2Q2019 LCFS Data – Insights into the Future of Clean Fuels Programs
November 15, 2019
By Leigh Noda
On October 31st, the California Air Resources Board (CARB) released the data reported by fuel-reporting Entities into the Low Carbon Fuel Standard (LCFS) Reporting Tool (LRT) through the second quarter of 2019. Stillwater has analyzed the data and included our analysis in our Second Quarter 2019 LCFS Newsletter (subscription required). In this article, we offer a high-level look at the progress of the LCFS program toward reducing the carbon intensities (CIs) of transportation fuels. For a detailed description and background of the program, we recommend a report published by the Fuels Institute entitled “Market Reactions to Low Carbon Fuel Standard Programs” which Stillwater co-authored.
The basic objective of the LCFS is to reduce the CI of the transportation fuel pool. Effectively, renewable fuels and alternate fuels (electricity, renewable natural gas, hydrogen) have CIs lower than the benchmark and generate LCFS credits. Fuels such as gasoline and diesel have CIs higher than the regulatory benchmark and generate LCFS credit deficits. Entities that generate deficits must use low-CI fuels to generate credits or purchase credits from low-CI fuel suppliers to cover their deficits each year. The value added to renewable fuels by the LCFS program is significant. At $208/MT of LCFS credits, for the average renewable fuel CI, the ethanol credit value is $0.50/gallon. For biodiesel, renewable diesel and renewable natural gas, these values are $1.76/gallon, $1.62/gallon and $13.15/MMBTU respectively.
The LCFS regulation was adopted in 2009, came into effect in 2011, and has been amended three times in 2011, 2015 and 2018. Along the way, the regulation was stayed at the 2013 levels until the 2015 re-adoption amendments became effective in 2016. The following chart illustrates how the credits and deficits have progressed by fuels type. As can be seen, credits have been growing each year as additional low-CI fuels are used. Offsetting the growing credits are growing deficits because of the declining benchmark each year.
From inception, the design of the program generates credits with no vintage, so they do not expire and the surplus in the early years are accumulated for use in future years. Figure 2 displays the progress of the program by quarter since its inception.
The credit bank peaked at 9.97 million MT in 2017 and has been declining in most quarters since then. In the second quarter of 2019, the net deficit was 46% smaller than in the previous quarter. The total deficit for the first half of 2019 – 0.7 million MT – is lower than Stillwater had expected.
In our LCFS Quarterly Newsletter we dive deep and extract key factors that are driving the credit balances. These analyses bring key insights and understanding to our readers. Today, we offer a different type of analysis looking at what’s behind the lower than expected drawdown of the bank. Essentially, there were three main factors that contributed to the increased credits or decreased deficits in the second quarter:
- Increased use of biodiesel (BD),
- Higher ethanol volumes and lower average CI ethanol with imports of sugar cane ethanol from Brazil and biomass-based ethanol, and
- A subtle downward trend in the high-CI gasoline (CARBOB) and diesel (ULSD) volumes that is now becoming apparent.
Increased BD Use
In past quarters, the news in biomass-based diesel has been renewable diesel (RD). This quarter, BD has pushed aside RD as far as notable changes go. Figure 3 (like Figure 4 below) illustrates the volumes of BD by feedstock and the average BD CI trendline. Of note from this figure is that almost all the BD is made from used cooking oils (UCO) and corn oils, while the volumes from soybean and canola oil have shrunk to very low volumes. The reason for these two feedstocks is their low CI scores which is 20 to 30 points lower than BD made from soybean or canola oil.
With the news that BD plants are shutting down across the country because of poor margins, those plants that process UCO and corn oils can improve their margins significantly by accessing the California market and earning those LCFS credits ($1.76/gallon in LCFS credit value, as mentioned above).
Higher Ethanol Volumes, Lower CI Scores
Figure 4 (like figure 3) illustrates the volumes of ethanol by feedstock and the average CI trendline. As can be seen, the trendline’s downward slope appears to be growing as the volumes of the lower CI ethanol – biomass-based and sugar cane – have grown.
Decreased Gasoline and Diesel Use
The LCFS program did not progress as anticipated in the initial 2009 rulemaking. One key factor contributing to this shortcoming was that in 2009 CARB anticipated that the volumes of CARBOB and ULSD would decline as Corporate Average Fuel Economy (CAFE) standards, alternative technologies, and renewable fuels displaced fuels from petroleum. This petroleum fuel displacement did not come to pass as the use of petroleum fuels has actually grown since the inception of the LCFS. Petroleum fuels generate deficits that must be covered by LCFS credits generated by alternative fuels. Thus, when more petroleum fuel is used, more credits must be generated from low CI-fuels to cover those deficits. There appears to be good news regarding petroleum fuels use, however. Over the past five quarters, it appears that the volume of CARBOB and ULSD have been declining when looked at on a rolling four-quarter basis. This is illustrated in figure 5.
Also shown in Figure 5 is the total volume including the renewable fuels contained in gasoline and diesel – ethanol, BD, and RD. The difference between the two lines represents these alternative, renewable fuels.
The LCFS is now closing its ninth year. It has been successful to date, although there have been changes and a few bumps in the road. With similar programs in effect in Oregon and British Columbia, and programs under consideration in Colorado, the Puget Sound region, New York, the Northeast states, and Canadian provinces, those in the fuels business have an opportunity to familiarize themselves with the principals and flows by following the LCFS program.
Stillwater’s LCFS Newsletter is a powerful tool for market participants to use when navigating California’s LCFS or Oregon’s Clean Fuels Program (CFP). Our insights also help industry leaders prepare for new programs coming down the pike – most of which are modeled on California’s success with its LCFS program. Stillwater’s unique LCFS Newsletter publication offers weekly, monthly, and quarterly looks at LCFS credit and deficit trends. Weekly reports include a summary of the week’s LCFS news, while monthly and quarterly reports also include Stillwater’s expert analysis of recent trends in the California program and LCFS-style regulations under development beyond California. The first two weeks of your subscription are free, so sign up today to see how our insights and analysis can help you navigate the LCFS and CFP markets.