A policy-driven boom in U.S. renewable diesel demand that’s been underpinning much of the farm economy is showing signs of softening as production exceeds the government’s usage mandates. But industry officials hope a new tax credit and a big potential market in Canada will restore some sizzle in the market.
U.S. production of renewable diesel, a biofuel that can replace conventional petroleum diesel, has been skyrocketing over the last several years, primarily due to demand from California and its low carbon fuel standard. The LCFS allows renewable diesel to qualify for credits that provide a substantial subsidy — at times it’s been more than $1 per gallon — for product sold in California.
To fill California’s appetite for the fuel, renewable diesel production capacity jumped from 1.65 billion gallons in 2021 to more than 4 billion gallons in 2023 and is expected to reach 5.5 billion gallons in 2024. That’s been a huge benefit to farmers; biofuel demand has added about $2 a bushel to the price of soybeans, according to a leading biofuel economist, Scott Irwin of the University of Illinois.
But the LCFS credits aren’t enough on their own to mandate usage of all of the renewable diesel the industry is producing. The most critical policy is the federal Renewable Fuel Standard and the annual renewable volume obligations set by EPA, and that’s where the problem for the industry has come, Irwin said on a recent webinar.
The RVOs effectively set both a floor and a ceiling in domestic demand for both forms of biomass-based diesel, renewable diesel and biodiesel, which is primarily used as an additive in conventional diesel, according to Irwin and industry officials. Refiners comply with the RVOs either by blending the required amount of biofuels or by buying compliance credits known as renewable identification numbers.
The RVOs EPA set last year for 2023 through 2025 will limit domestic demand for renewable diesel and biodiesel to a total of about 4.5 billion gallons a year, said Irwin.
Scott Irwin, University of IllinoisThe problem for the industry is that production capacity exceeded that amount back in 2022, and new production capacity continues to come online, including 1.5 billion gallons scheduled to start up this year. By the end of 2024, production capacity for renewable diesel and biodiesel could hit 7 billion gallons, Irwin said.
“It's going to be an ugly 2024 for the renewable diesel and FAME biodiesel industry,” said Irwin, referring to the chemical term for biodiesel. (FAME stands for fatty acid methyl ester.) “I don’t see that there is any way out of that straitjacket.”
The renewable diesel boom “has nothing to do with market incentives and everything to do with policy incentives or subsidies,” Irwin said.
The oversupply of biomass-based diesel and a sharp decline in crop prices have sent the prices for federal usage credits, known as D4 RINs, into free fall, plunging from a peak of about $2 at the beginning of 2023 to 41 cents as of Monday, according to the Energy Information Administration.
“The price of compliance credits for biomass-based diesel and ethanol has decreased about 45% since the start of the year, when prices were already the lowest in about three years,” EIA said in a report Tuesday. “The decline in the price of credits, known as renewable identification numbers (RINs), is due primarily to lower costs for agricultural feedstocks relative to petroleum fuels, and we expect prices to remain subdued due to record-high credit generation from the production of renewable diesel.”
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Soybeans for March delivery were trading at just over $11.40 per bushel on the Chicago Mercantile Exchange Tuesday, down from $15 a year ago.
Some excess U.S. renewable diesel production is being exported, and the airline, rail and shipping industries offer some long-term markets for the fuel.
It would obviously help the industry, too, if the EPA were to increase the RVOs, but that’s unlikely to happen in 2024 or 2025, since the blending targets have already been finalized. The agency justified the levels it set, in part, because of concerns about the impact of higher biofuel production on vegetable oil prices.
The RIN value is important to producers' revenue stream, “and when you have more RINs being generated than are required, that's had the RIN value somewhat in a pretty steep decline, and so we need a higher RVO to turn that around,” Gary Louis, president of Seaboard Energy, said in a recent interview with Agri-Pulse.
But EPA notwithstanding, some significant new help for the U.S. industry could arrive as soon as Jan. 1, 2025. That’s when a new tax credit, created by the Inflation Reduction Act of 2022, takes effect.
Unlike the existing $1-per-gallon blenders tax credit for renewable diesel and biodiesel, which applies both to imported as well as domestically produced fuels, the new incentive, known as 45Z, is a production tax credit and will apply only to fuel made in the United States.
Kate Shenk, Clean Fuels Alliance AmericaThe 45Z credit will discourage refiners from importing renewable diesel and biodiesel, and it also could help boost U.S. exports into Canada, which has launched a low-carbon fuel standard of its own similar to California’s.
Shutting out imported biofuels would be a major win for the U.S. industry; about 800 million gallons were imported last year.
Canada’s LCFS is designed to gradually reduce greenhouse gas emissions from transportation by 2030. The current goal is for the country to increase usage of low-carbon biomass-based diesel to at least 2.2 billion liters, or 581 million gallons, by 2030, said Kate Shenk, director of regulatory affairs for Clean Fuels Alliance America, which represents renewable diesel and biodiesel producers.
Canada has its own biofuel feedstocks, including canola oil and animal fats, but capital costs are higher there, and the 45Z credit has created a major new challenge for would-be producers in Canada. “Canadian producers are going to be disadvantaged” by the 45Z since the fuel has to be produced in the United States to qualify for it, she said.
Irwin said the potential market for U.S. biofuels is even bigger. Canada uses about 8 billion gallons of diesel per year, twice as much as California, he said.
Irwin’s bottom line: This year is going to be tough for U.S. producers, and some may not be operating by the end of the year. But the future is brighter.
“We might have to hang on through a very tough 2024, but some very interesting things look like they're going to be happening in 2025 and beyond,” he said.
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