Key Takeaways
Renewable diesel and biodiesel fuels receive lucrative subsidies, which caused many refiners to convert their petroleum facilities to produce them.
Production of those fuels has surged so much that its level now exceeds EPA mandates, making the associated renewable credits drop precipitously, leading some producers to shutter their plants or convert back to petroleum diesel.
Some refiners thought that the EPA would mandate the use of whatever level of biomass-based fuels they produced, but the Biden Administration has put its attention into electrification of transport, leaving producers with a product which is worth much less per gallon.
Lucrative subsidies for renewable diesel and biodiesel have caused petroleum refiners to retool, but because the supply of renewable and biodiesel exceeds demand, hammering profit margins, some renewable refiners have either shuttered or are retooling back to normal refinery production. The industry indicates that the situation could get worse as more renewable refineries go out of business before the year’s end. The issue could become a roadblock to future investments in biofuels, the U.S. Energy Information Administration (EIA) said.
U.S. renewable diesel production capacity nearly quadrupled from 791 million gallons a year in 2021 to 3 billion gallons by 2023. Combined with biodiesel, total U.S. output capacity for biomass-based diesel surpassed 5 billion gallons by 2023. Renewable diesel is a substitute for oil-based diesel, whereas biodiesel can only be used as a blend, making the former more attractive for producers. Renewable diesel can be produced in existing refinery equipment, but the yields are lower than with conventional diesel.
Both industries compete for the same biomass feedstock, such as used cooking oil and vegetable oils, and are more expensive to produce than petroleum-based diesel, so their demand relies almost entirely on governmental blending mandates and tax credits. But blending targets for biomass-based diesel, set under the U.S. Environmental Protection Agency’s Renewable Fuel Standards (RFS) program, generate combined demand of just up to 4.5 billion gallons a year through 2025, which is below existing domestic production, before factoring in imports. By 2025, U.S. renewable diesel and biodiesel output capacity could top 7 billion gallons.
The oversupply has cut prices of Renewable Identification Numbers (RINs) – the credits refiners earn under the renewable fuel standard for producing or importing biofuels – to the lowest in five years. D4 RINs tied to biodiesel and renewable diesel fell below 40 cents a gallon in February for the first time since 2019. They were recently trading for around 44.50 cents a gallon, down from an average of $1.50 from 2021 to 2023. This volatility is directly related to government subsidies which attracted much interest. U.S. taxpayers were even subsidizing imports of these biomass-based fuels, which is changing next year.
Biomass-based Industry Shutters Plants or Retools
Refiners are feeling the pinch across multiple segments of their renewable fuel businesses. In the first quarter 2024 independent refiner Valero’s renewable diesel margins fell 21.5 percent year-on-year to $1.02 a gallon. Rival HF Sinclair said lower credit prices swung its renewables segment to an adjusted loss of $18.6 million before interest, tax, depreciation and amortization in the first quarter, from a $3 million profit in the prior year.
Vertex Energy converted its 8,000-barrel-per-day renewable diesel facility in Mobile, Alabama back to fossil fuels production, after exhausting its feedstock inventory, citing macroeconomic issues for the biofuel which are likely to persist through next year. It had begun selling renewable diesel from the plant less than a year ago. The unit ran at around 50 percent of its capacity in the first quarter and renewable fuel gross margins fell from $12.11 a barrel in the fourth quarter of 2023 to $10.29 a barrel in the first quarter this year.
In March, Chevron had mothballed two biodiesel plants, citing unfavorable market conditions. Chevron idled plants in Ralston, Iowa, and Madison, Wisconsin, that combined can process 50 million gallons per year of biodiesel. Biodiesel not only competes with renewable diesel for feedstock, its production generates fewer RINs, putting it at an even bigger disadvantage to the boom in renewable diesel.
Other large renewable diesel producers are holding out for better times, despite the oversupply, betting that they can withstand lower margins until smaller companies are pushed out of the industry.
Export Situation
U.S. refiners are expected to turn to other markets in Canada and Europe for their excess renewable diesel. But there will be stiff competition from local producers. For example, Canada’s Imperial Oil is proceeding with plans to build a 20,000-barrel-per-day renewable diesel plant near Edmonton which will be able to produce the fuel cheaper than it would have cost to import it from the United States. Braya Renewable Fuels, which began making renewable diesel in February at the Come-by-Chance refinery in Newfoundland and Labrador, is producing up to 18,000 barrels per day of renewable diesel from its plant and sells it through a marketing partner. It believes, however, that operational issues will likely slow down new supply additions.
Tax Credits
Next year, the biomass-based diesel Blender’s Tax Credit (BTC) will be replaced by the Clean Fuel Production Tax Credit (PTC). The BTC allows importers to claim the same tax credits that domestic producers get, which is worsening the current situation of oversupply of biomass-based diesel. Importers were happy to take cash from taxpayers, even though their own governments were not as generous as the United States. Once the Clean Fuel PTC comes into effect next year, it will disincentivize imports and slightly improve the supply side for domestic producers.
The United States imported about 900 million gallons of biodiesel and renewable diesel last year, according to EIA data. Imports in the first two months this year were around 200 million gallons, and are likely to rise through the rest of the year as importers continue to receive the tax credits.
Conclusion
The biomass-based renewable fuel industry believed that if the renewable and biodiesel plants were built, the EPA would mandate their use, which did not happen as the Biden administration turned to its climate agenda to electrify everything and to heavily incentivize wind and solar power. There is now an oversupply of domestic biomass-based diesel, which needs mandates from EPA as it is much more expensive to produce than petroleum-based diesel. Importers of biomass-based imports currently get tax credits, which exasperates the problem. Next year, federal tax credits will only support the domestic industry. In the meantime, U.S. biomass-based diesel plants are either shuttering or retooling back to petroleum-based diesel.
