August 11, 2022
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The Stillwater LCFS Quarterly Newsletter presents our analysis of the credit and deficit data from the LCFS Reporting Tool and Credit Bank & Transfer System (LRT-CBTS). The LRT-CBTS is the repository of the LCFS transaction and credit/deficit data input by Fuel Reporting Entities. The California Air Resources Board (CARB) uses this data to publish its LRT Quarterly Summary. Analysis of the data provides insight into the trends of credit and deficit generation, the trends in low carbon intensity (CI) fuel use, and potential future trends.
The first quarter of 2022 logged an 892,431 MT (0.89 million MT) net credit, shy of the previous quarter’s record 973,059 MT (0.97 million MT) net credit, but a significant reversal from the 261,255 net deficit for the same quarter the previous year (1Q2021). CARB cautions that “these figures are subject to change as regulated parties may correct their quarterly data.”
With the quarterly net credit, the credit bank stands at a record high 10.35 million MT at the end of 1Q2022.
In the highlight section of this issue, we offer an analysis covering the first quarter 2022 data comparing to the prior and year-earlier quarters as well as a deeper dive into trends in renewable diesel, gasoline, and electricity.
LCFS Credit and Deficit Trends – Credit Bank Grows to Record High
For the first quarter of 2022, 6.04 million MT of gross credits were generated – the largest quarterly gross credit generation under the LCFS program to-date – compared to 5.61 million MT in the fourth quarter of 2021 and 4.04 million MT in the first quarter of 2021. There were 5.15 million MT of gross deficits for the first quarter of 2022 – the largest quarterly gross deficit generation under the LCFS program to-date – compared to 4.64 million MT and 4.30 million MT for the fourth and first quarters of 2021, respectively. The quarterly deficit reflects the ratcheting of the standard from 8.75% reduction to 10% in 2022, and the increase in the incremental crude CI from 0.41 to 0.92 gCO2e/MJ. At the close of the first quarter of 2022, the credit bank stands at 10.35 million MT compared to 9.46 million MT at the close of the fourth quarter of 2021.
As illustrated in Figure 1, the credit bank previously peaked at 9.95 million MT at the end of the third quarter of 2017 then began trending downward to the second quarter of 2020 as the LCFS standard became more stringent. Since that time, the credit bank has shown an increasing trend. The 892,431 MT first quarter 2022 net credit built on the past three quarters’ credit trend and brings the cumulative credit bank to the highest level since the LCFS program’s inception. Incremental Crude CI deficits, which were triggered for the first time in 2020, more than doubled in 2022 to 0.92 gCO2e/MJ of CARBOB or ULSD compared to 0.41 gCO2e/MJ in 2021. These CARBOB and ULSD Incremental Crude deficits for the first quarter totaled 0.39 million MT, up from 0.18 million MT for the previous quarter and 0.74 million MT for the previous year. The 1Q2022 quarterly Incremental Crude deficits nearly match the 0.40 million MT tallied for all of 2020.
At the end of the first quarter, the cumulative credit bank was equal to about two quarters of deficits at the 1Q2022 rate of deficit generation, meaning that if no credits were generated going forward, the bank would run out in approximately six months.
Figure 1: Net LCFS Credits by Quarter and Cumulative
LCFS Credit/Deficit Trends – Credit and Deficit Generation Both Hit Record Highs
Figure 2 shows the quarterly credits and deficits by fuel category as reported by CARB. The total credits (gross credits less adjustments for fuel exports, corrections, etc.) posted for credit-generating fuels increased to a record 5.97 million MT for 1Q2022 from 5.55 million MT for 4Q2021 and 3.99 million MT in 1Q2021.(1) The 5.97 million MT is about an 8% increase in credit generation from 4Q2021 and a 21% increase from the 2021 quarterly average credit generation.
On the deficit side, total CARBOB and ULSD deficits grew by 11% from 4.59 million MT in 4Q2021 to a record high of 5.10 million MT in the first quarter of 2022. This quarterly total deficit is up 20% from the 4.24 million MT total deficit in the same quarter the previous year (1Q2021).
Taking total credits and total deficits into account produces the black “net credits” line in Figure 2 below, which reflects the net credit and deficit columns in Figure 1 above.
