Renewable Diesel’s Uncertain Future

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July 13, 2023

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by Jacqueline Holland (Farm Progress) Farmers and the rest of the world want green energy. Is the U.S. government standing in the way? -- Greg Anderson was disheartened when the U.S. Environmental Protection Agency announced 2023-25 biofuel blending volumes in June. The Newman Grove, Neb., farmer described the lower-than-expected volumes as a “gut punch to rural America.”

That’s because for the past year or so, both oil and ag processing companies had been trumpeting big expansion plans leading to a boom for U.S. renewable diesel, thanks to friendly government policies that promote green energy. Now that rosy future is in doubt.

Anderson has a good idea of how far-reaching the ripple effects will be after EPA decided to increase biomass-based diesel production only slightly between 2023 and 2025.

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The issue hits close to home for Anderson. Two crush plants are being expanded within 60 miles of his farm in northeast Nebraska, which will have the ability to consume 25% of the Husker State’s soybeans by 2025. “That means stronger basis, more demand, good-paying jobs and economic stability,” he says.

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EPA data finds that U.S. biobased diesel production already topped 3 billion gallons — in 2022.

“The industry is on track to produce volumes over the 2025 levels already this year,” says Scott Gerlt, chief economist at the American Soybean Association. That means that the recently announced EPA volumes are not high enough to support the surge in soybean crush plant expansion and new-build announcements made in the media over the past few years.

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According to EPA, biobased diesel production — which includes biodiesel, renewable diesel, renewable jet fuel and renewable heating oil capacity — surged 21% in 2022, as consumers and companies alike pushed for new options to reduce reliance on carbon-intensive fuel sources.

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Biodiesel and renewable diesel production is still not profitable without government programs, says Joanna Hitchner, acting oilseeds chair at USDA’s Interagency Commodity Estimates Committees for the World Ag Outlook Board, which publishes the World Agricultural Supply and Demand Estimates (WASDE) reports.

That means government mandates are necessary to incentivize private expansion at soy crush plants across the country. “The price of biodiesel is above the price of diesel, so you need a mandate to make renewable diesel work,” Hitchner explains.

“Demand is driven by the mandate,” she says in regards to soy oil usage estimates for biobased diesel production in the WASDE report. “Our assumption is that the biofuel blending volumes are binding. That is the demand driver.”

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Hitchner agrees. “Once you overbuild capacity and exceed the mandate, it disincentivizes production,” she says.

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A benefit of the push for renewable diesel is that Big Oil is no longer fighting EPA on RIN oversight, as it persistently has with ethanol. That’s because the renewable diesel production process allows companies like Phillips 66, Marathon, Chevron and Valero to generate their own RINs instead of purchasing them.

“Renewable diesel production uses the same operations in the refineries,” Gerlt says. “It’s a straightforward process that allows Big Oil companies to capitalize on producing a lower carbon-intensity fuel while still using their current facilities.”

But the shortfall in EPA capacities announced in June increases the likelihood for overcapacity, Gerlt forecasts. “There’s billions of gallons of capacity that won’t come to fruition because companies are not going to produce over the blending levels,” he says.

Indeed, Cargill axed plans to build a new soy crush facility in Missouri in early June amid “shifting market dynamics.” Exxon Mobil also threw in the towel on an earlier deal to purchase green fuel additives from Global Clean Energy Holdings after its expansion plans were delayed due to a lack of skilled labor.

“The slowing construction paces right now are mitigating that concern,” Zuckerberg says. “We are expecting building delays over the next two years because of rising interest rates, high construction costs and labor shortages.”

Gerlt and Zuckerberg expect plants that have already broken ground on expansion and new build projects will likely plow forward with construction. But it will be more difficult for smaller companies to wait for EPA to someday increase volumes.

“These plants can come on line and underutilize their capacity,” Gerlt says. “But we have the ability for billions of gallons to be under capacity.”

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Anderson notes that renewable diesel and biodiesel already makes up 46% of California’s diesel pool, up from 33% in 2021. And in Northeastern states, he says biodiesel is being mixed into heating oil to decarbonize it at a faster pace than regulators had originally intended.

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As soymeal volumes increase with rising soy oil demand for renewable diesel, opportunities also grow for other producers, outside of soybean farmers. “That makes feed cheaper for livestock and poultry producers,” Anderson says.

That would make U.S. meat more affordable and increase international demand for domestically produced meat products, adding even more value to livestock and poultry operations. Steenhoek (Mike Steenhoek, the executive director at the Soy Transportation Coalition) summarized the potential added value this way: “It is more profitable to export meat than meal and meal than beans.”

It would also improve U.S. competitiveness in soymeal globally at a time when Brazil has cornered the market on whole soybean exports throughout an entire year — not just at fall harvest.

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“A couple of years ago, soy oil was 55% of feedstock use for biodiesel and renewable diesel,” Hitchner says. “It has drifted lower because of alternative feedstocks and lower carbon-intense feedstocks incentives in California.”

The growth in renewable diesel production has attracted more canola oil from Canada, especially after EPA approved the pathway for canola oil into renewable diesel in December. Hitchner cites the increased availability of other imported feedstocks, like tallow, as driving down the share of soy oil used for renewable diesel feedstocks this year. READ MORE

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