Spain's newly adopted mandate implementing the EU's recast renewable energy directive (RED III) is expected to support demand for HVO Class III from 2027, traders said.
Hydrotreated vegetable oil (HVO) Class III is made from category 3 tallow.
On an EU level, RED III requires member states to achieve a 14.5pc reduction in greenhouse gas emissions from transport fuels or a 29pc share of renewable energy in transport by 2030.
Under the directive, biofuels produced from feedstocks listed in Annexe IX can be double counted towards compliance with renewable energy-based mandates. But double counting does not apply under GHG-reduction mandates. There is a sub-target for Annexe IX Part A feedstocks such as palm oil mill effluent oil, while Annexe IX Part B feedstocks such as used cooking oil (UCO) are capped.
Spain adopted a GHG reduction mandate in its RED III transposition, effectively ending the practice of double counting in meeting national biofuel obligations. As a result, obligated parties will need higher absolute volumes of renewable fuels to meet GHG reduction quotas, supporting demand for drop-in fuels such as HVO. In Spain, biodiesel blending is capped at 7pc and ethanol at 5pc. HVO can be blended at up to around 20pc into diesel while still meeting fuel standards.
Strategic reserves agency Cores estimates demand for biofuels blended into diesel in 2025 at 1.92mn t, corresponding to a blend rate of 8.7pc by volume. It implies that around 40pc of biofuels blended into diesel in 2025 were double counted.
Argus Analytics estimates Spain's HVO demand in 2025 at around 715,000t.
Spain's new legislation also raised the sub-target for Annexe IX Part A biofuels from 1pc to 1.2pc, while retaining a 1.7pc cap on those made from Annexe IX Part B feedstocks.
Category 3 tallow is not included in Annexe IX and is not eligible for double counting in any EU member. As a result, HVO Class III has typically traded at a discount to waste-based grades such as UCO-based HVO (HVO Class II), which generally also offers greater GHG savings — category 3 tallow offers GHG savings of around 72-82pc, depending on assumptions and yields, compared with about 85-90pc for UCO. Argus currently assesses Class II at a minimum of 85pc GHG savings and Class III at a minimum of 80pc.
But with Annexe IX Part B feedstocks capped and double counting no longer available under Spain's GHG-based mandate, compliance value will be increasingly driven by GHG performance. For obligated parties, this will leave the higher GHG savings of HVO Class II as its main advantage over Class III, potentially narrowing the value gap between the two grades and improving Class III blending economics.
Spain's producers are ready
Spain's HVO production capacity, including standalone hydrotreatment units and co-processing facilities, totals about 900,000 t/yr.
Repsol accounts for around 722,000 t/yr through two hydrotreatment plants and one co-processing unit. The producer regularly imports category 3 tallow to its hydrotreatment plant in Cartagena, according to ship-tracking data.
Moeve operates two co-processing plants with combined capacity of roughly 86,000 t/yr and is set to add 500,000 t/yr of HVO and sustainable aviation fuel (SAF) production at Huelva in late 2026 or early 2027.
BP also produces HVO through a co-processing unit, with capacity of about 109,000 t/yr.
Further capacity is on the way, with Dreexo Energia and Alfa Laval expected to start up a 100,000 t/yr hydrotreatment plant next year.
Beyond Spain
Germany is already providing additional support for HVO Class III demand. The country recently decided to allow category 3 tallow under its GHG mandate from 2026, subject to a restrictive 0.3pc cap. Germany adopted RED III in April and retroactively ended double counting for Annexe IX biofuels in 2026.
Since that change and with both biofuels capped, HVO Class II and Class III have increasingly been valued on a similar basis for compliance in Germany, depending on their respective GHG savings, traders said. Obligated parties would be expected to blend as much HVO Class III as possible before reaching the cap. The Argus HVO fob ARA Class III/II spread narrowed to around $15/m³ on 22 May, its tightest since 12 August 2025, which many market participants attributed to the policy change.
This compares with an average spread of $72/m³ in 2025.
Together, the Spanish and German policy changes could encourage greater movement of category 3 material beyond its traditional demand hubs in northern Europe.
The wider European picture remains mixed. The Netherlands already limits incentives for category 3 tallow-derived biofuels, while France has proposed a 0.6pc cap from 2027 to avoid diverting material from other users such as the pet food, feed, oleochemical and pharmaceutical sectors.
