After a year of announcements and investment, renewable distillates are poised to have a breakthrough year in 2021 as new renewable diesel (RD) and sustainable aviation fuel (SAF) plants come online.
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Marathon's Dickinson, North Dakota, RD plant is expected to be fully operational in the first quarter of 2021, with additional production possible from HollyFrontier late in the year or in early 2022.
The new production is poised to join existing producers Valero, BP and Renewable Energy Group in supplying RD to key consumption hubs like California.
Through the first 11 months of 2020, RD production totaled over 432 million gallons compared with 408 million gallons in the same period of 2019, according to Environmental Protection Agency data.
Commodity markets in 2020: A year in nine infographics
US biomass diesel demand is expected to reach 200,000 b/d in 2021, with RD demand making up about one-third, according to Platts Analytics.
The 6% year-on-year increase came despite the sharp decline in transportation fuel demand due to the coronavirus pandemic.
To represent these emerging markets, S&P Global Platts started publishing prices for both RD and SAF in California in September. Platts' renewable distillate 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 HVO and SAF, Platts will continue to update its pricing to best reflect trading norms.
Feedstock supply presents challenges
Both SAF and RD prices have risen sharply since Platts began publishing values, with the former climbing to over $4.21/gal in late December from just over $3.66/gal on its first day of publication.
RD saw a similarly steep climb, rising to over $3.98/gal from $3.45/gal.
Though fixed and operating costs are a significant part of the price of the fuel, feedstock values play an outsized role in the final price of the distillate.
Biomass-based diesel feedstocks across the board have found support in late 2020 from strong demand in the soybean complex, which has bolstered alternative feedstocks like tallow.
Feedstock supply will remain a key challenge for biofuel producers in the coming year as the playing field becomes more crowded and producers look at a variety of options.
Most RD producers plan to use up to three feedstocks to limit exposure to volatility in any one feedstock, but competition from traditional biodiesel producers and demand from other sectors will create inevitable price spikes and tightness.
Refiners latch onto renewables
Poor margins and mounting costs of complying with carbon reduction and biofuel blending mandates has pushed some conventional refiners toward renewables production after years of lobbying against such programs.
"In a way, it's like waving the white flag," said one source at a conventional refiner.
Valero, Marathon, Phillips 66, as well as smaller companies like CVR and HollyFrontier have announced plans to add more biofuel capability, a trend that is likely to continue due to incentives and generally cost-effective conversions for cash-strapped refiners.
In most of these cases, it involves repurposing biofuel plants by converting existing refineries or units to make RD and SAF, thus addressing the issue of excess refinery capacity while taking advantage of the incentives.
Renewables production offers a second life for facilities with few alternatives due to poor refining margins while integrating renewables into conventional refiners' supply chains, lowering their exposure to what has for many been a separate market.
Credits spur interest
By producing their own RD and SAF, refiners can tap into currently high credit values. Both RD and SAF generate renewable identification numbers under the federal Renewable Fuel Standard, credits under California's Low Carbon Fuel Standard program and qualify for a $1/gal federal biomass-based diesel tax credit.
In late December, the value of the combined credits and incentives attached to a gallon of RD were over $4.17/gal, higher than the production cost of the fuel.
Sellers in the RD market can separate some or all of the credits and offer the fuel at a discount, usually cheaper than the conventional alternative, then sell the credits to lock in their profits.
The additional value from California's program has meant that, to date, the majority of RD and SAF consumed in the US has been in the state. As other states and regions consider transportation cap-and-trade programs and other projects to lower greenhouse gases, a trend supported by the incoming Biden Administration, consumption outside California is poised to rise in coming years.
Though currently high, those credit prices are likely to decline as RD capacity comes online. Current and forward-year D4 RINs hovered in a steep backwardation through the last several months of 2020 as the prospect of RD production weighed on the 2021 credits.
RINs typically see a contango between compliance years due to blending mandates increasing.