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European and UK regulations – notably the Renewable Energy Directive (RED III), the ReFuelEU Aviation regulation, and their equivalents in the UK – impact the demand for lipid feedstocks by establishing significantly different incentives between feedstock categories. Stillwater has established a “compliance recipe” for the projected lowest-cost compliance scenario required to fulfill the various mandates and targets, considering the combined contribution from renewable power for electric vehicles (EVs), eFuels (renewable fuels of non-biological origin or RFNBO in EU terminology), as well as the various biofuel categories. For RED III, we considered both the 2030 greenhouse gas (GHG) emission-reduction target as well as the energy % target. For 2035, estimated GHG reduction and energy % targets were constructed based on expectations of further progress towards the EU’s 2050 net zero ambition as set out in the European Green Deal. For more information on European biofuel legislation, view Stillwater’s overview article here. The table below summarizes the European and UK targets and accompanying assumptions.

The corresponding compliance scenario translates into demand patterns across the various bio feedstock categories in Europe, namely:

• Food & feed crops
• Advanced wastes and residues (RED III Annex IX part A)
• UCO and non-food tallow (RED III Annex IX part B)
• Cover crops (RED III Annex IX part A for SAF, part B for RD)
• Other feedstocks (including food-grade tallow, DCO etc.)

Compliance with the EU and UK targets considers the impact of the various multipliers set out in the respective legalizations.

Stillwater’s projection for EU and UK biofuels demand is derived from an analysis of the optimal “compliance scenario” to meet the mandates, in particular the RED III road mandate and the ReFuelEU aviation mandate.

The European and UK markets are already heavily orientated towards biomass-based diesel (BD and increasingly RD), with BD (known as FAME in Europe) forming ~75% of the total biofuel volumes blended, versus bioethanol, and biogas. Our projection shows this preference for bio-distillate continuing, with future growth focused on RD and increasingly SAF against flat bioethanol volumes constrained by both the food crop cap and the E10 blend-wall given declining gasoline demand.  

By 2030, we project a total lipid-based biofuel demand of over 8 billion gallons per year (bgy) increasing to 9 bgy by 2035 versus ~6 bgy currently. We project declining BD volumes, with SAF (and to some extent RD) competing away the advanced feedstocks in order to fulfill the SAF mandate[6] and to avoid the otherwise stringent penalties. By 2035 we project BD as being almost solely produced from food crops.   

Demand for SAF becomes an increasingly significant factor from the end of the decade onwards, comprising 2.6 bgy by 2035 or almost one third of total lipid biofuel demand. Despite the emergence of alternative technologies such as Fischer Tropsch or Alcohol-to-Jet, these products will remain largely if not exclusively produced from lipids feedstocks in this timeframe.

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[6] The ReFuelEU Aviation Regulation includes targets for SAF as a percentage of total jet fuel. As of October 2023, these targets are set at: 2% by 2025, 6% by 2030, 20% by 2035, and 70% by 2050.

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The global system is likely to be short feedstocks within the timeframe of this outlook, and both the U.S. and Europe will be seeking similar additional volumes. This reality and Europe’s more stringent requirements beg the question: Who is likely to win in the tussle for feedstock imports?

The figure below attempts to provide an answer to that question by looking at indicative 2025-2030 U.S./European pricing for some of the key pathways for BD, RD, and SAF. Key assumptions and inputs into this analysis are:

• 2025-2030 average U.S. federal Renewable Fuel Standard RINs and California LCFS credit prices derived from the base cases of Stillwater’s credit price outlook for each program, and assuming the 45Z tax credit is extended for the full period.
• Typical CI from the 40B SAF-GREET model and pathway average CIs from the California LCFS.
• European prices based on the valuation of EU RED III based on Germany’s biofuel quotas and penalties as per the Federal Emission Control Act (BImSchG), including the benefit of CI and double counting for advanced feedstocks.
• European SAF pricing based on the double economic benefit penalty in the case of non-compliance as stipulated by ReFuel Aviation.

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This sub-section covers U.S. supply and demand balances for each of the major lipid feedstocks.

