The European Union (EU) is one of the largest biofuel markets globally as the region continues to pursue a strategy of lower greenhouse gas emissions from road transport driven by a series of regulations such as the Renewable Energy Directive (RED). The choice of feedstocks for biofuels has become an important factor in determining which biofuels to use as environmental targets become stricter.
A more environmentally conscious approach to bioenergy supply is likely to place further pressures on the lower carbon and higher greenhouse gas feedstocks supply chains. Higher volumes of waste feedstocks, greases, and animal fats from regions like southeast Asia, the Middle East, and the U.S. are expected to be introduced into the biofuels supply chain in greater quantities, replacing palm and soybean oil. This has seen competitive pressures placed on the domestic EU biofuels industry with alternative supplies being more readily available from outside the EU-27 member states.
Soybean oil futures, the global vegoil benchmark
CME Group data shows that futures volumes in U.S. soybean oil reached around three million lots per month in the year-to-date September 2023 period, a 30% increase on the same period a year earlier. Futures and options on U.S. soybean oil are highly liquid and provide commercial firms with the ability to hedge their overall market price exposure to the growing feedstock uptake by the bio/renewable diesel sectors where production is expected to rise sharply in the coming months and years.
Chart 1: U.S. Soybean oil is the world’s most liquid vegoil futures contract
Both in and outside of the U.S., vegetable oils remain an important feedstock for biofuels. Some of the European feedstock volumes are hedged in products like soybean oil due to the level of overall liquidity in the futures and option contracts and the importance of soybean oil as a feedstock globally.
The latest data from the European vegetable oil and protein meal industry association (FEDIOL) shows that the combined production and imports of vegetable oils reached 26.89 million metric tons in 2022, a slight increase on the 2021 volumes. Rapeseed, soybean, palm, and sunflower oils represented the highest volumes. The FEDIOL data also shows that around 46% of the vegetable oil supply is used in the EU biodiesel industry with the remainder being used in the other industrial and food supply chains.
Renewable diesel volumes look set to sharply increase
The size of the European hydrotreated vegetable oils (HVO) has grown rapidly in recent years and further expansion is planned through the end of 2025. HVO is not subject to the same 10% blend limit as biodiesel in Europe, therefore, higher HVO blends could be used. However, this also places further strain on the feedstock supply. European HVO capacity looks set to reach around 10 million metric tons per year by 2025, which is a doubling of the current levels. Similar trends are also expected in the U.S. where renewable diesel capacity is also set to double by 2025 to reach 17.4 million metric tons per year.1
Chart 2: European HVO capacity pressures feedstock supply
Ethanol hedging increases in Europe
Bio-gasoline is part of the overall bioenergy market in Europe.2 Ethanol and Methanol are a growing part of the bio-gasoline supply. Hedging activity in both markets has been rising as countries pursue higher blending mandates for gasoline to reduce the overall dependence on fossil fuels. Year-to-date, October 2023 volumes in European Ethanol futures are 15% higher than at the same point in 2022, with an average volume traded of 4,300 lots per month or 430,000 cubic metres. Progressively higher ethanol blends into the gasoline supply since 2009 have been supportive to reduce the overall level of greenhouse gas emissions.
Chart 3: Bio gasoline demand sees greater demand for ethanol hedging
A higher blend of ethanol means a reduction in the volume of petroleum-based gasoline in the finished grade sold at the petrol station. European bio gasoline use in Europe was about 4.6 million metric tons in 2022, compared to a total biodiesel supply of around 15 million metric tons. By comparison, bio-gasoline use in Europe was just over four million metric tons in 2020, data from Eurostat showed.
