FEATURE: Renewable diesel producers racing for the finish line as credits under pressure

After years of investment and refinery conversions, renewable diesel is poised for a breakout year in 2022 as production facilities come online. Producers, though, are pushing to get plants across the finish line as prices for key credits are under pressure amid the wave of new output.

Renewable diesel, or RD, prices are at a steep premium to conventional diesel. S&P Global Platts calculated the value of RD in California at an average premium of more than $3.70/gal to CARB diesel in the early weeks of 2022.

Buyers would naturally balk at paying for such a large spread between conventional diesel and a drop-in replacement fuel. But the key to RD economics lies in associated credits the fuel generates. RD generates renewable identification numbers under the federal Renewable Fuel Standard (RFS), carbon credits under California Low Carbon Fuel Standards and qualifies for the federal $1/gal biomass-based diesel blending tax credit.

Stacking those incentives together can make RD competitive with CARB diesel values. Producers can splash blend RD with conventional diesel to separate the credits from the renewable fuel and then offer the physical RD without credits at a discount, making up the difference by selling the credits in secondary markets.

The early weeks of 2022 saw RD without credits hovering at nearly a $1/gal discount to CARB diesel thanks to strong credit values, according to Platts calculations.

Platts' RD prices reflect the cost of producing the fuel based on feedstock and operating costs while deducting applicable byproducts. As a spot market develops in the coming years for hydrotreated vegetable oil (HVO) and sustainable aviation fuel (SAF), Platts will continue to update its pricing to best reflect trading norms.

Credit values waning

Though the credits are key for renewables producers to keep RD competitive, the recent and looming startups of US RD plants has already put downward pressure on credit values.

Forward-year D4 RINs – the kind of RIN that RD generates – have historically commanded a premium over current and previous-year RINs as biofuel blending mandates increase each year under the RFS. But Platts assessments have shown 2022-vintage D4 RINs have traded at a steep discount to 2021 D4 RINs for several months, recently hovering near 20 cents below the prior-year vintage. Prices have faced pressure from increased RD volumes putting more D4 RINs into the market.

D6 RINs – the kind of RIN that conventional ethanol generates – have seen nearly a flat spread between the 2021 and 2022 vintages, showing the pressure is localized to biomass-based diesel.

California LCFS credits have also fallen from all-time highs above $200/mt in early 2020 to the low $140s/mt in February 2022, according to Platts data.

Producers pushing for startups

The waning credit values, with more pressure expected on the horizon, have spurred producers to try to get their projects across the finish line while high credit values are still bolstering margins.

Valero Energy has moved the anticipated start-up date for its Diamond Green Diesel joint venture RD project at Port Arthur, Texas, to Q1 2023, from its earlier timeline of the middle of 2023, the company said Jan. 27.

This is the second time that Valero and joint-venture partner, Darling Ingredients, have moved up the timeline for completing the 470 million gallon/year RD project. Initially, the plant was expected to start-up at the end of 2023.

"While competitor projects are getting delayed, [Valero's] projects are coming ahead of schedule," Credit-Suisse analyst Manav Gupta said in a research note.

Calumet Specialty Products Partners is moving forward with construction of the renewable hydrogen plant at its Great Falls, Montana, refinery, putting its RD project one step closer to completion, the company said Jan. 4.

The Great Falls renewable hydrogen plant is expected to start up in the fourth quarter of 2022, increasing production of RD from 5,000 b/d in May 2022 to about 12,000 b/d.

Those projects are just two in a massive pipeline of RD facilities on the horizon, such as Phillip 66's marquee energy transition project, Rodeo Renewed. The project is repurposing the company's 120,200 b/d San Francisco Bay Area refinery into one of the world's largest RD producers.

When it comes online in 2024, Phillips 66 will be able to produce 800 million gal/year of RD, SAF and sustainable gasoline to meet growing demand for renewable fuels in the area.

Projects still in the design and construction phase will also have to compete with already-operating plants, such as Marathon's 184-million-gallon/year plant in Dickinson, North Dakota, and refining giant Neste, which has been shipping RD from Singapore to California for several years.

Feedstock competition to remain fierce

Producers make RD by hydrotreating some form of fat, oil or grease, such as soybean oil, used cooking oil or beef tallow.

The variety of potential feedstocks forces producers to weigh differences in pretreatment requirements and costs versus potential lifecycle carbon emission reductions.

A producer using soybean oil, for example, might have lower pretreatment costs but receive a higher carbon intensity score as soybean oil is a virgin vegetable oil. Used cooking oil, on the other hand, typically receives low carbon intensity scores due to its status as a waste product but often requires more pretreatment before being fed through a hydrotreater.

Lower carbon intensity scores mean that the lifecycle production of a fuel emits less carbon dioxide equivalent than fuels with higher score.

RD producers typically configure production to use a handful of feedstocks, balancing treatment costs against potential carbon credit generation. That has meant fierce competition to lock in long-term supply of key feedstocks like soybean oil and beef tallow.

US feedstock demand is expected to more than double by 2025 while domestic supply of waste and vegetable oil feedstocks is projected to increase only 16% in that time span, according to S&P Global Platts Analytics.

That competition could push some producers out of the market before they even begin, with major refiners like Chevron, Marathon and Valero securing long-term supply agreements to lock in availability in the coming years.

With RD's ability to generate credits at a higher rate than legacy biodiesel and conventional refiners switching production toward the renewable fuel, the market is poised for competition and growth in the coming years and will remain a key sector to watch.