European demand for drop-in biofuels — hydrotreated vegetable oil (HVO) and sustainable aviation fuel (SAF) — will increase further in 2022, supported by higher blending targets and the introduction of new mandates for the aviation sector. HVO production capacity will be steady as SAF output starts to ramp up.
HVO, which can be blended into diesel beyond Europe's B7 technical blend wall for biodiesel, will be instrumental in meeting targets for renewable fuels in road transport. Growing demand, particularly for HVO produced from feedstocks listed in Annex IX of the EU's recast Renewable Energy Directive (RED II), will support physical prices.
The UK Trade Remedies Authority recently proposed to remove EU countervailing duties, which were transposed in the UK after it left the bloc, on HVO of US and Canadian origin, while maintaining those on fatty acid methyl ester (Fame) biodiesel. If confirmed, this could open the arbitrage for HVO from the US, where capacity is likely to nearly double next year to 8mn t/yr. This would offer some respite from supply tightness in Europe, where imports could also arrive from China. But European production will be largely unchanged on the year at around 4.5mn t.
In the context of a rising cost of compliance with higher targets, HVO prices will find support from higher values for biofuels tickets in key European demand centres such as Germany. Tickets are tradeable certificates largely generated with the blending of biofuels into the fossil road-fuel pool.
In Germany, the domestic blending mandate increases by one percentage point to 7pc in 2022, and the buy-out level to be paid in case of non-compliance with transport renewables targets will rise to €600/t CO2e from €470/t CO2e in 2021. The price of German greenhouse gas (GHG) reduction tickets for 2022 will increase accordingly, further supported by uncertainty about upstream emission reduction (UER) tickets — another mechanism used to meet mandates — caused by bureaucratic issues in the crediting procedure.
The outright Argus fob ARA range Class II HVO price, produced from used cooking oil (UCO), increased by around $1,139/t from the start of this year to 21 December and hit a record $3,001/t on 24 November. The Argus outright fob ARA range SAF price jumped by nearly $1,069/t in the same period, hitting a record of just below $3,257/t on 16 December. Prices for both products have been supported by gains across the biofuels and waste-feedstocks complex and by strong demand at a time of tight supply.
SAF demand outstripped availability in 2021, and with novel and higher targets in major markets this trend will continue in 2022 even with new capacity online. France will introduce a 1pc SAF mandate in 2022, rising to 5pc by 2030, and there are higher targets envisaged in Norway and Sweden. Norway has already introduced a 0.5pc blending mandate, which will increase to 30pc by 2030, while Sweden set a GHG emissions-reduction target of 0.8pc in July-December this year, which will rise gradually to a 27pc cut in 2030.
Further support will come from European Commission proposals for a SAF blending mandate, which would apply to fuel suppliers. Aircraft landing at EU airports would be required to use blended jet fuel with a mandated SAF share of 2pc by 2025, rising to 63pc by 2050. A target for synthetic aviation fuels of non-biogenic origin would rise from a 0.7pc share by 2030 to 28pc by 2050.
The vast majority of SAF supply currently comprises hydroprocessed esters and fatty acids synthetic paraffinic kerosene (HEFA-SPK), the most mature SAF production pathway with a maximum blend volume of 50pc. Production of European HEFA-SPK should exceed 200,000 t/yr in 2022, mainly from Neste's Porvoo refinery in Finland and TotalEnergies' La Mede plant in southern France. Additional output, made by co-processing renewable and non-renewable feedstocks, will be from Italy's Eni, Preem in Sweden, OMV in Austria, Repsol and BP in Spain and by Phillips 66 in the UK.
A sharp increase in SAF production is likely by 2025, when around 2.2mn t will be available in Europe and 5.4mn t globally, based on publicly announced projects.
