An Overview of Regulatory Compliance for Policy Fuels

Biodiesel, renewable diesel and SAF are often grouped together from a regulatory-compliance perspective, but these three distinct industries are headed in different directions.

Biodiesel, renewable diesel and sustainable aviation fuel (SAF) are liquid fuels that each utilize biomass feedstock oils, whether they come from plant, animal or waste streams. For these common characteristics, they are lumped together from the perspective of regulatory compliance. These are, however, three distinct industries going in different directions. Renewable diesel and SAF are gearing up for big expansions over the next 10 to 20 years and beyond. For biodiesel, there currently is some retrenchment and a determination of how and where this fuel can compete for market share, both in terms of feedstock supply and fuels sales.

Feedstock

One big, common issue for all three industries is securing feedstock sources. Every producer is looking to secure long-term agreements for feedstock supplies. A great example is the new Heartwell Renewables in Nebraska that is being built as a joint venture with a feedstock supplier (Cargill).

With the already existing surplus renewable diesel refining capacity and the expected increase in SAF refining capacity, expanding those feedstock supplies is required. This will need to be a multipronged approach in getting the most out of each source, especially having dedicated agricultural acreage for these feedstock oils.

Regulatory Compliance

Staying in front of regulatory compliance is required to maximize environmental credits. For the U.S. EPA’s Renewable Fuel Standard program, these industries can look to the recent RFS biogas-reform rule for some potential changes in the regulations in the coming years. This could mean additional tracking, measuring and reporting of feedstocks as part of the renewable identification number (RIN) credit-generation protocol. There could also be additional measurement and testing requirements for the renewable fuel, including confirming the fuel’s biogenic content.

Another potential area for RFS review is with biointermediates. Biointermediates are partially treated feedstock at a separate facility that is then transported to one or more renewable fuel facilities. A biointermediates facility is registered in the RFS program with similar reporting requirements as a renewable fuel facility. For the California Low Carbon Fuel Standard program, the key is a robust data-management system for carbon-intensity (CI) modeling and credit generation. California’s LCFS verification program can be very time-consuming for both the producer and third-party verifier. Utilizing the latest data-management technology can reduce this verification time and provide insights to reduce a facility’s CI score.

Environmental-Credit Pricing

Regulatory programs like RFS and LCFS basically set the annual price for the environmental credits associated with these fuels. Credit pricing and tax credits are the economic drivers for these industries—as much as, if not more than, the price of the fuel itself.

One might think EPA sets annual renewable volume obligations (RVO) under RFS based on the renewable fuel production capacity with these industries, but this is not what actually happens. The RVOs are determined by a mixture of renewable production capacity, feedstock supplies, effects on fuel pricing, potential effects on overall transportation fuel supply, and of course political pressures. The RVOs need to match up closer to the surplus production capacity in order to see an appreciable increase in RIN pricing.

Currently the new IRS clean fuel production credit under section 45Z for biodiesel and renewable diesel is being revised based on public comments and issues raised from the latest release. A big difference between the production tax credit and the previous blenders tax credit is the use of CI modeling to determine the value of the fuel credit. The latest version of the CI model puts strong emphasis on specific feedstocks, which will put additional strain on procurement and operations as refineries look at how to utilize those feedstocks. For some facilities, the current IRS CI model is untenable and may not even be worthwhile registering. A lot of producers are looking to Congress to bring back the $1-per-gallon blenders tax credit as a bridge for 2025 until issues with the 45Z production credit are resolved.

For SAF, producers need to continue working to explore other potential environmental credits associated with their fuel product. These probably can’t be generated per gallon but perhaps in concert with the carbon-footprint agendas for the airlines and large companies that can invest in these programs.

Fuel Markets

Renewable diesel producers have a ready market for their fuel, especially in states with their own low-carbon fuel programs like California, Oregon, Washington and perhaps New Mexico by the end of year. The market for biodiesel is quite different, as this is largely a blend-only fuel in order to stay in compliance with engine-manufacturer warranties. Since nearly all renewable diesel goes to states with renewable fuel programs (primarily California), this allows biodiesel to be used elsewhere around the country, especially in states that have a renewable fuel mandate and/or state tax incentives for biodiesel. Biodiesel producers, therefore, need to target more states that are considering these types of biodiesel incentives for future markets.

Author: Ernie Pollitzer

Owner, Clean Energy Consultants

770-331-2858

ernie@cleanenergyconsultants.net