In some ways, the past ten months may have been more defining for EU low-carbon fuel policies than the preceding ten years. In December, EU institutions presented a plan to achieve continent-wide carbon neutrality within 30 years (dubbed the European Green Deal). After COVID-19 hit Europe in March, national policymakers doubled down on climate ambitions. Green recovery funds, ambitious transition timelines and generous environmental subsidies were deemed central to the economic reboot. Over Summer, the European Commission raised its 2030 emission reduction target to 55% (up from previously 40%) and set out to reach a 24% share of renewable energy in transport by 2030 (in 2018 it was at 8%). All major EU directives related to energy, climate and transport will be revised in line with the elevated targets.
Historically the Renewable Energy Directive (RED) and its transposition through national blending mandates have been the most direct incentive for biofuel uptake in Europe. When RED was revised (RED II), the minimum renewables share in transport (RES-T) was increased from 10% in 2020 to 14% in 2030. To comply with the elevated European Green Deal targets, the European Commission will once more update the directive by June 2021. This is also the deadline for national transposition of RED II under its current form. A revision of the Fuel Quality Directive (FQD) which sets mandatory emission reductions is also scheduled for H1 2021. Against this background, governments in Germany (Europe’s biggest FAME blender) and Sweden (the continent’s largest HVO consumer) have recently put forward new emission reduction legislation for their fuel pools through 2030. Subscribers can see how we expect these new regulations to translate into feedstock demand in the full version of this analysis or in our new feedstock demand data tool.
Another force to reckon with is the sudden boom in the electric vehicle sales in Europe. In September 2020, plug-in EV market shares were at nearly 85% in Norway, 35% in Sweden, over 15% in Germany, Finland and the Netherlands, and more than 10% in France and the UK. In Europe’s five largest economies, EV shares have quadrupled over the past eighteen months. Further growth is expected in 2021 as EU fleet emission regulations and elevated purchase subsidies are fully phased in. Between 2021-2030, car manufacturers will be obliged to further reduce average passenger fleet emissions from 95 g CO2/km to 47.5 g CO2/km. These developments have implications for EU biofuel blending because road electricity can directly contribute to RES-T and emission reduction obligations.
In September, the German government released a draft bill transposing RED II and increasing the country’s reduction quota. Other major changes include the phasing in of a crop-cap, a limit to biofuels from UCO and animal fats and an increase of the non-compliance penalty. Fossil LPG and CNG no longer contribute to the obligation while road electricity can be credited four times. In Sweden, the government introduced draft legislation that sets out to linearly increase diesel-pool emission reduction obligations from 21% currently to 26% in 2021 and 66% by 2030. In the gasoline pool, the obligation increases from 5% currently to 6% in 2021 and 28% by 2030. This makes Sweden by far the most ambitious jurisdiction globally in decarbonizing its fuel pool.
Both the German and the Swedish proposals include an obligation to decrease carbon emission in the aviation fuel pools as well. They thereby join Norway, Finland, France, Spain and the Netherlands – all in various legislative stages of introducing sustainable aviation fuel (SAF) blending obligations. Combined, these countries represent over half of total EU aviation fuel demand. Moreover, the European Commission is mulling the introduction of a continent-wide SAF obligation and/or an increase of the 1.2 multiplier for aviation biofuel.
At the moment, aviation grade HVO dubbed HEFA is the only commercially scaled SAF. Just 2 percent European aviation biofuel blending by 2030 would easily translate into 1.5 million tonnes HEFA demand that year – equivalent to about half of current standalone HVO capacity in Europe. Even with diesel car sales in decline, the road sector will remain the main driver of European HVO uptake the coming decade. Demand in the road segment has a certain degree of predictability because of established blending obligations and a guaranteed base diesel pool. Some HVO capacity investments are explicitly betting on take-off in the more uncertain SAF segment however, like Total’s recent decision to convert its Grandpuits refinery. Another way to hedge against demand uncertainty is through low CAPEX co-processing capacity.
The coming ten months will be at least as defining as the last ten for the European biofuels framework. The simultaneous revision of RED II and the FQD allows for more coordination between the two. It will soon become clear whether more countries follow Germany and Sweden in having an emission-based framework, or if volumetric blending obligations remain the norm. How the European Commission sanctions potential undercompliance with 2020 RED obligations will set a precedent for how enforceable member states view the 2030 quota. Accelerated revisions of a wide variety of EU regulations, ranging from taxation to emission trading to electric mobility, will all have implications for biofuels. Brexit, US elections, COVID-developments, economic forecasts and oil prices each have significant impacts on national policymaking. Despite the rapid pace of change, Stratas Advisors believes the fundamentals behind EU biofuel policies (agricultural interests, climate protection and energy security) remain unchanged. Given feedstock constraints, European policymakers will not see biofuels as a catch-all solution to reach climate targets. Considering the level of ambition in decreasing emissions however, they will incentivize high levels of biofuel blending wherever other options are not feasible.