The rush by U.S. fuel makers to recalibrate their plants to produce renewable diesel has created a supply glut for low-emissions biofuels, hammering profit margins for refiners and threatening to impede the growth of the nascent industry.
The turmoil in the biomass-based diesel sector, which includes renewable diesel and biodiesel, could become a roadblock to future investments in biofuels, the U.S. Energy Information Administration (EIA) warned this year. This could potentially stall the transition away from traditional fossil fuels.
U.S. renewable diesel production capacity nearly quadrupled following the coronavirus pandemic, from just 791 million gallons a year in 2021 to 3 billion gallons by 2023, as refiners sought ways to survive the transition away from their petroleum-based products. Combined with biodiesel, total U.S. output capacity for biomass-based diesel surpassed 5 billion gallons by 2023.
Renewable diesel is a complete substitute for diesel, making it more attractive for producers than biodiesel, which can only be used as a blend. However, both compete for the same feedstock, such as used cooking oil and vegetable oils, and are more expensive to produce than petroleum-based diesel.
The demand for these biofuels relies almost entirely on governmental blending mandates and tax credits, but the blending targets for biomass-based diesel, set under the U.S. Environmental Protection Agency’s Renewable Fuel Standards (RFS) program, generate combined demand of just up to 4.5 billion gallons a year through 2025, according to Scott Irwin, a professor at the University of Illinois.
This is already below existing domestic production, before factoring in imports. By 2025, Irwin estimates U.S. renewable diesel and biodiesel output capacity will top 7 billion gallons, far exceeding the demand.
The oversupply has cut prices of Renewable Identification Numbers (RINs) – the credits refiners earn under RFS for producing or importing biofuels – to the lowest in five years. This has significantly impacted refiner profits and threatens the viability of the biofuels industry.
Some producers have already shuttered plants this year, and industry participants say more are set to go out of business before the year’s end, as the glut shows no signs of easing.