Argus' leading market experts gathered in London at the Argus Crude and Refined Products Forum to share insights into the rapidly changing and expanding refined products markets. This is a summary of one presentation on 25 February.
Europe is moving into the next phase of decarbonisation with a piece of legislation titled RED II — Renewable Energy Directive II — coming into effect in 2021. The target for total energy consumption from renewables has shifted from the first version of the legislation (RED I) from 20pc in 2020 to 32pc by 2030. Following along, the sub-target set out for transport fuels is rising from 10pc with RED I to 14pc with RED II. Additional pressure will mount to meet the new target by the end of this decade, and now aviation and marine fuels are specifically considered in conjunction with road transport fuels.
What pathways exist to achieve a 14pc renewable transport fuel goal by 2030?
Argus Consulting has analysed pathways to achieve this target based on the caps and targets set for different types of feedstocks as mandated by RED II. The first generation of biofuels — biodiesel based on a vegetable oil feedstock (rapeseed oil, soybean oil, etc) and crop-based ethanol — are expected to continue to play a significant role up to 2030. But with the evident food vs fuel debate, there is a 7pc maximum cap for 2030 for the use of such crop-based biofuels as part of the RED II legislation.
Biodiesel based on waste such as used cooking oil (UCO) and tallow (animal fat) also have a place in the RED II legislation and will count towards the 2030 target. These biofuels are popular as they are double-counted in several EU countries. This means that one unit will count twice towards the target. Also contributing to their popularity, is the generally high GHG savings. Although ripe with opportunity, the cap for this category is 1.7pc.
While the first two sources have good liquidity and availability, the big question remains around advanced biofuels. By 2030 the regulators are asking EU member states to achieve 3.5pc of advanced biofuels as part of their renewable energy fuels for transportation mix. Advanced biofuels can be based on waste feedstocks such as algae, bio-waste from households — such as ethanol based on bread — straw, tall oil, nut shells, and palm oil mill effluent (POME). Unfortunately, this is a group of biofuels for which the technology is underdeveloped, and available feedstock supplies are limited.
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Non-organic renewable fuels, such as fuel produced from plastic waste, and electric vehicles based on renewable electricity would make up the smallest portion of the 14pc target. This category is not double counted like UCO and tallow methyl ester (TME)-based biodiesel, but rather it is quadruple counted, all to incentivise the switch to more electric vehicles.
Furthermore, we will begin to see biojet and biomarine fuels coming into the picture. These markets will, in RED II, have a multiplicator of 1.2. — i.e. they will count 1.2 times more than the first-generation biofuels. Biojet will make its way into regulation in Norway this year, with the Scandinavian countries being ahead of the rest of the biofuels market.
Argus’ role in all of this is to help the market clear in the most efficient and economic ways through robust and accurate pricing that provides the right signals to the market on supply and demand fundamentals. In terms of liquidity, the first generation of biofuels is up and running, followed closely by UCO and tallow-based biodiesel markets. But liquidity for advanced biofuel feedstocks is very small at present, although growth is anticipated as these markets develop. Liquidity for non-organic renewable fuels is non-existent at this time.
Delving further, we can begin to see three key themes emerging — increased demand for waste-based feedstocks, decarbonisation and its costs, and the complex realities that European refiners are likely to face throughout the energy transition.
As waste-based feedstocks become a more viable option for producing biofuels to meet stringent environmental targets, demand and competition for them is expected to increase. Not only will UCO demand rise owing to the pull from the growing UCOME market, but we are also likely to see a demand surge for UCO from the hydrotreated vegetable oil (HVO) market, where it is a critical feedstock. We see the effect of this demand with European companies scouting the world for UCO, and as expected, imports have surged, rising eightfold in 2019 compared with 2012.
We expect to see a similar trend for the feedstocks for advanced biofuels as RED II kicks in. Argus has recently launched a price assessment for POME as feedstock pricing is growing in importance as decarbonisation gets under way.
With all the eco-friendly discussions, ideas and subsequent environmental regulations coming into play, it is important to understand what the associated costs of decarbonising the European transport sector will be.
Monthly commentary provided to and published by Argus for the HVO market, also known as renewable diesel, has shown price indications for HVO can be up to $1,300/t higher than traditional diesel. Despite the cost, we believe that HVO will become a major solution to combat road and aviation transport fuel emissions in Europe. Our expectations are that capacity will almost double over the next three years because:
1. HVO can directly replace diesel fuel and can be used in the existing fuel infrastructure. It can be co-processed alongside fossil fuels at refineries as well as further down the supply chain;
2. The technology is mature and tested – it was launched by Neste in 2008 and is now used across the world;
3. HVO is feedstock neutral and can be based on first-generation, waste-based and advanced biofuel feedstocks;
4. Transforming a refinery to an HVO refinery is an option for plants threatened by closure. For example, in 2019 Total chose to convert its La Mede refinery to an HVO facility, thereby avoiding the trouble of closing a refinery owing to cost pressures, while maintaining its current staff and upholding a “green” external profile.
Lastly, as Europe’s mature refining complex continues to navigate the ever-changing regulatory landscape, it is becoming clearer that some refiners must adapt in order to remain competitive and navigate the new realities of decarbonisation that they will face in the years to come.
As Europe moves through the decarbonisation lifecycle, its refiners will face increased complexity to meet the RED II targets. Even before feedstocks arrive at the refinery, there are considerations to be made. For example, refineries can consider using upstream emissions reductions (UERs) as credits to more easily comply with the RED regulation, or they can harness the use of “green” feedstocks such as bionaphtha. When blending fuels such as gasoline to the standard specification, biocomponents such as bioMTBE are an option along with higher biofuel blends such as ethanol. In essence, understanding what makes most sense economically in order to stay competitive needs to be at the forefront of European refiners’ logic when managing through such complexity, as having a “straightforward” process is essentially non-existent.
With decarbonisation efforts under way, the question remains — will the EU, along with the UK and Norway, achieve the goals it has set for itself by 2030?
Looking at the performance for 2020 and the 10pc renewable energy in transport goal from RED I, it is doubtful. By 2017, only four countries — Sweden, Norway, Finland and Austria — had achieved the 2030 target. The majority of European countries are falling behind and there are doubts over whether they will make the 2020 target. Even though the European average has improved to 8pc in 2018, there is still a long way to go. Nevertheless, for the next phase of decarbonisation — RED II — European countries are now coming up with their specific regulations and interpretations of RED II on how best to achieve the 2030 targets. Take Italy, Spain and Denmark for example. All aim to over-deliver on the 2030 targets by reaching around a 20pc share of renewable energy in transport, yet at this time they have not managed to achieve the 2020 target. This lack of progress, combined with immature technology and limited feedstock, makes reaching the 2030 goal even more doubtful.
To conclude, Europe needs to rapidly step up its development of renewable transport fuels, or risk failing to meet its ambitious 2030 targets.