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CHS : Growing a renewable diesel revolution

11/30/2021 | 01:11pm EST

As the United States focuses on tackling climate change, the energy market is seen as a key part of the solution. While federal policy and funding is focused on electric vehicles, a quieter potential answer is emerging: the growing adoption of renewable fuels.

While renewable fuels including biodiesel and ethanol have been reducing emissions since the Renewable Fuel Standard was enacted in 2007, renewable diesel is an emerging solution that could drive monumental changes in both agriculture and energy.

But how fast will change happen?

While all renewable diesel adoption has come in California and Oregon, which have enacted low-carbon fuel standards that make the fuel more affordable for refiners to produce, its growth across the country may not be far off.

"We're in the early adoption phase with renewable diesel, which will grow as more states have low-carbon fuel standards in place," says Joe Lardy, market intelligence analyst, CHS Global Research. "There is good momentum and there is good investment. It's coming in the foreseeable future."

Soy oil feedstock implications

Just as expansion of ethanol through higher-blend fuels like E15 steadily grows corn demand, increased use of renewable diesel could cause demand spikes for vegetable oil feedstocks, especially soy oil.

"In most instances, fossil fuels are blended with renewable fuels, but renewable diesel is kept separate in the refining process and made completely from renewable sources like vegetable oils," says Jason Schwantz, senior vice president, CHS Refined Fuels. "Which means more use of renewable diesel could impact soybean oil as a food source."

Read more: Powering engines with soybeans

"It will be a once-in-a-generation change in the use of soybean oil," adds Chris Pothen, vice president, CHS Global Grain & Processing, and that shift will have significant implications for ag.

2021 saw a tight soybean balance sheet with record-setting exports, mostly to China for animal feed. We won't see massive demand increases like this in the near term, and the projection for 2022 is a decrease in total U.S. exports by nearly 9%, says Lardy. "China is trying to rely less on imports, and African swine fever changed the Chinese hog industry in 2018 to an industrialized system where they're using more corn for feed," he says.

Plus, Brazil is the global soybean leader. "In 2022, Brazil is forecasted to grow the biggest soybean crop the world has seen at 143 million tons. The U.S. grows 119 million tons. Brazil exports almost two-thirds of its crop," says Lardy.

Soy oil production capacity has more than doubled in the past five years to meet new demand.

Other sources such as animal fat and canola can be used to create renewable diesel, but using these feedstocks doesn't satisfy Renewable Fuel Standard specifications. Efforts are underway to change this, including a petition pending with the Environmental Protection Agency (EPA) to certify canola as a renewable fuel feedstock.

"The EPA conducts an analysis to ensure a feedstock used to produce a renewable fuel decreases carbon emissions by a certain percentage relative to gasoline and diesel," says Dan Mauer, CHS Washington representative, who meets with legislators and industry groups to advocate for a better renewable fuel policy. "They're currently testing canola oil as a pathway for renewable diesel, and it's believed that canola should meet the required 50% carbon reduction threshold, but the timeline for approval isn't known."

Refining and the 3 Rs: RFS, RIN and RVO

The Renewable Fuel Standard (RFS) was created by Congress in 2007 and requires refiners to blend renewable fuel into the nation's transportation fuel. A renewable identification number (RIN), the compliance mechanism for the RFS, is created when a gallon of qualifying renewable fuel is produced. That RIN is then "attached" to that gallon of renewable fuel. It is separated once the renewable fuel is blended with gasoline or diesel. It can be used to show compliance with the RFS and it can be traded or banked for future use. If a refinery doesn't blend enough renewable fuel into the gas or diesel that it produces, the refiner must buy RINs. The number of RINs a refiner must have is set through the renewable volume obligation (RVO). The Environmental Protection Agency (EPA) has yet to name the RVO for 2021, which leaves refiners and renewable fuels groups guessing.

Due to 2020 gas demand declines and market uncertainties, RIN prices have been extremely volatile since the pandemic began. In January 2020, ethanol RINs were being purchased for about $0.15. In June 2021, they traded at an all-time high of over $2.

In October 2021, RINs cost about $1.30.

The RFS is set to undergo major changes after 2022 when the congressionally mandated RVOs expire and EPA is given the sole authority to set future volume amounts. Congress could pass a new law to give additional certainty to the industry or could leave it to the EPA to determine the future of the RFS.

"We don't know what kind of program, if any, the RFS will be replaced with," says Dan Mauer, CHS Washington representative. "The current market volatility and potential future changes to the RFS leave the refining industry in an anxious situation."

Soybean crush capacity expected to grow

To accommodate the expected increase in soybean oil demand for renewable diesel, crush capacity is expanding across the U.S., says Pothen. "We're seeing not only traditional large crushers growing in capacity, but new players coming in from the energy and private equity space."

