2022 Hot Topics – The Transportation Energy Transition is Expanding
January 12, 2022
By Megan Boutwell
Stillwater’s focus for 2022 is the transportation energy transition. Regulations in the U.S., Canada, and the European Union (EU) along with corporate commitments to lower greenhouse gas (GHG) emissions are driving investments in low-carbon alternatives to petroleum fuels. Here are some of the transportation energy transition hot topics we’ll be following for clients this year:
LCFS and ZEV programs will pop up across the country
In the U.S. and Canada, the transportation energy transition is being driven by low carbon fuel standard (LCFS) programs. California’s LCFS, along with Oregon’s Clean Fuels Program (CFP), have been successful in driving investment in new low carbon intensity renewable fuels and reducing the carbon intensity of the transportation fuel pool. Canada’s federal Clean Fuel Standard is scheduled to start in December of this year, and Washington state’s Clean Fuel Standard (CFS) has a scheduled start of 2023. We expect to see more LCFS-style programs passed by U.S. state legislatures this year. Minnesota and New Mexico introduced LCFS bills last year that will be reintroduced in the 2022 legislative sessions, and New York state just introduced its own Clean Fuel Standard bill for the current session.
To encourage the adoption of zero emissions vehicles (ZEVs), we expect to see states adopt incentives and mandates to increase ZEV sales. One such mandate, which also includes an incentive element, is California’s Advanced Clean Truck (ACT) rule. This rule mandates the percentage of new medium- and heavy-duty vehicle (MHDV) sales in the state to be ZEVs starting in 2024. Five other states including Oregon, Washington, New York, New Jersey, and Massachusetts have all adopted an ACT in line with California’s regulation. Going forward, at least 10 other states have committed to adopting an ACT.
Federal regulations and incentives sweeten renewable and alternative fuels investment
At the federal level, the Renewable Fuel Standard (RFS) will continue to mandate certain volumes of renewable fuels replacing petroleum fuels each year. Last month the U.S. Environmental Protection Agency (EPA) finally released proposed volume standards to retroactively set volumes for 2020 and 2021, as well as proposed volumes for 2022. The retroactive proposed volume standards for 2020 were revised down from 20.09 billion gallons to 17.13 billion gallons. The proposed renewable volume obligation (RVO) for 2021 is 18.52 billion gallons. The proposed 2022 RVO was raised to 20.77 billion gallons. In addition to the proposed RVOs for 2020-2022, and probably most important for RINs prices, the EPA has proposed rejecting the pending small-refinery exemption requests for 2016 through 2021. The public comment period for the proposed rule wrapped up last week, and a final rule is expected soon. EPA is planning to propose an expected reset of the RFS for 2023 and beyond next spring.
Federal tax incentives like the biomass-based diesel tax credit (BTC) and 45Q which incentivizes carbon capture and sequestration (CCS) projects will remain in place and continue to spur investment.
Finally, we are paying close attention to the development of incentives and mandates for sustainable aviation fuel (SAF). The current incentives designed for biodiesel and renewable diesel (BTC, RINs, LCFS credits in California and Oregon) are not sufficient to incentivize SAF at commercial volumes. In 2021, a tax credit like the BTC designed specifically for SAF was introduced in the U.S. House and Senate but has yet to make it out of committee. We don’t foresee SAF mandates enacted in the U.S. anytime soon, but they are picking up steam in Europe. Sweden, Norway, and France have each adopted a 1% SAF blending mandate. In addition, the European Commission is proposing an EU SAF blending mandate starting at 2% by 2025, rising to 5% by 2030, and 75% by 2050.
Policy trends will drive industry investment
Based on the policy trends outlined above, Stillwater expects to see plenty of investment in the transportation energy transition in 2022. RD and RNG investment will continue to grow, driven by the proliferation of LCFS-style programs across North America. These fuels are easily dropped into the existing infrastructure to generate credits for the programs. Along with RD and RNG investments, we’re tracking increased interest and investment in low CI electricity and hydrogen production. We’ll also see the addition of CCS technology to improve the CI of existing facilities and as components of new planned facilities. These CCS projects are spurred by the 45Q tax credit and provisions in California’s LCFS. More states may add CCS provisions to their LCFS programs to match California’s.
We expect to see more U.S. refiners diversify their refining portfolios by converting existing refining capacity to RD production. In the past year, Marathon, Phillips 66, PBF, Vertex, Calumet, Total, and HollyFrontier have all completed, started, or announced planned conversions for petroleum refineries to RD production. In addition to RD investments, we expect to see refiners continuing to invest in RNG to take advantage of the RINs and LCFS credit incentives like Chevron’s joint venture with Brightmark and Total’s joint venture with Clean Energy.
We’ll also see an increase in RD producers acquiring upstream and downstream companies to capture more of the value chain. RD producers are acquiring feedstock assets to control their supply in the very tight feedstock market like Darling Ingredient’s recent acquisition of Valley Proteins. We have also started to see producers acquiring downstream assets to retain the value of the LCFS credits (eliminating the need to share the value of the credit with downstream partners) while controlling market share like REG’s recent acquisition of distributor Amber Resources.
2022 won’t be entirely about renewable and alternative fuels
We’re watching trends and advising clients on petroleum trends as well. These include but are not limited to:
- Reduction in California crude oil supply
- The Transmountain Pipeline (TMPL) expansion
- California NOx mitigation efforts and their impact on in-state refineries
- The impact of peak refining in California on ports, terminals, and supply of specialty petroleum products like asphalt, propane, and lubricants.
- Fuel demand recovery post COVID-19, especially for gasoline and jet fuel.
We’ll be writing about these topics and helping clients navigate the issues in 2022. Be sure to sign up for our LCFS Newsletter and West Coast Watch to gain more in-depth insights and analysis on the transportation energy transition. It’s going to be a busy year!