Five in 5: Biofuels in transportation

1. How do biofuels differ from conventional fuel choices, and what role do they play in the broader low-carbon energy transition?

Daniel Bolgren: Biofuels, also known as renewable fuels or low-carbon fuels, are made from bio-based feedstock sources for use in hard-to-abate transport sectors, including on-road, off-road, rail, marine, and aviation. The market can be divided into two broad-based categories: liquid fuels made via feedstocks that are lipid-based, such as seed and waste oils, and gaseous fuels made via biomass. Liquids include biodiesel, renewable diesel, and sustainable aviation fuel. The main gaseous fuel is renewable natural gas. Biofuels have a much smaller carbon footprint than traditional fossil-derived fuels, with life cycle emission reductions ranging from 50% to above 100% in the case of certain renewable gas production pathways made from animal waste.

Kate Hardin: Biofuels are an attractive option for end customers and operators in hard-to-abate transport sectors due to their “drop-in” nature—they can be blended with and replace fossil fuels in existing combustion engines without conversion or retrofitting. Some biofuels can function only as add-in blends in certain proportions that maintain existing engine functionality. Other types, such as renewable diesel, can function as a one-for-one replacement. This creates a capital-light approach to providing energy density requirements and fueling needs for end-users—a cost-effective alternative with a lower carbon footprint.

2. What are the main market and industry drivers that generate interest in the biofuels space?

Kate Hardin: Biofuels have been gaining momentum as a viable alternative to traditional fossil fuels, as industries are increasingly pressured to reduce their carbon footprints in response to global climate change concerns. On the demand side, there are a handful of drivers engaging interest. Biofuels are of great importance to owners and operators of transportation fleets in hard-to-abate sectors, which are difficult to electrify. Biofuels can circumvent the costs and logistical challenges of deploying new types of engines or vehicles and reduce the need for widespread change in fueling infrastructure. We expect to see demand grow, provided that customers source biofuel products in a cost-competitive manner with the intended carbon intensity reduction outcome. They should also source with the same or better quality and performance attributes to fossil-derived alternatives—with the refueling assurance and reliability to meet evolving mobility needs.

Daniel Bolgren: On the supply side, there are many elements that can increase biofuels production capacity and market access. Cost competitiveness remains a primary driver of both demand and supply, so regulatory support and incentives are enabling adoption and growth of the market for biofuels. Various governments across the world are implementing incentives to promote production and adoption of biofuels, with most of the policy enablement coming from the United States and countries within Europe. In the United States, stackable incentives, such as the blenders tax credit, renewable fuel standard (RFS) at a national level, and low-carbon fuel standard in states such as California, help make products like renewable diesel cost competitive. Additionally, with the recent legislation in the Inflation Reduction Act in the United States, targeted credits such as the sustainable aviation fuel (SAF) blender’s tax credit will support SAF production with up to a $1.75/gallon tax credit based on carbon intensity. These credits have created an environment where producers are willing to invest in production facilities for biofuels.

3. What are the benefits of leveraging biofuels? What challenges might organizations face while choosing to use this low-carbon solution?

Kate Hardin: With companies across all industries increasingly adopting sustainable practices, corporations are facing the need to chart out their carbon reduction targets. Industries within hard-to-abate sectors are being driven to not only tackle their Scope 1 emissions (from direct business operations) to meet competitive standards but also adopt low-carbon solutions that enable corporations accross the value chain to achieve carbon-reduction targets through reduced Scope 3 emissions.

Daniel Bolgren: The molecular similarity of biofuels to their fossil counterparts enables a well-understood product value chain with relative technological maturity. Additionally, the production-to-end-user supply chain can harness existing oil and gas infrastructure that has been built within most developed economies. Many alternative low-carbon technologies have a high intrinsic capital expenditure and operating expense, driven by the inception of supply networks and the lack of infrastructure to drive the product to the marketplace. Liquid fuel infrastructure, such as existing pipelines and storage, can enable rapid biofuel adoption.

Kate Hardin: Some biofuels are challenged with complete replaceability by their counterparts across all use cases. While renewable diesel is a one-for-one replacement for traditional diesel, many other biofuels will need blending with fossil counterparts as a drop-in blend: SAF at 10–50% blending, for example, due to either engine performance considerations or current regulatory compliance standards. This “blend limit” puts a ceiling on some biofuels, though current production levels are nowhere near that limit.

