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Aug 2019

HVO market surged in Q1-19

The Air Resources Board (ARB) published the latest update displaying the volumes of biofuels used to generate LCFS credits under the 5% GHG reduction mandate. The consumption of HVO has experienced an impressive leap: + 68% compared to the same period last year.

As expected, fulfilling the new GHG mandate in California appears to be challenging. Obligated parties did not wait long to maximize physical blending through a big reliance on HVO and new products (bionaphta, propane) in Q1. Despite that surge of consumption, the net generation of credits vs deficits was negative at -455’733 mt CO2eq.

The volume of renewable diesel blended in California in Q1-19 was by far the greatest ever. With 159 million gallons, or 471 KT, it amounted to a huge 50 million gallons above the previous record set in Q1-18. Since Q1 is generally the weaker quarter of the year, sometimes by far, expectations to see a massive evolution of the HVO market this year are big with a 2 million mt/y market potential now in sight. Corn oil (49 million gal) and UCO (41) based HVO contributed largely to the growth, as tallow (47) based HVO proved to be weaker than in Q1-18 (61). The need for more HVO is reinforced by the fact that the average Carbon Intensity (CI) reported has recently gone up: from 30.9 gCO2eq/MJ in Q1-18 to 36.32 gCO2eq/MJ in Q1-19. This trend is definitely not sustainable and the only way to reverse it would be to increase the share of the HVO offering the lowest CI, in other words, UCO-based HVO. Neste’s Singapore plant can offer HVO with CI as low as 16.89 gCO2eq/MJ when it processes Asian origin while US producers like Diamond Green and REG can offer CI comprised between 19 and 25 gCO2eq/MJ.

Fame has become a minor option for generating LCFS credits, mainly because of the B5 blend wall. With 41 million gallons, the fuel accounted only for 20% of the biodiesel outlet in Q1, or 139 KT, blended. Although this is 14% higher than during the same period last year, it remains below the Q1-17 figure. This Fame ceiling is to constitute an important accelerating driver for HVO growth. Canola-based Fame was largely ignored by obligated parties, with the lowest figure (0.18 million gal) reported since 2012. UCOME (21 million gal) and corn oil ME (20) still constituted the backbone of the outlet.

Since Q4-18, some volumes of bionaphta have been reported by the ARB. Although the volumes remained low, with 0.17 and 0.11 million gallons blended in Q4-18 and Q1-19, respectively, a new outlet is developing, as is the case in Sweden. For the first time in Q1-19, some volumes of propane (2.4 million gallons) were reported within the quarterly update, underlying the need for obligated parties to find new sources of credit generation.