiesel prices are expected to come down, the UK’s compliance ticket market could become less volatile

The compliance ticket market in the UK’s Renewable Transport Fuels Obligation is likely to be less volatile on the upside in 2023, with market sources pointing to much lower biodiesel prices compared with the summertime peaks seen last year and the likelihood that fossil diesel prices remain far below the spikes seen in the months after Russia’s full invasion of Ukraine.

Extreme volatility in energy prices after the invasion and the beginnings of embargoes against Europe’s largest hydrocarbons supplier – which aim to take full effect in February 2023 – stoked extreme volatility in prices for fossil fuels in 2022 as well as for various types of biodiesel and its feedstocks.

In the second half of last year, the specter of a deep economic downturn in the UK and a loss of financial market confidence following a slew of scandals and botched decisions by the government fueled further uncertainty.

This was reflected particularly strongly in the sliding pound in Q3 and hikes in interest rates which in turn impacted the cost of physical blending.

The effect of high volatility on global commodity markets

Collectively, volatility in various financial and commodity markets contributed to unstable demand for compliance tickets and lower liquidity at key points of the year, particularly early in August and September, when there was hardly any market activity at all.

Uncertainty in wider energy markets that have a major impact on renewable fuels compliance ticket prices will, of course, remain a major factor in 2023 as the Ukraine war shows very little sign of reaching a decisive phase in the 12 months, while the prospect of a deep recession in Europe - particularly the UK - remains compelling despite signs that consumer spending is surprisingly robust and that price inflation might have peaked.

Yet traders say a miasma of variability in energy prices that was the mark of 2022 might be less prominent this year as producers and consumers adjust to changing dynamics, such as the greater supply of refined products from non-Russian markets and the relaxation of Covid controls in China.

China is the largest single supplier of waste feedstocks for waste-based biodiesel consumed in Europe and shipments of UCO from the country and from other countries in Asia are expected to rise again this year.

Renewable obligations and blending targets

Meanwhile, higher obligations in 2023 compared with last year will provide some bedrock of demand for biofuels even if the volume of freight traffic – the main source of demand for biodiesel in Europe and effectively a price-setter for RTFCs – was to weaken in an economic downturn.

In 2023 the UK’s volumetric blending target rises to around 11.4%, up from 11.1% in 2022 - although the increase is much less pronounced than the rise from the 9.6% blending target in 2021.

“As the obligation increases a bit each year [a 1.5% percentage point increase spread evenly between now and 2032], this year will bring more demand for tickets although there will be no [major] increase in the supply of tickets,” one market source said.

RTFC prices and biodiesel supply

In terms of pricing, RTFC prices are expected to be less volatile than in 2022, when European gasoil futures doubled to a record-high of over $1,500 per tonne in March following Russia’s full invasion of its neighbor, but then eased back later in the year towards the $800 per tonne mark.

Higher gasoil futures tend to be bullish for the underlying biodiesel price because blenders will typically blend in more bio- compared with fossil, particularly waste-based biodiesel that is the predominant type used in the UK and Netherlands – while in Germany waste-based biodiesel and HVO score highly on GHG-reduction metrics.

For 2023, some analysts are expecting an increased supply of fossil diesel as refineries worldwide have increased production to take advantage of premiums over crude and other refined products, while a remarkably mild winter in much of Europe has crimped heating demand for gasoil.

Moreover, natural gas prices this winter have been much lower than had been feared, which is seen as a bearish development for diesel and gasoil demand.

David Wech, chief economist at energy analyst company Vortexa, told Fastmarkets Agriculture that diesel prices would weaken significantly relative to crude in 2023, with most forecasters also seeing crude prices rangebound in the new year.

However, likely ‘wildcards’ in terms of impacts on gasoil fundamentals could be some global supply tightness related to the Russian embargoes and potentially a very strong economic recovery in China once Covid infections ease off and the economy opens up further following the ditching of the country’s zero Covid policy.

If the ICE gasoil contract this year fails to bounce back above its March-December 2022 average of $1,072 per tonne, then traders say that could keep a lid on RTFC prices that streaked as high as 40.75p last May, only for these to come tumbling back down to the 30p mark in September as the cost of physical blending plunged.

A sharp falloff in biodiesel prices in Q3 as higher supplies of waste-based feedstocks materialized from Asia and the easing impacts of summertime logistical problems dragged down the cost of physical blending and RTFC ticket prices by around 25% from their 2022 highs.

Prices for gasoil, UCOME, and RTFCs were strongly correlated in 2022, with only a few weeks last year when these indices were out of step with one another.

Prices for the 2022 RTFC (which can still be used for compliance until September 2023) were hovering just above the 30p level in early January 2023, seemingly weighed down by weak prices for waste-based biodiesel and the availability of cheap ethanol.

Market participants told us that it is “unlikely” that ticket prices in 2023 will reach 40p in the first half of 2023, given that overall fuel demand isn’t likely to markedly increase.

Meanwhile, others are convinced the physical market could level out in 2023, with one source saying activity “should be able to balance out within the current blend walls.”

One figure in the UK biofuels sector said the blending of ethanol has risen to 8.5-9% in the second of 2022 compared with 7.5-8% in the first six months of the year, mainly as the result of strong arbitrage opportunities opening up for US ethanol.

“Although the arbitrage window is now very narrow, there is strong potential for it to re-open later in 2023, which could decrease the cost of blending imports compared with European ethanol,” the source said.

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