FLASH ANALYSIS: Q1 2017 LCFS Deficits Exceed Credits for First Time
On August 2, the California Air Resources Board (CARB) released the first quarter 2017 data from the Low Carbon Fuel Standard (LCFS) Reporting Tool (LRT). For the first time, LCFS deficits exceeded credits for a quarter and the total banked credits declined. The chart below shows the decline in the first quarter and the break from the historical trend since 2011.
Figure 1. Total Credits and Deficits (MT) for All Fuels Reported, Q1 2011 – Q1 2017
Source: 2017 LCFS Reporting Tool (LRT) Quarterly Data Summary – Report No. 1
Recently, LCFS credit prices have been in a slight decline, but the LCFS credit market reacted to this Q1 data release by rising 27% last week.
Figure 2. Weekly Snapshot LCFS Credit
Source: Oil Price Information Service
For the first quarter of 2017, about 1.91 million metric tons (MT) of credits were generated compared to 2.36 million MT of deficits – a net deficit of 0.45 million MT for the quarter. Whether this deficit trend will continue through 2017 is the pressing question. Several observations help put this quarterly data in perspective:
- For the quarter compared to the fourth quarter of 2016, volumes of nearly all alternatives (excluding electricity) and renewables were down. Volumes of California Reformulated Gasoline Blendstock for Oxygenate Blending (CARBOB) and ultra-low-sulfur diesel (ULSD) were also down, likely due to the wet weather.
- Historically – particularly prior to 2016 – the first quarter has been a low one for LCFS credit generation. (In 2016, because of pathway recertification, fuel CIs were changed during the year, affecting credit generation trends.)
- The estimate of unmetered, on-road electricity is performed only once a year – in February – and added to the LRT for the fourth quarter of the previous year. Thus, the data of the first three quarters does not include these credits which are, in fact, generated each quarter. When the final 2017 number are in, the first quarter deficit will be less by the addition on unmetered on-road electricity. For reference: On June 9, 2016 CARB issued a revision to their February estimate and a total of 510,229 credits were added in 2016 for unmetered electricity (about 128,000 MT per quarter).
- The Standard has gotten tougher as the CI reduction requirement increased from 2.0% below 2010 levels in 2016 to 3.5% below in 2017. Besides the obvious increase in deficits from conventional fuels, this change in standard also reduces the credits earned by alternatives and renewables.
The fourth observation above is the most significant change in the trend and will be a major factor again in 2018 when there will be an additional 1.5% increase to the reduction requirement. How the change in standard impacts the program can be seen by a calculation. If the 2016 to 2017 standard difference is applied to the 2016 fuel volumes, the net change in credits is about 870,000 MT. That is more than the 2016 average of about 600,000 MT of net credits or the fourth quarter 2016 of 736,000 MT. This calculation illustrates that if the 2017 standard were to be applied to 2016, each quarter would have been in net deficit, so without an increase in year-to-year credit generation this year, 2017 will be in deficit.
If 2017 is to end with a net credit position and not depend on banked credits, the final three quarters of 2017 must show increases in low-carbon fuel volumes and decreases in average CI for each fuel paired with a strong on-road unmetered electricity estimate.
We will go into greater detail on these issues in our upcoming Monthly and Quarterly LCFS Newsletters, published on August 15th and August 22nd, respectively. Access to Stillwater’s LCFS Newsletter is only available to subscribers. For more detailed information on LCFS data trends and analysis, be sure to subscribe!