Market Trends in Biofuel

Feedstock and Biofuel Prices

In April 2022, vegetable oils were 65-164% more expensive than in 2019 [7]. This has fueled higher prices for biodiesel and RE diesel. Corn prices also increased putting upwards pressure on ethanol prices. Sugar, used primarily locally in Brazil and India, was less affected.

The USDA mentions several factors causing global agricultural commodity prices to be at near-record levels. These are the potential loss of exports from Ukraine, increased global demand, weather-related supply disruptions, rising energy prices, increased fertilizer costs and countries imposing export restrictions on certain food crops [7]. For example, Indonesia’s decision in April 2022 to temporarily ban the export of some components of palm oil put further upward pressure on biodiesel feedstock prices [7]. The

Russia/ Ukraine conflict and the very recent (June 2023) flooding in southeastern Ukraine (Collapse of Ukraine’s Nova Kakhovka dam) is forecast to adversely affect the corn, wheat and sunflower seed supply [9, 10].

It is unclear how or when commodity prices will come down, especially since the impact on markets are interrelated and widespread. While higher prices should encourage farmers to grow more crops, the cost of fertilizer, energy, wages and other costs all go to make such decisions difficult. For example, reducing fertilizer use due to cost, while potentially benefitting the environment, may limit overall yields and thus the benefits of more planting. Export barriers could also limit increased production from countries since farmers would be less able to capture export benefits.

In 2022, the agricultural industry was struggling with price shocks. Increases varied by region and by commodity. For example, Brazil’s ethanol prices increased 20% while in the US it increased by 30% [7]. Global biodiesel prices rose 20-30% as reported in December 2021 [7]. The response by governments of relaxing or delaying policies to increase the use of biofuels further contributed to a slowing of demand growth. Thus, in 2022, biofuel demand grew more slowly than previously forecast [8]. However, global biofuel demand in transportation is still expected to increase YoY by 5%, or 8,500 ML in 2022, and by a further 3%, or 5,200 ML, in 2023 [7]. Government policies do continue to drive global demand for biofuels [8].

Biofuel Demand and Growth by Country

Brazil and South America: Brazil accounts for the majority of the decline in global biofuel demand growth. Demand expectations in 2022 were revised downwards across all transportation fuels from the Jan 2022 estimate. However, Brazil’s biofuel demand still grew by 40% while gasoline was down by -0.2% and diesel down by -0.7% versus 2021 levels. This actually benefits Brazil’s RenovaBio mechanism (a carbon reduction scheme) [8] as the market share of biofuels is growing.

The Brazillian Government has mandated the blending of 27% ethanol in gasoline, a 3% increase. They have a large flex-fuel vehicle (FFV) programme enabling higher or lower ethanol blending with gasoline depending on price [8].

Brazil will maintain its biodiesel blending mandate at 10% for biodiesel, from an intended 15% target for 2022. The move to 10% was made in 2021 and then continued in 2023 to reduce diesel prices [8]. In contrast, some information suggests that Brazil will still reach 15% biodiesel blending by the end of 2023. This depends on the diesel base fuel price [7] and, perhaps, the engine development programmes active in Brazil.

Neighboring Argentina passed a law to reduce the biodiesel blend rate from 10% to 5% because of high crop costs. The law also authorizes the government to lower the biodiesel blend rate to 3%, and to halve the corn ethanol volume entering the fuel sector if required [7, 11].

The Colombian government reduced its ethanol blending mandate from 10% to 4% from April 2021, with the aim of returning blending to 10% in September 2021. However, in August of that year, Colombia delayed this return to January 2022 and is now proposing blending at 6% [7]. These are examples of how short term pressures can have severe, often much longer term, negative effects on the emerging renewable energy industry and on a countries GHG reduction goals.

USA: In the US, gasoline and diesel use has recovered to pre-Covid levels and, while the IEA have revised downward biofuel growth by 15% from January’s forecast the US still leads global biofuel growth with demand expected to increase by 6% in 2022 [7]. The US government has permitted blending of up to 15% ethanol during summer months to help lower gasoline bills (IEA, 2022). However, only 2% of gas stations provide 15% blended fuel and thus this policy change will only slightly increase ethanol demand. Even so, California’s low carbon fuel standards (LCFS), and renewable fuel standards (RFS), together with the federal biodiesel blenders’ tax credits will all combine to drive expansion in biofuels. EU: The EU has a “Fit for 55” package that aims to reach net zero by 2050. In 2022, gasoline and diesel demand were expected to be 1.5% and 1.1%, lower than forecasted in January of that year respectively [7]. Several governments are also proposing to, or have already, reduced blending obligations because of high biofuel prices. Belgium, Croatia, the Czech Republic, Finland, Germany and Sweden have all announced changes. Thus, biofuel demand growth slowed in 2023 [7]. Even so, European biofuel demand was expected to increase by 6% or 1,600 ML in 2022 compared to 2021 [7]. This growth is supported by stronger long term state-level policies and a planned decline in gasoline and diesel demand due to increasing energy efficiency. In addition, EV use outpaces it’s predicted growth from strengthening policies and customer choice.

