Hydrotreated vegetable oil (HVO) prices in northwest Europe will find support from higher blending targets in Europe, but will remain dependent on GHG ticket prices in major markets.
With EU ambitions of raising the share of renewable liquid fuels in transport, drop-in fuels such as HVO offer a means of surpassing the so-called B7 diesel blend wall, a limit that only allows for a 7pc biodiesel share in conventional road fuels. This should support HVO prices, as drop-in fuels can be used to hit rising national blending goals.
Targets can also be met with other mechanisms, such as tickets, which are tradeable certificates generated with the blending of biofuels. But lower ticket values can typically put a cap on biofuel prices. And in Germany — a key market for biofuels in Europe — a glut of certificates next year will probably weigh on values.
Road fuel suppliers, which have to fulfil Germany's greenhouse gas (GHG) emission reduction quota, carried over around 1mn t of CO2 equivalent (CO2e) — or around 11pc of overall GHG savings — from 2019 to 2021 because Germany paused the transfer of excess savings in 2019.
On top of this, German upstream emission reduction (UER) projects — which also generate tickets — are scheduled to bring 1.3mn t of CO2e to the market next year.
In the Netherlands, certificate values could increase if the government decides to exclude the maritime sector from the biofuels ticket scheme. The use of biofuels in shipping increased six-fold on the year in 2020, almost tripling ticket supply.
Unlike Germany, where a well-supplied tickets market has already prompted a reduction in HVO term purchases in 2021, the Netherlands is likely to increase the use of biofuels, supporting prices for the drop-in fuel.
In the UK, the government will increase its Renewable Transport Fuel Obligation buyout price for fuel suppliers to 50p/litre, from 30p/l, from January to deter suppliers from simply paying a penalty to avoid meeting the domestic blending obligation, which would result in the loss of blended biofuels volumes.
The increase in the buyout and a higher target of 10.1pc of renewables in transport in 2021, from 9.75pc this year, means suppliers will blend more biofuels and generate more tickets. In 2020, the value of these tickets consistently sat at the 30p/l limit.
HVO production from food and feed crops in the UK and Europe will be limited by new caps on these feedstocks introduced by RED II and by national legislation. But increasing interest for waste-based and advanced HVO will more than offset the shortfall. Waste-based biofuels are taking the lion's share in the Dutch and UK markets.
Higher HVO demand from the aviation sector — in the form of sustainable aviation fuel (SAF) — could also support prices. But demand will largely be driven by national and EU-wide mandates and is unlikely to increase significantly without a legislative push.
The EU currently produces around 35mn l/yr — around 123,000 t/yr — of SAF from various feedstocks. This accounts for around 0.05pc of the region's total jet fuel consumption, but output could rise to 1.5mn-1.7mn t/y by 2030, amounting to 2-10pc of total pre-pandemic jet demand according to an industry policy paper.
The European Commission has postponed proposals aimed at tackling aviation emissions until early 2021, including measures boosting SAF uptake. But it is still committed to proposing specific targets and launched a consultation at the beginning of 2019 proposing a 1-2pc EU-wide blending quota as well as the revision of the 1.2x multiplier component for SAF under the recast Renewable Energy Directive (RED II).
By Giulia Squadrin, Florence Schmit, Daniel Mackay and Sophie Barthel
