Valero Sees Policy Tailwinds for Renewable Diesel, SAF Operations — OPIS

July 26, 2024

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(Oil Price Information Service/Morningstar) With a U.S. presidential election on the horizon, and potential changes to federal and state-level biofuel credit schemes looming, Valero executives on Thursday said they see "a lot of tailwinds" for its renewable diesel and sustainable aviation fuel operations in the next two years.

"The Low Carbon Fuel Standard might expand in California, and the Renewable Identification Number credit update for 2026 got pushed to March 2025," Eric Honeyman, Valero's vice president of renewables operations and low-carbon fuels, said in a call with analysts to discuss the company's second quarter earnings. "But with all the expectations that agriculture has on the Renewable Fuel Standard volumes, we expect that will probably be some sort of increase."

The Biden administration two weeks ago said the EPA would abandon its plan to set RFS biofuel blending mandates for 2026 by the end of 2024. Setting the 2026 targets will be the job of whoever wins the presidential election in November.

The RIN and LCFS credit markets still appear to be oversupplied, Honeyman said, and Valero expects them to remain that way for the rest of this year.

But feedstock prices also play a role in Valero's outlook. Honeyman said Valero is still the largest importer of waste oils, which it uses to make renewable diesel, but it's noticing more competition in that space.

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Valero's two Diamond Green Diesel renewable diesel plants in Norco, Louisiana, and Port Arthur, Texas, are joint ventures with Texas-based Darling Ingredients Inc., which provides feedstocks in the form of used cooking oil, inedible animal fats and fuel-grade corn oil.

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The 470 million gal/year Port Arthur facility will be able to upgrade about half of its capacity to SAF starting in Q4. Valero said that move will make it one of the biggest SAF producers in the world.

"There is a premium for SAF over RD," Honeyman said. "It's going to give us a margin that will be stronger than RD, and our outlook is that it will meet the economics of our project."

Complicating the policy landscape further -- and to Valero's advantage, according to Honeyman -- is the federal biomass-based diesel blenders tax credit (commonly called the BTC) set to expire at the end of this year. A separate Clean Fuels Production Tax Credit (PTC) is scheduled to begin Jan. 1, 2025, but the government has not finalized guidance for that scheme.

A group of lawmakers on Tuesday urged the Treasury to move their feet, claiming that without PTC guidance, "producers are unable to make important business decisions regarding their fuel." And on the same day, a bipartisan bill was introduced in the House that would extend the BTC beyond 2024.

"Are we going to have a BTC or PTC transition on Jan. 1?" Honeyman said. "When we discuss the BTC going away, we expect the RIN to increase, to keep the biodiesel producer at break-even."

"The relationship between BTC, PTC and the RIN has always been somewhat of a factor of rebalancing the market," he added. "How fast that happens, how soon that happens, given the elections -- those are all kind of up in the air. But I think structurally, as you look forward, all of this looks pretty good for DGD." READ MORE

Related articles

Biofuel feedstock supplier Darling surges on improved outlook (Bloomberg/American Journal of Transportation)
Views: Sound policymaking needed to fully scale sustainable aviation fuel (Daily Chronicle DeKalb County/Illinois Farm Bureau)
Valero reports solid results for biofuel segments, mechanical completion of SAF project (Ethanol Producer Magazine)

Excerpt from Daily Chronicle DeKalb County/Illinois Farm Bureau: Decades of sound policymaking created channels and incentives for the agriculture and biofuels industries to supply a growing market.

The expanded Renewable Fuel Standard mandating the use of renewable fuels in transportation, and year-round use of higher blends of homegrown biofuels such as E15 and E85 have bolstered the ethanol market. State and federal tax credits tied to biofuels have been economic game changers for our state.

Sustainable aviation fuel, a bio-based jet fuel made from corn ethanol or soybean oil, holds similar economic and environmental opportunities as a path to decarbonize the aviation industry with homegrown biofuels.

While farmers, airlines and the ethanol industry are eager to embrace SAF, challenges persist in scaling up SAF production. Sound, reasonable policies are needed to ensure that significant changes and cost investments are worthwhile.

A first step came with recently released guidance from the U.S. Treasury Department acknowledging that feedstocks grown utilizing conservation practices can reduce overall SAF greenhouse gas emissions. This will play a role in the federal SAF production tax credits authorized under the Inflation Reduction Act.

Known as 40B, a $1.25-per-gallon tax credit will be awarded to SAF products with greenhouse gas emissions scores 50% lower than petroleum-based jet fuels along with additional incentives. This credit is retroactive to 2023 and extends through 2024.

The Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies model will be used to assess the 50% emission reduction.

Illinois Farm Bureau policy supports use of the GREET model in scoring the carbon intensity of agricultural feedstocks for SAF and other biofuels. We have advocated with federal officials to select GREET because it incorporates accurate, updated data around emissions and land-use changes, and recognizes on-farm practices to lower the carbon intensity of SAF and biofuel feedstocks.

The Treasury’s guidance for ethanol and biodiesel facilities will require farmers to demonstrate multiple sustainable practices including no-till farming, cover crops and energy-efficient fertilizer use. The bundled requirements are restrictive and lack the flexibility farmers need to use carbon-reducing practices that work for their farm.

Development of 45Z SAF tax credit guidance for 2025 through 2027 should include more options and flexibility in farming methods that qualify and allow farmers to adjust their methods from year to year.

It should also utilize the existing feedstock calculator available for use with GREET to determine on-farm carbon intensity of practices implemented by farmers to grow grain for SAF.

Federal and state-level incentives, such as Illinois’ $1.50-per-gallon SAF purchaser and user tax credit, are crucial for stimulating the SAF market. About 25 million gallons of SAF were produced in 2023, far below the current administration’s SAF goal of 3 billion gallons by 2030 and 35 billion gallons by 2050.

Modeling from Iowa-based Decision Innovation Solutions suggests U.S. agriculture has the production capacity of meeting about half of future SAF grain demand. SAF produced from soybean oil would account for four billion gallons, while SAF made from corn ethanol would make up another 6 to 11 billion gallons.

To contribute to those production levels, Illinois would need to establish 14 more 200-million-gallon ethanol plants and invest in other SAF infrastructure. Such expansion could lead to an extra $13 billion in economic activity per year, DIS models show.

Without a viable SAF market, corn farmers risk losing out on $2 billion per year through 2050. These are real, tangible dollars that farm families can use to sustain their operations and pass them on to the next generation.

To fully scale SAF technology and realize its market potential, today’s policy decisions around SAF must provide the certainty and flexibility farmers need to meet demand.

Airlines and biofuel producers require a solid backstop to their major investments into SAF technology just as much as farmers deserve credit for adopting and implementing sustainable farm practices used to produce SAF feedstocks.

This economic opportunity is too valuable to get wrong. READ MORE

Excerpt from Ethanol Producer Magazine: Valero Energy Corp. released third quarter financial results on Oct. 24, reporting increased production for both its ethanol and renewable diesel segments. Valero’s sustainable aviation fuel (SAF) project is expected to be fully operational before the end of the year.

The company’s ethanol segment reported $153 million in operating income for the third quarter, down from $197 million during the same period of last year. Ethanol production volumes averaged 4.6 million gallons per day, up 255,000 gallons per day when compared to the third quarter of 2023.

Homer Bhullar, vice president of investor relations and finance at Valero, said the ethanol segment is currently expected to produce 4.7 million gallons per day in the fourth quarter. Eric Fischer, senior vice president of product supply, trading and wholesale at Valero, noted the company has expanded its ethanol production capabilities this year in anticipation of increased demand globally for ethanol.

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Valero’s renewable diesel segment, which consists of the Diamond Green Diesel joint venture, reported $35 million of operating income for the quarter, down from $123 million during the same period of 2023. READ MORE

Tags

used cooking oil (UCO) Treasury Department Transportation Fuels Policy Texas tax policy tax credits soybeans RINs price RINs (Renewable Identification Numbers) renewable volume obligation (RVO) Renewable Fuel Standard (RFS and RFS2) Renewable Diesel/Green Diesel/HVO/Paraffinic Diesel Regulations-State Regulations-Federal markets/sales market forces Louisiana LCFS (Low Carbon Fuel Standard) Jetfuel (Sustainable Aviation Fuel (SAF)) Investing Illinois GREET Greenhouse Gases Regulated Emissions and Energy Use in Transportation Model feedstock prices ethanol/bioethanol EPA (Environmental Protection Agency) environmental policy E85 E15 defossilization cover crops corn oil/distillers corn oil (DCO) climate smart/conservation agriculture California Blenders Credit BioRefineries/Renewable Fuel Production biodiesel Aviation Fuel/Sustainable Aviation Fuel (SAF) animal fat alcohol-to-jet (ATJ)/ethanol-to-jet (ETJ) Agricultural Policy 45Z Clean Fuel Production Tax Credit 40B Sustainable Aviation Fuel Tax Credit 2024 Election

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