Belgium’s green coalition has proposed to remove current biofuel mandates to reduce fuel and food costs and then slowly fade out crop-based fuels by 2030 [7]. This may look odd to any country encouraging biofuels, but in a small country such as Belgium, agricultural land has to be prioritized for food production. It also indicates that not all countries have suitable conditions for large-scale biofuel production.

Croatia will remove penalties on blenders that miss their targets [7] while the Czech government has proposed removing blending targets, but this is not yet confirmed and GHGs reduction requirements would still apply [7].

Finland will reduce its renewable energy requirement to 12% from 20% for 2022. It estimates this will reduce fuel prices by 12 cents per litre [7], while also increasing its long- term blending target from 30% to 34% by 2030 [7]. Sweden is proposing to pause its GHG targets for the transport sector for 2023 holding them at 2022 levels. Increases in these targets will continue post 2023 [7]. Again, this shows how Governments feel that they have to react to short term pressures by abandoning (at least temporarily) their long term goals.

Germany’s Environment Minister proposed to “further reduce the use of agro-fuels from food and feed crops” in response to high food prices resulting from the Russia/ Ukraine war [7]. There is as yet no change, but should high prices persist other governments may also pause or delay their plans. The EU Commission has noted it will support member states that reduce mandates in favour of food security.

Asia and the Pacific Region: Despite the potential benefits, the use of biodiesel in Asian countries is still low compared to petrodiesel because of issues including high feedstock costs, insufficient feedstock supply, the higher viscosity of biodiesel, and concerns around emissions of nitrogen oxides (NOx) [11].

The IEA estimated that growth in biofuel demand was down 36% in 2022 compared to its January 2022 forecast for the Asian/Pacific region. However, biofuel demand still grew, though at a lesser extent of 9% in 2022 and 12% in 2023 [7]. This is due to robust gasoline and diesel growth and strengthening government policies in India which continued to increase the amount of ethanol blended into gasoline, reporting an average 9.7% blending rate in April 2022 [7].

China’s 14th Five-Year Plan provides little insight on its intentions for biofuels other than reiterating its intent to “vigorously support advanced biofuels”. China has warned ethanol producers that it will “strictly control processing of fuel ethanol from corn” [7].

The IEA had expected that Indonesia would begin implementing its 40% blending mandate in 2026 [7, 8]. But in April 2021, it delayed because of the effects of the Covid-19 pandemic [7] and in Feb 2023 Indonesia announced it will blend biodiesel at 35% which still pushes demand [12]. Indonesia is known for significant investment in biofuel infrastructure to meet its alternative fuel goals. The Indonesian Institute for Essential Services Reform (IESR) has projected biofuel demand to reach 190 Million Tonnes (MT) by 2050. At the same time, like many other countries, Indonesia is strongly encouraging EVs and expects a strongly growing lithium battery industry. There is thus a tension between the support for biofuels and that for EVs [1, 2].

In Singapore, a company, Alpha biofuels, is producing and blending biofuel into fuel oil for marine transport [2].

Future Global Trends: Global demand for biofuels is set to grow by 41 billion litres, or 28%, over the period 2021-2026. The recovery to pre-Covid-19 demand levels accounts for one-fifth of this demand growth. Renewable diesel demand is expected to nearly triple between 2020 and 2026 [7, 8]. Climate and energy goals underpin this robust forecast.

Overall, the RE share in transport energy consumption is expected to grow from 9% in 2020 to 16% in 2027 [8]. The FAO has recommended actions to manage current high prices, including maintaining trade policies, diversifying food supplies and supporting vulnerable groups. Nevertheless, it is obvious that countries are very concerned that demand for biofuel will take away land for food production [7, 13, 14]. This would always have eventually been the case if the demand for crop-based biofuel continued to grow but this “tipping- point” has potentially been reached far earlier due to global issues, particularly from Ukraine. Thus, biofuel blending requirements remain relaxed or even suspended because of high feedstock prices despite higher GHGs and the need for more oil to make up for these reductions.

