As California has become awash in renewable diesel (RD), sellers of the biofuel are eyeing additional homes for their product along the US west coast, particularly as Oregon's low-carbon fuel standard (LCFS) credit price maintains its premium to its southern neighbor. This trend is likely to persist this year, particularly as California's regulator may implement tighter requirements for crop- and forestry-based feedstocks.
For years, RD sellers focused their attention on the California market, as its transportation fuels market presented the most significant opportunity for sales. The state's LCFS and cap-and-trade programs add California-specific incentives to federal renewable fuel mandates and tax credits. As a result, California has become laden with renewable diesel. Renewable diesel use has led all sources of California LCFS credit generation since 2020, growing faster than new deficits and helping to drag down the state's spot LCFS price.
LCFS markets require yearly reductions in transportation fuel carbon intensity. Higher-carbon, conventional fuels that exceed the annual limits incur deficits that suppliers must offset with credits generated from the distribution of approved, lower-carbon alternatives.
RD remained the top source of new LCFS credits in California during the second quarter of 2023, rising by 14pc from the previous quarter to 2.9mn t of new credits and 39pc of all new credit generation, according to the latest state data. The fuel crowded both petroleum and biodiesel out of the state's diesel pool for the quarter, making up 54pc of all California diesel consumed during the period.
Low prices and rising competition have led major producers to seek new markets. European refiner Neste will supply RD in Washington state through a partnership with Coleman Oil, building on a joint venture with Marathon to deliver fuel into Washington's Clean Fuel Standard program.
Valero has turned attention to Canada, Oregon and Washington as California sets a "floor" for the petroleum replacement, the independent refiner and major renewable diesel producer said in October. The US independent refiner is a joint venture partner of Diamond Green Diesel, the largest US renewable diesel producer.
The California Air Resources Board's proposal for updating the state's LCFS could restrict access for fuels produced from crop and forestry based feedstocks to the market. Staff proposed requiring "continuous third-party sustainability certification" by 2028 for such feedstocks. California previously required chain-of-custody attestations for used cooking oil and other feedstocks. This would represent a new approach requiring expanded participation from verification bodies.
RD supplies in Oregon are rapidly rising and helped drive a surplus of new credits in the state's Clean Fuels Program in the second quarter of 2023. California's volumes still tower over Oregon's. Biodiesel and renewable diesel combined reached nearly 25pc of the diesel pool in Oregon in the quarter, compared to RD alone in California surpassing 50pc. But market participants are conscious of Oregon's sustained LCFS premium and the opportunities it provides. Oregon has maintained its premium over California since March 2022. Although that premium has narrowed in recent months as the Oregon market has recently had steep declines, it still sits $24.50/t above California's. Argus assessed California spot credit prices at $67.50/t on 5 January, with Oregon spot Clean Fuels Program credits at $92/t. Participants are eyeing future demand in Washington state and Canada, as their clean fuel programs came online last year. But these programs are in their infancy, which equates to less stringent targets now, so the pull on biofuels to those regions is likely to be less significant in the near term.
California RD demand is not going away, particularly not when two major refiners are nearing completion of substantial RD conversions in the state. But it is no longer the only game in town, and higher credit prices in Oregon's Clean Fuels Program and potential hurdles for certain feedstocks emerging in the upcoming California rulemaking could lure the biofuel out of the state.
