Downward Pressure Amidst Rising Renewable Diesel Supply

Exploring the intersection of renewable diesel production and LCFS market dynamics amid shifting regulatory landscapes and market responses.

Market Trends and Transactions

The trading volume for LCFS credits experienced a notable decrease. Type 1 trades, which often serve as a market indicator, fell by 28.37% week-over-week, with only 200,000 credits exchanged. Moreover, the broader market saw a sharp decline in activity, with non-zero trades dropping by 62.16% to 410,722 credits traded in the California LCFS market.

The average spot price for LCFS credits also decreased, down 11.72% from the previous week, settling at $50.63 per metric ton. This downward trend was further evidenced by a specific dip on May 14th, where the average LCFS spot price reached $44 per metric ton. For Type 1 transfers, the weekly average was slightly higher at $57.83 per metric ton, though this still represented a 3.12% decline from last week. Prices for All Non-Zero transfers similarly fell by 2.93%.

Contrasting with the LCFS market, the Renewable Fuel Standard (RFS) market showed mixed movements. D3 RIN prices remained lower compared to the previous week, indicating less volatility. Meanwhile, D4, D5, and D6 RIN prices saw marginal increases, suggesting a differentiated impact across various renewable fuel categories.

The U.S. renewable diesel (RD) sector has experienced unprecedented growth over the past two years, significantly influencing the biofuels market landscape. In 2023, production of renewable diesel in North America surged by 36% to a record 3.45 billion US gallons. This trend is poised to continue, with projections indicating a further 28% increase in 2024, pushing output to approximately 4.43 billion US gallons, according to data from Argus.

Impact on Renewable Identification Numbers (RINs)

This robust expansion in renewable diesel production has notably impacted the market for biomass-based diesel D4 credits, commonly known as renewable identification numbers (RINs). Over the past year, the value of D4 RINs plummeted by 75%, primarily due to renewable diesel production outstripping the U.S. Environmental Protection Agency's (EPA) biofuel blending targets. D4 RINs are critical in the renewable fuel landscape, serving as compliance markers for fuel suppliers under the EPA’s Renewable Fuel Standard (RFS) mandates. They also incentivize renewable fuel production by allowing producers to sell RINs after blending their biofuels with conventional road fuels.

Corporate Strategic Shifts

The declining RIN prices have compelled various industry players to reassess their strategies. For instance, Vertex Energy decided to idle renewable diesel production at its facility in Mobile, Alabama, with plans to pivot back to more profitable fossil fuel production, although it remains open to resuming RD operations should market conditions improve. Similarly, Chevron and CVR Energy are exploring feedstock flexibility to enhance their margins, with Chevron recently opting to focus on renewable diesel over biodiesel.

Valero and its joint venture, Diamond Green Diesel, are transitioning their operations to produce sustainable aviation fuel (SAF), citing persistent oversupply in the D4 RIN market. This move is part of a broader industry trend where companies are diversifying their product lines to capitalize on different segments of the clean fuels market.

Despite the current market challenges, the long-term outlook for renewable diesel remains optimistic. State-level incentives, such as low carbon fuel standards (LCFS), continue to support the industry. Companies like Valero are particularly buoyed by the proliferation of LCFS programs, which reward reductions in the carbon intensity of transportation fuels. These programs are crucial in states like California, which has been at the forefront of promoting lower-emission transportation fuels.

Industry Expansion and EPA Mandates

The expansion of renewable diesel capacity is set to continue, with significant projects underway, such as Marathon Petroleum’s conversion of its Martinez refinery and Phillips 66’s enhancements in Rodeo, California. These developments are strategically aligned with the EPA’s biofuel blending targets, which remain fixed through 2025. If the trend of expanding renewable diesel production continues, it could potentially stabilize or even reverse the downward pressure on D4 RIN prices, thus improving production margins for the industry.