Biodiesel and RE diesel are likely be under the most pressure since prices for these fuels have risen faster than oil prices and the vegetable oil market which will tend to take oil away from the food supply. However, this does open up opportunities for second, third and even fourth generation feedstocks (as well as encouraging even greater use of UCO and other waste oils and fats). The demand for waste and residue oils and fats are expected to nearly exhaust supplies of the most readily available sources by 2027 [8]. This needs not be considered a bad thing in itself – almost total recycling of a waste product is to be celebrated. Second generation feedstocks include wastes from food production (wastes from oil palm, sugar cane, cassava etc.) as well as non-food crops grown on more marginal land. Third generation feedstocks are those requiring no or little agricultural land. These include the intensive cultivation of oil-rich single celled algae in ponds or photo-bioreactors. However, prices for these feedstocks will rise as demand rises.

Asia’s first plant to mass-produce biofuel that does not reduce food stocks will be built in Thailand. The Japanese Sumitomo Corp. has signed a memorandum of understanding for the project with Global Green Chemicals, a subsidiary of the Thai petrochemical group PTT Global Chemical. The partners are discussing commercial production of bioethanol made from bagasse molasses, which is left over after sugarcane. Another Japanese company, Kao, is looking to produce ethanol from cassava waste in Thailand with production due to start in 2027 [15].

Governments are expected to tread carefully when considering reducing requirements for biofuel use. Any reduction in biofuel demand comes with an increase in both oil deliveries and GHGs, which runs counter to longer term priorities. These policy priorities will likely make any changes temporary in order to address short-term challenges. In the transport sector, countries will need more ambitious transport decarbonisation programmes, including both biofuel and EVs. The IEA and Biofuel International forecast that biofuel demand will increase between 2021 and 2027 by some 20% and the global renewable energy’s share in transport could reach 20% by 2027 [8, 13].

The US, Canada, Brazil, Indonesia and India make up 80% of global expansion in biofuel use [8]. This is due to these 5 countries having comprehensive policy packages to support growth. RE diesel is expected to lead the policy driven global expansion of biofuels for the first time in the 2022-2027 period. Bio jet fuel or RE diesel demand is expected to expand significantly to 3,800 ML/D (over 2021-2022) (35 times the 2021 level) to account for 1-2% of total jet fuel consumption [8]. Recent US tax incentives and the EU’s ReFuelEU targets will push most of the growth in biojet fuel. The US Sustainable Aviation Challenge sets a goal for the airline industry to use 11 billion litres of sustainable aviation fuel (SAF) by 2030, equivalent to 15% of current jet fuel demand [16].

Meanwhile, increasing ethanol and biodiesel use occurs almost entirely in emerging economies. These aim to reduce oil imports while benefiting the local economy by using indigenous resources. Unprecedented demand, coupled with food insecurity, is straining supply chains. Government policies and innovation may help here but, as has been shown, Governments have to react to short term problems. In advanced economies, vegetable oil supplies for biofuel production are forecasted to expand from 17% to 23% between 2022-2027 [8]. However, these oils command higher prices due to strong demand. Hopefully this will prompt companies and governments to improve feedstock supply chains, seek out new supplies and develop new techniques, policies and innovations enabling the use of more widely available feedstocks for sustainable biofuel production.

New investments include biodiesel from agricultural and municipal organic waste in Sweden and from microalgae in the US and the production of ethanol from molasses and cassava in Thailand [2, 15].

The IEA expects 2023 to show growing demand in Asia offsetting declines in the United States and Europe [8]. Asian countries are expected to account for nearly one-third of new production over the forecast period (to 2026). The combination of Government policies, transport fuel demand, export-driven production and agricultural opportunities pushes Asian biofuel production past that of Europe. However, the factors influencing biofuel demand are all subject to uncertainty [16].

There is still a considerable way to go. Biofuel demand must nearly double by 2026 to align with the IEA Net Zero Scenario. Liquid biofuels are required to reduce emissions in road transport and to a lesser extent for aircraft and ships. The London agreement (July, 2023) decided that shipping should aim to become net zero by 2050. Countries will need to both implement and strengthen policies before 2026 to meet such goals. These policies must also ensure that biofuels are produced sustainably and avoid the risk of negative impacts on biodiversity, freshwater systems, and food prices and availability [17].