Figure 2: LCFS Net Credit/Deficit by Fuel and Quarter
Fuel Volume Trends – Alternative and Renewable Fuels Volumes Rise to New Historic High
As shown in Figure 3, alternative and renewable fuels volumes rose from last quarter’s 16.17% of transportation energy to 17.86% in the first quarter of 2022. Alternative and Renewable Fuel volume percentage grew as total transportation fuel volume declined by 3.01% in the first quarter compared to the previous quarter. Total transportation fuel volume for the first quarter was, however, 7.85% higher than a year earlier – not surprising as the first quarter of 2021 was affected more by COVID-related shutdowns than the COVID-recovering first quarter of 2022.
Figure 3: Alternative and Renewable Fuel as % of Transportation Fuel Energy
Alternative and Renewable Fuels Excluding Ethanol at All-time High
Since ethanol is essentially fixed at 10% of the gasoline volume because of the CARB gasoline specification, except for the volume of E85 which has been small to-date, volumetric use of ethanol is dependent on gasoline use and should vary little independent of CARB gasoline other than changes in inventory. A truer picture of the impact of low-CI fuels on the California transportation energy mix becomes clearer when ethanol is excluded. Figure 4 shows the contribution that non-ethanol alternative and renewable fuels with growth potential have made to the transportation fuel mix. The total contribution of non-ethanol renewable and alternative fuels leapt up to 12.31% of transportation fuel energy in the first quarter of 2022, up from 10.78% in the fourth quarter of 2021 and an average of 9.67% in 2021. This strong first quarter showing continues the growth trend in non-ethanol renewable and alternative fuels and brings the total to an all-time high. As noted above, this growth continued against a backdrop of a decline in total transportation fuel usage for the first quarter compared to the previous quarter, but as fuel volumes recovered from the same quarter last year.
Figure 4: Alternative and Renewable Fuel excluding Ethanol as % of Transportation Fuel Energy
Ethanol CI Trend – Volumes Slightly Up, CI Slightly Down
Figure 5 shows the trend for the weighted average CI for ethanol and the volume of ethanol. The weighted average CI remains significantly lower than 2015 and earlier, since the 2016 indirect land use change (ILUC) value was decreased in the 2015 re-adoption of the LCFS. Since mid-2018, the weighted average ethanol CI began showing a declining trend with increased sugarcane and cellulosic ethanol in the mix. The 58.47 gCO2e/MJ average CI for the first quarter of 2022 is a slight decrease from the 58.79 gCO2e/MJ in the fourth quarter of 2021. Ethanol volumes for the first quarter rose slightly (1.89%) compared to the previous quarter but were up 22.84% compared to 1Q2021 which had a lower gasoline demand.
Figure 5: Ethanol Volume and Weighted Average Ethanol CI
Biodiesel, Renewable Diesel Shares and CI Trends – Sizeable Increase in RD, BD Essentially Flat
Figure 6 shows the percentage of BD and RD as a share of the liquid diesel pool (the combined ULSD, BD, and RD pool) and the weighted average CI for each. BD volume slid slightly to 7.8% of the diesel pool in the first quarter of 2022 from 8.2% in 4Q2021 as the total volume of liquid diesel fell off slightly. Meanwhile, the RD percentage grew to a record 36.0 volume % of the diesel pool in the first quarter, besting the previous record of 30.4% from 4Q2021. Combined, RD and BD made up 43.8% of the diesel pool in the first quarter of 2022, up from 38.6% in the fourth quarter of 2021.
The weighted average CI for RD has mostly hovered in the mid-to-low 30s since the middle of 2016 but increased several points in 2021 as RD from soybean oil increased in the RD mix. (2) The CI of RD dropped from a CI of 38.08 gCO2e/MJ in 4Q2021 and 36.32 in 1Q2021 to a CI of 35.60 for 1Q2022.
For its part, the weighted average CI of BD had showed a decline to the mid-20s but then increased steadily throughout 2020, reaching a high of 29.92 in the fourth quarter of 2020. The CI trend for BD returned to a slightly downward trajectory in 2021, however, and continued that trajectory in the first quarter of 2022 with the average CI decreasing to 27.28 gCO2e/MJ.
