CHS : Growing a Renewable Diesel Revolution

December 09, 2021

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(Market Screener) As the United States focuses on tackling climate change, the energy market is seen as a key part of the solution. While federal policy and funding is focused on electric vehicles, a quieter potential answer is emerging: the growing adoption of renewable fuels.

While renewable fuels including biodiesel and ethanol have been reducing emissions since the Renewable Fuel Standard was enacted in 2007, renewable diesel is an emerging solution that could drive monumental changes in both agriculture and energy.

But how fast will change happen?

While all renewable diesel adoption has come in California and Oregon, which have enacted low-carbon fuel standards that make the fuel more affordable for refiners to produce, its growth across the country may not be far off.

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"We're in the early adoption phase with renewable diesel, which will grow as more states have low-carbon fuel standards in place," says Joe Lardy, market intelligence analyst, CHS Global Research. "There is good momentum and there is good investment. It's coming in the foreseeable future."

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Soy oil production capacity has more than doubled in the past five years to meet new demand.

Other sources such as animal fat and canola can be used to create renewable diesel, but using these feedstocks doesn't satisfy Renewable Fuel Standard specifications. Efforts are underway to change this, including a petition pending with the Environmental Protection Agency (EPA) to certify canola as a renewable fuel feedstock.

"The EPA conducts an analysis to ensure a feedstock used to produce a renewable fuel decreases carbon emissions by a certain percentage relative to gasoline and diesel," says Dan Mauer, CHS Washington representative, who meets with legislators and industry groups to advocate for a better renewable fuel policy. "They're currently testing canola oil as a pathway for renewable diesel, and it's believed that canola should meet the required 50% carbon reduction threshold, but the timeline for approval isn't known."

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Refining and the 3 Rs: RFS, RIN and RVO

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The RFS is set to undergo major changes after 2022 when the congressionally mandated RVOs expire and EPA is given the sole authority to set future volume amounts. Congress could pass a new law to give additional certainty to the industry or could leave it to the EPA to determine the future of the RFS.

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To accommodate the expected increase in soybean oil demand for renewable diesel, crush capacity is expanding across the U.S., says Pothen (Chris Pothen, vice president, CHS Global Grain & Processing). "We're seeing not only traditional large crushers growing in capacity, but new players coming in from the energy and private equity space."

This includes expansion at the CHS soybean processing plant in Fairmont, Minn., and a recently announced expansion of the CHS soybean refinery in Mankato, Minn., which will increase the facility's soy oil refining capacity by 30%.

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"The industry is setting itself up to produce more than the market is looking for," says Pothen.

With increased crush capacity comes increased byproducts. "The more we turn crude soybean oil into soybean oil for the food market or for renewable diesel feedstock, the more soybean meal we'll produce."

This could mean up to 15% more soybean meal produced. "We'll need more infrastructure to support soybean meal. That could mean opportunities for livestock producers or increasing meal exports," says Pothen. "The implications will challenge the current balance and will create changes in trade flows."

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Three conditions must be in place for renewable diesel to be more cost-effective to produce than traditional diesel.

A tax credit that pays fuel blenders $1 per gallon to blend biodiesel or renewable diesel with petroleum diesel. Congress is considering legislation that would extend the credit through 2026. This policy is in place at the federal level.
A credit, or biomass-based diesel renewable identification number (or D4 RIN), that is created when renewable diesel is produced from feedstocks like soy oil, waste oil or animal fats. This policy is in place at the federal level.
Low-carbon fuel standards (LCFS), which generates credits to fuel producers for creating fuels that emit fewer greenhouse gases. California and Oregon are currently the only states with active LCFSs. If more states adopt LCFSs, renewable diesel adoption will grow. This policy is set state by state.

Electric vehicle growth hindered by infrastructure

"As we look at the role of the energy and ag markets in decreasing carbon emissions, all signs point to an evolution, not a revolution," says Darin Hunhoff, executive vice president, CHS Energy. "If you pick up any newspaper, you might think everyone will be driving electric vehicles (EVs) in the next few years. The reality is that there are a number of infrastructure issues that need to be figured out before we will be ready for mass adoption. If everyone goes out and buys an EV and plugs it in, the electric grid will be overloaded."

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"Reducing greenhouse gases will rely on a combination of efforts, including electric vehicles, but renewable fuels could be a more sustainable and attainable solution, especially in rural America." READ MORE

Tags

markets/sales market forces Electric Car/Electric Vehicle (EV) soybeans Renewable Diesel/Green Diesel/HVO/Paraffinic Diesel biodiesel ethanol/bioethanol Renewable Fuel Standard (RFS and RFS2) Regulations-Federal LCFS (Low Carbon Fuel Standard) California environmental policy Transportation Fuels Policy Transportation Fuels Policy--State farm equipment Oregon animal fat Canola/Rapeseed pathways Carbon Intensity (CI)/Carbon Footprint EPA (Environmental Protection Agency) RINs (Renewable Identification Numbers) renewable volume obligation (RVO) Minnesota co-products food and fuel animal feed tax policy biodiesel tax credit tax credits renewable diesel tax credit Blenders Credit Sustainability BioRefineries/Renewable Fuel Production Investing

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