Reproduced from California Low Carbon Fuel Standard Monthly Newsletter March 2024
Observers of Oregon’s Clean Fuel Program (CFP) have probably noticed that after two years of being significantly higher and more stable than California LCFS credit prices, CFP credit prices have fallen to near parity with those observed in California. In this article, we examine CFP credit price movements and the data, the reasons behind the decline, and the rationale for why CFP prices could not continue to be priced independently of (and much higher than) LCFS credit prices.
As can be seen in the figure below, since the beginning of October 2023 CFP credit prices have fallen off by more than 60% to levels near the recently depressed LCFS credit prices.
Figure 4. CFP and LCFS Credit Prices Converging
On the surface, one would expect that CFP and LCFS prices should consistently be similar as the CFP is a virtual copy of LCFS with only a few Oregon-specific adaptations. Historically, however, there has been a distinct mismatch in pricing between the two programs as shown in the figure below which illustrates the history of the two credit prices since 2016. From the Oregon program’s inception until mid-2020, CFP credit prices tracked LCFS prices but at a discount. During this period, ethanol and biodiesel functioned as the primary the credit generators in CFP, and our analysis of the data shows that the difference in the corn ethanol indirect land use change (ILUC) calculations between the two programs explained the difference in credit prices. Beginning in mid-2020, CFP credit prices flattened out, and the two price trends decoupled. But in April 2024, CFP credit prices began to plummet, and CFP and LCFS credit prices now appear to be converging.
Figure 5. CFP and LCFS Credit Prices historically have not shown convergence
Renewable Diesel has Become the Driver in CFP
The dramatic shift in Oregon’s CFP credit pricing trend begs the question: “Why is this happening?” The answer relates to the uptake of renewable diesel (RD) in Oregon and its impact on CFP credit and deficit balances. This trend and its impacts are illustrated in Figure 6. The stacked columns show the quarterly credit contribution of RD compared to the credit contribution of all the other fuels from 2016 through 3Q2023 (the latest data available). The black line represents the number of deficits generated each quarter. As can be seen, through 2021 CFP deficits were primarily covered by fuels other than RD.
In 2022 and 2023 however, RD became essential to the CFP credit balances to fully cover the deficits generated. As highlighted in the red-outlined columns, without RD the CFP program would have struck growing deficits beginning in 1Q2022. Although RD was available in Oregon prior to 2021, the volumes supplied to Oregon did not surge until 2023. There are reasons for this as discussed below.
Figure 6
Renewable Diesel has been the Driver in California’s LCFS
A look at similar statistics for the LCFS program shows that since 2016 RD has been a growing source of LCFS credits. In fact, as of 3Q2023, RD represented about 40% of the LCFS credits generated. The figure below, which displays the same data as the figure above but for California’s LCFS, shows a few interesting trends. Since 2017, the non-RD credit growth rate has roughly followed the growth rate of deficits. The year 2021 marked the start of significant growth in RD volumes and the start of the slide in LCFS credit prices from the $200/MT level to the $60-70 level observed today.
Figure 7
What is being seen in the CFP program today mirrors what the LCFS program has experienced – an oversupply of credits caused by volume increases in RD. Instead of occurring at the same time as the LCFS program, however, the CFP program has lagged.
Why Now?
In Stillwater’s view, there are several factors causing the current increased RD uptake in Oregon. The factors cover a broad range of independent items that perhaps formed a perfect storm to bring convergence between the two credit prices.
- The need to find markets for growing RD production
RD production capacity has ballooned in recent years. The following figure shows Stillwater’s assessment of Established and Probable RD Production Capacity aimed at the North American Market 2016-2030. As can be seen, after a slight bump in 2021, RD capacity has grown by leaps and bounds in 2022 and 2023, with a significant increase expected in 2024. Stillwater’s analysis of EPA data indicates that, historically, some 85% to 90% of RD produced in or imported into the country has been used in California. With California’s liquid diesel pool now exceeding 50% RD, RD producers need to find additional markets outside of California. Oregon and Washington (which also has an LCF program, the Clean Fuel Standard) have become logical candidates.
Figure 8
- Oregon’s Climate Protection Program (CPP) drives renewables in place of petroleum fuels
Although the CPP was struck down by the Oregon Court of Appeals in December , it was in effect for 2022 and most of 2023. It is expected that a new similar program will be adopted that will apply to transportation fuels. The CPP required fuels suppliers to use compliance instruments to account for the fossil portion of GHG emissions from fuel use. Unlike California’s Cap & Trade (C&T) and Washington’s Cap & Invest (C&I) programs, where fuel suppliers must purchase compliance instruments at auction or through the market, the CPP distributed compliance instruments at no cost to the fuel suppliers based on their historically supplied fuel with the annual amount decreasing each year. Since renewable fuels such as RD were not obligated under the CPP, replacing fossil diesel with RD was incentivized as it brings fuel suppliers into compliance without requiring use of their freely allocated CPP instruments to meet the CPP declining cap on emissions. With the growing availability of RD and the LCFS incentives for renewable fuels use, the moves to comply with CPP by fuel supplying entities will probably continue until a replacement program is adopted.
- The Portland Renewable Fuel Standard (RFS) also incentivizes RD use
Starting July 1, 2024, the Portland RFS will require a minimum 15% RD blend – in aggregate – for diesel sold in Portland; as such, petroleum diesel will begin to be phased out. Furthermore, to qualify, the aggregate CI of the RD used must not exceed 40 g/MJ. By July 1, 2030, the city will require its diesel fuel mix to be 99% RD and/or BD. Although the diesel volumes in Portland make up just a fraction of the total used in the state, nearly all liquid transportation fuel flows through terminals in Portland. As such, nearly all the terminals that supply diesel fuel to Oregon will have to supply RD perhaps in addition to or in place of BD. Importantly, transportation diesel can be 99% RD but BD is limited to 20%.
- Portland’s previous 5% BD requirement and logistic restrictions delayed RD uptake
For several years, Portland has been a transshipment hub for RD destined for California. RD is received into Portland from production facilities along the Northern Tier states like North Dakota and Montana by rail cars, and occasional deliveries of RD from other production centers by tanker. The RD was then loaded onto vessels and barges for delivery to California. Although volumes of RD were flowing through Oregon, not much of that RD was used in Oregon through 2022. The primary reason for this was that the Portland RFS required a minimum of 5% BD from 2006 until the RFS amendments were adopted in December 2022. Prior to the adoption of the RFS amendment, the 5% BD requirement would cause terminals supplying Portland to have BD as one of its products to blend with petroleum diesel. In order to offer RD blends as well, those terminals would need additional dedicated storage and delivery which may or may not have been feasible. Without the 5% BD requirement, terminals that supply Portland could, at a minimum, convert BD storage to RD storage; alternatively, they could provide storage for the additional product (RD) requiring dedicated tankage and delivery. The change from the 5% BD blending mandate to the Portland RFS removed a roadblock for terminals to supply RD (perhaps in place of BD) and cleared the way for the uptake of RD under the CFP.
Convergence
Since the first reported pricing of CFP credits in 2016, we have been perplexed by its apparent independence from LCFS credit pricing trends even though the programs and low-CI fuels that drive the programs are nearly identical. Understanding the convergence of the four points highlighted above starts to paint a picture that perhaps going forward CFP and LCFS prices will track each other much more closely than previously observed.