Figure 6: Biodiesel and Renewable Diesel Trends
CNG/LNG and Renewable Natural Gas Trends
Figure 7 highlights the trends in RNG and fossil natural gas use in CNG and LNG vehicles. The chart shows the volumes in thousand DGE per day of RNG by feedstock and fossil gas in the CNG and LNG pool, and the weighted average CI of the RNG pool. RNG represents 97.10% of total transportation CNG/LNG volume for the first quarter of 2022. Since fossil gas has been virtually completely displaced by RNG, Figure 7 reports the weighted average RNG CI without fossil gas. On the volume side, since previously peaking in 3Q2019, total CNG/LNG volume declined as the COVID pandemic reduced transit demand. For 1Q2022, total CNG/LNG volumes finally surpassed the previous peak. First quarter CNG/LNG usage rose slightly to 12.4 KBD (dge), up 1% compared fourth quarter 2021 levels and the 3Q2019 previous peak. After dropping dramatically over the past three of years, the weighted average CI of bio CNG was slightly up from the previous quarter at -52.74 gCO2e/MJ in 1Q2022. This was due to a flattening of dairy and swine digester volumes.
Figure 7: CNG & LNG and RNG Trends
Highlight 1: Quarter-to-Quarter and Year-to-Year trends
Many LCFS market observers expected a falloff of net credits in the first quarter of 2022 as this has been the historical trend. At the start of each year additional deficits are added with the ratcheting down of the CI-reduction benchmark which also results in a falloff of generated credits. The falloff of net credits between the first quarter of the year and the previous quarter for every year since 2012 are shown in Figure 8 below. The cumulative change between these quarters amounts to almost 4 million MT.
As can be seen in the figure, the drop in net credits from the fourth quarter 2021 to first quarter 2022 was much smaller than the historical amount. This was due to gains in RD and on-road electricity that offset most of the deficit increase from the benchmark change and increase in the incremental crude CI deficits. The result is that the market essentially maintained the high credit generation from 2021 into for first quarter of 2022.
Figure 8: Quarterly Credit Change 1Q vs 4Q
Table 1 below compares 1Q2022 with 4Q and 1Q 2021. A review of the largest credit generating fuels shows:
- RD credits rose 20.1% from 4Q2021 and 62.4% from the year earlier quarter (1Q2021) on volume increases of 17.4% and 64.0% respectively.
- Ethanol credits and volumes were down slightly compared to 4Q2021 as gasoline volumes were down. Compared to one year prior (1Q2021), which was impacted by COVID restrictions, credits and volumes were up 26.7% and 22.8% respectively.
- RNG credits and volumes were down slightly compared to 4Q2021, but compared to a year earlier, credits and volumes were up 74.2% and 18.7% respectively. This disproportional YTY change in credits and volumes is due to the higher percentage of dairy and swine RNG in the mix.
- On-road electricity credits rose 16.2% from 4Q2021 and 87.8% from a year earlier on volume increases of 19.5% and 92.2% respectively.
- BD credits and volumes were down 6.2% and 5.4%, respectively, compared to 4Q2021, but compared to a year earlier credits and volumes were up 12.2% and 10.2% respectively.
- Off-road electricity credits and volumes were essentially flat with 4Q2021 and up from a year earlier on credit and volume increases of 18.6% and 6.0% respectively.
- There were significant increases in deficits as the benchmark CI for gasoline and diesel was ratcheted down another 1.25% versus the program’s 2010 baseline. Additionally, the incremental crude CI added to the petroleum deficits more than doubled from 0.41 g CO2e/MJ in 2021 to 0.92 g CO2e/MJ in 2022.
Table 1. Quarter-to-Quarter Comparisons
Highlight 2. Deep Dive into RD and Gasoline
In this quarter’s second highlight, we dig deeper into the LRT data and our own analysis to portray trends for two fuel categories: renewable diesel and gasoline. The analytical trends will give some insight into the most important credit- and deficit-generating categories, respectively.
