Despite Storms, Continued Growth on the Horizon

Low RIN and LCFS credit prices coupled with massive UCO imports are causing hurdles, but demand for biobased diesel from emerging markets is high.

2023 was a year of incredible growth for biomass-based diesel (BBD) and for feedstocks that support its production. Consumption of BBD and sustainable aviation fuel (SAF) reached a record in 2023 at just under 4.6 billion gallons consumed. BBD consumption was about 8 percent of the total diesel fuel consumed in the United States, a significant growth from recent years. Biodiesel production capacity has remained relatively steady at 2.1 billion gallons per year (bgy), while renewable diesel capacity has expanded up to 3.9 bgy. States with low-carbon fuel standards (LCFS) remain the main drivers for BBD consumption, with California leading the charge with approximately 60 percent of the entire diesel pool in the state being BBD.

Market Concerns: The Double-Edged Sword of Credits

BBD growth does come at a cost. First, this unprecedented growth eclipsed what U.S. EPA forecasted was possible, greatly exceeding the set rule for 2023 under the Renewable Fuel Standard. When the set rule was released in June 2023, it was readily apparent that BBD would easily outpace the D4 set rule. The only question is whether it would completely fill (and possibly overfill) the D5 and D6 pools as well. When this happened, we saw a sharp decline in renewable identification number (RIN) credit prices. Many things drove this decline, but it is clear that markets have decided to revert to pricing the D4 RIN off of the bean-oil/heating-oil (BOHO) spread. The BOHO spread indicates a market-generalized necessity to fill a price gap between the cost of a producer’s feedstock (soybean oil in this case) and the producer’s final product (heating oil or diesel). Soybean-oil prices have fallen while diesel prices have increased, which has narrowed the BOHO spread—and the D4-RIN price. RIN prices seem to have found a floor at around 40 cents/RIN, and it will be interesting watching these markets to see if RINs rebound.

To add insult to injury, LCFS credit prices across the West Coast are also down from recent highs. While the RFS sets a mandated volume, LCFS markets set an overall carbon-intensity (CI) reduction target trying to balance deficit generation (petroleum/natural gas) with credit generation (renewables, electricity, etc.) at those target levels. Recently, there has been a huge growth in credit generation led by BBD, renewable natural gas and electric-vehicle adoption. There are currently over 20 million metric tons of LCFS credits in the California credit bank, significantly pulling LCFS credit prices down. These lower credit prices, along with lower RINs, make it harder for BBD producers to be profitable.

Feedstocks: Imports, Prices

The significant growth we saw in BBD production in 2023 led to a banner year for all feedstocks to the BBD process. Soybean-oil consumption reached a new record—just over 13 billion pounds—in 2023; yet soybean oil as a percentage of all feedstock used decreased to about 41 percent due to significant growth in canola-oil consumption and animal fats. Used cooking oil (UCO) also saw large growth in consumption, though it remained at about 21 percent of all feedstocks used in 2023.

Soybean growth came mostly domestically, as soybean-oil exports decreased and were pushed into the BBD production process. The other growth, however, came via increased imports. The big changes in imports came from both inedible tallow and UCO. The tallow growth was somewhat expected while UCO-import growth led by China was not expected to reach the levels it did. Chinese UCO imports rose from zero prior to 2023 to 362 million pounds in January 2024. This sharp increase in available UCO in the market has driven U.S. feedstock prices down significantly. Since LCFS markets preferentially select low-CI fuel sources, low-CI feedstocks like UCO are preferred for producers selling into those markets.

Reason for Hope: Demand Growth from Emerging Markets

There is significant enthusiasm in new markets, such as rail and marine, in reducing their corporate greenhouse-gas emissions, and both biodiesel and renewable diesel fit perfectly into their corporate structures. Biodiesel sales in marine markets are growing rapidly throughout the world, and these companies would like to increase their uptake in biodiesel and renewable diesel blends in the U.S.—but the inability for ocean-going vessels to get the benefits of RINs remains a hurdle. Meanwhile, multiple Class I railroad companies have been setting lofty goals for biodiesel use in their engines as early as 2030. Demand for BBD is going to continue to grow as the benefits of our fuels continue to reach new markets. It will be up to the industry to make that market come to fruition—even if we have to weather yet another storm to get there.