A further positive development for ethanol could be rising demand for sustainable aviation fuel (SAF) as ethanol is an approved feedstock. In Europe, ethanol must be produced from waste with several airlines already evaluating the role it could play in the market. Total Energies is currently evaluating the production of SAF using alcohols such as ethanol. It is estimated that by 2030 around 3.5 million metric tons of SAF could be produced using alcohol to jet (ATJ), rising to 5.8 million metric tons by 2050.3
Waste biofuels look set to benefit from EU changes
Waste and Circular fuels look set to become popular feedstock choices by EU member states as they strive to meet the tougher environmental targets laid out by the Renewable Energy Directive II.4 The EU has introduced a blending target of 1.7% for waste feedstocks such as used cooking oil (UCO) with volumes counted towards the overall 14% blending target. At the same time, crop-based biofuels from vegoils will be frozen at 2020 consumption levels plus 1% with a maximum cap of 7%. Trading interest in used cooking oil looks set to increase on the back of the revised environmental targets.
Biofuels can only be counted against EU and/or member state targets if they achieve a minimum percentage reduction of greenhouse gas emissions of 60% compared to the respective fossil fuel. The EU is phasing out the ILUC crops, biofuel crops that displace the production of crops for food or animal feed. These crops can risk significant greenhouse gas emissions from indirect land use. These changes have effectively placed limits on the use of feedstocks like palm oil and soybean oil and in some countries these products have been banned. An EU-wide ban of palm oil will come into effect in 2030, placing further demand pressures on other feedstock sources. The ban could result in a decline of around two billion liters of palm oil use in the EU.
A looming feedstock supply crunch?
A global push to expand the number of renewable diesel refineries is expected to have a significant bullish impact on the volume of feedstocks that will be required. Refiners from California to Asia have plans underway or plan to scale up the production of renewable diesel produced in the coming years.
As the environmental mandates have become stricter, several refiners have modified their production streams to refine a greater volume of waste feedstocks and greases. In the coming years and in the run up to 2030, waste, circular feedstock streams and residue demand are expected to see the biggest increases in demand in the U.S. and Europe, partly reflecting the tougher greenhouse gas savings targets in both regions. The International Energy Agency (IEA) believes that global waste and residue feedstocks could account for 13% of biofuel production in 2027, an increase from 9% in 2021.
Chart 4: Waste oils market share increases in EU biofuel mix
The higher volume of biofuels production is having an impact on the availability of feedstocks and those feedstocks with the higher greenhouse gas saving credentials are drawing the most buyer interest. In Europe, the largest feedstock stream is rapeseed oil in the production of biofuels. However, other feedstocks such as used cooking oil will play a larger role. The latest iteration of the Renewable Energy Directive (RED II) covering the period 2020-2029 is forcing the EU member states to look for feedstocks with higher greenhouse gas savings credentials or waste products. In many cases, feedstocks that comply with the EU independent land use criteria (ILUC) rules are highly sought after to avoid conflicts with food feedstocks being used in energy production.
RED III to boost blending rates for road transport?
A further revision to the Renewable Energy Directive (RED), referred to as RED III, was adopted by the European parliament in September 2023 and is expected to enter into force in late 2023 following the formal adoption by EU ministers. RED III covers the compliance period beyond 2030 and higher blending rates look likely. RED III sets a 29% share of renewables in the transport sector, a doubling from the current threshold of 14.5%. The EU expects this to be met through a greater share of advanced biofuels, renewable fuels of non-biological origin (RFNBO) including hydrogen and electric vehicles.
Importantly, it is the first time that RFNBO’s have had a specific target attached to them, which is likely to increase the demand for hydrogen, ammonia, and other synthetic hydrocarbon to help meet higher possible blending targets and further reduce the dependency on fossil fuels.
The European biofuels market faces some significant challenges in the years ahead around feedstock supply as some of the more traditional biofuel feedstocks get phased out and replaced by other products which offer higher greenhouse gas savings. The continued debate around the shortage of feedstocks in both biodiesel and bio-gasoline markets looks likely in the years ahead.
- USDA – Renewable Diesel Capacity to double.
- A liquid biofuel suitable for blending with or replacing motor gasoline from fossil origins such as methanol, ethanol, ETBE or MTBE.
- EASA - Current landscape and future of SAF industry.
- Fuels which are used but can then recycled and re-used at the end of life.
- European Commission - Advanced Biofules in the European Union
Biofuel and Renewable Fuel Products
Hedge your financial risk in the global biofuels (including waste-based products) and ethanol markets with a wide range of futures and options contracts at CME Group.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.