Renewable Diesel
RD, along with RNG, has been widely credited with adding LCFS credits that have caused the decline in credit prices seen since mid-2021. RD volumes have been increasing dramatically as additional RD capacity has come onstream since the beginning of 2021. Prior to 2021, much of this capacity was distant to California, in Singapore or Louisiana. This began to change as RD production capacity started up beginning in 2021 in PADD 2, PADD 4, and in California. We estimate that approximately 100 million gallons per quarter of capacity was added in 2021 in these three geographic regions, and this RD capacity is much better suited to supply California from a logistics point of view. We estimate that a similar amount of capacity will be added by year-end 2022 in PADDs 2 and 4, California, and New Mexico.
The growth in the RD capacity in 2021 drove the sharp quarterly increases we have seen since the end of 2020. The quarterly RD volumes recorded are shown in Figure 9.
Figure 9: Quarterly Renewable Diesel Volumes
As a drop in fuel, RD is an unusual credit-generating fuel that impacts both the credit and deficit balances. RD volumes generate credits and these volumes displace ULSD, resulting in a decrease in deficits generated. In effect, the total benefit of RD can be calculated by the CI difference between ULSD and RD instead of the CI difference between the benchmark and RD. The displacement of ULSD by RD can be seen in the liquid diesel pool volumes in Figure 10. Also seen in Figure 10 is the relatively stable volumes of BD that are used in California.
Due to the aforementioned new RD capacity and displacement of ULSD, RD volumes and credits should continue growing through at least 2023.
Figure 10: Liquid Diesel Pool Volumes
Gasoline
Stillwater has consistently emphasized the importance of gasoline demand in the LCFS credit balances. Rightly so. CARBOB generated 91.5% of total deficits for 1Q2022. Since deficits form the demand for LCFS credits, gasoline demand is essentially the measure of demand for LCFS credits. Currently, the only viable drop-in fuel in the gasoline pool is ethanol; as such, there is limited potential on the gasoline side of the equation to mimic what RD has achieved in the liquid diesel pool.
There is, however, one possibility that could impact the amount of CARBOB used. E15 could be approved for sale in California, thus reducing the deficits generated by gasoline (E10, E15 and E85). Whether gasoline is sold as E10 or E15, however, its high carbon emissions still make gasoline vehicles the primary target for the ZEV transition goals set by legislation and executive orders. ZEV fuels – electricity and hydrogen – are meant as substitutes for light-duty vehicle (LDV) and medium-duty vehicle (MDV) gasoline energy demand.
The quarterly historical trends of the fuel categories for LDV/MDV energy from the LRT are displayed in Figure 11. We observe several trends:
- Despite the accelerating sales of EVs, the vast majority of LDV/MDV energy is still gasoline.
- The impact of COVID on the LDV/MDV energy demand has been considerable.
- It appears that COVID may have established a new normal that is a step change downward of perhaps as much as 5% from the pre-COVID LDV/MDV energy demand trend.
Figure 11: LDV/MDV Quarterly Energy Volumes
We estimate that the impact of COVID in the nine quarters since 1Q20 on the gasoline credits (CARBOB deficits and ethanol credits) to be deficits of slightly less than 3 million MT based on a 2018-2019 trend line for gasoline demand. It appears there will be approximately 200,000 MT per quarter fewer gasoline deficits going forward if there is a continuing pattern of 5% pandemic-related demand destruction. This, coupled with the demand impact of gasoline prices over $6 per gallon should keep gasoline demand tempered into 2023. Gasoline demand can be volatile, however, and watching gasoline demand is important for LCFS market observers as it is the indicator of the demand side for credits.
Did you know that Stillwater offers credit price outlooks for California’s LCFS program, Oregon’s Clean Fuels Program (CFP),
British Columbia’s LCFS (BC-LCFS), and the U.S. Renewable Fuel Standard (RFS)?
(1) Per CARB: “For alternative fuels that displace diesel and CARBOB, credits are generated by low-CI fuels due to production, imports, and purchase, etc. while any deficits generated are either due to a higher carbon intensity (CI) than the CI standard or due to sale of inventories, exports outside of CA, etc.”
(2) This increasing RD CI trend was attributable to increasing soybean oil-based RD supplied to California. We note here that there is not projected to be enough waste oil feedstocks to fully supply the RD facilities being constructed in North America, so Stillwater expects average CI of RD to generally increase over the next couple of years as these plants come online and the share of soybean oil in the feedstock mix increases.