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Analysis: High credit values outweigh cost of production for US renewable distillates


Federal and state incentives entice refiners to transition toward renewables

Platts' newly-launched California SAF price shows high value of credits

New York — Rising prices for government credits have pushed the value of available incentives above the cost of production for renewable distillates, according to data analyzed by S&P Global Platts.

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D4 Renewable Identification Numbers have reached multi-year highs amid rallies in soybean oil, the most common feedstock for biodiesel in the US, while California Low Carbon Fuel Standard credits have hovered between $190/mt and $210/mt for the past two years. The reinstatement of the $1/gal federal biomass-based diesel tax credit through the end of 2022 has added additional value to entice refiners.

Renewable diesel (RD) and sustainable aviation fuel (SAF) both generate RINs, LCFS credits and qualify for the federal tax credit.

"With the decline in oil demand plaguing refineries, it should be no surprise that refiners have directed more attention toward producing sustainable aviation fuel (SAF) and other low carbon fuels," said Corey Lavinsky, advisor for global biofuels analytics with S&P Global Platts Analytics.

SAF, RD could turn negative for producers keeping credits

The combined value of those credits was over 390 cents/gal for RD and over 370 cents/gal for SAF sold in California as of Sept. 21, based on current prices for RINs, LCFS credits and the $1/gal tax credit.

Production costs for RD and SAF, meanwhile, have hovered between 350 cents/gal and 375 cents/gal in recent weeks, according to Platts analysis.

That means if a seller separated and kept all available credits, the price of a gallon of SAF could be negative.

Platts valued California SAF with all credits attached at 366.369 cents/gal Sept. 21, on the first day of publication for the price, while California SAF with credits detached was minus 4.949 cents/gal.

Biofuels market participants frequently negotiate splits of available credits. In the biodiesel market, producers typically separate RINs before selling the fuel and keep the tax credit, allowing them to offer product at steep discounts.

A negative price for a fuel may entice buyers, but buying a biofuel without credits could leave buyers in a difficult position if they need the credits to demonstrate compliance with renewables fuels mandates. That leaves buyers to consider whether to negotiate for the seller to keep certain credits and lower the cost of the fuel, while paying for the credits they need.

LCFS credits make up approximately 150 cents/gal of the additional value for the distillates, based on average carbon intensities published by the California Air Resources Board and analyzed by Platts. The remaining 220-240 cents/gal has created avenues for producers to sell RD and SAF outside of California, though California remains the largest single consumer of the fuels.

The state consumed over 130 million gallons of renewable diesel in the first quarter of 2020, according to California Air Resources Board data. In the fourth quarter of 2019, the state consumed nearly triple the volume of RD as biodiesel at nearly 165 million gallons.

Platts launches US SAF prices to bring transparency

With more refiners announcing plans to convert conventional production to renewable distillates capacity, Platts launched SAF prices in the US on Sept. 21 to bring transparency to this emerging product while continuing consultations with the market on RD.

As SAF is an emerging market with low production volumes, Platts' US SAF value uses inputs and yields from Platts Analytics and existing Platts assessments to build valuations.

Platts publishes US SAF prices with environmental and government credits – RINs, California Low Carbon Fuel Standard (LCFS) credits and the federal biomass-based diesel blender's tax credit (BTC) – and without credits to reflect a ceiling and a floor for the SAF market.

The value without credits reflects the sky-high prices those credits currently command, which has motivated more and more refiners to convert conventional production capacity to renewable diesel and SAF.

Valero and BP were early movers in the renewable diesel space, but Phillips 66, PBF Energy, CVR Refining, HollyFrontier and Marathon have also announced plans to convert capacity to renewable distillates, drawn by the added value from credit as oil refining margins tumble.

Though recent prices have pushed credits above the cost of SAF production, the amount of renewable diesel and SAF capacity coming online in the next five years is expected to lower the value of California LCFS credits and RINs, bringing the with credits and without credit values closer together. Platts Analytics forecasts 3.088 billion gallons of available RD production capacity in the US by 2023.

"The cumulative value of state and federal incentives for blending these fuels is eye-popping," Lavinsky said. "Few expected that the value of these credits would be higher than the cost to produce SAF, but that's where we are today for SAF sold into the California market."