Key Takeaways
Despite government policies forcing the use of biofuels, Chevron has had to idle biodiesel plants in Iowa and Wisconsin because their economics are less viable than “renewable diesel,” which generates more renewable credits per gallon.
Renewable diesel’s production process allows it to act as a direct replacement for petroleum diesel, while biodiesel is generally limited to a mix of no more than 20 percent.
EPA’s latest renewable fuel standards do not mandate biofuels to the level of current U.S. biofuel capacity.
The United States has enormous hydrocarbon resources which can be made into distillates including diesel more cheaply and efficiently, but for government mandates and incentives.
Despite subsidies and incentives from the Renewable Fuels Standard (RFS), Chevron has indefinitely idled two biodiesel production facilities in the U.S. Midwest and has laid off dozens of workers, citing poor market conditions. Chevron idled plants in Ralston, Iowa, and Madison, Wisconsin, that together can process 50 million gallons per year of biodiesel. Biodiesel, made from agricultural oils and animal fats, is more costly to make than petroleum-based diesel and its production requires government incentives that can offset its production cost. Biodiesel prices have declined recently as supplies have increased and the value of renewable credits fell to a three-year low. The price of a blend of 20 percent biodiesel fell last month to $3.45 per gallon of gasoline equivalent, from a peak of $4.80 per gallon in October 2022—a decline of 28 percent. In December, U.S. biodiesel production capacity totaled 2.07 billion gallons.
Under the RFS, oil refiners must blend billions of gallons of biofuels set by the Environmental Protection Agency (EPA) into the nation’s fuel mix, or buy tradable credits from companies that have exceeded the standard. Last year, the Biden administration increased the amount of biofuels that oil refiners must blend into the nation’s fuel mix over the next three years. But the EPA set lower mandates for corn-based ethanol than it had initially proposed, resulting in lower credit prices. EPA set corn-based ethanol at 15 billion gallons for 2023, 2024 and 2025, plus a 250 million-gallon supplemental amount for 2023, which was a decline from its initial proposal. The initial proposal included 15 billion gallons of conventional biofuels in 2023 and 15.25 billion gallons in both 2024 and 2025. The supplemental was in response to a court remand of the 2016 annual rule.
In 2022, Chevron, the second-largest U.S. oil producer, bought biodiesel maker Renewable Energy Group for $3.15 billion to expand its renewable fuels production to 100,000 barrels per day by 2030. The deal included 10 biodiesel plants and one renewable diesel facility. While biodiesel and renewable diesel use similar feedstocks, renewable diesel undergoes a separate refining process (hydrotreating) to make it chemically identical to ultra-low-sulfur diesel. Because renewable diesel can be used unaltered in diesel engines, its production is expected to reach 230,000 barrels per day this year, according to the U.S. Energy Information Administration. Original equipment manufacturers (OEMs) generally limit biodiesel use to a 5 to 20 percent mix with petroleum diesel. Producers of renewable diesel generate more renewable credits due to their lower carbon intensity score than biodiesel. U.S. renewable diesel production capacity totals 3.0 billion gallons per year.
The EPA set total biofuel blending volumes at 20.94 billion gallons in 2023, 21.54 billion gallons in 2024 and 22.33 billion gallons in 2025, which meant that advanced biofuels would be set at 5.94 billion gallons in 2023, 6.54 billion gallons in 2024, and 7.33 billion gallons in 2025. See table below.
Conclusion
The market for biofuels is not based on economics but on the mandates set by EPA. Congress had set specific targets for the RFS through 2022, and thereafter gave EPA the authority to administer the program. Because of the RFS mandates and state and federal incentives for biofuels production, many U.S. refiners have been ramping up production of renewable diesel. Chevron recently found that the economics were not as it expected for its biodiesel plants because the value of renewable permits dropped and it had to idle two biodiesel plants in the Midwest laying off dozens of workers. The industry had warned EPA about the possibility of plant closures when it set the federal RFS volume obligations below overall capacity. Low biodiesel sales also put the farm economy at risk as a strong biodiesel market helps farmers and supports the agriculture industry. Regardless, renewable fuels are more expensive than oil since its production renaissance when hydraulic fracturing and directional drilling were introduced and only exist because of the RFS mandates and lucrative subsidies by state and federal government.
