Don’t be surprised if the next truck that passes you by is powered by vegetable oil and animal fats. Renewable diesel fuel for trucks is suddenly on the rise on both coasts.
New York City Embraces Renewable Diesel
New York City government announced last week that all its heavy vehicles, like garbage trucks and ambulances, will be running on renewable diesel by the end of June. This fuel, which is similar in chemical makeup to petroleum but is based on plants, fats, animal waste, and more, is considered the greenest diesel available.
New York officials believe in the fuel so much that they’re willing to pay up for it. The first shipment, due to arrive from Louisiana by barge in September, will cost $4.81 per gallon. Although the retail price of diesel at the end of September was slightly lower at $4.59 per gallon, city officials are confident that with clean-fuel production on the upswing, they’ll eventually pay a discounted price.
A Milestone in California
The city’s decision comes on the heels of a major milestone in California. Starting earlier this year, more than half of the diesel consumed in the state was biofuel instead of fossil fuels. Additionally, both Oregon and Washington have adopted low-carbon fuel standards that will require carbon emitters to purchase credits to offset their emissions.
A Promising Industry with Challenges
“It’s pretty helpful for the industry to see new markets adopt alternative transport fuels,” said Tudor Pickering Holt analyst Matthew Blair. “California has been a huge success story through its low-carbon fuel standard.”
Despite the progress made this year, the investment landscape for renewable diesel and other biofuels companies has been bleak. The main challenge is that supply is outpacing demand, and while government policies have been helpful, they have not significantly boosted earnings. The stocks of biofuel producers like Darling Ingredients and Finnish company Neste have experienced double-digit declines this year due to the supply glut in the industry, which has impacted their margins.
As the world shifts towards greener and more sustainable energy sources, renewable diesel fuel is emerging as a viable alternative for trucks. With New York City leading the way and California setting an inspiring example, it’s only a matter of time before renewable diesel becomes the norm in the transportation industry.
The Rapid Growth of Renewable Diesel Supply
The supply of renewable diesel in the United States has experienced a remarkable growth rate. At the beginning of this year, the capacity of U.S. plants to produce renewable diesel reached three billion gallons annually. This is a significant increase from 1.75 billion gallons in 2022 and 791 million gallons in 2021. Notably, major fossil fuel refiners such as Valero have transitioned into becoming significant producers of renewable diesel.
Similarly, Italian energy company Eni and U.S. refiner PBF Energy have collaborated to establish a new plant in Louisiana. Once operating at full capacity, this facility will produce an impressive 300 million gallons of renewable diesel each year. Furthermore, Marathon Petroleum is nearing completion of a partnership project with Neste to build a 730 million gallon facility in California.
California’s Low-Carbon Fuel Standard
California pioneered the implementation of its low-carbon fuel standard in 2011. Under this policy, refiners and other fuel companies are required to purchase credits to offset their emissions. However, in recent years, the market for these credits has experienced an oversupply, with credits surpassing debits by more than 20%. Consequently, the value of credits has plummeted from over $200 per ton in 2020 to approximately $70 presently.
Challenges and Bright Spots Ahead
According to industry expert Blair, the remainder of 2023 is expected to be challenging for renewable diesel companies. However, there are some promising developments on the horizon for next year. California regulators are anticipated to tighten the carbon credit market by imposing stricter rules on emitters, thereby accelerating carbon reduction efforts. These new regulations, set to take effect in 2025, could potentially drive up prices for low-carbon fuel standard credits starting as early as next year.
Exploring New Markets
Another potential avenue for growth in the renewable fuel industry is the emerging market for sustainable aviation fuel. This fuel, chemically similar to renewable diesel, can be blended with conventional jet fuel to reduce the carbon intensity of airline flights. As airlines express ambitious goals for employing sustainable fuels, they may increase their demand for such products. This trend could be bolstered by regulatory pressures, similar to those experienced in Europe. Producers like Neste have already begun supplying more aviation fuel, which commands a premium compared to traditional renewable diesel.
Overall, industry expert Blair remains optimistic about the long-term prospects of the renewable diesel sector, despite short-term challenges.