HVO and Renewable Diesel

HVO stands for hydrotreated vegetable oil, which is produced by hydrotreating renewable fats and oils. It is also known as renewable diesel. This renewable biofuel is used as a replacement for diesel in road fuels. Its use is growing as industries comply with regulatory targets for reducing road transport emissions. A smaller part of the demand is voluntary as companies set their own targets for emissions reduction. Supply and demand fundamentals, and hence the value of HVO, are mainly driven by ever-changing environmental mandates.

HVO and biodiesel can be produced from the same renewable feedstocks but use different technologies. Biodiesel is produced by transesterification of renewable oils and fats whereas HVO is produced by hydrotreating such feedstocks.

Diesel can be blended with HVO up to 25-30pc whereas biodiesel has a maximum limit for diesel blending of 7pc, a so-called technical blend wall.

Argus publishes the price benchmark for European biodiesel, Argus FAME 0.

HVO is instrumental in reaching higher biofuels blending targets set out by the EU’s updated RED for 2021-30. It is a drop-in renewable fuel that can be blended with conventional fossil fuels up to 25-30pc. This means HVO is not subject to the 7pc blend wall that applies to conventional biodiesel, and that it can also be used as a standalone 100pc replacement for diesel. With such high blending ratios into fossil diesel, HVO provides an attractive way to efficiently decarbonise the European diesel market.

When HVO first emerged it was traditionally priced at a fixed premium to conventional diesel as that is what it replaces. However, there is a problem with this approach as the HVO market has its own supply and demand market dynamics. For example, the feedstock cost for producing HVO, namely vegetable oil, can vary significantly and is not correlated to the actual diesel market. This means a fixed premium runs the risk of not being representative of the actual cost of producing HVO.

In addition, on the demand side, as HVO demand is driven by regulatory set targets of blending renewable fuels into transport fuels. A fixed premium simply will not reflect what buyers are willing to pay to meet the mandated renewable fuel blends.

Simply put, a fixed HVO premium vs diesel risks not reflecting the actual physical market and will send the wrong signals to buyers and sellers but also to investors looking to participate in this market.

Argus provides a solution by publishing daily prices for HVO based on what is happening in the physical market, including bids, offers and trades. Argus also publishes price assessments for the key feedstocks.

Argus HVO price assessments are underpinned by actual physical trades, bids and offers of HVO. To aid transparency, our price discovery process can be followed in real time on the pricing platform Argus Open Market, where market participants are initiating trades by placing physical bids and offers on the platform, which then underpin the Argus HVO pricing.

To further ensure that Argus pricing is truly reflecting what is going on in the HVO market, in contrast to a fixed premium to diesel, the wider biofuels complex is also covered. By publishing daily prices for HVO feedstocks (such as used cooking oil and tallow), as well as other products from the hydrotreated complex such as Sustainable Aviation Fuels and bionaphtha, it means additional checks and controls on the fair value of HVO are in place.

Argus provides market participants and users of the HVO prices with the assurance of robust, transparent and market reflective pricing that is truly based on HVO market dynamics.

• HVO producer | Argus prices capture the market value of HVO providing you with a trusted, independent reference price at which to sell.
• Feedstock originators | Understand the price of the finished product to inform your pricing strategy for your feedstocks.
• Traders | Use the Argus HVO prices as an independent price reference in contracts when trading within and between regions.
• Downstream consumers | Have confidence that you are paying a fair price for your renewable fuel while adhering to regulatory mandates.
• Downstream suppliers/Bulk distributors | Assess the price at which you should set HVO for selling to end-consumers.
• Strategy and investors | Use a trusted reference when evaluating investment opportunities and risks within this fast-growing market.
• Regulators | Inform regulatory decisions with trusted, expert price and market insights relating to the energy transition.