Just as crack and fractionation spreads estimate the implied margins of motor fuel and gas liquids production, the renewable diesel margin gauges the implied returns of renewable diesel production. It is calculated as NYMEX ULSD + (1.7 × Biodiesel RIN) + (0.00707 × LCFS Credit) − (8.5 × CBOT Soybean Oil), reflecting the diesel price, the value of D4 biodiesel RINs (converted at a rate of 1.7 relative to D6 ethanol RINs), the LCFS credit earned (0.00707 of a credit per gallon at a carbon intensity of 54), and the roughly 8.5 pounds of soybean oil required to produce one gallon.
Renewable diesel is made from feedstocks such as soybean and corn oils and waste including animal fats and cooking grease. Produced in a petroleum refinery and chemically equivalent to petroleum diesel, it is a “drop-in” fuel that requires no changes in handling or distribution infrastructure and can be used in conventional diesel engines at blend rates up to 100 percent. Its counterpart, biodiesel, is produced from similar feedstocks through esterification but can only be blended with petroleum diesel up to a rate of 20 percent.
Demand is driven by renewable fuel mandates. California’s Low Carbon Fuel Standard (LCFS), which requires decreasing carbon intensity of transportation fuels, is one key driver at the state level, while the federal Renewable Fuel Standard (RFS) mandates increased annual use of biofuels. Faced with aggressive and rising RFS blending mandates, obligated parties look for ways to mitigate their RIN and LCFS credit exposure, and renewable diesel production is one such strategy.
From 2016 through 2020, the margin exhibited little volatility: feedstock and distillate prices were steady, and LCFS prices rose to almost $200 per metric ton, offsetting declines in D4 biodiesel RINs. Beginning in 2021, the margin remained mostly positive but became considerably volatile as distillate and feedstock prices rose sharply, LCFS prices dropped, and D4 RINs climbed to historically high levels.
From the EPRINC Chart of the Week archive.