What to expect from the evolution of blending mandates in Europe? What products and feedstocks will gain momentum? How will the new compliance alternatives play out? Will newly incentivized sectors create steep competition? Here are our takeaways for 2023 perspectives.
Road mandates will not create much growth in Europe
Most of the 2023 promoting tools for renewable fuels blending are now enforced in Europe, except for Italy and Ireland, both usual suspects. Among the 28 others, only the Netherlands (+1.4% e.c) and Germany (+1% GHG reduction) will significantly increase their blending obligations. All other countries will support either tiny increases by 0.2-0.5% or a freeze of the 2022 level (Sweden, Denmark, and Czechia). Finland (- 7.5% vs plan) and Croatia (penalty for minimum likely confirmed in 2023) should be the only two MS where drastic cuts linked to the energy crisis will be enforced.
We calculate that the overall blending mandates will increase on average by only 4% in Europe, one of the lowest rates in recent years, resulting mostly from the government’s aversion to more inflation. Coupled with a downtrend of fuels pools sizes and growing competition from other compliance options (biomethane and electricity), growth perspectives for renewable fuels in 2023 are limited. This is especially true for Fame in the EU-27 (+1% to 13.7 million mt), as the B7 blend wall is optimized almost everywhere, explaining why perspectives for HVO are better (+6% to 4.2 million mt).
Crop caps and ethanol competitiveness
Crop-based ethanol still enjoys the title of the cheapest compliance alternative in Europe. With new blend wall expansions (E10) and optimization of ETBE, ethanol growth will exceed gasoline sales (+6% to 5.1 million mt in the EU-27). This exacerbates competition under the crop caps, set far below RED2 limits. The recent example of Spain that has drafted a dramatic decrease of the cap to 2.6% e.c is symptomatic of the European trend.
More ethanol and less room under crop caps will ultimately impact crop-based biodiesel perspectives. The potential inclusion by the EC of soy within the definition of high-ILUC will be one of the most scrutinized decisions in 2023. As most of the Member States choose to phase out this category faster than the RED2 schedule, it would further decrease the 1G biodiesel cake. A soy ban would also support rapeseed and sunflower alternatives, both growingly used as HVO feedstocks.
9A momentum, 9B capharnaum
Expressed in relative growth, advanced sub-targets will progress significantly faster than overall targets. Absolute increases comprised between 0.1% and 0.5% translate into 25-100% growth rates, making, logically, the advanced segment the most promising in 2023. Our analysis of the advanced-sub targets enforced in 2023 shows the average level (0.9% e.c) is far ahead of RED2 schedule. Consolidation of our forecasts for 2023 puts advanced growth in the EU-27 at 22% to 2.9 million mt, all products included. This is lower than the progression of advanced sub-targets because of the double-counting effect. POME, tall oil, food wastes, low-grade starch, wine residues, manure, and sewage sludge are the most available options to fill the important needs next year.
The confirmation of the new Annex 9 list by the EC will be one of the key regulatory evolutions next year. If the draft published recently (17 add-ons, including 14 in Part B) is confirmed, it will turn the 9B segment as we know it today upside-down. Several feedstocks currently eligible for 9A d) including bakery wastes, brown grease, and flotation greases would directly compete with UCO and AF C1/C2 on the biodiesel segment. The clearance of several ethanol feedstocks under 9B (starchy effluents, drink production residues, vinasse, whey permeate, and brewers’ spent grains) would add much pressure on this segment, capped by RED 2 rules.
The EC clearly looks at increasing the supply of 9B feedstocks to allow the development of renewable fuels in transport sectors other than the road. The price impact of the new list, potentially bearish for UCO and AF C1, will be closely linked to the development of renewable fuels in the maritime and aviation sectors. SquareCo anticipates again a solid increase of 9B- based biofuels demand, estimated at 4.9 million mt in 2023, + 21% compared to 2022.
Union database vs frauds
The new version of Annex 9 may contain problematic feedstocks in terms of fraud: how can 9A “Non-food crops grown on severely degraded land”, 9B “Damaged crops that are not fit for use in the food or feed chain” and 9B “Intermediate crops, such as catch and cover crops” be certified as such with certainty? The EC answers this question by launching the Union database (UDB) from Q2-23. Its enforcement will be another crucial challenge for economic operators, especially with the short launch planning communicated recently by the EC. Its effectiveness in limiting fraud at the origin, before the 9A/9B feedstocks’ volumes enter the database, raises doubts.
While the risk of fraud might be mitigated by the launch of the UDB, it would certainly be exacerbated by a surge of premiums paid for waste-based biofuels. As the drafted Annex 9 list would lower the number of advanced options in an environment of steady demand growth, the price impact on available advanced feedstocks (POME, tall oil, low grade starch, etc.) would automatically increase the risk of fraud. Despite the 14 add-ons to the 9B list, the issue will be the same for this matter, only later when SAF and marine biofuel requirements will suddenly jump from 2025.
Green elec is the real black box
Eligible in most of the main low-carbon fuels markets (Germany, France, and the Netherlands), renewable electricity has so far contributed to limited amounts of GHG savings or renewable energy contents under European mandates. That will change. Determining at what speed is, however, clearly impossible at this stage, for two reasons: both anticipating the rate of road electrification and how much of the EVs’ consumption can be accountable under the mandates are challenging. The crash of LCFS credits in California during the past 18 months (USD 200 to 60/ mtCO2eq saved) provides a really good idea of what could create electrification in other countries when this materializes. The destruction of renewable fuel demand linked to the generation of certificates via green electricity in France and Germany in 2023 will be interesting in this regard.
The development of biomethane is the other key development to follow. As it is slower than expected on the bio-LNG German segment, it tends to open opportunities for HVO. If the compliance costs under the renewable transport mandates keep on increasing, the incentive to divert biomethane to this sector will clearly be a factor to watch. We anticipate a demand of 524 KT of biomethane accounting under the mandates in 2023. Some countries such as France still hesitate to include the product in the same set of rules as Fame or HVO.
SAF seen up 24%, maritime still in early-stage
The same three European countries will incentivize SAF use in 2023: Norway (0.5%, potentially up to 2% from July), Sweden (2.6% GHG). and France (1% e.c). Voluntary use is also gaining momentum in other countries like the UK and the Netherlands. We anticipate a demand above 50 KT in 2023, mainly based on UCO. The real game changer will be the enforcement of RefuelEU Aviation, currently under trilogue negotiations, which will be confirmed in 2023 for the 2025 kick-off. From 2024, the SAF growth will clearly surge. Portugal was the latest country to enforce a SAF mandate, from 2025 (2.5% e.c).
The country also became the very first to mandate the shipping sector to use renewable fuels from 2025 (2.5% e.c). Other MS either incentivize the sector indirectly (NL with HBE-G generation) or wait for the Fuel EU Maritime legislation to be voted, possibly in 2023, which may enforce a 2% GHG reduction mandate from 2025. They also expect the inclusion of the sector into the ETS scheme to constitute a decisive factor for using low-carbon alternatives. In the meantime, shipping companies will deal with the IMO’s CII legislation from 2023, incentivizing them to improve the GHG performance of their vessels, including using biodiesel. Some of them clearly want to anticipate all those regulations and be able to communicate on their GHG savings improvement ahead of their enforcement. In this regard, the voluntary use of renewable fuels option will grow in 2023, although it remains tricky to assess to what extent.