This includes expansion at the CHS soybean processing plant in Fairmont, Minn., and a recently announced expansion of the CHS soybean refinery in Mankato, Minn., which will increase the facility's soy oil refining capacity by 30%.

This growth is good news for Doug Jenkins, who runs more than 2,000 acres of corn and soybeans near Winnebago, Minn., and delivers soybeans to the CHS plant in Fairmont.

"When prices are good, plants can fill up. We want plants to be ready to take more crop as demand for soybeans grows. With the CHS plants being able to take more beans, we know we can deliver our crop and take advantage of that good price."

"The industry is setting itself up to produce more than the market is looking for," says Pothen.

With increased crush capacity comes increased byproducts. "The more we turn crude soybean oil into soybean oil for the food market or for renewable diesel feedstock, the more soybean meal we'll produce."

This could mean up to 15% more soybean meal produced. "We'll need more infrastructure to support soybean meal. That could mean opportunities for livestock producers or increasing meal exports," says Pothen. "The implications will challenge the current balance and will create changes in trade flows."

Renewable diesel production facility growth includes new construction as well as modifying current petroleum refineries to produce the biofuel.
Policy will drive renewable diesel adoption

How soon renewable diesel makes its way to mainstream consumption and how fast it is adopted depends on policy, says Mauer. "Policy will be a driver of adoption, especially the implementation of state-by-state low-carbon fuel standards."

Pending policies such as the extension of the renewable diesel tax credit, currently slated to expire at the end of 2022, and the push for a sustainable aviation fuel could tip the scales. "The best way to make renewables make sense for rural America is to have supportive policy that rewards refiners for creating and blending more renewable fuels," says Mauer.

But with no funding for renewable fuels in the bipartisan infrastructure bill that was recently signed into law, Mauer says the industry will have to find other opportunities, such as the recently announced $700 million in funding from USDA for biofuel producers. "As we look at the Renewable Fuel Standard mandates sunsetting after 2022, these kinds of opportunities from government agencies can help push adoption of renewable fuels."

When will using renewable diesel become the norm?

Three conditions must be in place for renewable diesel to be more cost-effective to produce than traditional diesel.

  1. A tax credit that pays fuel blenders $1 per gallon to blend biodiesel or renewable diesel with petroleum diesel. Congress is considering legislation that would extend the credit through 2026. This policy is in place at the federal level.
  2. A credit, or biomass-based diesel renewable identification number (or D4 RIN), that is created when renewable diesel is produced from feedstocks like soy oil, waste oil or animal fats. This policy is in place at the federal level.
  3. Low-carbon fuel standards (LCFS), which generates credits to fuel producers for creating fuels that emit fewer greenhouse gases. California and Oregon are currently the only states with active LCFSs. If more states adopt LCFSs, renewable diesel adoption will grow. This policy is set state by state.
Electric vehicle growth hindered by infrastructure

"As we look at the role of the energy and ag markets in decreasing carbon emissions, all signs point to an evolution, not a revolution," says Darin Hunhoff, executive vice president, CHS Energy. "If you pick up any newspaper, you might think everyone will be driving electric vehicles (EVs) in the next few years. The reality is that there are a number of infrastructure issues that need to be figured out before we will be ready for mass adoption. If everyone goes out and buys an EV and plugs it in, the electric grid will be overloaded."

While only 5% of cars on U.S. roads today are electric, that number is expected to grow, driven in part by state and federal policies that support EV adoption. "It's clear through the regulations and rules the Biden administration has put forward, and the legislation that Congress is considering, that the federal government sees EVs as one of the primary ways to accomplish its climate change goals," says Mauer. "Those initiatives support things like building a network of charging stations and tax credits for buying EVs. The push for EVs won't stop anytime soon."

In rural America, adoption will likely be slower. "Electric vehicles just don't make sense yet for a lot of people in rural communities," says Schwantz. "Charging stations aren't yet widely available and driving distances are greater."

Schwantz says there's even less viability for on-farm electric equipment. "High-torque and high-horsepower farm equipment will likely continue to rely on diesel fuel. We don't yet see that electric farm equipment has the charging ability or the power needed to run today's farms."

As ag equipment and trucks continue to run on diesel, Hunhoff says renewable diesel may be the solution for cutting emissions while powering agriculture. "Reducing greenhouse gases will rely on a combination of efforts, including electric vehicles, but renewable fuels could be a more sustainable and attainable solution, especially in rural America."

Check out the full C magazine with this article and more.

Disclaimer

CHS Inc. published this content on 30 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 30 November 2021 18:10:00 UTC.


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