Later this year, California regulators will vote whether to extend the state’s Low Carbon Fuel Standard(LCFS) from its current expiration in 2020 to 2030. If it passes, renewable diesel would be the biggest winner among biofuels. A shortage of renewable diesel in California would create a strong incentive for producers to build new capacity in the next decade, particularly in feedstock-rich Asia.
Biofuel of the Future?
In its current form, the LCFS requires a 10 percent reduction in the carbon intensity (CI) of California’s transportation fuel pool by 2020, achieved by replacing high-CI gasoline and diesel with low-CI biofuels and electric power. The state’s environmental regulator, the Air Resources Board (ARB), is now considering amendments to the LCFS which would deepen the CI reduction target to 20 percent by 2030. ARB is expected to vote on the proposed amendments on September 27. Given the LCFS’ effectiveness since its inception in 2011 and its strong base of political support in Sacramento, we expect ARB to extend and deepen the LCFS.
According to ARB projections, renewable diesel is poised to receive the biggest boost from the extended LCFS. As the chart below shows, renewable diesel demand in California grew from zero in 2011 to 340 million gallons per year (MGPY) in 2017, to account for 9 percent of the state’s diesel fuel pool. Under a low demand scenario, ARB projects California’s renewable diesel consumption to grow to 1.35 billion GPY in 2030, or 36 percent of the diesel pool. Unlike ethanol or biodiesel, renewable diesel is a drop-in fuel that is chemically nearly identical to the fuel it replaces, so it has no technical blending limit. Biodiesel and ethanol do not have this advantage, meaning the growth of California’s ethanol and biodiesel markets over the next decade will be far more limited.
This translates to substantial new opportunities for renewable diesel producers, particularly in Asia. The biggest constraint to renewable diesel production is the availability of feedstocks like recycled vegetable oil. California currently has two renewable diesel production facilities with a combined capacity of less than 60 MGPY. The balance of California’s consumption – about 270 MGPY – comes from outside the state. About 200 MGPY is imported from Neste’s renewable diesel plant in Singapore and the rest comes from the US Gulf Coast.
Globally, final investment decisions are expected in 2018 for a handful of new renewable diesel plants, including Neste’s expansion of its Singapore plant from 350 to nearly 700 MGPY and Diamond Green Diesel’s expansion of its Louisiana plant from 280 to 550 MGPY. Both expanded plants are forecast to be operational by 2022. Still, if the LCFS is extended to 2030, California will require larger volumes than facilities currently planned can provide. Given that the value of LCFS credits rises as biofuels become scarcer, the incentive to send renewable diesel to California will grow stronger. Asia, as the world’s biggest and fastest growing source of feedstocks for the fuel, will likely see the most new builds.