The Swedish government's decision to slash domestic road emissions reduction targets in a country that had been a trailblazer in renewable energy has upset conventional thinking on the short-term supply and demand outlook for hydrotreated vegetable oil (HVO) in Europe.
A sharp decline in demand for the drop-in biofuel in such a key market, coupled with expected growth in EU production capacity, is poised to shift the balance for what has so far been a relatively tightly supplied product.
Forward prices for HVO underscore the prevailing market view. European benchmark futures for free-on-board (fob) HVO produced from used cooking oil (UCO) — known as HVO Class II — changed hands at $875-950/t and $900-925/t over low-sulphur gasoil in the second and third quarters of this year respectively, significantly below average spot premiums of $1,255/t and $1,403/t in the same periods. A recent uptick in activity in the paper market anticipates a move to daily HVO price assessments in January.
Sweden's greenhouse gas (GHG) reduction targets were 7.8pc for gasoline and 30.5pc for diesel in 2023. The mandate will drop to 6pc for the 2024-26 period for both fuels as part of the government's attempts to address rising living costs, an issue it had campaigned on before the country's general elections in September last year.
Such a drastic cut could drive the share of HVO blended in Sweden's diesel pool below 1pc by volume, Swedish bioenergy association Svebio's programme director Tomas Ekbom told Argus earlier this year. Blending of HVO into diesel accounted for 24.7pc of the total pool in 2022 and 25.7pc in the first nine months of 2023, equivalent to 1.2mn m³ and around 1.04mn m³ respectively, according to government data provider Statistics Sweden.
Rising costs are a concern for other Nordic nations that have traditionally far surpassed renewables blending ambitions in wider Europe. Neighbouring Finland has proposed freezing its biofuel mandate for next year at 2023 levels, having previously cut 2022 and 2023 targets in response to rising fuel prices.
Silver lining
While such discussions are not isolated, EU member states are broadly making progress towards the bloc's increased emissions savings ambitions, notably under the revamped Renewable Energy Directive (RED III), which targets a 29pc share of renewables in final energy consumption in transport by 2030.
Some respite from the Swedish demand-side crunch should come from changes to Dutch legislation which would prompt additional biofuels blending, including of HVO, from next year. Elsewhere, Italy will increase incentives under its pure biofuels mandate, encouraging higher consumption of unblended biofuels such as HVO100.
Sales of pure HVO are expected to be allowed in Germany from next year, albeit not before April. And HVO demand is on the rise in Spain, where obligated parties seeking to meet GHG savings targets under the Fuel Quality Directive (FQD) have increasingly turned to drop-in fuels because of technical blend limitations for methyl ester biodiesels.
Supply-side gains
Longstanding policy positions have driven expectations for growth in renewable fuel demand in Europe, which in turn has underpinned investment in HVO, a biofuel not constrained by traditional blend wall limits. Based on latest project announcements, European HVO production capacity is set to rise by 34pc to 6.9mn t in 2024 and global capacity is due to increase by close to 20pc to around 24.7mn t.
Faced with a more challenging outlook on road fuel demand than jet fuel, some facilities could opt to maximise production of sustainable aviation fuel (SAF) in the form of synthetic paraffinic kerosene from hydrotreated esters and fatty acids (HEFA-SPK) over renewable diesel next year, in the run up to an EU-wide SAF mandate that is due to come into effect in 2025.
