The Evolving U.S. Biodiesel Market
Increasing Volume Requirements
Growth in the EPA Renewable Fuel Standard’s biodiesel volume requirements – from 1.63 billion gallons in 2014 to 2.1 billion gallons in 2018 – has resulted in more biodiesel fuel being introduced into the U.S. market. The greater volumes of product on offer has contributed to driving down the price of biodiesel in many regional markets.
Greater Supplier Diversity
Once available only through a handful of producers located far away from population centers, biodiesel today can be acquired from local suppliers in several American cities. In addition, the emergence of value-added biodiesel suppliers specialized in hedging, risk and supply chain management has helped create a more competitive marketplace, placing additional downwards pressure on price.
New State-Level Policies
In the last 10 years, several new policies have been introduced at the state level to incentivize biodiesel blending in the retail segment. In the next section, we’ll take a closer look at the states where requirements and incentives have created the strongest demand for biodiesel of late.
RIN Credits and Positive Blend Economics
Renewable Identification Numbers (RINs) are fungible, tradeable regulatory credits generated when 100% biodiesel (B100) is produced. For each gallon produced, a single RIN credit is created.
RIN Credits can be separated from their gallons and sold to obligated parties – primarily oil and gas companies – for compliance purposes. The sale of RINs enables biodiesel suppliers in certain markets to supply biodiesel at a lower price than ulta-low sulphur diesel (ULSD). This creates ‘positive blend economics’ allowing retailers and distributors to increase their fuel margins:
(Biodiesel $/gallon – RIN $/gallon) < diesel $/gallon
The Biodiesel Policy Landscape
State governments enact laws and provide incentives to help build and maintain a market for biodiesel fuel and vehicles. Below, we’ve compiled a list of the U.S. states with the most robust biodiesel policies currently in place.
The Low Carbon Fuel Standard (LCFS) sets pollution limits for transport fuel and rewards producers that reduce carbon pollution with credits.
Like RINs, LCFS credits help lower the selling price of biodiesel. This contributes to increasing the competitive advantage that biodiesel blending provides to retailers and distributors.
State diesel vehicles are required to be filled with B5 when refueling at a bulk central fueling facility, with certain exceptions. With respect to pure (100%) biodiesel and biodiesel blends between B10 and B99, sales tax does not apply to the proceeds of sales made until the end of 2023.
Retailers selling biodiesel blends containing a minimum of 5% biodiesel are eligible for a state income tax credit of 4.5 cts/gallon. As of Jan. 1, 2018, retailers selling biodiesel blends with a minimum of 11% biodiesel are eligible for an income tax credit of 5.5 cts/gallon; blends between 5% and 10% are eligible for an income tax credit of 3.5cts/gallon.
Minnesota introduced a 5% biodiesel mandate in May 2009. In July 2014, the mandate increased to 10% during April 1-Sept. 30. As of May 1, 2018, the biodiesel mandate has increased to 20% during April 1- Sept. 30. During the winter months (Oct. 1-March 30), the provision reverts to 5% biodiesel.
5. New York
New York began offering a corporate income tax credit for biodiesel purchases used for residential space heating and water heating in 2006. Eligible taxpayers are defined as corporations that are subject to the franchise tax on business corporations, including a corporation that is a partner in a partnership. The value of the tax credit is $0.01/gallon for each percent of biodiesel blended with conventional home heating oil, up to a maximum of $0.20/ gallon. In other words, the purchaser of a mixture of 10% biodiesel and 90% conventional heating oil is entitled to a tax credit of $0.10/gallon.
The entire state of Oregon has a 5% biodiesel requirement. Renewable diesel qualifies as a substitute for biodiesel in the blending requirement. Biodiesel blends of B20 and higher derived from used cooking oil are exempt from the state fuel excise tax through Dec. 31, 2019. This exemption does not apply to fuel used in vehicles over 26,000 pounds; fuel not sold in retail operations; or fuel sold in operations involving fleet fueling or bulk sales. Oregon also operates an LCFS program like the one found in California.
Since June 1, 2010, all diesel fuel sold in Pennsylvania must contain 2% biodiesel by volume, except for heating oil and various grades of jet fuel. The mandate is set to increase to 5% by volume one year after instate production reaches 100 million gallons; 10% by volume one year after instate production reaches 200 million gallons; and 20% by volume one year after instate production reaches 400 million gallons.
Biodiesel blended with taxable diesel is exempt from the diesel fuel tax. Moreover, state fleets with more than 15 vehicles, excluding emergency and law enforcement vehicles, may not purchase or lease a vehicle unless it uses an alternative fuel, such as ethanol or E85, biodiesel or B20.
At both the national and state levels, new carbon reduction policies and a matured biodiesel supply chain are providing fuel retailers and distributors with the opportunity to enhance their bottom lines while helping build a more sustainable energy future. And in an industry where fuel margins are often measured by the penny, the economic benefits of biodiesel blending can quickly add up.