Higher biofuels blending mandates under new European renewables legislation will offer a boon to biodiesel spot prices in 2021 after a year of poor margins caused by lockdown-related falls in road fuel demand.
And provisions in the Renewable Energy Directive (RED II), scheduled to come into effect in June, will drive feedstock diversification, providing additional support to waste-based and advanced biodiesel while capping the use of food and feed crop-based biofuels.
While uncertainty persists around road fuels use in the early months of 2021, and most national renewables targets in Europe are yet to be written into law, an ongoing revision of RED II will align it with more ambitious climate targets under the EU Green Deal.
RED II already sees the mandated renewable share of transport fuels rise to 14pc by 2030, from 10pc in 2020.
Any revision of RED II could spur revised biofuels sustainability criteria on top of simple increases to the current EU-wide target share for renewables in transport fuels. EU leaders have reached political agreement on net GHG reductions of 55pc by 2030, up from 40pc. This would require the EU setting a 24pc share of renewables in transport, alongside an overall renewable share of 38-40pc in gross final energy consumption, and will translate to higher mandates in EU countries in 2021.
In 2020, a 10pc renewables share of road transport fuels under RED and a 6pc greenhouse gas (GHG) reduction under the Fuel Quality Directive (FQD) should have driven significantly higher EU demand for biodiesel, only for producers to struggle with negative margins as early as the second quarter when governments across the bloc imposed movement restrictions. Globally, biofuels output contracted in 2020 for the first time in 20 years, with the IEA assessing a 13.5pc year-on-year decline in European biodiesel and HVO production to 12mn t. Under more normal circumstances, European output should increase to 14mn t in 2021, the IEA said, as demand from road fuel suppliers reacts to existing legislation.
But there are other qualifying factors away from uncertainties about the speed of road fuels uptake and the final look of legislation that will determine how higher targets translate to increased demand.
Biodiesel values in countries such as Germany will, to an extent, be pressured by upstream emission reduction (UER) projects, for which further approvals would generate alternative means of meeting mandates and prompt fuel suppliers to ask for a lower amount of biodiesel in their 2021 supply contracts.
More generally, the feedstock used to produce biofuels blended into road fuels will become more important.
In October, the European Parliament voted for EU legislation aimed at preventing imports of products linked to deforestation, including palm oil, soy, and maize. RED II already sets a 7pc limit on food and feed crop-based biofuels and the EU has agreed to a gradual phase out of biofuels with a high risk of indirect land use change (Iluc) by 2030, which in practise will take huge swathes of product from palm oil and soybean oil off the market.
Duties on imports of such biofuels from Indonesia and Argentina will compound the trend.
And recent regulatory moves by some countries suggesting the EU bloc could meet its target to phase out palm oil and soybean oil from the slate ahead of schedule. This will support EU demand for biodiesel made from rapeseed oil or from sunflower oil and encourage a greater divergence in pricing based on feedstock.
Waste oils could fill any shortfall. A 1.7pc cap is maintained for biodiesel produced from used cooking oil (UCO) and tallow categories 1 and 2 through the decade. RED II introduces sub-targets for advanced biofuels — produced from feedstocks listed in Annex IX part A — at 0.2pc in 2022, 1pc in 2025 and 3.5pc in 2030.
In the early stages of the 2021-30 period, much of this will be met by products for which there is existing capacity. Ucome prices will be supported by stronger demand and by tighter UCO availability, with the feedstock likely to be a key resource for road fuels, aviation and maritime as mandates for sustainable aviation fuel (SAF), or biojet, come into effect and discussions gain momentum on mandates for the maritime industry.