Daniel Bolgren: The efficacy of carbon reduction for biofuels hinges on policies that incentivize carbon intensity (CI) reduction. The CI score provides a benchmark that defines the carbon reduction capability of replacement fuel technology, thereby incentivizing fuel CI efficiency. Existing incentive structures could be further tuned to help promote more sustainable lower-CI options. The current US feedstocks consumed for biofuels production consist of about 90% agriculture and forestry products, with waste oils and other lower-CI feedstocks accounting for a small portion.

Kate Hardin: Waste and residue oils and fats, such as used cooking oil and animal fats, have the lowest CI among the feedstocks, followed by energy crops such as switchgrass and miscanthus. Such feedstocks are considered sustainable with limited extrinsic effects on food production, land, and water inputs. However, low-CI feedstocks face challenges scaling up and aggregating to meet growing demand. One such challenge is the geographical dispersion of these feedstocks, creating more complex logistic systems upstream of production. Another challenge is the lack of centralized plants that can coprocess biogenic feedstocks with petroleum feedstocks to produce lower-CI fuels. Coprocessing has proven to be commercially viable and an effective way to produce low-CI transportation fuels, but it can present some operational challenges, such as feedstock quality, compatibility, and stability.

Daniel Bolgren: There are policies and incentives that place a higher value on lower-CI alternatives, but the issue of “CI parity” can cause unintended effects. As demand for low-CI feedstocks increases, so does their price, which may in turn erode the realized value of biofuel credits and reduce the profitability of biofuel production. Moreover, as CI reduction targets become more stringent over time, the price difference between low-CI and high-CI feedstocks may narrow, achieving a “CI parity” in which all feedstocks have similar values regardless of their CI scores. In the short to medium term, prices may fluctuate significantly if the supply response can’t match the timing of potential demand. This may create uncertainty and volatility in the biofuel markets and affect investment decisions of biofuels producers and feedstock suppliers. Policy stability as well as innovation and diversification of low-CI feedstock sources will ensure a sustainable and resilient industry.

4. How is the biofuels market expected to grow?

Daniel Bolgren: The market is expected to have continued growth within both liquid fuels and renewable natural gas. Evolving regulations continue to incentivize production and consumption. In June 2023, the Environmental Protection Agency finalized guidance increasing the volume requirements for biofuels by 10% year over year through 2025. Growth in incentivized markets, such as the US West Coast, is causing a decline in fossil diesel consumption. Last year, US West Coast fossil-based distillate consumption, as measured by product supplied, was at its lowest since 2002 and is on track to fall further.

Kate Hardin: In the long term, certain biofuels such as SAF may have more staying power than others. The harder the sector is to electrify (for example, aviation), the likelier that the next best alternative will need to remain a liquid fuel. Growth in renewable diesel reflects its flexibility as a 100% drop-in blend with fossil diesel, as well as shared technical pathways with SAF, providing production flexibility with certain assets should the long-haul trucking sector achieve scale and cost competitiveness in battery technology.

Daniel Bolgren: Carbon accounting and corporate considerations of Scope 3 emissions could drive pressure for fleet services and supply chain networks to decarbonize. Sustainability targets and competitor responses to climate actions will push organizations to focus on their Scope 3 considerations, which will in turn drive the market to choose products and/or services with lower-carbon supply chains.

5. What initial steps must organizations take to begin their journeys in the adoption and/or production of biofuels?

Kate Hardin: Organizations looking to adopt or produce biofuels can start by conducting a comprehensive assessment of their energy consumption, emissions profile, and the compatibility of existing infrastructure with biofuels to understand the potential benefits and most suitable use cases. It’s essential to stay informed about the evolving regulatory landscape as well. Companies should establish communication channels with industry bodies, government agencies, and other stakeholders to ensure compliance with regulations and take advantage of incentives and support programs available.

Daniel Bolgren: For organizations interested in production, developing a business case and feasibility study is critical, inclusive of evaluating the availability of feedstock, production technologies, and market demand. Actors within the value chain will need to engage in pilot projects, which will help test the feasibility and benefits, attempting to scale efficiently and maintain low CI. Forming partnerships is also critical and can help in sharing knowledge, resources, and risks. In doing so, organizations will need to marry their pilots and partnerships with opportunities to adopt credits/production credits.