Soybean Oil (SBO) is the largest single source of lipid feedstocks used in the U.S. market, representing 40% to 45% of the mix in recent years. Due to its relatively high availability, SBO is the marginal feedstock used in the U.S. In formulating our outlook for domestic supply of SBO for use in biofuels each year out to 2035, we make the following key assumptions:

Canola – With the recent EPA approval of an RFS pathway for RD production from canola oil and growing demand for all lipid feedstocks in the U.S. market, we expect RD producers to begin incorporating canola oil in their feed slate as production becomes available. In recent years, U.S. canola plantings have averaged about 2 million acres per year. The growing demand for lipid feedstocks, coupled with canola’s high oil yield, is expected to allow canola to command additional acreage going forward.

Key assumptions in our canola oil outlook include:

Distillers Corn Oil (DCO) is a non-edible oil co-produced with ethanol at dry mill plants.[7] For the purposes of this discussion, DCO also includes sorghum oil (which is treated similarly to corn oil under the RFS and LCF programs.) As DCO is not suitable for food use, DCO not used for biofuels production is primarily utilized as a component of animal feed.

Key assumptions in our estimate of DCO availability are as follows:

Cover Crops – Currently the use of cover crops is limited. In 2022 in the U.S., 18 million acres of cover crops were planted, or ~5% of the U.S.’s total arable land area. However, the trend to use cover crops is growing in both the U.S. and Europe as an additional source of lipid supply for biofuels. The main cover crops currently being developed for biofuel feedstocks are camelina, carinata, pennycress, and winter canola.

Tallow and Used Cooking Oil – This category of feedstocks is comprised of several products with domestic production tracked by USDA, but USDA’s production figures do not break out how much of these materials are used for biofuels production versus other uses. To project future availability of these products for biofuel feedstock usage, we use data on historical biofuel feedstock usage in the U.S. obtained from OilWorld and estimate non-biofuel use as the difference between USDA’s historical domestic production data and OilWorld’s estimate of biofuels use.

Based on the analysis above, the figure below provides our composite outlook for feedstocks available for U.S. biofuels production. The potential volume of RD which could be produced from this quantity of feedstocks is also presented based on an assumed RD yield of one gallon per 8.5 pounds of feedstock.

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[7] Edible corn oil is produced by a different process at wet mills and requires a more sophisticated processing system to assure conformance with food safety requirements. Edible corn oil is not currently approved as a feedstock under RFS or LCFS.

[8] EIA 2023 AEO, Table 11

[9] This increasing yield is obtained by more efficient conversion of the starch content of the corn together with more efficient recovery of ethanol from the fermenter. This results in a lower yield of distillers grains co-product.

[10] This increased recovery of oil comes at the expense of a lower yield of distillers grains co-product.

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As displayed in the chart below, currently food-based crops are the largest compliance contributor to the EU RED III at just under 50%. We project this contribution to decline, as volumes remain flat due to the food crop cap and as obligated blenders are pressured to source increasing volumes of advanced biofuels with enhanced GHG emission reductions and/or multipliers.

In contrast, renewable power, currently predominately used in rail, contributed 11.6% to the EU RED III 2022 target. This contribution is expected to increase significantly to >20% by 2030 and ~37% by 2035 due to the expected penetration of EVs in the European market.

Key biomass feedstock growth vectors are:

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U.S. and Europe’s reliance on lipid feedstock imports differs significantly. The U.S. is the world’s second largest oilseed exporter and currently imports around 11-12% of its lipid feedstock, primarily UCO and tallow, a sharp increase from previous levels due to the increasing demand for low CI fuels under the LCF programs in California, Oregon, and Washington.

In contrast, Europe is the world’s second largest oilseed importer and relies heavily on lipid feedstocks, both food crop based and advanced, to meet its requirements. Currently 30-40% of Europe’s lipid feedstock is met by imports, the key sources being palm oil from Indonesia and Malaysia, soybean oil from Argentina and Brazil, and UCO from a variety of countries predominately China and other Asian countries.

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