German biofuel ticket market to get a boost

Germany's biofuel quota ticket prices are poised to receive a boost from 2018 onward, as market participants increasingly see benefits in holding onto tickets in anticipation of higher biofuels blending costs.

Germany's so-called tickets are tradeable greenhouse gas (GHG) reduction certificates that road fuel blenders receive for each tonne of CO2 equivalent (CO2e) saved when incorporating more biofuels into gasoline and diesel than needed to meet GHG savings targets. Suppliers of biogas, LPG and CNG selling into the retail fuel market also create tickets as their lower-carbon fossil fuels displace higher-emitting road fuels.

Road-fuels blenders that have missed their mandated GHG saving target can buy tickets to meet obligations and avoid a €470/t CO2e fine imposed by the German government. Compliance for each year is due on 15 April the following year, to give participants time to calculate their mass balance and trade tickets.

Market participants anticipate that a risk premium will likely start to be factored into ticket prices, as biofuel blending quotas rise to 2020 under European renewables transport targets. While domestic tickets for 2018 mandate compliance have so far been pricing well below 2017 values, premiums over Europe's mainstay biofuels already suggest ticket demand is outstripping supply.

Argus began assessing the ticket price in May this year. Tickets last traded at €160/t CO2e in the week to 10 August and the ticket price was assessed at €155-163/t CO2e that week on the basis of Argus' market survey.

But blending costs based on spot prices for the Fame 0 are currently around €108/t CO2e, while those for used cooking oil methyl ester (Ucome) biodiesel at €105/t CO2e and fuel ethanol at €24/t CO2e, a participant said.

This puts the Argus ticket price at a premium of around €52/t CO2e to the more expensive Fame 0 blend cost.

The shift to winter biofuels plays a role in the higher premium. Colder temperatures limit the amount of Ucome that can be blended into the road fuels, forcing suppliers to incorporate non-waste biofuels with typically lower GHG savings credentials that often result in a higher biofuels blending cost.

But this time around markets expect the ticket premium to biofuels blending cost to stay, leading to potentially higher ticket prices in early 2019 after mass balancing for this year's compliance draws out more buyers to meet shorts in biofuels blending. The rate of the government fine will eventually set a cap on ticket prices.

Current weaker ticket values have been attributed to narrowing differentials between oil product and biofuels prices, as values in the oil markets strengthened and associated fossil fuel costs through the supply chain increased.

"As long as the more economical option of CO2 reduction is physical blending, there is no need to search elsewhere for a transfer of reduction obligation," Total Germany new energies Advisor Ralf Stoeckel told Argus.

The prices of physical biofuels in Europe in recent months have generally been low enough for suppliers to focus on blending maximum volumes into the transport fuel mix.

Another potential driver of gains for both tickets and biodiesel prices is the anticipated low crude rapeseed oil (RSO) yields this year, which will likely lead to higher prices of biodiesel blend stock rapeseed methyl ester (RME).

RME accounts for the vast majority of European vegetable oil-based biodiesel production capacity. But the grade is now trading at an unseasonable spread over Fame 0, emphasising any upside risk of higher biofuels blending costs into 2019 and opposing weaker price indications from backwardated prices on the forward curve.

European RME has typically assumed an 80-90pc share of Fame with a -10°C cold filter plugging point (CFPP) (Fame -10) — a staple of German biofuels consumption in winter — with the remaining 10-20pc consisting of alternate biodiesel grades.

An increase in RME demand in the colder months will add to the shortages on the supply side that have already supported the grade, in turn driving further demand for German tickets into the next year.

German GHG reduction certificates €/t CO2e